-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J+bEeEr91KbpFjAOuR2Gar3bg+44gnaYft/CFqath3YNp8AKvm9GN+rTooRZAuXo AEmkM3UpyqSSBY5eLmYC3Q== 0000912057-97-021807.txt : 19970626 0000912057-97-021807.hdr.sgml : 19970626 ACCESSION NUMBER: 0000912057-97-021807 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 30 FILED AS OF DATE: 19970625 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICETEL COMMUNICATIONS INC /MN/ CENTRAL INDEX KEY: 0001031927 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 411649949 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-29969 FILM NUMBER: 97629335 BUSINESS ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 MAIL ADDRESS: STREET 1: 9724 10TH AVE NORTH CITY: PLYMOUTH STATE: MN ZIP: 55441 FORMER COMPANY: FORMER CONFORMED NAME: INTELLIPHONE INC DATE OF NAME CHANGE: 19970625 SB-2 1 SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 25, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- CHOICETEL COMMUNICATIONS, INC. (Name of small business issuer in its charter) MINNESOTA 4813 41-1649949 (State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
9724 10TH AVENUE NORTH PLYMOUTH, MINNESOTA 55441 (612) 544-1260 (Address and telephone number of registrant's principal executive offices and principal place of business) JACK S. KOHLER VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 9724 10TH AVENUE NORTH PLYMOUTH, MINNESOTA 55441 PHONE: (612) 544-1260 FAX: (612) 544-1281 (Name, address and telephone number of agent for service) -------------------------- COPIES OF ALL COMMUNICATIONS, INCLUDING ALL COMMUNICATIONS SENT TO THE AGENT FOR SERVICE, SHOULD BE SENT TO: ROBERT T. MONTAGUE ERIC O. MADSON Robins, Kaplan, Miller & Ciresi L.L.P. Winthrop & Weinstine, P.A. 2800 LaSalle Plaza 3000 Dain Bosworth Plaza 800 LaSalle Avenue 60 South Sixth Street Minneapolis, Minnesota 55402-2015 Minneapolis, Minnesota 55402-4430 Phone: (612) 349-8500 Phone: (612) 347-0700 Fax: (612) 339-4181 Fax: (612) 347-0600 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. -------------------------- If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, 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, please 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. / / 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 of 1933 check the following box. /X/ -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED TO BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE Common Stock, par value $.01 per share...... 920,000(2) $7.49 $ 6,890,800 $ 2,088 Redeemable Common Stock Purchase Warrants... 920,000(2) $0.01 $ 9,200 $ 3 Common Stock, par value $.01 per share, underlying Redeemable Common Stock Purchase Warrants......................... 920,000 $9.50 $ 8,740,000 $ 2,649 Total..................................... $ 15,640,000 $ 4,740
(1) Estimated for purposes of computing the registration fee in accordance with Rule 457. Of the total Unit price of $7.50, $7.49 has been assigned to the share of Common Stock and $0.01 to the Redeemable Warrant included therein solely for purposes of calculating the registration fee. (2) Includes 120,000 shares of Common Stock and 120,000 Redeemable Warrants, respectively, subject to the Underwriter's over-allotment option. -------------------------- 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 SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JUNE 25, 1997 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 THE 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 SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. CHOICETEL COMMUNICATIONS, INC. 800,000 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT --------------------- ChoiceTel Communications, Inc. (the "Company") is offering 800,000 units (the "Units"), each Unit consisting of one share of the Company's Common Stock, par value $0.01 per share (the "Common Stock"), and one redeemable Common Stock Purchase Warrant ("Redeemable Warrant"). The Redeemable Warrants are immediately exercisable and transferable separately from the Common Stock. Each Redeemable Warrant entitles the holder to purchase, at any time until five years following the date that the Registration Statement relating to this Prospectus (the "Registration Statement") has been declared effective by the Securities and Exchange Commission (the "Effective Date"), one share of Common Stock at an exercise price of $9.50 per Redeemable Warrant, subject to adjustment. The Redeemable Warrants are subject to redemption by the Company for $0.01 per Redeemable Warrant at any time 30 or more days after the Effective Date, on 30 days' written notice, provided that the closing bid price of the Common Stock exceeds $10.00 per share (subject to adjustment) for any 10 consecutive trading days prior to such notice. See "Description of Securities." In addition to the Units offered hereby, this Prospectus also relates to the registration for issuance by the Company of an additional 800,000 shares of Common Stock upon exercise of the Redeemable Warrants. See "Description of Securities." Prior to this offering, there has been no public market for any of the Company's securities, and no assurance can be given that a market will develop or will be maintained after the offering. See "Underwriting" for a discussion of the factors considered in determining the initial public offering price. The Company has filed an application for quotation of its Common Stock and Redeemable Warrants on The Nasdaq SmallCap Market under the symbols PHON and PHONW, respectively. THE SECURITIES OFFERED HEREBY ARE HIGHLY SPECULATIVE, INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION, AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING AT PAGE 6 FOR A DISCUSSION OF RISK FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE SECURITIES OFFERED HEREBY AND "DILUTION" ON PAGE 13. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) Per Unit................................................. $7.50 $0.675 $6.825 Total (3)................................................ $6,000,000 $540,000 $5,460,000
(1) The Company has agreed to (i) pay to the Underwriter a non-accountable expense allowance equal to 2.0% of the gross proceeds of the offering; (ii) indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"); and (iii) grant the Underwriter a five-year warrant, exercisable during the last four years, to purchase up to 80,000 Units at an exercise price of $9.00 per Unit (the "Underwriter's Warrant"). See "Underwriting." (2) Before deducting offering expenses payable by the Company estimated at $400,000, including the non-accountable expense allowance described in Note 1. (3) Does not include 120,000 additional Units to cover over-allotments, if any, which the Underwriter has an option to purchase from the Company for forty-five (45) days from the date of this Prospectus. See "Underwriting." If the option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $6,900,000, $621,000, and $6,279,000, respectively. -------------------------- The Units are offered by the Underwriter on a "firm commitment" basis, subject to prior sale, when, as and if delivered to and accepted by it, subject to the Underwriter's right to reject orders in whole or in part and to certain other conditions. It is expected that delivery of certificates representing the securities will be made on or about , 1997 in Minneapolis, Minnesota. EQUITY SECURITIES INVESTMENTS, INC. THE DATE OF THIS PROSPECTUS IS , 1997. In the course of making forward-looking statements about the Company's expectations for future performance, management makes assumptions which at the time are based on information deemed to be accurate and relevant. The Company's ability to achieve management's expectations is dependent upon numerous factors, many of which are outside of the Company's control. Variations from the assumptions used in making the forward-looking statements will cause the Company's performance to differ from that expressed in such statements, and those variations could be material. ------------------------ Prior to this offering, the Company has not been subject to the informational requirements of the Securities Exchange Act of 1934, as amended. After completion of this offering, the Company intends to furnish to its shareholders annual reports containing audited financial statements and quarterly reports for the first three quarters of each fiscal year containing unaudited financial information. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTMENTS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." ------------------------ INDEX OF CERTAIN DEFINED TERMS
DEFINED TERM PAGE - --------------------------------------------- --------- AT&T......................................... 6 Bank......................................... 10 CAT.......................................... 10 ChoiceTel.................................... 14 CI........................................... 14 Common Stock................................. 1 Company...................................... 1, 3 Dial-Around.................................. 23 Effective Date............................... 1 FCC.......................................... 6 independent pay telephones................... 21 interLATA.................................... 21 intraLATA.................................... 7, 21 LATA......................................... 21 LEC.......................................... 6, 21 MBCA......................................... 30 MN Act....................................... 16, 26 MNPUC........................................ 10 OSP.......................................... 17 DEFINED TERM PAGE - --------------------------------------------- --------- PAL.......................................... 25 PSP.......................................... 6, 21 public pay telephones........................ 21 PUC.......................................... 6 RBOC......................................... 6, 21 Redeemable Warrant........................... 1 Registration Statement....................... 1 ROI.......................................... 18 SEC.......................................... 31 Securities Act............................... 1 Site Agreements.............................. 25 Site Providers............................... 6 smart phones................................. 22 Telco West................................... 10 Telecom Act.................................. 26 Underwriter.................................. 39 Underwriter's Warrant........................ 1 Units........................................ 1 U.S. West.................................... 16
2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE COMBINED FINANCIAL STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT THE CONSUMMATION OF THE ACQUISITIONS DESCRIBED UNDER "RECENT ACQUISITIONS" TO BE EFFECTIVE PRIOR TO THE SALE OF THE UNITS PURSUANT TO THE REGISTRATION STATEMENT. IN ADDITION, AND UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A TWO-FOR-ONE STOCK SPLIT WHICH OCCURRED IN APRIL 1997. AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT REQUIRES OTHERWISE, THE "COMPANY" MEANS CHOICETEL COMMUNICATIONS, INC., AND ITS WHOLLY-OWNED SUBSIDIARY, CHOICETEL, INC. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITER IS NOT EXERCISED. SEE "UNDERWRITING." THE COMPANY The Company is the largest independent payphone service provider in Minnesota. The Company installed its first payphones in 1990 and presently has an installed base of approximately 3,000 payphones in 10 states. Management believes that it has developed the skills and systems to operate the Company on a larger scale and intends to grow through internal expansion and acquisitions. The Company believes the outlook for the pay telephone industry is favorable because of recent legislation that has led to deregulation of the rates for local pay telephone calls and a significant increase in the amount of compensation for certain types of calls which previously produced little revenue for payphone service providers. The Company anticipates that the rates for local pay telephone calls will increase as a result of the deregulation. The Company also believes that the continued expansion in telecommunication services, including the rise in call waiting, voice mail and pager usage, will result in increased calling volume, thus increasing the revenue generated by payphones. Deregulation is also expected to lead to increased competition among local telephone service providers and management anticipates that the increased competition will reduce telephone line charges, one of the Company's principal operating expenses. The Company has expanded its business through the installation of pay telephones at new sites and through strategic acquisitions of payphone routes and related assets. Since 1993, the Company has completed the acquisition of four payphone routes, adding over 2,000 telephones to the Company's operations and six new states for the Company. The Company seeks to acquire payphone routes with modern equipment, long-term leases, potential for additional installations, a favorable regulatory environment, and attractive returns based upon current operating conditions. The Company believes that the growth in the pay telephone industry will continue and the Company will be well positioned to capture a larger share of the market. The Company has developed a computer processing network that automates many of the operations necessary for the efficient management of payphone routes. The payphones operated by the Company are computer-based, enabling the Company to monitor payphones in the field from its central office. The network allows the Company to monitor phone call volume, identify malfunctioning equipment, dispatch repair service, schedule efficient coin collections, calculate commissions, print checks for location owners, rate and process long-distance calls, and generate reports that analyze and monitor the profitability of the phones. Management believes that as the Company grows, the network can be expanded easily with little additional investment in infrastructure. The Company was incorporated in Minnesota in 1989 as Intelliphone, Inc., and changed its name in April 1997 to ChoiceTel Communications, Inc. Its executive offices are located at 9724 10th Avenue North, Plymouth, Minnesota 55441, and its telephone number is (612) 544-1260. 3 THE OFFERING 800,000 Units, each Unit consisting of one share Securities Offered....................... of Common Stock and one Redeemable Warrant. Each Redeemable Warrant entitles the holder to purchase, at any time until five years after the Effective Date, one share of Common Stock at an exercise price of $9.50 per Redeemable Warrant, subject to adjustment. The Redeemable Warrants are subject to redemption by the Company for $0.01 per Redeemable Warrant at any time 30 or more days after the Effective Date, on 30 days' written notice, provided that the closing bid price of the Common Stock exceeds $10.00 per share (subject to adjustment) for any 10 consecutive trading days prior to such notice. See "Description of Securities." Securities Outstanding:(1)(2) Before the Offering.................... 1,928,766 shares of Common Stock After the Offering..................... 2,728,766 shares of Common Stock Use of Proceeds.......................... To retire debt, to finance acquisitions and expansion, and for working capital and general corporate purposes. See "Use of Proceeds." Proposed Nasdaq SmallCap Market Common Stock: PHON Symbols................................ Redeemable Warrants: PHONW
- -------------------------- (1) Does not include 172,500 shares of Common Stock reserved for issuance pursuant to options, consisting of outstanding options covering 72,500 shares and options for up to 100,000 shares which may be granted pursuant to the Company's 1997 Long-Term Incentive and Stock Option Plan, or 800,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants comprising part of the Units in the offering. Also does not include 80,000 shares of Common Stock comprising part of the Units issuable upon exercise of the Underwriter's Warrant or 80,000 shares reserved for issuance upon exercise of the Redeemable Warrants comprising part of the Units subject to the Underwriter's Warrant. See "Management," "Certain Transactions," "Description of Securities" and "Underwriting." (2) Does not include 186,240 shares of Common Stock to be issued in connection with a pending acquisition and up to 57,521 shares issuable upon conversion of a note to be issued in connection therewith. See "Recent Acquisitions." RISK FACTORS An investment in the securities offered hereby is highly speculative and involves a high degree of risk and immediate substantial dilution. The Units should be purchased only by persons who can afford to lose their entire investment. See "Risk Factors" beginning at page 6 for a discussion of risk factors that should be considered in connection with an investment in the Units and "Dilution" at page 13. 4 SUMMARY COMBINED FINANCIAL DATA
(UNAUDITED) FISCAL YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31, ----------------------------------------- -------------------------- 1996 1997 ----------------------------- ------------- 1995 ACTUAL PRO FORMA(1) 1996 ACTUAL ---------- ------------- ------------- ---------- ------------- (DOLLARS IN 000S, EXCEPT PER SHARE FIGURES) STATEMENT OF OPERATIONS DATA: Service revenue................................... $2,817 $3,562 $7,705 $ 779 $1,728 Cost of service................................... 1,785 1,987 4,181 494 802 Net income (loss) before pro forma income tax provision....................................... 122 (605)(2) (375)(2) (14 ) 172(2) Pro forma provision for income taxes (credit) (unaudited)..................................... 43 (212) (131) (5 ) 60 Pro forma net income (loss) (unaudited)........... 79 (393) (244) (9 ) 112(2) Pro forma net income (loss) per share (unaudited)..................................... $ 0.04 $(0.20)(2) $(0.11)(2) $(0.01 ) $0.06(2) Pro forma weighted shares outstanding (unaudited)..................................... 1,935,189 1,948,489 2,134,729 1,930,489 1,948,489 PRO FORMA(1) ------------- STATEMENT OF OPERATIONS DATA: Service revenue................................... $1,841 Cost of service................................... 876 Net income (loss) before pro forma income tax provision....................................... 169(2) Pro forma provision for income taxes (credit) (unaudited)..................................... 59 Pro forma net income (loss) (unaudited)........... 110(2) Pro forma net income (loss) per share (unaudited)..................................... $0.05(2) Pro forma weighted shares outstanding (unaudited)..................................... 2,134,729
(UNAUDITED) DECEMBER 31, 1996 MARCH 31, 1997 ---------------------- ------------------------------------- PRO PRO PRO FORMA AS ACTUAL FORMA(1) ACTUAL FORMA(1) ADJUSTED(1)(3) --------- ----------- --------- ----------- ------------- BALANCE SHEET DATA: Current assets.......................................... $ 1,210 $ 1,371 $ 1,313 $ 1,471 $ 3,616 Total assets............................................ 2,969 8,440 6,679 8,846 10,991 Current liabilities..................................... 1,736 4,404 4,710 5,284 2,734 Long-term debt.......................................... 570 2,673 1,117 2,014 1,649 Shareholders' equity.................................... 664 1,362 852 1,547 6,607 Working capital (deficit)............................... (526) (3,033) (3,397) (3,813) 882
- -------------------------- (1) Gives effect to the acquisitions described under "Recent Acquisitions" as if they were completed acquisitions as of the beginning of the statement of operations periods presented or the balance sheet dates, as applicable. The pro forma financial information is presented for illustration purposes only and is not indicative of what the Company's actual results and financial condition would have been for the periods and as of the dates presented. (2) Reflects reserve for Minnesota sales tax contingency of $865,000 established December 31, 1996 for the years ended prior thereto and $51,075 for the quarter ended March 31, 1997. See "Business - Legal Proceedings - Minnesota Sales Tax" and the Combined Financial Statements of the Company and notes thereto. (3) Adjusted to reflect the sale of the 800,000 Units offered hereby and the application of the net proceeds thereof (after deducting the underwriting discount and estimated offering expenses) as described in "Use of Proceeds." 5 RISK FACTORS AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PRIOR TO MAKING AN INVESTMENT, A PROSPECTIVE INVESTOR SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, INCLUDING THE COMBINED FINANCIAL STATEMENTS OF THE COMPANY AND NOTES THERETO CONTAINED ELSEWHERE HEREIN. RISKS ASSOCIATED WITH EXPANSION STRATEGY. The Company intends to expand its business by contracting to install payphones or acquiring assets from payphone service providers ("PSPs") in geographic areas where the Company is presently operating as well as in new areas. There can be no assurance that the Company will be able to identify and acquire businesses on a basis which permits it to satisfy its minimum rates of return and other criteria for acquisitions. Further, there can be no assurance that the Company will be able to locate favorable new sites for internal growth, obtain the capital necessary to permit it to pursue its business strategies, access developing technologies at satisfactory costs to provide those service enhancements demanded by consumers and customers in its existing and future businesses, or hire qualified new employees to meet the requirements of its expanding business. The Company has been in business since 1989 and, therefore, has a limited history of operations. Consequently, there can be no assurance that the Company's business strategy will prove to be successful or that expansion of the Company's business will not have a material adverse effect on the operations and financial condition of the Company. See "Recent Acquisitions" and "Business - Acquisition and Expansion Strategy." COMPETITION. The pay telephone business is highly competitive. The Company has no patents or exclusive rights to operate its business. The markets in which the Company operates are fragmented, but include certain large, well-capitalized providers of telecommunications services with substantially greater resources than the Company. The Company's principal competition in the pay telephone business comes from local exchange carriers ("LECs") operated by the regional Bell operating companies (the companies that were formed as a result of the 1985 divestiture of American Telephone & Telegraph Company ("AT&T"), collectively referred to herein as "RBOCs"), GTE Corporation, a number of independent providers of pay telephone services, major operator service providers and interexchange carriers. In addition to offering pay telephone service, LECs are the exclusive line service providers in certain geographical regions. The Company also competes with many other non-LEC telecommunication companies which offer services similar to those of the Company. Increased competition from these sources could cause the Company to offer higher commissions to new location owners ("Site Providers"). Such higher commissions could have a material adverse effect on the Company by impeding its ability to grow and by increasing its operating expenses as a percentage of revenue. Wireless and cellular communications provide an alternative to payphones and may, therefore, be a factor in slowing the rate of growth of the payphone industry. See "Business - Competition." REGULATORY FACTORS. The Company's operations are significantly influenced by the regulation of pay telephone services. Authority for regulating these services is concurrently vested in the Federal Communications Commission, which administers the interstate common carriage of telecommunications (the "FCC"), and the various state public utilities commissions ("PUCs"). Regulatory jurisdiction is determined by the interstate or intrastate character of the subject service, and the degree of regulatory oversight exercised varies among jurisdictions. Regulatory actions by these agencies have had, and are expected to continue to have, both positive and negative effects upon the Company. While most matters affecting the Company's operations fall within the administrative purview of these regulatory agencies, state and federal legislatures and the federal district court administering the AT&T divestiture are also involved in establishing certain rules and requirements governing aspects of these services. Changes in existing laws and regulations, as well as new laws and regulations, applicable to the activities of the Company or other telecommunications businesses, may materially adversely impact the operations and financial condition of the Company. See "Business - Government Regulation." 6 The FCC has had under consideration for several years proposals that would require most interstate long-distance calls initiated by dialing "0" from pay telephones to be completed using one or more predetermined long-distance carriers, such as AT&T, MCI and Sprint, rather than through the automated pay telephone or operator service provider to whom the pay telephones are pre-subscribed ("Billed Party Preference"). Some proposals would also extend Billed Party Preference to most intrastate calls initiated by dialing 0. There is significant industry opposition to all of the proposals. Although the Company believes it is unlikely that such proposals will be implemented, if they were to be adopted and implemented as currently proposed, they could have a material adverse impact on the Company's business. The FCC also has under consideration alternatives to Billed Party Preference, including rate cap and rate disclosure proposals. Although Billed Party Preference and its alternatives have been under consideration since 1987, the Company cannot predict whether or when the FCC will adopt any such proposals, or, if adopted, whether a rate cap or rate disclosure will have a material adverse impact on the Company. The FCC's payphone order of November 6, 1996 had the effect of significantly increasing the amount of Dial-Around compensation to be paid to the Company and other payphone service providers. See "Business - Government Regulation - Dial-Around Compensation." An appeal of this order is pending before the U.S. Court of Appeals for the D.C. Circuit and a decision is expected before the August 1997 recess. While the Company believes that the Court will not rescind the order, a rescission of the order would have a material adverse impact on the Company's business and financial prospects. The FCC's November 1996 payphone order will repeal all rules regulating the cost of a local payphone call in October 1997, with the intention that the market will set the rate for local payphone calls. See "Business - Government Regulation - Deregulation of Local Pay Telephone Rates." This deregulation provision of the FCC order is also under appeal. The Company believes that deregulation of rates for local pay telephone calls would result in increased rates. If the appeal of the deregulation order is successful, the rates will likely remain at their current levels. State regulatory commissions are primarily responsible for regulating the rates, terms and conditions for intrastate telephone services available from public pay telephones. There are several states in which it is illegal to provide certain intrastate services using non-LEC pay telephones, and such prohibitions could adversely affect the Company's ability to expand. In addition, several states have not authorized competition among intraLATA operator services (services related to calls originating and terminating in the same local access transport area) because of the exclusive franchise granted to LECs in such states. All of these barriers are expected to be eliminated as a result of the federal Telecommunications Act of 1996. See "Business - Government Regulation." TECHNOLOGICAL CHANGE AND NEW SERVICES. The telecommunications industry has been characterized by rapid technological advancements, frequent new service introductions and evolving industry standards. In the future, the Company's business could be adversely affected by the introduction of new technology, such as improved wireless communications, cellular telephone service and other personal communications systems. The Company believes that its future success will depend on its ability to anticipate and respond to changes and new technology. There can be no assurance that the Company will have sufficient resources to make the investments necessary to acquire new technology or to introduce new services that would satisfy an expanded range of customer needs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." DEPENDENCE UPON THIRD-PARTY PROVIDERS. The Company's ability to complete operator and direct dial long-distance calls is dependent upon contractual arrangements with long-distance carriers. While the Company believes that it has access to several providers of these services at competitive rates and expects to continue to have such access in the foreseeable future, the continuing availability of these resources cannot be assured. 7 SERVICE INTERRUPTIONS; EQUIPMENT FAILURES. The Company's long-distance operations require that its switching equipment and the equipment of its long-distance service providers be operational 24 hours per day, 365 days per year. As is the case with other telecommunications companies, the Company's long-distance operations may experience temporary service interruptions or equipment failures, which may result from causes beyond the Company's control. Any such event could have a material adverse effect on the Company. RELIANCE ON SINGLE BRAND OF PAYPHONES. To date, the Company has installed only "INTELLICALL" brand payphones and has acquired companies using only INTELLICALL payphones. If INTELLICALL payphones became unavailable for some reason, or if the Company decided to acquire payphones that were not INTELLICALL brand payphones, the Company would experience delay and additional costs in adapting its proprietary software, stocking additional spare parts and training personnel to service the new brand of payphones, which could have a material adverse effect on the Company. See "Business - Acquisition and Expansion Strategy." SEASONALITY. Similar to other pay telephone companies, the Company's business is seasonal, with revenues and earnings being generally lower during the winter months and greater during the summer months since weather conditions affect outdoor pay telephone usage. DIVIDEND POLICY. The Company does not intend to pay dividends following completion of this offering. See "Dividend Policy." RELIANCE ON KEY PERSONNEL. The Company is heavily dependent on the efforts of Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler and certain other management personnel. Each of the officers has entered into an employment agreement with the Company having a term that expires in March 1999. The loss of the services of one or more of these individuals could have a material adverse effect on the Company. The Company is the beneficiary under policies of life insurance covering its three officers in the aggregate amount of $1,850,000. In addition, the failure of the Company to attract and retain additional management to support its business strategy could have a material adverse effect on the Company. See "Management." DILUTION. Purchasers of the Units will incur immediate and substantial dilution in the tangible book value of $5.48 per share of Common Stock. In addition, the Company may use shares of Common Stock to consummate acquisitions, and any such issuance of Common Stock or the issuance of Common Stock upon the exercise of options or warrants would cause further dilution to existing shareholders. See "Dilution." NO PRIOR PUBLIC MARKET; SECURITIES ELIGIBLE FOR FUTURE SALE. Prior to this offering, there has been no public market for any securities of the Company, and there can be no assurance that an active trading market for the Common Stock or Redeemable Warrants will develop or continue after this offering. The Company has filed an application for quotation of its Common Stock and Redeemable Warrants on The Nasdaq SmallCap Market, and no assurance can be given that such application will be accepted. The initial public offering price was determined by negotiations between the Company and the Underwriter based upon several factors and may not be indicative of the market prices for the Common Stock and Redeemable Warrants after this offering. See "Underwriting." The market prices of the Company's Common Stock and Redeemable Warrants could be significantly affected by factors such as variations in the Company's operating results and regulatory developments. Although as a condition of the underwriting, the Company's existing shareholders must agree with the Underwriter not to sell Common Stock for periods of six months to two years from the date of this Prospectus, the market prices of the Common Stock and Redeemable Warrants after this offering could thereafter be adversely affected by sales of Common Stock by those shareholders. See "Securities Eligible for Future Sale." POSSIBLE VOLATILITY OF PRICES FOR SECURITIES. The market prices for the Common Stock and Redeemable Warrants may be highly volatile depending on various factors including, among others, the Company's 8 operating results, general conditions in the pay telephone industry, announcements of business developments by the Company or its competitors, and the market for similar securities, which market is subject to various pressures. In addition, the securities market is subject to price and volume fluctuations unrelated to the operating performance of the Company. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS; POSSIBLE REDEMPTION OF WARRANTS. Purchasers of Units will be able to exercise the Redeemable Warrants only if a current prospectus relating to the shares of Common Stock underlying the Redeemable Warrants is then in effect and only if such securities are qualified for sale or exempt from qualification under the applicable securities laws of the states in which the various holders of Redeemable Warrants reside. Although the Company will use its best efforts to maintain the effectiveness of a current prospectus covering the shares of Common Stock underlying the Redeemable Warrants, there can be no assurance that the Company will be able to do so, or that any required amendments will be declared effective by federal or state authorities in a timely manner. The Company will be unable to issue shares of Common Stock to those persons desiring to exercise their Redeemable Warrants if a current prospectus covering the securities issuable upon the exercise of the Redeemable Warrants is not kept effective or if such securities are not qualified or exempt from qualification in the states in which the holders of the Redeemable Warrants reside. The Redeemable Warrants are subject to redemption by the Company at $0.01 per Redeemable Warrant at any time 30 or more days after the Effective Date, on 30 days' written notice, if the closing bid price of the Common Stock exceeds $10.00 per share (subject to adjustment) for 10 consecutive trading days prior to such notice. If the Redeemable Warrants are redeemed, holders of Redeemable Warrants will lose their right to exercise the Redeemable Warrants except during such 30-day redemption period. Redemption of the Redeemable Warrants could force the holders to exercise the Redeemable Warrants at a time when it may be disadvantageous for the holders to do so or to sell the Redeemable Warrants at the then market price or accept the redemption price, which is likely to be substantially less than the market value of the Redeemable Warrants at the time of redemption. See "Description of Securities - Redeemable Warrants." CONTROL BY MANAGEMENT; ANTI-TAKEOVER PROVISIONS. Upon completion of this offering, officers and directors of the Company will beneficially own 61.9% of the outstanding shares of Common Stock and, accordingly, will be in a position to control the affairs of the Company, including the election of the Board of Directors. If these shareholders vote together as a group, they will be able to substantially influence the business and affairs of the Company, including the election of individuals to the Company's Board of Directors, and to otherwise affect the outcome of certain actions that require shareholder approval, such as adopting amendments to the Company's articles of incorporation and approving certain mergers, sales of assets and other business acquisitions and dispositions. See "Principal Shareholders." The Company is subject to the provisions of the Minnesota Business Corporation Act which includes provisions relating to "control share acquisitions" and restricting "business combinations" with "interested shareholders." Such provisions could have the effect of deterring or delaying a takeover or other change in control of the Company and could have a depressive effect on the market prices of the Common Stock and Redeemable Warrants. Accordingly, shareholders may be denied the opportunity to participate in a transaction which offers a premium to the prevailing market prices of the Common Stock or Redeemable Warrants. See "Description of Securities - Provisions of the Company's Articles and Bylaws and the Minnesota Business Corporation Act." DISCRETIONARY USE OF PROCEEDS. Approximately $2,145,000, or 42.4%, of the net proceeds to be received by the Company in the offering have been designated for acquisitions and expansion, and for working capital and general corporate purposes which may be utilized for one or more alternative purposes in the discretion of the Company. See "Use of Proceeds." UNDESIGNATED PREFERRED STOCK. The Board of Directors is authorized, without any action by the Company's shareholders, to issue up to 5,000,000 shares of authorized but undesignated Preferred Stock and to fix the powers, preferences, rights and limitations of any such Preferred Stock or any class or series 9 thereof. Persons acquiring Preferred Stock could have preferential rights with respect to voting, liquidation, dissolution or dividends over existing shareholders, including purchasers of Units in this offering. This ability of the Board would permit the Company to adopt a shareholders' rights plan or to take other action that could deter a hostile takeover of the Company, entrench the Board of Directors or deter an unsolicited tender offer. See "Description of Securities." USE OF PROCEEDS The net proceeds to the Company from the sale of the Units are estimated to be approximately $5,060,000 (or approximately $5,861,000 if the Underwriter's over-allotment option is exercised in full) after deducting underwriting discounts and estimated expenses of this offering. The Company intends to apply the net proceeds approximately as follows:
DOLLARS ------------ Retirement of bank debt......................................................... $ 2,550,000 Retirement of acquisition debt.................................................. 365,000 Acquisitions and expansion...................................................... 2,000,000 Working capital and general corporate purposes.................................. 145,000 ------------ Total....................................................................... $ 5,060,000 ------------ ------------
RETIREMENT OF BANK DEBT. Approximately $2,550,000 of the proceeds from this offering will be used to retire the balance of the Company's outstanding obligation to National City Bank (the "Bank"), which obligation arose in January 1997 and matures in January 1998. The Company used $2,200,000 of the proceeds from such loan to finance the acquisition of assets from Telco West, Inc. ("Telco West"). See "Recent Acquisitions." The Company makes principal payments to the Bank on a monthly basis, together with interest on the outstanding loan balance accruing at the rate of two points over the "reference" rate announced from time to time by the Bank. RETIREMENT OF ACQUISITION DEBT. Approximately $365,000 of the proceeds from this offering will be used to retire a portion of the Company's outstanding obligation to Telco West, due in April 1998, which arose in connection with the acquisition of site contracts and related assets in Colorado, Idaho, Oregon, Washington and Wyoming. See "Recent Acquisitions." ACQUISITIONS AND EXPANSION. The Company will reserve $2,000,000 of the proceeds from this offering for acquisitions and expansion. The Company anticipates expanding its business through the acquisition of site contracts and related assets from PSPs. The Company consummated the Telco West acquisition in January 1997 and has agreed to acquire substantially all of the assets of Computer Assisted Technologies, Inc. ("CAT"), subject to prior approval of the Minnesota Public Utilities Commission ("MNPUC"). Although the Company routinely explores acquisition opportunities, no other acquisitions are pending as of the date hereof. If the Company does not use the full amount of proceeds allocated for acquisitions and expansion, it may use such proceeds for further debt reduction and general corporate purposes. WORKING CAPITAL AND GENERAL CORPORATE PURPOSES. The remainder of the proceeds, estimated to be $145,000, will be retained as working capital and used for general corporate purposes. If the Underwriter exercises the over-allotment option in full, the Company will realize additional net proceeds of approximately $801,000, which may be used for further debt reduction, to finance acquisitions or for general corporate purposes. In addition, the Company may derive up to $8,740,000 from the exercise of the Redeemable Warrants included in the Units. Any amounts that the Company derives from the exercise of the Redeemable Warrants are expected to be used for further debt reduction, to finance acquisitions or for general corporate purposes. The Company has the right, under certain circumstances, to redeem the Redeemable Warrants for a total cost of up to $9,200. See "Risk Factors - Current Prospectus and State Registration Required to Exercise Warrants; Possible Redemption of Warrants." 10 The foregoing use of proceeds is based upon the Company's expectations with respect to its projected business operations and anticipated revenue from such operations. If such expectations are not met, the Company may have to reallocate the proceeds in such manner as it deems appropriate under the circumstances. Pending such uses, the net proceeds of this offering will be invested in bank certificates of deposit, investment-grade securities and short-term, income-producing investments, including government obligations and other money market instruments. The Company believes that the net proceeds of this offering, together with funds generated from operations, will be sufficient to conduct its operations for two years. DIVIDEND POLICY The Company intends to retain future earnings to fund the development and growth of its business and, therefore, does not anticipate paying cash dividends on the Common Stock for the foreseeable future. Any future payment of dividends will be determined by the Board of Directors of the Company and will depend on its financial condition, results of operations, restrictions in financing agreements and other factors the Board of Directors deems relevant. The Company has paid a $0.01 per quarter dividend on its outstanding shares of Common Stock since mid-1995. The Company's credit arrangement with the Bank includes covenants which prohibit the Company from paying dividends at a higher rate. The principal purpose of paying dividends has been to provide funds to shareholders of the Company to pay the income taxes incurred by them with respect to the net income of the Company due to the status of the Company as an "S corporation" under the Internal Revenue Code of 1986, as amended. The Company's status as an S corporation will be terminated in connection with this offering. It is the Company's intention to declare and pay a dividend to the existing shareholders immediately prior to the Effective Date in an aggregate amount equal to approximately 35% of the estimated taxable net income of the Company for the current fiscal year through such date. 11 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1997, and as adjusted to give effect to the sale of the Units offered hereby and the application of the net proceeds from such sale as set forth under "Use of Proceeds." This material should be read in conjunction with the Combined Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997 (UNAUDITED) ----------------------------------------- PRO FORMA AS ACTUAL PRO FORMA(1) ADJUSTED(2) ------------ ------------ ------------- Short-term debt....................................................... $ 3,352,980 $ 3,927,360 $ 1,377,360 Long-term debt, net of current maturities............................. 1,116,657 2,014,177 1,649,177 Shareholders' equity:(3)(4) Preferred Stock, par value $0.01 per share, 5,000,000 shares authorized; none outstanding Common Stock, par value $0.01 per share, 15,000,000 shares authorized; 1,928,766 shares issued and outstanding; 2,115,006 shares pro forma; 2,915,006 shares as adjusted.................... 1,431,892 2,130,292 7,190,292 Accumulated deficit................................................. (579,591) (583,253) (583,253) ------------ ------------ ------------- Total shareholders' equity........................................ 852,301 1,547,039 6,607,039 ------------ ------------ ------------- Total capitalization............................................ $ 5,321,938 $ 7,488,576 $ 9,633,576 ------------ ------------ ------------- ------------ ------------ -------------
- -------------------------- (1) Gives effect to the acquisitions described under "Recent Acquisitions" as if they were completed acquisitions as of March 31, 1997. The pro forma financial information is presented for illustration purposes only and is not indicative of what the Company's actual financial condition would have been as of such date. (2) Adjusted to reflect the sale of the 800,000 Units offered hereby and the application of the net proceeds thereof (after deducting the underwriting discount and estimated offering expenses) as described in "Use of Proceeds." (3) Does not include 172,500 shares of Common Stock reserved for issuance pursuant to options, consisting of outstanding options covering 72,500 shares and options for up to 100,000 shares which may be granted pursuant to the Company's 1997 Long-Term Incentive and Stock Option Plan, or 800,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants comprising part of the Units in the offering. Also does not include 80,000 shares of Common Stock comprising part of the Units issuable upon exercise of the Underwriter's Warrant or 80,000 shares reserved for issuance upon the exercise of the Redeemable Warrants comprising part of the Units subject to the Underwriter's Warrant. See "Management," "Certain Transactions," "Description of Securities" and "Underwriting." (4) Does not include 186,240 shares of Common Stock to be issued in connection with a pending acquisition and up to 57,521 shares of Common Stock issuable upon conversion of a note to be issued in connection therewith. See "Recent Acquisitions." 12 DILUTION For purposes of the following discussion, it is assumed that the entire amount of each Unit's offering price is allocable to the share of Common Stock included therein and that no amount is allocable to the Redeemable Warrant included therein. The Company's net tangible book value as of March 31, 1997 was $456,414, or $0.24 per share of Common Stock. "Net tangible book value" per share is determined by dividing the tangible net worth of the Company (tangible assets minus total liabilities) by the number of outstanding shares of Common Stock. Without giving effect to changes in net tangible book value after March 31, 1997, except for the sale by the Company of the Units offered hereby (after deduction of the underwriting discount and estimated offering expenses), the Company's net tangible book value at March 31, 1997 would have been $5,516,414, or $2.02 per share. This represents an immediate increase in the net tangible book value per share of Common Stock to the present shareholders of $1.78 and an immediate dilution of $5.48 per share to investors purchasing Units in this offering. The following table illustrates this dilution per share:
Initial public offering price................................. $ 7.50 Net tangible book value at March 31, 1997................... $ 0.24 Increase in net tangible book value attributable to new investors................................................. 1.78 --------- Pro forma net tangible book value after the offering.......... 2.02 --------- Dilution to new investors..................................... $ 5.48 --------- ---------
The following table provides a comparison of the total number of shares of Common Stock purchased from the Company, the total consideration paid, and the average price per share paid by the current holders of Common Stock and by the investors purchasing Units in this offering:
SHARES PURCHASED TOTAL CONSIDERATION(1) AVERAGE --------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- --------- ------------ --------- ----------- Existing shareholders................................ 1,928,766 70.7% $ 1,443,473 19.4% $ 0.75 New investors........................................ 800,000 29.3 6,000,000 80.6 $ 7.50 ---------- --------- ------------ --------- Total............................................ 2,728,766 100.00% $ 7,443,473 100.00% $ 2.73 ---------- --------- ------------ --------- ---------- --------- ------------ ---------
- -------------------------- (1) Does not reflect deduction of any underwriting discounts or other expenses incurred in connection with the issuance of the Units. The above tables assume no exercise of the Underwriter's over-allotment option. If such option is exercised in full, the new investors will have paid $6,900,000 for 920,000 shares of Common Stock, representing 82.7% of the total consideration for 32.3% of the total number of shares outstanding. The foregoing calculations do not include 172,500 shares of Common Stock reserved for issuance pursuant to options, consisting of outstanding options covering 72,500 shares and options for up to 100,000 shares which may be granted pursuant to the Company's 1997 Long-Term Incentive and Stock Option Plan, 800,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants, nor 186,240 shares to be issued in connection with a pending acquisition or up to 57,521 shares issuable upon conversion of a note to be issued in connection therewith. The calculations also do not include 80,000 shares of Common Stock comprising part of the Units issuable upon exercise of the Underwriter's Warrant or 80,000 shares reserved for issuance upon exercise of the Redeemable Warrants comprising part of the Units subject to the Underwriter's Warrant. See "Recent Acquisitions," "Management," "Certain Transactions," "Description of Securities" and "Underwriting." 13 SELECTED COMBINED FINANCIAL DATA The selected combined financial data presented below for, and as of the end of, the years ended December 31, 1995 and 1996, have been derived from the financial statements of ChoiceTel Communications, Inc. ("ChoiceTel"), and its wholly-owned subsidiary, Choicetel, Inc. ("CI"), which financial statements have been audited by Schechter Dokken Kanter Andrews & Selcer, Ltd., independent certified public accountants. The selected combined financial data presented below for, and as of the end of, the quarters ended March 31, 1996 and 1997, have been derived from the unaudited financial statements of ChoiceTel and CI which, in the opinion of the Company's management, include all adjustments necessary for a fair presentation of financial position and the results of operations. The operating results for the quarter ended March 31, 1997, are not necessarily indicative of the operating results to be expected for the full year or for any other period. The selected combined financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Combined Financial Statements of the Company and notes thereto included elsewhere in this Prospectus.
(UNAUDITED) FISCAL YEAR ENDED DECEMBER 31, QUARTER ENDED MARCH 31, ------------------------------------- ------------------------------------- 1996 1997 ------------------------ ------------------------ PRO PRO 1995 ACTUAL FORMA(1) 1996 ACTUAL FORMA(1) ----------- ----------- ----------- ----------- ----------- ----------- (DOLLARS IN 000S, EXCEPT PER SHARE FIGURES) STATEMENT OF OPERATIONS DATA: Service revenue..................... $ 2,817 $ 3,562 $ 7,705 $ 779 $ 1,728 $ 1,841 Cost of service..................... 1,785 1,987 4,181 494 802 876 ----------- ----------- ----------- ----------- ----------- ----------- Gross margin........................ 1,032 1,575 3,524 285 926 966 ----------- ----------- ----------- ----------- ----------- ----------- Selling, general and administrative expenses........................... 573 830 1,911 194 351 360 ----------- ----------- ----------- ----------- ----------- ----------- Net income (loss) before pro forma income tax provision......... 122 (605)(2) (375)(2) (14) 172(2) 169(2) ----------- ----------- ----------- ----------- ----------- ----------- Pro forma provision for income taxes (credit) (unaudited)............... 43 (212) (131) (5) 60 59 ----------- ----------- ----------- ----------- ----------- ----------- Pro forma net income (loss) (unaudited)........................ 79 (393) (244) $ (9) $ 112(2) $ 110(2) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Pro forma net income (loss) per share (unaudited).................. $ 0.04 $ (0.20)(2) $ (0.11 (2) $ (0.01 ) $ 0.06 (2) $ 0.05 (2) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma weighted shares outstanding (unaudited)..... 1,935,189 1,948,489 2,134,729 1,930,489 1,948,489 2,134,729 OPERATING DATA (AT END OF PERIOD): Number of phones in service..................... 1,013 1,219 2,824 1,054 2,880 2,880
14
(UNAUDITED) DECEMBER 31, 1996 MARCH 31, 1997 ---------------------- ------------------------------------- PRO PRO PRO FORMA AS ACTUAL FORMA(1) ACTUAL FORMA(1) ADJUSTED(1)(3) --------- ----------- --------- ----------- ------------- (DOLLARS IN 000S, EXCEPT PER SHARE FIGURES) BALANCE SHEET DATA: Current assets........................................... $ 1,210 $ 1,371 $ 1,313 $ 1,471 $ 3,616 Total assets............................................. 2,969 8,440 6,679 8,846 10,991 Current liabilities...................................... 1,736 4,404 4,710 5,284 2,734 Long-term debt........................................... 570 2,673 1,117 2,014 1,649 Total liabilities........................................ 2,305 7,077 5,827 7,298 4,383 Shareholders' equity..................................... 664 1,362 852 1,547 6,607 Working capital (deficit)................................ (526) (3,033) (3,397) (3,813) 882
- -------------------------- (1) Gives effect to the acquisitions described under "Recent Acquisitions" as if they were completed acquisitions as of the beginning of the statement of operations periods presented or the balance sheet dates, as applicable. The pro forma financial information is presented for illustration purposes only and is not indicative of what the Company's actual results and financial condition would have been for the periods and as of the dates presented. (2) Reflects reserve for Minnesota sales tax contingency of $865,000 established December 31, 1996 for the years prior thereto and $51,075 for the quarter ended March 31, 1997. See "Business - Legal Proceedings - Minnesota Sales Tax" and the Combined Financial Statements of the Company and notes thereto. (3) Adjusted to reflect the sale of the 800,000 Units offered hereby and the application of the net proceeds thereof (after deducting the underwriting discount and estimated offering expenses) as described in "Use of Proceeds." 15 REORGANIZATION In 1995, CI was incorporated to operate as a competitive LEC under the Minnesota Telecommunications Act of 1995 (the "MN Act"), which allows companies, upon approval of the MNPUC, to buy and competitively resell non-residential telephone service provided by U.S. West Communications, Inc. ("U.S. West"). CI was formed separately from ChoiceTel in order to more efficiently facilitate MNPUC approval, which approval was obtained on April 19, 1996. The stock ownership of CI was substantially identical to the ownership of ChoiceTel at the time of CI's formation. In addition to the telephone lines CI sells to ChoiceTel, CI also sells pay telephone lines to several other pay telephone companies in Minnesota, has been approved to compete with Nevada Bell and sell pay telephone lines in Nevada, and has filed to compete with U.S. West in Oregon. In March 1997, a corporate reorganization was effected in which the shareholders of CI transferred their common stock to ChoiceTel as an additional contribution to its capital and, as a result, CI became a wholly-owned subsidiary of ChoiceTel. RECENT ACQUISITIONS In January 1997, the Company completed its acquisition from Telco West of site contracts for 1,020 payphones located in Colorado, Idaho, Oregon, Washington and Wyoming and all equipment located at the respective sites, as well as the tradename "Telco Northwest." The purchase price for the acquired assets was $3,374,745, with the Company paying $2,173,245 in cash and the balance by delivery of a 10% secured subordinated note in the principal amount of $365,000, with the principal due on April 1, 1998, and a second 10% secured subordinated note in the principal amount of $841,500, which amortizes over a 54-month period. The promissory notes are collateralized by a security interest granted in substantially all of the Company's pay telephone assets, which security interest is subordinate to the senior secured position of the Bank as the Company's primary lender. In connection with the acquisition, Telco West and its principal shareholder entered into a five-year non-compete agreement covering the states of Colorado, Idaho, Oregon, Washington and Wyoming. In February 1997, the Company entered into an agreement to acquire from CAT 585 pay telephone site contracts and related assets, as well as site contracts only for the installation of an additional 100 pay telephones, all located in Minnesota and Wisconsin, subject to approval of the MNPUC. The purchase price for the assets is $2,270,300, consisting of $100,000 payable in cash, the Company's assumption of $1,121,900 of debt to two equipment leasing companies, the assumption of $350,000 of debt to CAT's principal shareholder, and the balance of $698,400 by delivery to CAT of 186,240 shares of unregistered Common Stock. In connection with the Company's assumption of CAT's debt to its principal shareholder, the Company will issue a convertible note bearing interest at the rate of 8% per annum with interest only payable for the first six months thereunder and the entire principal balance due at the end of such period. The note will be convertible into Common Stock on the basis of one share of stock for each $6.33 of principal and accrued interest due. However, if at August 1, 1997, any of the 685 acquired site contracts are not in service, or the average cash flow therefrom is less than the average of all of the Company's payphones in Minnesota and Wisconsin, then the purchase price for CAT's site contracts and related assets is subject to adjustment based on the performance of the payphones during July 1997. In connection with the transaction, CAT and its principal shareholder will enter into a two-year non-compete agreement with the Company covering the states of Minnesota and Wisconsin. The president of CAT will enter into employment, non-compete and incentive stock option agreements with the Company. Pending approval of the acquisition of the CAT assets by the MNPUC and satisfaction of other conditions of closing, the parties entered into a Route Service Agreement effective as of February 1, 1997, pursuant to which the Company is managing and servicing the CAT payphones in Minnesota and Wisconsin for a monthly fee equal to the operating revenue therefrom less equipment leasing costs and certain other expenses payable by CAT to third parties. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company derives revenue from three principal sources: coin calls, non-coin calls and Dial-Around calls. Coin calls represent calls paid for with coins deposited in the telephone. The Company recognizes coin revenue in the amount deposited. Non-coin calls are calls charged to a customer credit card or billed to the called party (collect calls). These calls are processed by the payphone's computer using "store and forward" technology or, if a live operator is requested, the call is processed by an operator service provider ("OSP") such as, for example, AT&T, MCI or Sprint. Compensation for Dial-Around calls is paid by long-distance carriers when customers access a long-distance carrier directly by dialing an access number or an 800 number or using a non-billable calling card. See "Business - Operations" and "- Government Regulation." The principal costs related to ongoing operation of the Company's payphones include telephone line charges, consisting of payments made by the Company to LECs and long-distance carriers for access charges and use of their networks; commission payments to Site Providers; and collection, repair and maintenance costs. RESULTS OF OPERATIONS The following table presents certain items in the combined statements of operations as a percentage of revenue for the years ended December 31, 1994 through 1996, and the quarters ended March 31, 1996 and 1997:
QUARTER YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------- -------------------- 1994 1995 1996 1996 1997 --------- --------- --------- --------- --------- REVENUE Coin revenue................................................. 81.4% 83.3% 78.9% 84.0% 65.9% Non-coin revenue............................................. 17.2 14.9 14.1 13.8 12.5 Dial-Around compensation..................................... 1.4 1.8 7.0 2.2 21.3 Competitive LEC revenue...................................... -- -- 1.6 -- 0.3 --------- --------- --------- --------- --------- Total service revenue.................................... 100.0% 100.0% 100.0% 100.0% 100.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- SERVICE COSTS AND EXPENSES Telephone line charges....................................... 43.0% 42.5% 36.2% 41.8% 25.8% Commissions.................................................. 18.3 18.0 16.3 18.0 16.1 Collection, repair and maintenance(1)........................ 7.1 7.5 8.5 12.0 10.1 --------- --------- --------- --------- --------- Total cost of service.................................... 68.4% 68.0% 61.0% 71.8% 52.0% --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Gross margin................................................. 31.6% 32.0% 39.0% 28.2% 48.0% Selling, general and administrative expenses(1).............. 15.9 15.7 18.1 16.3 14.3 Interest..................................................... 3.7 3.2 3.4 4.8 8.4 Depreciation and amortization................................ 8.2 8.8 10.2 8.7 12.2 --------- --------- --------- --------- --------- Net income (loss) before pro forma income tax provision(2)..................................... 3.8% 4.3% 7.3% (1.6)% 13.1% --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
- -------------------------- (1) A portion of the expenses classified as "Collection, repair and maintenance," above, are classified as "Selling, general and administrative expenses" in the Combined Financial Statements of the Company and notes thereto. (2) Before reserve for Minnesota sales tax contingency of $865,000 established December 31, 1996 for the years prior thereto and $51,075 for the quarter ended March 31, 1997. See "Business - Legal Proceedings - Minnesota Sales Tax" and the Combined Financial Statements and notes thereto. 17 THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31, 1996. Total revenue for the three months ended March 31, 1997, increased approximately $949,000, or 121.8%, compared to the three months ended March 31, 1996. This growth was primarily attributable to the increase in the average number of pay telephones in service from 1,046 during the 1996 quarter to 2,643 (including 602 phones in service pursuant to the Route Service Agreement with CAT) during the 1997 quarter and the increased Dial-Around compensation. Of the increase in revenue, $350,000, or 36.8%, is attributable to an increase in the rate of Dial-Around compensation which occurred on November 6, 1996. On that date, Dial-Around compensation increased from approximately $6.00 per phone per month to approximately $45.00 per phone per month. See "Business - Government Regulation - Dial-Around Compensation." Coin revenue increased $468,000, but declined to 64.9% of total revenue for the period compared to 84.0% in the previous year, as a result of the increase in the Dial-Around compensation, as well as the seasonal nature of the phones acquired in Oregon, Idaho and Washington, which generate most of their revenue from May through October. Telephone and long-distance charges decreased to 26.8% of total revenue for the 1997 period, as compared to 41.8% the previous year, due to the growth in Dial-Around compensation and a reduction in line charges in Minnesota in June 1996 from approximately $90.00 per line to $52.00 per line. Site Provider rent and collection, service and repair costs decreased from 18.0% and 12.0% of revenue, respectively, in 1996, to 15.8% and 10.0% of revenue, respectively, in 1997. Selling, general and administrative ("SG&A") expenses increased by $116,000 but, when expressed as a percentage of revenue, declined from 16.3% in the first three months of 1996 to 14.1% for the same period in 1997. Interest expense for the first three months in 1997 increased to 8.3% of revenue as compared to 4.8% of revenue in the prior year due to increased borrowing to finance the acquisition of a route in Oregon and new installations. Depreciation and amortization for the 1997 quarter increased to 12.1% of revenue from 8.7% of revenue as a result of the amortization associated with the acquired contracts. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995. For the year ended December 31, 1996, total revenue increased approximately $745,000, or 26.4%, compared to the year ended December 31, 1995. This growth was primarily attributable to the increase in the average number of pay telephones in service from 865 during 1995 to 1,123 during 1996, the increase in Dial-Around compensation and the initiation of operations as a competitive LEC. Of the increase in revenue, $147,000, or 19.7%, of the increase, was attributable to the increase in the Dial-Around compensation rate on November 6, 1996, and $50,700, or 6.8%, of the increase in revenue is attributable to sales of telephone service to non-affiliated companies. Telephone and long-distance charges decreased in 1996 to 36.2% of total revenue, compared to 42.5% of total revenue the prior year. The decrease was primarily attributable to CI receiving authorization to act as a reseller of telephone service in June 1996, which had the effect of reducing the Company's line charges in Minnesota to $52.00 per line. Rents paid to Site Providers decreased to 16.3% of total revenue in 1996, compared to 18.0% in the prior year. This was attributable to increased Dial-Around compensation revenue (which is not included in rent calculations for Site Providers) and to the phones added in 1996 which generated less revenue and, therefore, lower Site Provider rents than the phones put into service in prior years. As part of its growth strategy and in order to take advantage of lower line rates, the Company knowingly installed pay telephones that, while meeting the Company's return on investment ("ROI") objective, would under perform its existing phones. Service, collection, repair and maintenance costs increased in 1996 over the prior year by approximately $94,000, or 44.4%, due to the start-up costs associated with adding phones in new geographic areas, as well as the increased number of phones in service. 18 In 1996, SG&A expenses increased approximately $200,000, or 45.1%, from the prior year. This was attributable, in part, to higher marketing costs associated with the Company's growth strategy. Interest expense increased to 3.4% of revenue compared to 3.2% of revenue in the prior year due to increased borrowing to finance the Nevada acquisition and new installations. Depreciation and amortization increased in 1996 to 10.2% of revenue from 8.8% of revenue in the prior year, attributable to amortization associated with the acquired contracts. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994. For the year ended December 31, 1995, total revenue increased approximately $358,000, or 14.6%, compared to the prior year. This growth was primarily attributable to an increase in the average number of pay telephones in service from 730 in 1994 to 865 in 1995. Long-distance revenue decreased to 14.9% of total revenue compared to 17.2% in the previous year due to Dial-Around calls replacing revenue producing calls at the Company's payphones. Telephone and long-distance charges remained relatively unchanged as a percentage of revenue. Such charges represented 42.5% of total revenue in 1995 compared to 43.0% of revenue in the prior year. Rents paid to Site Providers and collection, repair and maintenance costs remained relatively constant. SG&A expenses increased approximately $52,000 in 1995, or 13.3%, from the prior year. As a percentage of revenues, SG&A expenses decreased to 15.7% of total revenues, compared to 15.9% in the prior year. Interest expenses remained stable. Depreciation and amortization increased approximately $46,000, or 23.1%, from the prior year. SALES TAX CONTINGENCY. The Company, based on its analysis of the published regulations of the Minnesota Department of Revenue, has not remitted any sales tax payments to the State of Minnesota. In 1996, the Company learned that the opinion of the Department was that calls from payphones were subject to state sales tax. Management is of the view that the payphone service it provides is not subject to sales tax and the Company is challenging the imposition of the tax. Nonetheless, on December 31, 1996, the Company established a reserve of $865,000 for the years prior thereto and has reserved an additional $51,075 for the quarter ended March 31, 1997. The effect of these reserves is considered extraordinary and is not included in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 1997, the Company's operating activities provided $13,000, net long- and short-term financing provided $3,275,000, and the sale of shares of Common Stock provided $16,000. The Company invested $3,831,000 in acquisitions and new installations, resulting in a $594,300 decrease in cash balances. Operating activities in the year ended December 31, 1996 provided $600,400 and sales of shares of Common Stock during the year provided $920,000. During the year, the Company invested $462,200 in new installations, reduced debt by $68,500 and paid $143,700 in dividends. The overall impact was an $846,000 increase in cash balances. For the year ended December 31, 1995, the Company's operating activities provided $161,000 and long-term financing provided $778,000. During the year, $623,000 was invested in acquisitions and new installations, $320,000 of short-term debt was retired and $33,000 was paid as dividends, resulting in a $37,000 decrease in cash balances for the year. In January 1997, the Company entered into an Amended and Restated Loan Agreement with the Bank pursuant to which the Company can borrow up to $3,000,000. The Company has granted the Bank a first lien on all of its assets to secure its obligations to the Bank. The agreement provides for the payment of interest on the amount outstanding from time to time at an annual rate equal to 2.0% over the "reference" rate announced from time to time by the Bank and expires in January 1998. The Company 19 intends to repay all of its obligations to the Bank with the proceeds from this offering. See "Use of Proceeds." The Company has also borrowed $453,000 in the aggregate from certain individuals and intends to repay the individual lenders out of cash generated from operations as and when their promissory notes mature. Management believes that the proceeds from the sale of the Units hereby, together with cash generated from operations, will be adequate to fund the Company's operations for the foreseeable future. RECENTLY ISSUED ACCOUNTING STANDARDS - NEW ACCOUNTING PRONOUNCEMENT The Company will adopt in the fiscal year ending December 31, 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which was issued in February 1997. SFAS No. 128 requires disclosure of basic earnings per share ("EPS") and diluted EPS, which replaces the existing primary EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the year. Dilutive EPS is computed similar to EPS as previously reported provided that, when applying the treasury stock method to common equivalent shares, the Company must use its average share price for the period rather than the more dilutive greater of the average share price or end-of-period share price required by APB No. 15. 20 BUSINESS GENERAL The Company is the largest independent payphone service provider ("PSP") in Minnesota. The Company installed its first payphones in early 1990 and presently has an installed phone base of approximately 3,000 payphones in 10 states. The Company has grown its business through the installation of pay telephones in new areas and through strategic asset acquisitions of payphone routes and related assets, including 270 payphones located in Minnesota acquired from American Amusement Arcade in 1993; 85 payphones acquired in Nevada from Telco West in 1995; an additional 1,020 payphones acquired from Telco West in 1997 in Oregon, Idaho, Colorado, Washington and Wyoming; and 602 payphones located in Minnesota and Wisconsin presently under a Route Service Agreement with CAT and to be acquired, together with site contracts only for the installation of an additional 83 payphones, following MNPUC approval and the satisfaction of customary closing conditions. INDUSTRY OVERVIEW In 1996, calls made from pay telephones were estimated at $7 billion in annual revenues to the United States telecommunications industry. Pay telephones may be "public," meaning they are owned by LECs, or "independent," meaning they are owned and operated by companies independent of the LECs, such as the Company. Of the approximately 2 million pay telephones operating in the United States in 1995, it is estimated that approximately 350,000 were independent. Today's telecommunications marketplace was principally shaped by the 1985 AT&T divestiture of the 22 regional Bell operating companies ("RBOCs"), which provided local telephone services within their areas of operation. The AT&T divestiture and the many regulatory changes adopted by the FCC and state regulatory authorities in response to the AT&T divestiture have resulted in the creation of new business segments in the telecommunications industry. As a result of the AT&T divestiture, pay telephones may now be owned and operated independently. As part of the AT&T divestiture, the United States was divided into geographic areas known as local access transport areas or "LATAs." Telephone service that both originates and terminates within the same LATA ("intraLATA") is priced based on tariffs filed with and approved by state regulatory authorities. Local exchange carriers ("LECs") provide intraLATA telephone service to, among others, independent pay telephone companies. LECs are generally prohibited from offering or deriving revenues or income from services between LATAs ("interLATA"). In addition, most state regulatory authorities require LECs to provide local access line service to independent pay telephone companies. See "Business - Government Regulation." Long-distance carriers provide interLATA service and, in some circumstances, may also provide long-distance service within LATAs. An interLATA long-distance pay telephone call begins with an originating LEC transmitting the call from the pay telephone that originates the call to a point of connection with a long-distance carrier. The long-distance carrier, through its owned or leased switching and transmission facilities, transmits the call across its long-distance network to the LEC serving the local area in which the recipient of the call is located. This terminating LEC then delivers the call to the recipient. Independent PSPs contract with one or more long-distance carriers to provide long-distance service to their pay telephones. BUSINESS STRATEGY The Company has focused on identifying payphone sites that had the potential to achieve a high return on investment ("ROI") after depreciating the equipment over the life of the phone lease. Although others in the industry have used shorter leases, the Company's analysis indicated that a long-term lease was necessary in order to achieve the Company's ROI objective and to offer a competitive commission to Site 21 Providers. Therefore, most of the Company's pay telephones are placed with Site Providers under leases having terms of five years or more. The Company's objective is to grow through additional acquisitions and internally, thereby achieving economies of scale. There are approximately 1,500 independent PSPs nationally. The Company believes that there is a significant opportunity to consolidate the highly fragmented independent segment of the public payphone industry. Further, independent PSPs, as compared to the RBOCs, generally have a larger percentage of computer-based, or "smart," phones in their inventory of pay telephones and their payphones are placed in locations that generate higher revenue per phone. The Company intends to use the proceeds from this offering to become a more active consolidator of the independent payphone market. Management believes that the Company's experience in completing acquisitions will be instrumental in identifying, negotiating and ultimately integrating additional acquisitions. The Company also intends to expand through internal growth. The Company actively seeks to contract and install additional payphones to increase its sales in existing markets. The installation of new payphone locations is generally less expensive, though less predictable, than acquiring existing PSPs. ACQUISITION AND EXPANSION STRATEGY The Company believes that the existence of many small independent PSPs presents acquisition opportunities for the Company. The Company further believes that management's experience in identifying and negotiating potential acquisitions and integrating acquired companies into the Company's ongoing operations will enable it to grow and benefit from the associated economies of scale. In reviewing potential acquisition candidates, the Company considers various factors, including: 1. HISTORICAL AND PRO FORMA FINANCIAL PERFORMANCE The Company reviews the historical revenues, mix between coin and non-coin revenue and cash flows of the telephones to be acquired and analyzes their prospective profitability based upon pro forma considerations such as lower service and collection expenses, lower general and administrative expenses, and the more favorable terms and conditions which the Company may be able to obtain from long-distance service providers. 2. LOCATION AGREEMENTS The Company seeks to acquire payphone contracts that are long-term (five or more years) with automatic renewals at the end of the term, that are assignable to another company, and which cannot be canceled by the Site Provider but give the Company the right to remove the phone if the revenues are insufficient. 3. EQUIPMENT IN SERVICE There are three primary suppliers of smart phones to PSPs. To date, the Company has installed only "INTELLICALL" brand payphones and has acquired only companies using INTELLICALL payphones. This has allowed the Company to quickly integrate acquired phones into daily operations. The Company could acquire routes using another brand's smart phones but it would have to factor in the additional costs associated with adapting proprietary software, stocking additional spare parts and training personnel for proficiency on new equipment. 22 4. LOCATION AND ECONOMIES OF SCALE The Company considers the geographic proximity of the payphones to be acquired to the Company's existing service areas, and the extent to which the acquisition would provide the Company with economies of scale through more efficient utilization of coin collection and service personnel. The Company seeks to enter new geographic areas that will result in similar economies of scale through one or more acquisitions. Installations at new locations are an important part of the Company's expansion strategy in that pay telephones placed directly with Site Providers, rather than through acquisition, have historically provided the Company with its highest returns. The Company has generally been able to add pay telephones at the rate of 100 phones per year in Minnesota, and anticipates that this rate of expansion will increase as the Company enters additional markets. Because the Company's Site Provider base is primarily businesses, the Company regularly obtains additional pay telephone locations as the Site Providers' respective businesses grow. OPERATIONS The Company operates, services and maintains a system of approximately 3,000 pay telephones in the midwestern and western United States, with approximately 60% of its payphones located in Minnesota. All of the Company's pay telephones accept coins as payment for local or long-distance calls and can also be used to place local or long-distance cashless calls. COIN CALLS The Company's pay telephones generate coin revenue primarily from local calls. In all of the states in which the Company's pay telephones are located, the Company charges the same rates for local coin calls as does the relevant LEC; in most states that charge is $0.25. The maximum rate LECs and independent pay telephone companies may charge for local calls is typically set by state regulatory authorities. Long-distance coin calls are carried by long-distance carriers that have agreed to provide long-distance service to the Company's telephones. The majority of the Company's phones sell coin long-distance for a rate of $0.25 per minute, with a two minute minimum. This rate is well below U.S. West's rates for coin long-distance and is significantly less expensive than credit card or collect long-distance rates. The Company offers these rates to create a better value for its price sensitive customers and to discourage Dial-Around calling from its phones (as the Company receives no incremental revenue from users who place long-distance calls through such services as "1-800-COLLECT" and the many other long-distance providers that can be accessed through the Company's payphones). However, beginning in October 1997, the Company will receive incremental revenue from Dial-Around calling. See "Government Regulation - Dial-Around Compensation." Management believes that its $0.25 per minute long-distance rate results in considerable goodwill and is a point of differentiation between its phones and its LEC competitors. NON-COIN CALLS The Company also receives revenue from non-coin, or cashless, calls made from its pay telephones, including credit card calls, calling card calls, collect calls and third-party billed calls. These calls are processed by the payphone's computer using store and forward technology, or, if a live operator is requested, then the call is transferred to the Company's designated OSP. DIAL-AROUND CALLS A Dial-Around call originates from a payphone when the user dials a non-billable access number such as, for example, 1-800-Collect, 1-800-CallATT or 10ATT, and thereby dials around the Company's long-distance carrier in order to reach another long-distance carrier. The user deposits no money for the call 23 and, prior to 1992, the long-distance provider carrying the call paid no commission to the payphone owner. Since 1992, payphone owners have been compensated by long-distance carriers for Dial-Around calls. COMPUTER NETWORK AND EQUIPMENT. The Company focused its early efforts on building a computer processing network that automated many of the operations of managing a pay telephone enterprise. Specialized software was designed and written when it was not available from industry suppliers. The Company's smart phones are part of a centralized network that links all of the Company's phones in the field with central processors. The system allows the Company to monitor phone call volume, identify malfunctioning equipment, dispatch repair service, schedule efficient coin collections, calculate commissions, print checks to Site Providers, rate and process long-distance calls using store and forward technology, and generate necessary reports that analyze and monitor profitability of the phones. Management believes that as the Company grows, this network can be expanded easily with little additional investment in infrastructure. The Company installs pay telephones which it believes incorporate the latest technology. The equipment makes use of microprocessors to provide voice synthesized calling instructions, detect and count coins deposited during each call, inform the caller at certain intervals of the time remaining on each call, and identify the need for and the amount of an additional deposit. The pay telephones can be programmed and reprogrammed from the Company's central computer facilities to update rate information or to direct different kinds of calls to particular carriers. The Company's pay telephones can distinguish coins by size and weight, report to a remote location the total coinage in the coin box, perform self-diagnosis and automatically report problems to a pre-programmed service number, and immediately report attempts of vandalism or theft. Some of the telephones also operate on power available from the telephone lines, thereby avoiding the need for and reliance upon an additional power source at the installation location. The telephones are designed to have a user-friendly appearance and manner of operation similar to LEC-owned pay telephones. The Company's smart phones utilize store and forward technology which enables the Company to sell credit card, calling card and collect calls through its own OSP. The store and forward software program provides callers with instructions communicated by a digitized human voice for entering billing information, such as a calling card number or a terminating phone number for a collect call, prior to connecting a call. For example, for a collect call, a synthesized voice directs the caller to speak his name into the payphone handset, the caller's response is digitally recorded and played back when the call is answered at its destination, and the called party is instructed to press "1" on his telephone to accept the call. The software program also minimizes fraudulent charges for calling card or credit card calls by automatically communicating with a credit bureau to verify that the card has not been identified as a lost, stolen or delinquent card. For a collect call, the software program can also verify that the number being called is not delinquent. After verifying the call, the payphone will complete the connection using a long-distance carrier. When the call is concluded, the software program directs the billing information, including the date, time and length of the call, the billed-to-number and the charges for the call, to the Company's computer. Later, the billing records are sent to a processing agent that bills and collects the charges. The processing agent keeps a percentage of the billed amount as its processing fee and remits the balance to the Company. The Company books the net amount received as non-coin revenue. The Company is billed by the long-distance carrier for long-distance charges, which charges are only a small percentage of the amount billed to the customer. Some of the Company's payphones, primarily those placed in locations that are not high generators of long-distance calls, do not have store and forward capability. In addition, customers occasionally request a live operator even with phones that have the store and forward technology. Examples of calls requiring live operator assistance include person-to-person calls and calls billed to a third party. In these situations, the calls are transferred to an OSP which completes and bills the calls and pays the Company a commission based on the amount billed. The Company contracts with several OSPs for this 24-hour a day service. While the Company could route all of these calls to a single OSP, and perhaps maximize the commission 24 revenue it receives, there are numerous OSPs available to the Company and the terms offered by them are highly competitive. In selecting an OSP, the Company considers numerous factors including the commission offered, the quality of service and the pricing of calls to customers. PLACEMENT OF PAY TELEPHONES. As of May 31, 1997, the Company's pay telephone system consisted of approximately 3,000 telephones located in 10 states. The following table sets forth certain information as of the dates indicated concerning the number and location of pay telephones operated by the Company: NUMBER OF PAY TELEPHONES
DECEMBER 31, --------------------------------- MAY 31, STATE 1994 1995 1996 1997(1) - ------------------------------------------------------------------------ ----- --------- --------- ----------- Minnesota............................................................... 792 910 1,074 1,741 Oregon.................................................................. -- -- 10 596 Idaho................................................................... -- -- -- 316 Nevada.................................................................. -- 84 112 110 Washington.............................................................. -- -- -- 57 Wisconsin............................................................... 7 7 32 46 New York................................................................ -- -- 12 36 Wyoming................................................................. -- -- -- 33 Colorado................................................................ -- -- -- 23 North Dakota............................................................ -- -- 5 5 --- --------- --------- ----- Total............................................................... 799 1,013(2) 1,219 2,963 --- --------- --------- ----- --- --------- --------- -----
- -------------------------- (1) Includes 602 phones owned by CAT, from which the Company derives revenue pursuant to a Route Service Agreement. See "Recent Acquisitions." (2) Does not include 12 phones removed from service in 1996. The Company's ROI focus has enabled it to profile locations based on the likely profitability of a location. While this methodology is proprietary, as are the specific locations under contract, the Company's locations include a wide variety of establishments, such as restaurants, shopping malls, convenience stores, grocery stores, gas stations and schools. The Company's pay telephone lease mix includes indoor phones, walk-up outdoor phones and drive-up pay telephones. No single Site Provider accounted for more than 5% of the Company's pay telephones or revenue in the years ended December 31, 1995 and 1996, or the three months ended March 31, 1997. Agreements with Site Providers to install the Company's pay telephones (the "Site Agreements") provide for revenue sharing with Site Providers, typically a commission based on a negotiated percentage of revenue from the pay telephone. The Site Agreements give the Company the exclusive right to install pay telephones at that location and are generally of a five-year or greater term with automatic renewal provisions. The Company's Site Agreements normally give the Company the right to remove poor performing phones. Further, the Company can typically terminate a Site Agreement on 30 days' notice to the Site Provider. The Site Provider does not generally have the right to terminate a Site Agreement. PHONE LINE RATES. The Company pays local line charges for each of its installed payphones. These line charges cover basic service to the telephone as well as the transport of local calls. The Company's business model has always been based on ROI and thus is highly influenced by the line rate charged by LECs, primarily U.S. West. Pay telephones are regulated by state PUCs and generally can be connected only to a Public Access Line ("PAL"). When the Company commenced operations, the PAL rate in effect resulted in an average phone bill of about $130 per month per phone. In order to achieve its ROI objective, the Company targeted high volume phones. In 1992, the MNPUC reduced the tariff for PALs, which resulted 25 in an average cost reduction of about $20 per phone per month, allowing the Company to include slightly lower volume phones in its network and still achieve its ROI objective. In April 1996, CI was approved to purchase telephone lines at a fixed monthly rate of $52 per phone. CI resells those lines to ChoiceTel at this lower rate which has allowed the Company to increase the profitability of its existing phones and to reduce the minimum call volume it needs from new phones to achieve its ROI objective. In May 1997, CI entered into an agreement with U.S. West that provides CI with a 21.5% reseller discount on the cost of telephone lines in Minnesota, which results in a fixed monthly rate for the Company of $42.50 per phone in such state. MARKETING. Four of the Company's employees devote substantially all of their time to locating and contracting with new Site Providers in Minnesota. In addition, the Company has engaged two independent contractors in Oregon to locate new sites for payphone installations. A successful contracting program requires identifying good locations, selling Site Providers on the benefits of the Company's payphones, and negotiating favorable Site Agreement terms. Identifying good locations for payphones is the most important aspect of the Company's marketing program, which includes an evaluation of population density, calling patterns and neighborhood socio-economic factors. The Company concentrates its efforts towards high traffic locations, lower income neighborhoods, and venues where people expect to find payphones. The Company promotes its payphone program to Site Providers by emphasizing service and maintenance. Site Providers generally view the payphone as a customer service rather than a profit center. Providing repair and collection services during evenings and on weekends and providing 24-hour a day live call placement assistance is sometimes more important in securing the Site Agreement than the amount of commission paid to the Site Provider. SERVICE AND MAINTENANCE. The Company believes it offers many of its Site Providers a higher level of service than is provided by the LEC competitors, who typically offer lower commissions and do not monitor payphone performance. The Company monitors its payphones electronically and offers evening and weekend repair service for its Minnesota payphones. The Company uses 25 field service technicians, each of whom collects money, cleans phones and responds to trouble calls made by either a customer or by the telephone itself as part of its internal diagnostic procedures. Many technicians are also responsible for the installation of new telephones. Due to the ability of the field service technicians to perform multiple service and maintenance functions, the Company is able to limit the frequency of trips to each pay telephone as well as the number of employees needed to service the pay telephones. GOVERNMENT REGULATION In 1995, the State of Minnesota passed comprehensive legislation for the telecommunications industry (the "MN Act"). One provision of the legislation created the ability for companies to compete with U.S. West in providing local telephone service. The effect of the legislation for the Minnesota payphone industry was to immediately decrease the cost of telephone lines. The Company believes that the increased competition to provide local telephone service may further reduce the cost of telephone lines. In January 1996, Congress passed the Telecommunications Act of 1996 (the "Telecom Act"), a comprehensive telecommunications bill that, in part, dealt with several concerns of the independent pay telephone industry. Congress stated that its intent was to create a "pro-competitive, de-regulatory national policy framework designed to accelerate rapidly private sector deployment of advanced telecommunications and information technologies and services to all Americans by opening all telecommunications markets to competition." The Telecom Act, among other things, requires local telephone companies to eliminate subsidies of its pay telephone services and to treat its own and independent payphones in a nondiscriminatory manner. Of particular importance to the Company, the Telecom Act addressed the inherently unfair disadvantage independent pay telephone companies have in competing with regulated monopolies, the compensation of independent pay telephone companies for calls made from their 26 equipment that previously offered no compensation, and the issue of price regulation of local calls by the various state PUCs. COMPETITION WITH RBOCS. Under the Telecom Act, the RBOCs must operate their payphone divisions with separate profit and loss statements. The Company believes that this will likely result in the Company's RBOC competitors (primarily, U.S. West) being less aggressive in bidding for locations. It also may result in the RBOCs removing many low volume pay telephones that collectively compete with the Company's pay telephones and, ultimately, may result in the RBOCs raising prices for pay telephone calls when allowable under price deregulation (see "- Deregulation of Local Pay Telephone Rates" below). DIAL-AROUND COMPENSATION. Pay telephones are required by the FCC to provide equal access to all long-distance carriers, either by access code (such as "10ATT") or by 800 service. Prior to November 1996, the Company received $6 per payphone per month from long-distance carriers. The Telecom Act recognized that it is a burden to pay telephone companies to provide such access and that the compensation for pay telephone companies for this access should be greater. Since the infrastructure to track and compensate for these calls does not currently exist, the FCC raised the flat rate of compensation for the Dial-Around service to approximately $45 per payphone per month, based on $0.35 per call times the national average of 131 monthly Dial-Around calls placed per payphone. In October 1997, the method of compensating payphone companies will switch to a per call charge of $0.35 to be tracked and paid by the long-distance carriers and, in November 1998, the per call charge will equal the cost of a local pay telephone call. While the Company is unable to estimate the number of Dial-Around calls made from its payphones, management believes that there will not be a material change in the total amount of Dial-Around compensation it receives when the basis for compensation is switched to a per call rate. An appeal of the 1996 FCC order implementing the increased Dial-Around compensation is presently pending in the U.S. Court of Appeals for the D.C. Circuit. See "Risk Factors - Regulatory Factors." DEREGULATION OF LOCAL PAY TELEPHONE RATES. The FCC also adopted rules pursuant to the Telecom Act which will repeal on October 7, 1997, all rules regulating the cost of a local call placed at a payphone and allow the market to set the rate for local coin calls, unless the state can demonstrate to the satisfaction of the FCC that there are market failures within the state that would not allow market-based rates. Management anticipates that when this deregulation goes into effect, the per call price of pay telephone service will rise to $0.35 or more. Management bases its belief on the experience in Iowa in 1989 when the price of pay telephone calls was deregulated and U.S. West raised its price to $0.35. Given the prohibitions on the RBOCs subsidizing their pay telephone business, and given the large number of low volume RBOC pay telephones in the marketplace, management believes the RBOCs will have a strong desire to raise pay telephone rates. However, there can be no assurance that the per call price of pay telephone service will increase. COMPETITION The Company competes for pay telephone locations with LECs and other independent pay telephone operators. The Company also competes indirectly with long-distance carriers, which can offer Site Providers commissions on long-distance calls made from LEC-owned payphones. Most LECs and long-distance carriers against which the Company competes and some independent pay telephone companies have substantially greater financial, marketing and other resources than the Company. In addition, many LECs, faced with competition from the Company and other independent pay telephone companies, have increased their compensation arrangements with Site Providers to offer more favorable commission schedules. The Company believes the principal competitive factors in the pay telephone business are (i) responsiveness to customer service needs, (ii) the amount of commission payments to a Site Provider and the opportunity for a Site Provider to obtain commissions on both local and long-distance calls from the same company, (iii) the quality of service and the availability of specialized services provided to a Site 27 Provider and telephone users, and (iv) the ability to serve accounts with locations in several LATAs or states. The Company believes that independent pay telephone operators have an advantage over LECs in that they can offer Site Providers commissions on coin and cashless local and long-distance calls. Most LECs are prohibited from obtaining revenues or commissions on interLATA long-distance telephone calls and, consequently, generally only pay commissions to Site Providers for local and intraLATA calls. Under the Telecom Act, this prohibition will be removed at such time as sufficient competition for local telephone service has been established. Opening the local telephone markets to competition will likely reduce telephone line charges, the Company's largest operating expense. In most of the areas where the Company operates, it must purchase local telephone service from a single regulated monopoly (primarily, U.S. West). As AT&T, MCI, Sprint and others compete to offer local telephone service, telephone line charges are expected to decline. In addition, the Company expects that its high number of telephone lines will give it the ability to negotiate additional volume discounts. Technological advances and cost efficiencies underlie a continuing increase in the transmission of voice messages. More telephone calls are being made because the manner, means and cost of completing a call have improved. With the advent of call waiting and caller I.D., and as the number of answering machines, voice mail systems, pagers and cellular phones increases, the likelihood of a telephone call being made also increases due to the perceived certainty that a message can be communicated even if the intended recipient may not be reached directly. Accordingly, as the means and desire to communicate by telephone increase, the Company anticipates that its payphones will experience increased usage. EMPLOYEES As of May 31, 1997, the Company had 30 employees, 22 of whom were full-time. No employees are covered by a collective bargaining agreement. The Company believes that its relationships with employees are good. PROPERTIES The Company's corporate offices are located in approximately 5,000 square feet of leased space in Plymouth, Minnesota. The lease for this property expires in May 2000 and the Company has two successive options to extend the lease for additional one-year periods. The Company believes that its current facilities will be sufficient for its needs for the foreseeable future. LEGAL PROCEEDINGS MINNESOTA SALES TAX. The Company, based on an analysis of the published regulations of the Minnesota Department of Revenue, has not remitted any sales tax payments to the State of Minnesota. In 1996, the Company learned that the opinion of the Department was that coin-operated payphone receipts were subject to state sales tax. Despite the Department's position, management is still of the view that the Company is not subject to sales tax, and the Company is challenging the imposition of the tax. The Company retained special tax counsel to defend its position that coin-operated payphone receipts are not subject to sales tax. Nonetheless, in order to take the most conservative financial position possible, the Company has established a reserve of $916,075 as of March 31, 1997, to provide for the potential sales tax liability. See the Combined Financial Statements of the Company and notes thereto set forth elsewhere in this Prospectus. CLAIM FOR REFUND OF OVERPAYMENT. Prior to enactment of the MN Act which facilitated increased competition in the telecommunications industry, U.S. West had required, with MNPUC approval, that PSPs purchase PALs at approximately twice the cost of business lines even though business lines and PALs were essentially the same. Beginning in August 1995, LECs could no longer restrict the resale of its products, and the Company, along with other Minnesota independent PSPs, requested to purchase for 28 resale from U.S. West regular business lines for its payphones. U.S. West refused the request on the grounds that its requirement that PSPs use PALs had, prior to the enactment of the law, been approved by the MNPUC. In November 1996, the MNPUC concluded that the law did entitle PSPs to use business lines in place of PALs and ordered U.S. West to convert the lines to business lines within 60 days. The MNPUC, however, did not require U.S. West to refund the difference in costs collected during the period from August 1995 until October 1996. Even though the Company was able to purchase business lines through CI starting in the summer of 1996, it estimates that it has overpaid U.S. West approximately $450,000. In April 1997, the Company, together with other Minnesota independent PSPs, initiated an action in the Minnesota Court of Appeals requesting the Court to order the MNPUC to order U.S. West to refund the overpayment. 29 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the Company's executive officers and directors as of March 31, 1997.
NAME AGE POSITION - ----------------------- --- ----------------------------------------------------- Gary S. Kohler 40 Chairman of the Board of Directors Jeffrey R. Paletz 40 President and Director Melvin Graf 41 Executive Vice President and Director Jack S. Kohler 41 Vice President and Chief Financial Officer Robert A. Hegstrom 55 Director
GARY S. KOHLER is a founder and has served as Chairman of the Board of Directors of the Company since its inception in 1989. Mr. Kohler has been employed full-time since 1981 as Vice President of Okabena Company, a private holding company. Mr. Kohler serves on the board of Audio King Corporation, an electronics retailer; NeoVision Corporation, a medical device manufacturer; and Payless Cashways, Inc., a building materials specialty retailer. Mr. Kohler has an M.B.A. from Cornell University and a B.A. from the University of Minnesota. Mr. Kohler is the brother of Jack S. Kohler. JEFFREY R. PALETZ is a founder and has been President and a director of the Company since its inception, overseeing all operations of the Company. Prior to founding the Company in 1989, Mr. Paletz was employed for 13 years at Sportsman's Guide, a mail order retailer, where he oversaw the computer data operations. Mr. Paletz has a B.S. degree in Business from the University of Minnesota. MELVIN GRAF is a founder and has been Executive Vice President and a director of the Company since its inception, overseeing all marketing and leasing activities. Prior to founding the Company in 1989, Mr. Graf was President of Network Travel, a Minneapolis travel agency, for five years. Mr. Graf has a B.S. degree in Business from the University of Minnesota. JACK S. KOHLER has been Vice President and Chief Financial Officer of the Company since 1993. Prior to joining the Company, Mr. Kohler was employed for 13 years in various management and accounting positions at Cargill, Inc., where he most recently served in the internal audit division. Mr. Kohler has a B.S. degree in Accounting from the University of Minnesota. Mr. Kohler is the brother of Gary S. Kohler. ROBERT A. HEGSTROM became a director of the Company in June 1997. In January 1997, Mr. Hegstrom joined Northwest Mortgage Services, Inc. as Chairman, President and Chief Executive Officer. Prior to that, he was a private investor for two years and, from December 1991 to January 1995, he was Executive Vice President of Green Tree Financial Corporation. DIRECTORS' COMPENSATION. No cash compensation is paid to the Company's directors. Upon the completion of this offering, independent, non-employee directors will receive an option to purchase $75,000 of Common Stock, valued as of the date of grant, at the first meeting thereafter of the Company's Board of Directors and upon each subsequent annual re-election. The options will be issued pursuant to the Company's 1997 Long-Term Incentive and Stock Option Plan, will be exercisable upon grant and will have five-year terms and exercise prices equal to the fair market value of the Common Stock as of the date of grant. No options will be issued to employee directors for their service as directors. LIMITATION OF LIABILITY AND INDEMNIFICATION. The Company's Articles of Incorporation limit the liability of its directors to the fullest extent permitted by the Minnesota Business Corporation Act ("MBCA"). Specifically, directors of the Company will not be personally liable for monetary damages for breach of fiduciary duty as directors, except for (i) any breach of the duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (iii) dividends or other distributions of corporate assets that are in contravention of certain statutory or contractual restrictions, (iv) violations of certain Minnesota securities laws, or (v) any 30 transaction from which the director derives an improper personal benefit. Liability under federal securities law is not limited by the Articles of Incorporation. The MBCA requires that the Company indemnify any director, officer or employee made or threatened to be made a party to a proceeding, by reason of the former or present official capacity of the person, against judgments, penalties, fines, settlements and reasonable expenses incurred in connection with the proceeding if certain statutory standards are met. "Proceeding" means a threatened, pending or completed civil, criminal, administrative, arbitration or investigative proceeding, including a derivative action in the name of the Company. Reference is made to the detailed terms of the Minnesota indemnification statute (Section 302A.521 of the MBCA) for a complete statement of such indemnification right. The Company's Bylaws also require the Company to provide indemnification to the fullest extent of the Minnesota indemnification statute. Indemnification under the foregoing arrangements may be available for liabilities arising in connection with this offering. Insofar as indemnification for liabilities arising under the Securities Act may be permitted for directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company is aware that in the opinion of the Securities and Exchange Commission (the "SEC") such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. OFFICERS' COMPENSATION. The following table summarizes the compensation for services rendered by the Company's President paid or accrued by the Company during 1996. No executive officer of the Company earned or was paid salary and bonus exceeding $100,000 in any fiscal year. The Company did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts to the named officer during 1996. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------- NAME AND POSITION FISCAL YEAR SALARY BONUS - ---------------------------------------------------------------- ----------- --------- --------- Jeffrey R. Paletz, President.................................... 1996 $ 70,000 $ 10,000
BONUS PROGRAM. The Company has implemented the 1997 Incentive Compensation Plan to provide an opportunity for executive officers and other Company employees to receive a bonus based on individual and Company performance. The maximum bonus for any executive officer will be 40% of annual salary. The bonus opportunity for Jeffrey R. Paletz, the Company's President, depends on the completion of this offering and achieving the Company's target earnings per share. The bonus opportunities for other executive officers also depend on the completion of this offering, as well as the success rate for new installations of payphones and the number of completed acquisitions. The bonus opportunity for other Company employees is discretionary and not subject to specific criteria. STOCK OPTION PLAN. Under the terms of the Company's 1997 Long-Term Incentive and Stock Option Plan (the "Stock Option Plan"), all of the directors, officers, other employees and consultants of the Company are eligible to receive options to purchase shares of the Company's Common Stock as part of their compensation package. No such options had been granted as of May 31, 1997. The Board of Directors adopted the Stock Option Plan on April 17, 1997, and the shareholders approved it on April 18, 1997. The Stock Option Plan provides for the grant both of incentive stock options intended to qualify for preferential tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended, and nonqualified stock options that do not qualify for such treatment. The exercise price of incentive stock options must equal or exceed the fair market value of the Common Stock at the time of grant. The Stock Option Plan also provides for grants of stock appreciation rights, restricted stock awards and performance awards and allows for the grant of restoration options. 31 The Compensation Committee of the Board of Directors will administer the Stock Option Plan, subject to approval of the Board. A total of 100,000 shares of Common Stock are reserved for issuance under the Stock Option Plan. Incentive stock options may be granted under the Stock Option Plan only to any full or part-time employee of the Company (including officers and directors who are also employees). Full or part-time employees, directors who are not employees, and consultants and independent contractors to the Company are eligible to receive options which do not qualify as incentive stock options, as well as other awards. In determining the persons to whom options and awards shall be granted and the number of shares subject to each, the Board of Directors may take into account the nature of services rendered by the respective employees or consultants, their present and potential contributions to the success of the Company, and such other factors as the Board of Directors in its discretion shall deem relevant. The Board of Directors may amend or discontinue the Stock Option Plan at any time but may not, without shareholder approval, make any revisions or amendments to the Stock Option Plan that increase the number of shares subject to the Stock Option Plan, decrease the minimum exercise price, extend the maximum exercise term, or modify the eligibility requirements. The Board of Directors may not alter or impair any award granted under the Stock Option Plan without the consent of the holder of the award. The Stock Option Plan will expire April 15, 2007. Pursuant to the terms of the Stock Option Plan, appropriate adjustments to the Stock Option Plan and outstanding options will be made in the event of changes in the Common Stock through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, or other change in corporate structure. EMPLOYMENT AGREEMENTS. The Company has entered into employment agreements with Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler effective April 15, 1997 which provide for an initial two-year term, with successive one-year renewals. The agreements provide a base salary and the right to receive additional compensation in the form of salary, bonus and other benefits as the Board of Directors shall determine in its sole discretion. The agreements prohibit each officer from competing against the Company for a period of one year after employment ceases and from communicating with a Site Provider until six months following expiration of the Site Agreement. In the event of termination of the officer's employment, except a termination for cause, the terminated officer is entitled to receive full compensation and benefits for a six-month period. CERTAIN TRANSACTIONS The Company has borrowed money from members of the Topp family (or a trust for the benefit thereof), who are in-laws of Gary S. Kohler, the Chairman of the Company's Board of Directors. The two outstanding loans are evidenced by promissory notes dated July 7 and 27, 1996, respectively, copies of which are filed as exhibits to the Registration Statement. The notes, in the aggregate principal amount of $114,669.45, bear interest at the rate of 12% per annum and mature on February 7, 1998, and September 27, 1997, respectively. 32 PRINCIPAL SHAREHOLDERS The following table sets forth certain information as of May 31, 1997 with respect to the beneficial ownership of the Company's Common Stock by (i) each director of the Company, (ii) all directors and executive officers of the Company as a group, and (iii) each shareholder who owns more than 5% of the outstanding shares of the Company's Common Stock. Except as otherwise indicated, the Company believes each of the persons listed below possesses sole voting and investment power with respect to the shares indicated. Beneficial ownership means the shareholder has voting or investment power with respect to the shares. Shares of the Company's Common Stock subject to options or warrants currently exercisable or exercisable within 60 days are deemed outstanding for computing the percentage of the person holding such options or warrants, but are not deemed outstanding for computing the percentage of any other person.
PERCENTAGE OF SHARES BENEFICIALLY OWNED(1) NUMBER OF SHARES ------------------------ BENEFICIALLY BEFORE AFTER NAME AND ADDRESS OF BENEFICIAL OWNER(2) OWNED OFFERING OFFERING - ----------------------------------------------------------------- ----------------- ----------- ----------- Gary S. Kohler(3)(4)............................................. 1,032,784 53.5% 37.8% Jeffrey R. Paletz................................................ 347,398 18.0% 12.7% Melvin Graf(5)................................................... 213,334 11.1% 7.8% Jack S. Kohler(4)(6)............................................. 321,500 16.2% 11.6% Robert A. Hegstrom............................................... 0 -- -- All directors and executive officers as a group (5 persons)(3)(4)(5)(6).............................. 1,721,016 87.0% 61.9%
- -------------------------- (1) Based on 1,928,766 shares of Common Stock outstanding prior to the offering and 2,728,766 shares outstanding after the offering which does not include the 800,000 additional shares of Common Stock issuable upon exercise of the Redeemable Warrants. (2) The address of each shareholder listed is c/o ChoiceTel Communications, Inc., 9724 10th Avenue North, Plymouth, Minnesota 55441. (3) The figure includes 40,000 shares held by Gary S. Kohler as custodian for the benefit of his children. (4) The figure includes 200,000 shares currently owned by Gary S. Kohler who has granted an option to Jack S. Kohler, available for exercise within 60 days, to purchase such shares. (5) The figure includes 13,334 shares of Common Stock held in the name of the wife of Melvin Graf, the Company's Executive Vice President and a director. (6) The figure includes options granted to Jack S. Kohler by the Company, available for exercise within 60 days, to purchase 50,000 shares. 33 SECURITIES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 2,728,766 shares of Common Stock outstanding not including the additional 800,000 shares of Common Stock issuable upon exercise of the Redeemable Warrants. In addition, the Company has reserved 172,500 shares of Common Stock for issuance pursuant to options, consisting of outstanding options covering 72,500 shares and options for up to 100,000 shares which may be granted pursuant to the Stock Option Plan, 80,000 shares of Common Stock comprising part of the Units issuable upon exercise of the Underwriter's Warrant and 80,000 shares issuable upon exercise of the Redeemable Warrants comprising part of the Units subject to the Underwriter's Warrant. See "Recent Acquisitions," "Management - Stock Option Plan" and "Underwriting." Of the outstanding shares of Common Stock after this offering, the 800,000 shares of Common Stock included in the Units offered hereby may be resold without restriction under the Securities Act, except that any of such shares purchased in the offering by "affiliates" of the Company, as the term is defined in Rule 144 adopted under the Securities Act ("Affiliates"), may generally be resold only in compliance with applicable provisions of Rule 144. The remaining 1,928,766 shares of Common Stock held by the existing shareholders are "restricted" securities within the meaning of Rule 144. Restricted securities and securities held by Affiliates of the Company may not be sold unless the sale is registered under the Securities Act or is made pursuant to an applicable exemption from registration, including an exemption pursuant to Rule 144. In general, under Rule 144, beginning 90 days after the date of this Prospectus, a shareholder, including an Affiliate, who has beneficially owned his or her restricted securities for at least one year from the later of the date such securities were acquired from the Company, or (if applicable) the date they were acquired from an Affiliate, is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of (i) 1% of the then outstanding shares of Common Stock (approximately 27,287 shares immediately after this offering) or (ii) the average weekly trading volume in the Common Stock during the four calendar weeks preceding the date on which notice of such sale is filed under Rule 144. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. In addition, under Rule 144(k), if a period of at least two years has elapsed between the later of the date restricted securities were acquired from the Company or the date they were acquired from an Affiliate, a shareholder who is not an Affiliate of the Company at the time of sale and has not been an Affiliate of the Company for at least three months prior to the sale would be entitled to sell the shares immediately without compliance with the volume limitations, manner of sale provisions, notice or public information requirements. Beginning 90 days after the date of this Prospectus, 1,804,891 shares of Common Stock will be eligible for sale in the public market under Rule 144, subject to the volume limitations and other requirements described above. Notwithstanding the above, Gary S. Kohler, Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler, who in the aggregate beneficially own 1,671,016 outstanding shares of Common Stock and options to acquire an additional 250,000 shares (which includes 200,000 shares that are currently outstanding), have agreed that, without the Underwriter's prior written consent, they will not sell or transfer any shares of Common Stock during the period ending one year after the date of this Prospectus nor sell or transfer more than 10% of the shares of Common Stock which they own during the period beginning one year and ending two years after the date of this Prospectus. As a condition of the underwriting, the Company's other shareholders, who own the remaining 257,750 shares of Common Stock, must agree that they will not, without the Underwriter's prior written consent, sell or transfer any shares of Common Stock during the period ending six months after the date of this Prospectus. Additional shares of Common Stock may also become available for sale in the public market from time to time in the future, including the shares of Common Stock issuable upon exercise of the Redeemable Warrants. Prior to this offering, there has been no public market for the Common Stock, and no predictions can be made of the effect, if any, that sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market or the perception that such sales could occur may adversely affect prevailing market prices and may impair the Company's future ability to raise capital through the public sale of its Common Stock. 34 DESCRIPTION OF SECURITIES GENERAL The Company's authorized capital stock consists of 15,000,000 shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of undesignated Preferred Stock, par value $0.01 per share (the "Preferred Stock"). As of May 31, 1997, there were issued and outstanding 1,928,766 shares of Common Stock which were held by 16 shareholders of record, and 72,500 shares of Common Stock reserved for issuance upon exercise of outstanding options. In addition, 100,000 shares were reserved for issuance under the Stock Option Plan, 186,240 shares were reserved for issuance in connection with a pending acquisition and up to 57,521 shares were reserved for issuance upon conversion of a note to be issued in connection therewith, 80,000 shares of Common Stock comprising part of the Units issuable upon exercise of the Underwriter's Warrant were reserved for issuance in connection therewith and 80,000 shares were reserved for issuance upon exercise of the Redeemable Warrants comprising part of the Units subject to the Underwriter's Warrant. See "Recent Acquisitions," "Management - Stock Option Plan" and "Underwriting." No shares of Preferred Stock were outstanding as of May 31, 1997. There will be 2,728,766 shares of Common Stock issued and outstanding upon completion of this offering and an additional 800,000 shares will be issuable upon exercise of the Redeemable Warrants (assuming the over-allotment option is not exercised). The exercise prices for the Company's outstanding options to purchase a total of 72,500 shares of Common Stock range from $1.50 to $4.00 per share. COMMON STOCK There are no preemptive, subscription, conversion or redemption rights pertaining to the shares of Common Stock and no sinking fund provisions applicable thereto. The absence of preemptive rights could result in the dilution of the interests of existing shareholders should additional shares of Common Stock be issued. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of shares of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of assets legally available therefor, and to share ratably, in proportion to the number of shares held, in the assets of the Company available upon liquidation, dissolution or winding up of the affairs of the Company after payment of all prior claims. Each share of Common Stock is entitled to one vote for all purposes, and cumulative voting is not permitted in the election of directors. Accordingly, the holders of more than fifty percent of all of the outstanding shares of Common Stock can elect all of the directors. Significant corporate transactions such as amendments to the articles of incorporation, mergers, sales of assets and dissolution or liquidation require approval by the affirmative vote of the majority of the outstanding shares of Common Stock. Other matters to be voted upon by the holders of Common Stock normally require the affirmative vote of a majority of the shares present at the particular shareholders meeting. Officers and directors will own approximately 61.9% of the outstanding Common Stock upon completion of this offering and, therefore, will continue to be able to elect all of the directors of the Company and to control the Company's affairs, including, without limitation, the sale of equity or debt securities of the Company and the appointment of officers. The outstanding shares of Common Stock are, and the Shares offered hereby will be, fully paid and non-assessable. PREFERRED STOCK The Articles of Incorporation authorize the Company's Board of Directors, without further shareholder action, to issue up to 5,000,000 shares of Preferred Stock in one or more series and to fix the voting rights, liquidation preferences, dividend rights, repurchase rights, conversion rights, redemption rights and terms, including sinking fund provisions, and certain other rights and preferences, of the Preferred Stock. Although there is currently no intention to do so, the Board of Directors of the Company may, without prior shareholder approval, issue shares of a class or series of Preferred Stock with voting and conversion 35 rights which could adversely affect the voting power or dividend rights of the holders of Common Stock and may have the effect of delaying, deferring or preventing a change in control of the Company. REDEEMABLE WARRANTS WARRANT AGREEMENT. The Redeemable Warrants included as part of the Units offered hereby will be issued under and governed by the provisions of the Warrant Agreement between the Company and Norwest Bank Minnesota, National Association, as Warrant Agent. A copy of the Warrant Agreement has been filed as an exhibit to the Registration Statement. The following statements are summaries of certain provisions contained therein, are not complete, and are qualified in their entirety by reference to the Warrant Agreement. The shares of Common Stock and the Redeemable Warrants offered as part of the Units are detachable and are separately transferable following their issuance. One Redeemable Warrant entitles the holder ("Warrantholder") thereof to purchase one share of Common Stock during the five years following the Effective Date of this Prospectus. Each Redeemable Warrant will be exercisable at a price equal to $9.50 per share, subject to adjustment as a result of certain events. Any time 30 or more days after the Effective Date of this Prospectus, the Redeemable Warrants are redeemable, in whole but not in part, by the Company at a redemption price of $0.01 per Redeemable Warrant on not less than 30 days' written notice, provided that the closing bid price of the Common Stock exceeds $10.00 per share (subject to adjustment) for any 10 consecutive trading days prior to such notice. Holders of Redeemable Warrants may exercise their rights until the close of business on the date fixed for redemption, unless extended by the Company. Warrantholders as such are not entitled to vote, receive dividends or exercise any of the rights of holders of shares of Common Stock for any purpose until such Redeemable Warrants have been duly exercised and payment of the purchase price has been made. The Redeemable Warrants are in registered form and may be presented for transfer, exchange or exercise at the corporate office of the Warrant Agent. Although the Company has applied for listing of the Redeemable Warrants on The Nasdaq SmallCap Market, there is currently no established market for the Redeemable Warrants, and there is no assurance that any such market will develop. The Warrant Agreement provides for adjustment of the exercise price and the number of shares of Common Stock purchasable upon exercise of the Redeemable Warrants to protect Warrantholders against dilution in certain events, including stock dividends, stock splits and any combination of Common Stock. In the event of the merger, consolidation, reclassification or disposition of substantially all the assets of the Company, the holders of the Redeemable Warrants are entitled to receive, upon payment of the exercise price therefor, the securities or property of the Company or the successor corporation resulting from such transaction that such holders would have received had they exercised such Redeemable Warrants immediately prior to such transaction. REGISTRATION. The Company has sufficient shares of Common Stock authorized and reserved for issuance upon exercise of the Redeemable Warrants, and such shares when issued will be fully paid and nonassessable. The Company must have a current registration statement on file with the SEC and, unless exempt therefrom, with the securities authority of the state in which the Warrantholder resides, in order for the Warrantholder to exercise his or her Redeemable Warrants and obtain shares of Common Stock free of any transfer restrictions. The shares so reserved for issuance upon exercise of the Redeemable Warrants are registered pursuant to the Registration Statement. Furthermore, the Company has agreed to use its best efforts to maintain the effectiveness of the Registration Statement (by filing any necessary post-effective amendments or supplements thereto) throughout the term of the Redeemable Warrants with respect to the shares of Common Stock issuable upon exercise thereof. The Company will incur significant legal and other related expenses in order to keep the Registration Statement current. However, there can be no assurance that the Company will be able to keep the Registration Statement current or that the 36 Registration Statement will be effective at the time a Warrantholder desires to exercise his or her Redeemable Warrants. Additionally, the Company has agreed to use it best efforts to maintain qualifications in those states where the Units were originally qualified for sale to permit exercise of the Redeemable Warrants and issuance of shares of Common Stock upon such exercise in such states. However, there can be no assurance that any such qualification will be effective at the time a Warrantholder desires to exercise his or her Redeemable Warrants. If for any reason the Registration Statement is not kept current, or if the Company is unable to maintain the qualification of the Common Stock underlying the Redeemable Warrants for sale in particular states, Warrantholders in those states, absent an applicable exemption, must either sell such Redeemable Warrants or let them expire. EXERCISE. The Redeemable Warrants may be exercised upon surrender of the certificate therefor on or prior to the expiration date (or earlier redemption date) at the corporate office of the Warrant Agent, with the form of "Election to Purchase" on the reverse side of the certificate filled out and executed as indicated, accompanied by payment of the full exercise price (by certified or cashier's check payable to the order of the Company) for the number of Redeemable Warrants being exercised. For the term of the Redeemable Warrants, the Warrantholders are given the opportunity to profit from a rise in the market price of the Company's Common Stock with a resulting dilution in the interest of the Company's shareholders. During such term, the Company may be deprived of opportunities to sell additional equity securities at a favorable price. The Warrantholders may be expected to exercise their Redeemable Warrants at a time when the Company would, in all likelihood, be able to obtain equity capital by a sale or a new offering on terms more favorable to the Company than the terms of the Redeemable Warrants. TAX CONSIDERATIONS. The following summary is based on present federal income tax law and interpretations thereof, all of which are subject to change or modification. The discussion is limited to the federal income tax matters discussed below and does not include all of the federal income tax considerations relevant to each investor's personal tax situation. Investors should consult their own tax advisers with respect to the matters discussed below and with respect to other federal and state tax considerations that may be applicable to their own personal tax situation. The cost basis of the Units will be the purchase price paid by each investor. Purchasers of Units will be required to allocate the price paid for such Units between the shares of Common Stock and the Redeemable Warrants based on their relative fair market values on the date of purchase. Upon exercise of the Redeemable Warrants, the Warrantholder's cost basis in the shares of Common Stock thus acquired will be the original purchase price allocable to the Redeemable Warrants plus any additional amount paid upon the exercise. No gain or loss will be recognized by such holder upon exercise of the Redeemable Warrants. However, gain or loss will be recognized upon the subsequent sale or exchange of the shares of Common Stock acquired upon exercise of the Redeemable Warrants. Gain or loss also will be recognized upon the sale or exchange of the Redeemable Warrants. Generally, gain or loss will be long- or short-term capital gain or loss, depending on whether the shares of Common Stock or the Redeemable Warrants are held for more than one year. If the Redeemable Warrants are exercised, the holding period of the Common Stock will not include the period during which the Redeemable Warrants were held. CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK Under the Company's Articles of Incorporation, upon completion of this offering and assuming no exercise of the Redeemable Warrants, there will be 12,096,634 shares of Common Stock available for future issuance without shareholder approval. These additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital or to facilitate corporate acquisitions. Except for the 186,240 shares of Common Stock to be issued in connection with a pending acquisition and up to 57,521 shares issuable upon conversion of a note to be issued in connection therewith, the Company does not currently have any plans to issue additional shares of Common Stock 37 (other than shares of Common Stock that may be issued upon exercise of the Redeemable Warrants, the Underwriter's Warrant, outstanding options and options which may be granted to the Company's officers, directors and employees pursuant to the Stock Option Plan). See "Recent Acquisitions," "Management - Stock Option Plan" and "Underwriting." One of the effects of the existence of unissued and unreserved Common Stock is that the Board of Directors could issue shares to persons likely to support current management and thereby protect the continuity of the Company's management. Such additional shares could also be used to dilute the stock ownership of persons seeking to obtain control of the Company. PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS AND THE MINNESOTA BUSINESS CORPORATION ACT The existence of authorized but unissued stock, as described above, and certain provisions of the Company's Articles of Incorporation and Bylaws and of Minnesota law, as described below, could have anti-takeover effects. These provisions are intended to provide management flexibility, to enhance the likelihood of continuity and stability in the composition of the Board of Directors and in the policies formulated by the Board of Directors and to discourage an unsolicited takeover of the Company if the Board of Directors determines that such a takeover is not in the best interests of the Company and its shareholders. However, these provisions could have the effect of discouraging certain attempts to acquire the Company, which could deprive the Company's shareholders of opportunities to sell their shares of Common Stock at prices higher than prevailing market prices. Such provisions may also have the effect of preventing changes in the management of the Company. Section 302A.671 of the MBCA applies, with certain exceptions, to any acquisition of voting stock of the Company (from a person other than the Company, and other than in connection with ceratin mergers and exchanges to which the Company is a party) resulting in the beneficial ownership of 20% or more of the voting stock then outstanding. Section 302A.671 requires approval of any such acquisitions by a majority vote of the shareholders of the Company prior to its consummation. In general, shares acquired in the absence of such approval are denied voting rights and are redeemable at their then fair market value by the Company within 30 days after the acquiring person has failed to give a timely information statement to the Company or the date the shareholders voted not to grant voting rights to the acquiring person's shares. Section 302A.673 of the MBCA generally prohibits any business combination by the Company, or any subsidiary of the Company, with any shareholder which purchases 10% or more of the Company's voting shares (an "interested shareholder") within four years following such interested shareholder's share acquisition date, unless the business combination or the acquisition of shares is approved by the affirmative vote of a majority of a committee of all the disinterested members of the Board of Directors, before the interested shareholder's share acquisition date. The Bylaws permit the Board to create new directorships and to elect new directors to serve for the full term of the directorship created. The Board (or its remaining members, even though less than a quorum) is also empowered to fill vacancies on the Board occurring for any reason for the remainder of the term of the directorship in which the vacancy occurred. TRANSFER AGENT The Company currently serves as its own transfer agent and registrar with respect to its Common Stock and does not utilize the services of an independent transfer agent such as a bank or trust company. The Company has appointed Norwest Bank Minnesota, National Association, to act upon completion of this offering as its transfer agent and registrar for the Common Stock and its warrant agent for the Redeemable Warrants. 38 UNDERWRITING Subject to the terms and conditions to be set forth in an underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to Equity Securities Investments, Inc. (the "Underwriter"), and the Underwriter has agreed to purchase from the Company, the 800,000 Units offered hereby at the Price to Public set forth on the cover page of this Prospectus, less the Underwriting Discount of $0.675 per Unit. The Underwriting Agreement provides that the obligations of the Underwriter are subject to certain conditions precedent. The nature of the Underwriter's obligation is that it is committed to purchase all Units offered hereby if any of the Units are purchased. The Company has been advised by the Underwriter that the Underwriter proposes to offer the Units directly to the public at the Price to Public set forth on the cover page of this Prospectus and to certain selected securities dealers who are members of the National Association of Securities Dealers, at such price less usual and customary commissions. The Company has granted to the Underwriter an option, exercisable not later than 45 days after the date of this Prospectus, and subject to the terms and conditions set forth in the Underwriting Agreement, to purchase up to 120,000 additional Units at the Price to Public, less the underwriting discount of $0.675 per Unit. The Underwriter may exercise such option only to cover over-allotments made in connection with the sale of the 800,000 Units offered hereby. To the extent the Underwriter exercises the over-allotment option, it will have a firm commitment to purchase the number of Units to be purchased by it, and the Company will be obligated pursuant to the option to sell such Units to the Underwriter. The Company has agreed to pay the Underwriter a non-accountable expense allowance equal to 2.0% of the aggregate public offering price of the Units, or $120,000 ($138,000 if the over-allotment option is exercised in full). Such allowance is included in the expenses of the offering set forth on the cover page of this Prospectus. The Underwriter has informed the Company that the Underwriter does not intend to confirm sales of Units to any accounts over which it exercises discretionary authority. The Company has agreed to sell to the Underwriter upon the closing of this offering, for $100.00, the Underwriter's Warrant to purchase up to 80,000 Units. The Underwriter's Warrant is not exercisable during the first year after the date of this Prospectus and, thereafter, is exercisable at a price per Unit of $9.00 (or 120% of the per Unit Price to Public) for a period of four years. The Underwriter's Warrant contains customary antidilution provisions and obligates the Company to register the shares of Common Stock and the Redeemable Warrants comprising the Units issuable upon exercise of the Underwriter's Warrant under the Securities Act once at the election of the holders and at any other time the Company has a registration statement pending under the Securities Act. The Underwriter's Warrant also includes "cashless" exercise provisions entitling the holder to apply the difference between the exercise price of the Underwriter's Warrant and the higher fair market value of the Units underlying the Underwriter's Warrant to the payment of the exercise price without paying cash to exercise the Underwriter's Warrant. The Underwriter's Warrant is not transferable during the first year after the date of this Prospectus (except to officers or partners of the Underwriter, members of the selling group, and officers or partners of members of the selling group). Any profits realized upon the sale of the Underwriter's Warrant, the Units issuable upon exercise of the Underwriter's Warrant, or the shares of Common Stock or Redeemable Warrants comprising such Units may be deemed to constitute additional underwriting compensation. The Underwriter will not receive any commissions, expense reimbursement or other compensation as a result of the exercise of the Redeemable Warrants included in the Units offered hereby. The Company and the Underwriter have agreed in the Underwriting Agreement to indemnify each other or provide contribution with respect to certain liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the Underwriting Agreement. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to 39 directors, officers and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Gary S. Kohler, Jeffrey R. Paletz, Melvin Graf and Jack S. Kohler, who in the aggregate beneficially own 1,671,016 outstanding shares of Common Stock and options to acquire an additional 250,000 shares (which includes 200,000 shares that are currently outstanding), have agreed that they will not, without the Underwriter's prior written consent, offer, sell or contract to sell or otherwise dispose of any shares of Common Stock during the period ending one year after the date of this Prospectus; and that they will not offer, sell or contract to sell or otherwise dispose of more than 10% of the shares of Common Stock which they own during the period beginning one year and ending two years after the date of this Prospectus. As a condition of the underwriting, the Company's other shareholders, who in the aggregate own 257,750 shares of Common Stock, must agree that they will not, without the Underwriter's prior written consent, offer, sell or contract to sell or otherwise dispose of any shares of Common Stock during the period ending six months after the date of this Prospectus. In addition, the Company's shareholders must agree that any sale of shares of the Company's Common Stock which is made by such shareholders during the period ending two years after the date of this Prospectus will be made through the Underwriter. The Company has agreed in the Underwriting Agreement that it will not, without the prior written consent of the Underwriter, file a registration statement relating to any shares of the Company's capital stock (other than a registration statement on Form S-8 relating to shares issuable under a stock option plan), whether such shares are to be sold by the Company or by shareholders of the Company, until at least three months after the date of this Prospectus. The Company granted demand registration rights, exercisable beginning 90 days after the date of this Prospectus, to five shareholders who own 111,875 shares of Common Stock in the aggregate. The holders of a majority of such shares may require the Company to file a registration statement under the Securities Act covering all or part of such securities, the expenses of which (other than underwriting discounts and commissions) will be paid by the Company. Notwithstanding their registration rights, as a condition of the underwriting, these shareholders must agree that they will not, without the Underwriter's prior written consent, offer, sell or contract to sell or otherwise dispose of any shares of Common Stock during the period ending six months after the date of this Prospectus. The Underwriting Agreement provides that, for a period of three years from the date of this Prospectus, the Underwriter will have a right of first refusal to (i) serve as the managing underwriter or selling agent for any public or private offering of the Company's equity or debt securities and (ii) act as the Company's investment banker or financial advisor in connection with any strategic partnership, sale of the Company or its assets, merger, acquisition of stock or assets of another entity, or similar transaction. The Underwriting Agreement also provides that, for a period of three years from the date of this Prospectus, the Underwriter will have the right to nominate one person to serve on the Company's Board of Directors, and the Company has agreed to use its best efforts to secure the election of such nominee to the Board of Directors upon request of the Underwriter. Prior to this offering, there has been no public market for any of the Company's securities. The Price to Public has been determined by negotiation between the Company and the Underwriter. The factors considered in determining the Price to Public include prevailing market and economic conditions, estimates of the business potential and prospects for the Company, the state of the Company's business operations, an assessment of the Company's management, and the consideration of the above factors in relation to market valuations of companies in related businesses. There can be no assurance that the per Unit Price to Public is indicative of the prices at which the Common Stock and Redeemable Warrants will sell in the public market after this offering. The foregoing is a summary of the provisions of the Underwriting Agreement, the Underwriter's Warrant and related documents and does not purport to be a complete statement of their terms and conditions. A copy of the Underwriting Agreement, including the Underwriter's Warrant, has been filed as an exhibit to the Registration Statement. 40 LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Robins, Kaplan, Miller & Ciresi L.L.P., Minneapolis, Minnesota. Winthrop & Weinstine, P.A., Minneapolis, Minnesota, has acted as counsel to the Underwriter in connection with certain legal matters relating to the securities offered hereby. EXPERTS The Combined Financial Statements of the Company, the Financial Statements for the pay telephone division of TelcoWest and the Financial Statements for CAT, all as of December 31, 1996, included herein and in the Registration Statement, have been included in reliance upon the reports of Schechter Dokken Kanter Andrews & Selcer, Ltd., Minneapolis, Minnesota, independent certified public accountants, appearing elsewhere herein and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the SEC a Registration Statement under the Securities Act with respect to the securities offered hereby. This Prospectus, filed as a part of the Registration Statement, does not contain certain information set forth in or annexed as exhibits to the Registration Statement. For further information regarding the Company and the securities offered hereby, reference is made to the Registration Statement and to the exhibits filed as a part thereof. Statements contained in this Prospectus and the contents of any contract or other document are not necessarily complete, and in each instance reference is made to the copy of such a contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement may be inspected without charge and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661 and 75 Park Place, 14th Floor, New York, New York 10048. Copies of such materials may be obtained from the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fee. In addition, the SEC maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, including the Company, that file electronically with the SEC. The Web site's address is http://www.sec.gov. 41 INDEX TO FINANCIAL STATEMENTS
PAGE --------- COMBINED FINANCIAL STATEMENTS FOR INTELLIPHONE, INC. AND CHOICETEL, INC. Independent Auditors' Report............................................................................. F-2 Combined Balance Sheets as of December 31, 1995 and 1996 and March 31, 1997 (unaudited).................. F-3 Combined Statements of Operations for the Years Ended December 31, 1995 and 1996 and for the Quarters Ended March 31, 1996 and 1997 (unaudited).............................................................. F-4 Combined Statements of Shareholders' Equity for the Years Ended December 31, 1995 and 1996 and the Quarter Ended March 31, 1997 (unaudited)............................................................... F-5 Combined Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and the Quarters Ended March 31, 1996 and 1997 (unaudited).................................................................... F-6 Notes to Combined Financial Statements for the Years Ended December 31, 1995 and 1996 and the Quarter Ended March 31, 1997 (unaudited)....................................................................... F-7 FINANCIAL STATEMENTS FOR TELCO WEST, INC. - PAY TELEPHONE DIVISION Independent Auditors' Report............................................................................. F-12 Statements of Revenues and Direct Expenses for the Years Ended December 31, 1995 and 1996................ F-13 Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-14 FINANCIAL STATEMENTS FOR COMPUTER ASSISTED TECHNOLOGIES, INC. Independent Auditors' Report............................................................................. F-15 Statements of Operations for the Years Ended December 31, 1995 and 1996.................................. F-16 Notes to Financial Statements for the Years Ended December 31, 1995 and 1996............................. F-17
F-1 INDEPENDENT AUDITORS' REPORT Board of Directors Intelliphone, Inc. and Choicetel, Inc. Minneapolis, Minnesota We have audited the accompanying combined balance sheets of Intelliphone, Inc. and Choicetel, Inc. ("S" Corporations) as of December 31, 1995 and 1996, and the related combined statements of operations, shareholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Intelliphone, Inc. and Choicetel, Inc. as of December 31, 1995 and 1996, and the combined results of their operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. /s/ Schechter Dokken Kanter Andrews & Selcer, Ltd. -------------------------------------- SCHECHTER DOKKEN KANTER ANDREWS & SELCER, LTD. Minneapolis, Minnesota March 20, 1997, except for Note 7 for which the date is May 31, 1997 F-2 INTELLIPHONE, INC. AND CHOICETEL, INC. COMBINED BALANCE SHEETS DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997 (UNAUDITED)
DECEMBER 31, -------------------------- MARCH 31, 1995 1996 1997 ------------ ------------ ------------- ASSETS Current assets: Cash................................................................. $ 29,146 $ 875,150 $ 348,465 Accounts receivable, considered fully collectible.................... 35,289 172,934 604,371 Prepaid: Rent............................................................... 90,285 78,732 72,281 Other.............................................................. 62,851 82,874 288,257 ------------ ------------ ------------- Total current assets............................................. 217,571 1,209,690 1,313,374 ------------ ------------ ------------- Property and equipment: Phones and related equipment......................................... 1,964,289 2,373,199 5,859,640 Accumulated depreciation............................................. (594,959) (845,176) (1,034,676) ------------ ------------ ------------- 1,369,330 1,528,023 4,824,964 ------------ ------------ ------------- Office equipment and improvements.................................... 60,174 66,548 66,548 Accumulated depreciation............................................. (23,739) (36,239) (40,739) ------------ ------------ ------------- 36,435 30,309 25,809 ------------ ------------ ------------- 1,405,765 1,558,332 4,850,773 ------------ ------------ ------------- Other assets: Prepaid rents........................................................ 197,232 134,443 118,843 Rental agreements, net of accumulated amortization of $75,719 in 1995, $111,073 in 1996 and $126,673 at March 1997.................. 91,914 65,632 395,887 Deferred financing, net of accumulated amortization of $4,975 in 1995, $33,870 in 1996 and $35,252 at March 1997.................... 30,277 1,382 0 ------------ ------------ ------------- 319,423 201,457 514,730 ------------ ------------ ------------- $ 1,942,759 $ 2,969,479 $ 6,678,877 ------------ ------------ ------------- ------------ ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Notes payable........................................................ $ 335,000 $ 360,000 $ 2,985,000 Current portion of long-term debt.................................... 100,572 265,931 367,980 Accounts payable..................................................... 183,800 136,298 211,966 Accrued expenses..................................................... 2,127 957,242 1,140,113 Unearned line charge received........................................ 0 16,218 4,860 ------------ ------------ ------------- Total current liabilities........................................ 621,499 1,735,689 4,709,919 Long-term debt, net of current portion................................. 828,530 569,702 1,116,657 Shareholders' equity................................................... 492,730 664,088 852,301 ------------ ------------ ------------- $ 1,942,759 $ 2,969,479 $ 6,678,877 ------------ ------------ ------------- ------------ ------------ -------------
See notes to combined financial statements. F-3 INTELLIPHONE, INC. AND CHOICETEL, INC. COMBINED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
FISCAL YEAR ENDED QUARTER ENDED DECEMBER 31, MARCH 31, -------------------------- -------------------------- 1995 1996 1996 1997 ------------ ------------ ------------ ------------ Service revenue.......................................... $ 2,817,446 $ 3,561,902 $ 779,197 $ 1,728,362 Cost of service.......................................... 1,785,062 1,986,985 493,754 802,091 ------------ ------------ ------------ ------------ Gross margin............................................. 1,032,384 1,574,917 285,443 926,271 ------------ ------------ ------------ ------------ Selling, general and administrative expenses: Salary and benefits.................................... 402,268 559,494 147,146 248,488 Travel and related..................................... 38,895 58,351 13,162 26,123 Office and overhead.................................... 132,331 212,506 33,496 76,868 ------------ ------------ ------------ ------------ 573,494 830,351 193,805 351,494 ------------ ------------ ------------ ------------ Income before depreciation, amortization, interest and sales tax contingency.................................. 458,890 744,566 91,638 574,777 ------------ ------------ ------------ ------------ Depreciation and amortization............................ 247,039 364,849 67,985 208,445 Interest................................................. 90,276 119,649 37,166 143,034 Sales tax contingency.................................... 0 865,000 0 51,075 ------------ ------------ ------------ ------------ 337,315 1,349,498 105,151 402,554 ------------ ------------ ------------ ------------ Net income (loss) before pro forma income tax provision.............................................. 121,575 (604,932) (13,513) 172,223 Pro forma provision for income taxes (credit) (unaudited)............................................ 42,550 (211,725) (4,730) 60,278 ------------ ------------ ------------ ------------ Pro forma net income (loss) (unaudited).................. $ 79,055 $ (393,207) $ (8,783) $ 111,945 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Pro forma net income (loss) per share (unaudited)........ $ .04 $ (.20) $ (.01) $ .06 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Pro forma weighted shares outstanding (unaudited)........ 1,935,189 1,948,489 1,930,489 1,948,489 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
See notes to combined financial statements. F-4 INTELLIPHONE, INC. AND CHOICETEL, INC. COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED)
COMMON STOCK -------------------------------------------- CHOICETEL, INC. INTELLIPHONE, INC. ---------------------- -------------------- 10,000,000 SHARES 2,000,000 AUTHORIZED SHARES AUTHORIZED ---------------------- -------------------- ACCUMULATED SUBSCRIPTIONS SHARES AMOUNT SHARES AMOUNT DEFICIT RECEIVABLE TOTAL --------- ----------- --------- --------- ------------ ------------ --------- Balance, January 1, 1995....... 1,622,016 $ 474,473 $ (91,627) $ (28,571) $ 354,275 Stock issued in exchange for retirement of debt at $2.00 a share, February 1995......... 25,000 25,000 25,000 Stock issued in exchange for retirement of debt at $5.00 a share, December 1995......... 10,000 25,000 25,000 Dividends...................... (33,120) (33,120) Net income..................... 121,575 121,575 --------- ----------- --------- --------- ------------ ------------ --------- Balance, December 31, 1995..... 1,657,016 524,473 (3,172) (28,571) 492,730 Collection of subscription receivable................... 10,000 10,000 Issuance of stock for: Cash......................... 256,000 910,000 910,000 Subscriptions receivable..... 846,508 $ 1,000 6,250 25,000 (26,000) Dividends...................... (143,710) (143,710) Net loss....................... (604,932) (604,932) --------- ----------- --------- --------- ------------ ------------ --------- Balance, December 31, 1996..... 846,508 1,000 1,910,266 1,459,473 (751,814) (44,571) 664,088 Collection of subscription receivable................... 5,990 5,990 Issuance of stock.............. 9,500 10,000 10,000 Dividends...................... Net income..................... 172,223 172,223 --------- ----------- --------- --------- ------------ ------------ --------- Balance, March 31, 1997........ 846,508 $ 1,000 1,928,766 $1,469,473 $ (579,591) $ (38,581) $ 852,301 --------- ----------- --------- --------- ------------ ------------ --------- --------- ----------- --------- --------- ------------ ------------ ---------
See notes to combined financial statements. F-5 INTELLIPHONE, INC. AND CHOICETEL, INC. COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTERS ENDED MARCH 31, 1996 AND 1997 (UNAUDITED)
FISCAL YEAR ENDED QUARTER ENDED DECEMBER 31, MARCH 31, -------------------------- -------------------------- 1995 1996 1996 1997 ------------ ------------ ------------ ------------ Cash flows from operating activities: Net (loss) income...................................... $ 121,575 $ (604,932) $ (13,513) $ 172,223 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation......................................... 213,924 300,600 59,600 194,000 Amortization......................................... 33,115 64,249 8,385 14,445 Changes in operating assets and liabilities: (Increase) decrease in: Accounts receivable.............................. (1,257) (137,645) (38,015) (431,437) Prepaid rent and other........................... (184,901) 54,319 (53,115) (183,332) Increase (decrease) in: Accounts payable................................. (13,594) (47,502) 52,855 75,668 Accrued expenses................................. (8,258) 955,115 0 182,871 Unearned line charge received.................... 0 16,218 0 (11,358) ------------ ------------ ------------ ------------ Net cash provided by operating activities................ 160,604 600,422 16,197 13,080 ------------ ------------ ------------ ------------ Cash flows used in investing activities, purchase of equipment and rental contracts......................... (623,008) (462,239) 52,505 3,831,141 ------------ ------------ ------------ ------------ Cash flows from financing activities: Proceeds from Issuance of: Long-term debt..................................... 813,102 7,103 0 1,206,500 Common stock....................................... 0 910,000 20,000 10,000 Payments of subscription receivable.................. 0 10,000 0 5,990 Principal payments on long-term debt................. (324,026) (100,572) (20,966) (556,114) Dividends paid....................................... (33,120) (143,710) (16,690) 0 Net change in notes payable.......................... 5,000 25,000 (2,373) 2,625,000 Deferred financing costs............................. (35,252) 0 0 0 ------------ ------------ ------------ ------------ Net cash provided by financing activities............ 425,704 707,821 (20,029) 3,291,376 ------------ ------------ ------------ ------------ Net increase (decrease) in cash.......................... (36,700) 846,004 (56,337) (526,685) Cash, beginning balance.................................. 65,846 29,146 29,146 875,150 ------------ ------------ ------------ ------------ Cash, ending balance..................................... $ 29,146 $ 875,150 $ (27,191) $ 348,465 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Supplemental disclosure of cash flow information: Cash paid for interest................................. $ 96,486 $ 121,530 $ 37,166 $ 143,034 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Supplemental schedule of noncash investing and financing activities: Refinanced debt from notes payable to long-term debt... $ 15,000 ------------ ------------ Retirement of debt through issuance of stock........... $ 50,000 ------------ ------------ Issuance of stock in exchange for subscription receivable........................................... $ 26,000 ------------ ------------
See notes to combined financial statements. F-6 INTELLIPHONE, INC. AND CHOICETEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION: The combined financial statements for 1995 and 1996 include the accounts of Intelliphone, Inc. combined with Choicetel, Inc., after elimination of all material intercompany transactions. The combined companies are commonly owned. NATURE OF BUSINESS: Intelliphone was incorporated in October 1989 to provide coin operated telephone service throughout Minnesota. Since inception, Intelliphone has expanded to other states, however, revenue is generated predominantly in the Minneapolis/St. Paul area. Choicetel, Inc. was incorporated in 1995 and was dormant until June 1996 when operations began. Choicetel is a reseller of telephone local line charge to pay telephone owners in Minnesota. PROPERTY AND EQUIPMENT AND DEPRECIATION METHODS: Property and equipment, consisting principally of coin operated telephones, are stated at cost. Depreciation is being provided by the straight-line method over the estimated useful lives of the related assets. PREPAID RENTS: Prepaid rents represent incentives paid to phone location merchants and property owners to secure long term contracts at such sites and are being amortized as consumed per the rental agreement. RENTAL AGREEMENTS: Rental agreements consist of the purchase price paid for phone location agreements in excess of the purchase price of the related equipment on site and is being amortized over a sixty month period on a straight line basis. DEFERRED FINANCING: Deferred financing costs are being amortized over the life of the related note on a straight-line basis. UNEARNED LINE CHARGE RECEIVED: Collections of the line charge revenue in advance of providing service are deferred until the month the service is provided. INCOME TAXES: Intelliphone, Inc. and Choicetel, Inc., with the consent of their shareholders, have elected to be "S" corporations under the Internal Revenue Code. Instead of paying corporate income taxes, the shareholders of an "S" corporation are taxed individually on their proportionate share of the Company's taxable income or loss. F-7 INTELLIPHONE, INC. AND CHOICETEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED) 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Immediately prior to registration and issuance of securities in the proposed initial public offering, the Companies will terminate their "S" corporation status and be subject to federal and state income taxes. The accompanying statements of operations include an unaudited pro forma provision for income taxes (credit), using a rate of 35 percent, to reflect estimated income tax expense (credit) of the Companies as if they had been subject to corporate income taxes in 1995 and 1996. PRO FORMA EARNING PER SHARE (UNAUDITED): Pro forma earnings per share for the years ended December 31, 1995 and 1996 and the quarter ended March 31, 1997 are computed on the basis of the number of shares of common stock outstanding during 1995 and 1996 and the quarter ended March 31, 1997. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, stock issued by the Company at prices less than the initial offering price during the twelve months immediately preceding the initial public offering, plus common stock equivalents granted at exercise prices less than the initial public offering price during the same period, have been included in the determination of shares used in the calculation of historical earnings (loss) per share as if they were outstanding for all periods. USE OF ESTIMATES: The timely preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. 2. NOTES PAYABLE:
DECEMBER 31, ---------------------- MARCH 31 1995 1996 1997 ---------- ---------- ------------ Line of credit, bank, $300,000, interest at 1.0% above the bank's prime rate (9.25% at December 31, 1996) guaranteed by shareholders and secured by equipment. The line was paid off in January 1997................ $ 300,000 $ 275,000 $ 0 Term note, bank, $3,000,000, interest at 2.0% above the bank's prime rate (10.5% at March 31, 1997) guaranteed by shareholders and secured by equipment. Due January 1998..................................... 0 0 2,900,000 Note payable, interest only payable monthly at 8.75%. Due on demand........................................ 0 50,000 50,000 Note payable, interest only payable monthly at 12%. Due on demand............................................ 35,000 35,000 35,000 ---------- ---------- ------------ $ 335,000 $ 360,000 $ 2,985,000 ---------- ---------- ------------ ---------- ---------- ------------
F-8 INTELLIPHONE, INC. AND CHOICETEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED) 3. LONG-TERM DEBT:
DECEMBER 31, ---------------------- MARCH 31, 1995 1996 1997 ---------- ---------- ------------ Note payable, Telco West, interest only payable monthly at 10% through March 1998. Principal due April 1998(A)................................. $ 0 $ 0 $ 364,896 Note payable, interest only payable monthly at 12% through April 1997. Thereafter due in monthly installments of $2,354 including interest to April 1999............................................................. 50,000 50,000 50,000 Notes payable, interest only payable monthly at 12% with various maturing dates from March 1997 through December 1997............................ 150,000 150,000 158,853 Note payable, interest at 12% compounded quarterly. Interest due on demand, principal due February 1998.................................... 60,823 67,926 69,626 Note payable, bank, due in monthly installments of $6,000 plus interest at 1.25% above bank's prime rate (9.5% at December 31, 1996) to August 2000 at which time remaining principal is due(B)....................... 468,279 396,279 0 Note payable, bank, due in monthly installments of $2,381 plus interest at 1.25% above prime rate (9.5% at December 31, 1996) to December 2000 at which time remaining principal is due(B)............................ 200,000 171,428 0 Note payable, Telco West, interest only payable monthly at 10% through June 1997. Thereafter due in monthly installments of $21,343 including interest to June 2001(A)............................................... 0 0 841,262 ---------- ---------- ------------ 929,102 835,633 1,484,637 Less current portion..................................................... 100,572 265,931 367,980 ---------- ---------- ------------ $ 828,530 $ 569,702 $ 1,116,657 ---------- ---------- ------------ ---------- ---------- ------------
- ------------------------ (A) Notes are secured by certain assets of Intelliphone and guaranteed by certain of its shareholders. (B) Notes are secured by all assets of Intelliphone and guaranteed by certain of its shareholders. The loan agreement requires the Company to maintain certain financial ratios and limits compensation and dividends. At December 31, 1995 and 1996, and March 31, 1997, notes with shareholders and shareholder family members included in long-term debt and notes payable amounted to $135,000 at an interest rate of 12%. F-9 INTELLIPHONE, INC. AND CHOICETEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED) 3. LONG-TERM DEBT: (CONTINUED) Future maturities of long-term debt as of December 31, 1996, and March 31, 1997, are as follows:
AMOUNT AT YEAR ENDING DECEMBER 31, DECEMBER 31, 1996 - --------------------------------------------------------------------------- ----------------- 1997....................................................................... $ 265,931 1998....................................................................... 193,955 1999....................................................................... 109,756 2000....................................................................... 265,991 ----------------- $ 835,633 ----------------- ----------------- AMOUNT AT TWELVE MONTHS ENDING MARCH 31, MARCH 31, 1997 - --------------------------------------------------------------------------- ----------------- 1998....................................................................... $ 367,980 1999....................................................................... 602,832 2000....................................................................... 214,377 2001....................................................................... 236,826 2002....................................................................... 62,622 ----------------- $ 1,484,637 ----------------- -----------------
4. COMMITMENTS AND CONTINGENCY: PHONE LOCATIONS: Intelliphone, Inc. rents phone locations from merchants and property owners under varying lease terms, usually seven years, generally cancelable by the Company upon 15 days notice. SALES TAX CONTINGENCY: After an original contact by Intelliphone, Inc., the Minnesota Department of Revenue conducted an audit of the Company's revenues for calculation of sales taxes the department asserts are due on telephone receipts. While the Company does not believe its coin receipts are subject to sales tax and has notified the Minnesota Department of Revenue of its position, it may have to assert its position in the Minnesota courts in order to prevail. The financial statements include an accrual management believes is sufficient to cover this contingency. 5. CONCENTRATION OF CREDIT RISK: Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash in excess of FDIC insurance limits. At December 31, 1996, and March 31, 1997, Intelliphone, Inc. had cash of approximately $765,000 and $95,387, respectively, in excess of FDIC insurance limits in one financial institution. No losses have been experienced from such deposits. F-10 INTELLIPHONE, INC. AND CHOICETEL, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1995 AND 1996 AND QUARTER ENDED MARCH 31, 1997 (UNAUDITED) 6. STOCK AND STOCK OPTIONS: Intelliphone intends to make a public offering of its securities. The proceeds of the offering will be used to retire debt, to finance acquisitions and expansion and for working capital. Intelliphone has issued stock options to a member of management providing for the issuance of up to 50,000 shares of common stock at a price of $1.50 per share expiring October 31, 1998. Subsequent to December 31, 1996, Intelliphone declared a 2 for 1 stock split. This stock split has been reflected in all share and per share amounts as if the split had occurred on January 1, 1995. 7. SUBSEQUENT EVENTS: In January 1997, Intelliphone purchased a route of pay telephones in the Northwestern United States. The route consists of approximately 1,020 pay phones. The purchase price was approximately $3,300,000 and was accounted for under the purchase method and financed primarily with bank and seller financing. In February 1997, Intelliphone reached an agreement to purchase another provider of pay telephones in Minnesota and Wisconsin. The purchase would add approximately 685 additional pay telephones and would be financed through the issuance of stock and assumption of debt. Closing is subject to approval by the Minnesota Public Utilities Commission. A condensed pro-forma balance sheet as if these transactions had closed on December 31, 1996 is as follows:
DECEMBER 31, PRO-FORMA 1996 PURCHASE DECEMBER 31, ACTUAL ADJUSTMENTS 1996 ------------ ------------ ------------ Current assets......................................................... $1,209,690 $ (160,000) $1,049,690 Property and equipment, net............................................ 1,558,332 4,691,956 6,250,288 Other assets........................................................... 201,457 878,344 1,079,801 ------------ ------------ ------------ $2,969,479 $ 5,410,300 $8,379,779 ------------ ------------ ------------ ------------ ------------ ------------ Liabilities............................................................ $2,305,391 $ 4,711,900 $7,017,291 Shareholders' equity................................................... 664,088 698,400 1,362,488 ------------ ------------ ------------ $2,969,479 $ 5,410,300 $8,379,779 ------------ ------------ ------------ ------------ ------------ ------------
In March 1997, Choicetel, Inc. became a wholly owned subsidiary of Intelliphone, Inc. In April 1997, Intelliphone, Inc. changed its name to ChoiceTel Communications, Inc. Also, in April 1997, the Company adopted the 1997 Long-Term Incentive and Stock Option Plan (the "Plan") which allows for the granting of options to purchase up to 100,000 shares of common stock to directors, officers, other employees and consultants. Options under the Plan may be either incentive stock options (intended to qualify for preferential tax treatment under Section 422 of the Internal Revenue Code of 1986, as amended) or non-qualified stock options. As of May 31, 1997, no options had been granted under the Plan. F-11 INDEPENDENT AUDITORS' REPORT Board of Directors Intelliphone, Inc. Minneapolis, Minnesota We have audited the accompanying statements of revenues and direct expenses of the pay telephone division of Telco West, Inc. for the years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Telco West management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of the pay telephone division of Telco West, Inc. for the years then ended, in conformity with generally accepted accounting principles. The statements of revenues and direct expenses are intended to be part of a filing for Intelliphone, Inc. for sale of its securities under Regulation S-B and are presented on a basis that is required for the filing with the Securities and Exchange Commission as more fully described in Note 1. /s/ Schechter Dokken Kanter Andrews & Selcer, Ltd. -------------------------------------- SCHECHTER DOKKEN KANTER ANDREWS & SELCER, LTD. Minneapolis, Minnesota April 30, 1997 F-12 TELCO WEST, INC. PAY TELEPHONE DIVISION STATEMENTS OF REVENUE AND DIRECT EXPENSES YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 ------------ ------------ Revenues: Coin collection..................................................................... $ 1,624,187 $ 1,308,067 Intellicall......................................................................... 1,268,073 807,793 Long distance....................................................................... 250,182 224,888 Other phone......................................................................... 93,342 174,630 Gain on sale of equipment........................................................... 184,090 146,730 Other operating income.............................................................. 6,299 1,886 ------------ ------------ 3,426,173 2,663,994 ------------ ------------ Direct expenses: Depreciation........................................................................ 414,924 307,331 Interest............................................................................ 133,273 95,323 Other direct expenses............................................................... 2,314,103 1,878,802 ------------ ------------ 2,862,300 2,281,456 ------------ ------------ Income from pay telephone operations.................................................. $ 563,873 $ 382,538 ------------ ------------ ------------ ------------
See notes to financial statements. F-13 TELCO WEST, INC. PAY TELEPHONE DIVISION NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND BASIS OF PRESENTATION: The Company provides telecommunications services to the hospitality and direct consumer markets in the Pacific Northwest. In January of 1997, Intelliphone, Inc. purchased the pay telephone division of Telco West, Inc. The financial statements include the results of operations of the pay telephone division only and include any direct revenues and expenses of the division. DEPRECIATION EXPENSE: Pay telephones and other assets are depreciated using an accelerated method over their estimated useful lives. USE OF ESTIMATES: The timely preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. INCOME TAXES: The Company's shareholders have elected to have the corporation taxed under Subchapter "S" of the Internal Revenue Code. Therefore, no provision for income taxes has been made on its earnings. The taxes, if any, are the liability of the Company's shareholders. 2. LEASES: The Company leases certain pay phones under two capital leases which expire in 1997. Amortization expense for this equipment is included with depreciation expense. Future minimum lease payments under the capital leases and the net present value of future minimum lease payments are as follows:
AMOUNT ---------- Year ending December 31, 1997..................................................... $ 331,380 Less amounts representing interest................................................ 13,637 ---------- Net present value of future minimum lease payments................................ $ 317,743 ---------- ----------
3. COMMITMENTS: PHONE LOCATIONS: The Company has entered into various contracts with merchants and property owners of the pay phone locations with terms ranging from one to ten years, cancelable upon 30 days notice by either party. 4. SUBSEQUENT EVENT: In January 1997, the Company sold substantially all of the assets of its pay telephone division to Intelliphone, Inc. for $3,300,000. The sale was accounted for under the purchase method and included seller financing for a portion of the sale price. F-14 INDEPENDENT AUDITORS' REPORT Board of Directors Intelliphone, Inc. Minneapolis, Minnesota We have audited the accompanying statements of operations of Computer Assisted Technologies, Inc. for the years ended December 31, 1995 and 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations of Computer Assisted Technologies, Inc. for the years then ended, in conformity with generally accepted accounting principles. /s/ Schechter Dokken Kanter Andrews & Selcer, Ltd. -------------------------------------- SCHECHTER DOKKEN KANTER ANDREWS & SELCER, LTD. Minneapolis, Minnesota May 16, 1997 F-15 COMPUTER ASSISTED TECHNOLOGIES, INC. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996 ---------- ------------ Revenues: Coin collection....................................................................... $ 866,425 $ 1,374,286 Long distance......................................................................... 89,005 48,010 Other operating income................................................................ 3,292 57,041 ---------- ------------ 958,722 1,479,337 ---------- ------------ ---------- ------------ Expenses: Depreciation and amortization......................................................... 59,000 158,044 Interest.............................................................................. 95,577 180,000 Other operating expenses.............................................................. 779,045 1,396,344 ---------- ------------ 933,622 1,734,388 ---------- ------------ Net income (loss)....................................................................... $ 25,100 $ (255,051) ---------- ------------ ---------- ------------
See notes to financial statements. F-16 COMPUTER ASSISTED TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995 AND 1996 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: NATURE OF BUSINESS AND BASIS OF PRESENTATION: The Company provides pay phone services to direct consumer markets mainly in Minnesota. In February of 1997, the Company reached an agreement to sell its pay telephone operations to Intelliphone, Inc. DEPRECIATION EXPENSE: Pay telephones and other assets are depreciated using a straight-line method over their estimated useful lives. USE OF ESTIMATES: The timely preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates. INCOME TAXES: The Company's shareholders have elected to have the corporation taxed under Subchapter "S" of the Internal Revenue Code. Therefore, no provision for income taxes has been made on the earnings of the Company. The taxes, if any, are the liability of the Company's shareholders. 2. LEASES: The Company leases certain pay phones under three capital leases which expire in 1999, 2000, and 2001. Amortization expense for this equipment is included with depreciation expenses. Net present value of future minimum lease payments under the capital leases are as follows:
AMOUNT ------------ 1997............................................................................ $ 345,396 1998............................................................................ 345,396 1999............................................................................ 341,011 2000............................................................................ 85,221 2001............................................................................ 80,301 ------------ 1,197,325 Less amounts representing interest.............................................. (276,979) ------------ Net present value of future minimum lease payments.............................. $ 920,346 ------------ ------------
F-17 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO PURCHASE BY ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Index of Certain Defined Terms............................................ 2 Prospectus Summary........................................................ 3 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 10 Dividend Policy........................................................... 11 Capitalization............................................................ 12 Dilution.................................................................. 13 Selected Combined Financial Data.......................................... 14 Reorganization............................................................ 16 Recent Acquisitions....................................................... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 17 Business.................................................................. 21 Management................................................................ 30 Certain Transactions...................................................... 32 Principal Shareholders.................................................... 33 Securities Eligible for Future Sale....................................... 34 Description of Securities................................................. 35 Underwriting.............................................................. 39 Legal Matters............................................................. 41 Experts................................................................... 41 Additional Information.................................................... 41 Index to Financial Statements............................................. F-1
------------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS AND SALESPERSONS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 800,000 UNITS EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT CHOICETEL COMMUNICATIONS, INC. --------------------- PROSPECTUS --------------------- EQUITY SECURITIES INVESTMENTS, INC. , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 302A.521 of the Minnesota Business Corporation Act provides that a corporation organized under Minnesota law shall indemnify any director, officer, employee or agent of the corporation made or threatened to be made a party to a proceeding by reason of the former or present official capacity (as defined) of the person against judgments, penalties, fines, settlements and reasonable expenses incurred by the person in connection with the proceedings if certain statutory standards are met. "Proceeding" means a threatened, pending or completed civil, criminal, administrative, arbitration or investigative proceeding, including one by or in the right of the corporation. Section 302A.521 contains detailed terms regarding such rights of indemnification and reference is made thereto for a complete statement of such indemnification rights. Reference is made to the Underwriting Agreement filed as Exhibit 1.1 to this Registration Statement for a description of indemnification arrangements related to this offering. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (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 (the "SEC") 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 Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the estimated costs and expenses of the Registrant in connection with the offering described in the Registration Statement other than the Underwriting Discount set forth on the cover page of the Prospectus. All of the amounts shown are estimates except the SEC registration fee, the NASD filing fee, and the Underwriter's non-accountable expense allowance. SEC filing fee................................................. $ 4,740.00 NASD filing fee................................................ 2,064.00 NASDAQ filing fee.............................................. 8,000.00 Transfer Agent fee............................................. 7,500.00 Legal fees and expenses........................................ 100,000.00 Accounting fees and expenses................................... 20,000.00 Printing and engraving expenses................................ 75,000.00 Blue Sky fees and expenses..................................... 20,000.00 Underwriter's non-accountable expense allowance................ 120,000.00(1) Miscellaneous expenses......................................... 42,696.00 ---------- Total...................................................... $400,000.00 ---------- ----------
- ------------------------ (1) If the Underwriter's over-allotment option is exercised in full, the Underwriter's non-accountable expense allowance will be $138,000.00 and total expenses will be $418,000.00 II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Since June 1, 1994, the Registrant has sold the securities described below without registration under the Act. The transactions described below are claimed to be exempt from registration pursuant to Section 4(2) of the Securities Act as they were isolated transactions and did not involve any public offering, and, in the case of the private placement described in Paragraph 7 below, under Rule 506 under Regulation D under the Act. 1. FEBRUARY 21, 1995 CONVERSION OF DEBT TO EQUITY: On February 21, 1995, an officer and director of the Registrant converted $25,000 of the principal balance of the Registrant's Promissory Note, issued to him in connection with a loan made to the Registrant, into 25,000 shares of Common Stock. 2. FEBRUARY 21, 1995 ISSUANCE OF COMMON STOCK: On February 21, 1995, the Registrant issued 6,000 shares of Common Stock valued at $6,000 to an officer of the Registrant as compensation, in part, for services rendered. 3. OCTOBER 19, 1995 ISSUANCE OF COMMON STOCK: On October 15, 1995, the Registrant issued 6,000 shares of Common Stock valued at $6,000 to an officer of the Registrant as compensation, in part, for services rendered. 4. DECEMBER 27, 1995 CONVERSION OF DEBT TO EQUITY: On December 27, 1995, a shareholder of the Registrant converted $25,000 of the principal balance of the Registrant's Promissory Note, issued to him in connection with a loan made to the Registrant, into 10,000 shares of Common Stock. 5. MARCH 1, 1996 ISOLATED SALE OF COMMON STOCK: On March 1, 1996, the Registrant sold 8,000 shares of Common Stock to an officer and director of the Registrant for $20,000. 6. OCTOBER 15, 1996 ISSUANCE OF COMMON STOCK: On October 15, 1996, the Registrant issued 6,000 shares of Common Stock valued at $15,000 to an officer of the Registrant as compensation, in part, for services rendered. 7. JANUARY 15, 1997 PRIVATE PLACEMENT OF COMMON STOCK: On January 15, 1997, the Registrant sold 111,875 shares of Common Stock to five accredited investors for aggregate consideration of $895,000. 8. MAY 29, 1997 ISSUANCE OF COMMON STOCK: On May 29, 1997, the Registrant issued 12,000 shares of Common Stock valued at $48,000 to an officer of the Registrant as compensation, in part, for services rendered. The purchasers of the securities described above represented that they acquired them for their own account and not with a view to any distribution thereof to the public. The Registrant made inquiries of purchasers of securities in these transactions and obtained representations from such purchasers to establish that such issuances qualified for an exemption from the registration requirements of the Securities Act. The certificates representing the securities bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements. II-2 ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION MANNER OF FILING - ------------- ----------------------------------------------------------------------------------- ---------------- 1.1 Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith 1.2 Form of Selected Dealer Agreement Filed herewith 3.1 Amended and Restated Articles of Incorporation Filed herewith 3.2 By-laws Filed herewith 4.1 Specimen Certificate representing the Common Stock Filed herewith 4.2 Form of Redeemable Warrant Agreement with Norwest Bank Minnesota, National Association, including certificate representing the Redeemable Warrants Filed herewith 5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. * 10.1 1997 Long-Term Incentive and Stock Option Plan Filed herewith 10.2 Lease Agreement Filed herewith 10.3 Bonus Program Filed herewith 10.4 Amended and Restated Loan Agreement with National City Bank, dated as of January 2, 1997 Filed herewith 10.5 Promissory Note payable to Serene Paletz, dated April 10, 1995 Filed herewith 10.6 Promissory Note payable to William Opsahl, dated, April 18, 1995 Filed herewith 10.7 Promissory Note payable to Miriam Graf, dated November 3, 1995 Filed herewith 10.8 Promissory Note payable to William Opsahl, dated December 2, 1995 Filed herewith 10.9 Promissory Note payable to Ronald M. Gross and Elaine Weitzman, dated December 7, 1995 Filed herewith 10.10 Promissory Note payable to William B. Topp and Norma Topp, dated July 7, 1996 Filed herewith 10.11 Promissory Note payable to The Topp Family Trust, dated July 27, 1996 Filed herewith 10.12 Agreement for Sale and Purchase of Business Assets with Telco West, Inc. ("Telco"), dated January 2, 1997 Filed herewith 10.13 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith 10.14 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith 10.15 Agreement for Sale and Purchase of Assets with Computer Assisted Technologies, Inc. ("CAT"), dated as of March 14, 1997 Filed herewith 10.16 Route Service Agreement with CAT, dated as of February 1, 1997 Filed herewith 10.17 Employment Agreement with Jeffrey R. Paletz, dated as of April 15, 1997 Filed herewith 10.18 Employment Agreement with Melvin Graf, dated as of April 15, 1997 Filed herewith 10.19 Employment Agreement with Jack S. Kohler, dated as of April 15, 1997 Filed herewith 10.20 Agreement for Service Resale with U.S. West Communications, Inc., undated Filed herewith 21 Subsidiaries of the Registrant Filed herewith 23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) *
II-3
EXHIBIT NO. DESCRIPTION MANNER OF FILING - ------------- ----------------------------------------------------------------------------------- ---------------- 23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith 24 Power of Attorney (included on signature page) Filed herewith 27 Financial Data Schedule Filed herewith
- ------------------------ * To be filed by amendment. ITEM 28. UNDERTAKINGS. (a) RULE 415 OFFERING The Registrant 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. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement. (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. (b) EQUITY OFFERINGS OF NON-REPORTING SMALL BUSINESS ISSUERS The Registrant will provide to the Underwriter at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. (c) INDEMNIFICATION See Item 24. (d) RULE 430A The Registrant will: (1) For determining any liability under the 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 small business issuer 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 SEC declared it effective. (2) For determining any liability under the 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-4 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Minneapolis, State of Minnesota, on June 23, 1997. CHOICETEL COMMUNICATIONS, INC. By: /s/ JEFFREY R. PALETZ ----------------------------------------- Jeffrey R. Paletz PRESIDENT Each person whose signature appears below constitutes and appoints Jeffrey R. Paletz and Jack S. Kohler, and each of them, his true and lawful attorney-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to the Registration Statement on Form SB-2, and to file the same, with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents 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 attorney-in-fact and agents, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities indicated on June 23, 1997. SIGNATURE TITLE - ------------------------------ -------------------------- /s/ JEFFREY R. PALETZ President and Director - ------------------------------ (principal executive Jeffrey R. Paletz officer) Vice President and Chief /s/ JACK KOHLER Financial Officer - ------------------------------ (principal financial and Jack S. Kohler accounting officer) /s/ GARY S. KOHLER - ------------------------------ Director Gary S. Kohler /s/ MELVIN GRAF - ------------------------------ Director Melvin Graf - ------------------------------ Director Robert A. Hegstrom II-5 EXHIBIT INDEX DOCUMENT DESCRIPTION
FORM OF FILING ---------------- 1.1 Form of Underwriting Agreement, including Underwriter's Warrant Filed herewith 1.2 Form of Selected Dealer Agreement Filed herewith 3.1 Amended and Restated Articles of Incorporation Filed herewith 3.2 By-laws Filed herewith 4.1 Specimen Certificate representing the Common Stock Filed herewith 4.2 Form of Redeemable Warrant Agreement with Norwest Bank Minnesota, National Association, including certificate representing the Redeemable Warrants Filed herewith 5 Opinion of Robins, Kaplan, Miller & Ciresi L.L.P. * 10.1 1997 Long-Term Incentive and Stock Option Plan Filed herewith 10.2 Lease Agreement Filed herewith 10.3 Bonus Program Filed herewith 10.4 Amended and Restated Loan Agreement with National City Bank, dated as of January 2, 1997 Filed herewith 10.5 Promissory Note payable to Serene Paletz, dated April 10, 1995 Filed herewith 10.6 Promissory Note payable to William Opsahl, dated, April 18, 1995 Filed herewith 10.7 Promissory Note payable to Miriam Graf, dated November 3, 1995 Filed herewith 10.8 Promissory Note payable to William Opsahl, dated December 2, 1995 Filed herewith 10.9 Promissory Note payable to Ronald M. Gross and Elaine Weitzman, dated December 7, 1995 Filed herewith 10.10 Promissory Note payable to William B. Topp and Norma Topp, dated July 7, 1996 Filed herewith 10.11 Promissory Note payable to The Topp Family Trust, dated July 27, 1996 Filed herewith 10.12 Agreement for Sale and Purchase of Business Assets with Telco West, Inc. ("Telco"), dated January 2, 1997 Filed herewith 10.13 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith 10.14 Installment Collateral Note payable to Telco, dated January 2, 1997 Filed herewith 10.15 Agreement for Sale and Purchase of Assets with Computer Assisted Technologies, Inc. ("CAT"), dated as of March 14, 1997 Filed herewith 10.16 Route Service Agreement with CAT, dated as of February 1, 1997 Filed herewith 10.17 Employment Agreement with Jeffrey R. Paletz, dated as of April 15, 1997 Filed herewith 10.18 Employment Agreement with Melvin Graf, dated as of April 15, 1997 Filed herewith 10.19 Employment Agreement with Jack S. Kohler, dated as of April 15, 1997 Filed herewith 10.20 Agreement for Service Resale with U.S. West Communications, Inc., undated Filed herewith 21 Subsidiaries of the Registrant Filed herewith 23.1 Consent of Robins, Kaplan, Miller & Ciresi L.L.P. (included in Exhibit 5) * 23.2 Consent of Schechter Dokken Kanter Andrews & Selcer, Ltd. Filed herewith 24 Power of Attorney (included on signature page) Filed herewith 27 Financial Data Schedule Filed herewith
- ------------------------ * To be filed by amendment. ITEM 27. EXHIBITS EXHIBIT NO. DESCRIPTION MANNER OF FILING - ----------- ------------ ---------------- 1.1 Form of Underwriting Agreement Filed herewith 1.2 Form of Selected Dealers Agreement Filed herewith 1.3 Form of Underwriter's Warrant Filed herewith 3.1 Amended and Restated Articles of Filed herewith Incorporation 3.2 By-laws Filed herewith 4.1 Specimen Certificate representing the Filed herewith Common Stock 5 Opinion of Robins, Kaplan, Miller & * Ciresi L.L.P. 10.1 1997 Long-Term Incentive and Stock Filed herewith Option Plan 10.2 Lease Agreement Filed herewith 10.3 Bonus Program Filed herewith 10.4 Amended and Restated Loan Agreement Filed herewith with National City Bank, dated as of January 2, 1997 10.5 Promissory Note payable to Serene Paletz, Filed herewith dated April 10, 1995 10.6 Promissory Note payable to William Opsahl, Filed herewith dated April 18, 1995 10.7 Promissory Note payable to Miriam Graf, Filed herewith dated November 3, 1995 10.8 Promissory Note payable to William Opsahl, Filed herewith dated December 2, 1995 10.9 Promissory Note payable to Ronald M. Gross Filed herewith and Elaine Weitzman, dated December 7, 1995 10.10 Promissory Note payable to William B. Topp Filed herewith and Norma Topp, dated July 7, 1996 10.11 Promissory Note payable to The Topp Filed herewith Family Trust, dated July 27, 1996 10.12 Agreement for Sale and Purchase of Business Filed herewith Assets with Telco West, Inc. ("Telco"), dated January 2, 1997 10.13 Installment Collateral Note payable to Telco, Filed herewith dated January 2, 1997 10.14 Installment Collateral Note payable to Filed herewith Telco, dated January 2, 1997 10.15 Agreement for Sale and Purchase of Assets with Computer Assisted Technologies, Inc. Filed herewith ("CAT"), dated as of March 14, 1997 10.16 Route Service Agreement with CAT, dated as Filed herewith of February 1, 1997 10.17 Employment Agreement with Jeffrey R. Paletz, Filed herewith dated as of April 15, 1997 10.18 Employment Agreement with Melvin Graf, Filed herewith dated as of April 15, 1997 10.19 Employment Agreement with Jack S. Kohler, Filed herewith dated as of April 15, 1997 11 Statement re computation of per share earnings Filed herewith 21 Subsidiaries of the Registrant Filed herewith 23.1 Consent of Robins, Kaplan, Miller & * Ciresi L.L.P. (included in Exhibit 5) 23.2 Consent of Schechter, Dokken, Kanter, Filed herewith Andrews & Selcer, Ltd. 24 Power of Attorney (included on signature page) Filed herewith 27 Financial Data Schedule Filed herewith ----------------------------- * To be filed by amendment. EX-1.1 2 EXHIBIT 1.1 CHOICETEL COMMUNICATIONS, INC. 800,000 UNITS(1) CONSISTING OF 800,000 SHARES OF COMMON STOCK AND 800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS UNDERWRITING AGREEMENT ____________, 1997 Equity Securities Investments, Inc. 2820 IDS Center 80 South Eighth Street Minneapolis, MN 55402 Ladies/Gentlemen: ChoiceTel Communications, Inc., a Minnesota corporation (the "Company"), hereby confirms its agreement to issue and sell to Equity Securities Investments, Inc. (the "Underwriter") an aggregate of 800,000 units (the "Units"), each Unit consisting of one share of the Company's common stock, $0.01 par value per share ("Common Stock"), and one redeemable Common Stock purchase warrant of the Company (the "Redeemable Warrants"). (Such 800,000 Units are collectively referred to in this Agreement as the "Firm Units.") The Company also hereby confirms its agreement to grant to the Underwriter an option to purchase up to 120,000 additional Units (the "Option Units") on the terms and for the purposes set forth in Section 2(b) hereof. (As used in this Agreement, the term "Units" shall consist of the Firm Units and the Option Units.) The Company also hereby confirms its agreement to issue to the Underwriter warrants for the purchase of a total of 80,000 Units as described in Section 6 hereof (the "Underwriter's Warrants"), assuming purchase by the Underwriter of the Firm Units. The Units issuable upon exercise of the Underwriter's Warrants are referred to in this Agreement as the "Warrant Units." 1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. (a) The Company represents and warrants to and agrees with the Underwriter as follows: (i) A registration statement on Form SB-2 (File No. 333- ______) with respect to the Units, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "SEC") thereunder and has been filed with the SEC under the Securities Act; one or more amendments to such registration statement have also been so prepared and have been, or will be, so filed. Copies of the registration statement and amendments and each related preliminary prospectus to date have been delivered by the Company to the Underwriter, and, to the extent applicable, were identical to the electronically transmitted copies thereof filed with the SEC pursuant to the SEC's Electronic Data Gathering Analysis and Retrieval System ("EDGAR"), except to the extent permitted by Regulation S-T under the Securities Act. If the Company has elected not to rely upon Rule 430A of the Rules - ----------------------- (1) Plus an option to purchase up to 120,000 additional Units to cover over- allotments. and Regulations, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and file a prospectus pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Such registration statement as amended at the time it is or was declared effective by the SEC and, in the event of any amendment thereto after the effective date and prior to the "First Closing Date" (as hereinafter defined), such registration statement as so amended (but only from and after the effectiveness of such amendment), including the information deemed to be part of the registration statement at the time of effectiveness pursuant to Rule 430A(b), if applicable, is hereinafter called the "Registration Statement." The prospectus included in the Registration Statement at the time it is or was declared effective by the SEC is hereinafter called the "Prospectus," except that if any prospectus filed by the Company with the SEC pursuant to Rule 424(b) of the Rules and Regulations or any other prospectus provided to the Underwriter by the Company for use in connection with the offering of the Units (whether or not required to be filed by the Company with the SEC pursuant to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file at the time the Registration Statement is or was declared effective by the SEC, the term "Prospectus" shall refer to such differing prospectus from and after the time such prospectus is filed with the SEC or transmitted to the SEC for filing pursuant to such Rule 424(b) or from and after the time it is first provided to the Underwriter by the Company for such use. The term "Preliminary Prospectus" as used herein means any preliminary prospectus included in the Registration Statement prior to the time it becomes or became effective under the Securities Act and any prospectus subject to completion as described in Rule 430A of the Rules and Regulations. For purposes of this Agreement, all references to the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement to any of the foregoing shall be deemed to include the respective copies thereof filed with the SEC pursuant to EDGAR. (ii) At the time the Registration Statement is or was declared effective by the SEC and at all times subsequent thereto up to the "First Closing Date" and the "Second Closing Date" (as such terms are hereinafter defined), the Registration Statement and Prospectus, and all amendments thereof and supplements thereto, will comply or complied with the provisions and requirements of the Securities Act and the Rules and Regulations. Neither the SEC nor any state securities authority has issued any order preventing or suspending the use of any Preliminary Prospectus or requiring the recirculation of a Preliminary Prospectus, or issued a stop order with respect to the offering of the Units (if the Registration Statement has been declared effective), or instituted or, to the Company's knowledge, threatened the institution of, proceedings for any of such purposes. When the Registration Statement shall become effective and when any post-effective amendment thereto shall become effective, the Registration Statement (as amended, if the Company shall have filed with the SEC any post-effective amendments thereto) will not or did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading. When the Registration Statement is or was declared effective by the SEC and at all times subsequent thereto up to the First Closing Date and the Second Closing Date, the Prospectus (as amended or supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto) will not or did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances in which they were made, not misleading. When any Preliminary Prospectus was first filed with the SEC and when any amendment thereof or supplement thereto was first filed with the SEC, such Preliminary Prospectus and any amendment thereof and supplement thereto complied in all material respects with the applicable provisions of the Securities Act and the Rules and Regulations and did not contain an untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading. None of the representations and warranties in this Subsection 1(a) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus, or any -2- amendment thereof or supplement thereto, which are based upon and conform to written information relating to the Underwriter furnished to the Company by the Underwriter specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (iii) The Company has no subsidiaries other than those identified in Exhibit 21.1 to the Registration Statement (each one a "Subsidiary" and collectively the "Subsidiaries") and is not affiliated with any other company or business entity, except as disclosed in the Prospectus. The Company and each Subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Registration Statement and Prospectus; the Company owns all of the outstanding capital stock of each of the Subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; the Company and each Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or lease of its properties or the conduct of its business requires such qualification and in which the failure to be qualified or in good standing would have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company; and no proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification. (iv) The Company and each Subsidiary has operated and is operating in material compliance with all authorizations, licenses, certificates, consents, permits, approvals and orders of and from all state, federal and other governmental regulatory officials and bodies necessary to own its properties and to conduct its business as described in the Registration Statement and Prospectus, all of which are, to the Company's knowledge, valid and in full force and effect; the Company and each Subsidiary is conducting its business in substantial compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business; and neither the Company nor any Subsidiary is in material violation of any applicable law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any Subsidiary or over their respective properties. Except as set forth in the Registration Statement and Prospectus, (A) the Company is in material compliance with all material rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment (the "Environmental Laws") which are applicable to its business, (B) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (C) the Company will not be required to make any future material capital expenditures to comply with Environmental Laws, and (D) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation and Liability Act of 1980, as amended (42 U.S.C. Section 9601, ET SEQ.), or otherwise designated as a contaminated site under applicable state or local law. (v) Neither the Company nor any Subsidiary is in violation of its respective articles of incorporation or bylaws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, lease, indenture, mortgage, loan agreement, joint venture or other agreement or instrument to which it is a party or by which it or its respective properties are bound, which default is material to the business of the Company and its Subsidiaries taken as a whole. (vi) The Company has full requisite power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly -3- authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable against the Company in accordance with its terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance, and except as the enforceability of the indemnification or contribution provisions hereof may be affected by applicable law or the public policies underlying such law. The performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a material default under, (A) any indenture, mortgage, deed of trust, loan agreement, bond, debenture, note, agreement or other evidence of indebtedness, any lease, contract, joint venture or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or their respective properties may be bound, (B) the respective articles of incorporation or bylaws of the Company or any Subsidiary, or (C) any material applicable law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any Subsidiary or over their respective properties. No consent, approval, authorization or order of or qualification with any court, governmental agency or body, domestic or foreign, having jurisdiction over the Company or any Subsidiary or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company of the transactions herein contemplated, except such as may be required under the Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other securities or Blue Sky laws, all of which requirements have been satisfied. (vii) Except as is otherwise expressly described in the Registration Statement or Prospectus, there is neither pending nor, to the best of the Company's knowledge, threatened, any action, suit, claim or proceeding against the Company, any Subsidiary, or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any Subsidiary or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations or business of the Company and its Subsidiaries taken as a whole or might materially and adversely affect their properties, assets or rights, or (ii) might prevent consummation of the transactions contemplated hereby. (viii) The Company has, and at the First Closing Date and Second Closing Date (collectively, the "Closing Dates") will have, the duly authorized and outstanding capitalization set forth in the Prospectus. All outstanding shares of capital stock of the Company are duly authorized and validly issued, fully paid and non- assessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company conforms in all material respects with the statements relating thereto contained in the Registration Statement and the Prospectus; the shares of Common Stock included in the Units to be sold hereunder by the Company have been duly authorized for issuance and sale to the Underwriter pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and non-assessable and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of shareholders exists with respect to any of the shares of Common Stock included in the Units to be sold hereunder by the Company or the issuance and sale thereof, or the issuance and sale or exercise of the Redeemable Warrants, or the issuance and sale or exercise of the Underwriter's Warrants, other than those that have been expressly waived prior to the date hereof. Except as disclosed in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or -4- other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The certificates evidencing the shares of Common Stock and the Redeemable Warrants comply as to form with all applicable provisions of the laws of the State of Minnesota. (ix) The Redeemable Warrants included in the Units to be sold by the Company have been duly and validly authorized and, when authenticated by Norwest Bank Minnesota, National Association (the "Warrant Agent") and issued, delivered and sold in accordance with this Agreement and the Warrant Agreement dated as of the date hereof, between the Company and the Warrant Agent, will have been duly and validly executed, authenticated, issued, and delivered and will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. A sufficient number of shares of Common Stock of the Company has been reserved for issuance by the Company upon exercise of the Redeemable Warrants. (x) The Underwriter's Warrants and the Common Stock and Redeemable Warrants included in the Warrant Units have been duly authorized. The Underwriter's Warrants, when issued and delivered to the Underwriter, will constitute valid and binding obligations of the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance and except insofar as the indemnification provisions thereof may be limited by applicable law and the policies underlying such law. The Common Stock included in the Warrant Units, when issued in accordance with the terms of this Agreement and pursuant to the Underwriter's Warrants, will be fully paid and non-assessable and subject to no preemptive rights or similar rights on the part of any person or entity. The Redeemable Warrants included in the Warrant Units, when authenticated by the Warrant Agent and issued, delivered and sold in accordance with this Agreement, the Warrant Agreement between the Company and the Warrant Agent, and the Underwriter's Warrants, will have been duly and validly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Company, enforceable by the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. The Common Stock issuable upon exercise of the Redeemable Warrants included in the Warrant Units has been duly authorized and, when issued and delivered upon such exercise, will be validly issued, fully paid and non-assessable, and subject to no preemptive rights or similar rights on the part of any person or entity. A sufficient number of shares of Common Stock of the Company has been reserved for issuance by the Company upon exercise of the Underwriter's Warrants and upon exercise of the Redeemable Warrants included in the Warrant Units. (xi) Schechter Dokken Kanter Andrews & Selcer, Ltd., which has expressed its opinion with respect to the financial statements filed as part of the Registration Statement and included in the Registration Statement and Prospectus, are independent accountants within the meaning of the Securities Act and the Rules and Regulations. The financial statements of the Company set forth in the Registration Statement and Prospectus comply in all material respects with the requirements of the Securities Act and fairly present the financial position and the results of operations of the Company and the Subsidiaries at the respective dates and for the respective periods to which they apply in accordance with generally accepted accounting principles consistently applied throughout the periods involved (subject, in the case of unaudited financial statements, to normal year-end adjustments which in the opinion of management of the Company are not material, and except as otherwise stated therein); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required by the Securities Act or the Rules and Regulations to be included in the Registration Statement. (xii) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and at each Closing Date, except as is otherwise disclosed in the Registration Statement or Prospectus, there has not been: (A) any change in the capital stock or long-term debt (including any capitalized lease obligation) or material increase in the short-term debt of the Company or any Subsidiary (other than issuances of Common Stock upon -5- the exercise of options outstanding as of the Effective Date and options granted under the Company's 1997 Long-Term Incentive and Stock Option Plan (the "Stock Plan")); (B) any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company (other than options granted under the Stock Plan); (C) any material adverse change, or any development involving a material adverse change, in or affecting the condition (financial or otherwise), earnings, operations, business, or business prospects, management, financial position, stockholders' equity, results of operations or general condition of the Company; (D) any transaction entered into by the Company or any Subsidiary that is material to the Company; (E) any obligation, direct or contingent, incurred by the Company or any Subsidiary, except obligations incurred in the ordinary course of business that, in the aggregate, are not material; (F) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company; or (G) any loss or damage (whether or not insured) to the property of the Company or any Subsidiary which has been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company or a Subsidiary. (xiii) Except as is otherwise expressly disclosed in the Registration Statement or Prospectus, (A) the Company and each Subsidiary has good and marketable title to all of the property, real and personal, and assets described in the Registration Statement or Prospectus as being owned by it, free and clear of any and all pledges, liens, security interests, encumbrances, equities, charges or claims, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company, (B) the agreements to which the Company or any Subsidiary is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company or the Subsidiary (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by judicial limitations on the right of specific performance, and (C) each of the Company and the Subsidiaries has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by judicial limitations on the right of specific performance. Except as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted. (xiv) The Company and each Subsidiary has timely filed (or has timely requested an extension of time to file) all necessary federal and state income and franchise tax returns and has paid all taxes shown thereon as due; there is no tax deficiency that has been or, to the best of the Company's knowledge, could be asserted against the Company or any Subsidiary that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or properties of the Company or a Subsidiary; and all tax liabilities are adequately provided for in the books of the Company and each Subsidiary. (xv) No labor disturbance by the employees of the Company or any Subsidiary exists or, to the best of the Company's knowledge, is imminent. Except as disclosed in the Registration Statement and the Prospectus, no collective bargaining agreement exists with any of the employees of the Company or any Subsidiary and, to the best of the Company's knowledge, no such agreement is imminent. (xvi) The Company and each Subsidiary owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, technology, service marks, trade names, copyrights, trademarks and proprietary rights or information which are necessary for the conduct of its present or intended business as described in the Registration Statement or Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or -6- otherwise), earnings, operations or business of the Company or any of its Subsidiaries, taken as a whole; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with the asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, technology, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company or any Subsidiary. Except as disclosed in the Registration Statement or Prospectus, the Company is not obligated or under any liability whatsoever to make any payments by way of royalties, fees or otherwise to any owner of, licensor of, or other claimant to, any patent, patent rights, inventions, trade secrets, know-how, technology, service marks, trade names, trademark, copyright or other intangible asset, with respect to the use thereof or in connection with the conduct of its business or otherwise. (xvii) The Common Stock and the Redeemable Warrants have been approved for quotation on The Nasdaq SmallCap Market. (xviii) The Company has no defined benefit pension plan or other pension benefit plan which is intended to comply with the provisions of the Employee Retirement Income Security Act of 1974 as amended from time to time, except as disclosed in the Registration Statement. (xix) The Company has not taken and will not take, directly or indirectly, any action (and does not know of any action by its directors, officers, shareholders or others) which has constituted or is designed to, or which might reasonably be expected to, cause or result in stabilization or manipulation, as defined in the Exchange Act or otherwise, of the price of any security of the Company to facilitate the sale or resale of the Units. The Company has not distributed and will not distribute prior to the later of (A) the First Closing Date or the Second Closing Date, as the case may be, and (B) completion of the distribution of the Units, any offering material in connection with the offering and sale of the Units other than any Preliminary Prospectus, the Prospectus, the Registration Statement and other materials, if any, permitted by the Securities Act. Except as is otherwise disclosed in the Registration Statement or Prospectus, and to the best of the Company's knowledge, no person is entitled, directly or indirectly, to compensation from the Company or the Underwriter for services as a "finder" or otherwise in connection with the transactions contemplated by this Agreement. (xx) The Company and each Subsidiary maintains insurance, which is in full force and effect, with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and, to the best of the Company's knowledge, in line with the insurance maintained by similar companies and businesses; and neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (xxi) Each executive officer and director of the Company and each beneficial owner of five percent (5%) or more of the Common Stock to be outstanding after the sale of the Firm Units (calculated in accordance with Rule 13d-3 under the Exchange Act) has agreed pursuant to the form of Two-Year Lock-up Agreement attached hereto as APPENDIX A-1 (the "Two-Year Lock-up Agreement") that such person will not, for a period of two years from the date (the "Effective Date") that the Registration Statement is declared effective by the SEC (the "Two-Year Lock-up Period"), without the prior written consent of the Underwriter, offer to sell, contract to sell, sell, pledge, hypothecate, transfer or otherwise dispose of, or grant any rights with respect to (collectively, a "Disposition"), any shares of Common Stock and any options, warrants and other rights to purchase any shares of Common Stock or any securities convertible into or -7- exchangeable or exercisable for shares of Common Stock now owned or hereafter acquired by such person (collectively, "Securities"), or with respect to which such person has or hereafter acquires the power of Disposition, other than as permitted by the Two-Year Lock- up Agreement. In addition, each other beneficial owner of Common Stock of the Company has agreed pursuant to the Lock-up Agreement attached hereto as APPENDIX A-2 (the "Six-Month Lock-up Agreement") that such person shall not, for a period of six (6) months from the Effective Date ("Six-Month Lock-up Period"), Dispose of any Securities now owned or hereafter acquired by such person or with respect to which such person has or hereafter acquires the power of Disposition, other than as permitted by the Six-Month Lock-up Agreement. (The Two-Year Lock-up Agreement and the Six-Month Lock- up Agreement shall hereinafter be collectively referred to as the "Lock-up Agreements.") The Company has provided to counsel for the Underwriter ("Underwriter's Counsel") true, accurate and complete copies of all of the Lock-up Agreements. The Company has provided to Underwriter's Counsel a complete and accurate list of all holders of Securities of the Company and the number and type of Securities held by each holder of Securities. (xxii) Neither the Company nor any Subsidiary has at any time during the last five (5) years (or, if formed during the last five years, since its inception) made any unlawful contribution to any candidate for an office or failed to disclose fully any contribution in violation of law, or made any payment to any federal or state governmental officer or official, domestic or foreign, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that transactions are executed in accordance with management's general or specific authorizations, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, access to assets is permitted only in accordance with management's general or specific authorization, and the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxiii) Neither the Company nor any of its affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. (b) Any certificate signed by any officer of the Company and delivered to you or to Underwriter's Counsel shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. 2. PURCHASE, SALE, DELIVERY AND PAYMENT. (a) On the basis of the representations, warranties and agreements herein contained, and subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriter, and the Underwriter agrees to purchase from the Company, the Firm Units at a purchase price of $__________ per Unit. The Underwriter will purchase all of the Firm Units if any are purchased. The Firm Units will be delivered by the Company to the Underwriter for the account of the Underwriter against payment of the purchase price therefor by wire transfer or other same-day funds payable to the order of the Company at the offices of Equity Securities Investments, Inc., 2820 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 (or at such other place as may be agreed upon by the Underwriter and the Company), at 9:00 a.m., Minneapolis, Minnesota time, on (i) the third (3rd) full business day following the date hereof if the Registration Statement is declared effective before 3:30 p.m., Minneapolis, Minnesota time on the date hereof, (ii) the fourth (4th) full business day following the date hereof if the Registration Statement is declared effective after 3:30 p.m., Minneapolis, Minnesota time on the date hereof, or (iii) such other time and date as the Underwriter and the Company may determine, such time and date of payment and delivery being herein called the "First Closing Date." -8- Delivery of the Firm Units will be made by credit to "full fast" transfer to the account or accounts at The Depository Trust Company designated by the Underwriter. (b) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriter to purchase an aggregate of up to 120,000 Option Units at the same purchase price as the Firm Units, for use solely in covering any over- allotments made by the Underwriter in the sale and distribution of the Firm Units. The option granted hereunder may be exercised by the Underwriter at any time (but not more than once), in whole or in part, during the period of forty-five (45) days after the date of this Agreement by giving written notice to the Company and the Company's counsel, which notice shall set forth the aggregate number of Option Units as to which the Underwriter is exercising the option, the names and denominations in which the Option Units are to be registered, and the date and time, as determined by the Underwriter, when the Option Units are to be delivered, such time and date being herein referred to as the "Second Closing Date;" provided, however, that the Second Closing Date shall not be earlier than the First Closing Date nor earlier than the second business day after the date on which the option shall have been exercised. No Option Units shall be sold and delivered unless the Firm Units previously have been, or simultaneously are, sold and delivered. The Option Units will be delivered by the Company to the Underwriter for the account of the Underwriter against payment of the purchase price therefor by wire transfer or other same-day funds payable to the order of the Company at the offices of Equity Securities Investments, Inc. 2820 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402 (or at such other place as may be agreed upon by the Underwriter and the Company) at 9:00 a.m., Minneapolis, Minnesota time, on the Second Closing Date. Delivery of the Option Units will be made by credit to "full fast" transfer to the account or accounts at The Depository Trust Company designated by the Underwriter. 3. COVENANTS OF THE COMPANY. The Company hereby covenants and agrees with the Underwriter as follows: (a) If the Registration Statement has not already been declared effective by the SEC, the Company will use its best efforts to cause the Registration Statement and any post-effective amendments thereto to become effective as promptly as possible; the Company will notify the Underwriter promptly of the time when the Registration Statement or any post-effective amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed and of any request by the SEC for any amendment or supplement to the Registration Statement or Prospectus or additional information; if the Company has elected to rely on Rule 430A of the Rules and Regulations, the Company will file a Prospectus containing the information omitted therefrom pursuant to such Rule 430A with the SEC within the time period required by, and otherwise in accordance with the provisions of, Rules 424(b) and 430A of the Rules and Regulations; the Company will prepare and file with the SEC, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus that, in your opinion, may be necessary or advisable in connection with the distribution of the Units by the Underwriter; and the Company will not file any amendment or supplement to the Registration Statement or Prospectus to which the Underwriter shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing. (b) The Company will advise the Underwriter, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Units for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and the Company will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued. (c) Within the time during which a prospectus relating to the Units is required to be delivered under the Securities Act, the Company will comply as far as it is able with all requirements imposed upon it by the Securities Act, as now and hereafter amended, and by the Rules and Regulations, -9- as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Units as contemplated by the provisions hereof and the Prospectus. If, during such period, any event occurs as a result of which the Prospectus would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if, during such period, it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Securities Act, the Company will promptly notify the Underwriter and will amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. (d) The Company will use its best efforts to arrange for the qualification of the Units for offering and sale under the securities laws of such jurisdictions as the Underwriter may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Units; provided, however, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to the service of process in suits, other than those arising out of the offering or sale of the Units, in any jurisdiction where it is not now so subject. In each jurisdiction in which the Units shall have been qualified as herein provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (e) The Company will furnish to the Underwriter copies of the Registration Statement (two of which will be signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements to such documents, in each case as soon as available and in such quantities as the Underwriter may from time to time reasonably request. (f) For a period of five years from the Effective Date, the Company will furnish directly to the Underwriter as soon as the same shall be sent to its shareholders generally copies of all annual or interim shareholder reports of the Company and will, for the same period, also furnish the Underwriter with the following: (i) One copy of any report, application or document (other than exhibits, which, however, will be furnished on your request) filed by the Company with the SEC, Nasdaq, the NASD or any securities exchange; (ii) As soon as the same shall be sent to shareholders generally, copies of each communication sent to shareholders; and (iii) From time to time, such other information concerning the Company as the Underwriter may reasonably and specifically request, provided that the Company shall not be required to furnish any information pursuant hereto that is not furnished to its shareholders or not otherwise made publicly available. (g) The Company will, for a period of two (2) years from the Effective Date, furnish directly to the Underwriter quarterly profit and loss statements, reports of the Company's cash flow and statements of application of the proceeds of the offering of the Units by the Company in such reasonable detail as the Underwriter may request. (h) The Company will make generally available to its security holders as soon as practicable, but in any event not later than the fifteen (15) months after the end of the Company's current fiscal quarter, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Securities Act and Rule 158 of the Rules and Regulations and covering a twelve (12)- month period beginning after the Effective Date of the Registration Statement. -10- (i) The Company will prepare and file with the SEC any required reports on Form SR in accordance with the Securities Act and the Rules and Regulations. (j) After completion of the offering of the Units, the Company will make all filings required to maintain the quotation of the Common Stock and the Redeemable Warrants on The Nasdaq SmallCap Market, The Nasdaq National Market, or any national stock exchange. (k) The Company will apply the net proceeds from the sale of the Units substantially in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (l) For a period of six months after the Second Closing Date, the Company will not, without the prior written consent of the Underwriter, directly or indirectly, effect the Disposition of any Securities including, without limitation, any Securities that are convertible into or exchangeable or exercisable for Common Stock, and shall not accelerate the exercisability of any Securities that are convertible into or exchangeable or exercisable for Common Stock, except for the sale of Units by the Company pursuant to this Agreement, the exercise of options granted under the Company's Stock Plan and other options outstanding on the date of this Agreement, and the grant of options under the Plan in the ordinary course. (m) For a period of six months from the Effective Date, the Company will not, without the prior written consent of the Underwriter, file a registration statement with the SEC or any state securities or "Blue Sky" law authority relating to any of the Company's Securities, whether such shares are to be offered and sold by the Company or by its shareholders, except for a Registration Statement on Form S-8 (or any successor or replacement form of registration statement) relating only to shares of Common Stock subject to options granted under the Stock Plan; provided, however, that the Company may file a registration statement at any time beginning ninety (90) days after the Effective Date if the holders of certain demand registration rights granted by the Company to shareholders who purchased shares of Common Stock from the Company in an unregistered private placement completed on January 15, 1997 properly exercise such demand registration rights. Notwithstanding the foregoing, all of the shares of Common Stock owned by such holders shall remain subject to either the Six-Month Lock-up Agreement or the Two-Year Lock-up Agreement executed by such holders. (n) The Company will not take, and will use its best efforts to cause each of its officers and directors not to take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Units. (o) The Company will inform the Florida Department of Banking and Finance at any time prior to the consummation of the distribution of the Units by the Underwriter if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba. Such information shall be provided within ninety (90) days after the commencement thereof or after a change occurs with respect to previously reported information. (p) For a period of three (3) years from the Effective Date, the Underwriter shall have the right, but not the obligation, to act as (i) managing underwriter or sole or lead selling agent in any public or private offering of equity or debt securities by the Company, and (ii) the Company's investment banker or financial advisor in connection with any strategic partnership, sale of the Company or its assets, merger, acquisition of stock or assets of another entity, or any similar transaction. If the Company intends to consider or enter into any of the transactions described in this Section 3(p), it will notify the Underwriter in writing, which notification shall contain a description of such transaction in reasonable detail. (q) For a period of three years from the Effective Date, and if the Underwriter so requests, the Company will use its best efforts to secure the election to the Company's Board of Directors of a representative selected by the Underwriter. -11- (r) The Company will cause the Common Stock, the Redeemable Warrants and the Units to be registered under the Exchange Act, which registrations shall be effective concurrently with the effectiveness of the Registration Statement. 4. EXPENSES. (a) The Company agrees with the Underwriter that: (i) Whether or not this Agreement becomes effective or is terminated or cancelled or the sale of the Units hereunder is consummated, and regardless of the reason for or cause of any such termination, cancellation, or failure to consummate, the Company will pay or cause to be paid (A) all expenses (including any transfer taxes) incurred in connection with the delivery to the Underwriter of the Units, (B) all expenses and fees (including, without limitation, fees and expenses of the Company's accountants and of counsel to the Company, excluding, however, fees of Underwriter's Counsel) in connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto, (C) all fees and reasonable expenses, including all reasonable counsel fees of Underwriter's Counsel, incurred in connection with the qualification of the Units for offering and sale by the Underwriter or by dealers under the securities or Blue Sky laws of the states and other jurisdictions which the Underwriter may designate in accordance with Section 3(d) hereof, (D) all costs and expenses incident to qualification with The Nasdaq SmallCap Market, (E) postage and express charges and other expenses in connection with delivery to the Underwriter of the Preliminary Prospectus and Prospectus, and (F) all other costs and expenses incident to the performance of the Company's obligations hereunder that are not otherwise specifically described herein. In addition to and not in lieu of the foregoing, the Company shall pay to the Underwriter on each Closing Date for out-of-pocket expenses (including fees of Underwriter's Counsel other than fees and expenses incurred in connection with Blue Sky or state securities qualifications) a nonaccountable expense allowance equal to two percent (2.0%) of the aggregate Price to Public for all the Units sold to the Underwriter on each Closing Date, including Units sold pursuant to orders received through the Company. If the Underwriter withdraws from the sale of the Units as herein proposed (A) for any reason within the control of the Company such as, for example, the sale of the Units as herein proposed is abandoned by the Company; (B) based upon the fact that there has been a material adverse change in the financial or other affairs of the Company since the date of the last financial statements of the Company provided to the Underwriter; (C) because any of the Company's representations or warranties in this Agreement prove to be untrue; (D) because there shall have occurred any general suspension of trading in securities on the New York Stock Exchange or any limitation on prices for such trading or because any new restrictions on the distribution of securities shall have been established by the New York Stock Exchange or by the SEC or by any federal or state agency, all to such a degree as, in the Underwriter's judgment, would restrict materially a free market for the Units, shares of Common Stock included in the Units, or the Redeemable Warrants; (E) because there shall have occurred such a materiel change in general economic, political or financial conditions, or because the effect of international conditions on the financial markets in the United States become such as, in the Underwriter's judgment, makes it inadvisable to proceed with the sale of the Units; (F) because the Company's financial condition or its business prospects do not fulfill the Underwriter's expectations based on representations made by the Company prior to March 3, 1997; (G) because the offering of the Units lacks public interest prior to the Effective Date; or (H) because adverse market or other conditions make the offering of the Units not feasible in the Underwriter's judgment, the Company will pay to the Underwriter the amount of all actual accountable, out-of-pocket expenses (including fees and disbursements of Underwriter's Counsel) incurred by the Underwriter in connection with the contemplated purchase, offer and sale of the Units, including, -12- without limitation, expenses incurred in its investigation, preparation to market, and marketing of the Units, and in contemplation of performing and in performance of its obligations hereunder, up to a maximum of $35,000.00. All reimbursements pursuant to this Section 4(a)(i) shall occur within ten (10) days after the Underwriter delivers to the Company a written itemization of such expenses. The provisions of this Section 4(a)(i) are intended to relieve the Underwriter from the payment of the expenses and costs which the Company hereby agrees to pay and shall not impair the obligations of the Company hereunder to the Underwriter. (ii) In addition to its other obligations under Sections 7(a) and 8 hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 7(a), it will reimburse the Underwriter on a monthly basis for all reasonable legal 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 Underwriter for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter shall promptly return such payment to the Company 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) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriter within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) It is agreed that any controversy rising out of the operation of the interim reimbursement arrangements set forth in Section 4(a)(ii) hereof, including the amounts of any requested reimbursement payments and the method of determining such amounts, shall be settled by arbitration conducted pursuant to the Code of Arbitration Procedure of the National Association of Securities Dealers, Inc. ("NASD"). Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Section 4(a)(ii) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 7(a) and 7(b) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(a) hereof. 5. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligation of the Underwriter to purchase and pay for the Units as provided herein shall be subject to the accuracy of the representations and warranties of the Company, in the case of the Firm Units, as of the date hereof and the First Closing Date (as if made on and as of the First Closing Date), and in the case of the Option Units, as of the date hereof and the Second Closing Date (as if made on and as of the Second Closing Date); to the performance by the Company of its obligations hereunder; and to the satisfaction of the following additional conditions on or before the First Closing Date in the case of the Firm Units and on or before the Second Closing Date in the case of the Option Units: (a) The Registration Statement shall have become effective not later than 4:00 p.m. Minneapolis, Minnesota time on the date of this Agreement, or such later date or time as shall be consented to in writing by you (the "Effective Date"); and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, or the Underwriter, threatened by the SEC or any state securities commission or similar regulatory body; and any request of the SEC for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Underwriter and Underwriter's Counsel. -13- (b) The Underwriter shall not have advised the Company that the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, contains any untrue statement of a fact which is material or omits to state a fact which is material and is required to be stated therein or is necessary to make the statements contained therein, in light of the circumstances under which they were made, not misleading; provided, however, that this Section 5(b) shall not apply to statements in, or omissions from, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, which are based upon and conform to written information furnished to the Company by the Underwriter specifically for use in the preparation of the Registration Statement or the Prospectus, or any such amendment or supplement. (c) Subsequent to the Effective Date and prior to each Closing Date, there shall not have occurred any change, or any development involving a prospective change, which materially and adversely affects the Company's condition (financial or otherwise), earnings, operations, properties, business or business prospects from that set forth in the Registration Statement or Prospectus, and which, in the Underwriter's sole judgment, is material and adverse and that makes it, in the Underwriter's sole judgment, impracticable or inadvisable to proceed with the public offering of the Units as contemplated by the Prospectus and this Agreement. (d) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Units shall have been reasonably satisfactory to Underwriter's Counsel, and Underwriter's Counsel shall have been furnished with such papers and information as it may reasonably have requested to enable it to pass upon the matters referred to in this Section. (e) On each Closing Date, the Underwriter shall have received the opinion of Robins, Kaplan, Miller & Ciresi L.L.P., counsel for the Company, dated as of such Closing Date, satisfactory in form and substance to the Underwriter and Underwriter's Counsel, to the effect that: (i) Each of the Company and the Subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has the corporate power and authority to own, lease and operate its properties and to conduct its business as currently being carried on and as described in the Registration Statement and Prospectus. (ii) Each of the Company and the Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and the Subsidiaries considered as one enterprise. To the best of such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than the Subsidiaries. (iii) The capital stock of the Company conforms as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Securities." The issued and outstanding Units of the Company have been duly and validly issued and are fully paid and non-assessable, and the holders thereof are not subject to any personal liability solely by reason of being such holders. (iv) The Units to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and non- assessable, and the holders thereof will not be subject to personal liability solely by reason of -14- being such holders. Except as otherwise stated in the Registration Statement and Prospectus, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of capital stock pursuant to the Company's articles of incorporation, bylaws or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company is bound. To the best of such counsel's knowledge, except as set forth in the Prospectus, neither the filing of the Registration Statement nor the offering or sale of the Units as contemplated by this Agreement gives rise to any rights for or relating to the registration of any shares of capital stock or other securities of the Company and no such rights exist, other than those rights described in Section 3(m) hereof. To the best of such counsel's knowledge, except as described in the Registration Statement and Prospectus, there are no options, warrants, agreements, contracts or rights in existence to purchase or acquire from the Company any shares of capital stock of the Company. (v) The Redeemable Warrants included in the Units to be sold by the Company have been duly and validly authorized and, when authenticated by the Warrant Agent and issued, delivered and sold in accordance with this Agreement and the Warrant Agreement dated as of the date hereof between the Company and the Warrant Agent, will have been duly and validly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. A sufficient number of shares of Common Stock of the Company has been reserved for issuance by the Company upon exercise of the Redeemable Warrants. (vi) The Underwriter's Warrants and the Common Stock and Redeemable Warrants included in the Warrant Units have been duly authorized. The Underwriter's Warrants, when issued and delivered to the Underwriter, will constitute valid and binding obligations of the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance. The Common Stock included in the Warrant Units, when issued in accordance with the terms of this Agreement and pursuant to the Underwriter's Warrants, will be fully paid and non-assessable and subject to no preemptive rights or similar rights on the part of any person or entity. The Redeemable Warrants included in the Warrant Units, when authenticated by the Warrant Agent and issued, delivered and sold in accordance with this Agreement, the Warrant Agreement between the Company and the Warrant Agent, and the Underwriter's Warrants, will have been duly and validly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations of the right of specific performance. The Common Stock issuable upon exercise of the Redeemable Warrants included in the Warrant Units has been duly authorized and, when issued and delivered upon such exercise, will be validly issued, fully paid and non-assessable and, to such counsel's knowledge, subject to no preemptive rights or similar rights on the part of any person or entity. A sufficient number of shares of Common Stock of the Company has been reserved for issuance by the Company upon exercise of the Underwriter's Warrants and upon exercise of the Redeemable Warrants included in the Warrant Units. (vii) The Company has the requisite corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriter the Units to be issued and sold by it hereunder. This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by the Underwriter, is a valid, legal and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification and contribution provisions may be limited by applicable law or the public policies underlying such law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws relating to or affecting creditors' rights generally or by general equitable principles. (viii) The Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or is pending or threatened under the Securities Act. (ix) The Registration Statement and the Prospectus, and each amendment thereof or supplement thereto (other than the financial statements, including the notes thereto and the -15- supporting schedules, and other financial, numerical, statistical and accounting data derived therefrom, as to which such counsel need express no opinion), comply as to form in all material respects with the requirements of the Securities Act and the Rules and Regulations. (x) The forms of certificates evidencing the Common Stock and the Redeemable Warrants and filed as exhibits to the Registration Statement comply with Minnesota law. (xi) The description in the Registration Statement and the Prospectus of the Company's articles of incorporation and bylaws and of statutes, legal and governmental proceedings, contracts and other documents are accurate in all material respects and fairly present the information required to be presented by the Securities Act and the applicable Rules and Regulations; and such counsel does not know of any statutes or legal or governmental proceedings required to be described in the Prospectus that are not described as required, or of any agreements, contracts, leases or documents of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required. (xii) The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification and contribution obligations hereunder, concerning which no opinion need be expressed) do not result in any violation of the Company's articles of incorporation or bylaws or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other material agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to the best of such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or the Subsidiaries or other any of their material properties or operations. (xiii) No consent, approval, authorization or order of, or filing with, or qualification with, any court, government or governmental agency or body is necessary in connection with the execution, delivery and performance of this Agreement or for the execution, delivery and performance of this Agreement or for the consummation of the transactions herein contemplated, except such as have been obtained under the Securities Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Units by the Underwriter. (xiv) To the best of such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the Rules and Regulations, other than those described therein. (xv) To the best of such counsel's knowledge, neither the Company nor any of the Subsidiaries is presently (A) in violation of its respective articles of incorporation or bylaws, (B) in material breach or violation of any applicable statute, rule or regulation known to such counsel or any order, writ or decree of any court or governmental agency or body, or (C) in breach of or otherwise in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note, loan agreement or any other material contract, lease or other instrument to which the Company is subject or by which it may be bound, or to which any of the material assets or property of the Company is subject. (xvi) To the best of such counsel's knowledge, the Company holds, and is operating in compliance in all material respects with, all franchises, grants, authorizations, licenses, -16- permits, easements, consents, certificates and orders of any government or self-regulatory body required for the conduct of its business, and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect. (xvii) To the best of such counsel's knowledge, after due inquiry, the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with the asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, technology, trade marks, service marks, trade names, or copyrights which, singularly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (xviii) To the best of such counsel's knowledge, after due inquiry, the Company owns, or possesses adequate rights to use, all patents, patent rights, inventions, trade secrets, know-how, technology, service marks, trade names, copyrights, trade marks and proprietary rights or information which are necessary for the conduct of its present or intended business as described in the Registration Statement or Prospectus. (xix) On the basis of information obtained as a result of discussions and meetings with officers and other Underwriter of the Company, discussions with Underwriter of the independent public accountants for the Company in connection with the preparation of the Registration Statement and the Prospectus, and the examination of other information and documents requested by such counsel, nothing has come to such counsel's attention that has caused them to believe that the Registration Statement and any amendment thereof, at the time it became effective and at all times subsequent thereto up to and on that Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, or that the Prospectus, and any amendment or supplement thereto, at the first date of its issuance and up to and at all times subsequent thereto up to and on that Closing Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Such counsel may further state that in making the foregoing comments, such counsel does not intend them to include or cover the financial statements and notes thereto and related schedules and other financial, numerical, statistical and accounting data contained or omitted from the Registration Statement and any amendment or supplement thereto and the Prospectus. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of Minnesota upon opinions of local counsel, and, as to questions of fact, upon representations or certificates of officers of the Company or its Subsidiaries and of government officials, in which case their opinion is to state the extent of such reliance. Copies of any opinion, representation or certificate so relied upon shall be delivered to the Underwriter and to Underwriter's Counsel. (f) The Underwriter shall have received from Winthrop & Weinstine, P.A., Underwriter's Counsel, such opinion or opinions as the Underwriter may reasonably require, dated as of the First Closing Date and the Second Closing Date, which are satisfactory in form and substance to the Underwriter, with respect to the sufficiency of corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby, and the Company shall have furnished to Underwriter's Counsel such documents as it may have requested for the purpose of enabling it to pass upon such matters. In connection with such opinion, as to matters of fact relevant to conclusions of law, Underwriter's Counsel may rely, to the extent that it deems proper, upon representations or certificates of public officials and of responsible officers of the Company. -17- (g) At the time of execution of this Agreement, the Underwriter shall have received from Schechter Dokken Kanter Andrews & Selcer, Ltd. a letter dated the date of such execution, in form and substance satisfactory to the Underwriter, to the effect that they are independent accountants with respect to the Company within the meaning of the Securities Act and the applicable published instructions, and the Rules and Regulations thereunder, and further stating in effect that: (i) In their opinion, the audited financial statements included in the Registration Statement and Prospectus covered by their report included therein comply as to form in all material respects with the applicable requirements of the Securities Act, the published instructions and the Rule and Regulations. (ii) On the basis of (A) a reading of the minutes of the shareholders' and directors' meetings of the Company since January 1, 1994, (B) inquiries of certain officials of the Company responsible for financial and accounting matters, (C) a reading of the Company's monthly operating statements for the months beginning on January 1, 1994, and (D) other specified procedures and inquiries (but not an audit in accordance with generally accepted accounting principles), nothing came to their attention causing them to believe that: (1) the unaudited consolidated financial statements of the Company and its Subsidiaries contained in the Prospectus and any amendment thereof or supplement thereto do not comply as to form, in all material respects, with the applicable accounting requirements of the Securities Act and the published Rules and Regulations or were not prepared in conformity with generally accepted accounting principles and practices applied on a basis consistent in all material respects with those followed in the preparation of the audited consolidated financial statements of the Company and its Subsidiaries included therein; or (2) the unaudited consolidated amounts of revenues, income before provision for income taxes, net income and ratio of earnings to fixed charges of the Company and its Subsidiaries, if any, contained in the Prospectus, or any amendment thereof or supplement thereto, were not derived from consolidated financial statements prepared in conformity with generally accepted accounting principles and practices applied on a basis consistent in all material respects with those followed in the preparation of the audited consolidated financial statements of the Company and its Subsidiaries included therein; or (3) the unaudited pro forma consolidated financial statements of the Company and its Subsidiaries and recently- acquired companies, if any, contained in the Prospectus or any amendment thereof or supplement thereto, were not properly compiled in accordance with generally accepted accounting principles or did not provide for all adjustments necessary for a fair presentation of the information purported to be shown thereby; or (4) with respect to the period subsequent to March 31, 1997, there were, at a specified date, not more than five (5) business days prior to the date of the letter, any changes or any material increases or decreases in capital stock, long-term or short-term debt or shareholders' equity, decreases in net assets, net current assets, or net worth or any material decrease, as compared with the corresponding period of the prior year, in revenues or net income of the Company as compared with the amounts shown in the consolidated balance sheet included in the Registration Statement, except as disclosed or referred to in the Prospectus and Registration Statement. (iii) Certain information set forth on the cover of the Prospectus and in the Prospectus under the headings "Prospectus Summary" (including the subheading "Summary -18- Combined Financial Data"), "Risk Factors," "Use of Proceeds," "Dividend Policy," "Capitalization," "Dilution," "Selected Combined Financial Data," "Recent Acquisitions," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Management," "Certain Transactions," "Principal Shareholders," "Securities Eligible for Future Sale," and "Description of Securities" and that are expressed in dollars (or percentages derived from dollar amounts) or numbers have been compared to accounting records of the Company which were subject to the internal accounting controls of the Company and are in agreement with such records or computations made therefrom, excluding any questions of legal interpretation. (h) The Underwriter shall have received from Schechter Dokken Kanter Andrews & Selcer, Ltd. a letter dated as of each Closing Date to the effect that such accountants reaffirm, as of such Closing Date, and as though made on such Closing Date, the statements made in the letter furnished by such accountants pursuant to Section 5(g), except that the specified date referred to in such letter will be a date not more than five (5) business days prior to such Closing Date. (i) The Underwriter shall have received from the Company a certificate, dated as of the First Closing Date and the Second Closing Date, of the principal executive officer and the principal financial or accounting officer of the Company, to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct as if made on and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at, or prior to, such Closing Date; (ii) No stop order or other order suspending the effectiveness of the Registration Statement or any amendment thereof or the qualification of the Units for offering or sale have been issued, and no proceedings for that purpose have been instituted or, to the best of their knowledge, are contemplated by the SEC or any state or regulatory body; and (iii) The signers of said certificate have carefully examined the Registration Statement and the Prospectus and any amendments thereof or supplements thereto, and (A) such documents contain all statements and information required to be included therein; the Registration Statement, or any amendment thereof, does 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 the Prospectus, as amended or supplemented, does not include any untrue statement of material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (B) since the Effective Date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; (C) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not incurred any material liabilities or material obligations, direct or contingent, or entered into any material transactions, not in the ordinary course of business consistent with past practice, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock, and except as disclosed in the Prospectus, there has not been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the offering of the Units or the issuance of shares upon the exercise of options outstanding as of the Effective Date or options granted pursuant to the Stock Plan described to in the Registration Statement), or any material increase in the short-term debt or long-term debt, or in the issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company, or any material adverse change or any development involving a prospective material adverse change (whether or not arising in the ordinary course of business) in the general affairs, condition (financial or otherwise), business, key personnel, property, prospects, net worth or results of operations of the Company, and (D) -19- except as stated in the Registration Statement and Prospectus, there is not pending or, to their knowledge, threatened or contemplated, any action, suit or proceeding to which the Company is a party before or by any court or governmental agency, authority or body, or any arbitrator, which might result in any material adverse change of the condition, (financial or otherwise), business, prospects, or results of operations of the Company. (j) On each Closing Date, there shall have been furnished to you a certificate of Secretary of the Company, dated as of such Closing Date, with the documents listed herein attached, and to the effect and certifying as follows: (i) Attached thereto are true and correct copies of the articles of incorporation of the Company, as amended to the date of the certificate, and stating that there have been no changes or amendments to the attached articles of incorporation of the Company, and no resolutions have been adopted by the Board of Directors or shareholders of the Company relating to (A) the amendment of said articles of incorporation, (B) the merger, consolidation or dissolution of the Company, or (C) the sale of all or substantially all of the assets or business of the Company, and that the Company is in good standing in the State of Minnesota and has paid all of its corporate franchise taxes due as of the date of such certificate. (ii) Attached thereto is a true and correct copy of the bylaws of the Company as in effect as of the date of such certificate and no resolutions have been adopted by the Board of Directors or shareholders of the Company relating to changes or amendments to the attached Bylaws. (iii) Attached thereto are true and correct copies of the resolutions of the Board of Directors of the Company relating to the preparation and signing of the Registration Statement and this Agreement, the issuance and sale of the Units and other related matters, and such resolutions have not been amended, modified or rescinded and are in full force and effect as of the date of such certificate and are the only resolutions adopted by the Board of Directors of the Company with respect to the offering contemplated by the Registration Statement. (iv) Attached thereto are true and correct copies of all material correspondence with respect to the Registration Statement and Prospectus and related matters between the Company, its counsel, and/or Schechter Dokken Kanter Andrews & Selcer, Ltd., on the one hand, and the SEC, on the other. (v) This Agreement, as executed and delivered by the Company, is in the form presented to and approved by officers authorized to do so by the Board of Directors of the Company. (vi) Attached thereto are specimens of the certificates for the Common Stock and the Redeemable Warrants in the forms authorized and approved for use by the Board of Directors of the Company. (vii) The persons who have signed the Registration Statement and all amendments thereto were duly elected at the respective times of such signing and duly acting as officers and directors of the Company or as an attorney-in-fact therefor, as set forth in the Registration Statement. (k) The Underwriter shall have received from each of the executive officers and directors of the Company and each beneficial owner of five percent (5%) or more of the Common Stock to be outstanding after the sale of the Firm Units (calculated in accordance with Rule 13d-3 under the Exchange Act) the Two-Year Lock-up Agreement in the form of APPENDIX A-1 hereto whereby each such person agrees that during the Two-Year Lock- up Period such person will not, without the Underwriter's prior -20- written consent, effect the Disposition of any Securities except as permitted by the Two-Year Lock-up Agreement, and the Underwriter shall have received from each other shareholder of the Company the Six-Month Lock-up Agreement in the form of APPENDIX A-2 hereto whereby each such person agrees that during the Six-Month Lock-up Period such person will not, without the Underwriter's prior written consent, effect the Disposition of any Securities other than as permitted by the Six-Month Lock-up Agreement. (l) The Common Stock of the Company shall be included and quoted on The Nasdaq SmallCap Market. (m) Winthrop & Weinstine, P.A. shall deliver to the Underwriter a Blue Sky Memorandum reasonably satisfactory to the Underwriter confirming that all requisite actions for the offer and sale of the Units in all jurisdictions requested by the Underwriter have been taken. (n) The Company shall have furnished to the Underwriter and to Underwriter's Counsel such additional certificates, documents and evidence as the Underwriter shall reasonably request. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to the Underwriter and Underwriter's Counsel. All statements contained in any certificate, letter or other document delivered pursuant hereto by, or on behalf of, the Company shall be deemed to constitute representations and warranties of the Company. The Underwriter may waive in writing the performance of any one or more of the conditions specified in this Section 5 or extend the time for their performance. If any of the conditions specified in this Section 5 shall not have been fulfilled when and as required by this Agreement to be fulfilled and if the fulfillment of said condition has not been waived by the Underwriter, this Agreement and all obligations of the Underwriter hereunder may be canceled at, or at any time prior to, each Closing Date by the Underwriter. Any such cancellation shall be without liability of the Underwriter to the Company and shall not relieve the Company of its obligations under Section 4(a) hereof. Notice of such cancellation shall be given to the Company at the address specified in Section 12 hereof in writing, or by telegraph or telephone confirmed in writing. 6. UNDERWRITER'S WARRANTS. In consideration of the agreement of the Underwriter to act as Underwriter, and upon payment of a purchase price of $100.00, on the First Closing Date the Company will issue and deliver to the Underwriter, for its account, the Underwriter's Warrants to purchase the Warrant Units in an amount equal to ten percent (10%) of the number of Firm Units purchased by the Underwriter in the offering. The Underwriter's Warrants shall be issued on the First Closing Date and shall be dated as of the Effective Date. The Underwriter's Warrants shall be exercisable commencing one year after the Effective Date and for a period ending five years after the Effective Date at a price equal to 120% of the Per Unit Price to Public set forth on the cover page of the Prospectus. As to other terms, the Underwriter's Warrants shall be in form and substance substantially the same as APPENDIX B hereto. -21- 7. INDEMNIFICATION. (a) The Company hereby agrees to indemnify and hold harmless the Underwriter, and each person, if any, who controls the Underwriter within the meaning of Section 15 of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Underwriter or each such controlling person may become subject under the Securities Act, the Exchange Act, the common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, (i) any breach of any representation, warranty, agreement or covenant of the Company contained in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or supplement thereto, or the omission or alleged omission to state in the Registration Statement or any amendment thereof or supplement thereto a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, if used prior to the Effective Date of the Registration Statement, or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Units under, or exempt the Units or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company will reimburse each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information relating to the Underwriter furnished to the Company by the Underwriter specifically for use in the preparation of the Registration Statement or any such post-effective amendment thereof, any such Preliminary Prospectus, or the Prospectus, or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or the Underwriter filed in any jurisdiction in order to qualify the Units under, or exempt the Units or the sale thereof from qualification under, the securities laws of such jurisdiction; and provided further that the foregoing indemnity agreement is subject to the condition that, insofar as it relates to any untrue statement, alleged untrue statement, omission or alleged omission made in any Preliminary Prospectus but eliminated or remedied in the Prospectus, such indemnity agreement shall not inure to the benefit of the Underwriter (or to the benefit of any person who controls the Underwriter) if the person asserting any loss, claim, damage or liability purchased the Units from the Underwriter if a copy of the Prospectus was not sent or given to such person with, or prior to, the written confirmation of the sale of such Units to such person. This indemnity agreement is in addition to any liability which the Company may otherwise have. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each person who controls the Company within the meaning of Section 15 of the Securities Act against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Securities Act, the Exchange Act, the common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of, or are based upon, (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any amendment thereof or supplement thereto, or the omission or alleged omission to state in the Registration Statement or any amendment thereof or supplement thereto, a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus, if used prior to the Effective Date of -22- the Registration Statement, or in the Prospectus (as amended or as supplemented, if the Company shall have filed with the SEC any amendment thereof or supplement thereto), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) any untrue statement or alleged untrue statement of a material fact contained in any application or other statement executed by the Company or by the Underwriter and filed in any jurisdiction in order to qualify the Units under, or exempt the Units or the sale thereof from qualification under, the securities laws of such jurisdiction, or the omission or alleged omission to state in such application or statement a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by, or on behalf of, the Underwriter specifically for use in the preparation of the Registration Statement or any such post- effective amendment thereof, any such Preliminary Prospectus, or the Prospectus or any such amendment thereof or supplement thereto, or in any application or other statement executed by the Company or by the Underwriter and filed in any jurisdiction; and the Underwriter will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending against any such loss, claim, damage, liability or action. This indemnity agreement is in addition to any liability which the Underwriter may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, notify in writing the indemnifying party of the commencement thereof. The omission so to notify the indemnifying party will relieve it from any liability under this Section 7 as to the particular item for which indemnification is then being sought, but not from any other liability which it may have to any indemnified party. In case any such action is brought against any indemnified party, and the indemnified party notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel who shall be reasonably satisfactory to such indemnified party; and after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party, and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties, in which event the fees and expenses of one such separate counsel shall be borne by the indemnifying party. Any such indemnifying party shall not be liable to any such indemnified party on account of any settlement of any claim or action effected without the consent of such indemnifying party. 8. CONTRIBUTION. (a) In order to provide for just and equitable contribution in any action in which the Underwriter or the Company (or any person who controls the Underwriter or the Company within the meaning of Section 15 of the Securities Act) makes claim for indemnification pursuant to Section 7 hereof, but such indemnification is unavailable or insufficient to hold harmless and indemnify a party under Section 7, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in Section 7 above (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriter on the other from the offering of the Units hereunder or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, in such proportion as is -23- appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of the Company on the one hand and the Underwriter on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering of the Units (before deducting expenses) received by the Company bear to the total underwriting discounts received by the Underwriter, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriter and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company and the Underwriter agree that it would not be just and equitable if contributions pursuant to this Section 8 were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this Section 8. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this Section 8 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this Section 8. Notwithstanding the provisions of this Section 8, the Underwriter shall not be required to contribute any amount in excess of the amount by which the total price at which the Units underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that the Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. (b) Promptly after receipt by a party to this Agreement of notice of the commencement of any action, suit or proceeding, such person will, if a claim for contribution in respect thereof is to be made against another party (the "Contributing Party"), notify the Contributing Party of the commencement thereof; but the omission so to notify the Contributing Party will not relieve the Contributing Party from any liability which it may have to any party other than under this Section 8. Any notice given pursuant to Section 7 hereof shall be deemed to be like notice hereunder. In case any such action, suit or proceeding is brought against any party, and such person notifies a Contributing Party of the commencement thereof, the Contributing Party will be entitled to participate therein with the notifying party and any other Contributing Party similarly notified. 9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at immediately after the time at which the Registration Statement shall become effective under the Securities Act upon the Effective Date of the Registration Statement. (b) Until the First Closing Date, this Agreement may be terminated by the Underwriter, at its option, by giving notice to the Company, and the option referred to in Section 2(b), if exercised, may be cancelled at any time prior to the Second Closing Date, if (i) the Company shall have failed, refused, or been unable, at or prior to such Closing Date, to perform any agreement on its part to be performed hereunder, (ii) any other condition of the Underwriter's obligations hereunder is not fulfilled or waived by the Underwriter, (iii) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or in the over-the-counter market shall have been suspended, (iv) minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall be required, on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market, by such Exchange or by Nasdaq or by order of the SEC or any other governmental authority having jurisdiction, (v) a banking moratorium shall have been declared by federal, New York, or Minnesota authorities, (vi) there shall have been such a serious, unusual and material change in general economic, monetary, political or financial conditions, or the effect of international conditions on the financial markets in the -24- United States shall be such as, in the judgment of the Underwriter, makes it inadvisable to proceed with the delivery of the Units, (vii) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which, in the judgment of the Underwriter, materially and adversely affects or will materially and adversely affect the business or operations of the Company, or (viii) there shall be a material outbreak of hostilities or material escalation and deterioration in the political and military situation between the United States and any foreign power, or a formal declaration of war by the United States of America shall have occurred. Any such termination shall be without liability of any party to any other party, except as provided in Sections 7 and 8 hereof; provided, however, that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 4 hereof. (c) If the Underwriter elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 9, it shall notify the Company and the Company's counsel promptly by telegram or telephone, confirmed by letter sent to the address specified in Section 11 hereof. If the Company shall elect to prevent this Agreement from becoming effective, it shall notify the Underwriter promptly by telegram or telephone, confirmed by letter sent to the addresses specified in Section 11 hereof. 10. SURVIVAL OF INDEMNITIES, CONTRIBUTION AGREEMENTS, WARRANTIES AND REPRESENTATIONS. The respective indemnity and contribution agreements of the Company and the Underwriter contained in Sections 7 and 8, the representations and warranties of the Company set forth in Section 1 hereof, and the covenants and agreements of the Company set forth in Section 3 hereof, shall remain operative and in full force and effect, regardless of any investigation made by, or on behalf of, the Underwriter, the Company, any of its officers and directors, or any controlling person referred to in Sections 7 and 8, and shall survive the delivery of and payment for the Units. The aforesaid indemnity and contribution agreements shall also survive any termination or cancellation of this Agreement. Any successor of any party or of any such controlling person, or any legal representative of such controlling person, as the case may be, shall be entitled to the benefit of the respective indemnity and contribution agreements. 11. NOTICES. All notices or communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be mailed, delivered or telegraphed, and confirmed, as follows: If to the Underwriter, to: Equity Securities Investments, 2820 IDS Center 80 South Eighth Street Minneapolis, Minnesota 55402 Attention: Mr. Nathan Newman with a copy to: Winthrop & Weinstine, P.A. 3000 Dain Bosworth Plaza 60 South Sixth Street Minneapolis, Minnesota 55402 Attention: Eric O. Madson, Esq. If to the Company, to: ChoiceTel Communications, Inc. 9724 10th Avenue North Plymouth, MN 55441 Attention: Mr. Jack S. Kohler with a copy to: Robins, Kaplan, Miller & Ciresi L.L.P. 2800 LaSalle Plaza 800 LaSalle Avenue Minneapolis, Minnesota 55402 Attention: Robert T. Montague, Esq. -25- 12. INFORMATION FURNISHED BY THE UNDERWRITER. The statements relating to the stabilization activities of the Underwriter and the statements under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the written information furnished by, or on behalf of, the Underwriter specifically for use with reference to the Underwriter referred to in Section 1(a)(ii) and Sections 7(a) and 7(b) hereof. 13. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Underwriter and the Company and their respective successors and assigns, and the officers, directors and controlling persons referred to in Sections 7 and 8. Nothing expressed in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto, their respective successors and assigns, and the controlling persons, officers and directors referred to in Sections 7 and 8 any legal or equitable right, remedy or claim under, or in respect of, this Agreement or any provision herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and their respective executors, administra-tors, successors, assigns and such controlling persons, officers and directors, and for the benefit of no other person or corporation. No purchaser of any Units from the Underwriter shall be construed a successor or assign merely by reason of such purchase. 14. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the laws of the State of Minnesota. If the foregoing is in accordance with your under-standing of our agreement, please sign and return to us the enclosed counterpart of this Agreement, whereupon it will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, CHOICETEL COMMUNICATIONS, INC. By -------------------------------- Signature -------------------------------- Name Typed or Printed Its --------------------------- Title Typed or Printed ACCEPTANCE The foregoing Underwriting Agreement is hereby confirmed and accepted by us as of the date first above written. Equity Securities Investments, Inc. By ------------------------------------- Signature ---------------------------------- Name Type or Printed Its ------------------------------ Title Typed or Printed -26- APPENDIX A-1 TWO-YEAR LOCK-UP AGREEMENT Equity Securities Investments, Inc. 2800 IDS Center 80 South 8th Street Minneapolis, MN 55402 Re: ChoiceTel Communications, Inc. Ladies and Gentlemen: The undersigned, a beneficial owner of common stock, $.01 par value per share (the "Common Stock"), of ChoiceTel Communications, Inc. (the "Company"), understands and acknowledges that the Company is intending to file or has filed with the Securities and Exchange Commission a Registration Statement on Form SB- 2 (the "Registration Statement") for the registration of the offer and sale of units (the "Units"), each Unit consisting of one share of Common Stock of the Company and a redeemable warrant to purchase one share of Common Stock, including units subject to the over-allotment option described in the Registration Statement (collectively, the "Units"). The undersigned further understands that the Company, as issuer, and Equity Securities Investments, Inc., as the underwriter (the "Underwriter") to be named in that certain proposed underwriting agreement expected to be entered into in connection with the public offering of the Units by the Underwriter (the "Underwriting Agreement"), contemplate entering into such Underwriting Agreement. In order to induce the Underwriter to proceed with the public offering, the undersigned agrees, for the benefit of the Company and the Underwriter, that should such public offering be effectuated, the undersigned will not, without the prior written consent of the Underwriter, during the two years commencing on the effective date of the Registration Statement ("Effective Date"): (i) offer to sell, contract to sell, pledge, hypothecate, transfer or otherwise dispose of, grant any rights with respect to (collectively, a "Disposition"), any shares of Common Stock of the Company, and options, warrants or other rights to purchase any shares of Common Stock or any securities convertible into or exchangeable or exercisable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of Disposition; or (ii) effect any Disposition of any Securities other than by gifts to donees who agree in writing to be bound by the same restrictions, or by will or the laws of descent and distribution; in which case the Securities also will be subject to the same restriction. Notwithstanding the foregoing, the Underwriter hereby agrees to release from this Lock-up Agreement ten percent (10%) of the Securities beneficially owned by the undersigned one (1) year following the Effective Date. The undersigned hereby agrees to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities except in compliance with this Agreement. The undersigned hereby further agrees that during the two years commencing on the Effective Date, the undersigned will effect all sales of Securities only through the Underwriter. Dated: ________________, 1997 Very truly yours, ----------------------------------- Signature ----------------------------------- Name Typed or Printed A-1 APPENDIX A-2 SIX-MONTH LOCK-UP AGREEMENT Equity Securities Investments, Inc. 2800 IDS Center 80 South 8th Street Minneapolis, MN 55402 Re: ChoiceTel Communications, Inc. Ladies and Gentlemen: The undersigned, a beneficial owner of common stock, $.01 par value per share (the "Common Stock"), of ChoiceTel Communications, Inc. (the "Company"), understands and acknowledges that the Company is intending to file or has filed with the Securities and Exchange Commission a Registration Statement on Form SB- 2 (the "Registration Statement") for the registration of the offer and sale of units (the "Units"), each Unit consisting of one share of Common Stock of the Company and a redeemable warrant to purchase one share of Common Stock, including Units subject to the over-allotment option described in the Registration Statement (collectively, the "Units"). The undersigned further understands that the Company, as issuer, and Equity Securities Investments, Inc., as the underwriter (the "Underwriter") to be named in that certain proposed underwriting agreement expected to be entered into in connection with the public offering of the Units by the Underwriter (the "Underwriting Agreement"), contemplate entering into such Underwriting Agreement. In order to induce the Underwriter to proceed with the public offering, the undersigned agrees, for the benefit of the Company and the Underwriter, that should such public offering be effectuated, the undersigned will not, without the prior written consent of the Underwriter, for six months commencing on the effective date of the Registration Statement ("Effective Date"): (i) offer to sell, contract to sell, pledge, hypothecate, transfer or otherwise dispose of, grant any rights with respect to (collectively, a "Disposition"), any shares of Common Stock of the Company, and options, warrants or other rights to purchase any shares of Common Stock or any securities convertible into or exchangeable or exercisable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of Disposition; or (ii) effect any Disposition of any Securities other than by gifts to donees who agree in writing to be bound by the same restrictions, or by will or the laws of descent and distribution; in which case the Securities also will be subject to the same restriction. The undersigned hereby agrees to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities except in compliance with this Agreement. The undersigned hereby further agrees that during the two years commencing on the Effective Date, the undersigned will effect all sales of Securities only through the Underwriter. Dated: ________________, 1997 Very truly yours, ----------------------------------- Signature ----------------------------------- Name Typed or Printed A-2 APPENDIX B FORM OF WARRANT TO PURCHASE 80,000 UNITS (EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT) OF CHOICETEL COMMUNICATIONS, INC. N0. ______ 80,000 UNITS FOR GOOD AND VALUABLE CONSIDERATION, ChoiceTel Communications, Inc., a Minnesota corporation (the "Company"), hereby certifies that Equity Securities Investments, Inc., Minneapolis, Minnesota (the "Underwriter"), or its registered assigns, is entitled to subscribe for and purchase from the Company at any time or from time to time after [ONE YEAR FROM EFFECTIVE DATE] , to and including [FIVE YEARS FROM EFFECTIVE DATE] Eighty Thousand (80,000) Units (the "Units"), each Unit consisting of one share of the Company's Common Stock and one redeemable Common Stock purchase warrant of the Company. The per Unit exercise price of this Warrant is $_____ (the "Warrant Exercise Price"), subject to adjustment as provided herein. This Warrant is one of the Underwriter's Warrants referred to in the Underwriting Agreement dated_____________, 1997 by and between the Company and the Underwriter (the "Offering") entered into in connection with the offering by the Company of 800,000 Units (the "Units"), plus an additional 120,000 Units solely to cover over-allotments. As used herein, (i) this Warrant and all warrants hereafter issued in exchange or substitution for this Warrant are referred to as the "Warrants;" (ii) the Units which may be acquired upon exercise of the Warrants are referred to herein as the "Warrant Units;" (iii) the term "Holder" means the Underwriter, any party who acquires all or a part of this Warrant as a registered transferee of the Underwriter, or any record holder or holders of the Warrant Units issued upon exercise, whether in whole or in part, of the Warrant; (iv) the term "Common Stock" means and includes the Company's presently authorized common stock, par value $.01 per share, together with any other equity securities which may be issued by the Company with respect thereto or in substitution therefor; (v) the term "Redeemable Warrants" means the redeemable common stock purchase warrants subject to the Warrant Agreement dated _____________, 1997 between the Company and Norwest Bank Minnesota, National Association, as warrant agent (the "Warrant Agent"), each Redeemable Warrant representing the right to purchase at any time on or before ____________, 2002 one share of Common Stock at a price of $9.50 per share, subject to adjustment as provided in said Warrant Agreement; and (vi) the term "Convertible Securities" means any stock or other securities convertible into, or exchangeable for, Common Stock. This Warrant is subject to the following provisions, terms and conditions, to which each Holder hereof consents and agrees: 1. EXERCISE; TRANSFERABILITY. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part (but not as to a fractional share of Unit) by written notice of exercise (in the form attached hereto) delivered to the Company at the principal office of the Company prior to the expiration of this Warrant and accompanied or preceded by the surrender of this Warrant along with a check in payment of the Warrant Exercise Price for such Units. (b) This Warrant may not be sold, assigned, hypothecated, or otherwise transferred for a period of one year from the effective date of the Offering (other than by will, pursuant to the operation of law, or where directed by a court of competent jurisdiction upon the dissolution or liquidation of a corporate Holder hereof), except to (i) a person who is an officer or partner of the Underwriter, (ii) a successor in interest to the business of the Underwriter, (iii) a person who is an officer or partner of a successor, (iv) a member of the selling group, or (v) a person who is an officer or partner of a member of the selling group; such transfer to be by endorsement (by the Holder hereof executing the form of assignment attached hereto) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery. Further, this Warrant B-1 may not be sold, transferred, assigned, hypothecated or divided into two or more Warrants of smaller denominations, nor may any shares of Common Stock or Redeemable Warrants issued pursuant to exercise of this Warrant be transferred, except as provided in Section 7 hereof. 2. EXCHANGE AND REPLACEMENT. Subject to Sections 1 and 7 hereof, this Warrant is exchangeable upon the surrender hereof by the Holder to the Company at its office for new Warrants of like tenor and date representing in the aggregate the right to purchase the number of Warrant Units purchasable hereunder, each of such new Warrants to represent the right to purchase such number of Warrant Units (not to exceed the aggregate total number purchasable hereunder) as shall be designated by the Holder at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction, or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant; provided, however, that if the Underwriter shall be such Holder, an agreement of indemnity by such Holder shall be sufficient for all purposes of this Section 2. This Warrant shall be promptly canceled by the Company upon the surrender hereof in connection with any exchange or replacement. The Company shall pay all expenses, taxes (other than stock transfer taxes), and other charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 2. 3. ISSUANCE OF THE WARRANT UNITS. (a) The Company agrees that the shares of Common Stock and the Redeemable Warrants comprising the Warrant Units purchased upon exercise of this Warrant shall be and are deemed to be issued to the Holder as of the close of business on the date on which this Warrant shall have been surrendered and the payment made for such Warrant Units as aforesaid. Subject to the provisions of Section 3(b), certificates for the shares of Common Stock and the Redeemable Warrants comprising the Warrant Units so purchased shall be delivered to the Holder within a reasonable time, not exceeding fifteen (15) days after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant representing the right to purchase the number of Warrant Units, if any, with respect to which this Warrant shall not then have been exercised shall also be delivered to the Holder within such time. (b) Notwithstanding the foregoing, the Company shall not be required to deliver any shares of Common Stock or the Redeemable Warrants comprising the Warrant Units upon exercise of this Warrant except in accordance with exemptions from the applicable securities registration requirements or registrations under applicable securities laws. Nothing herein, however, shall obligate the Company to effect registrations under federal or state securities laws, except as provided in Section 9. If registrations are not in effect and if exemptions are not available when the Holder seeks to exercise the Warrant, the Warrant exercise period will be extended, if need be, to prevent the Warrant from expiring, until such time as either registrations become effective or exemptions are available, and the Warrant shall then remain exercisable for a period of at least thirty (30) calendar days from the date the Company delivers to the Holder written notice of the availability of such registrations or exemptions. The Holder agrees to execute such documents and make such representations, warranties, and agreements as may be reasonably required solely to comply with the exemptions relied upon by the Company, or the registrations made, for the issuance of the shares of Common Stock and the Redeemable Warrants comprising the Warrant Units. 4. COVENANTS OF THE COMPANY. The Company covenants and agrees that (a) all shares of Common Stock included in the Warrant Units will, upon issuance, be duly authorized and issued, fully paid, non-assessable and free from all taxes, liens and charges with respect to the issue thereof; (b) all Redeemable Warrants included in the Warrant Units, when authenticated by the Warrant Agent and issued, delivered and sold in accordance with this Warrant and the Warrant Agreement between the Company and the Warrant Agent, will be duly and validly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as enforceability may be limited by the application of bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the rights of creditors generally and by judicial limitations on the right of specific performance; and (c) all shares of Common Stock issuable upon exercise of the Redeemable Warrants included in the Warrant Units will, upon issuance, be duly authorized and issued, fully paid, non-assessable and free from all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant a sufficient number of shares of Common Stock and Redeemable Warrants to provide for the exercise of the rights represented by this Warrant. 5. ANTI-DILUTION ADJUSTMENTS. The provisions of this Warrant are subject to adjustment as provided in this Section 5. (a) The Warrant Exercise Price shall be adjusted from time to time such that in case the Company shall hereafter: B-2 (i) pay any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock; (ii) subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Warrant Exercise Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (A) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Warrant Exercise Price, by (B) the total number of shares of Common Stock outstanding immediately after such event (including in each case the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Warrant Exercise Price per share. An adjustment made pursuant to this subsection shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination, reclassification or other event. If, as a result of an adjustment made pursuant to this subsection, the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Warrant Exercise Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. All calculations under this subsection shall be made to the nearest cent or to the nearest 1/100 of a share, as the case may be. In the event that at any time, as a result of an adjustment made pursuant to this sub-section, the holder of any Warrant thereafter surrendered for exercise shall become entitled to receive any shares of the Company other than shares of Common Stock, thereafter the Warrant Exercise Price of such other shares so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Common Stock contained in this subsection. (b) If the Company shall distribute to all holders of Common Stock (including any such distribution made to the shareholders of the Company in connection with a consolidation or merger in which the Company is the continuing corporation) evidences of its indebtedness, cash (other than any cash dividend which, together with any cash dividends paid within the 12 months prior to the record date for such distribution, does not exceed 5% of the "Current Market Price" (as hereinafter defined) at the record date for such distribution) or assets (other than dividends payable in shares of its capital stock), or rights, options, or warrants to subscribe for or purchase Common Stock or securities convertible into or exchangeable for shares of Common Stock, then, in each such case, the Warrant Exercise Price shall be adjusted by multiplying the Warrant Exercise Price in effect immediately prior to the record date for the determination of shareholders entitled to receive such distribution by a fraction, the numerator of which shall be the Current Market Price per share of Common Stock on such record date, less the fair market value (as determined in good faith by the Company's Board of Directors, whose determination shall be conclusive, absent manifest error) of the portion of the evidences of indebtedness or assets so to be distributed, or of such rights, options, or warrants or convertible or exchangeable securities, or the amount of such cash, applicable to one share, and the denominator of which shall be such Current Market Price per share of Common Stock. Such adjustment shall be made whenever any such distribution is made, and shall become effective on the record date for the determination of shareholders entitled to receive such distribution. (c) For the purpose of any computation under this Warrant, the "Current Market Price" per share of Common Stock on any date shall be the average of the daily closing prices for the 30 consecutive trading days immediately preceding the date in question. The closing price for each day shall be the last reported sales price regular way or, in case no such reported sale takes place on such day, the closing bid price regular way, in either case on the principal national securities exchange (including, for purposes hereof, The Nasdaq National Market and The Nasdaq SmallCap Market) on which the Common Stock is listed or admitted to trading or, if the Common Stock is not listed or admitted to trading on any national securities exchange, the highest reported bid B-3 price for the Common Stock as furnished by the National Association of Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq is no longer reporting such information. If, on any such date, the Common Stock is not listed or admitted to trading on any national securities exchange and is not quoted by Nasdaq or any similar organization, the fair value of a share of Common Stock on such date, as determined in good faith by the Company's Board of Directors, whose determination shall be conclusive, absent manifest error, shall be used. (d) No adjustment in the Warrant Exercise Price shall be required if such adjustment is less than $.05; provided, however, that any adjustments which by reason of this Section 5 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 5 shall be made to the nearest cent or to the nearest whole share, as the case may be. (e) In any case in which this Section 5 shall require that an adjustment in the Warrant Exercise Price may be made effective as of a record date for a specified event, the Company may elect to defer, until the occurrence of such event, issuing to the Holder, if the Holder exercised or converted this Warrant after such record date, the shares of Common Stock, if any, issuable upon such exercise or conversion over and above the shares of Common Stock, if any, issuable upon such exercise or conversion on the basis of the Warrant Exercise Price in effect prior to such adjustment; provided, however, that the Company shall deliver to the Holder a due bill or other appropriate instrument evidencing the Holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (f) Upon each adjustment of the Warrant Exercise Price pursuant to Section 5(a) above, the Holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Warrant Exercise Price the number of Warrant Units, calculated to the nearest full Unit, obtained by multiplying the number of Units specified in such Warrant (as adjusted as a result of all adjustments in the Warrant Exercise Price in effect prior to such adjustment) by the Warrant Exercise Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Warrant Exercise Price. (g) In case of any consolidation or merger to which the Company is a party other than a merger or consolidation in which the Company is the continuing corporation, or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, or in the case of any statutory exchange of securities with another corporation (including any exchange effected in connection with a merger of a third corporation into the Company), there shall be no adjustment under Subsection (a) of this Section above but the Holder of each Warrant then outstanding shall have the right thereafter to convert such Warrant into the kind and amount of shares of stock and other securities and property which he would have owned or have been entitled to receive immediately after such consolidation, merger, statutory exchange, sale, or conveyance had such Warrant been converted immediately prior to the effective date of such consolidation, merger, statutory exchange, sale, or conveyance and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this subsection with respect to the rights and interests thereafter of any Holders of the Warrant, to the end that the provisions set forth in this subsection shall thereafter correspondingly be made applicable, as nearly as may reasonably be, in relation to any shares of stock and other securities and property thereafter deliverable on the exercise of the Warrant. The provisions of this subsection shall similarly apply to successive consolidations, mergers, statutory exchanges, sales or conveyances. (h) Upon any adjustment of the Warrant Exercise Price, then and in each such case, the Company shall (i) give written notice thereof, by first-class mail, postage prepaid, within ten (10) calendar days after the date when the circumstances giving rise to the adjustment occurred, addressed to the Holder as shown on the books of the Company, which notice shall state the Warrant Exercise Price resulting from such adjustment and the increase or decrease, if any, in the number of Units purchasable at such price upon the exercise of this Warrant, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based; and (ii) prepare and retain on file a statement describing in reasonable detail the method used in arriving at the new Warrant Exercise Price. 6. NO VOTING RIGHTS. This Warrant shall not entitle the Holder to any voting rights or other rights as a shareholder of the Company. B-4 7. NOTICE OF TRANSFER OF WARRANT OR RESALE OF THE SHARES OR REDEEMABLE WARRANTS COMPRISING WARRANT UNITS. (a) Subject to the sale, assignment, hypothecation, or other transfer restrictions set forth in Section 1 hereof, the Holder, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant, or any shares of Common Stock or Redeemable Warrants comprising the Warrant Units, of such Holder's intention to do so, describing briefly the manner of any proposed transfer. Promptly upon receiving such written notice, the Company shall present copies thereof to the Company's counsel and to counsel to the original purchaser of this Warrant. If, in the opinion of each such counsel, the proposed transfer may be effected without registration or qualification (under any federal or state securities laws), the Company, as promptly as practicable, shall notify the Holder of such opinion, whereupon the Holder shall be entitled to transfer this Warrant or to dispose of shares of Common Stock and Redeemable Warrants comprising Warrant Units received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by the Holder to the Company; provided that an appropriate legend may be endorsed on this Warrant or the certificates for such shares of Common Stock or Redeemable Warrants comprising the Warrant Units describing restrictions upon transfer thereof necessary or advisable in the opinion of counsel and satisfactory to the Company to prevent further transfers which would be in violation of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), and applicable state securities laws; and provided further that the prospective transferee or purchaser shall execute such documents and make such representations, warranties, and agreements as may be required solely to comply with the exemptions relied upon by the Company for the transfer or disposition of the Warrant or shares of Common Stock or Redeemable Warrants comprising the Warrant Units. (b) If, in the opinion of either of the counsel referred to in this Section 7, the proposed transfer or disposition of this Warrant, or of such shares of Common Stock or Redeemable Warrants comprising the Warrant Units, Warrant Shares described in the written notice given pursuant to this Section 7 may not be effected without registration or qualification of this Warrant or such shares of Common Stock or Redeemable Warrants, the Company shall promptly give written notice thereof to the Holder, and the Holder will limit its activities in respect to such transfer or disposition as, in the opinion of both such counsel, are permitted by law. (c) Until this Warrant is duly transferred on the books of the Company, the Company shall treat the registered Holder of this Warrant as absolute owner hereof for all purposes without being affected by any notice to the Company. 8. FRACTIONAL UNITS. Fractional Units shall not be issued upon the exercise of this Warrant, but in any case where the holder would, except for the provisions of this Section, be entitled under the terms hereof to receive a fractional Unit, the Company shall, upon the exercise of this Warrant for the largest number of whole Units then called for, pay a sum in cash equal to the sum of (a) the excess, if any, of the "Fair Market Value" (as defined in Section 10(d) hereof) of such fractional Unit over the proportional part of the Warrant Exercise Price represented by such fractional Unit, plus (b) the proportional part of the Warrant Exercise Price represented by such fractional Unit. 9. REGISTRATION RIGHTS. (a) The Company agrees that, if at any time (but on a one-time basis only) during the period commencing [ONE YEAR FROM EFFECTIVE DATE] and ending [FIVE YEARS FROM EFFECTIVE DATE], the Holder of this Warrant and/or the Holders of any other Warrants and/or shares of Common Stock or Redeemable Warrants comprising Warrant Units who collectively shall hold not less than 50% of the Warrants, shares of Common Stock or Redeemable Warrants comprising Warrant Units outstanding at such time and not previously sold pursuant to this Section 9 shall request that the Company file a registration statement covering all or any part of the shares of Common Stock or Redeemable Warrants comprising Warrant Units: (i) the Company will promptly notify the Holder and all other registered Holders, if any, of other Warrants, shares of Common Stock, and/or Redeemable Warrants comprising Warrant Units that such registration statement will be filed and that the shares of Common Stock or Redeemable Warrants comprising Warrant Units which are then held and/or which may be acquired upon the exercise of the Warrants by the Holder and such other Holders will be included in such registration statement at the Holder's and such Holders' request; and B-5 (ii) the Company will cause such registration statement to include all shares of Common Stock and/or Redeemable Warrants comprising Warrant Units which it has been so requested to include, will take all necessary steps to register or qualify such shares of Common Stock and/or Redeemable Warrants under the Securities Act and the securities laws of such states as the holders may reasonably request, and will use its best efforts to cause such registration statement and qualifications to become effective as soon as practicable; provided, however, that the Company shall not be required to register any shares of Common Stock and/or Redeemable Warrants comprising Warrant Units that are eligible for resale under Rule 144(k) promulgated under the Securities Act. The Company shall keep effective and maintain any registration, qualification, notification, or approval specified in this Section 9(a) for such period as may be reasonably necessary for such Holder or Holders of such shares of Common Stock and/or Redeemable Warrants to dispose thereof and from time to time shall amend or supplement the prospectus used in connection therewith to the extent necessary in order to comply with applicable law; provided, however, that the Company need not maintain the effectiveness of any such registration, qualification, notification or approval, whether or not at the request of the Holders, more than nine (9) months following the effective date thereof. (b) The Company agrees that, if at any time and from time to time during the period commencing [ONE YEAR FROM EFFECTIVE DATE] and ending two (2) years after complete exercise of this Warrant (but not later than [SEVEN YEARS AFTER THE EFFECTIVE DATE]), the Company proposes to file a registration statement under the Securities Act (other than a Form S-4 or Form S-8 Registration Statement or any successor or replacement forms thereto) with respect to, or qualify for a public distribution under Section 3(b) of the Securities Act, any of its securities in connection with the proposed offer of such securities by the Company or any of its shareholders: (i) the Company will promptly notify the Holder and all other registered Holders, if any, of other Warrants, shares of Common Stock and/or Redeemable Warrants comprising Warrant Units at least thirty (30) days prior to each such filing, that it intends to file such registration statement or effect such qualification, and that the shares of Common Stock and/or Redeemable Warrants comprising Warrant Units which are then held and/or which may be acquired upon the exercise of the Warrants by the Holder and such other Holders will be included in such registration statement or qualification at the Holder's and such Holders' request; and (ii) the Company will use its best efforts to cause such registration statement or qualification to include all shares of Common Stock and/or Redeemable Warrants comprising Warrant Units which it has been so requested to include; provided, however, that if a greater number of shares of Common Stock and/or Redeemable Warrants comprising Warrant Units is offered for participation in the proposed offering than in the reasonable opinion of the managing underwriter of the proposed offering can be accommodated without adversely affecting the proposed offering, then the amount of shares of Common Stock and/or Redeemable Warrants comprising Warrant Units proposed to be offered by such Holders for registration, as well as the number of securities of any other selling shareholders participating in the registration (other than selling shareholders participating in the registration as holders of demand registration rights granted to them by the Company), shall be excluded or proportionately reduced to a number deemed satisfactory by the managing underwriter. The Holder and such other Holders may request that their shares of Common Stock and/or Redeemable Warrants comprising Warrant Units be included in such registration statement or qualification by making written request to the Company specifying the number of shares of Common Stock and/or Redeemable Warrants comprising Warrant Units to be so included. Such request shall be made within twenty (20) days after receipt from the Company of notice of such intended registration or qualification. (c) With respect to each inclusion of securities in a registration or qualification pursuant to this Section 9, the Company shall bear all fees, costs, and expenses thereof, including, without limitation, all filing fees, fees imposed by the National Association of Securities Dealers, Inc., printing expenses, fees and disbursements of counsel and accountants for the Company, fees and disbursements of counsel for the underwriter or Underwriter of such securities (if the Company is required to bear such fees and disbursements), all internal expenses, the premiums and other costs of policies of insurance against liability arising out of the public offering, and legal fees and disbursements and other expenses of complying with state securities laws of any jurisdictions in which the securities to be offered are to be registered or qualified. Fees and disbursements of special counsel and B-6 accountants for the selling Holders, underwriting discounts and commissions, and transfer taxes for selling Holders shall be borne by the selling Holders. (d) The Company will furnish the Holders whose shares of Common Stock and/or Redeemable Warrants comprising Warrant Units are included in a registration or qualification pursuant to this Section 9 with a reasonable number of copies of any prospectus and/or other offering materials included in such filings and will amend or supplement the same as required during the period of required use thereof. In connection with any registration filed or qualification made pursuant to this Section 9 in which shares of Common Stock and/or Redeemable Warrants comprising Warrant Units are included, and to the extent permissible under the Securities Act and controlling precedent thereunder, the Company and each Holder whose shares of Common Stock and/or Redeemable Warrants comprising Warrant Units are so included in such registration or qualification shall provide cross-indemnification agreements to each other in customary scope covering the accuracy and completeness of the information furnished by each in connection therewith. (e) Each Holder of shares of Common Stock and/or Redeemable Warrants comprising Warrant Units included in a registration or qualification pursuant to this Section 9 agrees to cooperate with the Company in the preparation and filing of any such registration statement or other offering materials and in the furnishing of information concerning the Holder for inclusion therein, or in any efforts by the Company to establish that the proposed sale is exempt under the Securities Act as to any proposed distribution. 10. RIGHT TO CONVERT. (a) The Holder of this Warrant shall have the right (but not the obligation) to require the Company to convert this Warrant (the "Conversion Right"), at any time after one year from the date of this Warrant and prior to its expiration, into shares of Warrant Units as provided for in this Section 10. Upon exercise of the Conversion Right by the Holder, the Company shall deliver to the Holder (without payment by the Holder of any exercise price) that number of Warrant Units equal to the quotient obtained by dividing (i) the value of the Warrant at the time the Conversion Right is exercised (determined by subtracting the aggregate Warrant Exercise Price for the Warrant Units in effect immediately prior to the exercise of the Conversion Right from the aggregate "Fair Market Value" (as determined below) for the Warrant Units immediately prior to the exercise of the Conversion Right) by (ii) the Fair Market Value of one Unit immediately prior to the exercise of the Conversion Right. (b) The Conversion Right may be exercised by the Holder, at any time or from time to time, prior to its expiration, on any business day, by delivering a written notice (the "Conversion Notice") to the Company at the offices of the Company exercising the Conversion Right and specifying (i) the total number of Units the Holder will purchase pursuant to such conversion, and (ii) a place, and a date not less than five (5) nor more than twenty (20) business days from the date of the Conversion Notice, for the closing of such purchase. (c) At any closing under Section 10(b) hereof, (i) the Holder will surrender the Warrant, (ii) the Company will deliver or cause to be delivered to the Holder a certificate or certificates for the number of shares of Common Stock and Redeemable Warrants comprising the Warrant Units issuable upon such conversion, together with cash, in lieu of any fraction of a Unit, and (iii) the Company will deliver to the Holder a new Warrant representing the number of Units, if any, with respect to which the Warrant shall not have been converted. (d) "Fair Market Value" of a Unit as of a particular date (the "Determination Date") shall mean the aggregate market price of shares of Common Stock and Redeemable Warrants comprising the Units as of the Determination Date. "Fair Market Value" of a share of Common Stock or of the Redeemable Warrants as of the Determination Date shall mean: (i) If the Company's Common Stock and Redeemable Warrants are traded on an exchange or quoted on The Nasdaq National Market or The Nasdaq SmallCap Market, then the average closing or last sale prices, respectively, reported for the ten (10) business days immediately preceding the Determination Date. (ii) If the Company's Common Stock and Redeemable Warrants are not traded on an exchange or on The Nasdaq National Market or The Nasdaq SmallCap Market but are traded in the over-the-counter market, then the average of the closing bid and asked prices as reported by Metro Data Company, Inc. (or a B-7 similar organization) from quotations by market makers in such Common Stock or Redeemable Warrants on the Minneapolis-St. Paul local over-the-counter market for the ten (10) business days immediately preceding the Determination Date. 11. MISCELLANEOUS. The Company shall not, by amendment of its articles of incorporation or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act or deed, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Company, but will, at all times in good faith, assist, insofar as it is able, in the carrying out of all provisions hereof and in the taking of all other action which may be necessary in order to protect the rights of Holders against dilution. Upon written request of the Holder of this Warrant, the Company will promptly provide such Holder with a then current written list of the names and addresses of all Holders of warrants originally issued under the terms of, and concurrent with, this Warrant. The representations, warranties and agreements herein contained shall survive the exercise of this Warrant. This Warrant shall be interpreted under the laws of the State of Minnesota. IN WITNESS WHEREOF, ChoiceTel Communications, Inc. has caused this Warrant to be signed by its duly authorized officer and to be dated ______________, 1997. CHOICETEL COMMUNICATIONS, INC. By ----------------------------------------- Signature ----------------------------------------- Name Typed or Printed ---------------------------------------- Its ------------------------------------ Title Typed or Printed B-8 NOTICE OF EXERCISE OF WARRANT (To be signed upon the exercise of the Warrant for cash or by check) The undersigned hereby irrevocably elects to exercise the attached Warrant and to purchase thereunder, for cash, ________________ of the Units of ChoiceTel Communications, Inc. issuable upon the exercise of such Warrant, herewith makes payment of $___________ therefor in cash or by check, and requests that certificates for the shares of Common Stock and Redeemable Warrants comprising such Units (together with a new Warrant to purchase the number of Units, if any, with respect to which this Warrant is not exercised) be issued in the name set forth below and be delivered to the address set forth below. Dated: ________________ ---------------------------------------- (Signature) ---------------------------------------- (Name Typed or Printed) ---------------------------------------- (Address) ---------------------------------------- (Social Security or Tax Ident. No.) * The signature on the Notice of Exercise of Warrant must exactly correspond to the name as written upon the face of the Warrant in every particular without alteration or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. NOTICE OF WARRANT CONVERSION (To be signed only upon conversion of warrant) The undersigned hereby irrevocably elects to exercise the conversion right provided in Section 10 of the attached Warrant and to purchase thereunder _______ Units of ChoiceTel Communications, Inc. to which such Warrant relates and herewith tenders the Warrant in full payment of the shares and requests that the certificates for the shares of Common Stock and Redeemable Warrants comprising such Units be issued in the name of, and be delivered to _______________________, whose address is set forth below the signature of the undersigned. Dated: _________________ ---------------------------------------- (Signature) ---------------------------------------- (Name Typed or Printed) ---------------------------------------- ---------------------------------------- (Address) * The signature on the Notice of Warrant Conversion must exactly correspond to the name as written upon the face of the Warrant in every particular without alteration or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. ASSIGNMENT OF WARRANT (To be signed only upon authorized transfer of the Warrant) FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers unto _________________________________ the right to purchase _______________ Units of ChoiceTel Communications, Inc. to which the within Warrant relates and appoints _________________________________, as attorney-in-fact, to transfer said right on the books of ChoiceTel Communications, Inc. with full power of substitution in the premises. Dated: ________________ ---------------------------------------- (Signature) ---------------------------------------- (Name Typed or Printed) ---------------------------------------- (Address) ---------------------------------------- (Social Security or Tax Ident. No.) * The signature on the Assignment of Warrant must exactly correspond to the name as written upon the face of the Warrant in every particular without alteration or any change whatsoever. When signing on behalf of a corporation, partnership, trust or other entity, PLEASE indicate your position(s) and title(s) with such entity. RESTRICTION ON TRANSFER THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS COVERING SUCH SECURITY OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, PLEDGE OR DISTRIBUTION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND ALL APPLICABLE STATE SECURITIES LAWS. EX-1.2 3 EXHIBIT 1.2 CHOICETEL COMMUNICATIONS, INC. 800,000 UNITS(1) CONSISTING OF 800,000 SHARES OF COMMON STOCK AND 800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS SELECTED DEALER AGREEMENT __________, 1997 - -------------------- - -------------------- - -------------------- Ladies and Gentlemen: 1. We are the Underwriter named in the Prospectus relating to the above securities (the "Underwriter"). As the Underwriter, we have agreed, on certain terms and subject to certain conditions, to purchase from ChoiceTel Communications, Inc., a Minnesota corporation (the "Company"), an aggregate of 800,000 Units (the "Units"), each Unit consisting of one share of the Company's common stock, $0.01 par value per share ("Common Stock"), and one redeemable common stock purchase warrant of the Company, and, for purposes of covering over-allotments in connection with the sale of the Firm Units, up to 120,000 additional Units (the "Option Units"), all as set forth in the Prospectus. The Firm Units and any Option Units purchased by us are referred to herein as the "Units." The Units and the shares of Common Stock and the common stock purchase warrants comprising the Units are collectively referred to herein as the "Securities." The Securities and the terms under which they are to be offered for sale are more particularly described in the Prospectus. 2. As the Underwriter, we are offering to you and certain other securities dealers ("Selected Dealers") the right as set forth herein to purchase, as principals, from us, certain of the Units subject to their receipt and acceptance by us and upon the terms and subject to the conditions set forth herein and in the Prospectus, at the Price to Public (as set forth on the cover page of the Prospectus) for such Units, less a selling concession of $____ per Unit, payable as herein provided. Each Selected Dealer shall be a member of the National Association of Securities Dealers, Inc. (the "NASD") who has agreed to comply with the provisions of Rule 2740 of the NASD's Conduct Rules (or a foreign dealer who is not eligible for membership in the NASD but who agrees to conform to the NASD's Conduct Rules and agrees in writing to comply with the NASD's Interpretation on "Free-Riding and Withholding" (IM-2110-1) and with the provisions of Rules 2730, 2740, 2750 and 2420 (as such Rule applies to foreign nonmembers) of the NASD's Conduct Rules), acting as principal or as buyer's agent. 3. All orders are subject to confirmation and allotment by us. We reserve the right to reject any order in whole or in part, or to allot less than the amount applied for, and to close the subscription books at any time without notice. The number of Units allotted to you will be confirmed, subject to the terms and conditions of this Agreement. 4. Please confirm your agreement to purchase Units on the terms and subject to the conditions hereof by completing and signing the form for that purpose on the enclosed counterpart of this Agreement and returning such counterpart to us, even though you may have previously advised us thereof by telephone or telegraph. Our signatures herein may be by facsimile. - ------------------------------ (1) Plus an option to purchase up to 120,000 additional Units to cover over- allotments. 5. Any Securities purchased by you under the terms of this Agreement may immediately be re-offered to the public in accordance with the terms of the offering thereof set forth herein and in the Prospectus, subject to the securities or Blue Sky laws of the various states or other jurisdictions. Neither you nor any other person is or has been authorized to give any information or to make any representation in connection with the sale of the Securities other than as contained in the Prospectus. You will not bid for, purchase or attempt to induce others to purchase or sell, directly or indirectly, any Securities except as contemplated by this Agreement. 6. You agree, upon our request, to deliver to us payment in the form and at the time, date and place specified in such request, for the Units to be purchased by you under this Agreement. Units accepted or allotted hereunder shall be paid for in full at the Price to Public less the above-mentioned selling concession, by certified or official bank check payable in Minneapolis clearing house funds or the equivalent thereof, to our order against delivery of certificates for the Securities. If you are a member of, or clear through a member of, The Depository Trust Company ("DTC"), we may, in our discretion, deliver your Securities through the facilities of DTC. If you are not a member of DTC, such delivery shall be made through a correspondent who is such a member, if you shall have furnished instructions to us naming such correspondent, unless you are otherwise notified by us in our discretion. 7. You agree to pay us on demand an amount equal to the above-mentioned selling concession as to Units purchased by you hereunder which, prior to the termination of this Agreement, we may purchase or contract to purchase and, in addition, we may charge you with any broker's commission and transfer tax paid in connection with such purchase or contract to purchase. Certificates for Securities delivered on such repurchases need not be the identical certificates originally purchased. 8. For the purpose of stabilizing the market in the Units, we have been authorized to make purchases and sales of the Securities, in the open market or otherwise, and, in arranging for sales, to over-allot. 9. You agree to advise us from time to time, upon request, of the aggregate number of Units purchased by you hereunder and remaining unsold at the time of such request, and, if in our opinion any such Units shall be needed to make delivery of the Units sold or over-allotted, you will, forthwith upon our request, grant to us the right, exercisable promptly after receipt of notice from you that such right has been granted, to purchase, at the Price to Public less the above-mentioned selling concession or such part thereof as we shall determine, such aggregate number of Units owned by you as shall have been specified in our request. 10. We hereby confirm that we will make available to you such number of copies of the Prospectus (as amended or supplemented) as you may reasonably request for the purposes contemplated by the Securities Act of 1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as amended ("1934 Act"), or the rules and regulations thereunder. 11. No Selected Dealer is authorized to act as our agent, or otherwise to act on our behalf, in offering or selling the Units to the public or otherwise or to furnish any information or make any representation except as contained in the Prospectus. Nothing will constitute the Selected Dealers an association or other separate entity or partners with us, or with each other, but you will be responsible for your share of any liability or expense based on any claim to the contrary. 12. We shall not be under any liability for or in respect of the value, validity or form of the Securities, or the delivery of the certificates for the Securities, or the performance by anyone of any agreement on its part, or the qualification of the Securities for offer or sale under the laws of any jurisdiction, or for or in respect of any other matter relating to this Agreement, except for lack of good faith and for obligations expressly assumed by us in this Agreement, and no obligation on our part shall be implied herefrom. The foregoing provisions shall not be deemed a waiver of any liability imposed under the 1933 Act. 13. You, by your confirmation below, represent that neither you nor any of your directors, officers, partners, nor any "person associated with" (as defined in the By-Laws of the NASD) you, nor, to your knowledge, 2 any "related person" (as defined in Rule 2710 of the NASD's Conduct Rules (the "Corporate Financing Rule")) has participated or intends to participate in any transaction or dealing as to which documents or information is required to be filed with the NASD pursuant to the Corporate Financing Rule, and as to which such documents or information have not been so filed in a timely manner. By such confirmation you also represent that either (a) you are a member in good standing of the NASD who agrees to comply with all applicable rules of the NASD including, but not limited to, Rule 2740 of the NASD's Conduct Rules, or (b) you are a foreign dealer not eligible for membership in the NASD and you agree not to make any sales within the United States, its territories, or its possessions, or to persons who are citizens thereof or residents therein, and in making other sales of the Units, you agree to comply with the NASD's Interpretation on "Free-Riding and Withholding" (IM-2110-1) and to comply, as if you were an NASD member, with the provisions of Rules 2730 and 2750 of the NASD's Conduct Rules and with Rule 2420 of such Conduct Rules as it applies to a nonmember foreign broker/dealer in a foreign country. 14. On becoming a Selected Dealer, and in offering and selling the Units, you agree to comply with all the applicable requirements of the 1933 Act and the 1934 Act including, but not limited to, Regulation M under the 1934 Act. You confirm that you are familiar with Rule 15c2-8 under the 1934 Act relating to the distribution of preliminary and final prospectuses for securities of an issuer (whether or not the issuer is subject to the reporting requirements of Section 13 or 15(d) of the 1934 Act) and confirm that you have complied and will comply therewith. 15. No expenses shall be charged to Selected Dealers. A single transfer tax, if payable, upon the sale of the Units to you will be paid when such Units are delivered to you. You shall, however, pay any transfer tax on sales of Units by you and you shall pay our proportionate share of any transfer tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise. 16. The provisions of this Agreement will terminate when we shall have determined that the public offering of the Units has been completed and upon notice to you by telegraph or telecopy of such termination, but if not theretofore terminated, this Agreement will terminate at 5:00 p.m., Minneapolis time, thirty (30) days after the initial public offering of the Units; provided, however, that we shall have the right to extend this Agreement for a further period or periods, not exceeding thirty (30) calendar days in the aggregate, upon notice to you by telegraph or telecopy. 17. Notices to us should be addressed to us, as the Underwriter, at our offices at 2820 IDS Center, 80 South Eighth Street, Minneapolis, Minnesota 55402; Attention: Syndicate Department. Notices to you shall be deemed to have been duly given if telegraphed, telecopied or mailed to you at the address to which this Agreement is sent. Very truly yours, EQUITY SECURITIES INVESTMENTS, INC. By ------------------------------------------ Authorized Officer 3 EQUITY SECURITIES INVESTMENTS, INC. 2820 IDS Center 80 South Eighth Street Minneapolis, MN 55402 RE: CHOICETEL COMMUNICATIONS, INC. Ladies and Gentlemen: We hereby confirm our agreement to purchase ___________ Units, each Unit consisting of one share of common stock and one redeemable common stock purchase warrant, of ChoiceTel Communications, Inc., subject to your acceptance or rejection in whole or in part in the case of a subscription in excess of any reservation and subject to the other terms and conditions stated in the Selected Dealer Agreement and in your telegram or telecopy to us referred to therein. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to said Units. We further confirm that in purchasing said Units we have relied upon the Prospectus and upon no other statement whatsoever, whether written or oral. We hereby confirm that we are (a) a member in good standing of the NASD who agrees to comply with all applicable rules of the NASD including, but not limited to, Rule 2740 of the NASD's Conduct Rules, or (b) a foreign dealer not eligible for membership in the NASD who agrees not to make any sales within the United States, its territories, or its possessions, or to persons who are citizens thereof or residents therein, and in making other sales of the Units, who hereby agrees to comply with Rule 2740 of the NASD's Conduct Rules and the NASD's Interpretation on "Free-Riding and Withholding" (IM-2110-1) and to comply, as if we were an NASD member, with the provisions of Rules 2730 and 2750 of the NASD's Conduct Rules and with Rule 2420 of such Conduct Rules as it applies to a nonmember foreign broker/dealer in a foreign country. Corporate or firm name of Dealer: ---------------------------------------------- By: ---------------------------------------------- Signature of Authorized Representative Its: ---------------------------------------------- Title of person signing Address: -------------------------------------------------- -------------------------------------------------- Dated: _______, 1997 EX-3.1 4 EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION INTELLIPHONE, INC. The following Amended and Restated Articles of Incorporation shall supersede and take the place of the existing Articles of Incorporation and all amendments thereto: ARTICLE 1. NAME The name of the corporation is ChoiceTel Communications, Inc. ARTICLE 2. REGISTERED OFFICE The address of the registered office of the corporation is 800 LaSalle Avenue, Suite 2800, Minneapolis, Minnesota 55402-2015. ARTICLE 3. AUTHORIZED SHARES The total number of shares of capital stock which the corporation is authorized to issue shall be 20,000,000 shares, consisting of 15,000,000 shares of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares of undesignated preferred stock, par value $.01 per share ("Preferred Stock"). The board of directors of the corporation is hereby authorized to provide, by resolution or resolutions adopted by such board, for the issuance of Preferred Stock from time to time in one or more classes and/or series, to establish the designation and number of shares of each such class or series, and to fix the relative rights and preferences of the shares of each such class or series, all to the full extent permitted by the Minnesota Business Corporation Act, Section 302A.401, or any successor provision. ARTICLE 4. NO CUMULATIVE VOTING No holder of shares of capital stock of the corporation shall have any cumulative voting rights. ARTICLE 5. NO PREEMPTIVE RIGHTS The shareholders of the corporation shall not have any preemptive rights to subscribe for or acquire securities or rights to purchase securities of any class, kind or series of the corporation. ARTICLE 6. DIRECTOR LIABILITY To the fullest extent permitted by the Minnesota Business Corporation Act as the same exists or may hereafter be amended, a director of this corporation shall not be liable to this corporation or its shareholders for monetary damages for breach of fiduciary duty as a director. Any repeal or modification of the foregoing provisions of this Article 6 by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification. ARTICLE 7. WRITTEN ACTION BY DIRECTORS Any action required or permitted to be taken at a meeting of the Board of Directors of the corporation may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by all of the directors unless the action need not be approved by the shareholders of the corporation, in which case the action may be taken by a written action signed, or counterparts of a written action signed in the aggregate, by the number and type of directors that would be required to take the same action at a meeting of the Board of Directors of the corporation at which all of the directors were present. The undersigned, as Vice President and Chief Financial Officer of Intelliphone, Inc., certifies that the attached Amended and Restated Articles of Incorporation were approved by the Board of Directors and adopted by the Shareholders of Intelliphone, Inc. on April 18, 1997, in accordance with 302A.135 of the Minnesota Statutes. IN WITNESS WHEREOF, the undersigned has executed these Amended and Restated Articles this 18th day of April, 1997. By: /s/ Jack Kohler ---------------------------------- Jack Kohler, Vice President and Chief Financial Officer State of Minnesota ) ) ss County of Hennepin ) On this 18th day of April, 1997 appeared before me, a Notary Public within and for said County and State, Jack Kohler, to me known to be the Vice President and Chief Financial Officer of Intelliphone, Inc., the person named in and who executed the foregoing Articles of Amendment and acknowledged to me that he executed the same as his true act and deed. /s/ Jill L. Noreen ------------------------------------- Notary Public EX-3.2 5 EXHIBIT 3.2 BYLAWS ARTICLE I. NAME AND LOCATION Section 1. The name of this corporation shall be Intelliphone, Inc. Section 2. Its principal office shall be located at 965 Decatur Avenue North, Minneapolis, Minnesota 55427. Section 3. Other offices for the transaction of business shall be located at such places as the Board of Directors may from time to time determine. ARTICLE II. SHAREHOLDERS' MEETING Section 1. The annual meetings of the shareholders shall be held on the 1st day of October in each year at ten o'clock a.m., at the registered office of the corporation or at such other place as may be designated by the Board of Directors; provided, however, that whenever such day shall fall upon a Sunday or a legal holiday, the meeting shall be held on the next succeeding business day. At such meeting, the shareholders shall elect directors to serve for one year or until their successors are duly elected and qualified. Section 2. A special meeting of the shareholders, to be held at the same place as the annual meeting, may be called at any time by the president, and in his absence by the vice-president or by the directors. It shall be the duty of the directors, president or the vice-president, to call such a meeting whenever so requested by shareholders holding ten percent or more of the voting power of the shareholders of the corporation. Section 3. Notice of the time and place of all annual and special meetings shall be mailed by the secretary to each shareholder to the last known address of said shareholder as the same appears on the books of the corporation at least seven (7) days before the date of all annual and special meetings. Section 4. The president or, in his absence the vice-president, shall preside at all such meetings. Section 5. At every such meeting, each shareholder shall be entitled to cast one vote for each share of voting stock held in his name, which vote may be cast by him either in person or by proxy. All proxies shall be in writing and shall be filed with the secretary and by him entered of record in the minutes of the meeting. Section 6. Every shareholder shall have the right to vote in person or by proxy for the number of shares owned by him for as many persons as there are directors to be elected; or upon written notice to the president or secretary of the corporation not less than twenty-four hours before the time fixed for holding a meeting for the election of directors, a shareholder may cumulate said shares and give one candidate as many votes as the number of directors multiplied by the number of his shares shall equal, or to distribute them on the same principal among as many candidates as he shall think fit. If a notice of intention to cumulate shares has been received, it shall be the duty of the presiding officer, upon the convening of the meeting, to announce that such notice has been given. Section 7. A quorum for the transaction of business at such meeting shall consist of a number of members representing a majority of the shares issued and outstanding; but the shareholders present at any meeting, though less than a quorum, may adjourn the meeting to a future time without notice other than an announcement at the meeting. ARTICLE III. BOARD OF DIRECTORS Section 1. The business and property of the corporation shall be managed by a Board of three (3) or more directors, who shall be elected annually by the shareholders at the annual meeting and shall hold office for one year or until their successors are duly elected and qualified. The number of directors of the corporation shall be as determined from time to time by the shareholders. Section 2. The annual meetings of the directors shall be held without notice immediately after the adjournment of each stockholders' meeting or at such time as may be provided by the Board of Directors. Section 3. Special meetings of the Board of Directors may be called by the president and, in his absence, by the vice president or by any member of the Board of Directors. By unanimous consent of the directors, special meetings of the Board may be held without notice at any time and place. Section 4. Notice of all regular and special meetings, except those specified in the second sentence of Section 3 of this Article, shall be mailed or telegraphed to each director by any director, at least two (2) days previous to the time fixed for the meeting. All notices of special meetings shall state the purpose thereof. Section 5. A quorum for the transaction of business at any regular or special meeting of the directors shall consist of a majority of the members of the Board. Section 6. The directors shall elect the officers of the corporation and fix their salaries; such election to be held at the directors' meeting following each annual shareholders' meeting. Section 7. Vacancies in the Board of Directors may be filled for the unexpired terms by the remaining directors at any regular or special directors' meeting. 2 Section 8. The directors may by resolution appoint two or more members of the Board as an executive committee to manage the business of the corporation during the interim between meetings of the Board. Section 9. At each annual shareholders' meeting, the directors shall submit a statement of the business done during the preceding year together with a report of the general financial condition of the corporation and of the condition of its tangible property. ARTICLE IV. OFFICERS Section 1. The Board of Directors shall elect a Chief Executive Officer and Chief Financial Officer, and may elect such other officers as it may deem necessary for the operation and management of the corporation, each of whom shall have the duties and responsibilities incident to the offices which they hold or as determined by the Board. Officers need not be directors or shareholders. Without limiting the foregoing, the Board may elect a Chairman of the Board, President, one or more Vice Presidents, a Treasurer, a Secretary and such assistant officers as it may designate with titles to describe their duties, functions or special responsibilities. Officers shall hold office at the will of the Board for an indefinite term until their successors are elected and qualified. Any officer elected or appointed by the Board of Directors may be removed by the Board at any time with or without cause. ARTICLE V. SHARES Section 1. All certificates of shares shall be signed by the president and secretary and shall be sealed with the corporate seal if the corporation shall have adopted a corporate seal. Section 2. Transfers of stock shall be made only on the books of the corporation and the old certificate properly endorsed shall be surrendered and canceled before a new certificate is issued. The stock books of the corporation shall be closed against transfer for a period of ten (10) days before the date of payment of a dividend and for ten (10) days before each annual meeting of the stockholders. Section 3. In case of loss or destruction of a certificate of stock, no new certificate shall be issued in lieu thereof except upon satisfactory proof to the Board of Directors of such loss or destruction and upon the giving of satisfactory security, by bond or otherwise, against loss to the corporation. 3 ARTICLE VI. DIVIDENDS AND FINANCE Section 1. The Board of Directors may from time to time declare dividends to be paid by the corporation. Section 2. The funds of the corporation shall be deposited in such bank or trust company as the directors shall designate and shall be withdrawn only upon the check or order of the treasurer and countersigned by the president. ARTICLE VII. INDEMNIFICATION Section 1. The corporation shall indemnify persons for such expenses and liabilities in such manner, under such circumstances, and to the extent required by Minnesota Statutes Section 302A.521. ARTICLE VIII. AMENDMENTS Section 1. Amendments to these Bylaws may be made by a vote of the shareholders representing a majority of all issued and outstanding shares at any annual shareholders' meeting or at any special shareholders' meeting when the proposed amendment has been set out in the notice of such meeting. 4 EX-4.1 6 EXHIBIT 4.1 INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA NUMBER [LOGO] SHARES ________________ ________________ CUSIP ________________ CHOICETEL COMMUNICATIONS, INC. THIS CERTIFIES THAT _________________________________________ IS THE REGISTERED HOLDER OF ________________________________________FULLY PAID AND NON-ASSESSABLE COMMON SHARES, $.01 PAR VALUE, OF CHOICETEL COMMUNICATIONS, INC. AND 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. THIS CERTIFICATE IS NOT VALID UNLESS COUNTERSIGNED BY THE TRANSFER AGENT OF THE CORPORATION. IN WITNESS WHEREOF, THE CORPORATION HAS CAUSED THIS CERTIFICATE TO BE SIGNED ON ITS BEHALF BY THE FACSIMILE SIGNATURES OF ITS DULY AUTHORIZED OFFICERS. this ________________________ day of __________________________ , 19 ___________ ______________________________________ ______________________________________ Secretary President FOR VALUE RECEIVED the undersigned hereby sells, assigns, and transfers unto ________________________________________________________________________________ (Name and address of transferee) ________________________________________________________________________________ __________________________________________________ Shares registered in the name of the undersigned on the books of the Corporation named on the face of this certificate and represented hereby, and irrevocably constitutes and appoints: __________________________________________________ the attorney of the undersigned to transfer the said shares on the register of transfers and books of the Corporation with full power of substitution hereunder. DATED: ______________________________________ ______________________________________ (Signature of Witness) (Signature of Shareholder) NOTICE: The signature of this assignment must correspond with the names as written upon the face of the certificate, in every particular, without alteration or enlargement, or any change whatsoever, and must be guaranteed by a bank, trust company or a member of a recognized stock exchange. Signature Guaranteed By: _______________________________________________________ EX-4.2 7 EXH.4.2 EXH. 4.2 REDEEMABLE WARRANT AGREEMENT DATE: _________, 1997 PARTIES: ChoiceTel Communications, Inc. 9724 10th Avenue North Plymouth, Minnesota 55441 Norwest Bank Minnesota, National Association Shareowner Services 161 North Concord Exchange P.O. Box 738 South Saint Paul, Minnesota 55075-0738 RECITALS: A. ChoiceTel Communications, Inc., a Minnesota corporation (the "Company"), proposes to issue at least 800,000 and up to 920,000 Redeemable Common Stock Purchase Warrants (the "Warrants") evidencing the right to purchase an aggregate of up to 920,000 authorized but previously unissued shares of Common Stock, $.01 par value, of the Company (the "Common Stock"). The Warrants would be issued in connection with the issuance by the Company of at least 800,000 and up to 920,000 Units, each Unit consisting of one share of Common Stock and one Warrant, in connection with the Company's Registration Statement on Form SB-2. B. The Company desires Norwest Bank Minnesota, National Association (the "Warrant Agent") to act on behalf of the Company, and the Warrant Agent desires so to act, in connection with the issuance, registration, transfer, exchange and exercise of the Warrants. AGREEMENT: The Company and the Warrant Agent, each intending to be legally bound, hereby covenant and agree as follows: ARTICLE I. APPOINTMENT OF WARRANT AGENT; ISSUANCE, FORM AND EXECUTION OF WARRANT CERTIFICATES SECTION 1.1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant Agent to act as agent for the Company, and the Warrant Agent hereby accepts the agency established herein and agrees to perform its agency duties in accordance with the terms and conditions of this Warrant Agreement. 1 SECTION 1.2. WARRANT CERTIFICATES. The Company shall execute and deliver to the Warrant Agent certificates which the Company has authorized to represent the Warrants ("Warrant Certificates"). The Warrant Certificates shall be substantially as set forth in Exhibit A hereto and may have 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 Warrant Agreement, or as may be required to comply with any law or with any rule or regulation relating to listing of the Warrants on the NASDAQ system, including the Nasdaq National Market, or on any stock exchange or to conform to usage. The Warrant Certificates shall be dated with the date of their issuance. SECTION 1.3. EXECUTION OF WARRANT CERTIFICATES. The Warrant Certificates shall be executed on behalf of the Company by a duly authorized officer of the Company, either manually or by facsimile signature printed thereon. The Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. Any Warrant Certificate may be signed on behalf of the Company by the person who at the actual date of the signing of such Warrant Certificate shall have been the proper officer of the Company, although at the date of issuance of such Warrant Certificate any such person has ceased to be such officer of the Company. ARTICLE II. EXERCISE OF WARRANTS SECTION 2.1. EXERCISE. Any or all of the Warrants represented by each Warrant Certificate may be exercised by the holder thereof on or before 5:00 p.m., Minneapolis time, on _________, 2002 unless extended by the Company, by surrender of the Warrant Certificate with the Purchase Form, which is printed on the reverse thereof (or a reasonable facsimile thereof), duly executed by such holder, to the Warrant Agent at its principal office in Minneapolis, Minnesota, accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in an amount equal to the product of the number of shares of Common Stock issuable upon exercise of the Warrant represented by such Warrant Certificate, as adjusted pursuant to the provisions of Article III hereof, multiplied by the exercise price of $9.50, as adjusted pursuant to the provisions of Article III hereof (such price as so adjusted from time to time being herein called the "Purchase Price"), and such holder shall be entitled to receive such number of fully paid and nonassessable shares of Common Stock, as so adjusted, at the time of such exercise. SECTION 2.2. TIME OF EXERCISE. Each exercise of Warrants shall be deemed to have been effective immediately prior to the close of business on the business day on which the Warrant Certificate relating to such Warrants shall have been surrendered to the Warrant Agent as provided in Section 2.1, and at such time the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such exercise as provided in Section 2.3 shall be deemed to have become the holder or holders of record thereof. 2 SECTION 2.3. ISSUANCE OF SHARES OF COMMON STOCK; NO FRACTIONAL SHARES. As soon as practicable after the exercise of any Warrant, and in any event within ten (10) days after receipt by the Company of the notice of exercise under Section 2.1, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder thereof or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, (a) a certificate or certificates for the number of fully paid and nonassessable shares of Common Stock to which such holder shall be entitled upon such exercise plus, in lieu of any fractional share to which such holder would otherwise be entitled, an amount in cash equal to such fraction multiplied by the then current value of a share of Common Stock, such current value to be determined as follows: (i) if the Common Stock shall be listed or admitted to unlisted trading privileges on any single national securities exchange, then such current value shall be computed on the basis of the last reported sale price of the Common Stock on such exchange on the last business day prior to the date of the exercise of such Warrant upon which a sale shall have been effected; or (ii) if the Common Stock shall not be so listed or admitted to unlisted trading privileges and bid and asked prices therefor in the over-the-counter market shall be reported by NASDAQ, including the Nasdaq National Market, then such current value shall be computed on the basis of the Last Reported Sale Valuation Method or, in the event such method is not then used by NASDAQ, the average of the closing bid and asked prices on the last business day prior to the date of the exercise of such Warrant as so reported; or (iii) if the Common Stock shall be listed or admitted to unlisted trading privileges on more than one national securities exchange or one or more national securities exchanges and in the over- the-counter market, then such current value shall, if different as a result of calculation under the applicable method(s) described above in this Section, be deemed to be the higher number calculated in connection therewith; or (iv) if the Common Stock shall not be so listed or admitted to unlisted trading privileges and such bid and asked prices shall not be so reported, then such current value shall be computed on the basis of the book value of Common Stock as of the close of business on the last day of the month immediately preceding the date upon which such Warrant was exercised, as determined by the Company; and (b) in case such exercise includes only part of the Warrants represented by any Warrant Certificate, a new Warrant Certificate or Warrant Certificates of like tenor, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such 3 shares called for on the face of such Warrant Certificate minus the number of such shares designated by the holder for such exercise as provided in Section 2.1. Warrants represented by a properly assigned Warrant Certificate may be exercised by a new holder without first having a new Warrant Certificate issued. SECTION 2.4. EXTENSION OF EXERCISE PERIOD; CHANGE OF EXERCISE PRICE. The Company may, upon notice given to the Warrant Agent, and without the consent of the holders of the Warrant Certificates, (a) reduce the Purchase Price during all or any portion of the originally stated exercise period or (b) extend the period over which the Warrants are exercisable beyond _________, 2002 and increase or decrease the Purchase Price for any period the Warrant exercise period is extended. In the case of the extension of the exercise period or a change in the Purchase Price, the Company must provide the Warrant Agent and the Warrantholders of record notice of such extension of the exercise period, specifying, as the case may be, the time to which such exercise period is extended, or specifying the new Purchase Price and the periods for which such new Purchase Price is in effect, a reasonable time prior to the date such extension or new Purchase Price is to take effect, such reasonable time to be commercially reasonable and consistent with applicable securities laws and regulations. ARTICLE III. ANTIDILUTION PROVISIONS SECTION 3.1. ADJUSTMENT OF PURCHASE PRICE. (a) The Purchase Price shall be subject to the following adjustments. In the event that: (i) any dividends on any class of stock of the Company payable in Common Stock or securities convertible into Common Stock shall be paid by the Company; (ii) the Company shall subdivide its then outstanding shares of Common Stock into a greater number of shares; or (iii) the Company shall combine outstanding shares of Common Stock, by reclassification or otherwise; then, in any such event, the Purchase Price in effect immediately prior to such event shall (until adjusted again pursuant hereto) be adjusted immediately after such event to a price (calculated to the nearest full cent) determined by dividing (A) the number of shares of Common Stock outstanding immediately prior to such event, multiplied by the then existing Purchase Price, by (B) the total number of shares of Common Stock outstanding immediately after such event (including in each case the maximum number of shares of Common Stock issuable in respect of any securities convertible into Common Stock), and the resulting quotient shall be the adjusted Purchase Price per share. 4 (b) No adjustment of the Purchase Price shall be made if the amount of such adjustments shall be less than $.05 per share, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to not less than $.05 per share. SECTION 3.2. ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE ON EXERCISE OF WARRANTS. Upon each adjustment of the Purchase Price pursuant to Section 3.1 above, the registered holder of each Warrant shall thereafter (until another such adjustment) be entitled to purchase at the adjusted Purchase Price the number of shares, calculated to the nearest full share, obtained by multiplying the number of shares specified in such Warrant (as adjusted as a result of all adjustments in the Purchase Price in effect prior to such adjustment) by the Purchase Price in effect prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price. SECTION 3.3. NOTICE AS TO ADJUSTMENT. Upon any adjustment of the Purchase Price and an increase or decrease in the number of shares of Common Stock purchasable upon the exercise of the Warrants, then, and in each such case, the Company shall within ten (10) days after the effective date of such adjustment give written notice thereof, by first class mail, postage prepaid, addressed to each registered Warrantholder at the address of such Warrantholder as shown on the books of the Company, which notice shall state the adjusted Purchase Price and the increased or decreased number of shares purchasable upon the exercise of the Warrants, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. SECTION 3.4. EFFECT OF REORGANIZATION, RECLASSIFICATION, MERGER, ETC. If at any time while any Warrant is outstanding there should be any capital reorganization or reclassification of the capital stock of the Company (other than the issue of any shares of Common Stock in subdivision of outstanding shares of Common Stock by reclassification or otherwise and other than a combination of shares provided for in Section 3.1 hereof) or any consolidation or merger of the Company with another corporation or any sale, conveyance, lease or other transfer by the Company of all or substantially all of its property to any other corporation, the holder of any Warrant shall, during the remainder of the period such Warrant is exercisable, be entitled to receive, upon payment of the Purchase Price, the number of shares of stock or other securities or property of the Company, or of the successor corporation resulting from such consolidation or merger, or of the corporation to which the property of the Company has been sold, conveyed, leased or otherwise transferred, as the case may be, to which the Common Stock (and any other securities and property) of the Company, deliverable upon the exercise of such Warrant, would have been entitled upon such capital reorganization, reclassification of capital stock, consolidation, merger, sale, conveyance, lease or other transfer if such Warrant had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale, conveyance, lease or other transfer; and, in any such case, appropriate adjustment (as determined by the Board of Directors of the Company) shall be made in the application of the provisions set forth in this Warrant Agreement with respect to the rights 5 and interests thereafter of the Warrantholders to the end that the provisions set forth in this Warrant Agreement (including the adjustment of the Purchase Price and the number of shares issuable upon the exercise of the Warrants) shall thereafter be applicable, as near as may be reasonably practicable, in relation to any shares or other property thereafter deliverable upon the exercise of the Warrants as if the Warrants had been exercised immediately prior to such capital reorganization, reclassification of capital stock, consolidation, merger, sale, conveyance, lease or other transfer and the Warrantholders had carried out the terms of the exchange as provided for by such capital reorganization, reclassification, consolidation or merger. The Company shall not effect any such capital reorganization, consolidation, merger or transfer unless, upon or prior to the consummation thereof, the successor corporation or the corporation to which the property of the Company has been sold, conveyed, leased or otherwise transferred shall assume by written instrument the obligation to deliver to the holder of each Warrant such shares of stock, securities, cash or property as in accordance with the foregoing provisions such holder shall be entitled to purchase. SECTION 3.5. PRIOR NOTICE AS TO CERTAIN EVENTS. In case at any time: (a) the Company shall pay any dividend upon its Common Stock payable in stock or make any distribution (other than cash dividends) to the holders of its Common Stock; or (b) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or any other rights; or (c) there shall be any capital reorganization or reclassification of the capital stock of the Company, or consolidation or merger of the Company with, or sale, conveyance, lease or other transfer of all or substantially all of its assets to, another corporation; or (d) there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; then in any one or more of such cases, the Company shall give prior written notice, by first class mail, postage prepaid, addressed to each registered Warrantholder at the address of such Warrantholder as shown on the books of the Company, of the date on which (x) the books of the Company shall close or a record shall be taken for such stock dividend, distribution or subscription rights or (y) such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding up shall take place, as the case may be. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in such dividend, distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding up, as the case may be. Such written notice shall be given at least twenty (20) days prior to the action in question and not less than twenty (20) days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. 6 SECTION 3.6. CERTAIN OBLIGATIONS OF THE COMPANY. The Company will not, by amendment of its articles of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant Agreement or the Warrant Certificate, but will at all times in good faith assist in the carrying out of all such terms. Without limiting the generality of the foregoing, the Company (a) will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of such stock upon the exercise of all Warrants from time to time outstanding, and (b) will not (i) transfer all or substantially all of its properties and assets to any other person or entity, or (ii) consolidate with or merge into any other entity where the Company is not the continuing or surviving entity, or (iii) permit any other entity to consolidate with or merge into the Company where the Company is the continuing or surviving entity but, in connection with such consolidation or merger, the Common Stock then issuable upon the exercise of the Warrants shall be changed into or exchanged for shares or other securities or property of any other entity unless, in any such case, the other entity acquiring such properties and assets, continuing or surviving after such consolidation or merger or issuing or distributing such shares or other securities or property, as the case may be, shall expressly assume in writing and be bound by all the terms of this Warrant Agreement and the Warrant Certificates. SECTION 3.7. RESERVATION AND LISTING OF COMMON STOCK. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock from time to time issuable upon such exercise. All such shares shall be authorized and, when issued upon such exercise, shall be validly issued, fully paid and nonassessable with no liability on the part of the holder thereof. The Company, at its expense, will list on the NASDAQ system, including the Nasdaq National Market, if applicable, and on each national securities exchange on which any Common Stock may at any time be listed, subject to official notice of issuance, and will maintain such listing of, the shares of Common Stock from time to time issuable upon the exercise of the Warrants. SECTION 3.8. REGISTRATION OR EXEMPTION FOR COMMON STOCK. The Company will use its best efforts (a) at all times the Warrants are exercisable to maintain an effective registration statement under the Securities Act of 1933, as amended (the "Act"), covering Common Stock issuable upon exercise of the Warrants, (b) from time to time to amend or supplement the prospectus contained in such registration statement to the extent necessary in order to comply with applicable law, (c) to qualify for exemption from the registration requirements of the Act the Common Stock issuable upon exercise of the Warrants, and (d) to maintain exemptions or qualifications, in those jurisdictions in which the original registration statement relating to the Warrants was initially qualified, to permit the exercise of the Warrants and the issuance of the Common Stock pursuant to such exercise. The Warrant Agent shall have no responsibility for the maintenance of such exemptions or qualifications or for liabilities arising from the exercise or attempted exercise of Warrants in jurisdictions where exemptions or qualifications have not been maintained or are otherwise unavailable. 7 ARTICLE IV. REDEMPTION OF WARRANTS SECTION 4.1. REDEMPTION PRICE. The Warrants may be redeemed at the option of the Company in whole, at any time on or after _________, 1997, and on or before _________, 2002, upon notice as set forth in Section 4.2, and at a redemption price equal to $.01 per Warrant, provided that (a) the last reported sale price of the Common Stock on a national securities exchange, if the Common Stock shall be listed or admitted to unlisted trading privileges on a national securities exchange, or (b) the closing bid price of the Common Stock on the NASDAQ system, if the Common Stock is not so listed or admitted to unlisted trading privileges, exceeds $10.00 per share (such price subject to adjustment from time to time in the same manner as the Purchase Price pursuant to the provisions of Article III hereof) for any 10 consecutive trading days prior to the date such notice of redemption is given. SECTION 4.2. NOTICE OF REDEMPTION. In the case of any redemption of Warrants, the Company or, at its request, the Warrant Agent in the name of and at the expense of the Company, shall give notice of such redemption to the holders of the Warrants to be redeemed as hereinafter provided in this Section 4.2. Notice of redemption to the holders of Warrants shall be given by mailing by first-class mail a notice of such redemption not less than 30 days prior to the date fixed for redemption. Any notice which is given in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives the notice. In any case, failure duly to give such notice, or any defect in such notice, to the holder of any Warrant Certificate shall not affect the validity of the proceedings for the redemption of Warrants represented by any other Warrant Certificate. Each such notice shall specify the date fixed for redemption, the place of redemption and the redemption price of $.01 at which each Warrant is to be redeemed, and shall state that payment of the redemption price of the Warrants will be made on surrender of the Warrants at such place of redemption, and that if not exercised by the close of business on the date fixed for redemption, the exercise rights of the Warrants identified for redemption shall expire unless extended by the Company. Such notice shall also state the current Purchase Price and the date on which the right to exercise the Warrants will expire unless extended by the Company. SECTION 4.3. PAYMENT OF WARRANTS ON REDEMPTION; DEPOSIT OF REDEMPTION PRICE. If notice of redemption shall have been given as provided in Section 4.2, the redemption price of $.01 per Warrant shall, unless the Warrant is theretofore exercised pursuant to the terms hereof, become due and payable on the date and at the place stated in such notice. On and after such date of redemption, provided that cash sufficient for the redemption thereof shall then be deposited by the Company with the Warrant Agent for that purpose, the exercise rights of the Warrants identified for redemption shall expire. On presentation and surrender of Warrant Certificates at such place of payment specified in such notice, the Warrants identified for redemption shall be paid and redeemed at the redemption price of $.01 per Warrant. Prior to the date fixed for redemption, the Company shall deposit with the Warrant Agent an amount of money sufficient to pay the redemption price of all the Warrants identified for redemption. Any monies which shall have been deposited with the Warrant Agent for redemption of Warrants and which are not 8 required for that purpose by reason of exercise of Warrants shall be repaid to the Company upon delivery to the Warrant Agent of evidence satisfactory to it of such exercise. ARTICLE V. CERTAIN OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANT CERTIFICATES SECTION 5.1. NO RIGHTS OF SHAREHOLDERS. The Warrant Certificates shall be issued in registered form only. No Warrant Certificate shall entitle the holder thereof to any of the rights of a holder of shares of Common Stock of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, or to receive any notice of, or to attend, meetings of holders of Common Stock or any other proceedings of the Company. SECTION 5.2. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT CERTIFICATES. Upon receipt by the Warrant Agent of evidence reasonably satisfactory to the Warrant Agent of the loss, theft, destruction or mutilation of any Warrant Certificate, and (a) in the case of any such loss, theft, or destruction, upon delivery to the Warrant Agent of an indemnity bond in form and amount, and issued by a bonding company, reasonably satisfactory to the Company, or (b) in the case of any such mutilation, upon surrender to and cancellation by the Warrant Agent of such Warrant Certificate, the Company at its expense will execute and cause the Warrant Agent to countersign and deliver, in lieu thereof, a new Warrant Certificate of like tenor. SECTION 5.3. TRANSFER AGENT; CANCELLATION OF WARRANT CERTIFICATES; UNEXERCISED WARRANTS. Norwest Bank Minnesota, National Association (and any successor), as transfer agent (the "Transfer Agent"), is hereby irrevocably authorized and directed at all times to reserve such number of authorized and unissued shares of Common Stock as shall be sufficient to permit the exercise in full of all Warrants from time to time outstanding. The Company will keep a copy of this Agreement on file with the Transfer Agent. The Warrant Agent, and any successor thereto, is hereby irrevocably authorized to requisition from time to time from the Transfer Agent certificates for shares of Common Stock required for exercise of Warrants. The Company will supply the Transfer Agent with duly executed certificates for shares of Common Stock for such purpose and will make available any cash required in settlement of fractional share interests. All Warrant Certificates surrendered upon the exercise or redemption of Warrants shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company; such cancelled Warrant Certificates, with the Purchase Form on the reverse thereof duly filled in and signed, shall constitute conclusive evidence as between the parties hereto of the numbers of shares of Common Stock which shall have been issued upon exercises of Warrants. Promptly after the last day on which the Warrants are exercisable (set forth in Section 2.1 above), the Warrant Agent shall certify to the Company the aggregate number of Warrants then outstanding and unexercised. No shares of Common Stock shall be subject to reservation with respect to Warrants not exercised prior to the time and date identified in Section 2.1 above as the last time and date at which Warrants may be exercised. 9 ARTICLE VI. TRANSFER AND EXCHANGE OF WARRANT CERTIFICATES SECTION 6.1. WARRANT REGISTER; TRANSFER OR EXCHANGE OF WARRANT CERTIFICATES. The Warrant Agent shall cause to be kept at the principal office of the Warrant Agent a register (the "Warrant Register") in which, subject to such reasonable regulations as the Company may prescribe, provisions shall be made for the registration of transfers and exchanges of Warrant Certificates. Upon surrender for transfer or exchange of any Warrant Certificates, properly endorsed, to the Warrant Agent, the Warrant Agent at the Company's expense will issue and deliver to or upon the order of the holder thereof a new Warrant Certificate or Warrant Certificates of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face of the Warrant Certificate so surrendered. Any Warrant Certificate surrendered for transfer or exchange shall be cancelled by the Warrant Agent and shall thereafter be delivered to the Company. SECTION 6.2. IDENTITY OF WARRANTHOLDERS. Until a Warrant Certificate is transferred in the Warrant Register, the Company and the Warrant Agent may treat the person in whose name the Warrant Certificate is registered as the absolute owner thereof and of the Warrants represented thereby for all purposes, notwithstanding any notice to the contrary, except that, if and when any Warrant Certificate is properly assigned in blank, the Company and the Warrant Agent may (but shall not be obligated to) treat the bearer thereof as the absolute owner of the Warrant Certificate and of the Warrants represented thereby for all purposes, notwithstanding any notice to the contrary. ARTICLE VII. CONCERNING THE WARRANT AGENT SECTION 7.1. TAXES. The Company will, from time to time, promptly pay to the Warrant Agent, or make provision satisfactory to the Warrant Agent for the payment of, all taxes and charges that may be imposed by the United States or any State upon the Company or the Warrant Agent upon the transfer or delivery of shares of Common Stock upon the exercise of Warrants, but the Company shall not be obligated to pay any tax imposed in connection with any transfer involved in the delivery of a certificate for shares of Common Stock in any name other than that of the registered holder of the Warrant Certificate surrendered in connection with the purchase thereof. SECTION 7.2. REPLACEMENT OF WARRANT AGENT IN CERTAIN CIRCUMSTANCES. (a) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder after giving thirty (30) days notice in writing to the Company, except that such shorter notice may be given as the Company shall, in writing, accept as sufficient. The Company may discharge the Warrant Agent at any time with or without reason, effective upon thirty (30) days written notice to the Warrant Agent or 10 such shorter period as the Warrant Agent shall, in writing, accept as sufficient. If the office of Warrant Agent becomes vacant by resignation, discharge, incapacity to act or otherwise, the Company shall appoint in writing a new Warrant Agent, the principal office of which shall be in Minnesota. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Warrant Agent or by the holder of a Warrant Certificate, then the holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new Warrant Agent. Any new Warrant Agent, whether appointed by the Company or by such a court, shall be a corporation organized and doing business under the laws of the United States or of the State of Minnesota, of good standing, and having its principal office in Minnesota, which is authorized under such laws to exercise corporate trust powers and is subject to supervision or examination by Federal or State authority. Any new Warrant Agent appointed hereunder shall execute, acknowledge and deliver to the Company an instrument accepting such appointment hereunder and thereupon such new Warrant Agent without any further act or deed shall become vested with all the rights, powers, duties and responsibilities of the Warrant Agent hereunder with like effect as if it had been named as the Warrant Agent; but if for any reason it becomes necessary or expedient to have the former Warrant Agent execute and deliver any further assurance, conveyance, act or deed, the same shall be done and shall be legally and validly executed and delivered by the former Warrant Agent. Not later than the effective date of any such appointment the Company shall file notice thereof with the former Warrant Agent. The Company shall promptly give notice of any such appointment to the holders of the Warrant Certificates by mail to their addresses as shown in the Warrant Register. Failure to file or give such notice, or any defect therein, shall not affect the legality or validity of the appointment of the successor Warrant Agent. (b) Any company into which the Warrant Agent or any new Warrant Agent may be merged or converted or with which it may be consolidated or any company resulting from any merger, conversion or consolidation to which the Warrant Agent or any new Warrant Agent shall be a party shall be the successor Warrant Agent under this Warrant Agreement without any further act; provided that if such company would not be eligible for appointment as a successor Warrant Agent under the provisions of paragraph (a) of this Section 7.2 the Company shall forthwith appoint a new Warrant Agent in accordance with such provisions. Any such successor Warrant Agent may adopt the prior countersignature of any predecessor Warrant Agent and deliver Warrant Certificates countersigned and not delivered by such predecessor Warrant Agent or may countersign Warrant Certificates either in the name of any predecessor Warrant Agent or the name of the successor Warrant Agent. SECTION 7.3. REMUNERATION OF WARRANT AGENT. The Company will pay the Warrant Agent reasonable remuneration for its services as Warrant Agent hereunder and will reimburse the Warrant Agent upon demand for all expenditures that the Warrant Agent may reasonably incur in the execution of its duties hereunder. 11 SECTION 7.4. FURTHER ASSURANCES. The Company will perform, exercise, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Warrant Agent for the carrying out or performing by the Warrant Agent of the provisions of this Warrant Agreement. SECTION 7.5. LIMITATIONS ON LIABILITIES OF THE WARRANT AGENT. (a) The Warrant Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection of the Warrant Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever, in the performance of its duties under this Warrant Agreement, the Warrant Agent shall deem it necessary or desirable that any matter be proved or established, or that any instructions with respect to the performance of its duties hereunder be given, by the Company prior to taking or suffering any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established, or such instructions may be given, by a certificate or instrument signed by an officer of the Company and delivered to the Warrant Agent; and such certificate or instrument shall be full authorization to the Warrant Agent for any action taken or suffered in good faith by it under the provisions of this Warrant Agreement in reliance upon such certificate or instrument; but in its discretion the Warrant Agent may in lieu thereof accept other evidence of such matter or may require such further or additional evidence as it may deem reasonable. (c) The Warrant Agent shall be liable hereunder only for its own negligence or willful misconduct. The Warrant Agent shall act hereunder solely as agent, and its duties shall be determined solely by the provisions hereof. The Company agrees to indemnify the Warrant Agent and save it harmless against any and all liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of this Warrant Agreement except as a result of the Warrant Agent's negligence or willful misconduct. (d) The Warrant Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Warrant Agreement or in the Warrant Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Warrant Agent shall not be under any responsibility in respect to the validity or execution of any Warrant Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Warrant Agreement or in any Warrant Certificate; nor shall it be responsible for the making of any adjustment in the Purchase Price, or number of shares 12 issuable upon exercise of the Warrant Certificates or responsible for the manner, method or amount of any such adjustment or the facts that would require any such adjustment; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Warrant Agreement or any Warrant Certificate or as to whether any shares of Common Stock or other securities are or will be validly authorized and issued and fully paid and nonassessable. SECTION 7.6. AMENDMENT AND MODIFICATION. The Warrant Agent may, without the consent or concurrence of the holders of the Warrant Certificates, by supplemental agreement or otherwise, join with the Company in making any changes or corrections in this Warrant Agreement that they shall have been advised by counsel (a) are required to cure any ambiguity or to correct any defective or inconsistent provision or clerical omission or mistake or manifest error herein contained, (b) add to the obligations of the Company in this Warrant Agreement further obligations thereafter to be observed by it, or surrender any right or power reserved to or conferred upon the Company in this Warrant Agreement, or (c) do not or will not adversely affect, alter or change the rights, privileges or immunities of the holders of Warrant Certificates not provided for under this Warrant Agreement; provided, however, that any term of this Warrant Agreement or any Warrant Certificate may be changed, waived, discharged or terminated by an instrument in writing signed by each party against which enforcement of such change, waiver, discharge or termination is sought, or by which the same is to be performed or observed. ARTICLE VIII. OTHER MATTERS SECTION 8.1. SUCCESSORS AND ASSIGNS. All the covenants and provisions of this Warrant Agreement by or for the benefit of the Company or the Warrant Agent shall bind and inure to the benefit of their respective successors and assigns. SECTION 8.2. NOTICES. Any notice or demand authorized by this Warrant Agreement to be given or made by the Warrant Agent or by the holder of any Warrant Certificate to or on the Company shall be sufficiently given or made if sent by first class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Company with the Warrant Agent) as follows: ChoiceTel Communications, Inc. 9724 10th Avenue North Plymouth, Minnesota 55441 Attention: Chief Financial Officer Any notice or demand authorized by this Warrant Agreement to be given or made by the holder of any Warrant Certificate or by the Company to or on the Warrant Agent shall be sufficiently given or made if sent by first class or registered mail, postage prepaid, addressed (until another address is filed in writing by the Warrant Agent with the Company) as follows: 13 Norwest Bank Minnesota, National Association Shareowner Services 161 North Concord Exchange P.O. Box 738 South Saint Paul, Minnesota 55075-0738 SECTIONS 8.3. GOVERNING LAW. This Warrant Agreement and the Warrant Certificates are being delivered in the State of Minnesota and shall be construed and enforced in accordance with and governed by the laws of such State. SECTION 8.4. NO BENEFITS CONFERRED. Nothing in this Warrant Agreement expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company, the Warrant Agent, and the holders of the Warrant Certificates, any right, remedy or claim under or by reason of this Agreement or of any covenant, condition, stipulation, promise or agreement herein; and all covenants, conditions, stipulations, promises and agreements in this Warrant Agreement contained shall be for the sole and exclusive benefit of the Company, the Warrant Agent, their respective successors and the holders of the Warrant Certificates. SECTION 8.5. HEADINGS. The descriptive headings used in this Warrant Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, this Warrant Agreement has been duly executed by the parties hereto as of the day and year first above written. CHOICETEL COMMUNICATIONS, INC. By _______________________________________ Its _______________________________________ NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By _______________________________________ Its _______________________________________ 14 EXHIBIT A THIS WARRANT CERTIFICATE MAY BE TRANSFERRED SEPARATELY FROM THE COMMON STOCK CERTIFICATE WITH WHICH IT IS INITIALLY ISSUED EXERCISABLE ON OR BEFORE, AND VOID AFTER, 5:00 P.M. MINNEAPOLIS TIME, _________, 2002 No. W- _____ Certificate for __________ Warrants -------------------------------------------- WARRANT CUSIP -------------------------------------------- WARRANTS TO PURCHASE COMMON STOCK OF CHOICETEL COMMUNICATIONS, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF MINNESOTA THIS CERTIFIES that ___________________________________________ or assigns, is the owner of the number of Warrants set forth above, each of which represents the right to purchase from ChoiceTel Communications, Inc., a Minnesota corporation (the "Company"), at any time on or before 5:00 p.m., Minneapolis time, _________, 2002, upon compliance with and subject to the conditions set forth herein and in the Warrant Agreement hereinafter referred to, one share (subject to adjustments referred to below) of the Common Stock of the Company (such shares or other securities or property purchasable upon exercise of the Warrants being herein called the "Shares"), by surrendering this Warrant Certificate, with the Purchase Form on the reverse side duly executed, at the principal office of Norwest Bank Minnesota, National Association, or its successor, as warrant agent (the "Warrant Agent"), and by paying in full, in cash or by certified or official bank check payable to the order of the Company, the purchase price of $9.50 per share. Upon any exercise of less than all the Warrants evidenced by this Warrant Certificate, there shall be issued to the holder a new Warrant Certificate in respect of the Warrants as to which this Warrant Certificate was not exercised. Upon the surrender for transfer or exchange hereof, properly endorsed, to the Warrant Agent, the Warrant Agent at the Company's expense will issue and deliver to the order of the holder hereof a new Warrant Certificate or Warrant Certificates of like tenor, in the name of such holder or as such holder (upon payment by such holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face hereof. A-1 The Warrant Certificates are issued only as registered Warrant Certificates. Until this Warrant Certificate is transferred in the Warrant Register, the Company and the Warrant Agent may treat the person in whose name this Warrant Certificate is registered as the absolute owner hereof and of the Warrants represented hereby for all purposes, notwithstanding any notice to the contrary. This Warrant Certificate is issued under the Warrant Agreement dated as of _________, 1997, between the Company and the Warrant Agent and is subject to the terms and provisions contained in said Warrant Agreement, to all of which terms and provisions the registered holder of this Warrant Certificate consents by acceptance hereof. Copies of said Warrant Agreement are on file at the principal office of the Warrant Agent in Minneapolis, Minnesota, and may be obtained by writing to the Warrant Agent. The number of Shares receivable upon the exercise of the Warrants represented by this Warrant Certificate and the purchase price per share are subject to adjustment upon the happening of certain events specified in the Warrant Agreement (which provisions are contained in Article III of the Warrant Agreement and are hereby incorporated by reference). No fractional Shares of the Company's Common Stock will be issued upon the exercise of Warrants. As to any final fraction of a share which a holder of Warrants exercised in the same transaction would otherwise be entitled to purchase on such exercise, the Company shall pay a cash adjustment in lieu of any fractional Share determined as provided in the Warrant Agreement. The Warrants may be redeemed by the Company, in whole, at any time on or after _________, 1997, and on or before _________, 2002, at a redemption price of $.01 per Warrant, upon notice of such redemption as set forth below, provided that (a) the last reported sale price of the Common Stock on a national securities exchange, if the Common Stock shall be listed or admitted to unlisted trading privileges on a national securities exchange, or (b) the closing bid price of the Common Stock on the NASDAQ system, if the Common Stock is not so listed or admitted to unlisted trading privileges, exceeds $10.00 per share (subject to adjustment as provided in the Warrant Agreement) for any 10 consecutive trading days prior to the date such notice of redemption is given. Notice of redemption shall be mailed not less than thirty (30) days prior to the date fixed for redemption to the holders of Warrants at their last registered addresses. If notice of redemption shall have been given as provided in the Warrant Agreement and cash sufficient for the redemption be deposited by the Company for that purpose, the exercise rights of the Warrants identified for redemption shall expire at the close of business on such date of redemption unless extended by the Company. This Warrant Certificate shall not entitle the holder hereof to any of the rights of a holder of Common Stock of the Company, including, without limitation, the right to vote, to receive dividends and other distributions, to exercise any preemptive right, or to receive any notice of, or to attend meetings of holders of Common Stock or any other proceedings of the Company. A-2 This Warrant Certificate shall be void and the Warrants and any rights represented hereby shall cease unless exercised on or before 5:00 P.M. Minneapolis time on _________, 2002, unless extended by the Company. This Warrant Certificate shall not be valid for any purpose until it shall have been countersigned by the Warrant Agent. WITNESS the facsimile signatures of the Company's duly authorized officers. Dated: ______________ CHOICETEL COMMUNICATIONS, INC. By ______________________________________ Its ______________________________________ Attest: __________________________ Secretary COUNTERSIGNED AND REGISTERED: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Warrant Agent By __________________________ Authorized Signature A-3 [REVERSE OF WARRANT CERTIFICATE] THE ARTICLES OF INCORPORATION OF THE CORPORATION GRANT TO THE BOARD OF DIRECTORS THE POWER TO ESTABLISH MORE THAN ONE CLASS OR SERIES OF SHARES AND TO FIX THE RELATIVE RIGHTS AND PREFERENCES OF ANY SUCH DIFFERENT CLASS OR SERIES. THE CORPORATION WILL FURNISH TO ANY SHAREHOLDER UPON REQUEST AND WITHOUT CHARGE A FULL STATEMENT OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS OF THE SHARES OF EACH CLASS OR SERIES AUTHORIZED TO BE ISSUED, SO FAR AS THEY HAVE BEEN DETERMINED, AND THE AUTHORITY OF THE BOARD TO DETERMINE THE RELATIVE RIGHTS AND PREFERENCES OF SUBSEQUENT CLASSES OR SERIES. THE HOLDER OF THIS WARRANT CERTIFICATE WILL BE ABLE TO EXERCISE THE WARRANTS ONLY IF A CURRENT PROSPECTUS RELATING TO THE SHARES UNDERLYING THE WARRANTS IS THEN IN EFFECT AND ONLY IF SUCH SHARES ARE QUALIFIED FOR SALE OR EXEMPT FROM QUALIFICATION UNDER THE APPLICABLE SECURITIES LAWS OF THE STATES IN WHICH THE HOLDER OF THIS WARRANT CERTIFICATE RESIDES. ALTHOUGH THE COMPANY WILL USE ITS BEST EFFORTS TO MAINTAIN THE EFFECTIVENESS OF A CURRENT PROSPECTUS COVERING THE SHARES UNDERLYING THE WARRANTS, THERE CAN BE NO ASSURANCE THAT THE COMPANY WILL BE ABLE TO DO SO, OR TO GET ANY REQUIRED AMENDMENTS DECLARED EFFECTIVE BY FEDERAL OR STATE AUTHORITIES IN A TIMELY MANNER. THE COMPANY WILL BE UNABLE TO ISSUE SHARES TO THOSE PERSONS DESIRING TO EXERCISE THEIR WARRANTS IF A CURRENT PROSPECTUS COVERING THE SHARES ISSUABLE UPON THE EXERCISE OF THE WARRANTS IS NOT KEPT EFFECTIVE OR IF SUCH SHARES ARE NOT QUALIFIED NOR EXEMPT FROM QUALIFICATION IN THE STATES IN WHICH THE HOLDERS OF THE WARRANTS RESIDE. TO: ChoiceTel Communications, Inc. c/o Norwest Bank Minnesota, National Association Warrant Agent PURCHASE FORM (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO EXERCISE WARRANT CERTIFICATES) The undersigned hereby irrevocably elects to exercise _____________* of the Warrants represented by the Warrant Certificate and to purchase for cash the Shares issuable upon the exercise of said Warrants, and herewith makes payment of $__________ therefor, and requests that certificates for such Shares shall be issued in the name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF A-4 REGISTERED HOLDER OF CERTIFICATE - ---------------------------------- - ---------------------------------- _____________________________ (Print Name) _____________________________ (Address) _____________________________ Dated: __________________ Signature(s) ________________ ________________ __________________ * Insert here the number of Warrants evidenced on the face of this Warrant Certificate (or, in the case of a partial exercise, the portion thereof being exercised), in either case without making any adjustment for additional Common Stock or any other securities or property or cash which, pursuant to the adjustment provisions referred to in this Warrant Certificate, may be deliverable upon exercise. A-5 ASSIGNMENT FORM (TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO TRANSFER WARRANT CERTIFICATES) FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers ____________________** of the Warrants represented by this Warrant Certificate unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------- - ---------------------------------- _________________________________________ (Print name) _________________________________________ (Address) _________________________________________ and does hereby irrevocably constitute and appoint ____________________________ Attorney to transfer this Warrant Certificate on the records of the Company with full power of substitution in the premises. Dated: _________________ Signature(s) _________________________ _______________________ Signature(s) Guaranteed: _________________________________________ - ----------------- ** Insert here the number of Warrants evidenced on the face of this Warrant Certificate (or, in the case of a partial assignment, the portion thereof being assigned), in either case without making any adjustment for additional Common Stock or any other securities or property or cash which, pursuant to the adjustment provisions referred to in this Warrant Certificate, may be deliverable upon exercise. NOTICE The Signature(s) to the Purchase Form or the Assignment Form must correspond to the name(s) as written upon the face of this Warrant Certificate in every particular without alteration or enlargement or any change whatsoever. A-6 EX-10.1 8 EXHIBIT 10.1 INTELLIPHONE, INC. 1997 LONG-TERM INCENTIVE AND STOCK OPTION PLAN SECTION 1. PURPOSE OF PLAN. This Plan shall be known as the "INTELLIPHONE, INC. 1997 LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and upon approval of the pending name change of the corporation to "ChoiceTel Communications, Inc.," the Plan shall be known as the "CHOICETEL COMMUNICATIONS, INC. 1997 LONG-TERM INCENTIVE AND STOCK OPTION PLAN" and is hereinafter referred to as the "Plan". The purpose of the Plan is to aid in maintaining and developing personnel capable of assuring the future success of Intelliphone, Inc., a Minnesota corporation (the "Company"), to offer such personnel additional incentives to put forth maximum efforts for the success of the business, and to afford them an opportunity to acquire a proprietary interest in the Company through stock options and other long-term incentive awards as provided herein. Options granted under this Plan may be either incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 (the "Code"), or options that do not qualify as Incentive Stock Options. Awards granted under this Plan shall be SARs, restricted stock or performance awards as hereinafter described. SECTION 2. STOCK SUBJECT TO PLAN. Subject to the provisions of Section 16 hereof, the stock to be subject to options or other awards under the Plan shall be the Company's authorized common shares, no par value(the "Common Shares"). Such Common Shares may be either authorized but unissued shares, or issued shares which have been reacquired by the Company. Subject to adjustment as provided in Section 16 hereof, the maximum number of shares on which options may be exercised or other awards issued under this Plan shall be 100,000 shares. If an option or award under the Plan expires, or for any reason is terminated or unexercised with respect to any shares, such shares shall again be available for options or awards thereafter granted during the term of the Plan. SECTION 3. ADMINISTRATION OF PLAN. (a) The Plan shall be administered by the Board of Directors of the Company or a committee thereof. The members of any such committee shall be appointed by and serve at the pleasure of the Board of Directors. (The group administering the Plan shall hereinafter be referred to as the "Committee".) (b) The Committee shall have plenary authority in its discretion, but subject to the express provisions of the Plan: (i) to determine the purchase price of the Common Stock covered by each option or award, (ii) to determine the employees to whom and the time or times at which such options and awards shall be granted and the number of shares to be subject to each, (iii) to determine the form of payment to be made upon the exercise of an SAR or in connection with performance awards, either cash, Common Shares of the Company or a combination thereof, (iv) to determine the terms of exercise of each option and award, (v) to accelerate the time at which all or any part of an option or award may be exercised, (vi) to amend or modify the terms of any option or award with the consent of the optionee, (vii) to interpret the Plan, (viii) to prescribe, amend and rescind rules and regulations relating to the Plan, (ix) to determine the terms and provisions of each option and award agreement under the Plan (which agreements need not be identical), including the designation of those options intended to be Incentive Stock Options, and (x) to make all other determinations necessary or advisable for the administration of the Plan, subject to the exclusive authority of the Board of Directors under Section 17 herein to amend or terminate the Plan. The Committee's determinations on the foregoing matters, unless otherwise disapproved by the Board of Directors of the Company, shall be final and conclusive. (c) The Committee shall select one of its members as its Chair and shall hold its meetings at such times and places as it may determine. A majority of its members shall constitute a quorum. All determinations of the Committee shall be made by not less than a majority of its members. Any decision or determination reduced to writing and signed by all of the members of the Committee shall be fully effective as if it had been made by a majority vote at a meeting duly called and held. The grant of an option or award shall be effective only if a written agreement shall have been duly executed and delivered by and on behalf of the Company following such grant. The Committee may appoint a Secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable. SECTION 4. ELIGIBILITY AND GRANT. (a) ELIGIBILITY. Incentive Stock Options may only be granted under this Plan to any full or part-time employee (which term as used herein includes, but is not limited to, officers and directors who are also employees) of the Company and of its present and future subsidiary corporations within the meaning of Section 424(f) of the Code (herein called "subsidiaries"). Full or part-time employees, directors who are not employees, consultants or independent contractors to the Company or one of its subsidiaries or affiliates shall be eligible to receive options which do not qualify as Incentive Stock Options and awards. In determining the persons to whom options and awards shall be granted and the number of shares subject to each, the Committee may take into account the nature of services rendered by the respective employees or consultants, their present and potential contributions to the success of the Company and such other factors as the Committee in its discretion shall deem relevant. (b) GRANT OF ADDITIONAL OPTIONS. A person who has been granted an option or award under this Plan may be granted additional options or awards under the Plan if the Committee shall so determine; provided, however, that to the extent the aggregate fair market value (determined at the time the Incentive Stock Option is granted) of the Common Shares with respect to which all Incentive Stock Options are exercisable for the first time by an employee during any calendar year (under all plans described in subsection (d) of Section 422 2 of the Code of his or her employer corporation and its parent and subsidiary corporations) exceeds $100,000, such options shall be treated as options that do not qualify as Incentive Stock Options. Nothing in the Plan or in any agreement thereunder shall confer on any employee any right to continue in the employ of the Company or any of its subsidiaries or affect, in any way, the right of the Company or any of its subsidiaries to terminate his or her employment at any time. SECTION 5. PRICE. The option price for all Incentive Stock Options granted under the Plan shall be determined by the Committee but shall not be less than 100% of the fair market value of the Common Shares at the date of grant of such option. The option price for options granted under the Plan that do not qualify as Incentive Stock Options and, if applicable, the price for all awards shall also be determined by the Committee. For purposes of the preceding sentence and for all other valuation purposes under the Plan, the fair market value of the Common Shares shall be as reasonably determined by the Committee. If on the date of grant of any option or award hereunder the Common Shares are not traded on an established securities market, the Committee shall make a good faith attempt to satisfy the requirements of this Section 5 and in connection therewith shall take such action as it deems necessary or advisable. SECTION 6. TERM. Each option and award and all rights and obligations thereunder shall expire on the date determined by the Committee and specified in the option or award agreement. The Committee shall be under no duty to provide terms of like duration for options or awards granted under the Plan, but the term of an Incentive Stock Option may not extend more than ten (10) years from the date of grant of such option and the term of options granted under the Plan which do not qualify as Incentive Stock Options may not extend more than fifteen (15) years from the date of granting of such option. SECTION 7. EXERCISE OF OPTION OR AWARD. (a) EXERCISABILITY. The Committee shall have full and complete authority to determine whether an option or award will be exercisable in full at any time or from time to time during the term thereof, or to provide for the exercise thereof in such installments, upon the occurrence of such events (such as termination of employment for any reason) and at such times during the term of the option as the Committee may determine and specify in the option or award agreement. (b) NO VIOLATION OF STATE OR FEDERAL LAWS. The exercise of any option or award granted hereunder shall only be effective at such time that the sale of Common Shares pursuant to such exercise will not violate any state or federal securities or other laws. (c) METHOD OF EXERCISE. An optionee or grantee electing to exercise an option or award shall give written notice to the Company of such election and of the number of shares subject to such exercise. The full purchase price of such shares shall be tendered with such notice of exercise. Payment shall be made to the Company in cash (including bank check, 3 certified check, personal check, or money order), or, at the discretion of the Committee and as specified by the Committee, (i) by delivering certificates for the Company's Common Shares already owned by the optionee or grantee having a fair market value as of the date of grant equal to the full purchase price of the shares, or (ii) relinquishing the right to acquire by exercise of any option, such number of the Company's Common Shares otherwise issuable to the optionee which in the aggregate have a fair market value equal to the amount of the full purchase price ("cashless exercise") or (iii) by delivering the optionee's or grantee's promissory note, which shall provide for interest at a rate not less than the minimum rate required to avoid the imputation of income, original issue discount or a below- market-rate loan pursuant to Sections 483, 1274 or 7872 of the Code or any successor provisions thereto, or (iv) a combination of cash, the optionee's or grantee promissory note, a cashless exercise and such owned shares. The fair market value of such tendered shares shall be determined as provided in Section 5 herein. The optionee's or grantee's promissory note shall be a full recourse liability of the optionee and may, at the discretion of the Committee, be secured by a pledge of the shares being purchased. Until such person has been issued the shares subject to such exercise, he or she shall possess no rights as a shareholder with respect to such shares. SECTION 8. RESTORATION OPTIONS. The Committee may grant "restoration" options, separately or together with another option, pursuant to which, subject to the terms and conditions established by the Committee and any applicable requirements of Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or any other applicable law, the optionee would be granted a new option when the payment of the exercise price of the option to which such "restoration" option relates is made by the delivery of shares of the Company's Common Shares owned by the optionee, as described in this Section 8, which new option would be an option to purchase the number of shares not exceeding the sum of (a) the number of shares of the Company's Common Shares tendered as payment upon the exercise of the option to which such "restoration" option relates and (b) the number of shares of the Company's Common Shares, if any, tendered as payment of the amount to be withheld under applicable income tax laws in connection with the exercise of the option to which such "restoration" option relates, as described in Section 12 hereof. "Restoration" options may be granted with respect to options previously granted under this Plan or any prior stock option plan of the Company, and may be granted in connection with any option granted under this Plan at the time of such grant. The purchase price of the Common Shares under each such new option, and the other terms and conditions of such option, shall be determined by the Committee, consistent with the provisions of the Plan. SECTION 9. STOCK APPRECIATION RIGHTS. (a) GRANT. At the time of grant of an option or award under the Plan (or at any other time), the Committee, in its discretion, may grant a Stock Appreciation Right ("SAR") evidenced by an agreement in such form as the Committee shall from time to time approve. Any such SAR may be subject to restrictions on the exercise thereof as may be set forth in the agreement representing such SAR, which agreement shall comply with and be subject to the 4 following terms and conditions and any additional terms and conditions established by the Committee that are consistent with the terms of the Plan. (b) EXERCISE. An SAR shall be exercised by the delivery to the Company of a written notice which shall state that the holder thereof elects to exercise his or her SAR as to the number of shares specified in the notice and which shall further state what portion, if any, of the SAR exercise amount (hereinafter defined) the holder thereof requests is to be paid in cash and what portion, if any, is to be paid in Common Shares of the Company. The Committee promptly shall cause to be paid to such holder the SAR exercise amount either in cash, in Common Shares of the Company, or any combination of cash and shares as the Committee may determine. Such determination may be either in accordance with the request made by the holder of the SAR or in the sole and absolute discretion of the Committee. The SAR exercise amount is the excess of the fair market value of one share of the Company's Common Shares on the date of exercise over the per share exercise price in respect of which the SAR was granted, multiplied by the number of shares as to which the SAR is exercised. For the purposes hereof, the fair market value of the Company's shares shall be determined as provided in Section 5 herein. SECTION 10. RESTRICTED STOCK AWARDS. Awards of Common Shares subject to forfeiture and transfer restrictions may be granted by the Committee. Any restricted stock award shall be evidenced by an agreement in such form as the Committee shall from time to time approve, which agreement shall comply with and be subject to the following terms and conditions and any additional terms and conditions established by the Committee that are consistent with the terms of the Plan: (a) GRANT OF RESTRICTED STOCK AWARDS. Each restricted stock award made under the Plan shall be for such number of Common Shares as shall be determined by the Committee and set forth in the agreement containing the terms of such restricted stock award. Such agreement shall set forth a period of time during which the grantee must remain in the continuous employment of the Company in order for the forfeiture and transfer restrictions to lapse. If the Committee so determines, the restrictions may lapse during such restricted period in installments with respect to specified portions of the shares covered by the restricted stock award. The agreement may also, in the discretion of the Committee, set forth performance or other conditions that will subject the Common Shares to forfeiture and transfer restrictions. The Committee may, at its discretion, waive all or any part of the restrictions applicable to any or all outstanding restricted stock awards. (b) DELIVERY OF COMMON SHARES AND RESTRICTIONS. At the time of a restricted stock award, a certificate representing the number of Common shares awarded thereunder shall be registered in the name of the grantee. Such certificate shall be held by the Company or any custodian appointed by the Company for the account of the grantee subject to the terms and conditions of the Plan, and shall bear such a legend setting forth the restrictions imposed thereon as the Committee, in its discretion, may determine. The grantee shall have 5 all rights of a shareholder with respect to the Common Shares, including the right to receive dividends and the right to vote such shares, subject to the following restrictions: (i) the grantee shall not be entitled to delivery of the stock certificate until the expiration of the restricted period and the fulfillment of any other restrictive conditions set forth in the restricted stock agreement with respect to such Common Shares; (ii) none of the Common Shares may be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered or disposed of during such restricted period or until after the fulfillment of any such other restrictive conditions; and (iii) except as otherwise determined by the Committee, all of the Common Shares shall be forfeited and all rights of the grantee to such Common Shares shall terminate, without further obligation on the part of the Company, unless the grantee remains in the continuous employment of the Company for the entire restricted period in relation to which such Common Shares were granted and unless any other restrictive conditions relating to the restricted stock award are met. Any Common Shares, any other securities of the Company and any other property (except for cash dividends) distributed with respect to the Common Shares subject to restricted stock awards shall be subject to the same restrictions, terms and conditions as such restricted Common Shares. (c) TERMINATION OF RESTRICTIONS. At the end of the restricted period and provided that any other restrictive conditions of the restricted stock award are met, or at such earlier time as otherwise determined by the Committee, all restrictions set forth in the agreement relating to the restricted stock award or in the Plan shall lapse as to the restricted Common Shares subject thereto, and a stock certificate for the appropriate number of Common Shares, free of the restrictions and the restricted stock legend, shall be delivered to the grantee or his or her beneficiary or estate, as the case may be. SECTION 11. PERFORMANCE AWARDS. The Committee is further authorized togrant performance awards. Subject to the terms of this Plan and any applicable award agreement, a performance award granted under the Plan (i) may be denominated or payable in cash, Common Shares (including, without limitation, restricted stock), other securities, other awards, or other property and (ii) shall confer on the holder thereof rights valued as determined by the Committee, in its discretion, and payable to, or exercisable by, the holder of the Performance awards, in whole or in part, upon the achievement of such performance goals during such performance periods as the Committee, in its discretion, shall establish. Subject to the terms of this Plan and any applicable award agreement, the performance goals to be achieved during any performance period, the length of any performance period, the amount of any Performance award granted, and the amount of any payment or transfer to be made by the grantee and by the Company under any Performance award shall be determined by the Committee. SECTION 12. INCOME TAX WITHHOLDING AND TAX BONUSES. (a) WITHHOLDING OF TAXES. In order to comply with all applicable federal or state income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal or state payroll, withholding, income or other taxes, which 6 are the sole and absolute responsibility of an optionee or grantee under the Plan, are withheld or collected from such optionee or grantee. In order to assist an optionee or grantee in paying all federal and state taxes to be withheld or collected upon exercise of an option or award which does not qualify as an Incentive Stock Option hereunder, the Committee, in its absolute discretion and subject to such additional terms and conditions as it may adopt, shall permit the optionee or grantee to satisfy such tax obligation by (i) electing to have the Company withhold a portion of the shares otherwise to be delivered upon exercise of such option or award with a fair market value, determined in accordance with Section 5 herein, equal to such taxes or (ii) delivering to the Company Common Shares other than the shares issuable upon exercise of such option or award with a fair market value, determined in accordance with Section 5, equal to such taxes. (b) TAX BONUS. The Committee shall have the authority, at the time of grant of an option under the Plan or at any time thereafter, to approve tax bonuses to designated optionees or grantees to be paid upon their exercise of options or awards granted hereunder. The amount of any such payments shall be determined by the Committee. The Committee shall have full authority in its absolute discretion to determine the amount of any such tax bonus and the terms and conditions affecting the vesting and payment thereafter. SECTION 13. ADDITIONAL RESTRICTIONS. The Committee shall have full and complete authority to determine whether all or any part of the Common Shares of the Company acquired upon exercise of any of the options or awards granted under the Plan shall be subject to restrictions on the transferability thereof or any other restrictions affecting in any manner the optionee's or grantee's rights with respect thereto, but any such restriction shall be contained in the agreement relating to such options or awards. SECTION 14. TEN PERCENT SHAREHOLDER RULE. Notwithstanding any other provision in the Plan, if at the time an option is otherwise to be granted pursuant to the Plan the optionee owns directly or indirectly (within the meaning of Section 424(d) of the Code) Common Shares of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporations, if any (within the meaning of Section 422(b) (6) of the Code), then any Incentive Stock Option to be granted to such optionee pursuant to the Plan shall satisfy the requirements of Section 422(c)(5) of the Code, and the option price shall be not less than 110% of the fair market value of the Common Shares of the Company determined as described herein, and such option by its terms shall not be exercisable after the expiration of five (5) years from the date such option is granted. SECTION 15. NON-TRANSFERABILITY. No option or award granted under the Plan shall be transferable by an optionee or grantee, otherwise than by will or the laws of descent or distribution. Except as otherwise provided in an option or award agreement, during the lifetime of an optionee or grantee, the option shall be exercisable only by such optionee or grantee. 7 SECTION 16. DILUTION OR OTHER ADJUSTMENTS. If there shall be any change in the Common Shares through merger, consolidation, reorganization, recapitalization, dividend in the form of stock (of whatever amount), stock split or other change in the corporate structure, appropriate adjustments in the Plan and outstanding options and awards shall be made by the Committee. In the event of any such changes, adjustments shall include, where appropriate, changes in the aggregate number of shares subject to the Plan, the number of shares and the price per share subject to outstanding options and awards and the amount payable upon exercise of outstanding awards, in order to prevent dilution or enlargement of option or award rights. SECTION 17. AMENDMENT OR DISCONTINUANCE OF PLAN. The Board of Directors may amend or discontinue the Plan at any time. Subject to the provisions of Section 16 no amendment of the Plan, however, shall without shareholder approval: (i) increase the maximum number of shares under the Plan as provided in Section 2 herein, (ii) decrease the minimum price provided in Section 5 herein, (iii) extend the maximum term under Section 6, or (iv) modify the eligibility requirements for participation in the Plan. The Board of Directors shall not alter or impair any option or award theretofore granted under the Plan without the consent of the holder of the option. SECTION 18. TIME OF GRANTING. Nothing contained in the Plan or in any resolution adopted or to be adopted by the Board of Directors or by the shareholders of the Company, and no action taken by the Committee or the Board of Directors (other than the execution and delivery of an option or award agreement), shall constitute the granting of an option or award hereunder. SECTION 19. EFFECTIVE DATE AND TERMINATION OF PLAN. (a) The Plan was approved by the Board of Directors on April 11, 1997, and shall be approved by the shareholders of the Company within twelve (12) months thereof. (b) Unless the Plan shall have been discontinued as provided in Section 16 hereof, the Plan shall terminate April 10, 2007. No option or award may be granted after such termination, but termination of the Plan shall not, without the consent of the optionee or grantee, alter or impair any rights or obligations under any option or award theretofore granted. 8 EX-10.2 9 EXHIBIT 10.2 LEASE AGREEMENT PROJECT: 9724 10TH AVE. NORTH, PLYMOUTH, MN. 55441 DATE: 4-16-97 ------------------------------------------- ---------- UNIT NO: SEE BELOW OCCUPANCY TERM: 3 YEARS FROM 6-1-97 TO: 5-31-2000 --------- ------- ------ --------- MONTHLY RENT: SEE BELOW ANNUAL RENT: EXPENSE SHARE: 15% --------- --- -- PARKING STALLS: AS LAID OUT BY LANDLORD ----------------------- TENANT: OWNER/LANDLORD: INTELLIPHONE, INC. ROBERT E. NELSON --------------------------- ------------------------------ 9724 10TH AVE. NORTH 6324 LAKELAND AVE. NORTH --------------------------- ------------------------------ PLYMOUTH, MINNESOTA 55441 BROOKLYN PARK, MINNESOTA 55428 --------------------------- ------------------------------ 1. LEASE. In consideration of these mutual agreements and provisions, Owner/Landlord hereby leases to Tenant and Tenant hereby leases from the Owner/Landlord the above unit(s) for Industrial Use, subject to all Federal, State or Local regulations, together with fixtures, for the above term. All parties listed as Tenant are herein referred to individually and collectively as Tenant, respectively. 2. RENT. a. Tenant shall pay to Owner/Landlord, in advance, the above monthly rent on the first day of each month. The first month's rent shall be be paid upon execution of this Lease, receipt of which is hereby acknowledged. RENT BREAKDOWN FOR THREE YEARS JUNE 1 1997 THRU MAY 31, 1998 $3,524.00 PER MONTH JUNE 1 1998 THRU MAY 31, 1999 $3,675.00 PER MONTH JUNE 1 1999 THRU MAY 31, 2000 $3,859.00 PER MONTH TENANT TO HAVE TWO ONE YEAR OPTIONS WITH 5% INCREASE PER YEAR IF DESIRED AND 90 DAYS NOTICE TO LANDLORD PRIOR TO LEASE END. LANDLORD WILL BILL TENANT 15% OF SEWER AND WATER BILL MONTHLY. PARKING STALLS AND NEW LOADING DOCK DOOR ON EAST WALL NEED TO BE LAID OUT BY LANDLORD SO NO PARKING OR TRAFFIC FLOW WILL BE CREATED. LANDLORD TO INSTALL DOOR ON EAST WALL COMPLETE AT HIS EXPENSE. LANDLORD WILL ALSO INSTALL OPENING ON SECOND LEVEL AT HIS EXPENSE. TENANT MAY OCCUPY PREMISES AS SOON AS LANDLORD HAS MADE IMPROVEMENTS AND UPON SECURITY DEPOSIT BEING MADE AND UTILITYS BEING TRANSFERRED AND INSURANCE CERTIFICATE TO LANDLORD. 3. SECURITY DEPOSIT. Upon the date hereof, the Tenant shall pay to Owner/Landlord an amount equal to one (1) month's rent as a Security Deposit to guarantee the performance of all the terms of this Lease, and the payment of rent. Upon the occurrence of any default by Tenant, Owner/Landlord may use said Security Deposit to the extent necessary to make good any arrearages of rent or any other expense. Any remaining balance of said Security Deposit shall be returned to Tenant upon compliance with terms herein and acceptance of the vacated premises by Owner/Landlord. Tenant understands that its liability is not limited to the amount of the Security Deposit and its use by Owner/Landlord shall not constitute a waiver, but is in addition to Owner/Landlord's other remedies under this Lease and law. Receipt of said Security Deposit is hereby acknowledged. 4. OCCUPANCY. Owner/Landlord agrees to deliver the unit(s) in a safe, broom clean and useable condition, in compliance with all applicable building codes. In the event Tenant is prevented from occupying the unit(s) at the start of the above term due to delays by Owner/Landlord, the rent shall be abated for each day occupancy is delayed. 5. UTILITIES. The Tenant shall pay for all utilities, including gas, electricity, water and telephone service for its unit(s) during the term of this Lease. 6. STRUCTURAL MAINTENANCE. The Owner/Landlord shall, at its expense, keep the structural parts of the building in good repair including the exterior walls, roof, floor, foundation, and interior columns, except that the Owner/Landlord shall not be responsible for repairs caused by the fault or negligence of the Tenant, its employees, or invitees. 7. INTERIOR MAINTENANCE. Tenant shall be responsible for the interior maintenance and repair of the premises, including entrance doors, overhead warehouse doors, heating, plumbing, electrical and mechanical fixtures and equipment, replacement of all glass broken and expendable. Tenant further agrees to keep the premises in as good a condition as when turned over to it, reasonable wear and tear and the elements excepted. SEE ADDENDUM 8. ALTERATIONS. No interior alterations, connection, painting or decorating of a permanent nature may be done to the unit(s) without written approval of Owner/Landlord. Tenant agrees that all such approved work shall be done in a workmanlike manner and in conformance with applicable building codes; that no liens shall attach to the premises by reason thereof; and that the premises shall be restored to their original condition by the Tenant prior to the expiration of this Lease. Failure to remove fixtures and equipment shall constitute abandonment to the Owner/Landlord who may remove said fixtures and equipment and restore the premises to their original condition, all at Tenant's expense. APPROVAL WILL NOT BE UNREASONABLY WITHHELD. 9. INSURANCE. Owner/Landlord shall maintain, at its own expense, fire and extended coverage insurance on the property. It is understood that the Owner/Landlord and Tenant shall look solely to their respective insuring agents in the event of casualty. Tenant will maintain in force during the term of this Lease a contents and public liability insurance policy with Owner/Landlord named as co-insured. Said insurance shall afford protection of not less than $300,000.00 for injury or death, $300,000.00 for any one accident, and $100,000.00 for property damage. Tenant agrees to deliver to Owner/Landlord a certificate of insurance with a 10 day cancellation clause, prior to occupancy, with the Owner/Landlord named as an additional insured. Owner/Landlord will require each of its other Tenants to carry the same insurance on their contents and property and will not permit any practice by any Tenant that may cause an increase in the rate of insurance on the building without charging said increase to the causing Tenant for the benefit of all other Tenants. 10. LOSS PROTECTION. Unless the liability for damage or loss is caused by the negligence of Owner/Landlord, Owner/Landlord shall be held harmless by Tenant from any liability for damages to any person or property in or upon the leased premises or common areas, including the person or property of Tenant and its employees and all persons in the building at its or their invitation. All property kept, stored or maintained on the leased premises shall be so kept, stored or maintained at the sole risk of the Tenant. 11. FIXTURES AND EQUIPMENT. All fixtures and equipment considered necessary to the general operation and maintenance of the property, shall be the property of the Owner/Landlord, except that any "trade fixtures" provided by Tenant, at its own expense, shall remain the property of the Tenant and will be removed by Tenant upon termination of this Lease. The Tenant grants to the Owner/Landlord a lien upon all personal property of the Tenant on said premises to secure payment of the rent, and agrees that no such property shall be removed from said premises while any installment of rent is past due, and/or any other default existing under this Lease. 12. ACCESS. Owner/Landlord or its authorized agent, has the right to enter the unit(s) at any reasonable time to inspect, make repairs or alterations as needed, and three (3) months prior to the termination of this Lease to show the unit(s) to prospective Tenants, and to place on doors and windows appropriate notice that the premises are for rent. SEE ADDENDUM 13. LOCKS. No additional locks will be placed on any of the doors in the building without Owner/Landlord's prior written approval, and unless Owner/Landlord receives an access key to such locks. 14. STORAGE. PARAGRAPH #14 HAS BEEN DELETED. 15. SUBLETTING OR ASSIGNMENT. No subletting or other assignment by Tenant is allowed without written consent of Owner/Landlord, which consent shall not release the assigning party of any obligation or liability arising under the terms of this Lease. This Lease and the deposits shall be assignable by Owner/Landlord, provided the assignee assumes all of Owner/Landlord's obligations hereunder. 16. DEFAULT. A breach of this Lease shall exist if at any time during the term of this Lease Tenant shall: (a) Vacate said premises or default in the payment of rent or in the performance of any of these provisions; or (b) Shall make an assignment for the benefit of creditors; or (c) File or have filed against it, a petition for bankruptcy, or arrangement in settlement of liabilities, or reorganization. In such an event, Owner/Landlord is authorized to take possession of the unit(s), eject the Tenant, terminate this Lease and re-lease said premises, remove and sell all personal property and use all sums for rent and expenses then in arrears or past due. No such acts by the Owner/Landlord shall be construed as a waiver of Owner/Landlord's right to collect rent for the remainder of the term. Tenant agrees to reimburse Owner/Landlord for reasonable attorney's fees and costs for any proceedings necessary to enforce these terms. If the Tenant should default in any respect, Tenant confirms onto Owner/Landlord the statutory lien for rent and all statutory rights under the laws of the State of Minnesota. No forebearance by the Owner/Landlord to exercise any right accruing to the Owner/Landlord hereunder shall be construed as a waiver of any such rights. 17. IMPAIRMENT OF USE. In the event the demised premises shall be untenable or unfit for occupancy, in whole or in part by the total or partial destruction of the building by fire or other casualty, this Lease may, at the option of the Owner/Landlord, cease and terminate. Tenant shall have no claim against Owner/Landlord for the value of any unexpired term of said lease or for any damages. SEE ADDENDUM 18. CONDEMNATION. In the event that the whole or any part of the demised premises shall be acquired or condemned by eminent domain for any public or quasi-public use or purpose, then, in that event, this Lease, may at the option of the Owner/Landlord, cease and terminate, and Tenant shall have no claim against Owner/Landlord for the value of any unexpired term of this Lease or for any damages. 19. ACCEPTANCE OF LEASE BY MORTGAGEE. This Lease is subject to acceptance by Owner/Landlord's mortgagee and such acceptance is a condition precedent to such agreement becoming effective. Further, this Lease is subject to the terms and the liens of present and future mortgage deeds securing the premises. 20. ADDITIONAL AGREEMENTS (IF ANY). RULES AND REGULATIONS (For All Tenants) Tenant further agrees to be bound by and comply with the Rules and Regulations, as follows: a. TRASH. Each Tenant shall provide its own dumpster for trash and agrees not to leave or store any materials, litter or trash on the grounds or parking areas. b. DISTURBANCE. No noise or conduct shall be permitted at any time which will disturb or annoy other Tenants. c. PARKING. The use of parking shall be subject to Rules and Regulations as the Owner/Landlord may promulgate from time to time. Tenant agrees that it will not use more than its prescribed number of stalls at any one time, and will not use or permit the use by its employees of the parking area for the overnight storage of automobiles or other vehicles which would interfere with maintenance, snow removal, traffic flow or emergency vehicles. SEE ADDENDUM d. SIGNS. The Tenant shall not erect, place, or display or allow to be erected, placed, or displayed any lettering, sign, advertisement, awning, or other projection in or on the leased property or in or on the building of which it forms a part without the Owner/Landlord's written consent. Owner/Landlord has the sole right of approval relating, but not limiting to size, type, materials and location. e. FIXTURE MOVEMENT. Tenant agrees that any and all furniture, fixtures and goods will be moved by the Tenant whenever such moving is necessary for purposes of building repair and/or maintenance by Owner/Landlord. f. These Rules and Regulations may be added to or amended from time-to-time by the Owner/Landlord and such amendments will become effective immediately upon notification. SEE ADDENDUM Tenant has read and agrees to abide by all Rules and Regulations and acknowledges that any violation of any provision of this Lease, or Rules and Regulations constitutes a breach. IN WITNESS WHEREOF, the parties have caused this Lease to be signed by their proper officers and/or representatives and represent that the have the authority to bind same. OWNER/LANDLORD: TENANT: /s/ Robert E. Nelson INTELLIPHONE, INC. -------------------------- ----------------------------- ROBERT E. NELSON By: By: /s/ Melvin Graf ------------------------- -------------------------- Authorized Representative MELVIN GRAF Real Estate Broker Its: By: ------------------------- ----------------------- GUARANTEE The undersigned hereby guarantees the payment of rent and performance to this Lease. EX-10.3 10 EXHIBIT 10.3 1997 Incentive Compensation Plan (Bonus Plan) The 1997 bonus plan is tied to various company and individual performance objectives. President: Maximum Bonus is 40% of base salary: 50% based upon completion of I.P.O. 50% based upon achieving E.P.S. target, excluding additional 1997 acquisitions. Executive Vice President: Maximum bonus of 40% of base salary: 25% based upon achieving E.P.S. target, excluding additional 1997 acquisitions. 37.50% based upon rate of installations of new payphones in the Northwest. 37.50% based upon rate of installations of new payphones in the Midwest. Vice President and Chief Financial Officer: Maximum bonus of 40% of base salary: 25% based upon achieving E.P.S. target, excluding additional 1997 acquisitions. 50% based upon completion of I.P.O. 25% based upon number of acquisitions in 1997. Other Employees: At the discretion of the Board of Directors. EX-10.4 11 EXHIBIT 10.4 AMENDED AND RESTATED LOAN AGREEMENT Dated as of January 2, 1997 Intelliphone, Inc., a Minnesota corporation (the "Borrower"), located at 6801 Wayzata Boulevard, St. Louis Park, Minnesota 55426, and National City Bank of Minneapolis, a national banking association (the "Bank"), located at 651 Nicollet Mall, Minneapolis, Minnesota 55402-1611, agree as follows: ARTICLE I. DEFINITIONS Section 1.1 DEFINITIONS. As used in this Agreement the following terms shall have the following meanings (such meanings to be equally applicable to singular and plural forms of the terms defined): (a) "Affiliates" shall mean any of the following Persons: (i) any director, officer or employee of the Borrower; (ii) any person who, individually or with his immediate family, beneficially owns or holds 5% or more of voting interest of the Borrower; or (iii) any company in which any Person described above owns a 5% or greater equity interest; (b) "Base Rate" shall mean the rate established by the Bank from time to time as its base rate. (c) "Business Day" shall mean any day other than a Saturday, Sunday or a public holiday or the equivalent under the laws of the State of Minnesota or the United States of America. (d) "Debt" shall mean (i) indebtedness for borrowed money or for the deferred purchase price of property or services, (ii) obligations as lessee under leases which shall have been or should be, in accordance with generally accepted accounting principles, recorded as capital leases, (iii) obligations under direct or indirect guaranties in respect of, and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in clause (i) or (ii) above, and (iv) liabilities in respect of unfunded vested benefits under plans covered by Title IV of ERISA. (e) "Debt Service Coverage Ratio" for any time period shall mean a ratio the numerator of which is the sum of the Borrower's net income during that period plus interest, depreciation and income tax expense during that period and the denominator of which is the sum of interest expense during that period plus that portion of the principal of the Borrower's Debt coming due during that period. (f) "Event of Default" shall mean one of the events specified in Section 6.1. (g) "Loan Documents" shall mean this Agreement, the Note, the Security Agreement, the Guaranty and all other documents to be executed in connection with this Agreement. (h) "Loan Party" shall mean any Person obligated under any Loan Document. (i) "Note" shall mean the Note described in Section 2.2. (j) "Person" shall mean an individual, corporation, partnership, joint venture, trust or unincorporated organization or governmental agency or political subdivision thereof. 2 (k) "Subordinated Debt" shall mean Debt of the Borrower which is subordinated both as to principal and as to interest to the extent required by the Bank in accordance with a written subordination agreement executed by the holder of that Debt and delivered to the Bank. (l) "Subsidiary" shall mean any corporation of which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether or not at the time capital stock or any other class or classes of stock of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. (m) "Tangible Net Worth" shall mean the aggregate of the capital stock, paid in surplus, Subordinated Debt and retained earnings of the Borrower (excluding stock of the Borrower held by the Borrower), determined and computed in accordance with generally accepted accounting principles consistently applied from year to year, less the book value of all assets of the Borrower that would be treated as intangibles under generally accepted accounting principles including without limitation, such items as goodwill, trademarks, tradenames, service marks, copyrights, patents and licenses and less the book value of all obligations owed to the Borrower by any of its Affiliates. (n) "Total Liabilities" shall mean the aggregate of the liabilities of the Borrower determined and computed in accordance with generally accepted accounting principles consistently applied from year to year. Section 1.2 ACCOUNTING AND OTHER TERMS. All accounting terms not specifically defined in this Agreement shall be construed in accordance with generally accepted accounting 3 principles consistently applied as such principles may change from time to time. Other terms defined herein shall have the meanings ascribed to them herein. ARTICLE II. TERM LOAN Section 2.1 COMMITMENT FOR TERM LOAN. The Bank hereby lends to the Borrower, and the Borrower hereby borrows from the Bank, the amount of $3,000,000.00 (the "Term Loan"). Section 2.2 THE NOTE. The Term Loan shall be evidenced by a promissory note (the "Note") which is in substantially the form of Exhibit A attached hereto and is delivered to the Bank pursuant to Article III. Section 2.3 INTEREST AND PAYMENTS. The Borrower shall repay, and shall pay interest on, the aggregate unpaid principal amount of the Term Loan in accordance with the Note. All payments of principal, interest and fees under this Agreement shall be made when due to the Bank in immediately available funds. All computations of interest shall be made by the Bank on the basis of the actual number of days elapsed in a year of 360 days. Whenever any such payment shall be due on a non-Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall be included in the computation of interest or fees, as the case may be. The Bank is expressly authorized to charge any principal, interest or fee payment, when due, to Borrower's demand deposit account maintained at the Bank, or, if that account shall not contain sufficient funds, to any other account maintained by the Borrower at the Bank. Section 2.4 VOLUNTARY PREPAYMENT. The Borrower may prepay the Note in whole or in part; PROVIDED, HOWEVER, that each partial prepayment shall be in a principal amount of not less than $10,000.00; and PROVIDED FURTHER, HOWEVER, that any prepayment of the Notes shall be applied to principal installments of the Notes in the inverse order of their maturities. 4 Section 2.5. USE OF PROCEEDS. The proceeds of the Term Loan shall be used to refinance existing Debt at the Bank and to fund the acquisition of certain assets from Telco West. Section 2.6. FACILITY FEE. In consideration of the Term Loan, the Borrower agrees to pay to the Bank a facility fee in the amount of $21,490.00. This fee shall be paid in two installments of $10,745.00 each payable on the date of this Agreement and on May 1, 1997. ARTICLE III. CONDITIONS OF LENDING Section 3.1 CONDITIONS PRECEDENT TO TERM LOAN ADVANCE. The Bank shall have no obligation to make the Term Loan unless the Bank shall have received on or before the date of disbursement the following documents: (a) The Note, properly executed and delivered on behalf of the Borrower. (b) A security agreement (the "Security Agreement"), in a form acceptable to the Bank, properly executed and delivered on behalf of the Borrower, granting to the Bank a security interest in all of the Borrower's inventory, accounts, equipment, general intangibles and other property described therein as security for the performance of the Borrower's obligations under this Agreement and the Note, together with any UCC-1 Financing Statement or other document deemed necessary or desirable by the Bank to perfect the security interest granted by the Security Agreement. The Bank and the Borrower agree that the Security Agreement dated September 20, 1995, as amended on the date hereof, executed by the Borrower in favor of the Bank shall constitute the Security Agreement under this Agreement. 5 (c) A certified copy of the resolutions of the Board of Directors of the Borrower, approving the execution and delivery of the Loan Documents to which it is a party and approving all other matters contemplated by this Agreement. (d) A certificate by the Secretary or any Assistant Secretary of the Borrower certifying the names of the officer or officers of the Borrower authorized to sign the Loan Documents to which it is a party, together with a sample of the true signature of such officer. (e) A guaranty (the "Guaranty") of Gary S. Kohler, Jeffrey R. Paletz, Melvin W. Graf (collectively, the "Guarantor"), in a form satisfactory to the Bank, securing the Borrower's obligations under this Agreement and the Note. (f) Payment of the first installment of the fee required to be paid under Section 2.6. In addition, the Bank shall have no obligation to make the Term Loan if on or before the date of disbursement, any event has occurred and is continuing, or will result from such Term Loan, which constitutes an Event of Default or would constitute an Event of Default but for the requirement that notice be given or time elapse or both. ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.1 REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the Bank to make the Term Loan, the Borrower represents and warrants as follows: (a) EXISTENCE OF BORROWER. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the state indicated at the beginning of this Agreement. 6 (b) AUTHORITY TO EXECUTE. The execution, delivery and performance by the Borrower of the Loan Documents to which it is a party are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, do not and will not conflict with any provision of law or of the charter or bylaws of the Borrower or of any agreement or contractual restriction binding upon or affecting the Borrower or any of its property, and need no further shareholder or creditor consent. (c) BINDING OBLIGATION. This Agreement is, and the other Loan Documents when delivered hereunder will be, legal, valid and binding obligations of the Loan Parties enforceable against such Persons in accordance with their respective terms. (d) GOVERNMENTAL APPROVAL. No consent of, or filing with, any governmental authority is required on the part of any Loan Party in connection with the execution, delivery or performance of any Loan Documents. (e) FINANCIAL STATEMENTS. The audited financial statements of the Borrower as of December 31, 1995 and the unaudited financial statements as of November 30, 1996, copies of which have been furnished to the Bank, have been prepared in conformity with generally accepted accounting principles consistently applied and present fairly the financial condition of the Borrower as of such dates, and the results of the operations of the Borrower for the financial periods then ended, and since such dates, there has been no materially adverse change in such financial condition. (f) LITIGATION. No litigation or governmental proceeding is pending or threatened against the Borrower which may have a materially adverse effect on the financial condition or operations of the Borrower. (g) TITLE TO ASSETS. The Borrower has good and marketable title to all assets used in connection with its trades or businesses, and none of such assets is subject to 7 any mortgage, pledge, lien, security interest or encumbrance of any kind, except for current taxes not delinquent, and except as has been disclosed in writing to the Bank contemporaneously with this Agreement. (h) TAXES. The Borrower has filed all federal and state income and excess profits tax returns which are required to be filed, and has paid all taxes shown on such returns to be due and all other tax assessments received by it to the extent that such assessments have become due. (i) ERISA. No plan (as that term is defined in the Employee Retirement Income Security Act of 1974 ("ERISA")) of the Borrower (a "Plan") which is subject to Part 3 of Subtitle B of Title 1 of ERISA had an accumulated funding deficiency (as such term is defined in ERISA) as of the last day of the most recent fiscal year of such Plan ended prior to the date hereof, or would have had such an accumulated funding deficiency on such date if such year were the first year of such Plan, and no material liability to the Pension Benefit Guaranty Corporation has been, or is expected by the Borrower to be, incurred with respect to any such Plan. No Reportable Event (as defined in ERISA) has occurred and is continuing in respect to any such Plan. (j) DEFAULTS. The Borrower is not in default in the payment of principal or interest on any indebtedness for borrowed money and is not in default under any instrument or agreement under or subject to which any indebtedness for borrowed money has been issued, and no event has occurred and is continuing which, with or without the lapse of time or the giving of notice, or both, constitutes or would constitute an event of default under any such instrument or agreement or an Event of Default hereunder. 8 (k) SUBSIDIARIES. The Borrower has no Subsidiaries. (l) PATENTS TRADEMARKS, ETC. The Borrower has good and marketable title to all patents, trademarks, processes, copyrights, franchises and licenses title to which is necessary for the operation of the Borrower's businesses. (m) USE OF PROCEEDS FOR SECURITIES TRANSACTIONS. No proceeds of the Term Loan will be used to acquire any security in any transaction which is subject to Sections 13 and 14 of the Securities Exchange Act of 1934. (n) REGULATION U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of the Term Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. ARTICLE V. COVENANTS OF THE BORROWER Section 5.1 AFFIRMATIVE COVENANTS. So long as the Note shall remain unpaid, the Borrower will, unless the Bank shall give its prior written consent: (a) FINANCIAL REPORTING. Furnish to the Bank: (i) as soon as available and in any event within 30 days after the end of each month of each fiscal year of the Borrower, balance sheets of the Borrower as of the end of such month and statements of income and retained earnings of the Borrower for the period commencing at the end of the previous fiscal year and ending with the end of such month, certified by the chief financial officer of the Borrower; (ii) as soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, (A) a copy of the annual report for such year for the Borrower, containing financial statements for such year certified in a 9 manner acceptable to the Bank by independent public accountants acceptable to the Bank and (B) a budget and projections prepared by the Borrower in a form acceptable to the Bank for the following fiscal year; (iii) promptly upon the sending or filing thereof copies of all public reports issued by the Borrower to any of its security holders, to the Securities and Exchange Commission or to any national securities exchange; (iv) promptly upon the filing or receiving thereof, copies of all reports which the Borrower files under ERISA or which the Borrower receives from the Pension Benefit Guaranty Corporation if such report shows any material violation or potential violation by the Borrower of its obligations under ERISA; (v) such other information concerning the conditions or operations, financial or otherwise, of the Borrower as the Bank from time to time may reasonably request; (vi) by April 15 of each year, a signed personal financial statement of each Guarantor dated as of a date not earlier than the immediately preceding December 31; and (vii) within 45 days after the end of each quarter, a certificate of the Borrower listing all of the Borrower's customers as of the end of the quarter most recently ended and listing the cash receipts from the Borrower's 50 largest customers during that quarter. (b) VISITATION RIGHTS. At any reasonable time and from time to time, permit the Bank or any agents or representatives thereof, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Borrower, and to discuss the affairs, finances and accounts of the Borrower with any of its officers or directors. The Borrower will reimburse the Bank for its reasonable costs and expenses of conducting such periodic examinations. (c) NOTIFICATION OF DEFAULT, ETC. Notify the Bank as promptly as practicable (but in any event not later than 5 Business Days) after the Borrower obtains knowledge 10 of: (i) the occurrence of any event which constitutes an Event of Default or which would constitute an Event of Default with the passage of time or the giving of notice or both; or (ii) the commencement of any litigation or governmental proceedings of any type which could materially adversely affect the financial condition or business operations of the Borrower. (d) COMPLIANCE CERTIFICATE. At the time any financial statement is required to be provided to Bank under this Agreement, the Borrower will provide to Bank a certificate of the chief financial officer of the Borrower substantially in the form of Exhibit B attached hereto (appropriately completed). If that certificate shows that an Event of Default or any event which would constitute an Event of Default with the passage of time or the giving of notice or both, has occurred, the certificate shall state in reasonable detail the circumstances surrounding such event and action proposed by the Borrower to cure such event. (e) KEEPING OF FINANCIAL RECORDS AND BOOKS OF ACCOUNT. Maintain proper financial records in accordance with generally accepted accounting principles consistently applied which fully and correctly reflect all financial transactions and all assets and liabilities of the Borrower. (f) TANGIBLE NET WORTH. Maintain Tangible Net Worth of not less than the following amounts during the time periods indicated: -------------------------------------------------- PERIOD MINIMUM TANGIBLE NET WORTH -------------------------------------------------- From Completion of Telco West $1,500,000 Acquisition through June 29, 1997 -------------------------------------------------- June 30, 1997 through December 30, $2,000,000 1997 -------------------------------------------------- After December 30, 1997 $2,500,000 -------------------------------------------------- 11 Maintain at all times a ratio of Total Liabilities to Tangible Net Worth of not more than 2.0 to 1. (g) DEBT SERVICE COVERAGE RATIO. Maintain as of the end of each 12-month period measured as of the end of each month, a Debt Service Coverage Ratio of not less than 1.25 to 1. (h) SUBORDINATED DEBT. Maintain at all times Subordinated Debt of not less than $1,562,000 and comply with the terms of each subordination agreement executed in connection with Subordinated Debt. (i) MAINTENANCE OF INSURANCE. Maintain such insurance with reputable insurance carriers as is normally carried by companies engaged in similar businesses and owning similar property, and name the Bank as loss payee on all policies insuring personal property in which the Bank has a security interest and provide the Bank with certificates of insurance evidencing its status as a loss payee. The loss payee endorsement shall provide for payment to the Bank notwithstanding any acts or omissions of the Borrower and shall require notice to the Bank 30 days prior to the expiration or cancellation of the insurance. (j) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all of its properties, necessary or useful in the proper conduct of its business in good working order and condition, ordinary wear and tear excepted. (k) PAYMENT OF TAXES. Pay all taxes, assessments and governmental charges of any kind payable by it as such taxes, assessments and charges become due and before any penalty shall be imposed, except as the Borrower shall contest in good faith and by appropriate proceedings providing such reserves as are required by generally accepted accounting principles. 12 (l) COMPLIANCE WITH ERISA. Cause each benefits Plan to comply and be administered in accordance with those provisions of ERISA which are applicable to such Plan. (m) MAINTENANCE OF ACCOUNTS. Maintain its corporate bank accounts at the Bank except for such incidental accounts that reasonable business judgment requires to be maintained elsewhere, and either (A) keep collected demand deposit balances in such accounts in the amount necessary to compensate the Bank for applicable activity charges in such accounts, as calculated by the Bank and applied to such balances in a manner consistent with all similar accounts or (B) pay such applicable activity charges. (n) PRESERVATION OF CORPORATE EXISTENCE, ETC. Preserve and maintain its corporate existence, rights, franchises and privileges in the jurisdiction of its incorporation, and qualify and remain qualified, as a foreign corporation in each jurisdiction in which such qualification is necessary or desirable in view of its business and operations or the ownership of its properties. Section 5.2 NEGATIVE COVENANTS. So long as the Note shall remain unpaid, the Borrower will not, unless the Bank shall give its prior written consent: (a) LIENS. Create or suffer to exist any mortgage, pledge, lien, security interest or other encumbrance with respect to any assets now owned or hereafter acquired by the Borrower except those encumbrances made in favor of the Bank and existing or future subordinated encumbrances held by Serene Paletz, Ronald Gross, Elaine Weitzman and Telco West. (b) DEBT. Create or suffer to exist any Debt except the Debt under this Agreement or the Note, Subordinated Debt and other Debt secured by liens permitted under Section 5.2(a). 13 (c) GUARANTIES, ETC. Assume, guarantee, endorse or otherwise become liable upon the obligation of any Person except by endorsement of negotiable instruments for collection in the ordinary course of business. (d) MERGER, ETC. Merge or consolidate with any other Person; sell, transfer, convey, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or a substantial portion of its assets (whether now owned or hereafter acquired) to any other Person. (e) COMPENSATION. Pay a salary or other compensation to any of its officers, directors, employees or stockholders in an amount which is in excess of a reasonable salary or other compensation paid for similar services by similar businesses. (f) TRANSACTIONS WITH AFFILIATES. Engage in any transaction (including, without limitation, loans or financial accommodations of any kind) with any Affiliate, provided that such transactions are permitted if they are on terms no less favorable to the Borrower than would be obtainable if no such relationship existed. (g) INVESTMENTS IN OTHER PERSONS. Make any loan or advance to any Person; or purchase or otherwise acquire the capital stock, assets, or obligations of, or any interest in, any other Person other than (i) readily marketable direct obligations of the United States of America, (ii) certificates of time deposits issued by commercial banks of recognized standing operating in the United States of America, (iii) prepayments of lease obligations for the placement of telephone units in the ordinary course of business not in excess of $100,000.00 outstanding at any one time for any one customer and (iv) advances to employees in the ordinary course of business. (h) CHANGE IN NATURE OF BUSINESS. Make any material change in the nature of the business of the Borrower, taken as a whole, as carried on at the date hereof. 14 (i) DIVIDENDS, ETC. Purchase or redeem any of its capital stock, declare or pay any dividends (other than stock dividends) thereon, make any cash or property distribution to shareholders, or set aside any funds for such purpose, except for cash dividends and distributions in any fiscal quarter not to exceed 2 cents for each share of common stock outstanding in that fiscal quarter. ARTICLE VI. DEFAULT Section 6.1 EVENTS OF DEFAULT. "Events of Default" in this Agreement means any of the following events: (a) Failure of the Borrower to pay the principal of the Note when due or, if payable on demand, upon demand; (b) Failure of the Borrower to pay any interest or fees required to be paid hereunder or under the Note when due; (c) Any representation or warranty made by, or on behalf of, any Loan Party in, or pursuant to, any Loan Document shall prove to have been incorrect in any material respect when made; (d) Default in performance of any other covenant or agreement of any Loan Party in, or pursuant to, any Loan Document and continuance of such default or breach for a period of 30 days after written notice thereof to such Person by the Bank; (e) Any Loan Party shall generally not pay its or his debts as such debts become due, or shall admit in writing its or his inability to pay its or his debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Loan Party seeking to adjudicate it or him a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, 15 custodianship, protection, relief, or composition of it or him or its or his debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief, or the appointment of a receiver, custodian, trustee, or other similar official for it or him or for any substantial part of its or his property; or any Loan Party shall take any corporate action to authorize any of the actions set forth above in this subsection; and in the case of a proceeding of the type described in this paragraph commenced against any Loan Party, that proceeding shall not be dismissed within 60 days or that Loan Party shall consent to that proceeding; (f) The Borrower shall fail to pay any Debt (but excluding Debt evidenced by the Note) of the Borrower, or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other default under any agreement or instrument relating to any such Debt, or any other event, shall occur and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such default or event is to accelerate, or to permit the acceleration of, the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid (other than by a regularly scheduled required prepayment), prior to the stated maturity thereof; (g) Any guaranty or any third party security interest securing any indebtedness of the Borrower to the Bank shall be repudiated or revoked, or purported to be repudiated or revoked; 16 (h) The entry against any Loan Party of a final judgment, decree or order for the payment of money in excess of $50,000.00 and the continuance of such judgment, decree or order unsatisfied for a period of 30 days without a stay of execution; (i) Any Reportable Event (as defined in ERISA) shall have occurred with respect to a Plan and continue for 30 days; or any Plan shall have been terminated by the Borrower not in compliance with ERISA, or a trustee shall have been appointed by a court to administer any Plan, or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; (j) The Bank shall at any time have reasonable grounds to believe that the prospect of due and punctual payment of any of the obligations of the Borrower now or hereafter existing under, or pursuant to, this Agreement is impaired. Section 6.2 RIGHTS AND REMEDIES. If any Event of Default shall occur and be continuing, the Bank may exercise any or all of the following rights and remedies: (a) Declare the Note, all interest thereon, and all other obligations under, or pursuant to, any Loan Document to be immediately due and payable, and upon such declaration such Note, interest and other obligations shall immediately be due and payable, without presentment, demand, protest or any notice of any kind, all of which are expressly waived; (b) Exercise any right or remedy under the Security Agreement, or any other right or remedy of a secured party under the Uniform Commercial Code as in effect in Minnesota or in any other State in which any collateral under the Security Agreement is located; 17 (c) Exercise any other right or remedy available to the Bank at law or in equity. ARTICLE VII. MISCELLANEOUS Section 7.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of the Bank in exercising any right or remedy under, or pursuant to, any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy or power preclude other or further exercise thereof, or the exercise of any other right, remedy or power. The remedies in the Loan Documents are cumulative and are not exclusive of any remedies provided by law. Section 7.2 AMENDMENTS AND WAIVERS. No amendment or waiver of any provision of any Loan Document shall be effective unless such amendment or waiver is in writing and is signed by the Bank, and such amendment or waiver shall be effective only in the specific instance and for the specific purpose for which it was given. Section 7.3 NOTICES, ETC. All notices and other communications provided for hereunder shall be in writing (including telecopier communication) and mailed or telecopied or delivered, if to the Borrower, at its address stated in the preamble hereof, Attention: Jack Kohler; if to the Bank, at its address stated in the preamble hereof, Attention: Nancy Madsen; or, as to each party, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed or telecopied, be effective when deposited in the mails or transmitted by telecopier, respectively, addressed as aforesaid, except that notices to the Bank pursuant to the provisions of Article II shall not be effective until received by the Bank. 18 Section 7.4 COSTS AND EXPENSES. The Borrower agrees to pay on demand all costs and expenses of the Bank in connection with the preparation of the Loan Documents, including reasonable attorneys fees and legal expenses, as well as all costs and expenses of the Bank, including reasonable attorneys fees and expenses, in connection with the administration and enforcement of the Loan Documents (whether suit is commenced or not). Section 7.5 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of any Event of Default the Bank is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Bank to or for the credit or the account of the Borrower or any Guarantor against any and all of the obligations of the Borrower now or hereafter existing under any Loan Document, irrespective of whether or not the Bank shall have made any demand under any Loan Document and although such obligations may be unmatured. The Bank agrees promptly to notify the Borrower after any such set-off and application, provided that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Bank under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Bank may have. Section 7.6 GOVERNING LAW. All Loan Documents shall be governed by the laws of the State of Minnesota. Any term used in this Agreement and not otherwise defined shall have the definition given that term in the Uniform Commercial Code as in effect in the State of Minnesota from time to time. If any term in this Agreement shall be held to be illegal or unenforceable, the remaining portions of this Agreement shall not be affected, and this Agreement shall be construed and enforced as if this Agreement did not contain the term held to be illegal or unenforceable. The Borrower hereby irrevocably submits to the jurisdiction of 19 the Minnesota District Court, Fourth District, and the Federal District Court, District of Minnesota, Fourth Division, over any action or proceeding arising out of or relating to this Agreement and agrees that all claims in respect of such action or proceeding may be heard and determined in any such court. Section 7.7 BINDING EFFECT; ASSIGNMENT. All Loan Documents shall be binding upon and inure to the benefit of the Loan Parties and the Bank and their respective successors and assigns. No Loan Party shall have the right to assign its rights or interest under any such agreement without the prior written consent of the Bank. Section 7.8 AMENDED AND RESTATED AGREEMENT. This Agreement is a complete amendment and restatement of a Revolving Credit Agreement (the "Prior Agreement") dated as of September 20, 1995, as amended, between the Borrower and the Bank. The Prior Agreement remains in effect as to all transactions which occurred prior to the date hereof. In the event of a conflict between the terms of this Agreement and the terms of the Prior Agreement, the terms of this Agreement shall govern. 20 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the date first above written. INTELLIPHONE, INC. By /s/ Jeffrey R. Paletz ---------------------------------- Its President ----------------------------- NATIONAL CITY BANK OF MINNEAPOLIS By /s/ Nancy G. Madsen ---------------------------------- Its AVP ----------------------------- 21 EXHIBIT A PROMISSORY NOTE $3,000,000.00 Dated: January 2, 1997 For value received, Intelliphone, Inc., a Minnesota corporation (the "Borrower") promises to pay to the order of National City Bank of Minneapolis (the "Bank"), at its offices in Minneapolis, Minnesota, in lawful money of the United States of America, the principal amount of Three Million and no/100 Dollars ($3,000,000.00); together with interest on any and all principal amounts remaining unpaid hereon from the date of this Note until said principal amounts are fully paid at a fluctuating annual rate equal to 2.0% above the rate of interest established by the Bank from time to time as its base rate (the "Base Rate"). Principal and interest shall be due and payable on the 15th day of each calendar month starting on February 15, 1997. The monthly payment shall be $50,000.00 in February, March, April, June, July, September, October and December of 1997, $100,000.00 in May and August of 1997 and $150,000.00 in November of 1997. All unpaid principal and interest shall come due and payable in full on January 15, 1998. Each change in the fluctuating interest rate shall take effect simultaneously with the corresponding change in the Base Rate. This Note is the Note referred to in, and is entitled to the benefits of, the Amended and Restated Loan Agreement dated as of the date hereof (the "Loan Agreement") between the Borrower and the Bank, which Loan Agreement, among other things, contains provisions for the acceleration of the maturity of this Note upon the happening of certain stated events and also for prepayments of the principal amount due under this Note upon stated terms and conditions. This Note is a renewal and replacement of three promissory notes from the Borrower to the Bank in the principal amount of $300,000.00 dated as of September 20, 1995, in the A-1 principal amount of $500,000.00 dated as of September 20, 1995 and in the principal amount of $200,000.00 dated as of December 18, 1995, respectively, which prior notes remain partially unpaid but the principal balances of which have been incorporated into this Note. Intelliphone, Inc. By ------------------------------------ Its -------------------------------- A-2 EXHIBIT B FORM OF COMPLIANCE CERTIFICATE I, the _________________________ of Intelliphone, Inc. (the "Borrower"), hereby provide this Compliance Certificate in accordance with Section 5.1(d) of the Amended and Restated Loan Agreement (the "Agreement") dated as of January 2, 1997 between the Borrower and National City Bank of Minneapolis. I certify that as of the date hereof: (1) The representations and warranties of the Borrower contained in Article IV of the Agreement are correct as though made on the date hereof. (2) No event has occurred and is continuing which constitutes an Event of Default under the Agreement or would constitute and Event of Default but for the requirement that notice be given or time elapse or both. I further certify that as of _____________________, 19__: (1) Tangible Net Worth as defined in the Agreement was $_________________. (2) The ratio of Total Liabilities to Tangible Net Worth as defined in the Agreement was _______________________. (3) The Debt Service Coverage Ratio as defined in the Agreement was ________________. (4) Subordinated Debt as defined in the Agreement was $__________________. Dated: _______________________________ __________________________________ Title: __________________________ B-1 EX-10.5 12 EXHIBIT 10.5 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE 544-1260 FAX 544-1281 PROMISSORY NOTE April 10, 1995 $50,000.00 Saint Louis Park, Minnesota FOR VALUE RECEIVED, Intelliphone, Inc., a Minnesota Corporation whose principle place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of Serene Paletz of 4740 S. Ocean Blvd. Apt. 814, Highland Beach, Florida Fifty Thousand ($50,000.00) Dollars with interest from the above date at the rate of twelve percent (12%) per annum. Payments will start on May 10, 1995. For the first 24 months, payments will be $500 interest only. Over the next 24 months Intelliphone will fully amortize this note; principal and interest payments to be $2,353.67 monthly. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler ------------------------------- INTELLIPHONE, INC. Jack Kohler - Chief Financial Officer EX-10.6 13 EXHIBIT 10.6 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE 544-1260 FAX 544-1281 PROMISSORY NOTE April 18, 1995 $25,000.00 Saint Louis Park, Minnesota FOR VALUE RECEIVED, Intelliphone, Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of William Opsahl of 5075 Norwest Center, Minneapolis, Minnesota Twenty Five Thousand ($25,000.00) Dollars with interest from the above date at the rate of twelve percent (12%) per annum. Monthly interest payments of $250.00 will start on May 18, 1995. The entire principal amount will be due September 30, 1997 and will not be repaid earlier without the written prior approval of both parties. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler ------------------------------- INTELLIPHONE, INC. Jack Kohler - Chief Financial Officer EX-10.7 14 EXHIBIT 10.7 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINN. 55426 PHONE (612) 544-1260 FAX (612) 544-1281 PROMISSORY NOTE $35,000.00 November 3, 1995 In place of our promissory note for $35,000 dated May 3, 1995, Intelliphone, Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of Miriam Graf of 13104 Sheffield Curve, Minnetonka, Minnesota Thirty-five Thousand ($35,000.00) Dollars with interest from the above date at the rate of twelve percent (12%) per annum. Monthly payments of $350 for interest only will start on December 3, 1995. The entire principal amount will be due two years from the above date. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler ------------------------------- INTELLIPHONE, INC. Jack Kohler Chief Financial Officer EX-10.8 15 EXHIBIT 10.8 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE 544-1260 FAX 544-1281 PROMISSORY NOTE December 2, 1995 $25,000.00 Saint Louis Park, Minnesota In return for our note dated December 2, 1993, Intelliphone, Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order to William Opsahl of 5075 Norwest Center, Minneapolis, Minnesota Twenty Five Thousand ($25,000.00) Dollars with interest from the date hereinabove set forth at the rate of twelve percent (12%) per annum. Monthly interest payments of $250.00 will start on January 2, 1996. The entire principal amount will be due December 2, 1997 and will not be repaid earlier without the written prior approval of both parties. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler ---------------------------------------- INTELLIPHONE, INC. Jack Kohler - Chief Financial Officer EX-10.9 16 EXHIBIT 10.9 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE (612) 544-1260 FAX (612) 544-1281 PROMISSORY NOTE $50,000.00 December 7, 1995 In place of our promissory note for $75,000 and in consideration for receiving 5,000 shares of Intelliphone common stock at $5.00 per share, Intelliphone Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of Ronald M. Gross and Elaine Weitzman of 4606 West 28th Street, St. Louis Park, Minnesota Fifty Thousand ($50,000.00) Dollars with interest at the rate of twelve percent (12%) per annum. Monthly payments of $500 for interest only will start on January 7, 1996. The entire principal will be due two years from the above date. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler ------------------------------- INTELLIPHONE, INC. Jack Kohler Chief Financial Officer EX-10.10 17 EXHIBIT 10.10 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE (612) 544-1260 FAX (612) 544-1281 PROMISSORY NOTE $64,669.45 July 7, 1996 In place of our promissory note for $54,690.63 dated February 7, 1994 and accumulated interest totaling $9,978.82 Intelliphone, Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of William B. Topp and Normal Topp of PO Box 191558 San Juan, Puerto Rico 00919 Sixty-four Thousand Six Hundred Sixty-nine dollars and 45 cents ($64,669.45) plus interest from the above date at the rate of twelve percent (12%) per annum compounded quarterly. Note holder may draw upon the accumulating interest as needed. The entire principal amount plus the unpaid accumulated interest will be due on February 7, 1998. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler --------------------- INTELLIPHONE, INC. Jack Kohler Chief Financial Officer EX-10.11 18 EXHIBIT 10.11 INTELLIPHONE, INC. 6801 WAYZATA BLVD. ST. LOUIS PARK, MINNESOTA 55426 PHONE (612) 544-1260 FAX (612) 544-1281 PROMISSORY NOTE $50,000.00 July 27, 1996 In place of our promissory note for $50,000 dated September 27, 1994, Intelliphone, Inc., a Minnesota Corporation whose principal place of business is located at 6801 Wayzata Blvd., St. Louis Park, Minnesota, 55426 promises to pay to the order of The Topp Family Trust, PO Box 191558 San Juan, Puerto Rico 00919 Fifty Thousand ($50,000.00) Dollars with interest from the above date at the rate of twelve percent (12%) per annum. Monthly payments of $500 for interest only will start on August 27, 1996. The entire principal will be due September 27, 1997. In the event of a failure to make payment when due, the undersigned shall be liable for all costs of collection including reasonable attorney fees. /s/ Jack Kohler --------------------- INTELLIPHONE, INC. Jack Kohler Chief Financial Officer EX-10.12 19 EXHIBIT 10.12 AGREEMENT FOR SALE AND PURCHASE OF BUSINESS ASSETS DATE: JANUARY 2, 1997 PARTIES: TELCO WEST, INC. AN OREGON CORPORATION ("SELLER") 15838 S.W. Upper Boones Ferry Rd. Lake Oswego, Oregon 97035 INTELLIPHONE, INC. a Minnesota corporation ("Buyer") 6801 Wayzata Blvd. St. Louis Park, Minnesota 55426 RECITALS: A. Seller operates a business primarily engaged in providing and servicing public pay telephones in several Western states. Seller owns equipment, contract rights, leasehold interests, tools, inventories, account receivables, operating accounts, prepaid insurance, advertising and sales materials and miscellaneous assets used in connection with the operation of its business. B. Buyer desires to acquire site contracts for 1,019 payphones located in the Colorado, Idaho, Oregon, Washington and Wyoming and all equipment located at the respective sites identified in Exhibit #1 and #2 hereto together with all telephones, computer boards, telephone enclosures, cash contents of the pay telephone at 11:59 p.m. on January 1, 1997, permits, contract rights and intangibles related thereto including all good will and rights associated the potential continuation of the contracts after the expiration of the term of the site agreement contracts and Seller desires to sell all of such assets to Buyer. AGREEMENT: SECTION 1. ASSETS PURCHASED. 1.1 ASSETS PURCHASED. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, on the terms and conditions set forth in this Agreement, the following assets ("Assets"): 1.1.1 The option to purchase from Berthel Fisher "Site Agreement" contents and any modifications thereto described on Exhibit #1 attached hereto and made a part hereof by reference, together with all equipment located at the sites identified in the contracts, including telephones, computer boards used in relation to the telephones, telephone enclosures, the cash contents of any pay telephones at 11:59 p.m. upon January 1, 1997 , contract rights identified therein and any intangibles related thereto. The options to purchase from Berthel Fisher shall be exercised by Buyer for the following consideration which shall be paid in cash to Berthel Fisher at closing: Lease-Option Price to be Applicable Pre-Paid Lease/Option Number Paid to Berthel Fisher Sales Tax Property Taxes - ------------------- ---------------------- ---------- -------------- 07676001 - 000 $ 303,919.08 $ 8,076.24 $ 8,108.99 0747601 - 001 126,490.78 668.43 2,639.06 ---------- -------- -------- Total $ 430,409.86 $ 8,744.67 $10,748.05 The sums stated above include sales tax applicable to the equipment purchased by Buyer directly from Berthel Fisher. Buyer shall pay to Berthel Fisher the applicable sales tax and pre-paid property taxes as stated above. Seller guarantees delivery unto Buyer of title to the "Site Agreement" contents and equipment by Berthel Fisher. 1.1.2 All of the Seller's right, title and interest in the "Site Agreement" contracts and any modifications thereto described on Exhibit #2 attached hereto and made a part hereof by reference, together with all equipment located at the sites identified in the contracts, including telephones, computer boards used in relation to the telephones, telephone enclosures, the cash contents of any pay telephones at 11:59 p.m. upon January 1, 1997 , contract rights identified therein and any intangibles related thereto. 1.1.3 Seller represents that there are not less than 1,019 pay telephones with "Site Agreements" which are being purchased by buyer either directly from Seller or by exercise of the option to purchase conveyed by Seller to Buyer. In the event the number of pay telephones is less than 1015 at closing, the purchase price set forth herein will be reduced accordingly at the rate of $3300 per pay telephone not delivered. Further, during the two year period following closing, if any of the approximately 32 telephones located in various "Shari's" restaurants are removed (which notice of intent has been given to Seller), then the purchase price due hereunder shall be further reduced at the rate of $2,000 for each telephone reduced in the first year and $1,000 for each phone removed in the second year. Buyer may deduct any amounts due to such removals from the next monthly payment due to Seller under the promissory note described at Section 3.2.1. Except for the "Shari's" restaurant locations there shall be no reduction for cancellation of any "Site Agreements" if at lease 1015 pay telephones were delivered upon the date of closing. 1.1.4 All manuals, warranties, sales materials and telephone books at the identified sites. 1.1.5 All inventories of Seller's pay telephone equipment, computer systems related only to pay telephones, spare parts, materials and supplies used by Seller in the ordinary course of Seller's business to maintain, service, repair and replace the equipment located at the site locations identified in the above paragraphs. Excluded from the equipment sold are 27 new telephone enclosures, the new copier, fax machine and equipment associated with Seller's presubscription or hotel/motel business. 1.1.6 Seller's goodwill for pay telephone operations within the states identified at B. above, and all files or other business records to handle accounts identified above. 1.1.7 All warranties, contract rights, claims, licenses, prepaid insurance, and renewal rights, rights to receive income or to continue contracts, options, grants and all assets of Seller associated with the equipment listed on Exhibits #1 and #2 of whatever kind, whether known or unknown (except as specifically excluded), are included as part of this sale. 1.1.8 Seven (7) pickup trucks described by year, make, model, V.I.N., and location at the time of closing on Exhibit #3 attached hereto and as made a part hereof by reference, all trucks are sold in "AS-IS" and "WHERE-IS" condition. Buyer shall insure the trucks effective at 11:59 p.m. upon January 1, 1997 , at which time, Seller will cancel insurance on said vehicles. Any refunds on insurance shall belong to Seller. 1.1.9 The tradename "Telco Northwest" and any associated logos or servicemarks except the trade name "Telco West". 1.1.10 Twenty-Five (25) uninstalled payphones. 1.2 EXCLUDED ASSETS. Excluded from this sale and purchase are other telephone equipment and site location agreements owned by Seller and not listed on Exhibits #1 and #2, all of Seller's accounts for hotel and motel long distance telephones, all pre-subscription agreements for LEC-owned payphones wherever located and Seller's accounts receivable, collected cash on hand, notes receivable, prepaid accounts, and the following: 1.2.1 All of Seller's cash on hand, bank accounts and operational accounts of January 1, 1997 , except for the cash deposited in all payphones being purchased at 11:59 p.m. on January 1, 1997, 1.2.2 Any prepaid taxes (personal property taxes on equipment sold to be pro rated at closing), tax deposits and prepaid rent, 1.2.3 No licenses or permits required to own and/or operate the equipment are being purchased by the Buyer. Buyer shall be solely responsible for obtaining all necessary permits and licenses as may be required to own and operate the telephone equipment, however Seller agrees to cooperate and to execute any documents which may be necessary to effect the transfer or assignment of any permits and licenses required by regulatory or government agencies. 1.2.4 Any claims for dial around compensation for Seller's pay telephones in continuous operation prior to January 1, 1997. 1.2.5 Any proceeds on account of litigation brought by Seller against Fearless Farris Stinker Stations, Inc. and/or Mountain Phone Company, Inc. in the District Court for the State of Idaho, Ada County, Case #CVOC9604405D. 1.2.6 Office equipment and furnishings used by Seller in relation to Seller's business in presubscription, hotel/motel business. 1.2.7 Any proceeds on account of litigation brought by Seller against U.S. West in Federal District Court, Seattle, Washington, Case #C951622WD. 1.2.8 Any motor vehicles owned by Seller except those sold to Buyer and identified in Exhibit #3. SECTION 2. LIABILITIES ASSUMED AND NOT ASSUMED 2.1 BUYER'S LIABILITIES ASSUMED. 2.1.1 CONTRACT OBLIGATIONS. Buyer shall accept the assignment and assume responsibility for the obligations of Seller under the contracts identified in Section 1.1.1 and Section 1.1.2. 2.2 BUYER'S LIABILITIES NOT ASSUMED. 2.2.1 CORPORATE OBLIGATIONS. Notwithstanding that Buyer is acquiring the trade name "Telco Northwest", it is not assuming any liabilities of Seller or "Telco Northwest" except for those described at Section 2.1.1 above. 2.2.2 EMPLOYEES. Buyer shall have no responsibility to hire or pay any employee or independent contractor of Seller compensation, sales commissions, sick pay, retirement or other compensation, except, that if Buyer installs telephones under contracts which have been assigned to Buyer, Buyer shall be responsible for any commission due to any person by reason of said installation. Should Buyer elect to hire former employees of Seller, Buyer shall be responsible for any employment compensation offered by Buyer subsequent to January 1, 1997 . 2.2.3 TRANSFER TAXES. Buyer shall pay to Seller at closing all transfer taxes and sales taxes arising from this sale as follows: State # of Telephones Tax Rate Tax ----- --------------- -------- --- Oregon 51 0% $ 0 Washington 35 6.5% $ 6,015.10 Idaho 63 5.0% $ 8,328.60 Colorado 21 4.0% $ 2,220.96 Wyoming 3 6.0% $ 475.92 TOTAL $ 17,040.58 and upon collection of said taxes, Seller shall pay said sales and excise taxes arising from this sale. Buyer acknowledges that all assets purchased herein except otherwise identified are being purchased in Oregon for use within the State of Oregon. Buyer shall pay to Berthel Fisher the applicable excise and sales taxes identified by Berthel Fisher for equipment being purchased by Buyer directly from Berthel Fisher in exercise of the option to purchase identified in section 1.1.1. Buyer shall reimburse Seller for prepaid personal property taxes for equipment sold to Buyer in the sum of $442.50 to be paid at closing. 2.2.4 LEASED OFFICE. Buyer has agreed to sublease from Seller approximately 1/2 of the office space currently occupied by Seller at 15838 S.W. Upper Boones Ferry Rd., Lake Oswego, Oregon on a month-to-month basis for base rent equal to one-half of the base rent paid by Seller to Seller's landlord. Rent shall be paid in advance. 2.2.5 GENERAL LIMITS. Except as set forth herein Buyer shall not be liable for any indebtedness of Seller. Buyer assumes no liabilities except as stated above. 2.3 SELLER'S OBLIGATIONS. 2.3.2 INCOME TAXES. Seller shall pay any State, Federal or Local income taxes of Seller after application of all loss carry forwards, credits, deductions or other tax offsets available to Seller and shall be responsible for the cost of preparation of said tax returns and for all accounting fees associated with the preparation of said tax returns. 2.2.3 COMMISSIONS AND CONTRACT OBLIGATIONS PAYABLE. Seller shall remain liable for and shall pay when due any and all obligations arising from payments and/or commissions due to customers under the "Pay Telephone Agreements", "Customer Service Agreements" and "Site Agreements" through January 1, 1997 and shall further pay all telephone bills and the cost of long distance or other telephone service charges calculated through January 1, 1997 . Buyer shall have the right but not the obligation to cure any of Seller's defaults under such agreements and to set off against its obligations under the note described at Section 3.1.1 any amounts paid to so cure Seller's defaults. SECTION 3. PURCHASE PRICE FOR ASSETS The purchase price for the assets is Two Million Nine Hundred Thirty-Five Thousand Five Hundred Ninety-Two and 00/100 Dollars ($2,935,592.00) plus interest at the rate of 10% per annum from January 1, 1997 until paid plus payment to Berthel Fisher as the sum due to them to exercise Seller's option to purchase the contracts and equipment as specified in Section 1.1.1. Security deposits paid by Seller to Berthel Fisher shall be returned to Seller and are not included in the purchase price. Seller accepts the consideration as full and sufficient consideration for the assets identified above. The purchase price shall be paid upon execution of this Agreement at closing in the following manner: 3.1 Upon the execution of this Agreement, Buyer shall pay Berthel Fisher the sum of $430,409.86 plus recalculated lease-option charges to update the balance due from the January 1, 1997 calculation date to the date of payment plus applicable sales tax in the sum of $8,744.67 plus pre-paid personal property taxes in the sum of $10,748.05, all in relation to the leased equipment. This sum is in addition to the purchase price agreed to above. Upon closing, Buyer shall pay Berthel Fisher the sum of $169,047.18 plus interest to update the balance due from the January 1, 1997 calculation date to the date of payment all to pay off a loan made by Berthel Fisher to Seller under Loan #079-76001-002 which sum shall be a credit toward the purchase price herein. 3.2 Upon the execution of this Agreement, Buyer shall issue a good and sufficient check to Buyer in the sum of One Million, Five Hundred Sixty Thousand Forty-Two and 96/100 Dollars ($1,560,042.96) plus interest at the rate of 10% per annum from January 1, 1996 until paid. 3.2.1 At closing, Buyer shall deliver its promissory note in the form attached hereto as Exhibit #4 in the principal face amount of $841,500 (or such lesser face amount if less than 1,015 phones are purchased as set forth in Section 1.1.1 above), bearing interest at the rate of 10% per annum, payable as follows: six (6) monthly interest payments commencing February 2, 1997 of $7,012.50 each followed by forty-eight (48) monthly payments of principal and interest in the aggregate amount of $21,342.61 per month. The obligations arising under the promissory note shall be secured by Buyer granting to Seller a security interest in all telephones owned by Buyer, except for any phones presently located in and on Indian-owned gaming casino property as identified in exhibit "7". The security interest shall be subordinate to the first lien security position held by Buyer's primary lender, National City Bank, Minneapolis, MN. or their assigns in an amount not to exceed $3,000,000. At such time as the remaining unpaid principal balance due on the promissory note is reduced to an amount less than $420,000, and if all sums have been paid on the Note identified in Section 3.2.2 herein, then Seller will release its security interest in all telephones owned by Buyer other than those acquired by Buyer from Seller under this Agreement. The Security Agreements, attached hereto as Exhibit #5 and Exhibit #5(a), giving rise to the security interest described hereunder, will be executed by the parties hereto at closing. 3.2.2 Buyer also shall deliver an additional promissory note in the form attached as Exhibit #4(a) in the principal face amount of Three Hundred Sixty Five Thousand ($365,000), bearing interest at the rate of ten percent (10%) per annum. Interest only at the rate of $3,042 per month shall commence on February 1, 1997 and continue monthly until April 1, 1998 when the entire principal amount will be due. This promissory note shall also be secured pursuant to the Security Agreements described in Section 3.2.1 above. / / / / / / / / / / / / / / / / / / / / / 3.3 The purchase price allocations shall be as follows: ITEM PURCHASED LOCATION PURCHASE PRICE ALLOCATION - -------------- -------- ------------------------- Berthel Fisher Lease - Option Oregon $2,363,180.00 Vehicles Oregon $ 37,000.00 Office Equipment Oregon $ 10,000.00 Inventory & Supplies Oregon $ 53,000.00 Non-Competition Agree Oregon $ 10,000.00 Goodwill Oregon $ 5,000.00 Telephones per 2.2.3 Oregon $ 134,844.00 Telephones per 2.2.3 Wash. $ 92,540.00 Telephones per 2.2.3 Idaho $ 166,572.00 Telephones per 2.2.3 Colorado $ 55,524.00 Telephones per 2.2.3 Wyoming $ 7,932.00 TOTAL $2,935,592.00 SECTION 4. ADJUSTMENTS The operation of telephone equipment identified on Exhibits #1 and #2 and related income and expenses up to 11:59 p.m. on January 1, 1997, shall be for the account of Seller and thereafter for the account of Buyer. Seller shall pay all expenses of the equipment through January 1, 1997 , including but not limited to site commissions, utilities, advertising, personal property taxes, rents and lease payments, real property taxes, wages, and payroll taxes of Seller. Buyer shall pay all expenses of the equipment after January 1, 1997, including but not limited to site commissions, utilities, advertising, payroll for employees of Seller who directly service said equipment including all applicable benefits, workers compensation premiums, insurance, withholding taxes and related charges. Cash from the telephones will be calculated electronically on 11:59 p.m. (local time in each location) on January 1, 1997 and any cash in the telephones thereafter shall belong to the Buyer. In addition to the purchase price, Buyer shall pay to Seller any personal property tax that Seller has paid on the pay telephone equipment pro rated through January 1, 1997. SECTION 5. OTHER AGREEMENTS 5.1 NON-COMPETE AGREEMENT. Seller, Buyer and Evert Brown will enter into an Agreement prohibiting certain competition by Seller and Evert Brown without the prior consent of Buyer. 5.2 ASSIGNMENT OF CONTRACTS. Seller shall execute and deliver at closing separate assignments of the Pay Telephone Agreements and Telephone Site Agreements and after closing any additional documentation as may be requested by Buyer it being the intention of the parties hereto that Seller shall cooperate as is hereinafter necessary to perfect the Buyer's interest in all assets purchased hereunder and that the obligations of Seller to execute assignments of said contracts shall survive the closing. SECTION 6. COLLECTION OF SELLER'S ACCOUNTS RECEIVABLE. Seller shall take such action as is necessary to collect accounts receivable due to Seller on account of telephone services provided prior to January 1, 1997 . Buyer shall cooperate with seller as is necessary to provide Seller with information from the files purchased by Buyer in order for Seller to collect the accounts receivable. All commissions due to site owners prorated as 11:59 p.m. on January 1, 1997 shall be paid by Seller. SECTION 7. SELLER'S REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer as follows: 7.1 CORPORATE EXISTENCE. Seller represents that Telco West, Inc. is an Oregon corporation duly organized and validly existing and in good standing and is authorized to transact business in the state of Oregon and such other states as the nature of its business requires it to be duly qualified to transact business therein. Seller has all requisite power and authority to own, operate and/or lease the assets, as the case may be, and to carry on its business as now being conducted. 7.2 AUTHORIZATION. The execution, delivery and performance of this Agreement have been duly authorized and approved by the Board of Directors and the requisite number of the shareholders of Seller, the lawful owner of all the assets described herein, that no further approval for sale and transfer of the assets to Buyer is required and this Agreement constitutes a valid and binding Agreement of Seller in accordance with its terms. 7.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer a list of site revenues through September 30, 1996. To the best of Seller's knowledge the site revenues are in accordance with the books and records of Seller and are true, correct, and complete. 7.4 TITLE TO ASSETS. Seller holds good and marketable title to the Assets, free and clear of restrictions on or conditions to transfer or assignment, and free and clear of liens, pledges, charges, or encumbrances except as described on Exhibit #5 attached hereto and made in part hereof by reference. Buyer is under no obligations whatsoever to use operator service providers or long distance providers previously used by Seller and Seller agrees to indemnify Buyer from any and all claims of any person who may claim a right, title or interest in the assets transferred by this agreement. 7.5 BROKERS AND FINDERS. Seller has not employed a broker or finder in connection with the transactions contemplated by this Agreement, or taken any action that would give rise to a valid claim against Buyer or any party for a brokerage commission, finder's fee, or other like payment. 7.6 TRANSFER NOT SUBJECT TO ENCUMBRANCES OR THIRD-PARTY APPROVAL. The execution and delivery of this Agreement by Seller, and the consummation of the contemplated transactions, will not result in the creation or imposition of any valid lien, charge, or encumbrance on any of the Assets by any person, and will not require the authorization, consent, or approval of any third party, including any governmental subdivision, court or regulatory agency. 7.7 LABOR AGREEMENTS AND DISPUTES. Seller is neither a party to, nor otherwise subject to any collective bargaining or other agreement governing the wages, hours, and terms of employment of Seller's employees. Seller is not aware of any labor dispute or labor trouble involving employees of Seller, nor has there been any such dispute or trouble during the three years preceding the date of this Agreement. 7.8 NONCANCELABLE CONTRACTS. At the time of closing, there will be no material leases, employment contracts, contracts for services or maintenance, or other similar contracts existing or relating to or connected with the operation of Seller's business not cancelable within 30 days, except the telephone site agreements. 7.9 LITIGATION. Seller has no knowledge of any claim, litigation, proceeding, or investigation pending or threatened against Seller that might result in any material adverse change in the business or condition of the Assets being conveyed under this Agreement. Buyer has been advised concerning the status of Seller's suit against Fearless Ferris Stinker Stations, Ada County, Idaho, Case #CVOC9604405D which may effect continuation of not more than three(3) pay telephones and related contracts with the defendant therein. / / / 7.10 NO MATERIAL ADVERSE CHANGE. Since December 3, 1996 there has not been an adverse change in any of the assets or in the business in which the assets are employed except as described on Exhibit 6 attached hereto and made a part hereof by reference. 7.11 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the representations or warranties of Seller contain or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make statements in this Agreement not misleading. Seller knows of no fact that has resulted, or that in the reasonable judgment of Seller will result in a material change in the business, operations, or assets of Seller that has not been set forth in this Agreement or otherwise disclosed to Buyer. 7.12 SELLER'S OPERATION OF BUSINESS PRIOR TO CLOSING. Seller represents that between December 3, 1996 and the closing date, Seller has: (a) operated the business that in the usual and ordinary course and in substantial conformity will all applicable laws, ordinances, regulation, rules, or orders, and has used its best efforts to preserve its business organization and preserve the continued operation of its business with its customers, suppliers, and others having business relations with Seller and b) not assigned, sold, leased, or otherwise transferred or disposed of any of the assets used in the performance of its business, whether now owned or hereafter acquired, except in the normal and ordinary course of business and in connection with its normal operation. SECTION 8. COVENANTS OF SELLER 8.1 EMPLOYEE MATTERS 8.1.1 Seller has delivered to Buyer a list of the names and addresses of all persons on the payroll of Seller having information concerning the site agreements transferred to Buyer which list is satisfactory to Buyer. Seller represents that seller is unaware of any person who has confidential information concerning the site agreements that would assist that person in interfering with the contract rights being assigned. 8.2 CONDITIONS AND BEST EFFORTS. Seller will use their best efforts to effectuate the transactions contemplated by this Agreement and to fulfill all the conditions and obligations of Seller under this Agreement, and will do all acts and things as may be required to carry out their respective obligations under this Agreement and to consummate and complete this Agreement. Seller agrees to execute such additional documents as may be required to transfer all assets identified by this Agreement. SECTION 9. COVENANTS OF BUYER 9.1 CONDITIONS AND BEST EFFORTS. Buyer will use its best efforts to effectuate the transactions contemplated by this Agreement and to fulfill all the conditions of Buyer's obligations under this Agreement. 9.2 CONFIDENTIAL INFORMATION. If for any reason the sale of Assets is not closed, Buyer will not disclose to third parties any confidential information received from Seller in the course of investigating, negotiating, and performing the transactions contemplated by this Agreement. SECTION 10. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The obligation of Buyer to purchase the Assets is subject to the fulfillment, before or at the closing date, of each of the following conditions, any one or portion of which may be waived in writing by Buyer: 10.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER. All representations and warranties made in this Agreement by Seller shall be true as of the closing date as fully as though such representations and warranties had been made on and as of the closing date, and, as of the closing date, neither Seller nor Selling Shareholders shall have violated or shall have failed to perform in accordance with any covenant contained in this Agreement. 10.2 CONDITIONS OF THE BUSINESS. There shall have been no material adverse change in the manner of operation of Seller's business before the closing date. 10.3 NO SUITS OR ACTIONS. At the closing date no suit, action, or other proceeding shall have been threatened or instituted to restrain, enjoin, or otherwise prevent the consummation of this Agreement or the contemplated transactions. 10.4 FINANCING. Buyer has arranged for financing (other than the Notes to be delivered to Seller by Buyer) on terms and conditions deemed acceptable to Buyer in its sole discretion and Buyer has obtained an enforceable commitment to lend from such lender. SECTION 11. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS 11.1 Buyer must provide Seller with satisfactory personally guarantees from Buyer's shareholders to secure the obligations of Buyer as set forth herein. 11.2 Buyer must provide Seller with a form of Subordination Agreement that is reasonably acceptable to Seller and to Buyer's primary lender. SECTION 12. BUYER'S ACCEPTANCE Buyer represents and acknowledges that it has entered into this Agreement on the basis of its own examination, personal knowledge, and opinion of the value of the business. Buyer has not relied on any representations made by Seller other than those specified in this Agreement. Buyer further acknowledges that Seller has made no agreement or promise to repair or improve any of the leasehold improvements, equipment, or other personal property being sold to Buyer under this Agreement, and that Buyer takes all such property in the condition existing on the date of this Agreement, "AS IS" and "WHERE IS". / / / SECTION 13. RISK OF LOSS The risk of loss, damage, or destruction to any of the equipment, inventory, or other personal property to be conveyed to Buyer under this Agreement shall be borne by Seller until January 1, 1997 and thereafter the risk of loss shall be born by the Buyer. In the event of such loss, damage, or destruction, Seller, to the extent reasonable, shall replace the lost property or repair or cause to repair the damaged property to its condition prior to the damage. If replacement, repairs, or restorations are not completed prior to January 1, 1997, then the purchase price shall be adjusted by an amount agreed upon by Buyer and Seller that will be required to complete the replacement, repair, or restoration following closing. If Buyer and Seller are unable to agree, then Buyer, at its sole option and notwithstanding any other provision of this Agreement, upon notice to Seller, may rescind this Agreement and declare it to be of no further force and effect, in which event there shall be no closing of this Agreement and all the terms and provisions of this Agreement shall be deemed null and void. SECTION 14. INDEMNIFICATION AND SURVIVAL 14.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement shall survive the closing of this Agreement, except that any party to whom a representation or warranty has been made in this Agreement shall be deemed to have waived any misrepresentation or breach of representation or warranty of which such party had knowledge prior to closing. Any party learning of a misrepresentation or breach of representation or warranty under this Agreement shall immediately give written notice thereof to all other parties to this Agreement. The representations and warranties in this Agreement shall terminate one year from the closing date, and such representations or warranties shall thereafter be without force or effect, except any claim with respect to which notice has been given to the party to be charged prior to such expiration date. 14.2 SELLER'S INDEMNIFICATION. 14.2.1 Seller agrees to indemnify and hold Buyer, its successors, and assigns harmless from and against: (1) Any and all claims, liabilities, and obligations of every kind and description, contingent or otherwise, arising out of or related to the operation of Seller's business assets prior to the close of business on the closing date, except for claims, liabilities, and obligations of Seller expressly assumed by Buyer under this Agreement or paid by insurance maintained by Seller or Buyer. (2) Any and all damage or deficiency resulting from any material misrepresentation, on the part of Seller or their authorized representatives under this Agreement. (3) Any and all claims by shareholders of Seller arising from this sale of assets. (4) Any and all claims of creditors of Seller if said creditor liabilities were not expressly assumed by Buyer under Section 2 of this agreement. 14.2.2 Seller's indemnity obligations under Section 15.2.1 shall be subject to the following: (1) If any claim is asserted against Buyer that would give rise to a claim by Buyer against Seller for indemnification under the provisions of this paragraph, then Buyer shall promptly give written notice to Seller concerning such claim and Seller shall, at no expense to Buyer, defend the claim. 14.3 BUYER'S INDEMNIFICATION. Buyer agrees to defend, indemnify, and hold harmless Seller from and against: 14.3.1 Any and all claims, liabilities, and obligations of every kind and description arising out of or related to the operation of the business following closing or arising out of Buyer's failure to perform obligations of Seller assumed by Buyer pursuant to Section 2 of this Agreement. 14.3.2 Any and all damage or deficiency resulting from any material misrepresentation, breach of warranty or covenant, or nonfulfillment of any agreement on the part of Buyer under this Agreement. 14.3.3 Any and all claims arising from any occurrence subsequent to January 1, 1997 by owners under "Pay Telephone Agreements" and/or "Customer Service Agreement & Letter of Agency" contracts, which agreements have been assigned to Buyer. SECTION 15. CLOSING 15.1 TIME AND PLACE. This Agreement shall be closed in Portland, Oregon the 6th day of January, 1997, or at such other time as the parties may agree in writing. 15.2 OBLIGATIONS OF SELLER AT THE CLOSING. At the closing and coincidentally with the performance by Buyer of its obligations described herein, Seller shall deliver to Buyer the following: 15.2.1 Bills of sale in the form of Exhibit #1 and #2 hereto, assignments, properly endorsed certificates of title, and other instruments of transfer, in form and substance reasonably satisfactory to Buyer, necessary to transfer and convey all of the Assets to Buyer as well as physical possession of the assets identified herein, free and clear of all liens, security interests and encumbrances. 15.2.2 Transfer of all licenses and permits to transacts business of the Seller and transfer of the assumed business name of Seller. 15.2.3 Such other certificates and documents as may be contemplated by the provisions of this Agreement, including a board resolution of Seller's board of directors authorizing this transaction. 15.3 OBLIGATIONS OF BUYER AT THE CLOSING. At the closing and coincidentally with the performance by Seller of their obligations described in Section 16.2, Buyer shall deliver to Seller the following: 15.3.1 A good and sufficient check or wire transfer in the amount specified herein as partial consideration for this transfer. 15.3.2 Original Promissory Notes as identified in Sections 3.1.1 and 3.1.2, Security Agreements and Financing Statements. 15.3.3 Such other certificates and documents as may be contemplated by the provisions of this Agreement. SECTION 16. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING 16.1 BOOKS AND RECORDS. This sale does not include the books and records of Seller's business, except those records relating to the sellers accounts with customers identified in the contracts being sold. 16.2 SELLER'S RIGHT TO PAY. In the event Buyer fails to make any payment of taxes, assessments, or other charges that Buyer is required to pay to third parties under this Agreement, Seller shall have the right, but not the obligation, to pay the same. Buyer will reimburse Seller for any such payment immediately upon Seller's demand. Any such payment by Seller shall not constitute a waiver by Seller of any remedy available by reason of Buyer's default for failure to make the payments. 16.3 BUYERS'S RIGHT TO PAY. In the event Seller failed to make any payment of taxes, assessments or other charges that Seller is required to pay to third parties (including but not limited to payments that are due to creditors of Seller which in any way affect the use or ownership of the property transferred hereunder) under this Agreement, Buyer shall have the right, but not the obligation, to pay the same. Seller and/or Selling Shareholder's will reimburse Buyer for any such payment immediately upon Buyer's demand. Further, Buyer may withhold payments due under the Installment Collateral Note in the amount paid by Buyer to satisfy Seller's obligations. Any such payment by Buyer shall not constitute a waiver by Buyer of any remedy available by reason of Seller's default for failure to make the payments. SECTION 17. BULK SALES LAW Buyer waives compliance by Seller with the any Bulk Transfer Act. Except for those liabilities assumed by Buyer, as provided herein, in the event any creditor of Seller claims the benefit of the Bulk Transfer Laws as against Buyer or any of the assets being conveyed to Buyer under this Agreement, Seller shall immediately pay or otherwise satisfy such claim or undertake its defense. Seller shall indemnify and hold Buyer harmless from and against any and all loss, expense, or damage resulting from the failure to comply with any Bulk Transfer Law. If Seller fails to comply with the provisions of this Section 15 and Buyer is required to pay any creditor of Seller in order to protect the property purchased under this Agreement from claims or liens of Seller's creditors, except those assumed by Buyer, then Buyer may offset the amount it pays against any sum due Seller under this agreement by furnishing proof of such payment in the form of a receipt from the creditor involved and/or demand payment and file an action to enforce the terms of this agreement. SECTION 18. COVENANT NOT-TO-COMPETE. In further consideration of the transactions contemplated by this agreement, at closing Seller and Evert Brown shall enter into the form of Non-Compete Agreement attached hereto as Exhibit #9 and made a part hereof by reference. In consideration of the granting of this covenant not-to-compete, the parties hereto agree to allocate $10,000.00 of the aggregate purchase price to such covenant. SECTION 19. MISCELLANEOUS PROVISIONS 19.1 PUBLIC DISCLOSURES. Neither Seller nor Buyer shall disclose the sale of the assets in any press release or other public announcement without the prior written consent of the other parties, which consent shall not be unreasonably withheld. 19.2 EXPENSES. Whether or not the closing occurs, each party hereto shall pay its own expenses in connection with his agreement. 19.3 NOTICES. Any notice, demand or communication required or permitted by this agreement shall be in writing and shall be delivered by hand or by U.S. mail, first class certified mail, postage prepaid, return-receipt requested and addressed to the parties at their respective addresses set forth at page one of this agreement. Either party may changes its address for notice purposes by providing notice in accordance with his provision. Any notice, demand or other communication shall be deemed given and effective as of the date of delivery by hand, or upon the firth day following mailing. 19.4 HEADINGS. The headings and titles to the Sections and subparagraphs of this agreement are inserted for convenience only, and shall not be deemed to be a part of the Agreement nor affect the construction or interpretation of any provision of the Agreement. 19.5 MODIFICATIONS AND WAIVERS. No modification or amendment of any provision of this Agreement shall be effective for any purpose unless set forth in a writing signed by the party of parties to be bound thereby. The waiver by any party of any right or remedy under this Agreement on any one occasion shall not be deemed a waiver of such right or remedy on any subsequent occasion. 19.6 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 19.7 BINDING EFFECT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties. 19.8 ENTIRE AGREEMENT. This Agreement and the exhibits to this Agreement set forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements between the parties with respect to such subject matter including without limiting the foregoing, the letter agreement between the parties hereto concerning the subject matter hereof dated December 3, 1996. 19.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Oregon. 19.11 VENUE. This Agreement has been made entirely within the state of Oregon. This Agreement shall be governed by and construed in accordance with the laws of the state of Oregon. If any suit or action is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, venue shall be in the federal or state courts in Oregon, Multnomah County, Oregon. DATED this 2nd day of January, 1997. SELLER: -------------------------------------------------------- Telco West, Inc., an Oregon corporation By /s/ Evert S. Brown, Treasurer ------------------- -------------------------------- Evert Brown Treasurer BUYER: -------------------------------------------------------- Intelliphone, Inc., a Minnesota corporation By /s/ Jeffrey Paletz, President ------------------- -------------------------------- EX-10.13 20 EXHIBIT 10.13 INSTALLMENT COLLATERAL NOTE $841,500 Portland, Oregon, January 2, 1997. The undersigned promises to pay to the order of TELCO WEST, INC., an Oregon corporation or their assigns at 15838 S.W. Upper Boones Ferry Rd., Lake Oswego, Oregon 97035 the sum of EIGHT HUNDRED FORTY ONE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($841,500.00), together with interest thereon at the rate of 10.0% per annum accruing from the date hereof until paid. Payments on this note shall commence on or before February 1, 1997 when the sum of $7,012.50 shall be due and on the first day of each month thereafter for five additional months the sum of $7,012.50 shall be due until beginning August 1, 1997 the sum of $21,342.61 shall be due and on the first day of each month thereafter for forty-seven (47) additional months the sum of $21,342.61 shall be due on or before the first day of each month. The balance, if any, shall be due and payable on or before August 1, 2001. All payments must be postmarked on or before the first day of each month. Attached hereto as exhibit "A" is an amortization table which the parties hereto agree represents the principal and interest balances as of the dates set forth therein if all payments are made upon the dates due as set forth by this Installment Collateral Note. The undersigned represents that the funds borrowed are for business purposes in the purchase pay telephone equipment and not for any non-commercial purpose. If any of said installments is not paid, all principal and interest shall become immediately due and collectible at the option of the holder of this note. The undersigned shall have the right to prepay all or any portion of the principal balance. A payment of principal only is known as a "prepayment". If the undersigned elects to make a "prepayment" it must be identified as such by written statement of the undersigned on the check or otherwise. No portion of any prepayment will be applied to the regular monthly payment. "Prepayment shall not forgive the undersigned from making any regular monthly payment. If the holder of this Note has not received the full amount of any monthly payment by the end of three calendar days after the date it is due, the undersigned agrees to pay a late charge to the note holder equal to 5.0% of the overdue amount. The undersigned agrees to pay the late charge promptly, however, in no event later than thirty (30) days past the date said late charge is assessed by reason of delinquency. The holder of this note shall not be required to send notice of any late charge assessment. In addition the holder may charge the undersigned any costs and expenses associated with collection of the late payment or charge. PAGE 1 - INSTALLMENT COLLATERAL NOTE To secure the payment of this note and any other liabilities of the undersigned to said payee, hereafter arising, the undersigned has delivered unto the payee a Security Agreement and Finance Statements. As additional security for payment of the debts evidenced hereby shareholders of Intelliphone, Inc. have personally guaranteed the debt. The payee shall have no duty to collect or protect the collateral or any proceeds, to preserve the rights of any of the undersigned against prior or other parties, to realize on the collateral in any particular manner or to seek reimbursement from any particular source and, at the payees option, may proceed directly against the undersigned without exercising any further right to satisfy the obligations of the undersigned by repossession or sale of the collateral. With reference to this note and also to that portion of the collateral, which indebtedness owing to the undersigned, the payee, at his election, may grant any extensions, postponement of time of payment, indulgence, or permit any substitutions, exchange or release of collateral and may add to or release any parties primarily or secondarily liable without notice to and without releasing the undersigned. The undersigned assumes full responsiblity for taking any necessary steps to protect any of the collateral in payee's possession including without limitation, the exercise of any rights respecting the collateral. The payee shall have exercised reasonable care in the preservation and protection of the collateral if he takes such action for that purpose as the undersigned shall request in writing. If this note is placed in the hands of an attorney for collection, each of the undersigned promises to pay the reasonable collection costs of the holder hereof; and if suit or action is filed hereon, also promises to pay(1) holder's reasonable attorney's fees to be fixed by the trial court and (2) if any appeal is taken from any decision of the trial court, such further sum as may be fixed by the appellate court, as the holder's reasonable attorney's fees in the appellate court. If payment of this note is made by any co-maker or endorser the payee is authorized, at his election, to surrender the collateral to the person making such payment. The rights and remedies of the payee (as the secured party herein) with respect to all of the above described collateral as well as all other collateral in which the payee has a security interest by this note or otherwise shall be those provided by the laws of the State of Oregon. PAGE 2 - INSTALLMENT COLLATERAL NOTE The undersigned shall be in default hereunder upon the occurrence of the following events: (a) Failure to pay when due the principal, interest or late charges on this note or any of the said installments when due; (b) Failure to pay when due the principal, interest or late charges on the Installment Note dated January 2, 1997 in the face amount of $365,000.00. (c) Commencement of any insolvency proceedings by or against any of the undersigned or any endorser hereof; (d) Failure of the undersigned to pay personal property taxes associated with the property securing the obligations hereunder. In the event of the occurrence of any of the foregoing events of default, then at the option of the said payee this note as well as all other obligations to the payee of any of the undersigned and of any endorser hereof shall immediately become due and payable. INTELLIPHONE, INC. By: /s/ Jeffrey Paletz, President ---------------------------------- STATE OF MINNESOTA ) )ss County of Hennepin ) This instrument was acknowledged before me on January 7, 1997 by Jeffrey Paletz who attested that he is the President of Intelliphone, Inc., a Minnesota corporation and that he has authority to sign this document on behalf of said corporation and acknowledged the foregoing document as the voluntary act and deed of Intelliphone, Inc. Before me this 7 day of January, 1997. /s/ Marilyn M. Susbauer --------------------------------------- Notary Public for Oregon my commission expires: 9-16-98 - ------------------------------------ OFFICIAL SEAL MARILYN M. SUSBAUER NOTARY PUBLIC-OREGON COMMISSION NO. 037827 MY COMMISSION EXPIRES SEPT. 18, 1998 - ------------------------------------- PAGE 3 - INSTALLMENT COLLATERAL NOTE EX-10.14 21 EXHIBIT 10.14 INSTALLMENT COLLATERAL NOTE $365,000.00 Portland, Oregon, January 2, 1997. The undersigned promises to pay to the order to TELCO WEST, INC., an Oregon Corporation or their assigns at 15838 S.W. Upper Boones Ferry Rd., Lake Oswego, Oregon 97035 the sum of THREE HUNDRED SIXTY FIVE THOUSAND AND NO/100 DOLLARS ($365,000), together with interest thereon at the rate of 10.0% per annum accruing from the date hereof until paid. Payments on this note shall commence on or before February 1, 1997 when the sum of $3,042.00 shall be due and on the first day of each month thereafter the sum of $3,042 shall be due until April 1, 1998 when the entire unpaid principal and interest us due and payable. All payments must be postmarked on or before the first day of each month. Attached hereto as exhibit "A" is an amortization table which the parties hereto agree represents the principal and interest balances as of the dates set forth therein if all payments are made upon the dates due as set forth by this Installment Collateral Note. The undersigned represents that the funds borrowed are for business purposes in the purchase pay telephone equipment and not for any non-commercial purpose. If any of said installments is not paid, all principal and interest shall become immediately due and collectible at the option of the holder of this note. The undersigned shall have the right to prepay all or any portion of the principal balance. A payment of principal only is known as a "prepayment". If the undersigned elects to make a "prepayment" it must be identified as such by written statement of the undersigned on the check or otherwise. No portion of any prepayment will be applied to the regular monthly payment. "Prepayment shall not forgive the undersigned from making any regular monthly payment. If the holder of this note has not received the full amount of any monthly payment by the end of three calendar days after the date it is due, the undersigned agrees to pay a late charge to the note holder equal to 5.0% of the overdue amount. The undersigned agrees to pay the late charge promptly, however, in no event later than thirty (30) days past the date said late charge is assessed by reason of delinquency. The holder of this note shall not be required to send notice of any late charge assessment. In addition the holder may charge the undersigned any costs and expenses associated with collection of the late payment or charge. PAGE 1 -- INSTALLMENT COLLATERAL NOTE To secure the payment of this note and any other liabilities of the undersigned to said payee, hereafter arising, the undersigned has delivered unto the payee a Security Agreement and Finance Statements. As additional security for payment of the debts evidenced hereby shareholders of Itelliphone, Inc. have personally guaranteed the debt. The payee shall have no duty to collect or protect the collateral or any proceeds, to preserve the rights of any of the undersigned against prior or other parties, to realize on the collateral in any particular manner or to seek reimbursement from any particular source and, at the payees option, may proceed directly against the undersigned without exercising any further right to satisfy the obligations of the undersigned by repossession or sale of the collateral. With reference to this note and also to that portion of the collateral, which indebtedness owing to the undersigned, the payee, at his election, may grant any extensions, postponement of time of payment, indulgence, or permit any substitutions, exchange or release of collateral and may add to or release any parties primarily or secondarily liable without notice to and without releasing the undersigned. The undersigned assumes full responsibility for taking any necessary steps to protect any of the collateral in payee's possession including without limitation, the exercise of any rights respecting the collateral. The payee shall have exercised reasonable care in the preservation and protection of the collateral if he takes such action for that purpose as the undersigned shall request in writing. If this note is placed in the hands of an attorney for collection, each of the undersigned promises to pay the reasonable collection costs of the holder hereof; and if suit or action is filed hereon, also promises to pay (1) holder's reasonable attorney's fees to be fixed by the trial court and (2) if any appeal is taken from any decision of the trial court, such further sum as may be fixed by the appellate court, as the holder's reasonable attorney's fees in the appellate court. If payment of this note is made by any co-maker or endorser the payee is authorized, at his election, to surrender the collateral to the person making such payment. The rights and remedies of the payee (as the secured party herein) with respect to all of the above described collateral as well as all other collateral in which the payee has a security interest by this note or otherwise shall be those provided by the laws of the State of Oregon. PAGE 2 -- INSTALLMENT COLLATERAL NOTE The undersigned shall be in default hereunder upon the occurrence of the following events: (a) Failure to pay when due the principal, interest or late charges on this note or any of the said installments when due; (b) Failure to pay when due the principal, interest or late charges on the Installment Note dated January 2, 1997 in the face amount of $841,500; (c) Commencement of any insolvency proceedings by or against any of the undersigned or any endorser hereof; (d) Failure of the undersigned to pay personal property taxes associated with the property securing the obligations hereunder. In the event of the occurrence of any of the foregoing events of default, then at the option of the said payee this note as well as all other obligations to the payee of any of the undersigned and of any endorser hereof shall immediately become due and payable. INTELLIPHONE, INC. by /s/ Jeffrey Paletz, President ------------------------------ STATE OF MINNESOTA ) )ss County of Hennepin ) This instrument was acknowledged before me on January 7, 1997 by Jeffrey Paletz who attested that he is the President of Intelliphone, Inc., a Minnesota corporation and that he has authority to sign this document on behalf of said corporation and acknowledged the foregoing document as the voluntary act and deed of Intelliphone, Inc. Before me this 7 day of January, 1997. OFFICIAL SEAL /s/ Marilyn M. Susbauer MARILYN M. SUSBAUER ------------------------------ NOTARY PUBLIC - OREGON Notary Public for Oregon COMMISSION NO. 037827 my commission expires: 9-16-98 MY COMMISSION EXPIRES SEPT. 16, 1998 PAGE 3 -- INSTALLMENT COLLATERAL NOTE EX-10.15 22 EXHIBIT 10.15 AGREEMENT FOR SALE AND PURCHASE OF ASSETS DATE: AS OF MARCH 14, 1997 PARTIES: COMPUTER ASSISTED TECHNOLOGIES, INC. a Wisconsin corporation ("Seller") 10740 Lyndale Avenue South Bloomington, MN 55420 INTELLIPHONE, INC. a Minnesota corporation ("Buyer") 6801 Wayzata Blvd. St. Louis Park, Minnesota 55426 RECITALS: A. Seller operates a business primarily engaged in providing and servicing public pay telephones in Minnesota and Wisconsin. Seller owns equipment, site contract rights, leasehold interests, tools, inventories, account receivables, operating accounts, prepaid insurance, advertising and sales materials and miscellaneous assets used in connection with the operation of its business. B. Buyer desires to acquire site contract rights for not less than 586 pay telephones, including a minimum of 385 "Intellicall" brand pay telephones ("Intellicall Phones"), located in Minnesota and Wisconsin and all telephones and related equipment located at the respective sites identified in Exhibit 1.1.1 hereto together with all computer boards, telephone enclosures, cash contents of the pay telephones, line deposits, permits, contract rights and intangibles related thereto including all good will and rights associated with the potential continuation of the site contracts after the expiration of the term of the site agreement contracts and Seller desires to sell all of such assets to Buyer. AGREEMENT: SECTION 1. ASSETS PURCHASED. 1.1 ASSETS PURCHASED. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, on the terms and conditions set forth in this Agreement, the following assets ("Assets"): 1.1.1 All of the Seller's right, title and interest in the "Site Agreements" and any modifications thereto described on Exhibit 1.1.1 attached hereto and made a part hereof by reference, together with all equipment located at the sites identified in the contracts, including telephones, computer boards used in relation to the telephones, telephone enclosures, the cash contents of any pay telephones at 11:59 p.m. upon the date of closing, line deposits, contract rights identified therein and any intangibles related thereto. Seller represents that there are not less than 586 pay telephones, including a minimum of 385 Intellicall Phones, with "Site Agreements" which are being purchased by Buyer. In the event that at the closing the number of pay telephones is less than 586 and/or the number of Intellicall Phones is less than 385, then the Purchase Price set forth at Section 3 will be reduced accordingly at the rate of $3,916 per pay telephone (other than an Intellicall Phone) and $4,166 per Intellicall Phone. Buyer shall have no obligation to purchase more than 586 installed telephones at closing, but should it elect to do so, the Purchase Price shall be increased accordingly at the rate of $3,916 per pay telephone (other than an Intellicall Phone) and $4,166 per Intellicall Phone, and the aggregate amount of such increase shall be added to the principal amount of the Buyer's convertible replacement promissory note ("Convertible Note") described at Section 3.1.4. 1.1.2 All manuals, warranties, sales materials and telephone books at the identified sites. 1.1.3 All inventories of Seller's equipment, computer systems, spare parts, materials and supplies used by Seller in the ordinary course of Seller's business to maintain, service, repair and replace the equipment located at the site locations identified in the above paragraphs. 1.1.4 Seller's goodwill for pay telephone operations within Minnesota and Wisconsin, and all files or other business records to handle accounts identified above. 1.1.5 All warranties, contract rights, claims, licenses, prepaid insurance, and renewal rights, rights to receive income or to continue contracts, options, grants and all assets of Seller associated with the equipment listed on Exhibit 1.1.1 of whatever kind, whether known or unknown (except as specifically excluded), are included as part of this sale. 1.1.6 The service vehicle described by year, make, model, V.I.N., and location at the time of closing on Exhibit 1.1.6 attached hereto and as made a part hereof by reference, which shall be sold in "AS-IS" and "WHERE-IS" condition. 1.1.7 The trade names "Computer Assisted Technologies" and "Rolcom USA," as well as any associated logos, or servicemarks. 2 1.1.8 Executed agreements providing for the installation of at least ninety-eight (98) pay telephones (the "Uninstalled Phones"), as set forth on Exhibit 1.1.8. 1.2 EXCLUDED ASSETS. Excluded from this sale and purchase are Seller's accounts receivable, collected cash on hand, notes receivable, prepaid accounts, and the following: 1.2.1 All of Seller's cash on hand, bank accounts and operational accounts of the date of closing, except for the cash contents of all pay telephones being purchased at 11:59 on the date of closing, 1.2.2 Any prepaid taxes, tax deposits and prepaid rent, 1.2.3 No licenses or permits required to own and/or operate the equipment are being purchased by the Buyer. Buyer shall be solely responsible for obtaining all necessary permits and licenses as may be required to own and operate the telephone equipment, however Seller agrees to cooperate and to execute any documents which may be necessary to effect the transfer or assignment of any permits and licenses required by regulatory or government agencies. SECTION 2. LIABILITIES ASSUMED AND NOT ASSUMED 2.1 LIABILITIES ASSUMED BY BUYER. 2.1.1 CONTRACT OBLIGATIONS. Buyer shall accept the assignment and assume responsibility for the obligations of Seller under the Site Agreements identified in Section 1.1.1, and Buyer will make its best efforts to install the Uninstalled Phones set forth on Exhibit 1.1.8 and obtain Seller's consent with respect to the Uninstalled Phones which it will not install, if any. 2.2 LIABILITIES NOT ASSUMED BY BUYER. 2.2.1 CORPORATE OBLIGATIONS. Notwithstanding that Buyer is acquiring the trade name "Computer Assisted Technologies", it is not assuming any liabilities of Seller or "Computer Assisted Technologies" except for those described at Section 2.1.1 above. 2.2.2 EMPLOYEES. Except for the agreement described at Section 5.1 below, Buyer shall have no responsibility to hire or pay any employee or independent contractor of Seller any compensation, sales commissions, sick pay, retirement or other compensation. 2.2.3 TRANSFER TAXES. Seller shall pay one-half of any transfer taxes, including, but not limited to, excise taxes and sales taxes arising from this sale (with Buyer paying the balance, if any). 3 2.2.4 GENERAL LIMITS. Except as set forth herein, Buyer shall not be liable for any indebtedness of Seller. Buyer assumes no liabilities except as stated herein. 2.3 SELLER'S OBLIGATIONS. 2.3.1 INCOME TAXES. Seller shall pay any state, federal or local income taxes of Seller after application of all loss carry forwards, credits, deductions or other tax offsets available to Seller and shall be responsible for the cost of preparation of said tax returns and for all accounting fees associated with the preparation of said tax returns for all time periods prior to the date of closing. 2.3.2 COMMISSIONS AND CONTRACT OBLIGATIONS PAYABLE. Seller shall remain liable for and shall pay when due any and all obligations arising from payments and/or commissions due to site providers under the "Pay Telephone Agreements", "Customer Service Agreements" and "Site Agreements" and shall further pay all telephone bills and the cost of long distance or other telephone service charges calculated through the date of closing. Buyer shall have the right but not the obligation to cure any of Seller's defaults under such agreements and to set off against its obligations under the Convertible Note described at Section 3.1.4 any amounts paid to so cure Seller's defaults. SECTION 3. PURCHASE PRICE FOR ASSETS 3.1 The purchase price for the assets is Two Million Two Hundred Seventy Thousand Three Hundred Dollars ($2,270,300) (the "Purchase Price"). Seller accepts the consideration as full and sufficient consideration for the assets identified above. The parties acknowledge that the Fifty Thousand Dollars ($50,000) paid by Buyer to Seller at the signing of the Letter of Intent between them dated January 31, 1997, shall be applied to the Purchase Price. The remainder of the Purchase Price shall be paid by Buyer to Seller at the closing in the following manner: 3.1.1 Fifty Thousand Dollars ($50,000) in cash or other immediately available funds; and 3.1.2 The assumption by Buyer of up to One Million One Hundred Twenty- One Thousand Nine Hundred Dollars ($1,121,900) of Seller's debt to two equipment leasing companies, Berthel Fisher and TeleCapital; and 3.1.3 Six Hundred Ninety-Eight Thousand Four Hundred Dollars ($698,400) to be paid by the delivery of 174,600 shares of Buyer's unregistered common stock, based on a valuation of 4 $4.00 per share. Seller shall be entitled to receive additional shares under the following circumstances: 3.1.3(a) In the event Buyer completes an initial public offering at a price per share of less than $8.00 (on a post-adjusted basis assuming a two-for-one stock split prior to the anticipated initial public offering), then, as soon as reasonably practical, Buyer shall deliver to Seller that number of additional shares necessary to provide them with such total number of shares resulting from the calculation in which 174,600 is divided by the result of dividing the actual initial public offering price by $8.00. For example, if the initial public offering price is $7.00, then Buyer shall deliver to Seller an additional 24,943 shares (for a total of 199,543 shares) in accordance with the following calculations: (i) $7.00 DIVIDED BY $8.00 = .875 (ii) 174,600 DIVIDED BY .875 = 199,543 (iii) 199,543 - 174,600 = 24,943 3.1.3(b) In the event Buyer does not complete an initial public offering within one year of the date of this Agreement, then, as soon as reasonably practical, Buyer shall deliver to Seller an additional 26,190 shares, representing an additional 15% of shares over the 174,600 delivered under Section 3.1.3 above; PROVIDED, HOWEVER, that instead of delivering such additional shares, Buyer may elect, in its sole discretion, to purchase all of the shares then held by Seller at a price of $8.00 per share for cash or other immediately available funds, and Seller hereby agrees to sell all of its shares to Buyer upon such election. Buyer shall make such election within 60 days after the first anniversary of this Agreement; the closing of the purchase of shares by Buyer from Seller shall take place no later than 60 days after such election. 3.1.4 Buyer will assume Seller's promissory note payable to Jack Elder in the principal amount of Three Hundred Fifty Thousand Dollars ($350,000), cancel it and then issue to him Buyer's Convertible Note in the principal amount of Three Hundred Fifty Thousand Dollars ($350,000) in substantially the form of Exhibit 3.1.3 hereto. The Convertible Note shall bear interest at the rate of eight and one-half percent (8 1/2%) per annum. Interest only will be payable for six (6) months 5 following the date of execution of said note, with the entire principal balance and accrued interest due at the end of such six (6) month period. Jack Elder shall have the right to convert any or all of the principal or accrued interest due under the Convertible Note on the basis of one (1) share of stock for each $6.75 of principal and accrued interest due (on a post-adjusted basis assuming a two-for-one stock split prior to the anticipated initial public offering), subject to the same adjustments for an initial public offering price of less than $8.00 as set forth in Section 3.1.3 above. SECTION 4. ADJUSTMENTS 4.1 PERFORMANCE OF UNINSTALLED PHONES. The Purchase Price shall be adjusted with respect to the performance of the Uninstalled Phones once they are in operation in accordance with the formula set forth in Exhibit 4.1 hereto. Such adjustment shall be applied to the principal amount of the Convertible Note outstanding as of August 1, 1997; provided, however, if, as of such date, the Convertible Note has been paid off or fully converted or is less than the amount of the adjustment, then Seller shall receive or surrender, as the case may be, one (1) share of stock for each $6.75 of the amount of the adjustment that is not applied to the Convertible Note (on a post-adjusted basis assuming a two- for-one stock split prior to the anticipated initial public offering), subject to the same adjustments for an initial public offering price of less than $8.00 as set forth in Section 3.1.3 above. Buyer agrees to waive such an adjustment to the Purchase Price if both of the following conditions are satisfied as of August 1, 1997: (i) the site providers under this Agreement have in service at least 685 payphones, and (ii) such payphones' average cash flow (as defined in Exhibit 4.1 hereto) meets or exceeds the average cash flow of all Minnesota and Wisconsin payphones. 4.2 OPERATION, INCOME AND EXPENSES REGARDING TELEPHONE EQUIPMENT. The operation of telephone equipment identified on Exhibit 1.1.1 and related income and expenses up to 11:59 p.m. on the closing date shall be for the account of Seller, and thereafter for the account of Buyer. Seller shall pay all expenses of the equipment through the date of closing, including but not limited to site commissions, utilities, advertising, personal property taxes, rents and lease payments, real property taxes, wages, and payroll taxes of Seller. Cash from the telephones will be collected by Seller prior 6 to 11:59 p.m. (local time in each location) on the date of closing and any cash in the telephones thereafter shall belong to the Buyer. 4.3 OPERATION, INCOME AND EXPENSES REGARDING TELEPHONE EQUIPMENT. The operation of telephone equipment identified on Exhibit 1.1.1 and related income and expenses up to 11:59 p.m. on the closing date shall be for the account of Seller, and thereafter for the account of Buyer. Seller SECTION 5. OTHER AGREEMENTS 5.1 EMPLOYMENT AND NON-COMPETITION AGREEMENT (DUSTIN ELDER). Following closing, Buyer shall engage Dustin Elder in the initial position of Vice President at an annual salary of Sixty Five Thousand ($65,000) all as set forth in the form of Employment and Non-Competition Agreement attached hereto as Exhibit 5.1(a) (the "Employment Agreement"). In further consideration of his execution of the Employment Agreement, Dustin Elder will be granted an option to purchase twenty thousand (20,000) shares of Buyer's common stock at an exercise price of $6.75 per share. In addition, subject to his continuing employment by Buyer or his termination of employment without cause (as set forth in the Employment Agreement) , Dustin Elder shall also be entitled to exercise successive stock options for ten thousand (10,000) shares (with the exercise price being the fair market value of Seller's common stock on the effective date of each exercise) in each of the three (3) years following the completion of his first full year of employment by Buyer. Such grants of options shall be subject to the terms and conditions of an Incentive Stock Option Agreement substantially in the form of Exhibit 5.1(b). 5.2 NON-COMPETITION AGREEMENT (SELLER AND JACK ELDER). In further consideration of the transactions contemplated by this Agreement, at closing Seller and Jack Elder shall enter into the form of Non-Competition Agreement attached hereto as Exhibit 5.2. In consideration of the granting of the covenant not-to-compete, the parties hereto agree to allocate $10,000 of the aggregate Purchase Price to such covenant. 5.3 ASSIGNMENT OF CONTRACTS. Seller shall execute and deliver at closing separate assignments of the Pay Telephone Agreements and Telephone Site Agreements and after closing any additional documentation as may be requested by Buyer it being the intention of the parties hereto that Seller shall cooperate as is hereinafter necessary to perfect the Buyer's interest in all assets purchased 7 hereunder and that the obligations of Seller to execute assignments of said contracts shall survive the closing. SECTION 6. COLLECTION OF SELLER'S ACCOUNTS RECEIVABLE. Seller shall take such action as is necessary to collect accounts receivable due to Seller on account of telephone services provided prior to the date of closing. Buyer shall cooperate with Seller as is necessary to provide Seller with information from the files purchased by Buyer in order for Seller to collect the accounts receivable. All commissions due to site owners prorated as 11:59 p.m. on the date of closing shall be paid by Seller. SECTION 7. SELLER'S REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer as follows: 7.1 CORPORATE EXISTENCE. Seller represents that Computer Assisted Technologies, Inc. is a Wisconsin corporation duly organized and validly existing and in good standing and is authorized to transact business in the states of Minnesota and Wisconsin. Seller has all requisite power and authority to own, operate and/or lease the assets, as the case may be, and to carry on its business as now being conducted. 7.2 AUTHORIZATION. The execution, delivery and performance of this Agreement have been duly authorized and approved by the Board of Directors and the requisite number of the shareholders of Seller, the lawful owner of all the assets described herein, that no further approval for sale and transfer of the assets to Buyer is required and this Agreement constitutes a valid and binding Agreement of Seller in accordance with its terms. 7.3 FINANCIAL STATEMENTS. Seller has delivered to Buyer a list of site revenues dated February 1, 1997. To the best of Seller's knowledge the site revenues are in accordance with the books and records of Seller and are true, correct, and complete. 7.4 TITLE TO ASSETS. Seller holds good and marketable title to the Assets, free and clear of restrictions on or conditions to transfer or assignment, and free and clear of liens, pledges, charges, security interests or encumbrances of any kind or nature whatsoever except as described on Exhibit 7.4 attached hereto and made in part hereof by reference. Buyer is under no obligations whatsoever to use OPTICOM operator service beyond August 31, 1997, or any long distance provider previously 8 used by Seller and Seller agrees to indemnify Buyer from any and all claims of any person who may claim a right, title or interest in the assets transferred by this Agreement. Seller specifically represents that it has made all payments required prior to closing and taken such actions as may be necessary in order for the transfer of all licenses for Intellicall I-STAR boards to be, and hereby are transferred to Buyer. 7.5 BROKERS AND FINDERS. Seller has not employed a broker or finder in connection with the transactions contemplated by this Agreement, or taken any action that would give rise to a valid claim against Buyer or any party for a brokerage commission, finder's fee, or other like payment. 7.6 TRANSFER NOT SUBJECT TO ENCUMBRANCES OR THIRD-PARTY APPROVAL. The execution and delivery of this Agreement by Seller, and the consummation of the contemplated transactions, will not result in the creation or imposition of any valid lien, charge, or encumbrance on any of the Assets by any person, and will not require the authorization, consent, or approval of any third party, including any governmental subdivision, court or regulatory agency, except for the consent required by the Minnesota and Wisconsin Public Utilities Commissions. 7.7 LABOR AGREEMENTS AND DISPUTES. Seller is neither a party to, nor otherwise subject to any collective bargaining or other agreement governing the wages, hours, and terms of employment of Seller's employees. Seller is not aware of any labor dispute or labor trouble involving employees of Seller, nor has there been any such dispute or trouble during the three years preceding the date of this Agreement 7.8 NONCANCELABLE CONTRACTS. At the time of closing, there will be no material leases, employment contracts, contracts for services or maintenance, or other similar contracts existing or relating to or connected with the operation of Seller's business not cancelable within 30 days, except the telephone site agreements. 7.9 LITIGATION. Seller has no knowledge of any claim, litigation, proceeding, or investigation pending or threatened against Seller that might result in any material adverse change in the business or condition of the Assets being conveyed under this Agreement. 9 7.10 NO MATERIAL ADVERSE CHANGE. Since January 1, 1997, there has not been an adverse change in any of the assets or in the business in which the assets are employed except as described on Exhibit 7.10 attached hereto and made a part hereof by reference. 7.11 ACCURACY OF REPRESENTATIONS AND WARRANTIES. None of the representations or warranties of Seller contain or will contain any untrue statement of a material fact or omit or will omit or misstate a material fact necessary in order to make statements in this Agreement not misleading. Seller knows of no fact that has resulted, or that in the reasonable judgment of Seller will result in a material change in the business, operations, or assets of Seller that has not been set forth in this Agreement or otherwise disclosed to Buyer. 7.12 SELLER'S OPERATION OF BUSINESS PRIOR TO CLOSING. Seller represents that between January 1, 1997 and the closing date, Seller has: (a) operated the business that in the usual and ordinary course and in substantial conformity will all applicable laws, ordinances, regulation, rules, or orders, and has used its best efforts to preserve its business organization and preserve the continued operation of its business with its customers, suppliers, and others having business relations with Seller and b) not assigned, sold, leased, or otherwise transferred or disposed of any of the assets used in the performance of its business, whether now owned or hereafter acquired, except in the normal and ordinary course of business and in connection with its normal operation. SECTION 8. COVENANTS OF SELLER 8.1 EMPLOYEE MATTERS 8.1.1 Seller has delivered to Buyer a list of the names and addresses of all persons on the payroll of Seller dated February 1, 1997 having information concerning the site agreements transferred to Buyer which list is satisfactory to Buyer. Seller represents that Seller is unaware of any person who has confidential information concerning the site agreements that would assist that person in interfering with the contract rights being assigned. 8.2 CONDITIONS AND BEST EFFORTS. Seller will use its best efforts to effectuate the transactions contemplated by this Agreement and to fulfill all the conditions and obligations of Seller under this Agreement, and will do all acts and things as may be required to carry out its obligations 10 under this Agreement and to consummate and complete this Agreement. Seller agrees to execute such additional documents as may be required to transfer all assets identified by this Agreement. SECTION 9. COVENANTS OF BUYER 9.1 CONDITIONS AND BEST EFFORTS. Buyer will use its best efforts to effectuate the transactions contemplated by this Agreement and to fulfill all the conditions of Buyer's obligations under this Agreement. 9.2 CONFIDENTIAL INFORMATION. If for any reason the sale of Assets is not closed, Buyer will not disclose to third parties or use any confidential information received from Seller in the course of investigating, negotiating, and performing the transactions contemplated by this Agreement. SECTION 10. CONDITIONS PRECEDENT TO BUYER'S OBLIGATIONS. The obligation of Buyer to purchase the Assets is subject to the fulfillment, before or at the closing date, of each of the following conditions. 10.1 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF SELLER. All representations and warranties made in this Agreement by Seller shall be true as of the closing date as fully as though such representations and warranties had been made on and as of the closing date, and, as of the closing date, Seller shall not have violated or failed to perform in accordance with any covenant contained in this Agreement. 10.2 LICENSES AND PERMITS. Buyer shall have obtained or applied for all licenses and permits from public authorities necessary to authorize the ownership and operation of the business of Seller and the transaction shall have been approved to by the Minnesota and Wisconsin Public Utilities Commissions. 10.3 CONDITIONS OF THE BUSINESS. There shall have been no material adverse change in the manner of operation of Seller's business before the closing date. 10.4 NO SUITS OR ACTIONS. At the closing date no suit, action, or other proceeding shall have been threatened or instituted to restrain, enjoin, or otherwise prevent the consummation of this Agreement or the contemplated transactions. 10.5 SITE AGREEMENTS. Seller has provided Buyer with satisfactory evidence of the extension or renewal of any Site Agreements which otherwise might have expired prior to closing. 11 In no event shall Buyer be obligated to close hereunder if there are more than 50 telephones without valid, enforceable Site Agreements. 10.6 ENFORCEABLE AND ASSIGNABLE SITE AGREEMENTS. At closing Buyer is provided with evidence that Seller is able to assign valid, enforceable and current Site Agreements for at least 586 pay telephones and that the average daily coin revenue per phone is $6.50 per phone and that site rents average approximately 15% of site revenues. SECTION 11. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS 11.1 Except for the assumption of liabilities by Buyer required at closing pursuant to Section 2.1.1 above, there are no other conditions precedent to the obligations of the Seller herein. SECTION 12. BUYER'S ACCEPTANCE Buyer represents and acknowledges that it has entered into this Agreement on the basis of its own examination, and opinion of the value of the business. Buyer has not relied on any representations made by Seller other than those specified in this Agreement. Buyer further acknowledges that Seller has made no agreement or promise to repair or improve any of the leasehold improvements, equipment, or other personal property being sold to Buyer under this Agreement, and that Buyer takes all such property in the condition existing on the date of this Agreement, "AS IS" and "WHERE IS". SECTION 13. RISK OF LOSS The risk of loss, damage, or destruction to any of the equipment, inventory, or other personal property to be conveyed to Buyer under this Agreement shall be borne by Seller to the time of closing. In the event of such loss, damage, or destruction, Seller, to the extent reasonable, shall replace the lost property or repair or cause to repair the damaged property to its condition prior to the damage. If replacement, repairs, or restorations are not completed prior to closing, then the Purchase Price shall be adjusted by an amount agreed upon by Buyer and Seller that will be required to complete the replacement, repair, or restoration following closing. If Buyer and Seller are unable to agree, then Buyer, at its sole option and notwithstanding any other provision of this Agreement, upon notice to Seller, may rescind this Agreement and declare it to be of no further force and effect, in which event 12 there shall be no closing of this Agreement and all the terms and provisions of this Agreement shall be deemed null and void. SECTION 14. INDEMNIFICATION AND SURVIVAL 14.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made in this Agreement shall survive the closing of this Agreement, except that any party to whom a representation or warranty has been made in this Agreement shall be deemed to have waived any misrepresentation or breach of representation or warranty of which such party had knowledge prior to closing. Any party learning of a misrepresentation or breach of representation or warranty under this Agreement shall immediately give written notice thereof to all other parties to this Agreement. The representations and warranties in this Agreement shall terminate two (2) years from the closing date, and such representations or warranties shall thereafter be without force or effect, except any claim with respect to which notice has been given to the party to be charged prior to such expiration date. 14.2 SELLER'S INDEMNIFICATION. 14.2.1 Seller agrees to indemnify and hold Buyer, its successors, and assigns harmless from and against: (1) Any and all claims, liabilities, and obligations of every kind and description, contingent or otherwise, arising out of or related to the operation of Seller's business assets prior to the close of business on the closing date, except for claims, liabilities, and obligations of Seller expressly assumed by Buyer under this Agreement or paid by insurance maintained by Seller or Buyer. (2) Any and all damage or deficiency resulting from any material misrepresentation, on the part of Seller or its authorized representatives under this Agreement. (3) Any and all claims by shareholders of Seller arising from this sale of the Assets. (4) Any and all claims of creditors of Seller if said creditor liabilities were not expressly assumed by Buyer under Section 2 of this Agreement. 14.2.2 Seller's indemnity obligations under Section 14.2.1 shall be subject to the following: 13 (1) If any claim is asserted against Buyer that would give rise to a claim by Buyer against Seller for indemnification under the provisions of this paragraph, then Buyer shall promptly give written notice to Seller concerning such claim and Seller shall, at no expense to Buyer, defend the claim. 14.3 BUYER'S INDEMNIFICATION. Buyer agrees to defend, indemnify, and hold harmless Seller from and against: 14.3.1 Any and all claims, liabilities, and obligations of every kind and description arising out of or related to the operation of the business following closing or arising out of Buyer's failure to perform obligations of Seller assumed by Buyer pursuant to Section 2 of this Agreement. 14.3.2 Any and all damage or deficiency resulting from any material misrepresentation, breach of warranty or covenant, or nonfulfillment of any agreement on the part of Buyer under this Agreement. 14.3.3 Any and all claims arising from any occurrence subsequent to the date of closing by owners under "Pay Telephone Agreements" and/or "Customer Service Agreement & Letter of Agency" contracts, which agreements have been assigned to Buyer. SECTION 15. CLOSING 15.1 TIME AND PLACE. This Agreement shall be closed in Minneapolis, Minnesota on the first business day following the date on which the Minnesota and Wisconsin Public Utilities Commissions approve the transaction contemplated hereby, unless the parties mutually agree in writing to a different date for closing. 15.2 OBLIGATIONS OF SELLER AT THE CLOSING. At the closing and coincidentally with the performance by Buyer of its obligations described herein, Seller shall deliver to Buyer the following: 15.2.1 Bill of Sale in the form of Exhibit 15.2.1 hereto, assignments, properly endorsed certificates of title, and other instruments of transfer, in form and substance reasonably satisfactory to Buyer, necessary to transfer and convey all of the Assets to Buyer as well as physical possession of the assets identified herein, free and clear of all liens, pledges, charges, security interests and encumbrances of any kind or nature whatsoever. 14 15.2.2 Transfer of all licenses and permits to transacts business of the Seller and transfer of the assumed business name of Seller. 15.2.3 Such other certificates and documents as may be contemplated by the provisions of this Agreement, including a resolution of Seller's board of directors and a resolution adopted by the requisite number of Seller's shareholders authorizing this transaction. 15.3 OBLIGATIONS OF BUYER AT THE CLOSING. At the closing and coincidentally with the performance by Seller of its obligations hereunder, Buyer shall deliver to Seller the following: 15.3.1 A good and sufficient check or wire transfer in the amount specified herein as consideration for this transfer along with the shares of Buyer's stock as required under Section 3.1.3 and the Convertible Note required under Section 3.1.4. 15.3.2 Such other certificates and documents as may be contemplated by the provisions of this Agreement. SECTION 16. RIGHTS AND OBLIGATIONS SUBSEQUENT TO CLOSING 16.1 BOOKS AND RECORDS. This sale does not include the books and records of Seller's business, except those records relating to the sellers accounts with customers identified in the contracts being sold. 16.2 SELLER'S RIGHT TO PAY. In the event Buyer failed to make any payment of taxes, assessments, or other charges that Buyer is required to pay to third parties under this Agreement, Seller shall have the right, but not the obligation, to pay the same. Buyer will reimburse Seller for any such payment immediately upon Seller's demand. Any such payment by Seller shall not constitute a waiver by Seller of any remedy available by reason of Buyer's default for failure to make the payments. 16.3 BUYERS'S RIGHT TO PAY. In the event Seller failed to make any payment of taxes, assessments or other charges that Seller is required to pay to third parties (including but not limited to payments that are due to creditors of Seller which in any way affect the use or ownership of the property transferred hereunder) under this Agreement, Buyer shall have the right, but not the obligation, to pay the same. Seller and/or Selling Shareholder's will reimburse Buyer for any such payment immediately upon Buyer's demand. Further, Buyer may withhold payments due under the Collateral Note in the amount paid by Buyer to satisfy Seller's obligations. Any such payment by 15 Buyer shall not constitute a waiver by Buyer of any remedy available by reason of Seller's default for failure to make the payments. SECTION 17. WISCONSIN BULK SALES LAW Buyer waives compliance by Seller with the Wisconsin Bulk Transfer Act. Except for those liabilities assumed by Buyer, as provided herein, in the event any creditor of Seller claims the benefit of the Bulk Transfer Laws as against Buyer or any of the assets being conveyed to Buyer under this Agreement, Seller shall immediately pay or otherwise satisfy such claim or undertake its defense. Seller shall indemnify and hold Buyer harmless from and against any and all loss, expense, or damage resulting from the failure to comply with the Wisconsin Bulk Transfer Law. If Seller fails to comply with the provisions of this Section 17 and Buyer is required to pay any creditor of Seller in order to protect the property purchased under this Agreement from claims or liens of Seller's creditors, except those assumed by Buyer, then Buyer may withhold payments due under the Convertible Note in the amount paid by Buyer to satisfy Seller's obligations. SECTION 18. SECURITIES LAWS. This Agreement provides for the tender and delivery of Buyer's common stock to Seller in partial consideration of the sale of the Assets and provides for option(s) to purchase its common stock to be granted in connection with the Employment Agreement between Buyer and Dustin Elder described at Section 5.1. The securities referred to above have not been (nor prior to closing will they be) registered with either the federal Securities and Exchange Commission or any state securities agency and will be issued in reliance on the exemption from registration contained in Section 4(2) of the Securities Act of 1933 (the "Securities Act"). The shares, including shares underlying the common stock purchase option(s) referred to above, may not be sold, pledged, hypothecated or otherwise transferred unless they are registered under the Securities Act and applicable state securities law or an exemption therefrom. Seller, Dustin Elder and Jack Elder, hereby acknowledge that the shares when issued will bear a restrictive legend to the following effect: THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ISSUED WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT") AND UPON REPRESENTATION OF THE HOLDER HEREOF THAT 16 SAID SHARES ARE BEING HELD FOR INVESTMENT AND NOT WITH A VIEW TO THE SALE OR DISTRIBUTION THEREOF, AND NO SALE, TRANSFER OR OTHER DISPOSITION MAY BE MADE EXCEPT IN COMPLIANCE WITH THE PROVISIONS OF THE ACT. Further, Seller, Dustin Elder and Jack Elder acknowledge that Buyer can give no assurance whatsoever that it will be able to complete an initial public offering of its common stock at $8.00 per share or at any price, notwithstanding references thereto at Section 3.1.3 above. Seller and Messrs. Elder represent they may be required to hold any common stock received pursuant to the transaction for an indefinite period of time and can resell or otherwise dispose of such stock only in accordance with applicable federal and state securities laws. SECTION 19. MISCELLANEOUS PROVISIONS 19.1 PUBLIC DISCLOSURES. Neither Seller nor Buyer shall disclose the sale of the assets in any press release or other public announcement without the prior written consent of the other parties, which consent shall not be unreasonably withheld. 19.2 EXPENSES. Whether or not the closing occurs, each party hereto shall pay its own expenses in connection with his agreement. 19.3 NOTICES. Any notice, demand or communication required or permitted by this Agreement shall be in writing and shall be delivered by hand or by U.S. mail, first class certified mail, postage prepaid, return-receipt requested and addressed to the parties at their respective addresses set forth at page one of this Agreement. Either party may changes its address for notice purposes by providing notice in accordance with his provision. Any notice, demand or other communication shall be deemed given and effective as of the date of delivery by hand, or upon the firth day following mailing. 19.4 HEADINGS. The headings and titles to the Sections and subparagraphs of this Agreement are inserted for convenience only, and shall not be deemed to be a part of the Agreement nor affect the construction or interpretation of any provision of the Agreement. 17 19.5 MODIFICATIONS AND WAIVERS. No modification or amendment of any provision of this Agreement shall be effective for any purpose unless set forth in a writing signed by the party of parties to be bound thereby. The waiver by any party of any right or remedy under this Agreement on any one occasion shall not be deemed a waiver of such right or remedy on any subsequent occasion. 19.6 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 19.7 BINDING EFFECT. The provisions of this Agreement shall be binding upon and inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties. 19.8 ENTIRE AGREEMENT. This Agreement and the exhibits to this Agreement set forth the entire understanding of the parties with respect to the subject matter hereof and supersedes all existing agreements between the parties with respect to such subject matter, including, without limiting the foregoing, the Letter of Intent between the parties hereto concerning the subject matter hereof dated January 31, 1997. 19.9 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19.10 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the state of Minnesota. 19.11 VENUE. This Agreement has been made entirely within the state of Minnesota. This Agreement shall be governed by and construed in accordance with the laws of the state of Minnesota. If any suit or action is filed by any party to enforce this Agreement or otherwise with respect to the subject matter of this Agreement, venue shall be in state courts in Minneapolis, Hennepin County, Minnesota. 18 DATED this 14 day of March, 1997. SELLER: ------------------------------------------------------ Computer Assisted Technologies, Inc., a Wisconsin corporation By /s/ Dustin Elder ------------------------------ Dustin Elder, President BUYER: ------------------------------------------------------ Intelliphone, Inc., a Minnesota corporation By /s/ Jack Kohler ------------------------------ Jack Kohler, Vice President and Chief Financial Officer AS TO SECTIONS 18 AND 19, THE UNDERSIGNED INDIVIDUALLY ACKNOWLEDGE THE DISCLOSURES MADE THEREIN. /s/ Dustin Elder /s/ Jack Elder - ------------------------------------ ------------------------------------ Dustin Elder Jack Elder EX-10.16 23 EXHIBIT 10.16 ROUTE SERVICE AGREEMENT THIS AGREEMENT is made and entered into as of this 1st day of February, 1997, by and between INTELLIPHONE, INC., a Minnesota corporation, with offices at 6801 Wayzata Boulevard, St. Louis Park, MN 55426 (the "Company"), and COMPUTER ASSISTED TECHNOLOGIES, INC., a Wisconsin corporation, with offices at 10740 Lyndale Avenue South, Bloomington, MN 55420 ("CAT"). WHEREAS, the Company and CAT separately engage in providing private payphone services in various locations in Minnesota and Wisconsin; WHEREAS, CAT seeks to engage the Company to provide various services in connection with the operation of its business while it seeks the approval of the Minnesota and Wisconsin Public Utilities Commissions to transfer its assets to the Company; and WHEREAS, the Company is willing to provide such services in accordance with the terms and conditions hereof. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, do covenant and agree as follows: 1) DUTIES. Commencing on or about February 3, 1997, the Company shall provide to CAT all services which are reasonably necessary to ensure the proper functioning of CAT's payphones located at various sites in Minnesota and Wisconsin including, without limiting the foregoing, daily monitoring, coin collection, maintenance and service, long distance processing, and the payment of all bills, including payphone line charges, long distance charges and site provider rents. The Company will deposit all coins collected into its own account and receive all commission checks for operator service, long distance and dial-around compensation (less the January 1997 portion thereof). The Company shall further install all telephones to be installed pursuant to agreements executed by CAT. During the term of this Agreement, CAT shall pay all of its state, federal and local income taxes after application of any tax offsets available to it, and it shall be responsible for the cost of preparing said tax returns, including all accounting fees. CAT shall also remain liable for and shall pay when due all obligations arising during the term of this Agreement from payments and/or commissions due to site providers under any "Pay Telephone Agreements," "Customer Service Agreements" and "Site Agreements" to which it is a party, and shall further pay all telephone bills and the cost of long distance or other telephone service charges calculated through January 1, 1997. 2) COMPENSATION. The Company will pay CAT (a) $30,900 on the last day of February and March 1997, and (b) $35,300 on the last day of April 1997 and of each month thereafter during the term of this Agreement; provided, however, that such payment shall be reduced by any amount the equipment leasing companies of Berthel Fisher and TeleCapital receive directly from the commissions that would otherwise be remitted by long distance providers, including, but not limited to, Intellicall and Opticom. Any income generated from CAT's pay telephones each month which remains after such fees have been paid to CAT shall belong to the Company. 3) TERM OF AGREEMENT. This Agreement will commence on or about February 1, 1997, and continue thereafter unless earlier terminated by mutual consent of the parties or the closing of an agreement by which CAT shall transfer its assets to the Company. 4) FURTHER ASSURANCES. The parties hereto agree to take such further actions, including the execution and delivery of documents and certificates, as may be necessary, in order to more fully accomplish the purposes and intent of this Agreement. 5) PUBLIC DISCLOSURE. Unless otherwise compelled by legal process, neither CAT nor the Company shall disclose the existence of this Agreement or its terms without the prior written consent of the party, which consent shall not be unreasonably withheld. 6) NOTICES. Any notice required or permitted under this Agreement shall be in writing and delivered by hand or U.S. mail and addressed to the party at their respective address as set forth above. 7) BINDING EFFECT. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors or assigns. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. INTELLIPHONE, INC. By: /s/ Jack Kohler ------------------------------------ Jack Kohler, Vice President and Chief Financial Officer COMPUTER ASSISTED TECHNOLOGIES, INC. By: /s/ Jack Elder ----------------------------------- Jack Elder, President EX-10.17 24 EXHIBIT 10.17 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the 15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota corporation (the "Company"), and JEFFREY R. PALETZ, a resident of Minnesota ("Employee"). RECITALS: WHEREAS, Employee is currently employed by the Company; WHEREAS, Employee desires to continue his employment with the Company, and the Company desires to continue employing Employee, on the terms and conditions set forth below; WHEREAS, Employee and the Company acknowledge that it is in their best interests to establish formal severance arrangements for the benefit of Employee, in partial consideration for which Employee has agreed to observe certain nondisclosure and non-competition restrictions with respect to the Company, as set forth herein. NOW, THEREFORE, in consideration of the foregoing recital and the mutual promises and agreements contained in this Agreement, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as President, and Employee hereby accepts such employment with the Company on the terms and conditions set forth in this Agreement. Employee hereby acknowledges and agrees that the Company has no obligation to retain Employee in such position during the term of this Agreement, and that it may place Employee in another position and/or reassign him different duties as the Board of Directors may determine in its sole discretion. 2. TERM AND RENEWAL. Employee's employment by the Company shall commence under the terms hereof as of April 15, 1997, and shall continue for a period of two (2) years, unless such employment is terminated earlier as provided herein. The term of this Agreement shall renew automatically for successive one (1) year terms unless a party gives notice to the other not less than thirty (30) days prior to the end of a term that this Agreement is not to be renewed, or unless this Agreement is otherwise terminated as provided herein. 3. DUTIES. Employee agrees to perform faithfully and to the best of his abilities such duties as are reasonably assigned to him from time to time by the Company's Board of Directors. Employee agrees to devote his entire business time, and to apply his best efforts, energy and skills, to properly discharge the duties of such employment, to promote the Company's interests, and to participate in the active management of the Company while employed hereunder. Employee shall report directly to the Company's Board of Directors or to such other officer of the Company as the Board of Directors may determine in its sole discretion. 4. COMPENSATION. (a) Employee's compensation for the services performed under this Agreement and for Employee's covenants and agreements hereinafter set forth shall be a salary of Six Thousand Four Hundred Forty-Eight Dollars and 33/100 ($6,448.33) per month. (b) As additional compensation, Employee shall be entitled to the fringe benefits described in Paragraph 5 below and may, in the sole discretion of the Company's Board of Directors, receive such additional compensation, salary, bonus or other benefits as the Company's Board of Directors shall determine. 5. FRINGE BENEFITS. Employee shall have the right to participate in the fringe benefit plans generally provided by the Company to its officers, subject, however, to Employee's qualification for participation in such benefit plans pursuant to the terms and conditions under which such benefit plans are offered. 6. VACATION. Employee shall be entitled during each calendar year in which this Agreement remains in effect such paid vacation time as the Company's Board of Directors shall determine in its sole discretion. Employee may carry over into the next calendar year not more than one (1) week of vacation. Any vacation time in excess of that which may be carried forward which is not used during any such calendar year may not be carried forward to any succeeding calendar year and shall be forfeited. No vacation may be taken in advance. Employee shall not be entitled to receive any payment in cash for vacation time remaining unused at the end of any year or upon termination of this Agreement. 7. NONCOMPETITION. The parties also acknowledge and agree that the Company's customer contacts and relations are established and maintained at great expense and that Employee, by virtue of his employment under this Agreement, will have unique and extensive exposure to, and personal contact with, the Company's customers and that Employee will be able to establish a unique relationship with those individuals that will enable him, both during and after employment, to unfairly compete with the Company. In consideration of the continued employment by the Company of Employee, and in consideration of the compensation and newly established severance arrangement provided to Employee by the Company under this Agreement, Employee agrees that he shall not at any time during the term of this Agreement, nor for a period of one (1) year after Employee ceases to be employed by the Company do the following: (a) directly or indirectly, become a stockholder, partner, member or other owner in any business or entity that is a business competitor of the Company, provided, however, that Employee shall not be prohibited from, and the foregoing restriction shall not apply to, Employee's ownership of less than a ten percent (10%) interest in any company whose shares of stock are traded in a recognized stock exchange or traded in the over-the-counter market; and/or -2- (b) in any manner induce, attempt to induce or assist others to induce any customer, client, employee or other person or entity having a business or employment relationship with the Company to terminate such relationship, or do anything to interfere with the relationship of the Company with such person or entity. (c) communicate with any party with whom the Company has a Site Contract in place until six (6) months following the expiration of any such Contract. Employee expressly agrees that in the event of a breach of the subparagraph (c), in addition to any other remedies provided hereunder or by law, the Company will be entitled to recover from Employee as liquidated damages, an amount equal to Five Thousand Dollars ($5,000) for each phone located on any site where a communication has been made in violation of this subparagraph (c). 8. CONFIDENTIAL INFORMATION. The parties agree that the Company's customers, business connections, agreements, customer lists, procedures, operations, business software and computer programs and printouts, techniques, financial information and other aspects of the business are established at great expense and protected as confidential information and provide the Company with a substantial competitive advantage in conducting its business. The parties further agree that by virtue of Employee's employment with the Company, Employee will have access to, and be entrusted with, secret, confidential and proprietary information, and that the Company would suffer great loss and injury if Employee would disclose this information or use it to compete with the Company. Therefore, in consideration of the compensation and other benefits to be provided to Employee under this Agreement, including the severance arrangement established herein, Employee agrees that during the term of his employment, and for a period of one (1) year after the termination of Employee's employment with the Company, Employee shall not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, consultant or in any other capacity, use or disclose, or cause to be used or disclosed, any secret, confidential or proprietary information acquired by Employee during his employment with the Company, whether owned by the Company prior to or discovered and developed by the Company subsequent to Employee's employment, even though Employee may have participated in the discovery or development of such information. 9. RELIEF FOR VIOLATIONS. Employee covenants and agrees that if he shall violate any of the covenants and agreements under Paragraph 7 and/or Paragraph 8 or both, the Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration or benefits which Employee directly or indirectly has realized and/or may realize as the result of, arising out of, or in connection with, any such violation. Employee acknowledges that an irreparable injury may result to the Company and its business in the event of a breach of Employee's covenants contained in Paragraph 7 and/or Paragraph 8 of this Agreement. Employee also acknowledges and agrees that the damages or injuries which the Company may sustain as a result of Employee's breach of Paragraphs 7 and/or Paragraph 8 of this Agreement are difficult to ascertain and money damages alone may not be an adequate remedy to the Company. Employee, therefore, agrees that if a controversy arises concerning the rights or obligations of a party under this Agreement, such rights or obligations shall be enforceable in a court of equity by a decree of specific performance and the Company shall also be entitled to any injunctive relief -3- necessary to prevent or restrain any violation by Employee or any persons directly or indirectly acting for or with Employee of the provisions of Paragraphs 7 and/or Paragraph 8 of this Agreement. Such remedies, however, shall be cumulative and non-exclusive and shall be in addition to any other remedy to which the parties may be entitled. 10. REASONABLE RESTRICTIONS. Employee agrees that the terms and conditions of Paragraphs 7, 8 and 9 of this Agreement are reasonable and necessary for the protection of the Company's business, trade secrets and confidential information and to prevent damage or loss to the Company as the result of action taken by Employee. Employee acknowledges that the consideration provided for herein is sufficient to fully and adequately compensate Employee for agreeing to the restrictions set forth in Paragraphs 7, 8 and 9 of this Agreement. Employee acknowledges that he could continue to actively pursue his career and earn sufficient compensation in business without breaching any of the restrictions contained in this Agreement. 11. TERMINATION; SEVERANCE ARRANGEMENT. (a) Except as otherwise set forth herein, if either party desires to terminate Employee's employment with the Company, such party shall give written notice of termination to the other party not less than thirty (30) days prior to the effective date of termination. (b) In the event of any termination of Employee's employment with the Company except that "for cause" (as defined in Section 11(c) below), Employee shall be entitled to continue receiving the full compensation and benefits set forth in Section 4 above for a period of six (6) months following such termination. If such termination is occasioned by Employee's death or "disability," the continued compensation to which Employee is entitled shall be paid to Employee's estate or personal representative, as the case may be. For purposes of this Agreement, "disability" shall mean that Employee is unable to perform substantially all of his duties for a period of one (1) year or for a total of twelve (12) months in any two (2) year period. If there is any dispute as to whether the termination of Employee's employment was due to Employee's physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of making such determination. An examination of Employee shall be made within thirty (30) days after written notice by the Company or Employee to the other by a licensed physician agreeable to Employee and the Company. Employee shall submit to such examination and provide such information that such physician may request and the determination of such physician as to the question of Employee's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. (c) The Company shall have the right to terminate the employment of Employee immediately "for cause" without notice upon the happening of any of the following events: (i) The breach by Employee of any provisions of Paragraph 7 or Paragraph 8 of this Agreement; -4- (ii) The commission by Employee of any act of gross misconduct or malfeasance with respect to the Company or its business; or (iii) The conviction of Employee of a felony or misdemeanor which, in the reasonable judgment of the Company's Board of Directors, is likely to have a material adverse effect upon the business or reputation of Employee or the Company or which substantially impairs Employee's ability to perform his duties for the Company. (d) Upon notice of termination of employment or at any time thereafter as directed by the Company, Employee shall return to the Company any and all property of the Company in Employee's possession or control. The agreements of Employee pursuant to Paragraphs 7, 8, 9 and 10 shall survive the termination of employment under this Agreement. 12. REIMBURSEMENT OF BUSINESS EXPENSES. The Company shall reimburse Employee for the amount of expenses reasonably and necessarily incurred by Employee in connection with the Company's business; provided, however, that no single expenditure in excess of $100 shall be made without the Company's prior approval. Employee shall submit an itemized accounting for all expenses for which reimbursement is sought at such time and in such detail as the Company shall reasonably require. The Company shall not be obligated to pay or reimburse expenses for which adequate documentation is not furnished in the manner directed by the Company. 13. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 14. SEVERABILITY. In the event any provision of this Agreement is held to be invalid or unenforceable for any reason whatsoever, such invalidity or unenforceability shall not affect any other provision of this Agreement and the remaining covenants, restrictions and provisions hereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. FURTHERMORE, THE PARTIES SPECIFICALLY ACKNOWLEDGE THE ABOVE COVENANT NOT TO COMPETE AND COVENANT NOT TO DISCLOSE CONFIDENTIAL INFORMATION ARE SEPARATE AND INDEPENDENT AGREEMENTS. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. 16. BENEFIT. This Agreement shall be binding upon and inure to the benefit of and shall be enforceable by and against the Company, its successors and assigns, and Employee, his heirs, beneficiaries and legal representatives. Employee's rights and obligations under this Agreement may not be delegated or assigned except as specifically set forth herein. -5- 17. NOTICES. Any notice to be given hereunder shall be deemed sufficient if addressed in writing, and delivered by registered or certified mail or delivered personally, in the case of the Company to its principal business office, and in the case of Employee, to his address appearing on the Company's records, or to such other address as he may designate in writing to the Company. 18. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire agreement and understanding between the parties hereto in reference to all of the matters herein agreed upon, and no representations, promises, agreements or understandings, whether written or oral, not herein contained shall be of any force or effect. This Agreement may only be amended by an agreement in writing signed by all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. EMPLOYEE COMPANY: INTELLIPHONE, INC., /s/ Jeffrey R. Paletz a Minnesota corporation - --------------------- Jeffrey R. Paletz By: /s/ Jack Kohler ---------------------------------- Name: Jack Kohler ---------------------------- Title: Chief Financial Officer --------------------------- -6- EX-10.18 25 EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the 15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota corporation (the "Company"), and MELVIN GRAF, a resident of Minnesota ("Employee"). RECITALS: WHEREAS, Employee is currently employed by the Company; WHEREAS, Employee desires to continue his employment with the Company, and the Company desires to continue employing Employee, on the terms and conditions set forth below; WHEREAS, Employee and the Company acknowledge that it is in their best interests to establish formal severance arrangements for the benefit of Employee, in partial consideration for which Employee has agreed to observe certain nondisclosure and non-competition restrictions with respect to the Company, as set forth herein. NOW, THEREFORE, in consideration of the foregoing recital and the mutual promises and agreements contained in this Agreement, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as Executive Vice President, and Employee hereby accepts such employment with the Company on the terms and conditions set forth in this Agreement. Employee hereby acknowledges and agrees that the Company has no obligation to retain Employee in such position during the term of this Agreement, and that it may place Employee in another position and/or reassign him different duties as the Board of Directors may determine in its sole discretion. 2. TERM AND RENEWAL. Employee's employment by the Company shall commence under the terms hereof as of April 15, 1997, and shall continue for a period of two (2) years, unless such employment is terminated earlier as provided herein. The term of this Agreement shall renew automatically for successive one (1) year terms unless a party gives notice to the other not less than thirty (30) days prior to the end of a term that this Agreement is not to be renewed, or unless this Agreement is otherwise terminated as provided herein. 3. DUTIES. Employee agrees to perform faithfully and to the best of his abilities such duties as are reasonably assigned to him from time to time by the Company's Board of Directors. Employee agrees to devote his entire business time, and to apply his best efforts, energy and skills, to properly discharge the duties of such employment, to promote the Company's interests, and to participate in the active management of the Company while employed hereunder. Employee shall report directly to the Company's Board of Directors or to such other officer of the Company as the Board of Directors may determine in its sole discretion. 4. COMPENSATION. (a) Employee's compensation for the services performed under this Agreement and for Employee's covenants and agreements hereinafter set forth shall be a salary of Five Thousand Eight Hundred Thirty Dollars ($5,830.00) per month. (b) As additional compensation, Employee shall be entitled to the fringe benefits described in Paragraph 5 below and may, in the sole discretion of the Company's Board of Directors, receive such additional compensation, salary, bonus or other benefits as the Company's Board of Directors shall determine. 5. FRINGE BENEFITS. Employee shall have the right to participate in the fringe benefit plans generally provided by the Company to its officers, subject, however, to Employee's qualification for participation in such benefit plans pursuant to the terms and conditions under which such benefit plans are offered. 6. VACATION. Employee shall be entitled during each calendar year in which this Agreement remains in effect such paid vacation time as the Company's Board of Directors shall determine in its sole discretion. Employee may carry over into the next calendar year not more than one (1) week of vacation. Any vacation time in excess of that which may be carried forward which is not used during any such calendar year may not be carried forward to any succeeding calendar year and shall be forfeited. No vacation may be taken in advance. Employee shall not be entitled to receive any payment in cash for vacation time remaining unused at the end of any year or upon termination of this Agreement. 7. NONCOMPETITION. The parties also acknowledge and agree that the Company's customer contacts and relations are established and maintained at great expense and that Employee, by virtue of his employment under this Agreement, will have unique and extensive exposure to, and personal contact with, the Company's customers and that Employee will be able to establish a unique relationship with those individuals that will enable him, both during and after employment, to unfairly compete with the Company. In consideration of the continued employment by the Company of Employee, and in consideration of the compensation and newly established severance arrangement provided to Employee by the Company under this Agreement, Employee agrees that he shall not at any time during the term of this Agreement, nor for a period of one (1) year after Employee ceases to be employed by the Company do the following: (a) directly or indirectly, become a stockholder, partner, member or other owner in any business or entity that is a business competitor of the Company, provided, however, that Employee shall not be prohibited from, and the foregoing restriction shall not apply to, Employee's ownership of less than a ten percent (10%) interest in any company whose shares of stock are traded in a recognized stock exchange or traded in the over-the-counter market; and/or -2- (b) in any manner induce, attempt to induce or assist others to induce any customer, client, employee or other person or entity having a business or employment relationship with the Company to terminate such relationship, or do anything to interfere with the relationship of the Company with such person or entity. (c) communicate with any party with whom the Company has a Site Contract in place until six (6) months following the expiration of any such Contract. Employee expressly agrees that in the event of a breach of the subparagraph (c), in addition to any other remedies provided hereunder or by law, the Company will be entitled to recover from Employee as liquidated damages, an amount equal to Five Thousand Dollars ($5,000) for each phone located on any site where a communication has been made in violation of this subparagraph (c). 8. CONFIDENTIAL INFORMATION. The parties agree that the Company's customers, business connections, agreements, customer lists, procedures, operations, business software and computer programs and printouts, techniques, financial information and other aspects of the business are established at great expense and protected as confidential information and provide the Company with a substantial competitive advantage in conducting its business. The parties further agree that by virtue of Employee's employment with the Company, Employee will have access to, and be entrusted with, secret, confidential and proprietary information, and that the Company would suffer great loss and injury if Employee would disclose this information or use it to compete with the Company. Therefore, in consideration of the compensation and other benefits to be provided to Employee under this Agreement, including the severance arrangement established herein, Employee agrees that during the term of his employment, and for a period of one (1) year after the termination of Employee's employment with the Company, Employee shall not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, consultant or in any other capacity, use or disclose, or cause to be used or disclosed, any secret, confidential or proprietary information acquired by Employee during his employment with the Company, whether owned by the Company prior to or discovered and developed by the Company subsequent to Employee's employment, even though Employee may have participated in the discovery or development of such information. 9. RELIEF FOR VIOLATIONS. Employee covenants and agrees that if he shall violate any of the covenants and agreements under Paragraph 7 and/or Paragraph 8 or both, the Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration or benefits which Employee directly or indirectly has realized and/or may realize as the result of, arising out of, or in connection with, any such violation. Employee acknowledges that an irreparable injury may result to the Company and its business in the event of a breach of Employee's covenants contained in Paragraph 7 and/or Paragraph 8 of this Agreement. Employee also acknowledges and agrees that the damages or injuries which the Company may sustain as a result of Employee's breach of Paragraphs 7 and/or Paragraph 8 of this Agreement are difficult to ascertain and money damages alone may not be an adequate remedy to the Company. Employee, therefore, agrees that if a controversy arises concerning the rights or obligations of a party under this Agreement, such rights or obligations shall be enforceable in a court of equity by a decree of specific performance and the Company shall also be entitled to any injunctive relief -3- necessary to prevent or restrain any violation by Employee or any persons directly or indirectly acting for or with Employee of the provisions of Paragraphs 7 and/or Paragraph 8 of this Agreement. Such remedies, however, shall be cumulative and non-exclusive and shall be in addition to any other remedy to which the parties may be entitled. 10. REASONABLE RESTRICTIONS. Employee agrees that the terms and conditions of Paragraphs 7, 8 and 9 of this Agreement are reasonable and necessary for the protection of the Company's business, trade secrets and confidential information and to prevent damage or loss to the Company as the result of action taken by Employee. Employee acknowledges that the consideration provided for herein is sufficient to fully and adequately compensate Employee for agreeing to the restrictions set forth in Paragraphs 7, 8 and 9 of this Agreement. Employee acknowledges that he could continue to actively pursue his career and earn sufficient compensation in business without breaching any of the restrictions contained in this Agreement. 11. TERMINATION; SEVERANCE ARRANGEMENT. (a) Except as otherwise set forth herein, if either party desires to terminate Employee's employment with the Company, such party shall give written notice of termination to the other party not less than thirty (30) days prior to the effective date of termination. (b) In the event of any termination of Employee's employment with the Company except that "for cause" (as defined in Section 11(c) below), Employee shall be entitled to continue receiving the full compensation and benefits set forth in Section 4 above for a period of six (6) months following such termination. If such termination is occasioned by Employee's death or "disability," the continued compensation to which Employee is entitled shall be paid to Employee's estate or personal representative, as the case may be. For purposes of this Agreement, "disability" shall mean that Employee is unable to perform substantially all of his duties for a period of one (1) year or for a total of twelve (12) months in any two (2) year period. If there is any dispute as to whether the termination of Employee's employment was due to Employee's physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of making such determination. An examination of Employee shall be made within thirty (30) days after written notice by the Company or Employee to the other by a licensed physician agreeable to Employee and the Company. Employee shall submit to such examination and provide such information that such physician may request and the determination of such physician as to the question of Employee's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. (c) The Company shall have the right to terminate the employment of Employee immediately "for cause" without notice upon the happening of any of the following events: (i) The breach by Employee of any provisions of Paragraph 7 or Paragraph 8 of this Agreement; -4- (ii) The commission by Employee of any act of gross misconduct or malfeasance with respect to the Company or its business; or (iii) The conviction of Employee of a felony or misdemeanor which, in the reasonable judgment of the Company's Board of Directors, is likely to have a material adverse effect upon the business or reputation of Employee or the Company or which substantially impairs Employee's ability to perform his duties for the Company. (d) Upon notice of termination of employment or at any time thereafter as directed by the Company, Employee shall return to the Company any and all property of the Company in Employee's possession or control. The agreements of Employee pursuant to Paragraphs 7, 8, 9 and 10 shall survive the termination of employment under this Agreement. 12. REIMBURSEMENT OF BUSINESS EXPENSES. The Company shall reimburse Employee for the amount of expenses reasonably and necessarily incurred by Employee in connection with the Company's business; provided, however, that no single expenditure in excess of $100 shall be made without the Company's prior approval. Employee shall submit an itemized accounting for all expenses for which reimbursement is sought at such time and in such detail as the Company shall reasonably require. The Company shall not be obligated to pay or reimburse expenses for which adequate documentation is not furnished in the manner directed by the Company. 13. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 14. SEVERABILITY. In the event any provision of this Agreement is held to be invalid or unenforceable for any reason whatsoever, such invalidity or unenforceability shall not affect any other provision of this Agreement and the remaining covenants, restrictions and provisions hereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. FURTHERMORE, THE PARTIES SPECIFICALLY ACKNOWLEDGE THE ABOVE COVENANT NOT TO COMPETE AND COVENANT NOT TO DISCLOSE CONFIDENTIAL INFORMATION ARE SEPARATE AND INDEPENDENT AGREEMENTS. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. 16. BENEFIT. This Agreement shall be binding upon and inure to the benefit of and shall be enforceable by and against the Company, its successors and assigns, and Employee, his heirs, beneficiaries and legal representatives. Employee's rights and obligations under this Agreement may not be delegated or assigned except as specifically set forth herein. -5- 17. NOTICES. Any notice to be given hereunder shall be deemed sufficient if addressed in writing, and delivered by registered or certified mail or delivered personally, in the case of the Company to its principal business office, and in the case of Employee, to his address appearing on the Company's records, or to such other address as he may designate in writing to the Company. 18. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire agreement and understanding between the parties hereto in reference to all of the matters herein agreed upon, and no representations, promises, agreements or understandings, whether written or oral, not herein contained shall be of any force or effect. This Agreement may only be amended by an agreement in writing signed by all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. EMPLOYEE COMPANY: INTELLIPHONE, INC., /s/ Melvin Graf Minnesota corporation - ------------------------------ Melvin Graf By: /s/ Jeff Paletz ---------------------------------- Name: Jeff Paletz --------------------------- Title: President -------------------------- -6- EX-10.19 26 EXHIBIT 10.19 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective as of the 15th day of April, 1997, by and between INTELLIPHONE, INC., a Minnesota corporation (the "Company"), and JACK KOHLER, a resident of Minnesota ("Employee"). RECITALS: WHEREAS, Employee is currently employed by the Company; WHEREAS, Employee desires to continue his employment with the Company, and the Company desires to continue employing Employee, on the terms and conditions set forth below; WHEREAS, Employee and the Company acknowledge that it is in their best interests to establish formal severance arrangements for the benefit of Employee, in partial consideration for which Employee has agreed to observe certain nondisclosure and non-competition restrictions with respect to the Company, as set forth herein. NOW, THEREFORE, in consideration of the foregoing recital and the mutual promises and agreements contained in this Agreement, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Vice President and Chief Financial Officer, and Employee hereby accepts such employment with the Company on the terms and conditions set forth in this Agreement. Employee hereby acknowledges and agrees that the Company has no obligation to retain Employee in such position during the term of this Agreement, and that it may place Employee in another position and/or reassign him different duties as the Board of Directors may determine in its sole discretion. 2. TERM AND RENEWAL. Employee's employment by the Company shall commence under the terms hereof as of April 15, 1997, and shall continue for a period of two (2) years, unless such employment is terminated earlier as provided herein. The term of this Agreement shall renew automatically for successive one (1) year terms unless a party gives notice to the other not less than thirty (30) days prior to the end of a term that this Agreement is not to be renewed, or unless this Agreement is otherwise terminated as provided herein. 3. DUTIES. Employee agrees to perform faithfully and to the best of his abilities such duties as are reasonably assigned to him from time to time by the Company's Board of Directors. Employee agrees to devote his entire business time, and to apply his best efforts, energy and skills, to properly discharge the duties of such employment, to promote the Company's interests, and to participate in the active management of the Company while employed hereunder. Employee shall report directly to the Company's Board of Directors or to such other officer of the Company as the Board of Directors may determine in its sole discretion. 4. COMPENSATION. (a) Employee's compensation for the services performed under this Agreement and for Employee's covenants and agreements hereinafter set forth shall be a salary of Five Thousand Three Hundred Dollars ($5,300.00) per month. (b) As additional compensation, Employee shall be entitled to the fringe benefits described in Paragraph 5 below and may, in the sole discretion of the Company's Board of Directors, receive such additional compensation, salary, bonus or other benefits as the Company's Board of Directors shall determine. 5. FRINGE BENEFITS. Employee shall have the right to participate in the fringe benefit plans generally provided by the Company to its officers, subject, however, to Employee's qualification for participation in such benefit plans pursuant to the terms and conditions under which such benefit plans are offered. 6. VACATION. Employee shall be entitled during each calendar year in which this Agreement remains in effect such paid vacation time as the Company's Board of Directors shall determine in its sole discretion. Employee may carry over into the next calendar year not more than one (1) week of vacation. Any vacation time in excess of that which may be carried forward which is not used during any such calendar year may not be carried forward to any succeeding calendar year and shall be forfeited. No vacation may be taken in advance. Employee shall not be entitled to receive any payment in cash for vacation time remaining unused at the end of any year or upon termination of this Agreement. 7. NONCOMPETITION. The parties also acknowledge and agree that the Company's customer contacts and relations are established and maintained at great expense and that Employee, by virtue of his employment under this Agreement, will have unique and extensive exposure to, and personal contact with, the Company's customers and that Employee will be able to establish a unique relationship with those individuals that will enable him, both during and after employment, to unfairly compete with the Company. In consideration of the continued employment by the Company of Employee, and in consideration of the compensation and newly established severance arrangement provided to Employee by the Company under this Agreement, Employee agrees that he shall not at any time during the term of this Agreement, nor for a period of one (1) year after Employee ceases to be employed by the Company do the following: (a) directly or indirectly, become a stockholder, partner, member or other owner in any business or entity that is a business competitor of the Company, provided, however, that Employee shall not be prohibited from, and the foregoing restriction shall not apply to, Employee's ownership of less than a ten percent (10%) interest in any company whose shares of stock are traded in a recognized stock exchange or traded in the over-the-counter market; and/or -2- (b) in any manner induce, attempt to induce or assist others to induce any customer, client, employee or other person or entity having a business or employment relationship with the Company to terminate such relationship, or do anything to interfere with the relationship of the Company with such person or entity. (c) communicate with any party with whom the Company has a Site Contract in place until six (6) months following the expiration of any such Contract. Employee expressly agrees that in the event of a breach of the subparagraph (c), in addition to any other remedies provided hereunder or by law, the Company will be entitled to recover from Employee as liquidated damages, an amount equal to Five Thousand Dollars ($5,000) for each phone located on any site where a communication has been made in violation of this subparagraph (c). 8. CONFIDENTIAL INFORMATION. The parties agree that the Company's customers, business connections, agreements, customer lists, procedures, operations, business software and computer programs and printouts, techniques, financial information and other aspects of the business are established at great expense and protected as confidential information and provide the Company with a substantial competitive advantage in conducting its business. The parties further agree that by virtue of Employee's employment with the Company, Employee will have access to, and be entrusted with, secret, confidential and proprietary information, and that the Company would suffer great loss and injury if Employee would disclose this information or use it to compete with the Company. Therefore, in consideration of the compensation and other benefits to be provided to Employee under this Agreement, including the severance arrangement established herein, Employee agrees that during the term of his employment, and for a period of one (1) year after the termination of Employee's employment with the Company, Employee shall not, directly or indirectly, either individually or as an employee, agent, partner, shareholder, consultant or in any other capacity, use or disclose, or cause to be used or disclosed, any secret, confidential or proprietary information acquired by Employee during his employment with the Company, whether owned by the Company prior to or discovered and developed by the Company subsequent to Employee's employment, even though Employee may have participated in the discovery or development of such information. 9. RELIEF FOR VIOLATIONS. Employee covenants and agrees that if he shall violate any of the covenants and agreements under Paragraph 7 and/or Paragraph 8 or both, the Company shall be entitled to an accounting and repayment of all profits, compensation, commissions, remuneration or benefits which Employee directly or indirectly has realized and/or may realize as the result of, arising out of, or in connection with, any such violation. Employee acknowledges that an irreparable injury may result to the Company and its business in the event of a breach of Employee's covenants contained in Paragraph 7 and/or Paragraph 8 of this Agreement. Employee also acknowledges and agrees that the damages or injuries which the Company may sustain as a result of Employee's breach of Paragraphs 7 and/or Paragraph 8 of this Agreement are difficult to ascertain and money damages alone may not be an adequate remedy to the Company. Employee, therefore, agrees that if a controversy arises concerning the rights or obligations of a party under this Agreement, such rights or obligations shall be enforceable in a court of equity by a decree of specific performance and the Company shall also be entitled to any injunctive relief -3- necessary to prevent or restrain any violation by Employee or any persons directly or indirectly acting for or with Employee of the provisions of Paragraphs 7 and/or Paragraph 8 of this Agreement. Such remedies, however, shall be cumulative and non-exclusive and shall be in addition to any other remedy to which the parties may be entitled. 10. REASONABLE RESTRICTIONS. Employee agrees that the terms and conditions of Paragraphs 7, 8 and 9 of this Agreement are reasonable and necessary for the protection of the Company's business, trade secrets and confidential information and to prevent damage or loss to the Company as the result of action taken by Employee. Employee acknowledges that the consideration provided for herein is sufficient to fully and adequately compensate Employee for agreeing to the restrictions set forth in Paragraphs 7, 8 and 9 of this Agreement. Employee acknowledges that he could continue to actively pursue his career and earn sufficient compensation in business without breaching any of the restrictions contained in this Agreement. 11. TERMINATION; SEVERANCE ARRANGEMENT. (a) Except as otherwise set forth herein, if either party desires to terminate Employee's employment with the Company, such party shall give written notice of termination to the other party not less than thirty (30) days prior to the effective date of termination. (b) In the event of any termination of Employee's employment with the Company except that "for cause" (as defined in Section 11(c) below), Employee shall be entitled to continue receiving the full compensation and benefits set forth in Section 4 above for a period of six (6) months following such termination. If such termination is occasioned by Employee's death or "disability," the continued compensation to which Employee is entitled shall be paid to Employee's estate or personal representative, as the case may be. For purposes of this Agreement, "disability" shall mean that Employee is unable to perform substantially all of his duties for a period of one (1) year or for a total of twelve (12) months in any two (2) year period. If there is any dispute as to whether the termination of Employee's employment was due to Employee's physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of making such determination. An examination of Employee shall be made within thirty (30) days after written notice by the Company or Employee to the other by a licensed physician agreeable to Employee and the Company. Employee shall submit to such examination and provide such information that such physician may request and the determination of such physician as to the question of Employee's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. (c) The Company shall have the right to terminate the employment of Employee immediately "for cause" without notice upon the happening of any of the following events: (i) The breach by Employee of any provisions of Paragraph 7 or Paragraph 8 of this Agreement; -4- (ii) The commission by Employee of any act of gross misconduct or malfeasance with respect to the Company or its business; or (iii) The conviction of Employee of a felony or misdemeanor which, in the reasonable judgment of the Company's Board of Directors, is likely to have a material adverse effect upon the business or reputation of Employee or the Company or which substantially impairs Employee's ability to perform his duties for the Company. (d) Upon notice of termination of employment or at any time thereafter as directed by the Company, Employee shall return to the Company any and all property of the Company in Employee's possession or control. The agreements of Employee pursuant to Paragraphs 7, 8, 9 and 10 shall survive the termination of employment under this Agreement. 12. REIMBURSEMENT OF BUSINESS EXPENSES. The Company shall reimburse Employee for the amount of expenses reasonably and necessarily incurred by Employee in connection with the Company's business; provided, however, that no single expenditure in excess of $100 shall be made without the Company's prior approval. Employee shall submit an itemized accounting for all expenses for which reimbursement is sought at such time and in such detail as the Company shall reasonably require. The Company shall not be obligated to pay or reimburse expenses for which adequate documentation is not furnished in the manner directed by the Company. 13. WAIVER. The failure of either party to insist, in any one or more instances, upon performance of the terms or conditions of this Agreement shall not be construed as a waiver or a relinquishment of any right granted hereunder or of the future performance of any such term, covenant or condition. 14. SEVERABILITY. In the event any provision of this Agreement is held to be invalid or unenforceable for any reason whatsoever, such invalidity or unenforceability shall not affect any other provision of this Agreement and the remaining covenants, restrictions and provisions hereof shall remain in full force and effect and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. FURTHERMORE, THE PARTIES SPECIFICALLY ACKNOWLEDGE THE ABOVE COVENANT NOT TO COMPETE AND COVENANT NOT TO DISCLOSE CONFIDENTIAL INFORMATION ARE SEPARATE AND INDEPENDENT AGREEMENTS. 15. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. 16. BENEFIT. This Agreement shall be binding upon and inure to the benefit of and shall be enforceable by and against the Company, its successors and assigns, and Employee, his heirs, beneficiaries and legal representatives. Employee's rights and obligations under this Agreement may not be delegated or assigned except as specifically set forth herein. -5- 17. NOTICES. Any notice to be given hereunder shall be deemed sufficient if addressed in writing, and delivered by registered or certified mail or delivered personally, in the case of the Company to its principal business office, and in the case of Employee, to his address appearing on the Company's records, or to such other address as he may designate in writing to the Company. 18. ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire agreement and understanding between the parties hereto in reference to all of the matters herein agreed upon, and no representations, promises, agreements or understandings, whether written or oral, not herein contained shall be of any force or effect. This Agreement may only be amended by an agreement in writing signed by all of the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written. EMPLOYEE COMPANY: INTELLIPHONE, INC., /s/ Jack Kohler a Minnesota corporation - ------------------------------ Jack Kohler By: /s/ Jeff Paletz ---------------------------------- Name: Jeff Paletz ----------------------------- Title: President ----------------------------- -6- EX-10.20 27 EX10-20_3890 AGREEMENT FOR SERVICE RESALE BETWEEN CHOICETEL, INC. AND U S WEST COMMUNICATIONS, INC. TABLE OF CONTENTS
PAGE ----- I. RECITALS & PRINCIPALS.............................................................................. 3 II. SCOPE OF AGREEMENT................................................................................. 4 III. DEFINITIONS........................................................................................ 4 IV. RESALE SERVICES.................................................................................... 5 A. Description.................................................................................... 5 B. Scope.......................................................................................... 5 C. Ordering and Maintenance....................................................................... 6 D. Reseller Responsibilities...................................................................... 7 E. Rates and Charges.............................................................................. 8 F. Collateral and Training........................................................................ 9 G. Cooperation.................................................................................... 10 V. ACCESS TO OPERATIONAL SUPPORT (OSS)................................................................ 10 VI. DIRECTORY LISTINGS................................................................................. 10 VII. GENERAL PROVISIONS................................................................................. 11 A. Term........................................................................................... 11 B. Billing........................................................................................ 11 C. Payment........................................................................................ 11 D. Deposit........................................................................................ 12 E. Taxes.......................................................................................... 13 F. Force Majeure.................................................................................. 13 G. Responsibility of Each Party................................................................... 13 H. Limitation of Liability........................................................................ 13 I. Indemnification................................................................................ 14 J. Patents, Trademarks and Branding............................................................... 14 K. Warranties..................................................................................... 16 L. Assignment..................................................................................... 16 M. Default........................................................................................ 16 N. Severability................................................................................... 16 O. Nondisclosure.................................................................................. 16 P. Survival....................................................................................... 18 Q. Dispute Resolution............................................................................. 18 R. State Commission Arbitration Issues............................................................ 18
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PAGE ----- S. Governing Law.................................................................................. 18 T. Limitation of Action........................................................................... 18 U. Joint Work Project............................................................................. 19 V. Notices........................................................................................ 19 W. No Third Party Beneficiaries................................................................... 19 X. Publicity and Advertising...................................................................... 19 Y. Amendments or Waivers.......................................................................... 19 Z. Most Favored Nation............................................................................ 20 AA. Executed In Counterparts...................................................................... 20 BB. Headings of No force or Effect................................................................ 20 CC. Entire Agreement.............................................................................. 20
2 AGREEMENT FOR SERVICE RESALE This is an Agreement for Service Resale ("Agreement"), between ChoiceTel, Inc., ("Reseller"), a Certified Reseller and US WEST Communications, Inc. ("USWC") (collectively, "the Parties") in which USWC will provide certain services to Reseller within the state of Minnesota. Where required, this Agreement or the portions of this Agreement relative to a particular state, will be submitted to the appropriate Public Utilities Commission ("Commission") and the Parties will specifically request that the Commission promptly approve this Agreement and refrain from taking any action to change, suspend or otherwise delay implementation of this Agreement. The Parties enter into this Agreement without prejudice to any positions they have taken previously, or may take in the future in any legislative, regulatory, or other public forum addressing any matters, including matters related to the types of arrangements prescribed by this Agreement. The Parties agree and understand that USWC is proposing certain provisions in this contract based, in large part, on the FCC's First Report and Order, IN THE MATTER OF IMPLEMENTING OF THE LOCAL COMPETITION PROVISIONS IN THE TELECOMMUNICATIONS ACT OF 1996, CC Docket No. 96-98, rel. Aug. 8, 1996 ("FCC lst Order") and the Second Report and Order and Memorandum Opinion and Order, IN THE MATTER OF IMPLEMENTATION OF THE LOCAL COMPETITION PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996, CC Docket No. 96-98, rel. Aug. 8, 1996 ("FCC 2d Order"). To the extent that certain of the rules contained in the FCC lst Order and the FCC 2d Order are deemed by the courts to be not effective, this contract shall be modified to comport with the final court decisions and subsequent FCC or state Commission decisions or rules issued to comply with the courts' decisions. I. RECITALS & PRINCIPLES. WHEREAS, the Telecommunications Act of 1996 (the "Act") was signed into law on February 8, 1996; and WHEREAS, the Act places certain duties and obligations upon, and grants certain rights to, Telecommunications Carriers; and WHEREAS, USWC is an Incumbent Local Exchange Carrier or has a majority ownership interest in local exchange companies ("USWCs") which are Incumbent Local Exchange Carriers; and WHEREAS, the Telecommunications Act of 1996 has specific requirements for service resale, commonly referred to as. a part of the "checklist" and USWC desires that this Agreement meet those checklist requirements; and WHEREAS, USWC, for itself and its Affiliates, is willing to sell services for resale, on the terms and subject to the conditions of this Agreement; and, WHEREAS, Reseller is a Telecommunications Carrier and has requested that USWC negotiate an Agreement with Reseller for the provision of USWC services for resale pursuant to the Act and in conformance with USWC's duties under the Act; and WHEREAS, the parties have arrived at this Agreement through voluntary negotiations undertaken pursuant to the Act, 3 NOW, THEREFORE, in consideration of the mutual provisions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Reseller and USWC hereby covenant and agree as follows: II. SCOPE OF AGREEMENT. A. This Agreement sets forth the terms, conditions and prices under which USWC agrees to provide services for resale. Unless otherwise provided in this Agreement, USWC will perform all of its obligations hereunder throughout, to the extent provided in the Appendices attached hereto. The Agreement includes all accompanying appendices. B. In the performance of their obligations under this Agreement, the Parties shall act in good faith and consistently with the intent of the Act. Where notice, approval or similar action by a Party is permitted or required by any provision of this Agreement, the Act, FCC 1st and 2nd Orders, or a state Commission, (including, without limitation, the obligation of the parties to further negotiate the resolution of new or open issues under this Agreement) such action shall not be unreasonably delayed, withheld or conditioned. C. The Parties acknowledge that the terms and conditions herein represent a balancing of interests important to the parties, and for that reason will, unless otherwise agreed, implement this Agreement as an integrated package without alteration of any material term or condition, or the inclusion or deletion of terms and conditions that would serve to after a material term or condition herein unless such term or condition is altered pursuant to Section IV, E. 1 herein or to comply with a court order or an FCC or state Commission order. D. This Agreement is entered into as a result of both private negotiations between the Parties and the incorporation of some of the results of arbitrated decisions by the Minnesota Commission acting pursuant to Section 252 (b) of the Act involving interconnection/resale agreements of other parties. The Parties have included for convenience certain rates and services in this Agreement which reflect rates and services established in some of those other arbitrations. Reseller acknowledges (1) that those rates and services are extended only because of the arbitrated results in other dockets, (2) that USWC intends to appeal certain of those decisions and (3) that any negotiations, appeal, stay, injunction, settlement or similar proceedings impacting the applicability of those rates and services to the local services providers who were parties to those arbitrations will similarly impact the applicability of those rates and services to Reseller. III. DEFINITIONS. A. "Basic Exchange Telecommunications Service" means a service offered to end users which provides the end user with a telephonic connection to, and a unique local telephone number address on, the public switched telecommunications network, and which enables such end user to generally place calls to, or receive calls from, other stations on the public switched telecommunications network. Basic residence and business line services are Basic Exchange Telecommunication Services. As used solely in the context of this Agreement and unless otherwise agreed, Basic Exchange Telecommunication Services includes access to ancillary services such as 911, directory assistance and operator services. B. "Basic Exchange Switched features" are optional CLASS, Custom Calling, and AIN end user switched service features which include, but are not necessarily limited to: Automatic Call Back; Call Trace; Caller ID and Related Blocking Features; Distinctive Ringing/Call Waiting; Selective Call Forward; Selective Call Rejection. (See Bellcore documentation for definition.) 4 C. "Commission" means the Public Utilities Commission(s) in the state of Minnesota. D. Directory Listings are any information: (1) identifying the listed names of subscribers of a telecommunications carrier and such subscribers' telephone numbers and addresses and (2) that the telecommunications carrier or an affiliate has published, caused to be published, or accepted for publication in any directory format. E. "Enhanced Services" means any service offered over common carrier transmission facilities that employ computer processing applications that act on format, content, code, protocol or similar aspects of the subscriber's transmitted information; that provide the subscriber with additional, different or restructured information; or involve customer interaction with stored information. F. "Pre-ordering and Ordering" includes the exchange of information between telecommunications carriers about current or proposed customer products and services. G. "Reseller" is a category of Local Exchange service providers that are certified to obtain dial tone and associated telecommunications services from another provider through the purchase of bundled finished services for resale to its end user customers. H. "Tariff Services" as used throughout this Agreement refers to USWC state tariffs, price lists, price schedules and catalogs. I. "Technically feasible." Branding of Operator Services and Directory Assistance shall be deemed technically feasible absent technical or operational concerns that prevent the fulfillment of a request by a telecommunications carrier for such branding. A determination of technical feasibility does not include consideration of economic, accounting, billing, space, or site concerns, except that space and site concerns may be considered in circumstances where there is no possibility of expanding the space available. The fact that an incumbent LEC must modify its facilities or equipment to respond to such request does not determine whether satisfying such request is technically feasible. An incumbent LEC that claims that it cannot satisfy such request because of adverse network reliability impacts must prove to the state Commission by clear and convincing evidence that such interconnection, access, or methods would result in specific and significant adverse network reliability impacts. J. "Telecommunications Service(s)" means the offering of telecommunications for a fee directly to the public, or to such class of users as to be effectively available directly to the public, regardless of the facilities used. As used in this definition, "telecommunications" means the transmission, between or among points specified by the user, of information of the user's choosing, without change in the form or content of the information sent and received. IV. RESALE SERVICES. A. Description. USWC services (as defined in Section III.A. and B.) and intraLATA toll originating from USWC exchanges (hereinafter "intraLATA toll") will be available for resale by USWC pursuant to the Act and will reference terms and conditions (except prices) in USWC tariffs, where applicable. Appendix A lists services which are available for resale under this Agreement and the applicable discounts, and is attached and incorporated herein by this reference. B. Scope. 1. Basic Exchange Telecommunications Service, Basic Exchange Switched Features and IntraLATA toll may be resold without restriction on their use except that residential service, lifeline service or other means tested services may be resold only to the same class of customers to whom USWC sells such services and Centrex services may not be resold to 5 residence customers. Notwithstanding the above, nothing herein shall be construed to prohibit USWC from seeking restrictions on resale in tariffs approved by a state Commission. 2. USWC shall provide to Reseller services for resale that are equal in quality, subject to the same conditions (including the conditions in USWC's effective tariffs), within the same provisioning time intervals that the LEC provides these services to others, including end users, and in accordance with any applicable state Commission service quality standards, including standards a state Commission may impose pursuant to Section 252 (e)(3) of the Act. C. Ordering and Maintenance. 1. Reseller or Reseller's agent shall act as the single point of contact for its end users' service needs, including without limitation, sales, service design, order taking, provisioning, change orders, training, maintenance, trouble reports, repair, post-sale servicing, billing, collection and inquiry, Reseller shall make it clear to its end users that they are customers of the Reseller for resold services. Reseller's end users contacting USWC will be instructed to contact the Reseller; however, nothing in this Agreement, except as provided in Section IV.C.7(e), shall be deemed to prohibit USWC from discussing its products and services with Reseller's customers who call USWC for any reason. 2. Reseller shall transmit to USWC all information necessary for the installation (billing, listing and other information), repair, maintenance and post-installation servicing according to USWC's standard procedures, as described in the USWC resale operations guide that will be provided to Reseller. When USWC's end user or the end user's new service provider discontinues the end user's service in anticipation of moving to another service provider, USWC will render its closing bill to end user customer effective with the disconnection. If USWC is not the local service provider, USWC will issue a bill to Reseller for that portion of the service provided to the Reseller should Reseller's end user customer, a new service provider, or Reseller request service be discontinued to the end user. USWC will notify Reseller by FAX, OSS, or other processes when end user moves to another service provider. USWC will not provide Reseller with the name of the other reseller or service provider selected by the end user. 3. Reseller shall provide USWC and USWC shall provide Reseller with points of contact for order entry, problem resolution and repair of the resold services. 4. Prior to placing orders on behalf of the end user, Reseller shall be responsible for obtaining and have in its possession Proof of Authorization ("POA"). POA shall consistent of documentation acceptable to USWC of the end user's selection of Reseller. Such selection may be obtained in any manner consistent with Minnesota and federal law. Reseller shall make POAs available to USWC upon request. Prior to placing orders that will disconnect a line from another reseller's account the Reseller is responsible for obtaining all information needed to process the disconnect order and re-establish the service on behalf of the end user. If a Reseller is displaced by another reseller or service provider, the Reseller is responsible for coordination with the other reseller or service provider. Should an end user dispute or a discrepancy arise regarding the authority of Reseller to act on behalf of the end user, the Reseller is responsible for providing written evidence of its authority to USWC within three (3) business days. If there is a conflict between the end user designation and Reseller's written evidence of its authority, USWC shall honor the designation of the end user and change the end user back to the previous service provider. If the Reseller does not 6 provide the POA within three (3) business days, or if the end user disputes the authority of the POA, then the Reseller must, by the end of the third business day: - notify USWC to change the end user back to the previous reseller or service provider, and - provide any end user information and billing records the Reseller has obtained relating to the end user to the previous reseller, and - notify the end user and USWC that the change has been made, - remit to USWC a charge of $100.00 ("slamming charge") as compensation for the change back to the previous reseller or service provider. If an end user customer is switched from Reseller back to USWC and there is a dispute or discrepancy with respect to such change in service provider, Reseller may request to see a copy of the POA which USWC has obtained from the end user to effectuate a return to USWC as the end user's service provider. If USWC is unable to produce a POA within three (3) business days, USWC shall change the end user back to Reseller (or other previous reseller) without imposition of any Customer Transfer Charge. 5. Reseller shall designate Primary lnterexchange Carrier (PIC) assignments on behalf of its end-users for interLATA services and intraLATA services where intraLATA presubscription is implemented. 6. When end user customers switch from USWC to Reseller, or to Reseller from any other reseller, such customers shall be permitted to retain their current telephone numbers if they so desire and do not change their service address to an address served by a different central office. USWC shall take no action to prevent Reseller customers from retaining their current telephone numbers. 7. Reseller and USWC will employ the following procedures for handling misdirected repair calls: a. Reseller and USWC will provide their respective customers with the correct telephone numbers to call for access to their respective repair bureaus. b. Customers of Reseller shall be instructed to report all cases of trouble to Reseller. Customers of USWC shall be instructed to report all cases of trouble to USWC. c. To the extent the correct provider can be determined, misdirected repair calls will be referred to the proper provider of Basic Exchange Telecommunications Service. d. Reseller and USWC will provide their respective repair contact numbers to one another on a reciprocal basis. e. Notwithstanding the provisions of Section IV. C. I., USWC will not discuss its products and services with Reseller's customers during the course of repair calls or visits. D. Reseller Responsibilities. 1. Reseller must send USWC complete and accurate end-user listing information for Directory Assistance, Directory, and 911 Emergency Services using USWC's resale order form and process. Reseller must provide to USWC accurate end-user information to ensure appropriate listings in any databases in which USWC is required to retain and/or maintain end-user information. USWC assumes no liability for the accuracy of information provided by Reseller. 2. Reseller may not reserve blocks of USWC telephone numbers, except as allowed by tariffs. 7 3. Reseller is liable for all fraud associated with Service to its end-users and accounts. USWC takes no responsibility, will not investigate, and will make no adjustments to Reseller's account in cases of fraud unless such fraud is the result of any intentional act or gross negligence of USWC. Notwithstanding the above, if USWC becomes aware of potential fraud with respect to Reseller's accounts, USWC will promptly inform Reseller and, at the direction of Reseller, take reasonable action to mitigate the fraud where such action is possible. 4. In accordance with the Act, Reseller will indicate the date it will offer to residential and business subscribers telephone exchange services. The Reseller will provide a two year forecast within ninety (90) days of signing this Agreement. During the first year of the term of this Agreement, the forecast shall be updated and provided to USWC on a quarterly basis. Thereafter, during the term of this Agreement, Reseller will provide updated forecasts from time to time, as requested by USWC. The initial forecast will provide: - The date service will be offered (by city and/or state) - The type and quantity of service(s) which will be offered - Reseller's anticipated order volume - Reseller's key contact personnel The information provided pursuant to this paragraph shall be considered Proprietary Information under Section VII. 0. of this Agreement. 5. In the event USWC terminates the provisioning of any resold services to Reseller for any reason, Reseller shall be responsible for providing any and all necessary notice to its end users of the termination. In no case shall USWC be responsible for providing notice to Reseller's end user customers. USWC will provide notice to Reseller of its termination of a resold service on a timely basis consistent with Commission rules and notice requirements. E. Rates and Charges. 1. Resold services as listed in Appendix A are available for resale at the applicable discount percentage or rate per minute set forth in Appendix A or at the retail tariff rates for services available for resale but excluded from the wholesale pricing arrangement in this Agreement. The wholesale discounts rates in Appendix A were established as interim rates in Minnesota Docket Nos. P-442,421/M-96-855, P-5321,421/M-96-909 and P-3167,421/M-96-729, Order Resolving Issues after Reconsideration and Approving Contract, In the Matter of AT&T Communications of the Midwest, Inc., MCImetro Access Transmission Services, Inc., and MFS Communications Company (the "AT&T Rate"). If the AT&T Rate or applicability of the wholesale discounts rates and/or services set forth in Appendix A are changed by any negotiations, appeal, stay, injunction, settlement or similar proceeding with respect to AT&T/MCI or MFS, who were parties to the above-referenced arbitrations dockets which established the AT&T Rates and services, the Parties agree that the telecommunications services still available for resale following the proceeding will be available to Reseller, effective as of the date of the order in the proceeding or settlement at a wholesale discount rate of 12% (the "Standard Rate") until such time as a final order establishes wholesale discount rates or until the proceeding impacting the rates and/or services reaches final resolution, which ever comes first. If the Standard Rate becomes effective pursuant to this paragraph, the Standard Rate will also be subject to true-up to the rates established in the final order for the period of that the Standard Rate was in effect. USWC shall have a reasonable time to implement system or other changes necessary to bill the Commission ordered rates or services. 8 2. If the resold services are purchased pursuant to Tariffs and the Tariff rates change, charges billed to Reseller for such services will be based upon the new Tariff rates less the applicable wholesale discount as agreed to herein or established by resale Tariff. The new rate will be effective upon Tariff effective date. 3. A Customer Transfer Charge (CTC) as specified in Appendix A applies when transferring any existing lines from USWC or another service provider to Reseller. Tariffed non-recurring charges will apply to new installations. 4. A Subscriber Line Charge (SLC) will continue to be paid by the Reseller without discount to USWC for each local exchange line resold under this Agreement. All federal and state rules and regulations associated with SLC as found in the applicable tariffs also apply. 5. Reseller will pay to USWC the PIC change charge without discount associated with Reseller end user changes of inter-exchange or intraLATA carriers. 6. Reseller agrees to pay USWC when its end user activates any services or features that are billed on a per use or per activation basis subject to the applicable discount in Appendix A as such may be amended pursuant to Section IV.E.1 (e.g., continuous redial, last call return, call back calling, call trace, etc.). 7. Resold services are available only where facilities currently exist and are capable of providing such services without construction of additional facilities or enhancement of existing facilities. However, if Reseller requests that facilities be constructed or enhanced to provide resold services, USWC will review such requests on a case-by-case basis and determine, in its sole discretion, if it is economically feasible for USWC to build or enhance facilities. If USWC decides to build or enhance the requested facilities, USWC will develop and provide to Reseller a price quote for the construction. If the quote is accepted, Reseller will be billed the quoted price and construction will commence after receipt of payment. 8. Nonrecurring charges will not be discounted and will be billed at the applicable Tariff rates. 9. As part of the resold line, USWC provides and Reseller accepts, at this time, operator services, directory assistance, and IntraLATA long distance with standard USWC branding. Reseller is not permitted to alter the branding of these services in any manner when the services are a part of the resold line without the prior written approval of USWC. However, at the request of Reseller and where technically feasible, USWC will rebrand operator services and directory assistance in the Reseller's name, provided the costs associated with such rebranding are paid by Reseller. F. Collateral and Training. The Parties will jointly develop procedures regarding Reseller's use of USWC's retail product training materials. Except for any rights granted by USWC to Reseller for the use or copying of product training material, product training provided under this Agreement shall be considered "Proprietary Information" as described in Section VII.O., and shall be subject to the terms and conditions specified therein. G. Cooperation. The Parties agree that this Agreement involves the provision of USWC services in ways such services were not previously available and the introduction of new processes and procedures to provide and bill such services. Accordingly, the Parties agree to work jointly and cooperatively in testing and implementing processes for pre-ordering, ordering, maintenance, provisioning and billing and in reasonably resolving issues which result from such implementation on a timely basis. 9 V. ACCESS TO OPERATIONAL SUPPORT SYSTEMS (OSS). A. The Parties acknowledge that USWC is developing a proposal for access to its Operational Support Systems (OSS) to meet the requirements of the FCC's lst and 2nd Orders and to provide Reseller and other telecommunications carriers with electronic interfaces for pre-ordering, ordering, repair and billing functions by January 1, 1997 for Plain Old Telephone services (POTs). Subsequent phases of the plan will incorporate the capabilities to support designed services for preordering, ordering and repair, which are estimated to be available between the second and third quarters of 1997. Reseller understands that USWC is proposing that these interfaces will have the necessary mediation to protect the integrity of the network and protect the privacy of customer information. B. The Parties further acknowledge that USWC is, or soon will be, presenting its OSS proposal to state Commissions for approval, including approval of fees or cost recovery methods that USWC may charge or use to charge Reseller in connection with the design, implementation and on-going maintenance and support of the OSS ("OSS fees"). The Parties further acknowledge that, because the OSS is still in the conceptual stage of development at the time of execution of this Agreement, USWC is unable to specify or estimate the amount of OSS fees to be charged Reseller at this time. C. The Parties agree that, at such time as the interfaces to USWC's OSS become operational and a state Commission approves USWC's OSS plan and establishes OSS fees or cost recovery methods, the Parties will amend this Agreement to incorporate terms and conditions regarding Reseller's access to USWC's OSS, including OSS fees, on a state-by-state basis. The Parties further agree that Reseller may terminate this Agreement if the amount of OSS fees turns out to be so excessive as to make the overall terms and conditions of this Agreement uneconomic for Reseller. In the event of such termination, Reseller shall give USWC (sixty) 60 days written notice. D. Prior to approval and deployment of USWC's OSS interfaces, USWC shall continue to provide all pre-ordering, ordering, repair and billing functions and services through manual procedures outlined in a separately provided Resale Resource Guide. Such manual procedures shall be available where USWC's OSS interfaces are unable to handle pre-ordering, ordering, repair and billing functions for the services available to Reseller under this Agreement. E. Notwithstanding Section II.B., Reseller reserves the right to intervene and participate in any manner in any state Commission proceeding that addresses USWC's OSS interface proposal, including the establishment of OSS fees to the extent such participation is permitted by a Commission. VI. DIRECTORY LISTING. USWC will accept at no charge one primary listing for each main telephone number belonging to Reseller's end user customer based on end user information provided to USWC by Reseller. USWC will place Reseller's listings in USWC's directory listing database for directory assistance purposes and will make listings available to directory publishers and other third parties. Additional terms and conditions with respect to directory listings are described in Appendix B which by this reference is incorporated and made a part of this Agreement. VII. GENERAL PROVISIONS. A. Term. This Agreement shall be deemed effective upon approval by a Commission(s) or pursuant to a Commission's rules or the Act. Except as provided herein, USWC agrees to provide service on 10 the terms defined in this Agreement for a term of two (2) years, and thereafter the Agreement shall continue in force and effect unless and until terminated as provided herein. Either party may terminate this Agreement by providing written notice of termination to the other party, such written notice to be provided at least sixty (60) days in advance of the date of termination; provided no such termination shall be effective prior to January 1, 1998. In the event of such termination as described herein, for service arrangements made available under this Agreement and existing at the time of termination, those arrangements shall continue without interruption under either a) a new agreement executed by the Parties, b) standard resale terms and conditions approved and made generally effective by the Commission, or c) tariff terms and conditions generally available to reseller's. By mutual agreement USWC and Reseller may jointly petition the appropriate regulatory bodies for permission to have this Agreement supersede any future standardized agreements or rules such as regulators might adopt or approve. B. Billing. 1. USWC shall bill Reseller and Reseller is responsible for all applicable charges for the resold services as provided herein. The Reseller shall also be responsible for all tariffed charges and charges separately identified in this Agreement associated with services that the Reseller resells to an end user under this Agreement. 2. USWC shall provide Reseller, on a monthly basis, within 7-10 days of the last day of the most recent billing period, in an agreed upon standard electronic billing format, billing information including (1) a summary bill, and (2) individual end user customer sub-account information consistent with the samples provided to Reseller for Reseller to render end user customer bills indicating all recurring and nonrecurring charges associated with each individual customer's account for the most recent billing period. C. Payment. 1. Amounts payable under this Agreement are due and payable within thirty (30) days after the bill date of USWC's invoice. During the initial three billing cycles of this Agreement, Reseller and USWC agree that undisputed amounts shall be paid as provided herein. Reseller and USWC further agree that, during said three billing cycle period, they will cooperate to resolve amounts in dispute or billing process issues in a timely manner but no later than sixty (60) days after the bill date of USWC's invoice or identification and notice of the billing process issue. Disputed amounts will be paid within thirty (30) days following resolution of the dispute. 2. After the three (3) month period outlined in Section C.1. above, the Reseller will pay the bill in full within 30 days after the bill date of the invoice. Billing disputes will be processed and jointly resolved. Any disputed amounts that USWC remits to the Reseller will be credited on the next billing cycle including an interest credit of 1.5% per month compounded. 3. A late payment charge of 1.5% applies to all billed balances which are not paid by 30 days after the bill date shown on the invoice. USWC agrees, however, that the application of this provision will be suspended for the initial three billing cycles of this Agreement and will not apply to amounts billed during those three cycles. 4. USWC may discontinue processing orders for the failure by Reseller to make full payment for the resold services provided under this Agreement within thirty (30) days of the due date on Reseller's bill. USWC agrees, however, that the application of this provision will be suspended for the initial three billing cycles of this Agreement and will not apply to amounts billed during those three cycles. 11 5. USWC may disconnect for the failure by Reseller to make full payment for the resold services provided under this Agreement within sixty (60) days of the due date on Reseller's bill. USWC agrees, however, that the application of this provision will be suspended for the first three billing cycles under this Agreement and will not apply to amounts billed during those three cycles. USWC will not disconnect an end user customer without first obtaining the approval of the Commission. USWC will notify Reseller of the date of Reseller's disconnection thirty (30) days prior to the effective date of the disconnection. Reseller shall notify its end user customers that service will be disconnected on the date specified in USWC's notice to Reseller for Reseller's failure to make payment due hereunder ten (10) days prior to the effective date of Reseller's disconnection. If Reseller is granted a stay of the disconnection, then Reseller shall notify its end users that service will be disconnected ten (10) days prior to the subsequent disconnection date, if any, established by the Commission or by USWC pursuant to Commission order. 6. Collection procedures and the requirements for deposit are unaffected by the application of a late payment charge. 7. The Parties agree that this payment and dispute resolution process is a new procedure and they further agree that this Section VII. C. can be reopened for negotiation at any time within the first twelve (12) months of this Agreement. 8. USWC shall credit Reseller's account the amount due for any trouble or out-of-service conditions in the same manner that USWC credits the accounts of its own end-user customers and pursuant to any applicable provisions in USWC's tariffs. USWC shall reflect the amount of such credits on an individual customer telephone number basis in the billing information USWC provides Reseller. 9. In the event billing disputes relate to service quality issues, the dispute shall be referred to the USWC account executive assigned to Reseller who will evaluate the facts and circumstances of the service quality issues and will work with Reseller to resolve the dispute. D. Deposit. 1. USWC may require Reseller to make a suitable deposit to be held by USWC as a guarantee of the payment of charges. Any deposit required of an existing reseller is due and payable within ten days after the requirement is imposed. The amount of the deposit shall be the estimated charges for the resold Service which will accrue for a two-month period. Reseller is acknowledged to have credit satisfactory to USWC for purposes of initiating operations under this Agreement and no deposit will be required unless Reseller's circumstances change. 2. When the service is terminated, or when Reseller has established satisfactory credit, the amount of the initial or additional deposit, with any interest due as set forth in applicable tariffs, will, at Reseller's option, either be credited to Reseller's account or refunded. Satisfactory credit for a reseller is defined as twelve consecutive months service as a reseller without a termination for nonpayment and with no more than one notification of intent to terminate Service for nonpayment. Interest on the deposit will be accumulated by USWC at a rate equal to the federal discount rate, as published in the Wall Street Journal from time-to-time. E. Taxes. Reseller shall be responsible for the collection, payment and remittance of all federal, state or local sales, use, excise or gross receipts taxes, fees or surcharges (collectively "Taxes") imposed on 12 or with respect to its sale of services or equipment provided under this Agreement, except those Taxes which are explicitly required by a governmental authority to be collected by USWC. Reseller shall seek sale for resale exemptions from any applicable governmental or taxing body for payment of any and all Taxes related to Reseller's purchase of services or equipment from USWC under this Agreement. Until such time as exemptions are obtained or applicable, Reseller shall pay USWC for the amount of any such Taxes that USWC is required to pay or collect. Reseller shall in no event be liable for payment of any income taxes payable by USWC. F. Force Majeure. Neither Party shall be responsible for delays or failures in performance resulting from acts or occurrences beyond the reasonable control of such Party, regardless of whether such delays or failures in performance were foreseen or foreseeable as of the date of this Agreement, including, without limitation: fire, explosion, power failure, acts of God, war, revolution, civil commotion, or acts of public enemies; any law, order, regulation, ordinance or requirement of any government or legal body; or labor unrest, including, without limitation, strikes, slowdowns, picketing or boycotts; or delays caused by the other Party or by other service or equipment vendors; or any other circumstances beyond the Party's reasonable control. In such event, the Party affected shall, upon giving prompt notice to the other Party, be excused from such performance on a day-to-day basis to the extent of such interference (and the other Party shall likewise be excused from performance of its obligations on a day-for-day basis to the extent such Party's obligations relate to the performance so interfered with). The affected Party shall use its best efforts to avoid or remove the cause of non-performance and both parties shall proceed to perform with dispatch once the causes are removed or cease. G. Responsibility of Each Party. Each Party is an independent contractor, and has and hereby retains the right to exercise full control of and supervision over its own performance of its obligations under this Agreement and retains full control over the employment, direction, compensation and discharge of all employees assisting in the performance of such obligations. Each Party will be solely responsible for all matters relating to payment of such employees, including compliance with social security taxes, withholding taxes and all other regulations governing such matters. Each Party will be solely responsible for proper handling, storage, transport and disposal at its own expense of all (i) substances or materials that it or its contractors or agents bring to, create or assume control over at Work Locations or, (ii) Waste resulting therefrom or otherwise generated in connection with its or its contractors' or agents' activities at the Work Locations. Subject to the limitations on liability and except as otherwise provided in this Agreement, each Party shall be responsible for (i) its own acts and performance of all obligations imposed by Applicable Law in connection with its activities, legal status and property, real or personal and, (ii) the acts of its own affiliates, employees, agents and contractors during the performance of that Party's obligations hereunder. H. Limitation of Liability. Except for indemnity obligations, each Party's liability to the other for any loss related to or arising out of any negligent act or omission in its performance of this Agreement, whether in contract or in tort, shall be limited to the total amount that is or would have been charged to the other Party by such negligent or breaching Party for the service(s) or function(s) not performed or improperly performed. In no event shall either Party be liable to the other in connection with the provision or use of services offered under this Agreement for indirect, incidental, consequential, reliance or special damages, including (without limitation) damages for lost profits, lost revenues, lost savings suffered by such other Parties regardless of the form of action, whether in contract, warranty, 13 strict liability, or tort, including (without limitation) negligence of any kind and regardless of whether the Parties know the possibility that such damages could result. Nothing contained in this Section H shall limit USWC's or Reseller's liability to the other for (i) willful or intentional misconduct (including gross negligence); (ii) bodily injury, death or damage to tangible real or tangible personal property proximately caused by USWC's or Reseller's negligent act or omission or that of their respective agents, subcontractors or employees, nor shall anything contained in this section limit the parties indemnification obligations, as specified below. I. Indemnification. 1. Each of the Parties agrees to release, indemnify, defend and hold harmless the other Party and each of its officers, directors, employees and agents (each an "Indemnitee") from and against and in respect of any loss, debt, liability, damage, obligation, claim, demand, judgment or settlement of any nature or kind, known or unknown, liquidated or unliquidated including, but not limited to, costs and attorneys' fees, whether suffered, made, instituted, or asserted by any other party or person, for invasion of privacy, personal injury to or death of any person or persons, or for loss, damage to, or destruction of property, whether or not owned by others, resulting , from the indemnifying Party's performance, breach of Applicable Law, or status of its employees, agents and subcontractors; or for failure to perform under this Agreement, regardless of the form of action. 2. The indemnification provided herein shall be conditioned upon: a. The indemnified Party shall promptly notify the indemnifying Party of any action taken against the indemnified Party relating to the indemnification. Failure to so notify the Indemnifying Party shall not relieve the Indemnifying Party of any liability that the Indemnifying Party might have, except to the extent that such failure prejudices the Indemnifying Party's ability to defend such Claim. b. The indemnifying Party shall have sole authority to defend any such action, including the selection of legal counsel, and the indemnified Party may engage separate legal counsel only at its sole cost and expense. c. In no event shall the indemnifying Party settle or consent to any judgment pertaining to any such action without the prior written consent of the indemnified Party. J. Patents and Trademarks. 1. Neither Party shall have any obligation to defend, indemnify or hold harmless, or acquire any license or right for the benefit of, or owe any other obligation or have any liability to, the other based on or arising from any claim, demand, or proceeding (hereinafter "claim") by any third party alleging or asserting that the use of any circuit, apparatus, or system, or the use of any software, or the performance of any service or method, or the provision of any facilities by either Party under this Agreement constitutes direct or contributory infringement, or misuse or misappropriation of any patent, copyright, trademark, trade secret, or any other proprietary or intellectual property right of any third party. 2. No license or affiliation. a. Nothing in this Agreement shall be construed as the grant of a license, either express or implied, with respect to any patent, copyright, logo, trademark, tradename, trade secret or any other intellectual property right now or hereafter owned, controlled or licensable by either Party. Reseller may not use any patent, copyright, logo, trademark, tradename, trade secret or other intellectual property right of USWC or its affiliates without execution of a separate agreement between the Parties. 14 b. Reseller shall not, without the express written permission of USWC, state or imply that; 1) Reseller is connected, or in any way affiliated with USWC or its affiliates or, 2) Reseller is part of a joint business association or any similar arrangement with USWC or its affiliates or, 3) USWC and its affiliates are in any way sponsoring endorsing or certifying Reseller and its goods and services or, 4) the resold goods and services are in any way associated with or originated from USWC or any of its affiliates. Notwithstanding the above, Reseller may state in response to a specific customer inquiry concerning the origin of the resold services that "Reseller is reselling USWC services." No other statements may be made. 3. Notwithstanding the above, unless otherwise prohibited by USWC pursuant to an applicable provision herein, Reseller may use the phrase "(Name of Reseller) is a reseller of US WEST Communications services" (the "Authorized Phrase") in Reseller's printed materials provided: a. The Authorized Phrase is not used in connection with any goods or services other than USWC services resold by Reseller. b. Reseller's use of the Authorized Phrase does not, in USWC's sole discretion, cause customers to believe that Reseller is USWC. c. The Authorized Phrase, when displayed, appears only in text form (Reseller may not use the US WEST logo) with all letters being the same font and point size. The point size of the Authorized Phrase shall be no greater than one fourth the point size of the smallest use of Reseller's name and in no even shall exceed 8 point size. d. Reseller shall provide all printed materials to USWC for its prior written approval. e. If USWC determines that Reseller's use of the Authorized Phrase causes customer confusion, USWC may in it's sole discretion, immediately terminate Reseller's right to use the Authorized Phrase. f. Upon termination of the Reseller's right to use the Authorized Phrase or termination of this Agreement, all permission or right to use the Authorized Phrase shall immediately cease to exist and Reseller shall immediately cease any and all such use of the Authorized Phrase. Reseller shall either promptly return to USWC or destroy all materials in its possession or control displaying the Authorized Phrase. 4. Reseller acknowledges the value of the marks "US WEST" and "US WEST Communications" (the "Marks") and the goodwill associated therewith and acknowledges that such goodwill is a property right belonging to, US WEST Inc. and USWC respectively (the "Owners"). Reseller recognizes that nothing contained in this Agreement is intended as an assignment or grant to Reseller of any right, title or interest in or to the Marks and that this Agreement does not confer any right or license to grant sublicenses or permission to third parties to Use the Marks and is not assignable. Reseller will do nothing inconsistent with the Owner's ownership of the Marks, and all rights, if any , that may be acquired by use of the Marks shall inure to the benefit of the Owners. Reseller will not adopt, use (other than as authorized in Section 3 herein,) register or seek to register any mark anywhere in the world which is identical or confusingly similar to the Marks or which is so similar thereto as to constitute a deceptive colorable imitation thereof or to suggest or imply some association, sponsorship, or endorsement by the Owners; The Owners make no warranties regarding its ownership of any rights in or the validity of the Marks. K. Warranties. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE PARTIES AGREE THAT NEITHER PARTY HAS MADE, AND THAT THERE DOES NOT EXIST, ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. 15 L. Assignment. This Agreement is unique in nature and the result of negotiations between the Parties. As such, this Agreement can be assigned only with the prior written consent of the non-assigning Party, which consent shall not be unreasonably withheld. M. Default. If either Party defaults in the payment of any amount due hereunder, or if either Party violates any other provision of this Agreement, and such default or violation shall continue for thirty (30) days after written notice thereof, the other Party may terminate this Agreement forthwith by written instrument. The failure of either Party to enforce any of the provisions of this Agreement or the waiver thereof in any instance shall not be construed as a general waiver or relinquishment on its part of any such provision, but the same shall, nevertheless, be and remain in full force and effect. N. Severability. The Parties recognize that the FCC has promulgated rules addressing issues contained in this Agreement. To the extent that certain of the rules contained in the FCC lst Order and the FCC 2d Order are deemed by the courts to be not effective, this contract shall be modified to comport with the final court decisions and subsequent FCC or state Commission decisions or rules issued to comply with the courts' decisions. If any other term, condition or provision of this Agreement is held to be invalid or unenforceable for any reason, such invalidity or unenforceability shall not invalidate the entire Agreement. The Agreement shall be construed as if it did not contain the invalid or unenforceable provision or provisions, and the rights and obligations of each Party shall be construed and enforced accordingly; provided, however, that in the event that such invalid or unenforceable provision or provisions are essential elements of this Agreement and, in the opinion of either party, substantially impair the rights or obligations of either party, Reseller and USWC shall promptly negotiate a replacement provision or provisions. If the Parties cannot negotiate such a replacement provision or provisions, the Parties may agree to terminate the Agreement, In the event of termination as described herein, for service arrangements made available under this Agreement and existing at the time of termination, those arrangements shall continue without interruption under either a) a new agreement executed by the Parties, b) standard resale terms and conditions approved and made generally effective by the Commission, or c) tariff terms and conditions generally available to reseller's. If a) does not come about, or b) or c) are not available, the Agreement shall remain in effect until a replacement provision is determined through arbitration. O. Nondisclosure. 1. All information including, but not limited to, specifications, drawings, sketches, models, tools, technical information, employee records, maps, financial reports, and market data, (i) furnished by one Party to the other Party or to which one Party provides to the other Party access (such as to a database) dealing with customer specific, facility specific, or usage specific information, or (ii) in written, graphic, electromagnetic, or other tangible form and marked at the time of delivery as "Confidential", "Proprietary", or other similar legend, or (iii) communicated orally or by visual presentation and declared to the receiving Party at the time of delivery, or by written notice given to the receiving Party within ten (10) days after delivery, to be "Confidential" or "Proprietary" (collectively referred to as "Proprietary Information"), shall remain the property of the disclosing Party. 2. Upon request by the disclosing Party, the receiving Party shall return all tangible copies of Proprietary Information, whether written, graphic or otherwise, except that the receiving Party may retain one copy for archival purposes. 16 3. The receiving Party acknowledges and agrees that Proprietary Information constitutes trade secrets of the disclosing Party. The receiving Party shall maintain in confidence all of the disclosing Party's Proprietary Information and shall use the disclosing Party's Proprietary Information only for performing the covenants contained, or exercising any rights granted, in this Agreement. Only the employees and agents with a need to know shall have access to the Proprietary Information and each such employee and agent shall be advised of his or her obligations under this Section O. Neither Party shall use the other Party's Proprietary Information for any other purpose except upon such-terms and conditions as may be agreed upon between the parties in writing. 4. Unless otherwise agreed, the obligations of confidentiality and non-use set forth in this Agreement do not apply to the extent that such Proprietary Information: a. was at the time of receipt already known to the receiving Party free of any obligation to keep it confidential (evidenced by written records prepared prior to delivery by the disclosing Party); b. is or becomes publicly known through no wrongful act of the receiving Party; c. is rightfully received from a third person having no direct or indirect secrecy or confidentiality obligation to the disclosing Party with respect to such information; or d. is independently developed by receiving Party individuals who do not have access to the Proprietary Information; e. is disclosed to a third person by the disclosing Party without restrictions on disclosure; f. is approved for release by written authorization of the disclosing Party; or g. is required to be made public by the receiving Party pursuant to applicable law, regulation, or governmental order, provided that the receiving Party shall give sufficient notice of the requirement to the disclosing Party to enable the disclosing Party to seek protective orders where possible. 5. USWC grants Reseller the limited, personal, nonexclusive right and license to access and use information contained in certain of USWC's databases (Directory Assistance and Operator Services databases, certain Advanced Intelligent Network databases and Operation Support System databases) but only to the extent as specifically required by the then applicable federal and state rules and regulations relating to access to and use of such databases, as they may be amended from time to time, and for no other purpose. Without limiting the generality of the foregoing, this right and license to Reseller does not include the license and right to extract or copy (including by any manual, mechanical or electronic means) or use any such database information, in whole or in part, to enhance the quality of any of Reseller's own database services or offerings, as inputs to Reseller's or other's directory assistance or directory publishing operations or for the creation of marketing databases, in the absence of USWC's prior written consent. Reseller agrees that any and all information contained in any of such USWC's databases shall be Proprietary Information subject to the terms and conditions of this section O; provided, however, that Sections 4 a, b, and c shall not apply even though the individual parts or components of the information contained in any such databases may otherwise fall within such Sections. 6. Notwithstanding any other provision of this Agreement, the Proprietary Information provisions of this Agreement shall apply to all information furnished by either Party to the other in furtherance of the purpose of this Agreement, even if furnished before the date of this Agreement. 17 7. The Parties acknowledge that this Agreement contains commercially confidential information that may be considered Proprietary Information by either or both Parties, and agree to limit distribution of this Agreement to those individuals in their respective companies with a need to know the contents of this Agreement. P. Survival. Any liabilities or obligations of a Party for acts or omissions prior to the cancellation or termination of this Agreement; any obligation of a Party under the provisions regarding indemnification, Confidential Information, limitations on liability, and any other provisions of this Agreement which, by their terms, are contemplated to survive (or to be performed after) termination of this Agreement, shall survive cancellation or termination thereof. Q. Dispute Resolution. Except as provided by the Act, if any claim, controversy or dispute between the Parties, their agents, employees, officers, directors or affiliated agents ("Dispute") cannot be settled through negotiation, it shall be resolved by arbitration conducted by a single arbitrator engaged in the practice of law, under the then current rules of the American Arbitration Association ("AAA"). The Federal Arbitration Act, 9 U.S.C. Secs. 1-16, not state law, shall govern the arbitrability of all Disputes. The arbitrator shall not have authority to award punitive damages. All expedited procedures prescribed by the AAA rules shall apply. The arbitrator's award shall be final and binding and may be entered in any court having jurisdiction thereof. Each Party shall bear its own costs and attorneys' fees, and shall share equally in the fees and expenses of the arbitrator. The laws of the state where the services subject to this Agreement are provided shall govern the construction and interpretation of this Agreement. R. State Commission Arbitration Issues. In the event Reseller and USWC are unable to agree on certain issues during negotiation, the Parties will identify such issues for arbitration before an appropriate state regulatory agency. Only those points identified by the Parties for arbitration will be submitted. All other terms on which the Parties reach agreement will be submitted for approval in their final form. S. Governing Law. This Agreement shall be deemed to be a contract made under and shall be construed, interpreted and enforced in accordance with the Act, where applicable, and the laws of the state where the services subject to this Agreement are provided and shall be subject to the exclusive jurisdiction of the courts in that state, unless otherwise provided by the Act. USWC shall be responsible for obtaining and keeping in effect all Federal Communications Commission, state regulatory Commission, franchise authority and other regulatory approvals that may be required in connection with the performance of its obligations under this Agreement. Reseller shall be responsible for obtaining and keeping in effect all Federal Communications Commission, state regulatory Commission, franchise authority and other regulatory approvals that may be required in connection with its offering of services to Reseller Customers contemplated by this Agreement. T. Limitation of Action. No arbitration demand or judicial action, regardless of form, arising out of the transaction(s) under this Agreement, whether in contract, tort, or other theory, may be brought by either party more than two (2) years after the cause of action accrues. 18 U. Joint Work Product. This Agreement is the joint work product of representatives of the Parties. For convenience, it has been drafted in final form by one of the Parties. Accordingly, in the event of ambiguities, no inferences will be drawn against either Party solely on the basis of authorship of this Agreement. V. Notices. Any notices or other communications required or permitted to be given or delivered under this Agreement shall be in hard-copy writing (unless otherwise specifically provided herein) and shall be sufficiently given if delivered personally or delivered by prepaid overnight express service to the following (unless otherwise specifically required by this Agreement to be delivered to another representative or point of contact). Any notices required by or concerning this Agreement shall be sent to the Parties and to the Commission at the addresses shown below: USWC Reseller Kathy Fleming Jack Kohler US WEST Communications Choicetel, Inc. Interconnection Services 6801 Wayzata Blvd. 1801 California, Room 2340 Louis Park, MN 55426 Denver, CO 80202 303-896-6100 (phone) 612-544-1260 (phone) 303-893-9028 (fax) 612-544-1281 (fax) Commission Executive Secretary Minnesota Public Utilities Commission Metro Square Building, Suite 350 121 Seventh Place E St. Paul, MN 55101-2147
Each Party and the Commission shall inform the other of any changes in the above addresses. W. No Third-Party Beneficiaries. Except as may be specifically set forth in this Agreement, this Agreement does not provide and shall not be construed to provide third parties with any remedy, claim, liability, reimbursement, cause of action, or other privilege. The Commission is a third party beneficiary of this contract on behalf of the public. Accordingly, the Commission is entitled to notice and may intervene to protect the public interest in any lawsuit involving this Agreement. X. Publicity and Advertising. Neither party shall publish or use any advertising, sales promotions or other publicity materials that use the other party's name, logo, trademarks or service marks without the prior written approval of the other party. Y. Amendments or Waivers. Except as otherwise provided in this Agreement, no amendment or waiver of any provision of this Agreement, and no consent to any default under this Agreement, shall be effective unless the same is in writing and signed by an officer of the Party against whom such amendment, waiver or consent is 19 claimed. The Parties acknowledge that they may not consent to the default of any requirement of federal or state law which affects the rights of end use customers. Z. Most Favored Nation. The Parties agree that the provisions of Section 252(i) of the Act shall apply, including final state and federal interpretive regulations in effect from time to time and USWC shall make available to Reseller the terms and conditions-of any other agreement for interconnection and/or resale services whether arrived at through negotiations, mediation or arbitration, approved by a state Commission under Section 252 of the Act, in that agreement's entirety. AA. Executed in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original; but such counterparts shall together constitute one and the same instrument. BB. Headings of No Force or Effect. The headings of Articles and Sections of this Agreement are for convenience of reference only, and shall in no way define, modify or restrict the meaning or interpretation of the terms or provisions of this Agreement. CC. Entire Agreement. This Agreement constitutes the entire agreement between the Parties and supersedes all prior oral or written agreements, representations, statements, negotiations, understandings, proposals and undertakings with respect to the subject matter hereof. This Agreement shall prevail in the event of any conflict between the "Resale Resource Guide" and the terms and conditions of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized representatives. CHOICETEL, INC. US WEST COMMUNICATIONS, INC. /s/ JACK KOHLER /s/ KATHERINE L. FLEMING - -------------------------------------- -------------------------------------- Signature Signature Jack Kohler Katherine L. Fleming - -------------------------------------- -------------------------------------- Name Printed/Typed Name Printed/Typed PRESIDENT EXEC DIRECTOR--INTERCONNECT - -------------------------------------- -------------------------------------- Title Title - -------------------------------------- -------------------------------------- Date Date
SIGNATURE DOES NOT WAIVE ANY RIGHTS OF EITHER PARTY TO SEEK ADMINISTRATIVE/JUDICIAL REVIEW OF ALL OR PART OF THIS AGREEMENT OR TO REFORM THIS AGREEMENT AS A RESULT OF SUCCESSFUL ADMINISTRATIVE/JUDICIAL REVIEW AND/OR FUTURE SETTLEMENT AGREEMENTS BETWEEN THE PARTIES OF THIS AGREEMENT. 20 APPENDIX A LOCAL EXCHANGE SERVICES RESALE OF SERVICES The Parties agree the following charges apply to the Resale of Local Services: 1. Nonrecurring Charges. a. Customer Transfer Charge (CTC): The following nonrecurring charges apply when converting a USWC account to a Reseller account or when changing an end user from one reseller to another.
USOC NONRECURRING CHARGE --------- ------------------- MEDIATED ACCESS - Residence First Line................................................. $12.64 Each Additional Line....................................... $11.16 - Business First Line................................................. $16.80 Each Additional Line....................................... $13.93 NON-MEDIATED ACCESS (MANUAL) - Residence and Business First Line................................................. $22.20 Each Additional Line....................................... $16.38
b. Product Specific Nonrecurring Charge: As set forth in USWC tariffs, the product specific nonrecurring charges, without discount, will apply when additional lines or trunks are added or when the end user adds features or services to existing lines or trunks. c. IntraLATA Toll Charges: lntraLATA toll resale at the below uniform rate.
STATE: RATE PER MINUTE OF USE ------ ------------------------ Minnesota.............................................................. .135
2. The Parties agree the following charges apply to the Resale of Local Services in Minnesota: a. Except as expressly listed in Paragraphs 2b. and 2c. of this Appendix, all USWC telecommunications tariffed services and rate elements offered now or in the future to retail customers shall be available for resale at a 21.5% discount. b. Promotions of less than 90 days and enhanced services are not available for resale. Grandparented services are only available for resale to customers currently receiving such services. c. The following services are available at the 21.5% discount only to the same class of customers eligible to purchase that service from USWC: - Residential Service - Contract Services - Special Arrangements - Packaged and Discount Services - Promotional offerings of greater than 90 days - Grandfathered services d. USWC provides Lifeline-type services to reseller's as residential basic exchange lines. Reseller is responsible for obtaining certification for Reseller's end users from the qualifying and funding organizations for these programs. APPENDIX B DIRECTORY LISTINGS Directory Listings 1. Scope. a. Reseller Listings Service ("Listings") consists of USWC placing the names, addresses and telephone numbers of Reseller's end users in USWC's listing database, based on end user information provided to USWC by Reseller. USWC is authorized to use Listings in Directory Assistance (DA) and as noted in 1.D.i or 1.D.ii. b. Reseller will provide in standard, format, and USWC will accept at no charge, one primary listing for each main telephone number belonging to Reseller's end user customers. Primary listings are as defined for USWC end users in USWC's general exchange tariffs. Reseller will be charged for privacy listings and premium listings, e.g., additional, foreign, cross reference, informational, etc., at USWC's general exchange listing tariff rates minus the applicable standard resale discount in each state. c. USWC will furnish Reseller the Listings format specifications. USWC cannot accept Listings with advance completion dates. d. Reseller grants USWC a non-exclusive license to incorporate Listings information into its directory assistance database. Reseller hereby selects one of two options for USWC's use of Listings and dissemination of Listings to third parties. EITHER: i. TREAT THE SAME AS USWC'S END USER LISTINGS--NO PRIOR AUTHORIZATION is needed for USWC to release Listings to directory publishers or other third parties. USWC will incorporate Listings information in all existing and future directory assistance applications developed by USWC. Reseller will authorize USWC to sell and otherwise make Listings available to directory publishers including USWC's publisher affiliate for inclusion in white pages published on USWC's behalf. USWC shall be entitled to retain all revenue associated with any such sales. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. OR: ii. RESTRICT TO USWC'S DIRECTORY ASSISTANCE--PRIOR AUTHORIZATION REQUIRED BY RESELLER FOR ALL OTHER USES. Reseller makes its own, separate agreements with USWC, third parties and directory publishers for all uses of its listings beyond DA. USWC will sell Listings to directory publishers (including USWC'S publisher affiliate for inclusion in white pages published on USWC's behalf, other third parties and USWC products only after third party presents proof of Reseller's authorization. USWC shall be entitled to retain all revenue associated with any such sales. Listings shall not be provided or sold in such a manner as to segregate end users by carrier. e. To the extent that state tariffs limit USWC's liability with regard to Listings, the applicable state tariff(s) is incorporated herein and supersedes Section VII.G., "Limitation of Liability", of this Agreement with respect to Listings only. 2. USWC Responsibilities. USWC is responsible for maintaining Listings including entering, changing, correcting, rearranging and removing Listings in accordance with Reseller orders. USWC will take reasonable steps in accordance with industry practices to accommodate non-published and non-listed listings provided that Reseller has supplied USWC the necessary privacy indicators on such Listings. USWC will include Reseller's Listings in USWC's Directory Assistance service to ensure that callers to USWC's Directory Assistance service have non-discriminatory access to Reseller's Listings. USWC will incorporate Reseller's Listings provided to USWC in the white pages directory published on USWC's behalf. 3. Reseller Responsibilities. a. Reseller agrees to provide to USWC its end user names, addresses and telephone numbers in a standard format, as specified by USWC. b. Reseller will supply its ACNA/CIC or CLCC/OCN, as appropriate, with each order to provide USWC the means of identifying Listings ownership. c. Reseller represents and warrants the end user information provided to USWC is accurate and correct. Reseller further represents and warrants that it has reviewed all Listings provided to USWC, including end user requested restrictions on use such as non-published and non-listed. Reseller shall be solely responsible for knowing and adhering to state laws or rulings regarding Listings (e.g., no solicitation requirements in the states of Arizona and Oregon, privacy requirements in Colorado), and for supplying USWC the applicable Listing information. d. Reseller is responsible for all dealings with and on behalf of Reseller's end users, including: i. All end user account activity, e.g., end user queries and complaints. ii. All account maintenance activity, e.g., additions, changes, issuance of orders for Listings to USWC. iii. Determining privacy requirements and accurately coding the privacy indicators for Reseller's end user information. If end user information provided by Reseller to USWC does not contain a privacy indicator, no privacy restrictions will apply. iv. Any additional services requested by Reseller's end users. EX-21 28 EXHIBIT 21 Exhibit 21 Registrant: ChoiceTel Communications, Inc. Subsidiaries of the Registrant: Choicetel, Inc. EX-23.2 29 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT We hereby consent to the use in this Registration Statement on Form SB-2 of (i) our report dated March 20, 1997 except for Note 7 for which the date is May 31, 1997 relating to the combined financial statements of Intelliphone, Inc. and Choicetel, Inc., (ii) our report dated April 30, 1997 relating to the statements of revenues and direct expenses for the Telco West, Inc. pay telephone division, (iii) our report dated May 16, 1997 relating to the statements of operations for Computer Assisted Technologies, Inc. and (iv) the reference to our Firm under the caption "Experts" in the Prospectus included therein. /s/ Schechter Dokken Kanter Andrews & Selcer, Ltd. -------------------------------------- SCHECHTER DOKKEN KANTER ANDREWS & SELCER, LTD. Minneapolis, Minnesota June 24, 1997 EX-27 30 FINANCIAL DATA SCHEDULE
5 1,000 YEAR 3-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 MAR-31-1997 875 348 0 0 173 604 0 0 0 0 1,210 1,313 2,440 5,926 881 1,075 2,969 6,679 1,736 4,709 0 0 0 0 0 0 1,460 1,470 (796) (618) 2,969 6,679 0 0 3,562 1,728 0 0 1,987 802 1,195 560 0 0 120 143 260 223 0 0 260 223 0 0 (865) (51) 0 0 (605) 172 (.20) .06 (.20) .06
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