-----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, C9DxnSEuBpgtSBJxe0KFutk9iOZsm4OrtRuQ8Xl9Ly7TxkpuvmZZwaEDa7VaFmum OPQg119oJ3ej6W0C6A9Brw== 0000927356-98-000235.txt : 19980302 0000927356-98-000235.hdr.sgml : 19980302 ACCESSION NUMBER: 0000927356-98-000235 CONFORMED SUBMISSION TYPE: SB-2 PUBLIC DOCUMENT COUNT: 28 FILED AS OF DATE: 19980227 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000945131 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841238018 STATE OF INCORPORATION: CO FILING VALUES: FORM TYPE: SB-2 SEC ACT: SEC FILE NUMBER: 333-47045 FILM NUMBER: 98552716 BUSINESS ADDRESS: STREET 1: 121 E PIKER PEAK AVE STREET 2: SUITE 226A CITY: COLORADO SPRINGS STATE: CO ZIP: 80903 MAIL ADDRESS: STREET 1: 8 SOUTH NEVADA AVE STE 200 CITY: COLORADO SPRINGS STATE: CO ZIP: 80903 SB-2 1 FORM SB-2 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 27, 1998 REGISTRATION NO. 333- =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. (EXACT NAME OF ISSUER AS SPECIFIED IN ITS CHARTER) COLORADO (STATE OF INCORPORATION) 4813 84-1238018 (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION CLASSIFICATION CODE NUMBER) NO.) 8 S. NEVADA AVENUE, SUITE 200 ROBERT A. SPADE, CHAIRMAN OF THE COLORADO SPRINGS, COLORADO 80903 BOARD (719) 471-3332 AND CHIEF EXECUTIVE OFFICER (ADDRESS AND TELEPHONE NUMBER OF 8 S. NEVADA AVENUE, SUITE 200 PRINCIPAL EXECUTIVE OFFICE) COLORADO SPRINGS, COLORADO 80903 (719) 471-3332 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) Copies to: DOUGLAS R. WRIGHT, ESQ. ROBERT W. WALTER, ESQ. PARCEL, MAURO & SPAANSTRA, P.C. BERLINER ZISSER WALTER & GALLEGOS, 1801 CALIFORNIA STREET, SUITE 3600 P.C. DENVER, COLORADO 80202 1700 LINCOLN, SUITE 4700 (303) 292-6400 DENVER, COLORADO 80203 (303) 830-1700 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE ===============================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE REGISTRATION FEE (1) - ------------------------------------------------------------------------------------------------ Common Stock (2)....... 1,265,000 $11.00 $13,915,000 $4,104.92 - ------------------------------------------------------------------------------------------------ Common Stock (3)....... 263,600 $11.00 $ 2,899,600 $ 855.38 - ------------------------------------------------------------------------------------------------ Representative's Warrants (4).......... 110,000 $ -- $ -- $ -- (5) - ------------------------------------------------------------------------------------------------ Common Stock Underlying Representative's Warrants (6).......... 110,000 $13.75 $ 1,512,500 $ 446.18 - ------------------------------------------------------------------------------------------------ TOTAL.................. $18,327,100 $5,406.49 ================================================================================================
(1) Calculated pursuant to Rule 457 of the rules and regulations promulgated under the Securities Act of 1933, as amended. (2) These shares will be offered to the public in the registrant's public offering (including 165,000 shares that the representative of the underwriters (the "Representative") has the option to purchase from the registrant to cover over-allotments, if any). (3) These shares consist of the Selling Securityholders' Shares which will be offered to the public by the Selling Securityholders. The number of such shares is estimated solely for the purpose of calculating the Registration Fee. (4) The registrant will issue to the Representative at the closing of this offering warrants to purchase 110,000 shares of Common Stock (the "Representative's Warrants"). (5) No fee pursuant to Rule 457(g). (6) These shares of Common Stock are issuable upon exercise of the Representative's Warrants. An indeterminate number of additional shares of Common Stock are registered hereunder which may be issued as provided in the Representative's Warrants in the event that the provisions against dilution in the Representative's Warrants become operative. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. =============================================================================== EXPLANATORY NOTES All historical share and per share information has been removed from this registration statement (the "Registration Statement") pending a proposed reverse stock split that the Company intends to effectuate in order to comply with the listing requirements of The Nasdaq Stock Market, Inc. Upon the determination of the reverse stock split ratio, this Registration Statement will be amended to include all such share and per share information. This Registration Statement contains two prospectuses: one related to the offering of 1,100,000 shares of Common Stock (the "Common Stock") by Communications Systems International Inc. (the "Company") (the "Prospectus"); and one relating to the offering of shares of Common Stock by certain selling Securityholders (the "Selling Securityholders' Prospectus"). The exact number of Selling Securityholders' Shares to be registered cannot be determined until the Company effects its proposed reverse stock split. Following the Prospectus are certain substitute pages of the Selling Securityholders' Prospectus, including alternate front outside and back outside cover pages, an alternate "The Offering" section of the "Prospectus Summary" and sections entitled "Concurrent Offering" and "Plan of Distribution." Each of the alternate pages for the Selling Shareholder Prospectus included herein is labeled "Alternate Page for Selling Securityholders' Prospectus" or "Additional Page for Selling Securityholders' Prospectus." All other sections of the Prospectus, other than "Underwriting" and "Concurrent Offering," are to be used in the Selling Securityholders' Prospectus. In addition, cross-references in the Prospectus will be modified in the Selling Securityholders' Prospectus to refer to the appropriate sections. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES + +EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE + +SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH + +STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1998 PRELIMINARY PROSPECTUS 1,100,000 SHARES [LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.] COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. COMMON STOCK Communications Systems International, Inc. is offering 1,100,000 shares (the "Shares") of common stock of the Company ("Common Stock") hereby. The Common Stock is traded sporadically in limited amounts on the OTC Bulletin Board under the symbol CSYG. On February 25, 1998, the closing high bid price of the Common Stock was $ per share. It is currently estimated that the offering price of the Common Stock will be between $9.00 and $11.00 per share after giving effect to a proposed 1 for reverse stock split to be effective prior to the date of this Prospectus. The Company has applied to have the Common Stock quoted on The Nasdaq SmallCap Market under the symbol [CSIL]. See "Price Range of Common Stock." Concurrently with the Offering, shares of Common Stock are being registered for offer and sale by certain Securityholders (collectively, the "Selling Securityholders") of the Company. Such shares consist of a maximum of 113,600 shares of Common Stock that were issued in a private placement completed in December 1997 and shares issuable upon the exercise of certain warrants (collectively, the "Selling Securityholders' Shares"). The Selling Securityholders' Shares are not part of the underwritten offering. Other than receipt of the exercise price of those certain warrants, the Company will not receive any proceeds from the sale of the Selling Securityholders' Shares. In addition, the Selling Securityholders have agreed not to sell or transfer the Selling Securityholders' Shares for a period of 180 days following the date of this Prospectus. See "Selling Securityholders and Plan of Distribution." ----------- THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNTS (1) COMPANY (2) - -------------------------------------------------------------------------------- Per Share................................... $ $ $ - -------------------------------------------------------------------------------- Total(3).................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to pay the Representative of the Underwriters (the "Representative") a non-accountable expense allowance equal to 3% of the offering proceeds and to issue to it the Representative's Warrants (as defined herein). The Company has also agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated offering expenses of $680,000, which includes the non-accountable expense allowance, exclusive of the Selling Securityholders' expenses. (3) The Company has granted to the Representative an option, exercisable within 45 days after the date of this Prospectus, to purchase up to an additional 165,000 shares of Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If the option is exercised in full the total Price to Public, Underwriting Discounts and Proceeds to Company will be $ , $ , and $ , respectively. See "Underwriting." The Shares are being offered severally by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to reject orders in whole or in part and certain other conditions. It is expected that delivery of certificates representing the Shares will be made on or about , 1998. COHIG & ASSOCIATES, INC. THE DATE OF THIS PROSPECTUS IS , 1998 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMONSTOCK OF THE COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE IMPOSITION OF PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND OVER-ALLOTMENTS IN CONNECTION WITH THE OFFERING. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." The Company intends to furnish its security holders with annual reports containing audited financial statements and quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. On the effective date of the Registration Statement of which this Prospectus forms a part, the Company will become a "reporting company" under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company intends to register the Common Stock under the Exchange Act as of the effective date of the Registration Statement. The Company is a "small business issuer" as defined under Regulation S-B adopted under the Securities Act of 1933, as amended (the "Securities Act"), and will file reports with the Securities and Exchange Commission (the "Commission") pursuant to the Exchange Act on forms applicable to small business issuers. The Company claims proprietary rights in its logo and the terms "LINK-US" and "DIAL." This Prospectus also includes trademarks of other companies. SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. Certain information contained herein is derived from industry sources. Although the Company believes that this information is reliable, it has not independently verified this information. The following summary is qualified in its entirety by the more detailed information and Financial Statements, including notes thereto, appearing elsewhere in this Prospectus. Per share and other financial information assumes a proposed 1 for reverse stock split that will be completed prior to the date of this Prospectus. CSI has an agreement in principle to acquire all of the outstanding stock of International Telephone Company. The consummation of this acquisition (the "ITC Acquisition") is conditioned upon, and will occur simultaneously with, the completion of this Offering. Unless the context otherwise requires, (i) references to the "Combined Company" refer to Communications Systems International, Inc. and International Telephone Company, assuming the ITC Acquisition is consummated, (ii) references to the "Company" or "CSI" refer to Communications Systems International, Inc. and (iii) references to "ITC" refer to International Telephone Company. References to the present action of the Combined Company refer to activities or matters that are common to each of CSI and ITC as of the date of this Prospectus. Statements regarding prospective activities or matters relating to the Combined Company refer to activities that may be undertaken or matters that may result following the ITC Acquisition. Unless otherwise indicated, information contained in this Prospectus does not give effect to exercise of the Representative's over-allotment option. THE COMPANY Communications Systems International, Inc. is a growing provider of international long distance telecommunications services principally to customers in South America, Europe, the Pacific Rim, South Africa and Central America. CSI emphasizes innovative software solutions and technical expertise to provide higher quality, lower cost alternative routing of telecommunications for its customer base. CSI is focusing its marketing efforts on high volume customers such as hotels, large local businesses and foreign branches of multinational businesses in addition to individuals and small businesses. International Telephone Company is a provider of international long distance telecommunications service principally to customers in Africa, Europe and the Middle East. Existing customers of the Combined Company include the Inter- Continental Hotel in Rio de Janiero, Brazil and foreign offices of Nike Inc., Microsoft Corporation, Mitsubishi Corporation, Chrysler International, Warner Lambert Corporation, Diners Club International, DHL Aviation, Holiday Inn Hotels, Best Western Hotel, Wal-Mart Stores, Inc., Citibank, N.A., Bank of Tokyo, Royal Bank of Canada and the United States embassies in Chile, Korea, Australia and the Ukraine, the United Nations consulate in South Africa and other countries' embassies and international agencies. As a switch-based reseller of international long distance services, the Combined Company purchases access to multiple telecommunications networks from companies such as AT&T Corporation ("AT&T"), Sprint Communications L.P. ("Sprint"), and Cable & Wireless plc ("Cable & Wireless"). Through its least cost routing capabilities, the Combined Company routes calls via telecommunications networks that offer the Combined Company the lowest cost available among its carriers ("least cost routing"). The Combined Company resells network time by providing customized telecommunications services to its international business and residential customers that may not typically be available from incumbent telecommunications operators ("ITOs"). Decisions as to how such services are technically delivered to its international customers are based on several factors, including the local regulatory environment, market conditions, telecommunications traffic volume and strategic economic considerations. 1 The current means by which the Combined Company provides long distance service is reverse origination, or "call-reorigination," in which a customer seeking to make an international call is connected to the United States telephone system by a computer signal at its telecommunications center, located in Florida at the U.S. telecommunications gateway to Latin America. The computer triggers a call to be originated in the United States and routed back to the caller. The caller is then connected to the international destination by a second call also originating in the United States. The lines are joined and the call is completed using two high quality, low cost outgoing calls from the United States. The result is an effortless, high quality, rapid connection typically at a cost savings for the customer compared to ITO-provided service. Through utilization of proprietary software technologies, dedicated lines, automated call triggering circuits and the Internet, CSI is increasingly making its service seamless (or "transparent") to the customer. When customers use the Combined Company's transparent call-reorigination service, callers may not even be aware they are using call-reorigination because transparent call- reorigination requires no additional actions by the caller other than the normal dialing process. CSI has installed its proprietary call-reorigination systems, DIAL and LINK-US, and other call-reorigination technologies in several major hotel properties in Brazil and South Africa and has received indications of interest regarding commencement of call-reorigination service from several additional hotels in Brazil, Argentina, South Africa and Hong Kong. Management of the Company believes call-reorigination will remain a viable technical, economic telecommunications solution in many countries for years to come. As regulatory and competitive environments evolve around the world, the Combined Company intends to employ other telecommunications bypass solutions including "call through" international long-distance services to serve its customers and expand its customer base in specific target countries which have deregulated telecommunications industries. Unlike call-reorigination, "callthrough" service does not re-originate a call from another country. Instead, the call bypasses the ITO, is sent through an alternate switch and is then routed to the desired destination by means of least cost routing. Of the Combined Company's telecommunications revenue for the ten months ended October 31, 1997, approximately 42.5% was generated from customers located in South America (primarily in Argentina), 20.5% from Europe, 18.7% from Africa, 11.2% from Asia, and 7.1% from Central America and other areas. Nearly all of this revenue was generated from call-reorigination services which are anticipated to continue to provide the majority of revenue in the near term. Both CSI and ITC have achieved significant growth since their respective inceptions in 1993. CSI's revenue increased from $1.8 million in the fiscal year ended April 30, 1995 to $6.7 million in the fiscal year ended April 30, 1996 and $11.9 million in the fiscal year April 30, 1997. The number of CSI's customers increased from approximately 8,400 at January 31, 1997 to approximately 10,200 at January 31, 1998. The Combined Company defines customers as those persons or businesses who have used the Combined Company's services within the previous four months. ITC's revenue increased from $1.4 million in the fiscal year ended December 31, 1994 to $7.6 million in the fiscal year ended December 31, 1996. The number of ITC's customers was approximately 8,800 at January 31, 1998. As of December 31, 1997, the Combined Company had a network of approximately 95 local sales agents who have engaged over 400 sub-agents to market the Combined Company's services. Based in the Combined Company's telecommunications center, the Combined Company's multilingual sales and customer service departments assist the agents, sub- agents and customers. A portion of the proceeds from this Offering will enable the Combined Company to recruit additional sales agents and sub-agents to support its growth strategy. The global market for international telecommunications services is undergoing significant deregulation and reform. The industry is being shaped by: (i) deregulation and privatization of telecommunications markets worldwide; (ii) diversification of services through technological innovation; and (iii) globalization of major carriers through market expansion, consolidation and strategic alliances. As a result of these factors, it is anticipated that the industry will experience considerable growth in the foreseeable future, both in terms of traffic volume and revenue. According to the International Telecommunications Union ("ITU"), the international 2 telecommunications industry accounted for $53 billion in revenue and over 60 billion minutes of use in 1995, increasing from $21.7 billion in revenue and 16.7 billion minutes of use in 1986, which represents compound annual growth rates of 10% and 15%, respectively. The ITU projects that international telecommunications revenue will approach $76.0 billion by the year 2000 with the volume of traffic expanding to 107.0 billion minutes of use, representing compound annual growth rates of 7% and 12%, respectively, from 1995. Based on information available to the Company from the ITU and telecommunications industry publications, the call-reorigination, and call through segments of the telecommunications industry accounted for approximately $1.4 billion in revenue in 1997 and is growing at a rate of approximately 15% per year. CSI believes that its emphasis on innovative software solutions to telecommunications services strategically positions the Combined Company to take advantage of the multiple changes occurring in the telecommunications industry as a result of global deregulation and rapid technological change. Key elements of CSI's business strategy include: (1) integrating the ITC business and capitalizing on the resulting economies of scale; (2) increasing sales to larger customers through deployment of its proprietary transparent technology; (3) offering additional products, such as Internet, facsimile and hotel operator services; (4) applying resources to increase its sales agent base and sales and marketing activities; (5) utilizing technology to reduce costs; (6) pursuing and implementing strategic acquisitions; and (7) broadening and improving relationships with U.S. and international telecommunications providers. CSI is a Colorado corporation formed in April 1993. The Combined Company's executive offices are located at 8 South Nevada, Colorado Springs, Colorado 80903, and its telephone number is (719) 471-3332. The Combined Company's Internet address is http://www.csil.com. RECENT DEVELOPMENTS ITC ACQUISITION CSI has a agreement in principle to acquire all of the outstanding capital stock of ITC for $3.1 million in cash and 207,000 shares of Common Stock based on an assumed initial offering price of $10.00 per Share, to be issued one year from the closing of this Offering. A portion of the cash will be held in escrow for one year and the Common Stock will be subject to set-off to secure certain indemnification obligations of the stockholders of ITC. ITC is currently owned by Lynch Family, LLC, Philip Thomas and Sean Thomas. Upon completion of the ITC Acquisition, Philip Thomas and Sean Thomas will become employees of the Combined Company. The ITC Acquisition is conditioned on, among other things, the consummation of this Offering. See "ITC Acquisition" and ITC's Financial Statements and the Notes related thereto included elsewhere is this Prospectus. DECEMBER 1997 FINANCING In December 1997, CSI completed a private placement (the "December 1997 Financing") of an aggregate of $2.84 million principal amount Mandatorily Redeemable Convertible Promissory Notes (the "Bridge Notes"). Based on an assumed offering price of $10.00 per Share, the holders of the Bridge Notes will receive 4,000 shares of Common Stock (the "Bridge Shares") for each $100,000 principal amount of Bridge Notes held by such noteholder. The Representative acted as placement agent in connection with the December 1997 Financing. The Combined Company intends to use a portion of the net proceeds of this Offering to repay the entire principal amount and accrued interest on the Bridge Notes. The net proceeds from the December 1997 Financing were used to repay notes payable of $850,000 and accounts payable of $1.1 million and for payments representing a deposit to a carrier of $150,000 and a standstill payment to ITC of $100,000. The repayment of the notes payable will result in a gain on early extinguishment of debt totaling $747,000, net of related expenses, in December 1997. See "Use of Proceeds." 3 THE OFFERING Securities offered................ 1,100,000 shares Common Stock outstanding before shares (1) the Offering..................... Common Stock outstanding after the shares (1) Offering......................... Use of proceeds................... To repay the Bridge Notes; to consummate the ITC Acquisition; to further develop and expand the Combined Company's sales and marketing capabilities; to install equipment to facilitate transparent call- reorigination services for additional hotels and large multinational businesses; to locate regional switches or other telecommunications equipment in Europe, Africa and Asia to facilitate least cost routing; for research and development and system capacity expansion associated with the Combined Company's enhanced services, including facsimile and debit card services and compression technology that is intended to improve service and reduce operating costs; and for working capital to fund operating expenses. See "Use of Proceeds" and "Business." Proposed Nasdaq SmallCap Market Symbol for the Common Stock...... [CSIL]
- -------- (1) Includes 113,600 Bridge Shares to be issued immediately prior to the closing of this Offering based on an assumed offering price of $10.00 per Share. Does not include (i) up to shares of Common Stock issuable upon exercise of outstanding options, which have weighted average exercise prices of $ per share, (ii) up to shares of Common Stock issuable upon the exercise of outstanding warrants, which have weighted average exercise prices of $ per share, (iii) an indeterminate number of shares of Common Stock issuable upon conversion of outstanding promissory notes in the aggregate principal amount of $30,000 which have a conversion price per share equal to 90% of the average bid and ask price of the Common Stock on the day before conversion, (iv) up to 110,000 shares of Common Stock issuable upon exercise of the Representative's Warrants and (v) any shares issuable in connection with the ITC Acquisition (collectively referred to herein as "Additional Securities"). See "Management," "Description of Securities" and "Underwriting." 4 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) The summary financial information set forth below is derived from the audited financial statements of CSI and ITC, the unaudited financial statements of CSI and ITC, and the unaudited pro forma condensed combined financial statements of CSI and ITC. Such information should be read in conjunction with such financial statements and the notes thereto and the reports of the Independent Public Accountants.
CSI ACTUAL ITC ACTUAL PRO FORMA COMBINED(1) ----------------------------- ------------------------------ --------------------------- YEAR ENDED SIX MONTHS APRIL 30, ENDED YEAR ENDED TEN MONTHS YEAR ENDED SIX MONTHS ENDED ---------------- OCTOBER 31, DECEMBER 31, ENDED OCTOBER 31, APRIL 30, OCTOBER 31, 1996 1997 1997 1996 1997 1997 1997 ------- ------- ----------- ------------ ----------------- ---------- ---------------- STATEMENT OF OPERATIONS DATA: Revenue........................ $ 6,741 $11,865 $6,372 $7,603 $8,054 $19,732 $11,426 Cost of revenue................ 5,963 7,755 3,807 5,070 6,790 13,253 8,357 ------- ------- ------ ------ ------ ------- ------- Gross margin................... 778 4,110 2,565 2,533 1,264 6,479 3,069 Operating expenses: Sales and marketing.......... 1,573 2,080 1,271 1,099 715 2,928 1,703 General and administrative... 1,258 1,302 1,326 1,446 1,388 2,929 2,183 Technical and developmental.. 394 722 389 -- -- 722 389 Depreciation................. 58 103 68 69 73 179 113 Amortization of intangibles.. -- -- -- -- -- 937 468 ------- ------- ------ ------ ------ ------- ------- Total operating expenses....... 3,283 4,207 3,054 2,614 2,176 7,695 4,856 ------- ------- ------ ------ ------ ------- ------- Income (loss) from operations.. (2,505) (97) (489) (81) (912) (1,216) (1,787) Other income (expense)--net.... (19) (162) (88) 88 62 (62) (109) ------- ------- ------ ------ ------ ------- ------- Net income (loss).............. (2,524) (259) (577) 7 (850) (1,278) (1,896) ======= ======= ====== ====== ====== ======= ======= Net income (loss) per share(2)...................... Weighted average number of shares outstanding............
CSI ACTUAL ITC ACTUAL PRO FORMA --------------------- ----------- COMBINED APRIL 30, OCTOBER 31, OCTOBER 31, OCTOBER 31, 1997 1997 1997 1997(1)(3) --------- ----------- ----------- ----------- BALANCE SHEET DATA: Current assets.................. $ 1,284 $ 1,499 $ 1,950 $ 8,369 Long-term assets................ 662 779 770 1,452 Intangible assets............... -- -- -- 4,683 Total assets.................... 1,946 2,278 2,720 14,505 Current liabilities............. 3,615 3,532 3,209 5,543 Long-term liabilities........... -- 850 292 292 Total liabilities............... 3,615 4,382 3,501 5,835 Working capital (deficit)....... (2,331) (2,033) (1,259) 2,826 Shareholders' equity (deficiency)................... (1,669) (2,104) (781) 8,670
- -------- (1) Refer to the Pro Forma Condensed Combined Financial Statements contained herein. (2) Based on the weighted average number of shares outstanding. (3) Gives effect to the December 1997 Financing, the ITC Acquisition and the sale of the Shares offered hereby at the assumed offering price of $10.00 per Share and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 5 RISK FACTORS Investment in the Securities involves substantial risks, some of which are summarized below. Prospective investors should carefully consider the following risk factors, among others, relating to the Combined Company and this Offering prior to making an investment. The discussions and information in this Prospectus contain both historical and forward-looking statements. Forward-looking statements are those identified with words such as "believes," "expects," "anticipates" and similar terms. To the extent that this Prospectus contains forward-looking statements regarding the financial condition, operating results, business prospects or any other operations of the Combined Company, please be advised that the Combined Company's actual financial condition, operating results and business prospects may differ materially from that projected or estimated by the Combined Company in forward-looking statements. Actual results will differ from the Combined Company's current expectations. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, intense competition, including entry of new competitors, loss of agents and their customer bases, the introduction of more competitive pricing structures by long distance carriers, adverse government regulation, both foreign and domestic, inadequate capital, unexpected costs, the imposition of new, or the increase of existing, tariffs, lower revenue and net income than anticipated, failure to obtain new customers, higher than anticipated costs, difficulties of consummating and integrating the ITC Acquisition and the acquisitions of other businesses that do not perform as anticipated, the potential fluctuation and volatility of the Combined Company's operating results and financial condition, inability to carry out marketing and sales plans, loss of key executives, changes in interest rates or international exchange rates, inflationary factors, and other specific risks that may be alluded to in this Prospectus or in other reports issued by the Combined Company. Risks Related to the Combined Company and the Telecommunications Industry LIMITED RELEVANT OPERATING HISTORY; SIGNIFICANT AND CONTINUING LOSSES Both CSI and ITC began operations in 1993. Accordingly, CSI and ITC have limited operating histories upon which an evaluation of their combined prospects and future performance can be made. Such prospects must be considered in light of the risks, expenses and difficulties frequently encountered in the operation and expansion of a business in the highly competitive telecommunications industry, which is characterized by an increasing number of market entrants. The Combined Company has no combined operating history. Therefore, there is no assurance the Combined Company will operate profitably or be successful in capitalizing on perceived synergies. CSI has incurred significant losses, including losses of approximately $2.5 million and $259,000 during the years ended April 30, 1996 and 1997, respectively, and a loss of approximately $577,000, during the six months ended October 31, 1997, resulting in an accumulated deficit of approximately $4.6 million at October 31, 1997. In addition, ITC incurred a loss of approximately $850,000 during the ten months ended October 31, 1997. Losses may continue until such time, if ever, that the Combined Company is able to generate a level of revenue sufficient to offset its cost structure. There can be no assurance that the Combined Company will achieve significant increased revenue or profitable operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements. SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING The capital requirements of CSI and ITC have been and will continue to be significant and their cash requirements have been exceeding cash flow from operations. At October 31, 1997, CSI and ITC had working capital deficits of approximately $2.0 million and $1.3 million respectively. The Combined Company has been substantially dependent upon sales of its equity and debt securities and financing from trade creditors. Based on the Combined Company's current proposed plans, the Combined Company anticipates that the net proceeds of this Offering will be sufficient to satisfy its contemplated cash requirements for at least 12 months following the consummation of this Offering. If the Combined Company's plans change or its assumptions prove inaccurate (due to unanticipated expenses, delays or difficulties or otherwise), or the proceeds of this Offering otherwise prove insufficient to fund operations and implement the Combined Company's proposed expansion strategy, the Combined Company could be required to seek additional financing sooner than currently anticipated. The 6 Combined Company has no current arrangements with respect to, or potential sources of, additional financing and it is not anticipated that any current shareholders will provide any additional guarantees for Combined Company obligations. Consequently, there can be no assurance that any additional financing will be available to the Combined Company when needed, on commercially reasonable terms, or at all. The inability to obtain additional financing when needed would have a material adverse effect on the Combined Company, requiring it to curtail its expansion efforts. In addition, any additional equity financing may involve substantial dilution to the interests of the Combined Company's then existing shareholders. See "Use of Proceeds," "Dilution," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY SALES AGENTS CSI currently depends on approximately 40 independent sales agents to sell its services, including Edward Stoever, who operates in Argentina, and CS do Brazil. These two sales agents accounted for approximately 54.3%, and 11.5%, respectively, of CSI's revenue in the six months ended October 31, 1997, and the ten largest sales agents accounted for approximately 91.3% of CSI's revenue in the six months ended October 31, 1997. ITC currently depends on approximately 55 independent sales agents to sell its services, including Generic Telecom, Inc., Zohair Attoue and Janel Richards. These three sales agents accounted for approximately 26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the ten months ended October 31, 1997, and the ten largest sales agents accounted for approximately 89.1% of ITC's revenue in the ten months ended October 31, 1997. If the Combined Company fails to retain the services of Mr. Stoever, CS do Brazil, Generic Telecom, Inc., Mr. Attoue or Ms. Richards for any reason or loses the services of other sales agents that contribute significantly to the Combined Company's revenue, the Combined Company's cash flow and results of operations would be adversely affected because of expected high customer attrition due to the loss of sales agents. The Combined Company also depends on these sales agents and persons engaged by them to install and service much of the Combined Company's call-reorigination technology. The failure of such persons to properly install or service the Combined Company's systems could adversely affect the Combined Company. Although sales agents are subject to distributor agreements, the agreements may be difficult to enforce because the sales agents are domiciled in foreign countries. Under the terms of the sales agent agreements, the sales agents are responsible for collecting customer payments except for credit card payments, and sales agents generally are responsible for customer bad debts less, in some cases, an allowance granted by the Combined Company. Failure of sales agents to collect and remit customer payments to the Combined Company presents a risk to the Combined Company. CSI's former Singapore distributor recently failed to remit payments of $215,000. CSI is aggressively pursuing collection of this debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--General" and "Business--Sales and Marketing." NEED TO INTEGRATE AND MANAGE ITC; SELECTION AND INTEGRATION OF UNSPECIFIED ACQUISITIONS Management believes that the consummation of the ITC Acquisition will substantially increase the Combined Company's sales agent base, technological capabilities, management expertise and carrier relationships. The Combined Company's ability to realize any long-term advantages from the ITC Acquisition will depend in large part on successfully integrating, managing and improving the operations of ITC. The Combined Company's management team has no experience in integrating acquired companies. Risks relating to such integration include the risk of loss of services of ITC's executive officers, including Philip Thomas and Sean Thomas, the loss of key sales agents of CSI or ITC or adverse changes in relationships with carriers or other strategic relationships. There can be no assurance that the Combined Company will be able to successfully integrate ITC. Failure to successfully integrate ITC would have a material adverse effect on the business of the Combined Company. A key element to the Combined Company's strategy is expansion through the additional acquisition of products, technologies, businesses or customer bases. Except for the agreement with respect to the ITC Acquisition, the Combined Company has no commitment for any such acquisition as of the date of this 7 Prospectus, and there can be no assurance that the Combined Company will be successful in identifying appropriate acquisition opportunities or negotiating favorable terms. In most cases, the Combined Company will not be required to obtain shareholder approval in order to complete its acquisitions. Any future acquisitions or related activity such as strategic alliances or licensing arrangements will be accompanied by the risks commonly encountered in such transactions. Such risks include, among others, the difficulty of identifying appropriate acquisition candidates, the difficulty of assimilating the operations and personnel of the respective entities, the potential disruption of the Combined Company's ongoing business, the inability of management to capitalize on the opportunities presented by the acquisitions or related efforts, the failure to successfully incorporate licensed or acquired technology and rights into the Combined Company's services, the inability to maintain uniform standards, controls, procedures and policies, the impairment of relationships with employees and customers as a result of changes in management and an increase of amortization of intangibles, such as goodwill, in the Combined Company's financial statements. In addition, to the extent the Company uses cash to complete acquisitions, it may deplete its tangible assets. If the Company's tangible assets falls below $2 million, the Common Stock may be delisted from the Nasdaq. There can be no assurance that the Combined Company will be able to finance any future acquisitions. The successful integration of any such acquisition is critical to future financial performance of the Combined Company. Complete integration of any acquisitions could take several fiscal quarters to accomplish and would require, among other things, coordination of the respective companies' sales and marketing, and technical development efforts. There can be no assurance that present and potential customers of the Combined Company and any acquired entity would continue their historic usage patterns without regard to the acquisition, and any significant delay or reduction in usage could have an adverse effect on the Combined Company's business, financial condition and results of operations. The process of integrating companies may cause management's attention to be diverted from operating the Combined Company, and any difficulties encountered in the transition process could have an adverse impact on the business, financial condition and results of operations of the Combined Company. In addition, the process of combining two organizations could cause the interruption of, or loss of momentum in, the activities of either or both companies' businesses, which could have an adverse impact on their combined operations. The difficulty of combining companies may be increased by the need to integrate the personnel and the geographic distances between companies. Changes brought about by any acquisition may cause key employees, sales agents, or carriers to terminate their relationships with the Combined Company. There can be no assurance that the Combined Company will retain the employees, sales agents, and carrier relationships of an acquired entity or that the Combined Company will realize any of the other anticipated benefits of any acquisition. There can be no assurance that costs of combining potential acquisitions will not have an adverse effect upon the Combined Company's operating results, particularly in the fiscal quarters immediately following the consummation of any acquisition, while the operations of the acquired business are being integrated into the Combined Company's operations. There can be no assurance that, following any acquisition, the Combined Company will be able to operate any acquired business on a profitable basis. RELATIONSHIP WITH LONG DISTANCE CARRIERS The Combined Company's ability to achieve and maintain profitable operations is heavily dependent upon the agreements the Combined Company has with certain international long distance telephone carriers based in the United States. The Combined Company uses the long distance telephone systems of these carriers to provide its long distance telephone service to customers located outside the United States. The Combined Company, among other things, must negotiate favorable rates with these long distance carriers. Because of the frequent fluctuations in rates of long distance carriers, the Combined Company believes that it is in its best interest to have short-term agreements with long distance carriers. Most of the Combined Company's agreements with its long distance telephone carriers will expire, or may be terminated by either party, within one year, and there can be no assurance that these agreements will be renewed or that the Combined Company will be able to obtain favorable rates from these long distance carriers. The Combined Company's dependence on particular carriers will vary because the Combined Company shifts its use of carriers depending on the rates that are offered. The 8 Combined Company is continually attempting to renegotiate rates with its current carriers and to establish relationships with new long distance carriers that provide the most favorable rates. The Combined Company's ability to obtain favorable rates from the carriers depends, in large part, on the Combined Company's total volume of long distance traffic. There is no guarantee that the Combined Company will be able to maintain the volume of international long distance traffic necessary to obtain favorable rates. Due to its financial condition, CSI defaulted on payment obligations to certain carriers in 1995, 1996 and 1997. Although CSI was able to negotiate deferred payment arrangements with these carriers (and thereafter made such deferred payments) and was able to continue purchasing minutes from certain of these carriers, there is no assurance that it will be able to make such arrangements with these or other carriers if required in the future. In addition, in November 1997, WorldCom, Inc. ("WorldCom") commenced an action against ITC in Connecticut state court seeking damages of approximately $1.1 million for alleged past due carrier bills. ITC believes it has meritorious defenses to the suit. ITC intends to vigorously defend its position and will attempt to reach a settlement with this carrier. Under certain carrier contracts, the Combined Company obtains rate commitments (subject to adjustment, as provided in each carrier contract), which are generally more favorable than otherwise would be available, by committing to purchase a minimum number of minutes from such carriers. If the Combined Company fails to meet its minimum requirements under a carrier contract, it could still be required to pay some or all of its minimum monthly commitment as a penalty. Historically, CSI failed to meet required minimum purchases and incurred unused usage charges from AT&T and MCI. The Combined Company's aggregate minimum monthly commitments currently are approximately $400,000, which represent approximately 28.7% of the Combined Company's average monthly cost of revenue for the six months ended October 31, 1997. Failure to maintain favorable carrier contracts would increase the Combined Company's direct cost and the ability to achieve and maintain profitability. See "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." CHANGING INDUSTRY ENVIRONMENT The majority of the Combined Company's operations involve the telephone call-reorigination industry. This industry operates under the guidelines of multiple foreign and domestic government regulations. If the Combined Company should lose the authorization to offer call-reorigination services in any of its current markets, the results of operations of the Combined Company could be materially adversely affected. The call-reorigination industry is based upon the arbitrage opportunities created by higher international calling rates charged by non-U.S. ITOs compared to rates charged by U.S.-based long distance carriers. However, ITOs may lower their international calling rates, thereby eliminating or severely affecting the market for call-reorigination services. Representatives of 69 countries, including the United States, recently entered into an agreement with the World Trade Organization ("WTO"), which became effective on February 5, 1998, with the goal of increasing competition among telecommunications providers in those markets. If some or all of the non-U.S. ITOs operating in the Combined Company's current markets lower their rates, the results of operations of the Combined Company in those markets would be adversely affected if the Combined Company in turn is required to reduce its rates. In addition, certain European countries have enacted or have proposed enacting a value added tax (VAT) on international call-reorigination services. In February 1997, the government of Argentina enacted legislation that simultaneously lowered the international long distance calling rates from Argentina and increased the domestic rates within Argentina. Historically, the Combined Company has received a significant portion of its revenue from customers in Argentina. To date this legislation has not had an adverse effect on the Combined Company's results of operations, but there can be no assurance such an adverse effect will not occur in the future as a result of this or other pending legislation. See "Business." COMPETITION General. The Combined Company faces a high level of competition for customers and sales agents in all of its markets, and expects competition to intensify in the future. There are no substantial barriers to entry in the call-reorigination industry. The Combined Company competes with other organizations that have greater resources than the Combined Company. The Combined Company believes that there are more than 150 9 companies engaged in the international call-reorigination industry. Many of the Combined Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources, larger networks and a broader portfolio of services than the Combined Company. Additionally, many competitors have strong name recognition and "brand" loyalty, long-standing relationships with the Combined Company's target customers, and economies of scale that can result in a lower relative cost structure for transmission and related costs. Competition for customers and sales agents in the telecommunication markets in which the Combined Company operates is on the basis of price and on the basis of the type and quality of service offered. Increased competition could force the Combined Company to reduce its prices and profit margins if the Combined Company's competitors are able to procure rates or enter into service agreements comparable to or better than those the Combined Company obtains or if competitors are able to offer other incentives to existing and potential customers and sales agents. Similarly, the Combined Company has no control over the prices set by its competitors in the long distance resale market. The Combined Company is aware that its ability to market its long distance resale services depends upon the existence of spreads between the rates offered by the Combined Company and those offered by the providers with whom it competes as well as those from whom it obtains service for resale. A decrease in such spreads or price competition in the Combined Company's markets could have a material adverse effect on the Combined Company's business, financial condition or results of operations. Other potential competitors include cable television providers, wireless telephone providers, Internet access providers, electric and other utilities with rights of way, railways, microwave carriers and large end users that have private networks. The intensity of such competition has recently increased and the Combined Company believes that such competition will continue to intensify as the number of new entrants increases. If the Combined Company's competitors devote significant additional resources to the provision of international and domestic interstate long distance telecommunications services to the Combined Company's target customer base of high volume customers such as hotels, large local businesses and foreign branches of multinational businesses, such action could have a material adverse effect on the Combined Company's business, financial condition and results of operations. There can be no assurance that the Combined Company will be able to compete successfully against new or existing competitors. See "Business--Competition." U.S. Based Competition. The large U.S. long distance carriers have, in the past, been reluctant to compete directly with ITOs by entering the international call-reorigination business and attempting to capture significant market share of the domestic customers of the ITOs. This is changing, and AT&T, among others, is entering the call-reorigination business. The Combined Company's principal U.S.-based competitors are providers of international call-reorigination services such as Access Authority, AT&T, IDT Corporation, Justice Technology Corp, Kallback, NetSource Communications, Telegroup, USA Global Link, UTG Communications, Viatel, Inc. and Worldpass, and as well as providers of traditional long distance services such as AT&T, MCI, Sprint, WorldCom, Cable & Wireless, Frontier Corp., LCI International, Inc., GTE Communications, Qwest Communications and Regional Bell Operating Companies ("RBOCs") outside their exchange territories. International Based Competition. The Combined Company's principal international-based competitors include, among others, Telekom S.A. in South Africa; Telefonica de Argentina and Telecom Argentina in Argentina; Telebras, Telesp and Telerj in Brazil; France Telecom in France; PTT Telecom B.V. in the Netherlands; Cable & Wireless plc, British Telecommunications plc, Mercury Communications Ltd., AT&T, WorldCom, Sprint and ACC Corp., Swiftcall Ltd., Oystel Communications, Ltd. and First Telecom in the United Kingdom; Deutsche Telecom AG in Germany; Optus in Australia and Kokusan Denshin Denwa International Telecom Japan (KDD) and International Digital Communications in Japan. The Combined Company also competes with non-U.S. based providers of international call-reorigination or other alternative international long- distance services. The Combined Company believes that local ITOs generally have certain competitive advantages due to their control over local connectivity and close ties with national regulatory authorities. The Combined Company also believes that, in certain instances, some regulators have shown a reluctance to adopt policies and grant regulatory approvals that would result in increased competition for the local ITO. If an ITO were to successfully pressure national regulators to outlaw the provision of call-reorigination services and 10 prevent the Combined Company from providing its services, the Combined Company could be denied regulatory approval in certain jurisdictions in which its services would otherwise be permitted. Any delay in obtaining approval, or failure to obtain approval, could have a material adverse effect on the Combined Company's business, financial condition and results of operations. If the Combined Company encounters anti-competitive behavior in countries in which it operates (such as an ITO attempting to block access to call- reorigination services) or if the ITO in any country in which the Combined Company operates uses its competitive advantages to the fullest extent, the Combined Company's business, financial condition and results of operations could be materially adversely affected. Deregulation and increased competition in international markets could cause prices for direct-dial international calls to decrease so much that the Combined Company's international call- reorigination services would no longer be attractive to customers. See "Business--Competition" and "Business--Government Regulation." GOVERNMENT REGULATION The Combined Company's international telecommunications services are subject to the jurisdiction of many regulators. The United States Federal Communications Commission ("FCC") has imposed certain restrictions on international call-reorigination providers, including the requirement that authorized carriers provide service in a manner consistent with the laws of the countries in which they operate. Recently, the ITU agreed that any country could ban call-reorigination services, and the provision of some forms of call-reorigination services is illegal in Uruguay, Venezuela, the Philippines and certain other countries. In addition, approximately 30 countries primarily in Central and South America, the Middle East and Asia (including China) have informed the FCC that they have banned certain forms of call-reorigination. Call-reorigination service providers or customers violating these countries' laws may be subject to fines or penalties. Call-reorigination services in these countries comprised approximately 7.8% of the Combined Company's revenue in the ten months ended October 31, 1997. Currently, the Combined Company believes that it is not in violation of any country's laws or regulations related to the provision of international long distance services, but rules or regulations could be adopted by one or more countries that could prevent the Combined Company from operating in such countries, thereby having a material adverse effect on the Combined Company's operations. Local laws and regulations differ significantly among the jurisdictions in which the Combined Company operates, and the interpretation and enforcement of such laws and regulations vary and are often based on the informal views of the local ministries which, in some cases, are subject to influence by government owned or sanctioned local telephone companies. In addition, failure to interpret accurately the applicable laws and regulations and the mode of their enforcement in particular jurisdictions could result in monetary penalties imposed against the Combined Company that could be significant. The Combined Company generates a significant portion of its revenue from customers originating calls in South America, Europe, the Pacific Rim, Africa, the Middle East and Central America. There can be no assurance that foreign regulation will not have a material adverse effect on the Combined Company's business, results of operations and financial condition. See "Business-- Regulation." As a switch-based reseller of international long distance telecommunications services, the Combined Company is regulated by the FCC. The Combined Company is currently authorized by the FCC as a reseller of international long distance telephone services. The Combined Company has not been the subject of any action by the FCC or any other regulatory entity that would affect its ability to resell international long distance services. The FCC has determined that call-reorigination service using uncompleted call signaling, such as that used by the Combined Company, does not violate United States or international law, but has held that United States companies providing such services must comply with the laws of the countries in which they operate as a condition of such companies' FCC authorizations. The FCC reserves the right to condition, modify or revoke any authorizations and impose fines for violations of the Communications Act of 1934, as amended (the "Communications Act") or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the clear and explicit telecommunications laws of other countries that are unable to enforce their laws against U.S. carriers. See "Business-- Regulation." 11 RISKS OF OPERATIONS IN FOREIGN COUNTRIES At the present time, substantially all of the Combined Company's revenue is from international customers. The Combined Company anticipates that revenue from international customers will continue to account for substantially all of its total revenue. Therefore, the Combined Company is particularly exposed to risks associated with international operations, including unexpected changes in legal and regulatory requirements, changes in tariffs, exchange rates and other barriers, political and economic instability, difficulties in collecting accounts receivable, longer payment cycles, difficulties in establishing, maintaining and managing independent sales agents, difficulties in staffing and managing international operations, difficulties in installing, maintaining and repairing equipment abroad, difficulties in protecting the Combined Company's intellectual property overseas, potential confiscation of property and equipment, potentially adverse tax consequences and the regulation of telecommunications companies by foreign jurisdictions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." RELIANCE ON RAPIDLY CHANGING TECHNOLOGY; DEPENDENCE ON THIRD PARTY SUPPLIERS The market for long distance services is characterized by rapidly changing technology, evolving industry standards and customer demands, and frequent new product, service and software introductions and enhancements. The Combined Company has invested significantly in sophisticated and specialized telecommunications and computer technologies such as the LINK-US and DIAL, and has focused on the application of these and other technologies to provide customized solutions to meet its customers' needs. Future technological advances in the industry may result in the availability of new services or products that could compete directly with the services currently provided by the Combined Company or could lower the cost of competitive services and products to a level where the Combined Company's services and products could lose any competitive technological advantage. The Combined Company anticipates that it will be necessary to continue to select, invest in, and develop new and enhanced technology on a timely basis in order to maintain its competitiveness. The Combined Company's future success will also depend, in part, on its ability to continue to evolve and adapt telecommunications technology solutions that keep pace with changing customer demands. There can be no assurance that the Combined Company will be successful in anticipating technological changes or in selecting and developing new and enhanced information technology on a timely basis. The Combined Company is dependent on certain third-party suppliers of equipment and hardware components, including its integrated computer systems and switching platform, and expects that it will become more dependent on such suppliers as its business expands. A failure by a supplier to deliver quality products on a timely basis, or the inability to develop other sources if required, could result in delays that could adversely affect the Combined Company. In addition, the Combined Company's business is highly dependent on its computer systems, telephone equipment and software. See "Business." DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS The Combined Company believes that the integration of its management information systems and switching platforms is important in order to best provide least cost routing and efficient billing of customers. Although the Combined Company's computer system and switching platform located at its telecommunications center in Ft. Lauderdale are integrated, there can be no assurance, if its current system becomes damaged or obsolete, that the Combined Company will be able to upgrade or replace such system with another integrated system at commercially reasonable prices, or at all. Failure to maintain an integrated system could have a material adverse effect on the Combined Company. The computer system that runs ITC's switches and billing operation has not yet been upgraded to be Year 2000 compliant. A new system called NTS 2000, which is Year 2000 compliant, is expected to be released and implemented in 1998 at an estimated cost of $30,000 to the Combined Company. Failure to achieve Year 2000 compliance could have a material adverse effect on the Combined Company. 12 The Combined Company believes, based on its current business plan, that its management information systems will be sufficient for the next 12 months, but will require substantial additional investments to continue their effectiveness after such time as the Combined Company continues to expand its operations and process a higher volume of calls. The failure to successfully implement enhancements, replacements and investments in a timely fashion could result in a material adverse effect on the Combined Company's business, financial condition and results of operations. Furthermore, even if the Combined Company is successful in implementing such investments in a timely fashion there can be no assurance that the Combined Company's management information systems will not require further investments. DEPENDENCE UPON EXECUTIVE OFFICERS AND MANAGEMENT PERSONNEL The Combined Company's operations are dependent upon the continued services of Robert Spade, its Chairman and Chief Executive Officer, and Patrick Scanlon, its President and Chief Operating Officer. The loss of the services of either of Messrs. Spade or Scanlon could have a material adverse effect on the Combined Company. The Combined Company has an employment agreement with Mr. Spade that expires April 30, 2000. The Combined Company maintains a key- person life insurance policy on the life of Mr. Spade in the amount of $2 million. The Company has applied for key-person life insurance on the life of Mr. Scanlon in the amount of $2 million. The Company has an employment agreement with Mr. Scanlon which expires on August 25, 2000. The Combined Company's success also is dependent on its ability to hire and retain other qualified management, technical, marketing, sales and customer service personnel. There can be no assurance that the Combined Company will be successful in recruiting and retaining such personnel. See "Management." MANAGEMENT OF GROWTH The Combined Company has experienced significant growth in the past two years and expects such growth to continue. The Combined Company's growth may place significant strains on the Combined Company's management, staff, working capital and operating and financial control systems. There can be no assurance that the Combined Company's management, staff, working capital and systems will be adequate to support its future anticipated growth. The failure to continue to upgrade operating and financial control systems, to recruit qualified staff or to respond effectively to difficulties encountered during expansion could have a material adverse effect on the Combined Company's business, financial condition and results of operation. PROPRIETARY RIGHTS AND LICENSES The Combined Company does not have a formal patent or other intellectual property protection program. It relies on trade secret and contractual restrictions to establish and protect its technology. The Combined Company's success depends in part on its ability to enforce intellectual property rights for its proprietary software technology, both in the United States and in other countries. The Combined Company's proprietary software is protected by the use of confidentiality agreements that restrict the unauthorized distribution of the Combined Company's proprietary data. While the Combined Company has attempted to limit unauthorized use of its software products or the dissemination of its proprietary information, there can be no assurance that the Combined Company will be able to retain its proprietary software rights and prohibit the unauthorized use of proprietary information. The hardware and other equipment used by the Combined Company for its call- reorigination systems are purchased from third party suppliers and therefore are not proprietary to the Combined Company. See "Business--Sales and Marketing" and "--Technology and Intellectual Property." INTERNATIONAL CURRENCY FLUCTUATIONS The Combined Company's operations may be adversely affected by fluctuations in the value of the U.S. dollar against certain non-U.S. currencies, and the enactment of exchange controls or non-U.S. government restrictions on the transfer of funds. The Combined Company currently prices all of its products and services in U.S. dollars. However, swings in the relative value of the U.S. dollar in relation to currencies in nations in which the Combined Company conducts operations can affect the prices of the Combined Company's products and 13 services. There is no assurance that the Combined Company will be able to maintain a competitive position in foreign countries where the domestic currency is experiencing devaluation. To the extent the Combined Company expands its international operations or changes its pricing practices to denominate prices in foreign currencies, the Combined Company will be exposed to increased risks of currency fluctuation as the Combined Company does not, and has no plans to, engage in hedging activities designed to protect against currency fluctuations. Risks Related to the Offering DETERMINATION OF OFFERING PRICE The offering price of the Shares was determined through negotiations between CSI and the Representative. Among the factors considered were the limited financial resources of the Combined Company, the Combined Company's potential revenue and cash flow, the industry in which the Combined Company operates and the general condition of the securities market. The offering price of the Shares is not necessarily reflective of the Combined Company's assets, history of revenue and cash flow, book value or any other objective criteria of value. See "Underwriting." MARKET FOR THE COMMON STOCK; PRICE FLUCTUATIONS Prior to this Offering, there has been only a limited market for the Common Stock. The Common Stock is traded sporadically in limited quantities on the OTC Bulletin Board, and the Combined Company has applied to have the Common Stock quoted on the Nasdaq SmallCap Market. There can be no assurance that a regular, active trading market will develop or that the market price of the Common Stock will not decline below the public offering price. The price at which the Common Stock trades may be highly volatile. In addition, other events, such as quarter-to-quarter variations in operating results, news announcements, trading volume, general market trends and other factors, could result in wide fluctuations in the market price of the Common Stock. The stock market is subject to significant price and volume fluctuations. These fluctuations, which are often unrelated to the operating performance of specific companies, have had a substantial effect on the market price for many small capitalization companies. Factors such as those cited above, as well as other factors which may be unrelated to the operating performance of the Combined Company, may adversely affect the price of the Combined Company's securities. See "Price Range of Common Stock." SHARES AVAILABLE FOR RESALE As of 1998, there were shares of CSI's Common Stock issued and outstanding. Of this amount, approximately shares are "restricted securities" as defined by Rule 144 of the Securities Act. Of the shares of restricted stock which are presently outstanding, approximately shares of restricted stock have satisfied the one year holding period required by Rule 144. The remaining shares of restricted stock will become available for resale pursuant to Rule 144 in various amounts each month, with all shares of restricted stock being available for resale by January 1999. All of the officers and directors and persons known by CSI to be the beneficial holders of 2% or greater of the Common Stock have agreed not to sell such shares for a period of 270 days following the date of this Prospectus. The Selling Securityholders have agreed not to sell their shares for a period of 180 days following the date of this Prospectus. No prediction can be made as to the effect, if any, that the sale of Common Stock (or the availability of such Common Stock for sale) by the holders of the Company's restricted stock will have on the market price of the Common Stock. Nevertheless, the possibility of a substantial number of shares of Common Stock being offered for sale in the public market may adversely affect prevailing market prices for the Common Stock and could impair investors' ability to sell the Common Stock or the Combined Company's ability to raise capital through the sale of its equity securities. See "Shares Eligible for Future Sale." 14 DIVIDENDS CSI has paid no dividends since inception. The payment of dividends on the Common Stock rests with the discretion of the Board of Directors. Payment of dividends is contingent upon, among other things, future earnings, if any, and the financial condition of the Combined Company, capital requirements, general business conditions, and other factors which cannot now be predicted. There can be no assurance that the future operations of the Combined Company will be profitable or that dividends will ever be paid by the Combined Company. See "Dividend Policy." IMMEDIATE SUBSTANTIAL DILUTION A purchaser of Common Stock in this Offering will experience immediate substantial dilution of $ per Share or %, which amount represents the difference between the pro forma net tangible book value per share of Common Stock after the Offering and the assumed public offering price of $10.00 per share. See "Dilution." POTENTIAL FUTURE DILUTION Currently, the Combined Company has outstanding (i) options to purchase up to shares of Common Stock, which have weighted average exercise prices of $ per share, (ii) warrants to purchase up to shares of Common Stock, which have weighted average exercise prices of $ per share, and (iii) convertible promissory notes in the aggregate principal amount of $30,000 convertible into an undeterminable number of shares of Common Stock, which have a conversion price per share equal to 90% of the average bid and ask price of the Common Stock on the day before conversion. The issuance of any Common Stock pursuant to the exercise or conversion of any options, warrants, or convertible promissory notes at a price less than the book value per share of the Common Stock will dilute the book value of the Common Stock. POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK; POTENTIAL ANTI- TAKEOVER EFFECT OF COLORADO LAW CSI is authorized to issue up to 5,000,000 shares of Preferred Stock, and the Board of Directors may fix the preferences, limitations and relative rights of those shares without any vote or action by the shareholders. The potential issuance of Preferred Stock may delay, deter, or prevent a change in control of the Combined Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock, and may adversely affect the market price of, and the voting and other rights of the holders of, the Common Stock. The Combined Company presently has no plans to issue shares of Preferred Stock. In addition, certain provisions of Colorado law could have the effect of delaying, deterring or preventing a change in control of the Combined Company. See "Description of Securities." 15 USE OF PROCEEDS The net proceeds to the Combined Company from this Offering, after deduction for estimated offering expenses and underwriting discounts of $1,780,000, are estimated to be $9,220,000 ($10,655,500 if the Representative's over-allotment option is exercised in full), assuming a public offering price of $10.00 per share of Common Stock. The Combined Company expects to use the net proceeds during the 12 months following the Offering as follows:
PERCENTAGE OF APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS ----------------------- ------------- ------------- Repayment of Bridge Notes(1)...................... $2,911,000 31.6% Completion of ITC Acquisition(2).................. 2,975,000 32.3 Expansion of marketing capability(3).............. 750,000 8.1 Installation of automated switching equipment(4).. 500,000 5.4 Purchase or lease and installation of regional switches(5)...................................... 500,000 5.4 Technical development(6).......................... 300,000 3.3 Working capital and general corporate purposes(7)...................................... 1,284,000 13.9 ---------- ----- $9,220,000 100.0% ========== =====
- -------- (1) Represents amounts to be used for the repayment of the entire $2,840,000 amount of Bridge Notes and estimated accrued interest thereon. The Bridge Notes bear interest at a rate of 10% per annum and are repayable on the earlier of five days after the consummation of this Offering or December 30, 1998. CSI used the proceeds of the December 1997 Financing principally in connection with the repayment of trade payables and notes payable to telecommunications carriers. See "Description of Securities--Description of Indebtedness." (2) Represents amounts to be paid to Lynch Family, LLC, Philip Thomas and Sean Thomas as partial consideration for all of the capital stock of ITC and estimated acquisition costs of $100,000. In addition, on the first anniversary of the closing of this Offering, Lynch Family, LLC and Messrs. Thomas and Thomas will receive 207,000 shares of Common Stock based on an assumed initial offering price of $10.00 per Share. See "Business--The ITC Acquisition." (3) Represents amounts to be paid for recruiting and for salaries of specialized sales personnel to promote hotel and large business, operator services, cellular and other specialized services. This amount also represents funds to be used to pay for additional technical, customer service and overhead resulting from the expansion of the sales and marketing effort. See "Business--Business Strategy." (4) Represents amounts to be used to install DIAL, LINK-US and other automated switching equipment which facilitate transparent call-reorigination services for hotels and large businesses in select countries. See "Business--Business Strategy." (5) Represents amounts to be used to purchase or lease and locate regional switches or other telecommunications equipment in South America, Europe, Africa or Asia to facilitate least cost routing. See "Business--Business Strategy." (6) Represents amounts to be used to continue technical development associated with the Combined Company's enhanced services, including facsimile and debit card services and compression technology, which is intended to improve service and reduce operating costs. See "Business--Business Strategy." (7) Working capital will be used, among other things, to pay security deposits in connection with carrier agreements and to pay general and administrative expenses. This amount includes approximately $80,000 payable to a former employee of CSI and $50,000 payable to a director of CSI. Pending use of the proceeds, the Combined Company intends to invest the net proceeds in short term, interest bearing, investment grade securities, including government obligations and other money market instruments. 16 The amounts set forth above represent the Combined Company's present intentions for the use of the proceeds from this Offering. Actual expenditures could vary considerably depending upon many factors, including, without limitation, changes in economic conditions, unanticipated complications, delays and expenses, or the availability of alternative financing. Any reallocation of net proceeds of this Offering will be made at the discretion of the Board of Directors but will be in furtherance of the Combined Company's strategy as described in this Prospectus. DIVIDEND POLICY CSI has paid no dividends since inception. The payment of dividends on the Common Stock rests with the discretion of the Board of Directors. There are no restrictions on payment of dividends under any agreements to which the Combined Company is a party. Payment of dividends is contingent upon, among other things, future earnings, if any, and the financial condition of the Combined Company, capital requirements, general business conditions, and other factors which cannot now be predicted. There can be no assurance that the future operations of the Combined Company will be profitable or that dividends will ever be paid by the Combined Company. To the extent the Combined Company issues preferred stock, it may have a preference over the Common Stock with respect to dividends. 17 PRICE RANGE OF COMMON STOCK The Common Stock currently is traded infrequently in limited quantities on the OTC Bulletin Board under the symbol CSYG. The following table sets forth the range of high and low sales prices per share for the Common Stock through the fiscal quarter ending April 30, 1998, and the range of high and low closing bid prices thereafter, as adjusted to give effect to the assumed 1 for reverse stock split. Market quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions, and may not represent actual transactions. There was no market for the Common Stock prior to March 18, 1996.
PRICE RANGE OF FISCAL QUARTER ENDED COMMON STOCK -------------------- --------------- HIGH LOW ------- ------- 1996 April 30, 1996 (commencing March 18, 1996)...................... 1997 July 31, 1996................................................... October 31, 1996................................................ January 31, 1997................................................ April 30, 1997.................................................. 1998 July 31, 1997................................................... October 31, 1997................................................ January 31, 1998................................................ April 30, 1998 (through , 1998)............................
On , 1998, the closing bid price of the Common Stock as reported on the OTC Bulletin Board was $ per share. As of , 1998, there were holders of record of the Common Stock. 18 DILUTION The difference between the public offering price per Share and the adjusted net tangible book value (deficit) per share of Common Stock after this Offering constitutes the dilution to investors in this Offering. Net tangible book value per share of Common Stock on any given date is determined by dividing the net tangible book value (total tangible assets less total liabilities) on that date, by the number of shares of Common Stock outstanding on that date. CSI's net tangible book value (deficit) at October 31, 1997 was ($2.1 million) or ($ ) per share of Common Stock. After giving effect to the December 1997 Financing (the "Pro Forma Adjustments"), the Pro Forma net tangible book value (deficit) of CSI as of October 31, 1997 would have been ($562,000) or ($ ) per share. After also giving effect to the sale by the Combined Company of 1,100,000 shares of Common Stock at an assumed offering price of $10.00 per share and the receipt of the estimated net proceeds thereof and the ITC Acquisition, the adjusted net tangible book value of the Combined Company at October 31, 1997 would have been approximately $4.1 million or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors purchasing in this Offering. The following table illustrates this per share dilution: Assumed public offering price...................................... $10.00 Net tangible book value (deficit) before Pro Forma Adjustments... Increase attributable to the Pro Forma Adjustments............... Pro Forma net tangible book value (deficit) per share of Common Stock before Offering........................................... Increase per share of Common Stock attributable to this Offering and the ITC Acquisition......................................... Adjusted net tangible book value per share of Common Stock after this Offering..................................................... $ ------ Dilution per share of Common Stock to new investors in this Offering.......................................................... $ ====== Dilution as a percentage of assumed offering price................. % ======
The following table summarizes as of October 31, 1997, the difference between existing shareholders and new investors with respect to the number of shares of Common Stock purchased from the Combined Company, the total consideration paid and the average price paid per share by the Combined Company hereby (before deducting underwriting discounts and estimated offering expenses):
SHARES PURCHASED TOTAL CONSIDERATION ------------------ ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT (PER SHARE) ---------- ------- ----------- ------- ------------- Existing shareholders(1)(2)...... % $ 2,750,285 20.0% $ New shareholders......... 1,100,000 11,000,000 80.0% $10.00 ---------- ----- ----------- ----- Total.................... 100.0% $13,750,285 100.0% ========== ===== =========== =====
- -------- (1) Includes 113,600 Bridge Shares to be issued immediately prior to the closing of this Offering based on an assumed offering price of $10.00 per share. Excludes the Additional Securities. See "Management," "Description of Securities" and "Underwriting." (2) Includes shares issued in exchange for services rendered, rent and equipment valued at $423,114. Statements of Shareholders' Equity (Deficiency) in the Financial Statements. 19 CAPITALIZATION The following table sets forth the capitalization of CSI at October 31, 1997, the Pro Forma capitalization of CSI to reflect the December 1997 Financing, and the Pro Forma Combined capitalization to reflect the December 1997 Financing, the ITC Acquisition and the sale of the Common Stock at an assumed public offering price of $10.00 and the application of the estimated net proceeds therefrom. The table should be read together with the Financial Statements and the notes thereto.
OCTOBER 31, 1997 ------------------------------------------ PRO FORMA CSI ACTUAL CSI PRO FORMA(1) COMBINED(2)(3) ---------- ---------------- -------------- (IN THOUSANDS) Long-term liabilities, net of current portion.................... $ 850 $ 2,045 $ 292 Shareholders' equity (deficiency): Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding............ 0 0 0 Common Stock, no par value; 25,000,000 shares authorized; shares issued and outstanding actual; shares issued and outstanding pro forma; and shares issued and outstanding, as adjusted......................... 2,750 2,750 14,008 Common Stock subscribed............. -- 795 -- Notes receivable from shareholder... (35) (35) (35) Accumulated deficit................. (4,577) (3,830) (5,061) Treasury Stock, at cost............. (243) (243) (243) ------- ------- ------- Total shareholders' equity (deficiency)....................... (2,104) (562) 8,670 ------- ------- ------- Total capitalization (deficiency)... $(1,254) $ 1,483 $ 8,962 ======= ======= =======
- -------- (1) Gives effect to the December 1997 Financing. (2) Adjusted to reflect the December 1997 Financing, the ITC Acquisition and net proceeds from the sale by the Combined Company in this Offering of 1,100,000 Shares at an assumed public offering price of $10.00 per Share. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Does not include the Additional Securities. 20 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA) The following selected financial data should be read in conjunction with the financial statements of CSI and ITC and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data below has been derived from CSI's audited statement of operations data for the years ended April 30, 1996 and 1997, and the balance sheet data as of April 30, 1996 and 1997, from ITC's audited statement of operations data for the ten months ended October 31, 1997 and the year ended December 31, 1996, and the balance sheet data as of October 31, 1997. The selected financial data for CSI with respect to the periods ended October 31, 1996 and 1997 and the balance sheet data as of October 31, 1997 have been derived from CSI's unaudited financial statements. Management believes that CSI's interim financial statements as of October 31, 1996 and 1997 and for the periods ended October 31, 1996 and 1997 include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations of the CSI for such interim periods. Prior results are not a prediction of future results of operations. The Pro Forma Combined information does not purport to present the Combined Company's financial position or results of operations that would have occurred had the transactions, to which pro forma effect is given, been consummated as of the dates or for the periods indicated and do not purport to project the Combined Company's financial position or results of operations at any future date or for a future period, and should be read in conjunction with the separate financial statements of CSI and ITC and the pro forma condensed combined financial statements of CSI and ITC.
CSI ACTUAL ITC ACTUAL PRO FORMA COMBINED(1) -------------------------------- ------------------------ ---------------------- SIX MONTHS YEAR ENDED ENDED TEN MONTHS SIX MONTHS APRIL 30, OCTOBER 31, YEAR ENDED ENDED YEAR ENDED ENDED ---------------- -------------- DECEMBER 31, OCTOBER 31, APRIL 30, OCTOBER 31, 1996 1997 1996 1997 1996 1997 1997 1997 ------- ------- ------ ------ ------------ ----------- ---------- ----------- STATEMENT OF OPERATIONS DATA: Revenue................. $ 6,741 $11,865 $5,530 $6,372 $7,603 $8,054 $19,732 $11,426 Cost of revenue......... 5,963 7,755 3,608 3,807 5,070 6,790 13,253 8,357 ------- ------- ------ ------ ------ ------ ------- ------- Gross margin............ 778 4,110 1,922 2,565 2,533 1,264 6,479 3,069 Operating expenses: Sales and marketing... 1,573 2,080 877 1,271 1,099 715 2,928 1,703 General and administrative......... 1,258 1,302 609 1,326 1,446 1,388 2,929 2,183 Technical and developmental.......... 394 722 294 389 -- -- 722 389 Depreciation.......... 58 103 42 68 69 73 179 113 Amortization of intangibles............ -- -- -- -- -- -- 937 468 ------- ------- ------ ------ ------ ------ ------- ------- Total operating expenses............... 3,283 4,207 1,822 3,054 2,614 2,176 7,695 4,856 ------- ------- ------ ------ ------ ------ ------- ------- Income (loss) from operations............. (2,505) (97) 100 (489) (81) (912) (1,216) (1,787) Other income (expense)- net.................... (19) (162) (76) (88) 88 62 (62) (109) ------- ------- ------ ------ ------ ------ ------- ------- Net income (loss)....... (2,524) (259) 24 (577) 7 (850) (1,278) (1,896) ======= ======= ====== ====== ====== ====== ======= ======= Net income (loss) per share(2)............... Weighted average number of shares outstanding..
CSI ACTUAL ITC ACTUAL PRO FORMA ------------------------------- ----------- COMBINED APRIL 30, APRIL 30, OCTOBER 31, OCTOBER 31, OCTOBER 31, 1996 1997 1997 1997 1997(1)(3) --------- --------- ----------- ----------- ----------- BALANCE SHEET DATA: Current assets.......... $ 1,223 $ 1,284 $ 1,499 $ 1,950 $ 8,369 Long-term assets........ 296 662 779 770 1,452 Intangible assets....... -- -- -- -- 4,683 Total assets............ 1,519 1,946 2,278 2,720 14,505 Current liabilities..... 3,375 3,615 3,532 3,209 5,543 Long-term liabilities... -- -- 850 292 292 Total liabilities....... 3,375 3,615 4,382 3,501 5,835 Working capital (deficit).............. (2,152) (2,331) (2,033) (1,259) 2,826 Shareholders' equity (deficiency)........... (1,856) (1,669) (2,104) (781) 8,670
- -------- (1) Refer to the Pro Forma Condensed Combined Financial Statements contained herein. (2) Based on the weighted average number of shares outstanding. (3) Gives effect to the December 1997 Financing, the ITC Acquisition and the sale of the Shares at an assumed offering price of $10.00 per Share offered hereby and the application of the estimated net proceeds therefrom. See "Use of Proceeds." 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical matters, the matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward- looking statements include, but are not limited to, statements concerning anticipated trends in revenue and net income, the mix of the Combined Company's revenue, projections concerning operations and available cash flow. The Combined Company's actual results could differ materially from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in "Risk Factors" and elsewhere in this Prospectus. THE COMBINED COMPANY GENERAL Communications Systems International, Inc. and International Telephone Company are growing providers of international long distance telecommunications services. CSI's customers are principally located in South America, the Pacific Rim, South Africa and Central America, while ITC's customers are principally located in Africa, Europe and the Middle East. CSI emphasizes innovative software solutions and technical expertise to provide higher quality, lower cost alternative routing of telecommunications for its customer base. CSI focuses its marketing efforts on high volume customers such as hotels, large local businesses and foreign branches of multinational businesses in addition to individuals and small businesses. ITC emphasizes its wholesale long distance services, least cost routing capabilities and superior customer service for its individual and small business customers. The Combined Company expects to benefit from the synergies of a complementary customer base, geographic diversity, technical expertise and marketing and customer support services; however, no assurance can be given that such synergies will occur. The Combined Company contracts with several United States and other long distance carriers to ensure a ready supply of long distance service at competitive rates. Prices in the international long distance telecommunications industry in many of the countries in which the Combined Company provides its services have declined in recent years due to increased competition and deregulation, and the Combined Company believes that prices are likely to continue to decrease. In addition, the Combined Company believes that the deregulation trends in some international markets will result in greater competition that could reduce telecommunications revenue per minute and the Combined Company's operating margins. For example, representatives of 69 countries, including the United States, recently entered into an agreement with the World Trade Organization, which became effective on February 5, 1998 (the "WTO Agreement"), with the goal of increasing competition among telecommunications providers in those markets. The Combined Company believes, however, that any decreases in prices as a result of deregulation and increased competition will be at least partially offset by increased telecommunications usage and the decreased cost structure discussed below. See "Business--Competition" and "-- Regulation." CSI and ITC experienced rapid growth in revenue in fiscal years 1996 and 1997. Revenue is generated primarily from international call-reorigination services and is based on the minutes of customer use billed by the Combined Company on completed calls. An international call-reorigination call has two segments: an origination segment and a destination segment. Revenue is recorded and billed from the beginning of the origination segment to the completion of the destination segment, if the destination segment is answered or otherwise connected. If the destination segment is not answered or connected, the origination segment is not completed and not billable, and the Combined Company incurs a nonrecoverable cost. CSI and ITC estimate that less than 6.0% of all minutes charged by its carriers resulted from non-billable calls during the 12 months ended April 30, 1997. The Combined Company's gross margin on each completed call or service placed through its facility is equal to the difference between the amount charged its customer for a call or service and the amount it is charged by the long distance carrier for the same call or service. 22 Approximately 60.0% of all revenue is collected through weekly automatic charges to pre-approved customer credit cards. Under the terms of the sales agent agreements, the sales agents are responsible for collecting customer payments except for credit card payments, and sales agents generally are responsible for customer bad debts less, in some cases, an allowance granted by the Combined Company. Failure of sales agents to collect and remit customer payments to the Combined Company presents a risk to the Combined Company. Although collection terms for other customers are net 30 days, the time necessary to process billings and collect billings through the Combined Company's sales agents may at times result in receivables reaching 60 to 90 days. Cost of revenue consists primarily of costs paid to carriers for the origination, transmission and termination of voice and data telecommunications services and to a lesser extent, debit card costs and agent allowances and discounts. Currently, a substantial portion of the Combined Company's telecommunications revenue is derived from services that are accessed through the facilities of long distance carriers. Accordingly, a significant portion of the Combined Company's cost of telecommunications services is variable, based on the number of minutes of use, with transmission and termination costs being the Combined Company's most significant expense. One of the Combined Company's business strategies is to minimize costs through efficient call management. The Combined Company continually seeks to negotiate more favorable rates with its existing long distance carriers. Under certain carrier contracts, the Combined Company obtains guaranteed rates, which are generally more favorable than otherwise would be available, by committing to purchase a minimum number of minutes from such carriers. If the Combined Company fails to meet its minimum requirements under a carrier contract, it could still be required to pay its minimum monthly commitment as a penalty. The Combined Company's aggregate minimum monthly commitments are approximately $400,000, which represents approximately 28.7% of the Combined Company's monthly variable transmission cost. The Combined Company is seeking to enter into agreements with additional long distance carriers in order to access the lowest transmission and termination costs for each call segment. This "least cost routing" allows the Combined Company to route each call segment on the carrier with the least cost for that segment. In addition, the Combined Company intends to establish additional switching facilities outside the U.S. in order to utilize a larger number of long distance carriers and reduce its call per unit operating costs. See "Use of Proceeds" and "Business--Business Strategy." The Combined Company generally realizes higher gross margins from its call- reorigination services than from its wholesale services. Wholesale services, however, provide a source of additional revenue and add significant minutes originating and terminating on the Combined Company's network, thus enhancing the Combined Company's purchasing power for leased lines and switched minutes from its carriers and enabling it to take advantage of volume discounts. The Combined Company expects gross margin percentages may decline if wholesale revenue increases as a percentage of total revenue. CSI intends to expand its wholesale business following the ITC Acquisition. In addition, gross margin percentages could be adversely affected by price reductions due to market competition. Due to ITC's more sophisticated switching platform, the Combined Company has the capacity of offering wholesale telecommunications services to its customers. Wholesale services enable ITC to improve its operating results despite lower gross margins on its wholesale sales because all wholesale minutes generally are "billable" minutes even if the destination segment of the call is not answered or connected. Furthermore, ITC is not responsible for billing end users. Therefore, operating expenses are generally lower for wholesale services. Sales and marketing expenses primarily represent commissions paid to independent sales agents, compensation paid to internal salespersons and advertising expense. The Combined Company's decision to use independent agents to date has been primarily driven by the low initial fixed costs associated with this distribution channel, and the agents' familiarity with local business and marketing practices. CSI currently depends on approximately 40 independent sales agents to sell its services, including Edward Stoever, who operates in Argentina, and CS do Brazil. These two sales agents accounted for approximately 54.3%, and 11.5%, respectively, of revenue in the six months ended October 31, 1997, and the ten largest sales agents accounted for approximately 91.3% of CSI's revenue in the six months ended October 31, 1997. ITC currently depends on approximately 55 independent sales agents to sell its services, including Generic Telecom, Inc., Zohair Attoue 23 and Janel Richards. These three sales agents accounted for approximately 26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the ten months ended October 31, 1997, and the ten largest sales agents accounted for approximately 89.1% of ITC's revenue in the ten months ended October 31, 1997. The Combined Company expects that sales and marketing expenses will continue to increase as the Combined Company obtains additional sales agents either directly or in connection with acquisitions, and otherwise generally expands its sales and marketing activities. The Combined Company anticipates, however, that as sales networks become fully integrated and economies of scale are realized, sales and marketing expenses ultimately will decline as a percent of revenue and that its dependence on the five principal sales agents also will be reduced. See "Use of Proceeds" and "Business--Business Strategy" and "--Sales and Marketing--Sales Agents." General and administrative expenses are primarily compensation paid for agent and customer support, executives and accounting personnel, credit card merchant charges, bad debt expense and other corporate overhead costs. The Combined Company devotes considerable resources to collect receivables from agents and customers who fail to remit payment in a timely manner. While the Combined Company continually seeks to minimize bad debt, the Combined Company's experience indicates that a certain portion of past due receivables will never be collected, and that such bad debt is a necessary cost of conducting business in the telecommunications industry. The Combined Company expects that general and administrative expenses will increase in absolute terms as the Company integrates personnel from the ITC Acquisition and implements its growth strategy; however, The Combined Company expects general and administrative expenses will decrease as a percent of revenue due to anticipated cost reductions resulting from the efficiencies of combining CSI and ITC. In conjunction with the December 1997 Financing, CSI will incur additional monthly non-cash expenses totaling $117,000, including: accrued interest expense of $24,000 on the Bridge Notes; amortized interest expense of $66,000 from the accretion of a $795,000 discount on the Bridge Notes; and $27,000 of amortized prepaid debt offering expenses totaling $323,000. Upon repayment of the Bridge Notes and accrued interest, CSI will recognize an extraordinary item from loss on early retirement of debt equal to the unamortized balances of the $795,000 discount on the Bridge Notes and $323,000 prepaid offering expenses. EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE Although increases in salaries, carrier costs and operating overhead can adversely affect the Combined Company's operations, The Combined Company does not believe that inflation has had a material effect on its operating results. However, because future increases in inflation may cause the Combined Company's suppliers to increase prices of materials and services to the Combined Company, an increase in inflation could increase the Combined Company's cost of revenue and operating expenses. The Combined Company generally believes the Combined Company will be able to adjust its rates to offset such increases. Because the Combined Company prices its services in United States dollars, foreign currency exchange rates have not had, and are not expected to have, a material effect on the Combined Company. SEASONALITY The Combined Company's business exhibits a small degree of seasonality. Historically, the Combined Company's revenue (as well as sales in the telecommunications industry in general) has decreased slightly in August and December, which CSI attributes to vacations and holidays in its European and Latin American markets and in the United States. As a result of these factors, reported quarterly revenue in future periods will vary and are not indicative of revenue in subsequent comparable periods. ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) has issued FAS No. 128, "Earnings per Share," FAS No. 129, "Disclosure of Information about Capital Structure," FAS No. 130, "Reporting Comprehensive Income" and FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" and FAS No. 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits. FAS No. 128 modifies the standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock and is effective for periods ending after December 15, 1997, including interim periods; the Combined Company expects that the adoption of this statement will have a negative effect on 24 previously presented or future earnings per share amounts. FAS No. 129 provides for increased disclosure information about an entity's capital structure and is effective for periods ending after December 15, 1997; the Combined Company does not expect the adoption of this standard to significantly affect its capital structure disclosures. FAS No. 130 establishes standards for reporting and display of comprehensive income and its components and is effective for years beginning after December 15, 1997; the Combined Company does not believe the adoption of this Statement will have an effect on earlier periods. FAS No. 131 modifies the disclosure requirements for reportable segments and is effective for the Combined Company's year ending April 30, 1999; the Combined Company has not determined if the effect of the adoption of this Statement would require the Combined Company to report industry segments. FAS No. 132 modifies the disclosure requirements for pensions and other postretirement benefits and is effective for the Combined Company's fiscal year ending April 30, 1999. The Combined Company currently does not have any benefit plan that would be affected by this Statement. YEAR 2000 STATEMENT The computer system that runs ITC's switches and billing operation has not yet been upgraded to be Year 2000 compliant. A new system called NTS 2000, which is Year 2000 compliant, is expected to be released and implemented in 1998 at an estimated cost of $30,000 to the Combined Company. COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. CSI OVERVIEW CSI was incorporated in April 1993 as a provider of international telecommunications services. CSI had an accumulated deficit of approximately $4.6 million as of October 31, 1997. CSI incurred significant net operating losses totaling $633,000 and $2.5 million during the fiscal years ended April 30, 1995 and 1996, respectively, primarily because of low gross margins resulting from contractual commitments with its primary long distance carriers. Gross margin was approximately $582,000 for fiscal year 1995 and approximately $778,000 for fiscal year 1996. Gross margin as a percent of revenue was 29.4% and 11.5% for fiscal years 1995 and 1996, respectively. In fiscal year 1997, CSI improved its gross margin to approximately $4.1 million, or 34.6% of revenues, due to increased revenue and improved per unit costs that principally resulted from lower rates charged CSI by long distance carriers. As a result, CSI's net loss was reduced to $259,000 for the fiscal year ended April 30, 1997. In March 1997 and November 1997, CSI completed negotiations with its two largest carriers to further improve its rate structure which resulted in agreements that are expected to improve CSI's per unit carrier costs. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to revenue of certain items in CSI's statements of operations:
SIX MONTHS ENDED YEAR ENDED APRIL 30, OCTOBER 31, ----------------------- ------------------ 1996 1997 1996 1997 ---------- ---------- -------- -------- Revenue................... 100.0% 100.0% 100.0% 100.0% Cost of revenue........... 88.5 65.4 65.2 59.7 Gross margin.............. 11.5 34.6 34.8 40.3 Operating expenses: Sales and marketing..... 23.3 17.5 15.9 19.9 General and administrative......... 18.7 11.0 11.0 20.8 Technical and developmental.......... 5.8 6.1 5.3 6.1 Depreciation and amortization........... 0.9 0.9 0.8 1.1 Total operating expenses.. 48.7 35.5 32.9 47.9 Income (loss) from operations............... (37.2) (0.8) 1.8 (7.7) Interest income (expense)................ (0.3) (1.4) (1.4) (1.4) Net income (loss)......... (37.4)% (2.2)% 0.4% (9.1)%
25 COMPARISON OF SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997 Revenue. Revenue increased 15.2% from approximately $5.5 million for the six months ended October 31, 1996 to $6.4 million for the six months ended October 31, 1997. The increase was due primarily to a 27.9% increase in billable minutes from approximately 5.2 million billable minutes for the six months ended October 31, 1996 to approximately 6.7 million billable minutes for the six months ended October 31, 1997. The number of customers increased from approximately 8,400 customers at January 31, 1997 to approximately 10,200 customers at January 31, 1998. The increase in customers, billable minutes, and revenue was due to the improved performance of CSI's sales agent base. Customers are defined as those persons or businesses who have used the Combined Company's services within the previous four months. These increases were offset by a 9.4% decrease in the average revenue per billable minute. Cost of revenue. CSI's cost of revenue increased by 5.5% from approximately $3.6 million in the six months ended October 31, 1996 to approximately $3.8 million for the six months ended October 31, 1997. As a percentage of revenue, these costs decreased from 65.2% to 59.7% for the six months ended October 31, 1996 and 1997, respectively. As of March 1997, CSI had in place new contractual commitments with its primary carriers reflecting more favorable rates that resulted in improved gross margins during the six months ended October 31, 1997. Management continues to negotiate improved pricing and expects to continue to reduce costs per minute as a result of improved technology which reduces the percentage of non-completed calls and therefore reduces origination minutes and costs. Origination and destination segment minute usage increased 27.0% from approximately 9.7 million switched minutes for the six months ended October 31, 1996 to approximately 12.3 million switched minutes for the six months ended October 31, 1997. Sales and marketing. Sales and marketing expenses increased 44.9% from $877,000 for the six months ended October 31, 1996 to $1.3 million for the six months ended October 31, 1997. As a percentage of revenue, these costs increased from 15.9% to 19.9% for the six months ended October 31, 1996 and 1997, respectively. The increase in absolute dollars was due primarily to an increase in agent commissions caused by the increase in revenue, while the increase as a percentage of revenue was due primarily to an increase in advertising expense and hiring of additional internal sales personnel. General and administrative. General and administrative expenses increased 117.7% from $609,000 for the six months ended October 31, 1996 to $1.3 million for the six months ended October 31, 1997. As a percentage of revenue, these costs increased from 11.0% to 20.8% for the six months ended October 31, 1996 and 1997, respectively. The significant increase in expenses was due to several non-recurring costs incurred by CSI, including: a $215,000 reserve for bad debt associated with a former sales agent; a $188,000 compensation expense associated with a severance agreement with a former employee; a $50,000 accrued consulting fee to a director of CSI for negotiating a settlement with a carrier and a more favorable contractual commitment to one of its primary long distance carriers; and a $35,000 expense associated with the relocation of CSI employees to the Combined Company's operations center in Florida. Excluding these non-recurring costs, general and administrative expenses increased 37.6% to $838,000 and increased to 13.2% of revenue. The remaining increase in costs was due to additional customer support and administrative personnel hired to support the growth of CSI's operations. CSI has implemented internal control procedures to mitigate the risk of significant loss in the future from individual sales agents. CSI continues to vigorously pursue the collections of all bad debt expenses from former customers and sales agents. Technical and developmental. Technical and developmental expenses are primarily compensation paid to internal technical personnel, fixed telephone circuit and line costs and other costs associated with the development, operation and maintenance of CSI's proprietary products and services. Technical and development expenses increased 32.3% from $294,000 for the six months ended October 31, 1996 to $389,000 for the six months ended October 31, 1997. As a percentage of revenue, these costs increased from 5.3% to 6.1% for the six months ended October 31, 1996 and 1997, respectively. The increase in absolute dollars was due primarily to an increase in fixed telephone circuit and line costs due to the significant increase in revenue. The Company expects the technical and developmental expenses will increase in absolute dollars in the near future as the Combined Company incurs additional costs related to the installation of automated switching equipment and technical and developmental costs associated with the Combined Company's enhanced services. The Combined 26 Company expects technical and developmental expenses to decrease as a percentage of revenue in the future because revenue is expected to increase at a rate greater than that of technical and developmental expenses. Depreciation and amortization. Depreciation and amortization expense increased 61.9% from approximately $42,000 for the six months ended October 31, 1996 to approximately $68,000 for the six months ended October 31, 1997. These costs increased primarily as a result of CSI's higher fixed asset base during the six months ended October 31, 1997 as compared with the six months ended October 31, 1996. The Combined Company expects depreciation and amortization expense to increase significantly in the future as the Combined Company continues it growth strategy which includes purchases and installations of automated switching equipment for its hotel and larger business customers, purchases and installation of regional switches and amortization of intangible assets associated with the ITC acquisition. Interest income/expense. Interest income/expense, which represents primarily interest expense, increased 15.8% from approximately $76,000 for the six months ended October 31, 1996 to approximately $88,000 for the six months ended October 31, 1997. Interest expense for the six months ended October 31, 1997 includes accrued interest of approximately $117,000 to one of CSI's carriers, which was forgiven in December 1997 as a part of a settlement agreement reached in October 1997. Interest and other expense will increase significantly until completion of this Offering due to accrued interest expense on the Bridge Notes, amortization of other debt offering costs, accretion of the discount on the Bridge Notes associated with the December 1997 Financing and issuance of 113,600 shares of Common Stock (based on an assumed initial offering price of $10.00 per Share). Income taxes. CSI did not record an income tax expense or benefit for the six months ended October 31, 1996 or 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. Net income/loss. CSI had a net loss of $577,000 for the six months ended October 31, 1997 compared to net income of $24,000 for the six months ended October 31, 1996. The decrease in net income was primarily due to significant non-recurring expenses including a $215,000 bad debt expense from a sales agent, a $188,000 compensation expense related to a severance agreement with a former employee, a $50,000 accrued consulting fee to a director of CSI for negotiating a more favorable contractual commitment to one of its primary carriers, and $35,000 associated with relocation expenses. Excluding the effects of these non-recurring costs, CSI would have incurred a net loss of $89,000 for the six months ended October 31, 1997. Net income/loss per share. CSI had a net loss per share of $ for the six months ended October 31, 1997 compared to net income per share of less than $ for the six months ended October 31, 1997. The change in per share results was due primarily to an increase in net loss and by an increase in weighted average shares outstanding. EBITDA. EBITDA represents net earnings (loss) plus interest expense (income), income taxes, depreciation and amortization. CSI had a negative EBITDA of $421,000 for the six months ended October 31, 1997 compared to a positive EBITDA of $142,000 for the six months ended October 31, 1996. The decrease in EBITDA was primarily due to the non-recurring costs discussed herein. Excluding the effects of these non-recurring costs, CSI would have a positive EBITDA of $67,000 for the six months ended October 31, 1997. COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1997 Revenue. Revenue increased 76.0% from $6.7 million for the year ended April 30, 1996 to $11.9 million for the year ended April 30, 1997. This increase was primarily due to growth in the number of customers and the resultant rise in billable minutes. Billable minutes increased accordingly, reaching approximately 11.5 million minutes in fiscal year 1997. The significant increase in customers, billable minutes and revenue was primarily due to CSI's efforts to increase its sales agent base in its target markets. Cost of revenue. Cost of revenue increased 30.1% from $6.0 million for fiscal year 1996 to $7.8 million for fiscal year 1997 and as a percentage of revenue decreased from 88.5% to 65.4%, respectively. During fiscal year 1996, CSI increased minute volume, in advance of its ability to secure more favorable volume discount rates with its carriers. 27 Sales and marketing. Sales and marketing expenses increased 32.2% from $1.6 million for the year ended April 30, 1996 to $2.1 million for the year ended April 30, 1997. As a percentage of revenue, these costs decreased from 23.3% to 17.5% for the years ended April 30, 1996 and 1997, respectively. The increase in absolute dollars was due primarily to commissions from increased revenue while the decrease as a percentage of revenue was due primarily to revenues increasing at a greater rate than marketing expenses and costs associated with internal salespersons. General and administrative. General and administrative expenses increased 3.5% from less than $1.3 million for the year ended April 30, 1996 to slightly more than $1.3 million for the year ended April 30, 1997. As a percentage of revenue, these costs decreased from 18.7% to 11.0% for the years ended April 30, 1996 and 1997, respectively. The increase in costs were due to additional customer support and administrative personnel hired to support the growth of CSI's operations. Technical and developmental. Technical and developmental expenses increased 83.2% from $394,000 for the year ended April 30, 1996 to $722,000 for the year ended April 30, 1997. As a percentage of revenue, these costs increased from 5.8% to 6.1% for the years ended April 30, 1996 and 1997, respectively. The increase in absolute dollars was due primarily to an increase in fixed telephone circuit and line costs due to the significant increase in revenue and to increased costs associated with the development of CSI's transparent automated call processors. Depreciation and amortization. Depreciation and amortization expenses increased 77.6% from approximately $58,000 for fiscal year 1996 to approximately $103,000 for fiscal year 1997. These expenses increased primarily as a result of CSI's higher fixed asset base in fiscal year 1997 which was principally due to investments in telecommunications equipment and infrastructure and facility expansion. Interest income/expense. Interest income/expense, which represents primarily interest expense, increased from approximately $19,000 for the year ended April 30, 1996 to approximately $162,000 for the year ended April 30, 1997. The increase in interest expense was due primarily to the issuance of notes payable to satisfy carrier obligations. Income taxes. CSI did not record an income tax benefit in either fiscal year 1996 or 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. As of April 30, 1997, CSI had federal net operating loss carryforwards of approximately $3.4 million. These carryforwards will begin expiring in the year 2009. The amount of these carryforwards that can be used in any given year may be limited in the event of certain changes in the ownership of CSI. CSI is currently not able to determine the effect that a change in ownership that will result from this Offering may have on CSI's ability to use its net operating loss carryforwards. Net loss. The net loss decreased from $2.5 million for the year ended April 30, 1996 to $259,000 for the year ended April 30, 1997. The decrease in net loss was primarily due to CSI's obtaining more favorable carrier rates and increases in customer volume. Net income (loss) per share. CSI had net loss per share of $ for the year ended April 30, 1997 compared to net loss per share of $ for the year ended April 30, 1996. The decrease in net loss per share was due primarily to CSI's obtaining more favorable carrier rates and increases in customer volumes as well as an increase in the weighted average number of shares outstanding. EBITDA. CSI had a negative EBITDA of $2.5 million for the year ended April 30, 1996 compared to a positive EBITDA of $6,000 for the year ended April 30, 1997. The increase in EBITDA was primarily due to CSI's obtaining more favorable carrier rates resulting in improved gross margin percentages and overall operating results. LIQUIDITY AND CAPITAL RESOURCES Since its inception, CSI has experienced net losses and negative cash flow from operations. As of October 31, 1997, CSI had a working capital deficit of approximately $2.0 million. CSI has satisfied its capital 28 requirements principally through a combination of sales of equity and debt securities, borrowings from third parties (including its shareholders) and trade credit extended by carriers. The proceeds from the issuance of stock and notes were used for development and expansion, and other general corporate purposes, including working capital. During fiscal year 1996 and 1997, CSI issued shares of its Common Stock for aggregate proceeds of $537,000 and $111,000, respectively, and generated additional working capital of $320,000 through the issuance of convertible notes. The notes bear interest at the rate of 10% per annum and mature two years after issuance. In fiscal year 1998, $95,000 of principal amount of such notes were also issued. The notes are convertible into shares of Common Stock at a conversion price equal to 90% of the average of the bid and ask price on the day preceding the date of conversion. As of October 31, 1997, $375,000 of the convertible notes had been converted. In fiscal year 1997, CSI also raised $85,000 through the issuance of notes that bear interest at 15% per annum and mature in March 1998. In December 1997, the Company issued Bridge Notes in the principal amount of $2,840,000. The Bridge Notes bear interest at 10% per annum and are due five days following the closing of this Offering. See "Description of Securities." Net cash used in operating activities was approximately $25,000 for the six months ended October 31, 1997, as compared to cash provided by operating activities of approximately $406,000 for the six months ended October 31, 1996. The decrease in cash provided was primarily due to a $601,000 decrease in net income offset by an increase in accounts payable and accrued expenses. Net cash used in investing activities was approximately $163,000 for the six months ended October 31, 1997, as compared to approximately $178,000 for the six months ended October 31, 1996. The increase was primarily due to acquisition to ITC. Net cash provided by financing activities was approximately $185,000 for the six months ended October 31, 1997, compared to cash used in financing activities of approximately $208,000 for the six months ended October 31, 1996. The increase in cash provided was primarily due to proceeds from the issuance of stock, net of cash payments to acquire treasury stock from former CSI employees, and decreased debt service requirements. Net cash provided by operating activities was approximately $730,000 for the year ended April 30, 1997, as compared to cash used in operating activities of approximately $362,000 for the year ended April 30, 1996. The increase in cash provided was primarily due to a $2.3 million decrease in net loss and by an increase in accounts payable of approximately $911,000. Net cash used in investing activities was approximately $244,000 for the year ended April 30, 1997, as compared to approximately $223,000 for the year ended April 30, 1996. The increase was primarily due to acquisition standstill payments to ITC. Net cash used in financing activities as approximately $397,000 for the year ended April 30, 1997, compared to cash provided by financing activities of approximately $560,000 for the year ended April 30, 1996. The increase in cash used was primarily due to repayment of notes payable, net of proceeds from the sale of stock and issuances of notes. During fiscal year 1996 and 1997, CSI incurred usage fees, which it was unable to pay on a current basis, with two of its primary carriers totaling approximately $2.0 million. In February 1997, CSI restructured these obligations and converted all amounts into notes bearing interest ranging from 10% to 12% payable in monthly installments ranging from $40,000 to $123,000 through August 1997 and $40,000 thereafter through January 2001. In December 1997, all carrier obligations were paid in full from the proceeds of the Bridge Financing. CSI anticipates that its minimum commitments to carriers (exclusive of any carrier commitments of ITC) will be approximately $3.7 million and $1.45 million for fiscal year 1998 and fiscal year 1999, respectively. Although CSI realized a significant increase in revenue, a greater percentage of CSI's customers paid amounts due by credit card, thus resulting in lower receivable balances in relation to revenue billed. CSI is experiencing improved cash flow from increased volume, a higher percentage of credit card customers which enhances collections, improved pricing structure, least cost routing, reduced carrier costs and the implementation of cost containment policies. CSI believes that, based upon its present business plan, the net proceeds from the sale of the Shares offered hereby, together with its increased cash flow from operations, will be sufficient to meet its currently anticipated working capital and capital expenditure requirements for at least the next 12 months. Thereafter, if cash generated from operations is insufficient to satisfy the Combined Company's requirements, the Combined Company would likely seek to establish credit facilities or sell additional securities. 29 INTERNATIONAL TELEPHONE COMPANY ITC OVERVIEW ITC was incorporated in March 1993 as a provider of international telecommunications services. ITC had an accumulated deficit of approximately $782,000 as of October 31, 1997 primarily because ITC reported a net loss of approximately $850,000 for the ten months ended October 31, 1997. The net loss includes a $1.1 million claim against ITC by a carrier for usage charges, a portion of which ITC is disputing. ITC was committed to purchase transmission capacity from WorldCom, but was not able to meet these minimum usage commitments due to the unavailability of sufficient capacity from the carrier. ITC is currently negotiating with the carrier to resolve the dispute and has requested credits from the carrier for the minimum usage charges and losses incurred by ITC resulting from the carrier's inability to provide ITC with sufficient capacity. ITC and the carrier have not reached a settlement. ITC intends to vigorously defend its position and will continue to attempt to reach a settlement with the carrier. RESULTS OF OPERATIONS Due to the pendency of the ITC Acquisition, ITC's financial statements are being presented for the period ending October 31, 1997. The statement of operations data for the ten months ended October 31, 1997 is therefore not directly comparable to the statement of operations data for the year ended December 31, 1996. The results of operations for the ten-month period ended October 31, 1997 may also not be reflective of results achieved in the 12 months ended December 31, 1997. The following table sets forth, for the periods indicated, the percentage relationship to revenue of certain items in ITC's statements of operations:
YEAR ENDED TEN MONTHS ENDED DECEMBER 31, 1996 OCTOBER 31, 1997 ----------------- ---------------- Revenue...................................... 100.0% 100.0% Cost of revenue.............................. 66.7 84.3 Gross margin................................. 33.3 15.7 Operating expenses: Sales and marketing........................ 14.5 8.9 General and administrative................. 19.0 17.2 Technical and developmental................ 0.0 0.0 Depreciation............................... 0.9 0.9 Total operating expenses..................... 34.4 (27.0) Income (loss) from operations................ (0.1) (11.3) Interest and other income (expense).......... 0.1 0.7 Income (loss) before taxes................... 0.0 (10.6) Income tax expense........................... 0.0 0.0 Net income (loss)............................ 0.1 (10.6)
COMPARISON OF TEN MONTHS ENDED OCTOBER 31, 1997 TO THE YEAR ENDED DECEMBER 31, 1996 Revenue. Revenue increased 5.9% from approximately $7.6 million for the year ended December 31, 1996 to approximately $8.1 million for the ten months ended October 31, 1997. The increase is due primarily to an increase in billable minutes. During this period of time, the number of customers, billable minutes, and revenue increased due to an increase in ITC's sale agent base as well as the improved performance of ITC's existing sales agent base. Cost of revenue. Cost of revenue increased 33.9% from approximately $5.1 million for the year ended December 31, 1996 to approximately $6.8 million for the ten months ended October 31, 1997. As a percentage of revenue, these costs increased from 66.7% to 84.3% for the periods ended December 31, 1996 and October 31, 1997, respectively. The increase in cost of revenue is due to an increase in origination and destination segment minute usage as well as the carrier dispute previously discussed. The increased cost of revenue as a 30 percentage of total revenue was due to an increase in revenue from wholesale services as a percentage of total revenue, which has lower gross margin percentages, and an increase in costs associated with the carrier dispute. Sales and marketing. Sales and marketing expenses decreased from approximately $1.1 million for the year ended December 31, 1996 to approximately $715,000 for the ten months ended October 31, 1997. As a percentage of revenue, sales and marketing decreased from 14.5% to 8.9% for the periods ended December 31, 1996 and October 31, 1997, respectively. The decrease was due primarily to lower commissions to agents resulting from an increase in the revenue from wholesale services, which the Company does not pay. General and administrative. General and administrative expenses decreased 4.0% from over $1.4 million for the year ended December 31, 1996 to slightly under $1.4 million for the ten months ended October 31, 1997. The decrease in these costs was due primarily to the different length of the time periods presented. Depreciation. Depreciation expense increased 5.8% from approximately $69,000 for the year ended December 31, 1996 to approximately $73,000 for the ten months ended October 31, 1997. These costs increased primarily as a result of ITC's higher fixed asset base during the ten months ended October 31, 1997 as compared with the year ended December 31, 1996 related to the acquisition of telecommunication equipment. Interest and other income/expense. Interest and other income/expense decreased 32.6% from approximately $88,000 for the year ended December 31, 1996 compared to approximately $62,000 for the ten months ended October 31, 1997. The decrease in interest and other income/expense was due primarily to an increase in other expenses related to a loss on the sale of equipment and an increase in interest expense related to a capital lease obligation incurred to acquire telecommunications equipment. ITC also had consulting fees totaling approximately $113,000, net of related consulting expenses, received from CSI in conjunction with ITC assisting CSI in the settlement of a note with a carrier. Income taxes. ITC did not record an income tax benefit for the ten months ended October 31, 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. ITC recorded an income tax expense of $4,000 for the year ended December 31, 1996. Net income/loss. ITC reported a net loss of approximately $850,000 for the ten months ended October 31, 1997 compared to net income of approximately $7,000 for the year ended December 31, 1996. The net loss includes a $1.1 million claim against ITC by a carrier for usage charges, a portion of which ITC is disputing. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was approximately $626,000 for the ten months ended October 31, 1997, as compared to cash provided by operating activities of approximately $286,000 for the year ended December 31, 1996. The increase in cash provided was primarily due to a net loss of $850,000 offset by an increase in accounts payable of $1.2 million and a decrease in accounts receivable of $180,000. Net cash provided by investing activities was approximately $242,000 for the ten months ended October 31, 1997, as compared to cash used in investing activities of approximately $29,000 for the year ended December 31, 1996. The increase was primarily due to proceeds received from the sale of telecommunications equipment. Net cash used in financing activities was approximately $238,000 for the ten months ended October 31, 1997, compared to cash used in financing activities of approximately $186,000 for the year ended December 31, 1996. The change was due primarily to an increase in capital lease payments related to the acquisition of telecommunications equipment. 31 BUSINESS GENERAL Communications Systems International, Inc. is a growing provider of international long distance telecommunications services principally to customers in South America, Europe, the Pacific Rim, South Africa and Central America. CSI emphasizes innovative software solutions and technical expertise to provide higher quality, lower cost alternative routing of telecommunications for its customer base. CSI is focusing its marketing efforts on high volume customers such as hotels, large local businesses and foreign branches of multinational businesses in addition to individuals and small businesses. International Telephone Company is a provider of international long distance telecommunications service principally to customers in Africa, Europe and the Middle East. Existing customers of the Combined Company include the Inter-Continental Hotel in Rio de Janeiro, Brazil and foreign offices of Nike Inc., Microsoft Corporation, Mitsubishi Corporation, Chrysler International, Warner Lambert Corporation, Diners Club International, DHL Aviation, Holiday Inn Hotels, Best Western Hotel, Wal-Mart Stores, Inc., Citibank, N.A., Bank of Tokyo, Royal Bank of Canada and the United States embassies in Chile, Korea, Australia and the Ukraine, the United Nations consulate in South Africa and other countries' embassies and international agencies. THE ITC ACQUISITION The ITC Acquisition is CSI's first step in its acquisition strategy. ITC is a provider of international long distance telecommunication services, with approximately $7.6 million in revenue for the year ended December 31, 1996 and $8.1 million for the ten months ended October 31, 1997 and approximately 8,800 customers. ITC currently focuses its marketing efforts on individuals and small businesses. Although ITC provides services to customers in many regions of the world, ITC primarily targets customers in Europe, Africa and the Middle East. These three regions comprised approximately 33.2%, 33.7% and 14.7%, respectively, of ITC's revenue for the ten months ended October 31, 1997. Sales of ITC's call-reorigination services are conducted through a network of approximately 55 independent sales agents based in the countries in which ITC conducts business. The sales agents have engaged approximately 100 sub- agents to assist in sales and marketing on behalf of ITC. The agents earn commissions on revenue collected from their customers. ITC generally recruits agents through advertisements in international newspapers. ITC services its customers through a switching platform located at its telecommunications center in Ft. Lauderdale, Florida. The center is a fiber optic facility that directs international telephone and facsimile traffic and has a broad spectrum of Internet capabilities. ITC's facility includes an integrated management information system and switching platform, which enhances ITC's ability to provide least cost routing and efficient billing of its customers. CSI believes that the acquisition of ITC will provide a number of advantages to the combined entity. These advantages include: Combined Cost Structures. Although there can be no assurance, management believes the integration of existing cost structures will result in immediate savings. ITC has traditionally concentrated its marketing on Africa and Europe, while CSI has focused on South America. As a result, through relationships with their respective carriers, each company believes it has achieved superior rate structures in its area of emphasis. CSI anticipates that the combined entity will integrate the best of both rate structures, realizing cost reductions on each of the pre-existing customer bases. Increased Buying Power with Carriers. CSI entered into a reciprocal telecommunications agreement with ITC in July 1997 (the "Reciprocal Telecommunications Agreement"), which entitles CSI to use ITC's volume of minutes, in addition to its own, to negotiate with carriers for reduced rates. As a result, the Combined Company is beginning to realize additional savings via its increased bargaining power with its carriers. CSI believes minimum volume commitments will be easier to fulfill, and will be increased where there are cost benefits, while redundancy in carrier deposits may be eliminated when the ITC Acquisition is consummated. 32 Customer and Agent Diversification. As the combined entity attains greater geographic diversity, management believes capacity efficiencies can be achieved by spreading traffic more evenly over the 24-hour day. Equipment and personnel can be allocated and optimized over 24 hours, rather than over the shorter "peak" periods associated with each continent. This diversification also reduces the concentration of the Combined Company's exposure to regulatory and business risk and reduces its dependence upon individual sales agents. Additional Products. In addition to the basic telecommunications products and services presently offered by CSI, the ITC switch makes it possible for CSI to significantly expand its wholesale business, and to introduce new value-added services such as facsimile, debit card and hotel long-distance operator services to its hotel and business customers. The Combined Company also will have the opportunity to market CSI's proprietary DIAL and LINK-US transparent, automated, call re-origination systems through ITC's established agent network in Europe, the Middle East and Africa. Elimination of Redundant Overhead. The Combined Company believes it will be able to reduce employee headcount and its hiring of outside contractors through the consolidation of functional areas such as accounting, customer service and technical operations. The Combined Company intends that marketing services, accounting and administration functions will be centralized in Colorado Springs, Colorado, while technical and customer service functions will reside in Fort Lauderdale, Florida. Personnel Experience and Expertise. Both ITC and CSI possess broad telecommunications industry experience. The Combined Company anticipates that synergies will be achieved in the areas of marketing, collections, customer provisioning, carrier relationships, development and enhancement of switch technologies and Internet expertise. CSI has entered into an agreement in principle to acquire all of the outstanding capital stock of ITC for $3.1 million in cash and 207,000 shares of Common Stock based on an assumed initial offering price of $10.00 per Share, to be issued on the first anniversary of the closing of this Offering. A portion of the cash will be held in escrow for one year to secure certain indemnification obligations of the stockholders of ITC. ITC is currently owned by Lynch Family, LLC, Philip Thomas and Sean Thomas. Upon completion of the ITC Acquisition, Philip Thomas and Sean Thomas will become employees of the Combined Company. The ITC Acquisition is conditioned upon, and will occur immediately following, the consummation of this Offering. See the Financial Statements and the Notes related thereto included elsewhere in this Prospectus. INDUSTRY OVERVIEW International telecommunications services consist of wire and cable, wireless and satellite transmissions that originate in one country and terminate in a different country. The international long distance telecommunications services market is divided into two major segments: telecommunications that either originate or terminate in the United States; and telecommunications between countries other than the United States. The ITU estimates that in 1995, the international long distance telecommunications services market was approximately $53 billion, with AT&T, Deutsche Telekom AG, MCI, France Telcom and British Telecommunications plc generating the largest share of global long distance carrier revenue, and numerous other telecommunications carriers and resellers accounting for the balance of the market. The ITU projects that by the year 2000 revenue will approach $76 billion with the volume of traffic expanding to 107 billion minutes of use. Based on information available to the Company from the ITU and telecommunications industry sources, the call-reorigination and call through segments of the telecommunications industry accounted for approximately $1.4 billion in revenue in 1997 and is growing at a rate of approximately 15% per year. Historically, ITOs provided all of the telephone services required by their respective countries, leaving customers with no choice but to use those services and pay the prices charged by ITOs. Additionally, ITOs have historically controlled much of the inter-country traffic. Due to this lack of competition, the historical cost of making international telephone calls from points of origin outside of the United States has been significantly higher than that of making international calls from inside the United States. In connection with increasing deregulation in international markets, telecommunications providers such as the Combined Company offered savings over the rates charged by local telephone companies in countries with 33 regulated telecommunications markets through a process known as "call- reorigination." Call-reorigination technology allows telecommunications providers to purchase telecommunications capacity from service providers outside the regulated countries at lower rates and resell the service to customers at a favorable rate relative to that offered by the local telephone companies. The reduced costs afforded by call-reorigination technology, coupled with the introduction of value-added services such as debit cards, facsimile and data transmission, have resulted in new competitors to ITOs in providing international telecommunications services. CSI believes that continuing deregulation of international telecommunications markets coupled with technological advances will lead to increased international competition similar to that within the United States. Specifically, CSI believes that increased utilization of high-speed fiber optic cable and technologically advanced switching software may increase capacity, speed and quality and may offer value-added features while reducing cost. CSI believes that these developments will result in decreased demand for basic, traditional call-reorigination services in deregulated markets, but that these factors should also lead to increased traffic volume for high quality, state-of-the-art international facilities-based carriers with an established customer base, carrier relationships and switches. The international telecommunications industry provides voice and data transmission from one national telephone network to another. The industry has experienced dramatic changes during the past decade that have resulted in significant growth in the use of services and in enhancements to technology. The industry is expecting similar growth in revenue and traffic volume in the foreseeable future. The market for telecommunications services is highly concentrated, with Europe and the United States accounting for approximately 43% and 25%, respectively, of the industry's worldwide minutes of use in 1995. AT&T, Deutsche Telecom, MCI, France Telecom and BT originated approximately 40% of the aggregate international long distance traffic minutes in 1995. Growth and change in the international telecommunications industry have been fueled by a number of factors, including greater consumer demand, globalization of the industry, increases in international business travel, privatization of ITOs, and growth of computerized transmission of voice and data information, including the Internet. These trends have sharply increased the use of, and reliance upon, telecommunications services throughout the world. CSI believes that despite these trends, a high percentage of the world's businesses and residential consumers continue to be subject to high prices with poor quality of service which have been characteristic of many ITOs. Demand for improved service and lower prices has created opportunities for private industry to compete in the international telecommunications market. Increased competition, in turn, has spurred a broadening of products and services, and new technologies which have contributed to improved quality and increased transmission capacity and speed. Consumer demand and competitive initiatives have also acted as catalysts for government deregulation, especially in developed countries. Deregulation in the domestic interstate long distance market accelerated in the United States in 1984 with the divestiture by AT&T of the RBOCs. Today, there are over 500 U.S. long distance companies, most of which are small- or medium-sized companies. In order to be successful, these small- and medium-sized companies have to offer their customers a full range of services, including international long distance. However, most of these carriers do not have the critical mass of customers to receive volume discounts on international traffic from the larger facilities-based carriers such as AT&T, MCI and Sprint. In addition, these small- and medium-sized companies have only a limited ability to invest in international facilities. Alternative international carriers such as the Combined Company have capitalized on this demand for less expensive international transmission facilities. These emerging international carriers are able to take advantage of larger traffic volumes to obtain volume discounts on international routes (resale traffic) and/or invest in facilities when volume on particular routes justify such investments. As these emerging international carriers have become established, they have also begun to carry overflow traffic from the larger long distance providers that own overseas transmission facilities. On February 15, 1997, pursuant to the WTO Agreement, which became effective on February 5, 1998, 69 members, including the United States, of the WTO agreed to open their respective telecommunications markets 34 to competition and foreign ownership committed to and adopted regulatory measures to protect market entrants against anticompetitive behavior by dominant telecommunications providers. Although CSI believes that the WTO Agreement could provide the Combined Company with significant opportunities to compete in markets that were not previously accessible, the WTO Agreement could also provide similar opportunities to the Combined Company's competitors. In some countries, for example, the Combined Company will be allowed to own facilities or to interconnect to the public switched network on reasonable and non-discriminatory terms. There can be no assurance, however, that the pro-competitive effects of the WTO Agreement will not have a material adverse effect on the Combined Company's business, financial condition and results of operations or that members of the WTO will implement the terms of the WTO Agreement. By eroding the traditional monopolies held by ITOs, many of which are wholly or partially government owned, implementation of the WTO Agreement will provide U.S.-based providers the opportunity to negotiate more favorable agreements with both the traditional ITOs and emerging foreign providers. In addition, deregulation in certain foreign countries will enable U.S.-based providers to establish local switching and transmission facilities in order to terminate their own traffic and begin to carry international long distance traffic originating in those countries. BUSINESS STRATEGY The Combined Company is a switch-based reseller of international, long distance telecommunications products and services within South America, Europe, the Middle East, Africa, Pacific Rim and Central America markets. Management's strategy is to grow its business through aggressive marketing and agent expansion programs, provision of higher margin products and provision of enhanced services such as Internet fax and its proprietary DIAL and LINK-US automated call processors, and strategic acquisitions of complementary telecommunications companies and customer bases. CSI believes that its DIAL and LINK-US high volume, automated call processors and high quality service provide it with advantages over other similar telecommunications providers. As regulatory and competitive environments around the world evolve and change, CSI expects to respond in a prudent fashion to maintain and increase its customer base and competitive position. Key elements of CSI's business strategy include the following: Integrate ITC. In July, 1997, CSI entered into a Reciprocal Operating Agreement with ITC wherein the two companies agreed to combine their respective technologies and operating strengths in order to take advantage of resulting synergies and economies of scale. This relationship has yielded improved rates from carriers; greater CSI and ITC flexibility in marketing new, customized wholesale and retail products; and improved CSI cost savings due to superior least-cost routing capabilities of the ITC switch and its location at a major telecommunication's gateway for terminating Latin American traffic. In addition to overall carrier rate reductions, ITC has also benefited from CSI's automated, Internet triggering technology allowing it to expand its customer base in Middle Eastern markets where standard call-reorigination has not been an effective product offering. Management of CSI believes that the Combined Company will generate additional synergies and efficiencies. In order to increase revenue, the Combined Company will offer new and expanded products and services, such as its proprietary DIAL and LINK-US high volume PBX installations and Internet fax products, to ITC's existing agents in Europe, the Middle East and Africa. To decrease costs, the Combined Company intends to optimize its equipment utilization over a full 24-hour day at the Ft. Lauderdale operations and customer service center. In addition, consolidation of administrative, financial and customer service staffs should yield additional efficiencies. Increase Number of Larger Customers Through the Deployment of Transparent Technology. The Combined Company's customers consist primarily of small businesses and individuals who do not require transparent service and who are rate sensitive. CSI has developed its proprietary DIAL and LINK-US 35 transparent technologies that, coupled with its offering of other transparent technologies manufactured by other suppliers, are attractive to high volume customers, such as hotels, embassies and the local offices of large multinational businesses which are seeking improved international telecommunications services. CSI has found that its target market of hotel and other business customers are willing to pay a premium for high quality, transparent access to call-reorigination services. CSI has installed transparent switches in hotels and in offices of large multinational companies located in Brazil, South Africa and Argentina. Following completion of the ITC Acquisition, CSI expects ITC's sales force, which does not currently market transparent technologies to its customers, to begin marketing transparent services to large customers in ITC's target markets as well as to ITC's current customer base. Rapidly Expand Service Offerings. For existing and potential hotel and multinational business customers, the Combined Company is developing a complement of enhanced services, including operator services for hotel customers, custom debit calling cards, Internet/private network fax and data services with substantial savings over normal telephone rates, and Internet-managed conference calling. Increase Sales Agent Base and Sales and Marketing Activities. The Combined Company has a network of approximately 95 local sales agents and 400 sub-agents employed by such sales agents. CSI believes that it can most effectively increase its customer base and revenue through the attraction of qualified additional local sales agents, and believes that it can attract sales agents because of its advanced technology, its focus on higher volume hotel and business customers and its emphasis on high quality service. The Combined Company also will seek to expand its business by increasing its sales and marketing activities and by hiring additional personnel to support its increased sales and marketing efforts. Utilize Technology to Reduce Costs. The Combined Company is seeking to reduce its costs through the use of automated "least cost routing" of its call segments. The Combined Company's least cost routing system coordinates the worldwide process of selecting the lowest cost route for each call based on the time of day and the requirements for optimal quality among available routes. The Combined Company, under the Reciprocal Telecommunications Agreement, runs its telecommunications traffic over ITC's switch, taking advantage of its least cost routing capabilities and its proximity to the South American switch gateway. In addition, this switch platform enhances the Combined Company's ability to provide customized wholesale services. In addition, where conditions warrant, the Combined Company also plans to install switches capable of performing least cost routing in Europe, South America, the Pacific Rim and elsewhere to achieve cost savings by reducing the need to route a call through the United States. Instead, calls would use the long distance services of non- U.S. countries that have favorable rates. The Combined Company has acquired full Internet capability to provide a wide range of enhancements to its services. These include lower cost transmission of data and facsimile traffic, assisting in least cost routing and providing real time billing and accounting information. Pursue and Implement Strategic Acquisitions. As a key part of its growth strategy, the Combined Company intends to actively pursue and execute strategic acquisitions of complementary international customer bases, products and telecommunications companies. ITC is the first such significant acquisition. Management believes the worldwide telecommunications industry will continue to undergo a period of strong consolidation activity due to the general cost advantages of economies of scale associated with larger operations. The Combined Company intends on being an active participant during this consolidation period acquiring those products and companies that fit its strategy of providing business and other customers with high quality, state-of-the-art telecommunications service. Broaden and Improve Strategic Relationships with U.S. Carriers and International Telecommunications Providers. The Combined Company intends to forge strategic alliances with major U.S. and international telecommunications companies when and where such alliances can be an advantage to the Combined Company. Such alliances may be attractive in the case of large corporate accounts involving multiple locations of high volume international long distance traffic. This business potential is possible due to CSI's capabilities using its proprietary DIAL and LINK-US PBX automated call-reorigination installations in Brazil and South Africa. 36 SERVICES Call-reorigination. The largest segment of the Combined Company's business involves call-reorigination services. When the Combined Company provides call- reorigination service, it connects its international customers to the U.S. telephone system via computer triggering, which makes each international customer's call originate in the U.S. As a result, the customer's call cost structure is based on the lower charges of the U.S. telecommunications marketplace. The Combined Company provides two basic types of call- reorigination: transparent and non-transparent. When customers use the Combined Company's transparent call-reorigination service, callers may not even be aware they are using call-reorigination because transparent call- reorigination requires no additional actions by the caller other than the normal dialing process. When customers use the Combined Company's non- transparent call-reorigination service, they are required to make an initial telephone call to the Combined Company's computer and then wait for a "call back" from the Combined Company's computer to complete the call. As of the date of this Prospectus, most of the Combined Company's customers utilize non- transparent call-reorigination services. Customers who use non-transparent call-reorigination typically are individuals or smaller businesses. The Combined Company intends to focus its future sales and marketing efforts toward recruitment of larger transparent call-reorigination customers. Non-transparent Call-reorigination. Customers of the Combined Company that do not make a large number of international calls, usually residential customers and some small businesses, do not normally require or demand transparent call-reorigination, which is more expensive and requires more sophisticated equipment. These customers are each assigned a special telephone number to dial when they want to make an international call. The caller dials this special number that triggers the Combined Company's computer to make the call-reorigination. Because the computer does not answer the call, the caller is not charged for a completed call. When the caller answers the call- reorigination, he or she can dial any location in the world via the Combined Company's computer and typically at lower rates than those charged by the ITO. The Combined Company believes that the quality of the calls made using the Combined Company's system is normally as good as, or better than, the quality obtained by using the ITO. Approximately 81% of the Combined Company's traffic is currently non-transparent. Transparent Call-reorigination. CSI has developed advanced call triggering methods which, when used along with standard triggering methods and commercially available, state-of-the-art call processing devices, provide transparent access to the Combined Company's call-reorigination system. These methods take advantage of global data networks such as X.25, Internet and frame relay, and digital services such as Integrated Services Digital Networks (ISDN), to provide extremely fast and reliable call-reorigination initiation. The Combined Company currently utilizes the X.25 network in Brazil and Argentina and the Internet in Brazil, Argentina, Venezuela, South Africa and Lebanon to facilitate the call-reorigination process. The Combined Company plans to have Internet triggering installed in Singapore and New Zealand in the near future. The utilization of proprietary, software-based triggering methods and commercially produced, full-featured call processing devices provide the Combined Company with a transparent solution to a wide array of telecommunications situations. The Combined Company is able to quickly adapt its call processors to virtually any type of customer's requirements, providing extremely fast and reliable service. CSI's transparent call processors function by recognizing the customer's dialed digits and routing the customer's call through a predetermined route for call completion. When a call processor recognizes the initiation of an international call, typically by detecting the leading "00" in a customer's dialed string, the call processor triggers the Combined Company's switch in the United States, indicating that a call-reorigination has been requested by the call processor at the customer's site. The call-reorigination request is processed and the call processor receives the call-reorigination, often by the time the customer has finished dialing his or her international call. The call processor answers the incoming call-reorigination and immediately sends the international number dialed by the customer to the Combined Company's switch, which places the call on another outgoing telephone line to the number dialed by the customer. The call-reorigination call to the customer and the call to the customer's dialed destination are then joined and the international call is completed. This procedure, while complex in nature, actually only takes a few seconds to occur. 37 CSI has developed proprietary call processors called "DIAL" and "LINK-US," which allow hotels and other large businesses that have PBX telephone systems to use its transparent call-reorigination services. Prior to the development of this proprietary technology, the PBX telephone systems used by these organizations were incompatible with CSI's switching technology. The Company installs its PBX processors in hotels and large businesses and offers similar but less sophisticated and less expensive switches that are manufactured by third parties to small businesses and other customers. CSI estimates that approximately 19% of the Combined Company's traffic is currently routed through transparent call processors. The Combined Company has approximately 200 DIAL and five LINK-US as well as approximately 200 other transparent call processors installed at various hotels and businesses. DIAL or LINK-US processors or other transparent call-reorigination processors are installed at the Inter-Continental, Caesar Park, Copacabana Palace, Marina Palace and Atlantico Hotels in Rio de Janeiro, and the Austacem business park in Sao Paulo, several Holiday Inns in South Africa and are proposed to be installed in several additional hotels and businesses in Brazil, Argentina, South Africa and Hong Kong. RELATED SERVICES In addition to call-reorigination service, the Combined Company intends to offer facsimile and debit card services. The Combined Company plans to provide value-added services such as hotel operator services and Internet services. The Combined Company currently provides domestic long distance reselling as an agent for several domestic carriers. Hotel Operator Services and Other Hotel Services. The Combined Company plans to introduce operator services for hotel customers. With operator services in place, a hotel guest seeking to use his credit card to "dial around" the hotel system is routed via the Combined Company's call-reorigination system to an international operator. The call is billed on the guest's credit card once the card is validated. The hotel normally would not receive the revenue from these calls. The Combined Company may share a small percentage of its revenue from operator services with the hotel by agreement in order to introduce operator services into the hotel. The Combined Company intends to offer a variety of other services to hotel customers and their guests, including direct dial call-reorigination, facsimile and Internet services, voice-mail and debit card services. Wholesale Long Distance Reselling. The Combined Company intends to expand its wholesale call-reorigination services. The provision of wholesale services enables the Combined Company to resell its services to companies and sales agents wanting to sell long distance services under their own names. Companies and sales agents purchasing wholesale services will receive such services at rates below the retail rates the Combined Company traditionally charges its retail customer because the Combined Company will not incur the overhead costs associated with servicing retail accounts. The Combined Company will be able to provide customized billing formats and rate structures for its wholesale clients. The Combined Company anticipates that the additional traffic from wholesale customers will enable it to negotiate further rate reductions with its carriers. Facsimile Services. The Combined Company offers its customers the ability to send quality, high-speed facsimiles internationally. The Combined Company currently transmits facsimiles over its call-reorigination network. The Combined Company intends to commence offering the transmission of facsimiles via the Internet or private data networks. Both facsimile and Internet usage are increasing significantly worldwide. The Combined Company's switching facilities are equipped with redundant, dedicated T-1 access to the Internet. The Combined Company believes that the integration of call-reorigination technology, facsimile and Internet capabilities will provide it with important competitive data telecommunication advantages over other call-reorigination companies. The Company intends to use a portion of the proceeds of this Offering to implement and expand these services. Debit Card Services. The Combined Company offers rechargeable debit cards to its customers. The use of debit calling cards is a common practice in Western Europe and Asian countries. Debit cards operate the same as conventional "charge-a-call" cards issued by AT&T, MCI and Sprint, but are purchased with a set amount of 38 time available. For the cardholder, toll fraud is no longer a concern. If the card is lost or stolen, the loss is limited to the amount of the time remaining on the card, and then the card simply expires and is of no further value to the holder. The Combined Company plans to offer debit cards through its hotel and business customers that will combine call-reorigination with local debit card platforms. SALES AND MARKETING General Sales of the Combined Company's call-reorigination services are conducted through a network of approximately 95 independent sales agents based in the countries in which the Combined Company conducts business. The sales agents have engaged approximately 400 sub-agents, many of whom may be employed by such sales agents on a part-time basis, to assist in sales and marketing on behalf of the Combined Company. The agents earn commissions on revenue collected from their customers. These commissions generally range between ten to fifteen percent of the revenue collected by the agents and sub-agents. The Combined Company trains and supplies agents and sub-agents with necessary promotional materials for use in attracting customers and product and service updates through printed material and access to the Combined Company's operations center in Ft. Lauderdale, Florida. The Combined Company provides order entry and product fulfillment services through customer service personnel located at its operations center. The Combined Company currently advertises its services in international newspapers and on a limited basis via a web site on the Internet to attract sales agents, sub-agents and customers. Historically, the Combined Company has had a limited marketing budget. CSI intends to use a portion of the net proceeds of this Offering to increase significantly its marketing program in order to further develop its Latin American and Pacific Rim markets, and recruit new agents around the world. Agents All of the Company's sales agents are required to enter into one of two forms of agreement: a "CSI Distributor Agreement," or a "CSI Branch Office Distributor Agreement." ITC has entered into an "ITC Independent Contractor Agreement," a wholesale agreement or a consulting agreement with certain of its sales agents. After the consummation of the ITC Acquisition, CSI intends to review the forms of sales agent agreements currently used by both companies and maintain only those forms which management believes will provide the best relationship between the Combined Company and its sales agents. See "Risk Factors--Dependence on Key Sales Agents." CSI Distributor Agreement. The distributor agreements grant authority to agents to solicit offers to subscribe for or purchase CSI's services and products, but grants no authority to bind the Company. All customer orders are subject to the approval of the Company. Although the distributor agreements do not establish a specific territory, each agent must obtain the Company's permission with respect to each area in which such sales agent intends to solicit offers. The agent generally is responsible for soliciting and servicing of customers, but the Company is responsible for all billing and collections. The agent is responsible to the Company for all bad debts less, in certain circumstances, an allowance granted by the Company. Each agent earns commissions on collected revenue from its customers. Such commissions are on a scale ranging from 10% for less than $50,000 of monthly collected revenue to 15% for monthly collected revenue of $250,000 or more. Certain distributor agreements relating to high volume large businesses such as hotels limit commissions to a maximum of 10% of monthly collected revenue. Generally, each sales agent must meet sales goals ranging from $3,000 in billings per month after six months from the effective date of such distributor's agreement to $33,000 in billings per month after 36 months. Branch Office Distributor Agreement. Under CSI's branch office distributor agreements, agents establish offices designed to serve specific territories. In addition, such agents may solicit customers outside their territories with the Company's prior consent. Except as set forth below, the terms of the branch office distributor agreements are the same as the distributor agreements. CSI's two largest agents are engaged under branch office distribution agreements. 39 Unlike the distributor agreements, the branch offices are responsible for billing and collection, except for bills paid by credit card, which are paid directly to the Company. The branch offices are required to remit all revenue collected, twice monthly. The branch offices are responsible to the Company for all bad debts less, in certain cases, an allowance granted by the Company. Each branch office is paid commissions on monthly collected revenue based on a scale ranging from 13% for up to $50,000 of monthly collected revenue to 15% for monthly collected revenue of $100,000 or more. Generally, each branch office agent must meet the sales goals ranging from $20,000 per month in billings after six months from the effective date of such branch office distributor's agreement to $250,000 in billings per month after 36 months. ITC Independent Contractor Agreement. Under ITC's Independent Contractor Agreement, each sales agent can market and sell ITC's services within a defined geographical region. Generally, within six months of the agreement, each sales agent must meet certain sales and customer quotas and must maintain a monthly billing of $100,000 per month to be authorized exclusive rights to market the services of ITC in that region. ITC is responsible for billing and maintaining all records for the sales agent's accounts. Sales agents collect, in advance, payments from each of their customers equal to the customer's average monthly telephone bill. Sales agents are responsible for their customers' account balances. Each sales agent earns commissions on collected revenue from customers such sales agent has solicited on a scale ranging from 6% for less than $25,000 of collected monthly revenue to 10% for collected monthly revenue of $100,000 or more. ITC has made certain exceptions to this scale and pays certain agents commissions higher than 10% of monthly collected revenue. The agreements are generally in effect for one calendar year and are renewed yearly unless terminated by ITC or the agent. Technicians CSI currently has three technicians available to install and program its DIAL and LINK-US transparent call-reorigination technologies at customer sites. Before the Company sends one of its technicians to an international customer's location to perform an installation, the Company verifies that the customer's site is equipped to handle the type of equipment to be installed. The Company's technicians typically perform the first few equipment installations for each sales agent. The sales agents are responsible for hiring technical consultants, who are trained by CSI's technicians, to perform additional transparent equipment installations. CSI plans to hire additional in-house technicians as needed to support the demand for the Company's automated call-reorigination systems. Customers The Combined Company believes that its customers prefer the Combined Company's service to their local telephone ITO's service for several reasons, including: (1) lower international, and in some cases intra-country, telephone rates; (2) increased system reliability and call completion rates; (3) improved line quality, with less echo, static and snow; and (4) available and responsive customer service support. The Combined Company's system is also easy to use, particularly with transparent call-reorigination. Large corporate users, especially hotels, benefit from CSI's transparent system, through which employees and hotel guests are able to dial just as they would on the local ITO's system. The Combined Company's primary customers currently are residential and individual customers, hotels and small and medium-sized businesses. The Combined Company also serves large corporations and non-profit entities such as missions, schools and churches. The Combined Company provides telecommunications services to approximately 19,000 customers as of January 31, 1998. The Combined Company defines customers as those persons or businesses who have used the Combined Company's services within the prior four months; however, a high level of customer attrition is typical in the call- reorigination industry. South America (particularly Argentina and Brazil), Europe and Africa currently represent the greatest areas of market penetration for the Combined Company. 40 The Combined Company is developing a variety of service and payment structures to attract a broader base of customers and to retain existing price sensitive accounts. New payment methods are necessary for customers in many parts of the world where credit cards are not as prevalent or easily accessible as in the United States. The two leading methods are pre-payment by guaranteed funds or direct bank debit (automatic bank withdrawal), which is a method of payment preferred by larger businesses in several countries. CSI has recently entered into cellular markets in South Africa and Italy. Cellular providers are natural competitors to ITOs and are open to alliances with call-reorigination providers such as the Combined Company that have similar competitive objectives. The Combined Company will seek to market its services to the existing subscriber base of the cellular providers with which it has contracts. CARRIER CONTRACTS Carrier costs constitute a significant portion of the Combined Company's variable costs. The Combined Company has entered into contracts to purchase switched minute capacity from various domestic and foreign carriers and depends on such contracts for origination and termination of its telecommunications. Pursuant to these contracts, the Combined Company obtains rates, which are generally more favorable than otherwise would be available, by committing to purchase switched minute minimums from such carriers. If the Combined Company fails to meet its switched minute minimum requirements under a carrier contract, it could still be required to pay its minimum monthly commitment as a penalty or the contracts could be canceled. The Combined Company's aggregate minimum monthly commitments are approximately $400,000 which represent approximately 31% of the Combined Company's monthly variable transmission expense. Because of the frequent fluctuations in rates of long distance carriers, the Combined Company believes that it is in its best interest to have short-term agreements with these carriers. Most of the Combined Company's agreements with its long distance telephone carriers will expire, or may be terminated by either party, within one year. The Combined Company's dependence on particular carriers will vary because the Combined Company shifts its use of carriers depending on the rates that are offered. The Combined Company is continually attempting to renegotiate rates with its current carriers and to establish relationships with new long distance carriers that provide the most favorable rates. Due to its financial condition, the Combined Company defaulted on payment obligations to certain carriers in 1995, 1996 and 1997. Although the Combined Company was able to negotiate deferred payment arrangements with these carriers (and subsequently payoff such arrangements), there is no assurance that it will be able to make such arrangements with these or other carriers if required in the future. In November 1997, WorldCom commenced an action against ITC in Connecticut state court seeking damages of approximately $1.1 million for alleged past due carrier bills. ITC believes it has meritorious defenses to the suit. ITC intends to vigorously defend its position and will attempt to reach a settlement with this carrier. The Combined Company's ability to obtain favorable rates from the carriers depends, in large part, on the Combined Company's total volume of long distance traffic. The Combined Company does not believe that the loss of any one supplier or contract would have a material adverse impact on the Combined Company's business, financial condition or results of operations. See "Risk Factors--Relationship With Long Distance Carriers" and "Management's Discussion of Financial Condition and Results of Operations." COMPETITION General The Combined Company faces a high level of competition for customers and sales agents in all of its markets, and expects competition to intensify in the future. There are no substantial barriers to entry in the call- reorigination industry. The Combined Company believes that there are more than 150 companies engaged in the international call-reorigination industry. Many of the Combined Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources, larger networks and a broader portfolio of services than the Combined Company. Additionally, many competitors have strong name recognition and "brand" loyalty, long-standing relationships with their target customers, and economies of scale which can result in a lower relative cost structure for transmission and related costs. 41 Inasmuch as the Combined Company believes that competition for customers and sales agents is based primarily on price, transmission quality, services offered and the ability of the supplier to "bundle" various telecommunications services to meet customer requirements, the U.S.-based providers of international call-reorigination service typically set pricing, quality, service, and standards that the Combined Company seeks to match or exceed in order to compete. Increased competition could force the Combined Company to reduce its prices and profit margins if the Combined Company's competitors are able to procure rates or enter into service agreements comparable to or better than those the Combined Company obtains or if competitors are able to offer other incentives to existing and potential customers and sales agents. Similarly, the Combined Company has no control over the prices set by its competitors in the long distance resale market. The Combined Company is aware that its ability to market its long distance resale services depends upon its ability to continue to offer rates lower than the ITOs. A decrease in the arbitrage spreads could have a material adverse effect on the Combined Company's business, financial condition or results of operations. Other potential competitors include cable television providers, wireless telephone providers, Internet access providers, electric and other utilities with rights of way, railways, microwave carriers and large end users that have private networks. The intensity of such competition has recently increased and the Combined Company believes that such competition will continue to intensify as the number of new entrants increases. If the Combined Company's competitors devote significant additional resources to the provision of international and national long distance telecommunications services to the Combined Company's target customer base of high-volume residential consumers and small- and medium-sized businesses, such action could have a material adverse effect on the Combined Company's business, financial condition and results of operations. There can be no assurance that the Combined Company will be able to compete successfully against new or existing competitors. On February 15, 1997, representatives of 69 countries, including the United States, finalized the WTO Agreement, which addresses market access, foreign investment and procompetitive regulatory principles for countries generating more than 90% of world-wide telecommunications revenue. The WTO Agreement became effective February 5, 1998. Although certain countries took specific exceptions to the agreement, the WTO Agreement generally provides (i) market access for United States companies to local, long distance and international service through means of network technology on either a resale or facilities basis, (ii) the opportunity for United States companies to acquire, establish or hold a significant stake in telecommunications companies in the countries which are a party to the WTO Agreement, and (iii) the ability to take advantage of these opportunities within a framework of procompetitive regulatory principles. The Combined Company expects to benefit from the anticipated effects of the WTO Agreement because of its procompetitive aspects, but it expects that it may take several years before the principles of the agreement are implemented in many countries and it cannot predict the extent of the opportunities that may be presented. U.S. Based Competition. The large U.S. long distance carriers have, in the past, been reluctant to compete directly with ITOs by entering the international call-reorigination business and attempting to capture significant market share of the domestic customers of the ITOs. This is changing, and AT&T, among others, is entering the call-reorigination business. The Combined Company's principal U.S.-based competitors are providers of international call-reorigination services such as AT&T, Access Authority, IDT Corporation, Justice Technology Corp., Kallback, NetSource Communications, Telegroup, USA Global Link, UTG Communications, Viatel, Inc. and Worldpass as well as providers of traditional long distance services such as AT&T, Cable & Wireless, Inc., Frontier Corp., GTE Communications, LCI International, Inc., MCI, Qwest Communications International, Inc., RBOCs, Sprint, WorldCom, outside their exchange territories providing long distance services in the United States. International Based Competition. The Combined Company's principal international-based competitors include, among others, Telekom S.A. in South Africa; Telefonica de Argentina and Telecom Argentina in Argentina; Telebras, Telesp and Telerj in 42 Brazil; France Telecom in France; PTT Telecom B.V. in the Netherlands; ACC Corp., First Telecom plc, Oystel Communications Ltd., Swiftcall Ltd., AT&T, British Telecommunications plc, Cable & Wireless, Mercury Communications Ltd., Sprint and WorldCom in the United Kingdom; Deutsche Telecom AG in Germany; Optus in Australia and Kokusan Denshin, Denwa, International Telecom Japan and International Digital Communications in Japan. The Combined Company also competes with non-U.S. based providers of international call-reorigination services. The Combined Company believes that these international ITOs generally have certain competitive advantages due to their control over local connectivity and close ties with national regulatory authorities. The Combined Company also believes that, in certain instances, some regulators have shown a reluctance to adopt policies and grant regulatory approvals that would result in increased competition for the local ITO. If an ITO were to successfully pressure national regulators to outlaw the provision of call-reorigination services, the Combined Company could be denied regulatory approval in certain jurisdictions in which its services would otherwise be permitted, thereby requiring the Combined Company to seek judicial or other legal enforcement of its right to provide services. Any delay in obtaining approval, or failure to obtain approval, could have a material adverse effect on the Combined Company's business, financial condition and results of operations. ITOs may influence regulatory authorities to outlaw the provision of certain call- reorigination services or block access to the call-reorigination services the Combined Company markets. The ITOs generally seek to prevent call- reorigination companies from using uncompleted local telephone service to trigger international calls. In such environments, the Combined Company uses X.25 or Internet triggering to avoid violating local laws or regulations. The Combined Company has benefited from the fact that regulation of telecommunications services in foreign countries has created a high differential between the rates charged by ITOs and the rates charged by the Combined Company. As deregulation continues in foreign markets, this differential in rates is expected to decrease, thus placing pricing pressure on the Combined Company. Furthermore, deregulation may lead to additional competitors entering the international telecommunications market. If the Combined Company encounters anti-competitive behavior in countries in which it operates (such as an ITO attempting to block access to call-reorigination services) or if the ITO in any country in which the Combined Company operates uses its competitive advantages to the fullest extent, the Combined Company's business, financial condition and results of operations could be materially adversely affected. Deregulation and increased competition in foreign markets could cause prices for direct-dial international calls to decrease so much that customers are no longer willing to use the Combined Company's international call-reorigination services. TECHNOLOGY AND INTELLECTUAL PROPERTY The Combined Company does not have a formal patent or other intellectual property program. It relies on trade secret and contractual restrictions to establish and protect its technology. The Combined Company's success depends in part on its ability to enforce intellectual property rights for its proprietary software technology, both in the United States and in other countries. The Combined Company's proprietary software is protected by the use of confidentiality agreements that restrict the unauthorized distribution of the Combined Company's proprietary data. Although the Combined Company believes that its success is more dependent upon its technical expertise than its proprietary rights, the Combined Company's success and ability to compete is dependent in part upon its ability to enhance its technology. The Combined Company continually strives to provide faster, higher quality, enhanced service for its customers. Part of the Combined Company's success in speed and reliability of its call-reoriginations can be attributed to its use of transparent X.25 and Internet automated call- reorigination-triggering technology. Redundancy. The Combined Company's operations center in Ft. Lauderdale, Florida has redundant computer systems and fiber optics that provide two advantages. First, its telecommunications services are rarely off-line. The Combined Company believes that this gives it an advantage compared to many of the Combined Company's smaller competitors, and enhances the Combined Company's reputation for quality, service and uninterrupted system availability. Second, the Combined Company's redundant system architecture permits the Combined Company the flexibility to take individual computers off line intentionally for scheduled maintenance, upgrades and enhancements. 43 DIAL and LINK-US Technology. CSI utilizes proprietary DIAL and LINK-US technologies in connection with transparent call-reorigination. These technologies are incorporated into a switch that permits automatic call- reorigination to occur when interconnected with PBX's of hotels, large businesses and other high volume customers. As of October 31, 1997, CSI had installed approximately 200 DIAL systems and five LINK-US systems. The DIAL technology, which largely consists of proprietary programming enhancements to third-party switching equipment is beneficially owned entirely by CSI and is not subject to royalty payments or any restrictions or financial penalties whatsoever regarding its deployment or lack of deployment. CSI supports two versions of its DIAL technology. The first version is the Enhanced DIAL system, which is installed to facilitate transparent call- reorigination in large hotels and business parks. Enhanced DIAL is a system that facilitates transparent call-reorigination through the utilization of X.25 and Internet triggering technologies interconnected with commercial PBX environments. The Company plans to emphasize the installation of its Enhanced DIAL technology at the sites of its largest customers in the future. The Enhanced DIAL system can support the same volume of traffic as 64 of the Basic DIAL systems. The Company's Basic DIAL system is more of an entry-level system that is installed to facilitate transparent call-reorigination for smaller companies. The Basic DIAL system is able to utilize X.25 and Internet triggering, but is also commonly used in locations that do not currently have X.25 or Internet access. CSI has entered into a consulting agreement with Gary Kamienski with respect to the LINK-US technology. Mr. Kamienski has worked in the computer science field for over 24 years, specializing in systems programming and data communications and spent 17 years working with Bell Communications Research. Pursuant to Mr. Kamienski's agreement, dated September 19, 1996, Mr. Kamienski transferred the LINK-US switch technology to the Company. The Company agreed to pay the costs of installation and associated costs for LINK-US, and to pay Mr. Kamienski a monthly royalty equal to 4% of the Company's gross revenue related to LINK-US. The Company has the option to buy out the royalty for an amount equal to the greater of $2,500,000 or three times the aggregate royalty payments for the first twelve months of the Agreement. In addition, for each installation of LINK-US, the Company agrees to pay Mr. Kamienski a flat fee of $1,500 if such installation produces gross revenue between $10,000 and $20,000 in its first full billing month of operation, and a flat fee of $3,000 if such revenue exceeds $20,000 in its first full billing month of operation. In addition, Mr. Kamienski agrees to provide ongoing maintenance, support and consulting with respect to LINK-US for as long as the system is in operation at a rate of $5,200 per month. The agreement stays in effect for as long as the LINK-US is operational until September 1, 2006, unless earlier terminated. The agreement may be terminated by either party upon 30 days notice to the other of a material default or consummation of the buy out of the royalty. Mr. Kamienski has agreed not to develop or market any technology similar to LINK- US which in any way might compete with the Combined Company for the lesser of 10 years or the period of time the Company is utilizing the technology associated with LINK-US. X.25 Triggering Technology. An X.25 data network can transport data or voice information to any network destination in the world. CSI has proprietary software technology that makes X.25 triggering technology work with its call- reorigination system. The Company uses X.25 technology in areas where it has several business customers. The Company currently has X.25 triggering available in Argentina and Brazil. In countries with underdeveloped telecommunications systems, it can be difficult and time consuming to make an international phone call. With X.25 triggering technology installed, up to 100% of the trigger calls to the Combined Company's switch make it out of the country and nearly 100% of the call-reorigination calls make it back into the country. The combination of X.25 triggering technology with a DIAL or LINK-US switch is especially appealing to hotels and business owners. See "--Call-reorigination-- Transparent Call-reorigination." By utilizing these alternate call-triggering mechanisms, the ITO is removed from the call-reorigination process. ITOs typically object to call- reorigination because call-reorigination companies use the ITO's lines to trigger the call-reorigination without paying the ITO for the use of its lines on the long distance segment because that long distance call is not completed. When the Combined Company uses X.25 or Internet triggering 44 technology to trigger its call-reoriginations, the ITO's long distance lines are not used. Instead, a low cost, local call is completed as part of the call-reorigination triggering process. See "Risk Factors--Risks of Operations in Foreign Countries." Internet Triggering Technology. Internet triggering is a newer technology and is less expensive than X.25 triggering technology. CSI is currently triggering call-reoriginations via the Internet in Argentina, Brazil, Venezuela, South Africa and Lebanon and intends to have it installed in New Zealand and Singapore. CSI has found that call-reoriginations using Internet triggering usually take four to six seconds and are nearly 100% effective at getting back to the customer. REGULATION The Combined Company's international call-reorigination services are subject to the jurisdiction of many regulators. The terms and conditions under which the Combined Company provides international communications services are subject to government regulation. The FCC has imposed certain restrictions on international call-reorigination providers, including the requirement that authorized carriers provide service in a manner consistent with the laws of the countries in which they operate. Local laws and regulations differ significantly among the jurisdictions in which the Combined Company operates, and the interpretation and enforcement of such laws and regulations vary and are often based on the informal views of the local ministries which, in some cases, are subject to influence by the local telephone companies. In addition, since the Combined Company's call-reorigination services effectively bypass the local telephone system, regulators in certain countries have objected to call-reorigination services, and approximately 30 countries have notified the FCC that they have declared certain call-reorigination services illegal. The Combined Company's services in such countries comprised approximately 7.8% of its revenue for the ten months ended October 31, 1997. The Combined Company generates a significant portion of its revenue from customers originating calls in Argentina, Brazil, Europe, the Middle East and South Africa. In the event that any of these countries prohibited the Combined Company's services or regulated the pricing or profit levels of such services, the Combined Company's business, results of operations and financial condition could be materially adversely affected. At this time, the Argentine government is attempting to provide sufficient information to demonstrate to the FCC's satisfaction that call-reorigination is unlawful in Argentina. Although the Combined Company believes that the probability that the FCC would rescind the Combined Company's grant of authority to provide call-reorigination services for failure to comply with non-U.S. law is unlikely, such action by the FCC would have a material adverse effect on the Combined Company's business. The Combined Company intends to expand its international service offerings to continue to be competitive in additional countries. To facilitate this expansion, the Combined Company may deploy additional switching facilities to be located in a number of countries. As a result, the Combined Company will be directly subject to regulation in an increasing number of countries, and there can be no assurance that such regulation will not have a material adverse effect on the Combined Company's business, results of operations and financial condition. In addition, there can be no assurance that the Combined Company has accurately interpreted or will accurately predict the interpretation of applicable laws and regulations or regulatory and enforcement trends in a given jurisdiction or that the Combined Company will be found to be in compliance with all such laws and regulations. Failure to interpret accurately the applicable laws and regulations and the mode of their enforcement in particular jurisdictions could cause the Combined Company to lose, or be unable to obtain, regulatory approvals necessary for it to be able to provide certain services in such jurisdictions or to use certain of its transmission methods. Such failure could result in significant monetary penalties being imposed against the Combined Company. See "Risk Factors--Government Regulation." Federal regulations, regulatory actions and court decisions have had, and may have in the future, an impact on the Combined Company and its ability to compete as well as on the number and types of competitors in the market. The FCC typically imposes obligations to file tariffs containing the rate, terms and conditions of service. The FCC does not currently regulate the Combined Company's profit levels, although the FCC has the authority to do so. There can be no assurance that regulators will not raise material issues with regard to the Combined Company's compliance with regulations or that existing or future regulations will not have a material adverse effect on the Combined Company's business, financial condition and results of operations. 45 The Combined Company offers service by means of call-reorigination pursuant to an FCC authorization ("Section 214 Switched Voice Authorization") pursuant to Section 214 of the Communications Act and certain relevant FCC decisions. The FCC has determined that call-reorigination service using uncompleted call signaling does not violate United States or international law, but has held that United States companies providing such services must comply with the laws of the countries in which they operate as a condition of such companies' Section 214 Switched Voice Authorizations. The FCC reserves the right to condition, modify or revoke any Section 214 Authorizations and impose fines for violations of the Communications Act or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the clear and explicit telecommunications laws of other countries that are unable to enforce their laws against U.S. carriers. FCC policy provides that foreign governments that satisfy certain conditions may request FCC assistance in enforcing their laws against U.S. carriers. Thirty countries have formally notified the FCC that certain call-reorigination services violate their laws. Only eight of these countries have submitted copies of actual laws to the FCC that declare certain call-reorigination services unlawful. Two of the 30 countries have requested assistance from the FCC in enforcing their prohibitions on call-reorigination within their respective jurisdictions. The FCC has held that it would consider enforcement action against companies based in the United States engaged in call-reorigination by means of uncompleted call signaling in countries where this activity is expressly prohibited. While the Combined Company believes that the FCC has not initiated any action to date to limit the provisions of call-reorigination services, there can be no assurance that it will not take action in the future. Enforcement action could include an order to cease providing call-reorigination services in such country, the imposition of one or more restrictions on the Combined Company, monetary fines or, ultimately, the revocation of the Combined Company's Section 214 Switched Voice Authorization, and could have a material adverse effect on the Combined Company's business, financial condition and results of operations. EMPLOYEES AND CONSULTANTS As of December 31, 1997, CSI had 21 full-time employees and two consultants. As of December 31, 1997, ITC had 14 full-time employees and one consultant. CSI plans to hire additional employees and consultants as may be required to support expansion of the Combined Company's operations and the Combined Company's sales agent network. None of the Combined Company's employees are covered by a collective bargaining agreement. Management believes that the Combined Company's relationship with its employees is good. FACILITIES CSI's executive offices are located at 8 South Nevada Avenue, Colorado Springs, Colorado 80903. The Combined Company leases approximately 11,000 square feet of space under a lease that expires January 31, 1999 with respect to 5,100 square feet, and December 31, 1999 with respect to the remainder. See "Certain Transactions." ITC's executive offices are located at 290 Pratt Road, Meriden, Connecticut 06450. The telecommunications and customer service center for the Combined Company is leased by ITC and located at 110 East Broward Boulevard, Suite 610, Ft. Lauderdale, Florida 33301. LITIGATION In November 1997, WorldCom commenced an action entitled "WorldCom, Inc. v. International Telephone Company d/b/a Interglobal Telephone Company" against ITC in Connecticut state court (Docket No. CV-970407418, Superior Court, J.D. of New Haven) seeking damages of approximately $1.1 million for alleged past due carrier bills. ITC believes it has meritorious defenses to the suit. ITC intends to vigorously defend its position and will attempt to reach a settlement with this carrier. In the ordinary course of business, the Combined Company is a party to several legal proceedings, the outcome of which, singly or in the aggregate, is not expected to be material to the Combined Company's financial position, results of operations or cash flows. The Combined Company intends to aggressively pursue collection of debts, including those owed by a former distributor in Singapore. 46 MANAGEMENT OFFICERS AND DIRECTORS The following table contains the name, age and position with CSI of each executive officer and director of CSI as of the date of this Prospectus.
NAME AGE POSITION WITH CSI - ---- --- ----------------- Robert A. Spade........................ 51 Chief Executive Officer and Chairman of the Board Patrick R. Scanlon..................... 51 President, Chief Operating Officer and Director Daniel R. Hudspeth..................... 35 Chief Financial Officer and Treasurer Philip A. Thomas....................... 52 Vice President and General Manager (upon completion of the ITC Acquisition) Cassandra A. Zajac..................... 26 Vice President of Investor Relations and Secretary Dean H. Cary........................... 49 Director Richard F. Nipert...................... 41 Director
Robert A. Spade has been the Chairman of the Board since March 1994 and CSI's Chief Executive Officer since January 1995. Mr. Spade also served as President of CSI from April 1995 to June 1997 and as the Treasurer CSI from April 1995 to July 1996. He devotes substantially all of his time to the business of CSI. Mr. Spade is a director of MedPlus Corporation, a company that operates a workers' compensation medical clinic and arranges financing for patients. He was a director of World Information Networks On The Net, Inc. ("WIN"), a company that provides Internet access, designs web pages and broadcasts facsimiles via the Internet, from August 1995 to March 1997. From 1994 to 1995, Mr. Spade was an Adjunct Professor of International Corporate Finance with, and was a director of, the International School of Management in Colorado Springs. In 1991, Mr. Spade founded Diamante Properties, Inc. ("Diamante"), a company engaged in commercial real estate. He served as President of Diamante from inception through 1995 and currently serves as its Chairman and Secretary. Mr. Spade graduated from the Johns Hopkins School of Advanced International Studies in 1971 with a Masters Degree, and from University of California, Santa Barbara in 1968 with a B.A. Degree in Economics and Hispanic Civilization. Mr. Spade is fluent in Spanish and Portuguese. Patrick R. Scanlon has been President and Chief Operating Officer of CSI since June 1997 and a director of the Company since January 1996. He also served as Treasurer from June 1997 to December 1997. From May 1991 to June 1996 Mr. Scanlon served as Executive Vice President of BRC Imagination Arts, Inc., a designer and producer of custom exhibits and attractions for world fairs, aquariums, theme parks and visitor centers. Prior to that time, Mr. Scanlon was with Walt Disney Imagineering, the theme park design, engineering, production, and construction division of the Walt Disney Company, for 18 years, most recently as Senior Vice President. Mr. Scanlon is also an owner and partner in a number of real estate ventures, and has served on the Boards of Directors of the Theme Entertainment Association, the Angeles Chorale, and The Learning Company. Mr. Scanlon earned an M.S. Degree in Finance in 1971 from the UCLA Graduate School of Management and a B.A. Degree in Economics from the University of California, Santa Barbara in 1968. Daniel R. Hudspeth has been Chief Financial Officer and Treasurer of CSI since December 1997. From October 1995 to December 1997, Mr. Hudspeth served as Chief Financial Officer and Corporate Secretary of Wireless Telecom, Inc., a company that distributes wireless data products and services for the telecommunications and computer industries. From January 1995 to October 1995, he was Vice President and Corporate Controller of CWE, Inc., a publicly traded computer retail company. From August 1992 to January 1995, Mr. Hudspeth was Vice President of Finance and Administration and Treasurer of OfficeScapes Business 47 Furniture, and from July 1985 to August 1992, he was an Audit Manager of Emerging Business Services for Deloitte & Touche LLP. Mr. Hudspeth is a Certified Public Accountant in Colorado and a member of the Colorado Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He earned his B.S. Degree in Business Administration from Colorado State University in 1985. Philip Thomas will become Vice President-General Manager of CSI upon the closing of this Offering. Mr. Thomas was a co-founder and served as Vice President of Operations of ITC since March 1993. From 1990 until 1993, Mr. Thomas was a partner of Thomas Powell and Associates, a software developer for voice mail systems, automated attendants and international call-reorigination systems. From 1977 until 1990, Mr. Thomas was principal of Thomas Business Systems, Inc., a computer hardware dealer. Mr. Thomas received his H.N.D. Degree in Applied Physics from the Farnborough College of Technology. Cassandra A. Zajac has been CSI's Secretary since June 1996, Vice President of Investor Relations since September 1995 and an employee of CSI since June 1995. From January 1994 to May 1995, Ms. Zajac was a Business Analyst for Amoco Production Company. From June 1992 to December 1993, Ms. Zajac was a licensed real estate agent in the State of Colorado and worked for Woodland Real Estate Better Homes and Gardens. Ms. Zajac was a director of World Information Network ("WIN") from August 1995 to July 1996. Ms. Zajac graduated in 1993 from Colorado State University with a B.S. Degree in Finance and Computer Information Systems. Ms. Zajac is the step-daughter of Mr. Spade. Dean H. Cary has been a director of CSI since January 1997. Since November 1995 he has been an Executive Director of Forval International Telecommunications, Inc., an international long distance carrier based in Japan. From November 1993 to November 1995 he served as Executive Vice President of Viatel, Inc., one of CSI's principal competitors. In 1992 he formed Paragon Management Group, a business engaged in strategic and business planning, and served as its President. From 1988 to 1992 he was the Vice President/General Manager of Metromedia Communications Corp., a U.S. based long distance carrier. He earned a B.A. Degree in Business, Education and Psychology from the University of Minnesota in 1969. Richard F. Nipert has been a director of CSI since November 1996. Since January 1993, Mr. Nipert has been a partner in the law firm of Bright, Gibson and Nipert, P.C. in Denver, Colorado. Mr. Nipert previously practiced law with three other law firms located in Denver. Mr. Nipert practices law primarily in the fields of business and commercial real estate. He earned his J.D. Degree from the University of Southern California in 1980 and a B.A. Degree in Social Ecology from the University of California at Irvine in 1977. BOARD COMMITTEES The Board of Directors maintains a Compensation Committee and an Audit Committee. The Compensation Committee, consisting of Messrs. Nipert and Cary, reviews compensation and option matters and makes recommendations to the Board regarding changes in executive compensation. The Audit Committee, consisting of Messrs. Nipert and Cary, reviews CSI's internal audit controls. COMPENSATION OF DIRECTORS Directors who are also employees of CSI receive no additional compensation for serving as directors. Non-employee directors have received options to purchase shares of Common Stock at the time they commenced service on the Board of Directors. The options are exercisable at the bid price of the Common Stock at the date of grant. The options vest 20% per year over five years from the date of grant. CSI reimburses all of its directors for travel and out-of- pocket expenses in connection with their attendance at meetings of the Board of Directors and for carrying out various board-directed assignments for the benefits of CSI. LIMITATION OF LIABILITY AND INDEMNIFICATION CSI's Articles of Incorporation eliminate the personal liability of its directors to CSI and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. CSI's Bylaws 48 provide that CSI will indemnify its officers and directors to the fullest extent permitted by law. In addition, CSI carries officers' and directors' liability insurance with an annual $1 million aggregate limit. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of CSI pursuant to the foregoing provisions, or otherwise, CSI has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. KEY EMPLOYEES Mark Lyons has been CSI's Director of Sales and Marketing since November 1996. From 1990 to 1996 he worked for Sprint as its Senior Business Services Representative. He previously worked as a Branch Manager for Norwest Bank and First Interstate Bank. He earned a B.S. Degree in Finance from Utah State University in 1983 and has earned graduate credits in telecommunications from the University of Denver. Sean Thomas will become CSI's Director of Business Development in Europe upon the closing of this Offering. Mr. Thomas was a co-founder of ITC in 1993 and served as Vice President of Sales of ITC since November 1996. From 1991 to 1993, Mr. Thomas served as Sales Manager with Connecticut Computer Technologies. Mr. Thomas attended Loyola University in New Orleans. Mr. Thomas is the son of Philip Thomas. Stuart Agranoff has been CSI's Director of Technical Operations since September 1997 and a senior engineer for CSI since January 1996. From 1992 to 1996, Mr. Agranoff worked as an Associate Engineer for Kaman Sciences Corporation. From 1984 to 1992 he served in the United States Navy where he worked as an Aircraft Intermediate Maintenance Department Supervisor and as a Senior Communication/Navigation Technician. Mr. Agranoff earned his degree in Electronics Technology from the University of Phoenix. John Spade has been CSI's Director of Technology and Development since September 1997 and Special Projects Manager since March 1997. He has been an employee of CSI since August 1996. From August 1995 to July 1996, Mr. Spade was Vice President and a director of WIN, an Internet services provider. In 1994, he earned his B.A. degree from Chico State University, where he also taught courses on Economics and the Internet. John Spade is the son of Robert A. Spade. Keith Busch has been CSI's Director of Business Development in Asia since December 1997. Mr. Busch previously served as President of two other call- reorigination providers. From 1996 to 1997 he founded and served as President of American Fone Network, and from 1995 to 1996 he served as President of Rapid Link USA. Mr. Busch also previously worked as the International Sales Manager for Premiere Communications, an international calling card company. He earned his B.A. Degree from the University of Washington in 1991. EXECUTIVE COMPENSATION No executive officer of CSI received total compensation in excess of $100,000 in any of the last three fiscal years. Robert A. Spade, Chief Executive Officer of CSI since 1995, received total salary and bonus of $9,000 in fiscal year 1995 and $48,000 in fiscal year 1996. In fiscal year 1996, CSI granted to Mr. Spade, pursuant to CSI's Non-Qualified Stock Option Plan, options to purchase shares of Common Stock at an exercise price of $ per share, that expire on August 31, 1998, options to purchase shares of Common Stock at an exercise price of $ that expire on October 31, 1999, options to purchase shares of Common Stock at $ per share that expire on July 31, 1999, and options to purchase shares of Common Stock at $ per share that expire on August 29, 2007. The options Mr. Spade received in 1997 represent approximately 5.7% of all options granted to employees in fiscal year 1997. Mr. Spade did not exercise any of his options in fiscal year 1996. Based on the closing high bid price of the Common Stock of $ per share as quoted on the OTC Bulletin Board on , 1998, Mr. Spade's unexercised vested options on that date had no value. 49 EMPLOYMENT AGREEMENTS CSI has entered into an employment agreement with Mr. Spade. Mr. Spade's employment agreement, dated May 1, 1997, provides for a base salary of a minimum of $150,000 which will be increased by 4% annually during the three year term of the agreement. CSI may terminate Mr. Spade's employment only for cause (as defined in the agreement). Mr. Spade also is entitled to receive an annual bonus of up to 65% of his salary pursuant to any cash bonus plan adopted by the Board of Directors. He has the option to convert any cash bonus to stock options having an exercise price equal to the price of CSI's Common Stock on the first day of the fiscal year on which a bonus is calculated. Pursuant to the agreement, Mr. Spade has agreed not to compete with CSI for a period of three years following termination of the agreement. CSI has entered into an employment agreement with Mr. Scanlon. Mr. Scanlon's employment agreement, dated October 31, 1997, provides for a base salary of a minimum of $140,000, which may be increased to reflect the market rate for persons in comparable positions. CSI may terminate Mr. Scanlon's employment only for cause (as defined in the agreement). Mr. Scanlon also is entitled to receive an annual bonus pursuant to any cash bonus plan adopted by the Board of Directors and stock options. He has the option to convert any cash bonus to stock options having an exercise price of CSI's Common Stock on the first day of the fiscal year on which a bonus is calculated. Pursuant to the agreement, Mr. Scanlon has agreed not to compete with CSI for a period of three years following termination of the agreement. CSI has entered into an employment agreement with Mr. Hudspeth. Mr. Hudspeth's employment agreement, dated December 1997, provides for a base salary of a minimum of $110,000 which may be increased to reflect the market rate for persons in comparable positions. CSI may terminate Mr. Hudspeth's employment only for cause (as defined in the agreement). Mr. Hudspeth also is entitled to receive an annual bonus pursuant to any cash bonus plan adopted by the Board of Directors and stock options. He has the option to convert any cash bonus to stock options having an exercise price of CSI's Common Stock on the first day of the fiscal year on which a bonus is calculated. Pursuant to the agreement, Mr. Hudspeth has agreed not to compete with CSI for a period of three years following termination of the agreement. Upon the completion of the ITC Acquisition, CSI will enter into one year employment agreements with Philip Thomas and Sean Thomas which provide for base salaries of $115,000 and $65,000, respectively. CSI may terminate Messrs. Thomas and Thomas only for cause (as defined in the agreements). Messrs. Thomas and Thomas have each agreed not to compete with the Company for a period of six months following termination of the respective agreements. STOCK OPTION PLAN In 1995 the Board of Directors adopted, and the shareholders approved, an Incentive Stock Option Plan and a Non-qualified Stock Option Plan, which in January 1998 the shareholders approved combining into one stock option plan (the "Stock Option Plan"). The Stock Option Plan allows for the issuance of stock options to officers, employees, and directors, and to consultants and advisors who render bona fide services to CSI not in connection with the issuance of securities in a capital-raising transaction. CSI has authorized 3,000,000 shares of Common Stock for issuance upon the exercise of options granted under this plan. The aggregate fair market value (measured at the time the options are granted) of all Common Stock issued pursuant to exercise of Incentive Stock Options under the Stock Option Plan may not exceed $100,000. The Incentive Stock Options granted under the Stock Option Plan are intended to qualify as "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code. The Non-Qualified Stock Options granted under the Stock Option Plan are not intended to meet the requirements of Section 422 of the Internal Revenue Code. The plans are administered by the Compensation Committee. As of January 31, 1998, Non-Qualified Stock Options to purchase up to shares of Common Stock have been granted under the Stock Option Plan. No Incentive Stock Options have been granted under the Stock Option Plan. In January 1998, CSI terminated its Stock Bonus Plan. The exercise price and period for the options granted under the plans are as determined by the Board of Directors or committee thereof. For Incentive Stock Options, the exercise price cannot be below the fair market 50 value of the underlying Common Stock at the time the options are granted, and in the case of holders of over 10% of the combined voting power of all classes of voting stock of CSI, the exercise price cannot be below 110% of the fair market value of the underlying Common Stock at the time the options are granted. The exercise period cannot exceed ten years under either plan. Options may not be transferred other than by will and the laws of descent and distribution without the express consent of the Board of Directors or a committee thereof. The exercise of such options is subject to the satisfaction of any applicable withholding tax or other liabilities and any listing, registration, or qualification with any regulatory authority of the Shares of Common Stock to be issued upon exercise of such options. Unless the Common Stock issuable upon exercise of the options has been registered with the Commission and any applicable state regulatory authorities, each optionee represents, by accepting such shares, that such optionee is acquiring such shares for investment and not for resale or distribution. The Board of Directors has reserved the right to alter, suspend, or discontinue the plans, but may not, without the affirmative vote of a majority of shares of capital stock then entitled to vote, do any of the following: abolish the committee then administering the plans, if any, change the qualification of its members, or withdraw the plans from its supervision; make any material change to the class of persons eligible to receive options; increase the total number of shares of Common Stock reserved for issuance under the plans; increase the number of shares for which an option is exercisable to any one employee; extend the term of the plan or the maximum option periods; decrease the minimum exercise price; or materially increase the benefits accruing to plan participants. 51 PRINCIPAL SHAREHOLDERS The following table sets forth, as of January 31, 1998, the number of and percentage of outstanding shares of Common Stock owned of record or beneficially by (i) each director and executive officer of the Combined Company; (ii) each person who owns beneficially more than five percent (5%) of the Company's outstanding Common Stock; and (iii) all directors and executive officers as a group. Unless otherwise indicated, the address of each person listed is the Combined Company's address, 8 South Nevada Avenue, Colorado Springs, Colorado 80903.
PERCENT OF COMMON STOCK(1) --------------------------------------- SHARES AFTER OFFERING BENEFICIALLY BEFORE AND ITC NAME AND ADDRESS OWNED OFFERING(2) ACQUISITION - ---------------- ------------ ----------- -------------- DIRECTORS AND EXECUTIVE OFFICERS: Robert A. Spade(3).................. Patrick R. Scanlon(4)............... Cassandra A. Zajac(5)............... Daniel R. Hudspeth.................. Dean H. Cary(6)..................... 71 Burnwood Lane Upper Saddle River, NJ 07458 Richard F. Nipert(7)................ 1140 Grant Street, Suite 100 Denver, CO 80203 Philip A. Thomas(8)................. All directors and executive officers as a group (6 persons)(9).......... OTHER SHAREHOLDERS: James L. Williams(10)............... 123 Vientos Road Camarillo, CA 93010
- -------- *Less than 1%. (1) Calculated pursuant to Rule 13d-3(d) of the Exchange Act. Under Rule 13d- 3(d), shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed. (2) Shares outstanding before offering include 113,600 Bridge Shares to be issued immediately prior to this Offering. (3) Of such shares, are held of record by Mr. Spade or his spouse and shares are issuable upon exercise of options held by Mr. Spade. (4) Of such shares, are held of record and shares are issuable upon exercise of options held by Mr. Scanlon. (5) Of such shares, are held of record and shares are issuable upon exercise of options held by Ms. Zajac. (6) Of such shares, none are held of record and are issuable upon exercise of options held by Mr. Cary. (7) Of such shares, are held of record and are issuable upon exercise of options held by Mr. Nipert. (8) Mr. Thomas will receive shares on the first anniversary of the closing of this Offering in connection with the ITC Acquisition. (9) Of such shares, are held of record and shares are issuable upon exercise of options. (10) Of such shares, are held of record and shares are issuable upon exercise of warrants. 52 CERTAIN TRANSACTIONS Effective September 14, 1995, Redden Dynamics, Inc. ("Redden") was merged with and into CSI. Shareholders of Redden received a total of shares of Common Stock of CSI in connection with the merger. At the time of the merger, Redden had no operations, minimal assets and no liabilities. CSI undertook the merger in order to enable it to have a sufficient number of shareholders to permit CSI to commence trading of its Common Stock on the OTC Bulletin Board, which occurred effective March 18, 1996. To acquire control of Redden in order to facilitate the merger, Robert Spade purchased approximately 80% of Redden's outstanding common stock in May 1995 from certain shareholders of Redden for $34,500. Mr. Spade was then elected President and a director of Redden. In the merger, Mr. Spade exchanged the Redden shares for shares of Common Stock. Immediately after the merger, Mr. Spade transferred shares of such Common Stock to 21 persons, including the following: Mr. Nipert ( shares); Mr. Scanlon ( shares); and Ms. Zajac ( shares). CSI has received periodic advances from Robert Spade. On April 30, 1996, CSI issued an unsecured note payable to Mr. Spade in the principal amount of $160,000, payable on May 31, 1999 and bearing interest at 10% to reflect advances made through that date. As of January 31, 1998, the total amount of outstanding advances from Mr. Spade was $149,000. The building in which CSI has its principal executive office is owned by a partnership, the managing general partner of which is owned by Robert Spade and his wife. CSI paid the partnership $37,592 and $87,259 in lease expense for the fiscal years ended April 30, 1996 and 1997, respectively. Minimum lease payments for the fiscal years ended April 30, 1998, 1999 and 2000 are approximately $137,000, $118,000 and $55,000 reflecting the increase in leased space from 5,100 square feet in fiscal year 1996 to 11,000 square feet commencing September 1996. See "Business--Facilities" and the Financial Statements. In August 1996, CSI issued shares of Common Stock and granted options to purchase shares of Common Stock at $ per share to certain minority shareholders of WIN in exchange for their shares of WIN Common Stock. As a result of this exchange, CSI became a shareholder of WIN. CSI then transferred the WIN shares to WIN for certain technology and equipment owned by WIN. Ms. Zajac and certain other family members of Mr. Spade, who were shareholders of WIN, received options to purchase and shares of Common Stock respectively, in the WIN transaction. The Common Stock was valued at $ per share in the WIN transaction. Following the WIN transaction, John Spade, who was an officer, director and a principal shareholder of WIN, became an employee of CSI. John Spade is the son of Robert Spade. Robert Spade was a director of WIN at the time of the transaction and therefore this transaction may have been at terms less favorable than one with a third party. See "Management." On January 10, 1997, CSI granted Dean H. Cary, a Director of CSI, options to purchase shares of Common Stock at $ per share in connection with consulting services provided by Mr. Cary to CSI. The options vest 20% per year over five years from the date of grant; provided that vesting may be accelerated if the trading price of the Common Stock exceeds certain levels ranging from $ to $ per share. In October 1997, CSI incurred an obligation to pay $50,000 and in January 1998 granted options to purchase shares of Common Stock at an exercise price of $ per share to Mr. Cary in consideration of business consulting services. In November 1997, CSI entered into an agreement in principle with ITC and its stockholders, Lynch Family, LLC, Sean Thomas and Philip Thomas. Upon consummation of this Offering and the ITC Acquisition, Lynch Family, LLC and Messrs. Thomas and Thomas will receive an aggregate of $3.1 million in cash and 207,000 shares of Common Stock based on an assumed initial offering price of $10.00 per Share to be issued on the first anniversary of the closing of this Offering. Furthermore, John Lynch, a manager of Lynch Family, LLC, will enter into a one year consulting agreement with the Combined Company under which he will receive $125,000, 53 and Philip Thomas and Sean Thomas will enter into one year employment agreements with the Combined Company under which they will receive annual salaries of $115,000 and $65,000, respectively. See "Management." In December 1997, CSI paid $178,000 to ITC in consideration of consulting services provided by John Lynch, a manager of Lynch Family, LLC, in negotiating a carrier agreement on behalf of CSI. Richard F. Nipert, a Director of CSI, is a partner of the law firm of Bright, Gibson and Nipert P.C., which from time to time has provided legal services to CSI. Fees paid to the firm by CSI were less than 5% of the law firm's gross revenue for each fiscal year in which they have represented CSI. Other than as set forth above, the transactions described above were on terms that CSI's Board of Directors believed to be fair to CSI and no less favorable to CSI than terms that could have been obtained from an unrelated party. The Combined Company has adopted a policy that future transactions between the Company and its officers, directors and 5% or more shareholders are subject to approval by a majority of the disinterested directors of the Company. Any such transactions will be on terms believed to be no less favorable than could be obtained from unaffiliated parties. TRANSACTIONS WITH PROMOTERS CSI believes that Messrs. Robert Spade and James L. Williams may be considered "founders" or "promoters" of CSI. In addition to the transactions referenced in "Certain Transactions," Mr. Spade purchased shares of Common Stock from CSI at various times from April 1993 to December 1994 at prices ranging from $ per share to $ per share. Mr. Williams purchased shares of Common Stock from CSI at various times from April 1993 to June 1995 at prices ranging from $ to $ per share. Mr. Williams also acquired shares from Mr. Spade at various times from August 1993 to December 1994. Mr. Williams has received approximately $38,400 from CSI as compensation for services in connection with equity and debt financings by CSI. In addition, Mr. Williams loaned $40,000 to CSI and received a 10% convertible note in October 1996 that he converted into shares of Common Stock in January 1997. In connection with the note, Mr. Williams received warrants to purchase shares of Common Stock at $ per share. In June 1997, Mr. Williams purchased an additional 10% convertible note with a $20,000 principal amount. In connection therewith, he received a warrant to purchase shares of Common Stock at an exercise price of $ per share. In October 1997, Mr. Williams purchased shares of Common Stock for $ per share in a private placement. CSI used the proceeds from the sales of Common Stock discussed above to fund its operations. CSI believes that these transactions were conducted on terms that were fair and reasonable to CSI and at prices that approximated the fair market value of the Common Stock at the time of the transactions. See "Principal Shareholders." 54 DESCRIPTION OF SECURITIES The following description of CSI's securities is qualified in its entirety by reference to CSI's Articles of Incorporation and Bylaws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. As of December 31, 1997, the Common Stock was held of record by 621 shareholders. See "Additional Information." COMMON STOCK CSI is authorized to issue 25,000,000 shares of Common Stock, no par value. As of the date of this Prospectus, the Company had shares of Common Stock issued and outstanding. Holders of Common Stock are each entitled to cast one vote for each share held of record on all matters presented to shareholders. Cumulative voting is not allowed; hence, the holders of a majority of the outstanding Common Stock can elect all directors. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor and, in the event of liquidation, to share pro rata in any distribution of the Company's assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will be paid in the foreseeable future. See "Dividend Policy." Holders of Common Stock do not have preemptive rights to subscribe to additional shares if issued by the Company. Except for shares which were purchased with a note, which is outstanding, all of the outstanding shares of Common Stock are fully paid and non-assessable and all of the Shares of Common Stock offered hereby will be, upon issuance, fully paid and non-assessable. PREFERRED STOCK CSI is authorized to issue up to 5,000,000 shares of Preferred Stock, no par value. As of the date of this Prospectus, no shares of Preferred Stock were outstanding. The Board of Directors has the authority to issue Preferred Stock in one or more series and to fix the number of shares constituting any such series and the preferences, limitations, and relative rights, including dividend rights, and liquidation preferences of the Shares constituting any series, without any further vote or action by the shareholders of the Company. The issuance of Preferred Stock by the Board of Directors could adversely affect the rights of holders of Common Stock. The potential issuance of Preferred Stock may have the effect of delaying, deterring, or preventing a change in control of the Company, may discourage bids for the Common Stock at a premium over the market price of the Common Stock and may adversely affect the market price of, and the voting and other rights of the holders of, Common Stock. The Company has no current intention to issue shares of Preferred Stock. DESCRIPTION OF INDEBTEDNESS Mandatorily Redeemable Convertible Promissory Notes. In December 1997, CSI issued Bridge Notes in an aggregate principal amount of $2,840,000. Interest on the Bridge Notes is payable at a rate of 10% per annum, semi-annually. The aggregate outstanding principal amount of the Bridge Notes is due five days following the closing of this Offering. Robert Spade, the Chairman and Chief Executive Officer of CSI, and Patrick Scanlon, the President and Chief Operating Officer of CSI, each guaranteed payment of the Bridge Notes for up to $750,000. For each $100,000 of principal amount of the Bridge Notes, the holder will receive 4,000 Bridge Shares upon the closing of this Offering, based on a $10.00 per share initial offering price. Such Bridge Shares are offered by this Registration Statement. See "Selling Securityholders and Plan of Distribution." 10% Notes. From October 1996 through July 1997, CSI issued unsecured convertible promissory notes (the "10% Notes") in an aggregate principal amount of $415,000. Interest on the 10% Notes is payable at a rate of 10% per annum, semi-annually, commencing on March 31, 1997 and continuing until the maturity date, which 55 is two years from the respective dates of investment. The aggregate outstanding principal amount of the 10% Notes is due on the maturity date. The 10% Notes may be converted into shares of Common Stock at a conversion price of 90% of the average high bid and low asked price of the Common Stock on the day before conversion. CSI may prepay any of the 10% Notes in full at any time without penalty, and any note holders may cause CSI to repay such holder's note at the end of each six-month period that any principal is outstanding upon 30 days written notice. As of January 31, 1998, $385,000 principal amount of 10% Notes have been converted. For each $10,000 of principal amount of the 10% Notes, the holder received warrants to purchase shares of Common Stock of CSI at an exercise price equal to the closing bid price of the Common Stock on the date of the 10% Notes. 15% Notes. From February 1997 through March 1997, CSI issued $85,000 aggregate principal amount of the 15% Notes. Interest on the 15% Notes, and the aggregate outstanding principal amount of the 15% Notes, are payable on the maturity date, which is six months after the date of each Note. For each $10,000 of principal amount of 15% Notes, the holder received warrants to purchase shares of Common Stock at an exercise price equal to the closing bid price of the Common Stock on the date of the 15% Notes. REGISTRATION RIGHTS CSI has agreed to grant to two holders of shares of the Common Stock (the "Rights Holders") certain "piggy-back" registration rights under the Securities Act with respect to such shares. Under the terms of agreements between the Company and these Rights Holders, if CSI proposes to register any of its Common Stock under the Securities Act for its own account or for the account of other security holders (other than pursuant to this Offering and certain excluded registration forms), the Rights Holders are entitled to notice of such registration and to include in such registration shares of Common Stock that they hold, subject to cutback limitations that may be imposed by the underwriter of any underwritten public offering of the Common Stock. The Rights Holders are not required to bear any expenses incurred by CSI in connection with registering the Rights Holders' shares, but underwriting fees, discounts, or commissions relating to the sale of each Rights Holder's shares are borne by the applicable Rights Holder. CSI is not required to include any of the shares with registration rights in a registration if the holders of such shares would be able to sell such shares without registration pursuant to Rule 144 of the Securities Act or otherwise. None of the Rights Holders will participate in this Offering. CSI has agreed to grant to Lynch Family, LLC, Philip Thomas and Sean Thomas (collectively, the "Former ITC Stockholders") certain "demand" registration rights under the Securities Act with respect to the Common Stock (the "ITC Acquisition Stock") they will receive in connection with the ITC Acquisition. Under the terms of the Stock Purchase Agreement, CSI is obligated, after the first anniversary of the completion of the ITC Acquisition, upon the demand of the Former ITC Stockholders, to file within 30 days of such demand (subject to an extension in the event CSI is then involved in certain transactions not in the ordinary course of business) a registration statement on Form S-3 covering the ITC Acquisition Stock. The Former ITC Stockholders are not required to bear any expenses incurred by CSI in connection with registering the ITC Acquisition Stock. TRANSFER AGENT American Securities Transfer & Trust, Inc. is the Transfer Agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering and after giving effect to the ITC Acquisition, CSI will have shares of Common Stock outstanding ( shares if the Representative's over-allotment option with respect to the Common Stock is exercised in full). The 1,100,000 shares of Common Stock sold in this Offering will be freely transferable and tradeable without restriction or further registration under the Securities Act except for any shares purchased or held by any "affiliate" of CSI, which will be subject to the resale limitation of Rule 144 promulgated under the Securities Act. 56 Of CSI's approximately million shares of Common Stock outstanding immediately prior to the date of this Prospectus, million are "restricted securities" as that term is defined under Rule 144 of the Securities Act. Restricted securities may be sold in open market transactions in compliance with Rule 144 if the conditions of such rule are satisfied. Under Rule 144 any person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least one year is entitled to sell, within any three- month period, a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of CSI's Common Stock ( shares immediately after this Offering) or (ii) the average weekly trading volume during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are also subject to certain requirements relating to the manner of sale, notice and availability of current public information about CSI. A person who is not deemed to have been an affiliate of CSI at any time during the 90 days immediately preceding the sale and whose restricted shares have been fully paid for two years since the later of the date they were acquired from CSI or the date they were acquired from an affiliate of CSI may sell such restricted shares under Rule 144(k) without regard to the limitations described above. Up to 110,000 additional shares of Common Stock may be purchased by the Representative after the first anniversary date of this Prospectus through the exercise of the Representative's Warrants. Any and all shares of Common Stock purchased upon exercise of the Representative's Warrant may be freely tradeable, provided that CSI satisfies certain securities registration and qualification requirements in accordance with the terms of the Representative's Warrants. See "Underwriting." CSI, its officers and directors and persons known by CSI to be greater than 2% shareholders, have agreed not, directly or indirectly, to sell, offer to sell, contract to sell, grant any option for the sale of, otherwise dispose of, or register or announce the sale or Offering of any shares of capital stock of CSI beneficially owned by them or any securities beneficially owned by them convertible into, or exercisable or exchangeable for capital stock of CSI for a period of 270 days after the date of this Prospectus without the prior written consent of the Representative. Furthermore, the holders of the Selling Securityholders' Warrants have agreed not to sell or offer for sale the share of Common Stock underlying the Selling Securityholders' Warrants for a period of 180 days after this Prospectus. Sales of substantial numbers of shares of Common Stock pursuant to Rule 144 or otherwise could adversely affect the market price of the Common Stock, should any such market develop. 57 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part, the Underwriters named below (the "Underwriters"), have severally agreed, through Cohig & Associates, Inc., the Representative of the Underwriters, to purchase from CSI, and CSI has agreed to sell the Underwriters, the aggregate number of shares of Common Stock set forth opposite their respective names.
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Cohig & Associates, Inc................................... Total................................................... 1,100,000 =========
The Common Stock are being offered by the several Underwriters, subject to prior sale, when, as, and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part and subject to approval of certain legal matters by counsel and to various other conditions. The nature of the Underwriters' obligation is such that they must purchase all of the Common Stock offered hereby if any are purchased. CSI has granted to the Representative a separate option, exercisable within 45 days from the effective date of the Registration Statement, to purchase an additional number of shares of Common Stock as will be equal to not more than 15% each of the total number of shares of Common Stock initially offered at the public offering price less the underwriting discount of $ per share of Common Stock. The Representative may exercise such option only for the purpose of covering any over-allotments in the sale of the Common Stock offered hereby. The Underwriters have advised CSI that the Underwriters propose to offer the Common Stock directly to the public at the public offering prices set forth on the cover page of this Prospectus, and to selected dealers at that price, less a concession of not more than $ per share of Common Stock. After the public offering, the price to the public and the concession may be changed by the Underwriters. The Underwriters have informed CSI that they do not expect to sell any Common Stock offered hereby to accounts over which they exercise discretionary authority in excess of 5% of the Offering. CSI will pay the Representative a non-accountable expense allowance of 3% of the offering proceeds, which will include proceeds from the over-allotment option to the extent exercised. CSI has paid to the Representative $40,000 against the non-accountable expense allowance. The Representative's expenses in excess of the non-accountable expense allowance will be borne by the Representative. To the extent that the expenses of the Representative are less than the non-accountable expense allowance, the excess shall be deemed to be compensation to the Representative. CSI has granted the Representative a right of first refusal with respect to additional public or private offerings proposed to be undertaken by CSI for a period of 12 months after the date of this Prospectus. CSI and the Underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the 1933 Act, and, if such indemnifications are unavailable or insufficient, CSI and the Underwriters have agreed to damage contribution agreements between them based upon relative benefits received from this Offering and relative fault resulting in such damages. CSI also has agreed with the Underwriters that CSI will use its best efforts to cause a registration statement pursuant to Section 12(g) of the Exchange Act to become effective no later than the date of this Prospectus. Although there is no contractual agreement or other obligation, officers, directors and affiliates of CSI might be sold a portion of the Common Stock, but only on the same terms and conditions as will be offered to the public. Such persons will be required to represent that purchases by such persons, if any, will be for investment purposes only with no present intent to sell. 58 The Underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the 1934 Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transaction permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. Neither the Company nor the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. The foregoing does not purport to be a complete statement of the terms and conditions of the Underwriting Agreement, copies of which are on file at the offices of the Representative, CSI and the Commission. See "Additional Information." The Common Stock is traded infrequently in limited quantities on the OTC Bulletin Board under the symbol CSYG. The public offering prices of the Common Stock was determined by negotiations between the Representative and CSI. Among the factors considered in determining the public offering prices were the prospects for CSI, an assessment of the industry in which CSI operates, the assessment of management, the number of shares of Common Stock offered, and the price that purchasers of such securities might be expected to pay given the nature of CSI and the general condition of the securities markets at the time of the Offering. Accordingly, the offering price set forth on the cover page of this Prospectus should not be considered an indication of the actual value of CSI or the Common Stock. REPRESENTATIVE'S WARRANTS At the closing of the Offering, CSI will sell and deliver to the Representative for an aggregate purchase price of $100, warrants (the "Representative's Warrants"), consisting of 110,000 warrants to purchase 110,000 shares of Common Stock (the "Representative's Warrants") at a price that is equal to 125% of the public offering price for the Common Stock. The Representative's Warrants will be non-transferable for a period of one year following the date of this Prospectus except to the Underwriters, other selling group members, and their respective officers or partners. The Representative's Warrants contain anti-dilution provisions for stock splits, recombinations and reorganizations, a one-time demand registration provision (at CSI's expense), piggyback registration rights (both of which expire five years from the date of this Prospectus), a cashless exercise provision, and will otherwise be in form and substance satisfactory to the Representative. The Representative's Warrants will be exercisable during the four-year period commencing one year after the date of this Prospectus. LEGAL MATTERS The validity of the Securities offered hereby will be passed upon for CSI by Parcel, Mauro & Spaanstra, P.C., Denver, Colorado and for the Representative by Berliner Zisser Walter & Gallegos, P.C., Denver, Colorado. 59 EXPERTS The financial statements of CSI as of April 30, 1997 and for the years ended April 30, 1996 and 1997 included in this prospectus, have been audited by Stockman Kast Ryan & Scruggs, P.C., independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The financial statements of ITC as of October 31, 1997 and for the year ended December 31, 1996 and the ten months ended October 31, 1997 included in this prospectus, have been audited by Richard A. Eisner & Company, LLP., independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing ADDITIONAL INFORMATION CSI has filed with the Securities and Exchange Commission (the "Commission"), 450 Fifth Street, N.W., Washington, D.C. 20549, a Registration Statement on Form SB-2 under the Securities Act with respect to the Securities offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and exhibits and schedules thereto. For further information with respect to CSI and the Securities, reference is made to the Registration Statement, including exhibits and schedules thereto, which may be inspected without charge at, and copies of which may be obtained at prescribed rates from, the public reference facilities of the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of all or any part of the Registration Statement may be obtained from the Public Reference Section of the Commission in Washington, D.C. upon the payment of the fees prescribed by the Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy statements, and other information that will be filed by the Company. 60 INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER ------ COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED).................... F-2 Pro Forma Condensed Combined Balance Sheet at of October 31, 1997...... F-3 Pro Forma Condensed Combined Statement of Operations for the year ended April 30, 1997........................................................ F-4 Pro Forma Condensed Combined Statement of Operations for six months ended October 31, 1997................................................ F-5 Notes to Pro Forma Condensed Combined Financial Statements............. F-6 HISTORICAL FINANCIAL STATEMENTS Independent Auditors' Report........................................... F-7 Balance Sheets as of April 30, 1997 and October 31, 1997 (unaudited)... F-8 Statements of Operations for the year ended April 30, 1997 and six months ended October 31, 1996 and 1997 (unaudited).................... F-9 Statements of Shareholders' Equity (Deficiency) for the year ended April 30, 1997 and six months ended October 31, 1997 (unaudited)...... F-10 Statements of Cash Flows for the year ended April 30, 1997 and six months ended October 31, 1996 and 1997 (unaudited).................... F-11 Notes to Financial Statements.......................................... F-12 INTERNATIONAL TELEPHONE COMPANY HISTORICAL FINANCIAL STATEMENTS Report of Independent Auditors......................................... F-20 Balance Sheet as of October 31, 1997................................... F-21 Statements of Operations for the ten months ended October 31, 1997 and year ended December 31, 1996.......................................... F-22 Statements of Stockholders' Equity for the ten months ended October 31, 1997 and year ended December 31, 1996................................. F-23 Statements of Cash Flows for the ten months ended October 31, 1997 and year ended December 31, 1996.......................................... F-24 Notes to Financial Statements.......................................... F-25
F-1 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma condensed combined financial statements have been prepared to give effect to the private placement of promissory notes, completion of the public offering and the acquisition of International Telephone Company (ITC) described below. On December 30, 1997, Communications Systems International, Inc. (the Company) completed a private placement of mandatorily redeemable convertible promissory notes (the "Bridge Notes") totalling $2,840,000. The holders of the Bridge Notes are also entitled to receive shares valued at $1,136,000, the number of shares to be issued by the Company will be based on the public offering per share price. The Company also has entered into a proposed agreement to acquire all of the stock of ITC for $3,100,000 cash and the issuance of shares of the Company's common stock valued at $2,070,000, the number of shares to be issued by the Company will be based on the public offering per share price. The pro forma condensed combined financial statements for the year ended April 30, 1997 and the six months ended October 31, 1997 assume the Bridge Notes and related shares were issued and the proposed acquisition was consummated on May 1, 1996 and May 1, 1997, respectively. In management's opinion, all material adjustments necessary to reflect the transactions are presented in the pro forma adjustments for the year ended April 30, 1997 and the six months ended October 31, 1997 which are based upon available information and the currently agreed upon terms of the proposed acquisition. The pro forma condensed combined financial statements do not purport to present the Company's financial position or results of operations that would have occurred had the transactions, to which pro forma effect is given, been consummated as of the dates or for the periods indicated and do not purport to project the Company's financial position or results of operations at any future date or for any future period, and should be read in conjunction with the separate financial statements of the Company and ITC. F-2 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEETS (UNAUDITED) OCTOBER 31, 1997
HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA CSI ADJUSTMENTS CSI ITC ADJUSTMENTS COMBINED ---------- ----------- ---------- ---------- ----------- ----------- ASSETS Current assets: Cash.................... $ 143,632 $ 2,516,550 (a) $ 468,182 $ 847,994 $ 7,895,000 (b) $ 4,943,457 (2,192,000)(a) (2,840,000)(c) 122,281 (b) (1,550,000)(d) Restricted cash......... -- -- -- -- 1,325,000 (b) 1,325,000 Accounts receivable-- net.................... 1,092,111 -- 1,092,111 1,045,061 (178,047)(e) 1,959,125 Other................... 263,081 (178,047)(a) 85,034 56,424 -- 141,458 ---------- ----------- ---------- ---------- ----------- ----------- Total current assets.... 1,498,824 146,503 1,645,327 1,949,479 4,774,234 8,369,040 Property and equipment-- net.................... 453,090 -- 453,090 640,167 -- 1,093,257 Deferred offering costs.................. 122,281 323,450 (a) 445,731 -- (122,281)(b) -- (323,450)(c) Deposits................ 203,820 250,000 (a) 453,820 130,250 (225,000)(d) 359,070 Intangible assets....... -- -- -- -- 4,683,358 (d) 4,683,358 ---------- ----------- ---------- ---------- ----------- ----------- Total assets........... $2,278,015 $ 719,953 $2,997,968 $2,719,896 $ 8,786,861 $14,504,725 ========== =========== ========== ========== =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable........ $1,540,935 $(1,091,810)(a) $ 449,125 $2,455,784 $ (65,505)(e) $ 2,839,404 Accrued commissions..... 264,361 -- 264,361 145,000 -- 409,361 Accrued expenses and customer deposits...... 401,912 (116,755)(a) 285,157 317,083 -- 602,240 Accrued income taxes payable................ -- -- -- 7,227 -- 7,227 Payables to former shareholders........... 242,619 -- 242,619 -- -- 242,619 Debt to related party... 148,761 -- 148,761 -- 884,284 (d) 1,033,045 Capitalized lease obligations............ -- -- -- 281,385 -- 281,385 Notes payable........... 933,292 (808,292)(a) 125,000 2,686 -- 127,686 ---------- ----------- ---------- ---------- ----------- ----------- Total current liabilities............ 3,531,880 (2,016,857) 1,515,023 3,209,165 818,779 5,542,967 ---------- ----------- ---------- ---------- ----------- ----------- Long-term liabilities... 850,190 2,840,000 (a) 2,044,800 291,804 (2,840,000)(c) 291,804 (795,200)(a) 795,200 (c) (850,190)(a) ---------- ----------- ---------- ---------- ----------- ----------- Shareholders' equity (deficiency): Common stock............ 2,750,285 -- 2,750,285 12 9,220,000 (b) 14,008,486 795,200 (b) 1,243,001 (d) (12)(d) Additional paid-in capital................ -- -- -- 988 (988)(d) -- Common stock subscribed............. -- 795,200 (a) 795,200 -- (795,200)(b) -- Notes receivable from shareholder............ (35,000) -- (35,000) -- -- (35,000) Accumulated deficit..... (4,576,721) 747,000 (a) (3,829,721) (782,073) (1,118,650)(c) (5,060,913) (112,542)(e) 782,073 (d) Treasury stock, at cost................... (242,619) -- (242,619) -- -- (242,619) ---------- ----------- ---------- ---------- ----------- ----------- Total shareholders' equity (deficiency)... (2,104,055) 1,542,200 (561,855) (781,073) 10,012,882 8,669,954 ---------- ----------- ---------- ---------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)........... $2,278,015 $ 719,953 $2,997,968 $2,719,896 $ 8,786,861 $14,504,725 ========== =========== ========== ========== =========== ===========
See notes to pro forma condensed combined financial statements. F-3 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE YEAR ENDED APRIL 30, 1997
HISTORICAL HISTORICAL CSI ITC YEAR ENDED TWELVE MONTHS APRIL 30, ENDED PRO FORMA PRO FORMA 1997 APRIL 30, 1997 ADJUSTMENTS(G) COMBINED ----------- -------------- -------------- ----------- REVENUE................. $11,865,412 $7,867,078 $ -- $19,732,490 COST OF REVENUE......... 7,754,897 5,498,553 -- 13,253,450 ----------- ---------- --------- ----------- GROSS MARGIN............ 4,110,515 2,368,525 -- 6,479,040 ----------- ---------- --------- ----------- OPERATING EXPENSES Sales and marketing..... 2,080,020 848,012 -- 2,928,032 General and administrative......... 1,302,272 1,626,845 -- 2,929,117 Technical and developmental.......... 722,111 -- -- 722,111 Depreciation............ 102,983 76,231 -- 179,214 Amortization............ -- -- 936,672 (f) 936,672 ----------- ---------- --------- ----------- Total operating expenses............. 4,207,386 2,551,088 936,672 7,695,146 ----------- ---------- --------- ----------- LOSS FROM OPERATIONS.... (96,871) (182,563) (936,672) (1,216,106) OTHER INCOME (EXPENSE)-- Net.................... (162,602) 100,238 -- (62,364) ----------- ---------- --------- ----------- NET LOSS................ $ (259,473) $ (82,325) $(936,672) $(1,278,470) =========== ========== ========= =========== NET LOSS PER SHARE...... $ $ =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING............ =========== ===========
See notes to pro forma condensed combined financial statements. F-4 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE SIX MONTHS ENDED OCTOBER 31, 1997
SIX MONTHS ENDED OCTOBER 31, 1997 ---------------------- HISTORICAL HISTORICAL PRO FORMA PRO FORMA CSI ITC ADJUSTMENTS(G) COMBINED ---------- ---------- -------------- ----------- REVENUE................. $6,371,549 $5,054,014 $ -- $11,425,563 COST OF REVENUE......... 3,807,066 4,549,470 -- 8,356,536 ---------- ---------- --------- ----------- GROSS MARGIN............ 2,564,483 504,544 -- 3,069,027 ---------- ---------- --------- ----------- OPERATING EXPENSES Sales and marketing..... 1,270,857 432,260 -- 1,703,117 General and administrative......... 1,326,260 856,530 -- 2,182,790 Technical and developmental.......... 388,663 -- -- 388,663 Depreciation............ 67,808 45,000 -- 112,808 Amortization............ -- -- 468,336 (f) 468,336 ---------- ---------- --------- ----------- Total operating expenses............. 3,053,588 1,333,790 468,336 4,855,714 ---------- ---------- --------- ----------- LOSS FROM OPERATIONS.... (489,105) (829,246) (468,336) (1,786,687) OTHER INCOME (EXPENSE)-- Net.................... (87,905) 91,307 (178,047)(e) (109,140) 65,505 (e) ---------- ---------- --------- ----------- NET LOSS................ $ (577,010) $ (737,939) $(580,878) $(1,895,827) ========== ========== ========= =========== NET LOSS PER SHARE...... $ $ ========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING............ ========== ===========
See notes to pro forma condensed combined financial statements. F-5 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following pro forma adjustments give effect to (i) the private placement of the Bridge Notes as of October 31, 1997, (ii) the completion of the offering and the proposed acquisition of ITC as of October 31, 1997, and (iii) the proposed acquisition of ITC as of the beginning of each period presented for the statements of operations: (a) Reflects the private placement of promissory notes of $2,840,000, net of a discount of $795,200 for the value of common stock to be issued, debt offering costs of $323,450, and the net proceeds of $2,516,550. Reflects $2,192,000 of the net proceeds used for the repayment of notes payable of $850,190 and accounts payable of $1,091,810 and for deposits of $250,000. Reflects the forgiveness of $808,292 of notes payable and $116,755 of accrued interest, offset by prepaid consulting fees of $178,047 incurred to obtain such forgiveness, resulting in a gain of $747,000. The common stock to be issued to the holders of the Bridge Notes, valued at $1,136,000 based on the public offering per share price, which value has been discounted by 30% to $795,200 as a result of the limitations on the transferability of the shares subsequent to their issuance. (b) Reflects the estimated net proceeds of the offering of $9,220,000, of which $1,325,000 is to be placed in escrow to satisfy the terms of the proposed ITC acquisition agreement. Reflects the reclassification of deferred offering costs of $122,281, which have been included as a reduction in determining the estimated net proceeds of the offering. Reflects the issuance of the common stock valued at $795,200 to the holders of the Bridge Notes. (c) Reflects the repayment of the Bridge Notes of $2,840,000. Reflects the loss totalling $1,118,650 from the early retirement of the Bridge Notes resulting from the write-off of the debt placement offering costs of $323,450 and the full and immediate amortization of the discount on the Bridge Notes of $795,200. (d) Reflects the proposed acquisition of ITC based on currently agreed upon terms which includes: cash payments of $1,325,000, excluding deposits previously made, to the ITC shareholders; the commitment to issue an estimated number of shares of stock valued at $1,243,001 to the ITC shareholders, which value is based on the public offering price and discounted by 30% as a result of the timing of the issuance of such stock and the limitations on its transferability; accrual of an estimated payment to the ITC shareholders of $884,284; reclassification of deposits given to ITC of $225,000; and, the elimination of ITC's historical equity balances in connection with purchase accounting. The recorded values of ITC's assets and liabilities are believed to be reasonable estimates of their fair values. The number of shares to be issued to, and the amount of cash to be paid from escrow to ITC shareholders, is ultimately dependent upon the resolution of certain ITC liabilities; the acquisition price, however, is not expected to be adjusted. (e) Reflects the elimination of intercompany transactions and balances. (f) Reflects the increase in amortization expense due to the amortization of the intangible assets recorded in the acquisition of ITC. The intangible assets are amortized over a five-year period using the straight-line method. (g) Does not reflect pro forma adjustments for the following material nonrecurring charges and credit which result directly from the Bridge Notes and which will be included in the Company's statements of operations within the twelve months subsequent to such placement: an extraordinary gain of $747,000 resulting from the forgiveness of debt and accrued interest; interest expense, excluding amortization of the discount on the Bridge Notes, of $284,000 for the twelve months subsequent to the placement, respectively; and, amortization to interest expense of the discount on the Bridge Notes and the deferred placement offering costs of $1,118,650 for the twelve months subsequent to the placement, respectively. F-6 INDEPENDENT AUDITORS' REPORT Communications Systems International, Inc. Colorado Springs, Colorado We have audited the accompanying balance sheet of Communications Systems International, Inc. as of April 30, 1997, and the related statements of operations, stockholders' equity (deficiency) and cash flows for each of the years in the two-year period ended April 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Communications Systems International, Inc. as of April 30, 1997, and the results of its operations and its cash flows for each of the years in the two-year period ended April 30, 1997 in conformity with generally accepted accounting principles. Stockman Kast Ryan & Scruggs, P.C. Colorado Springs, Colorado June 2, 1997 (August 11, 1997 as to the matters discussed in the tenth paragraph of Note 4; September 17, 1997 as to the matters discussed in the fourth paragraph of Note 10; October 9, 1997 as to the matters discussed in the second paragraph of Note 3; October 31, 1997 as to the matters discussed in the last paragraph of Note 4, the first paragraph of Note 10, and Note 13; and, December 30, 1997 as to the matters discussed in the third paragraph of Note 3 and Note 14) F-7 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. BALANCE SHEETS
APRIL 30, OCTOBER 31, 1997 1997 ----------- ----------- (UNAUDITED) ASSETS CURRENT ASSETS Cash................................................. $ 146,686 $ 143,632 Accounts receivable--net............................. 1,053,233 1,092,111 Prepaid expenses and other current assets............ 83,962 263,081 ----------- ----------- Total current assets................................. 1,283,881 1,498,824 PROPERTY AND EQUIPMENT--Net (Note 2)................. 457,791 453,090 DEFERRED OFFERING COSTS (Notes 12 and 14)............ 83,939 122,281 DEPOSITS (Note 13)................................... 120,880 203,820 ----------- ----------- TOTAL ASSETS....................................... $ 1,946,491 $ 2,278,015 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES Accounts payable (including bank overdraft of $85,035 at October 31)...................................... $ 1,287,187 $ 1,540,935 Accrued commissions.................................. 145,352 264,361 Accrued expenses and customer deposits (Note 10)..... 88,940 401,912 Payables to former shareholders (Note 4)............. -- 242,619 Debt to related party (Note 8)....................... 148,761 148,761 Current portion of notes payable (Note 3)............ 1,944,896 933,292 ----------- ----------- Total current liabilities.......................... 3,615,136 3,531,880 ----------- ----------- NOTES PAYABLE (Note 3)............................... -- 850,190 ----------- COMMITMENTS AND CONTINGENCIES (Notes 4, 8 and 10) SHAREHOLDERS' EQUITY (DEFICIENCY) (Notes 4, 5 and 6) Preferred stock, no par value--5,000,000 shares authorized, none issued or outstanding Common stock, no par value--25,000,000 shares authorized; 9,765,590 and 10,047,091 shares issued and outstanding at April 30, 1997 and October 31, 1997.. 2,366,066 2,750,285 Notes receivable from shareholder.................... (35,000) (35,000) Accumulated deficit.................................. (3,999,711) (4,576,721) Treasury stock, at cost.............................. -- (242,619) ----------- ----------- Total shareholders' equity (deficiency)............ (1,668,645) (2,104,055) ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)...................................... $ 1,946,491 $ 2,278,015 =========== ===========
See notes to financial statements. F-8 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF OPERATIONS
SIX MONTH YEAR ENDED APRIL 30, PERIOD ENDED OCTOBER ------------------------ ------------------------ 1996 1997 1996 1997 ----------- ----------- ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUE.................... $ 6,741,022 $11,865,412 $5,530,847 $6,371,549 COST OF REVENUE............ 5,962,609 7,754,897 3,608,465 3,807,066 ----------- ----------- ---------- ---------- GROSS MARGIN............... 778,413 4,110,515 1,922,382 2,564,483 ----------- ----------- ---------- ---------- OPERATING EXPENSES Sales and marketing........ 1,572,747 2,080,020 876,630 1,270,857 General and administrative (Note 10)................. 1,257,964 1,302,272 608,689 1,326,260 Technical and developmental............. 394,410 722,111 294,512 388,663 Depreciation and amortization.............. 57,843 102,983 42,219 67,808 ----------- ----------- ---------- ---------- Total operating expenses................ 3,282,964 4,207,386 1,822,050 3,053,588 ----------- ----------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS................ (2,504,551) (96,871) 100,332 (489,105) INTEREST INCOME (EXPENSE)-- Net....................... (19,389) (162,602) (76,142) (87,905) ----------- ----------- ---------- ---------- NET INCOME (LOSS).......... $(2,523,940) $ (259,473) $ 24,190 $ (577,010) =========== =========== ========== ========== NET INCOME (LOSS) PER SHARE..................... $ (.30) $ (.03) $ .00 $ (.06) =========== =========== ========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING............... 8,394,451 9,414,238 9,388,938 9,996,455 =========== =========== ========== ==========
See notes to financial statements. F-9 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)
NOTES COMMON STOCK COMMON RECEIVABLE TREASURY STOCK ---------------------- STOCK FROM ACCUMULATED ------------------- SHARES AMOUNT SUBSCRIBED SHAREHOLDER DEFICIT SHARES AMOUNT TOTAL ---------- ---------- ---------- ----------- ----------- -------- --------- ----------- BALANCES, May 1, 1995............ 4,901,040 $ 530,929 $ 503,437 $ -- $(1,216,298) -- $ -- $ (181,932) Issuance of subscribed stock.................. 1,687,263 503,437 (503,437) -- -- -- -- Sale of stock for cash and note............... 934,000 542,000 -- (5,000) -- -- -- 537,000 Stock issued for services............... 657,910 312,775 -- -- -- -- -- 312,775 Stock issued in acquisition............ 818,774 -- -- -- -- -- -- -- Net loss................ -- -- -- -- (2,523,940) -- -- (2,523,940) ---------- ---------- --------- -------- ----------- -------- --------- ----------- BALANCES, April 30, 1996......... 8,998,987 1,889,141 -- (5,000) (3,740,238) -- -- (1,856,097) Sale of stock for cash.. 61,500 111,200 -- -- -- -- -- 111,200 Stock issued in exchange for note............... 60,000 30,000 -- (30,000) -- -- -- -- Stock issued for services............... 140,000 34,224 -- -- -- -- -- 34,224 Stock issued in acquisition of affiliate.............. 179,076 49,993 -- -- -- -- -- 49,993 Conversion of notes and accrued interest to stock.................. 326,027 251,508 -- -- -- -- -- 251,508 Net loss................ -- -- -- -- (259,473) -- -- (259,473) ---------- ---------- --------- -------- ----------- -------- --------- ----------- BALANCES, April 30, 1997......... 9,765,590 2,366,066 -- (35,000) (3,999,711) -- -- (1,668,645) Unaudited: Conversion of notes and accrued interest to stock.................. 213,986 104,467 -- -- -- -- -- 104,467 Sale of stock for cash.. 908,641 499,752 -- -- -- -- -- 499,752 Purchase of common stock.................. -- -- -- -- -- (841,126) (462,619) (462,619) Retirement of treasury stock.................. (400,000) (220,000) -- -- -- 400,000 220,000 -- Net loss................ -- -- -- -- (577,010) -- -- (577,010) ---------- ---------- --------- -------- ----------- -------- --------- ----------- BALANCES, October 31, 1997 (unaudited)........... 10,488,217 $2,750,285 $ -- $(35,000) $(4,576,721) (441,126) $(242,619) $(2,104,055) ========== ========== ========= ======== =========== ======== ========= ===========
See notes to financial statements. F-10 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
SIX MONTH YEAR ENDED APRIL 30, PERIOD ENDED OCTOBER 31, ---------------------- --------------------------- 1996 1997 1996 1997 ----------- --------- ------------ ------------ (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net income (loss)....... $(2,523,940) $(259,473) $ 24,190 $ (577,010) Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: Stock issued or subscribed for services and interest........... 312,775 38,566 -- -- Depreciation and amortization.......... 57,843 102,983 42,219 67,808 Changes in operating assets and liabilities: Accounts receivable.... (904,447) 52,565 138,973 (38,878) Other assets........... (15,393) (115,783) (21,274) (162,767) Accounts payable and accrued expenses...... 2,711,390 911,463 222,116 685,904 ----------- --------- ----------- ------------ Net cash provided by (used in) operating activities............. (361,772) 730,321 406,224 (24,943) ----------- --------- ----------- ------------ INVESTING ACTIVITIES Purchases of property and equipment.......... (222,813) (218,668) (177,581) (63,107) Increase in deposits for acquisition............ -- (25,000) -- (100,000) ----------- --------- ----------- ------------ Net cash used in investing activities... (222,813) (243,668) (177,581) (163,107) ----------- --------- ----------- ------------ FINANCING ACTIVITIES Proceeds from issuance of notes............... 7,000 405,000 100,000 95,000 Proceeds from the issuance of stock...... 537,000 111,200 225,417 499,752 Repayment of notes payable................ (78,530) (818,418) (533,573) (151,414) Increase in deferred offering costs......... -- (83,989) -- (38,342) Payment for treasury stock.................. -- -- -- (220,000) Net proceeds (repayments) from issuances of debt to related party.......... 94,915 (11,154) -- - ----------- --------- ----------- ------------ Net cash provided by (used in) financing activities............. 560,385 (397,361) (208,156) 184,996 ----------- --------- ----------- ------------ NET INCREASE (DECREASE) IN CASH................ (24,200) 89,292 20,487 (3,054) CASH, Beginning of period................. 81,594 57,394 57,394 146,686 ----------- --------- ----------- ------------ CASH, End of period..... $ 57,394 $ 146,686 $ 77,881 $ 143,632 =========== ========= =========== ============ SUPPLEMENTAL CASH FLOW INFORMATION Interest paid.......... $ 7,879 $ 126,066 $ 56,892 $ 28,610 SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES Stock issued or subscribed for services and interest.............. $ 312,775 $ 38,566 -- -- Conversion of accounts payable to notes payable............... 1,938,227 761,617 -- -- Issuance of stock in exchange for note..... 5,000 30,000 -- -- Stock issued in acquisition of affiliate (Note 4).... -- 49,993 -- -- Conversion of notes and accrued interest to stock (Note 4)........ -- 274,342 -- $ 104,467 Purchase of treasury stock................. -- -- -- 242,619
See notes to financial statements. F-11 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF AND FOR THE SIX MONTHS ENDED OCTOBER 31, 1996 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Communications Systems International, Inc. (the Company) is a rapidly growing provider of international long distance telecommunications services principally in South America, Europe, the Pacific Rim, Central America and South Africa. The Company emphasizes innovative software solutions and technical expertise to provide higher quality, lower cost alternative routing of telecommunications for its customer base. The Company's telecommunications center is a fiber optic facility which directs international telephone and fax traffic and has a broad spectrum of Internet capabilities. The Company purchases long distance time increments from established international telecommunication carriers and derives its revenue by providing competitively priced international telecommunications services combined with enhanced technical capabilities and services not typically available from local telecommunications providers. The Company's principal service is reverse origination, in which a customer seeking to make an international call is connected to the United States telephone system by a computer signal that triggers a call to be originated in the United States and routed back to the caller who is then connected to the international destination by a second call also originating in the United States. In fiscal 1997, the Company's management took actions to increase its revenue through increased calling volume and, as a result, the Company has been able to negotiate more favorable rates with its long distance telephone carriers enabling the Company to reduce its cost of revenues per unit of service sold. These steps have enabled the Company to significantly improve its gross margins and improve its results of operations during the year ended April 30, 1997 and the six-month period ended October 31, 1997. In fiscal 1998, in order to raise additional working capital and satisfy certain obligations, the Company issued mandatorily redeemable convertible promissory notes in a private offering (see Note 14). Also in fiscal 1998, management believes it will be successful in raising a significant amount of equity capital in a public offering (see Note 12) and intends to use the proceeds for repayment of the mandatorily redeemable convertible promissory notes and to complete a pending acquisition (see Note 13) as well as repay existing obligations, working capital, development of new product and service offerings and enhancement and expansion of existing products and services. Accounts Receivable--Accounts receivable are presented net of an allowance for doubtful accounts which is based on management's estimate of uncollectible accounts. At April 30, 1997 and October 31, 1997, the allowance for doubtful accounts was $186,489 and $318,693, respectively. Property and Equipment--Property and equipment are recorded at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the respective assets (generally five to seven years). Use of Estimates--The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation--Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. See Note 5. F-12 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Per Share Amounts--The net loss per share is based upon the weighted average of common shares outstanding during the period; the effect of outstanding stock options and warrants is antidilutive. The net income per share amount for the six-month period ended October 31, 1996 is de minimis; the effect of the outstanding stock options and warrants on the computation of fully diluted net income per share is less than $.01. Interim Financial Statements--The financial statements of the Company for the six months ended October 31, 1996 and 1997 are unaudited. In management's opinion, the financial statements reflect all adjustments necessary for a fair presentation of the results for these periods, all adjustments being of a normal and recurring nature. The Company's interim financial statements may not be indicative of the results of operations for a full year. 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
APRIL 30, OCTOBER 31, 1997 1997 --------- ----------- Equipment.............................................. $574,966 $636,337 Furniture and fixtures................................. 61,601 61,601 Leasehold improvements................................. 13,651 15,387 -------- -------- Total................................................ 650,218 713,325 Less accumulated depreciation and amortization......... 192,427 260,235 -------- -------- Property and equipment--net............................ $457,791 $453,090 ======== ========
3. NOTES PAYABLE Notes payable consist of the following:
APRIL 30, OCTOBER 31, 1997 1997 ---------- ----------- Unsecured note payable to a long distance carrier, bearing interest at 10%, payable in monthly installments of $40,000 due January 2001, repaid December 1997; see below and Note 14............... $1,485,909 $1,458,292 Unsecured note payable to a long distance carrier, bearing interest at 12%, payable in varying monthly installments ranging from $60,000 to $123,117, repaid December 1997; see below and Note 14........ 323,987 200,190 Unsecured notes payable, bearing interest at 15%, principal and interest due March 1998.............. 85,000 85,000 Unsecured convertible notes payable bearing interest at 10% which is payable semi-annually on March 31 and September 30; the outstanding principal is due in 1998, however, the notes are callable at the option of the noteholders at any interest payment date............................................... 50,000 40,000 ---------- ---------- Total............................................. 1,944,896 1,783,482 Current portion..................................... 1,944,896 933,292 ---------- ---------- Long-term portion of notes payable.................. $ -- $ 850,190 ========== ==========
On October 9, 1997, the Company entered into an agreement with the long distance carrier to which the Company had a note payable with an outstanding balance of $1,458,292 as of October 31, 1997. The agreement provided that the carrier would accept a payment of $650,000 in full satisfaction of the remaining principal balance on the note and all accrued and unpaid interest thereon ($116,755 at October 31, 1997). The Company was also obligated to pay a fee of $178,047 to the company which the Company intends to acquire (see Note 13) for assistance in obtaining this agreement. F-13 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) On December 30, 1997 the Company issued promissory notes totalling $2,840,000, due December 30, 1998 or five days after the closing of the proposed public offering (see Notes 12 and 14). A portion of the proceeds from the issuance of such notes was used to satisfy the reduced liability of $650,000 to the carrier and to repay the note with the outstanding balance of $200,190 at October 31, 1997 and, accordingly, such amounts have been classified as long-term as of October 31, 1997. The Company will recognize a gain of $747,000 in December 1997 upon the payment of the $650,000 liability. As of April 30, 1997, all of the Company's obligations are classified as current liabilities due to their repayment terms or the Company's failure to make timely principal and interest payments. 4. SHAREHOLDERS' EQUITY The Company offered up to 1,000,000 shares of its no par common stock at a purchase price of $.50 per share under a private placement memorandum dated January 31, 1995. At May 1, 1995, 185,000 shares had been subscribed. During the year ended April 30, 1996, the offering was fully subscribed. In September 1995, the Company's shareholders authorized a 10-for-1 stock split of the Company's common stock. The split was effective for shares issued and shares subscribed as of March 1, 1995. See also Note 11. In September 1995, in an effort to increase the number of shareholders of the Company's common stock, the Company's shareholders approved a plan of merger to acquire all of the outstanding shares of Redden Dynamics Corporation (Redden) for $34,500 cash and 818,774 shares of the Company's common stock. Under the plan of merger, the shareholders of Redden received one share of the Company's common stock in exchange for each 13.5 shares of Redden stock. Effective as of the date of the merger, all shares of Redden were cancelled, the assets of Redden became assets of the Company and Redden ceased to exist. Redden's only recorded asset consisted of $11,050 of organizational costs. Redden had no liabilities and had no revenues or expenses since inception. Subsequent to the merger, the Company determined that Redden's assets were of no value to the Company. Accordingly, no amounts have been recognized for the issuance of the common stock in connection with the merger of Redden. During the year ended April 30, 1996, the Company issued 657,910 shares of its common stock in exchange for financial and technological consulting services. The cost of the services provided of $312,775 has been charged to operations. During the year ended April 30, 1997, the Company sold 61,500 shares for $2.00 per share and received $111,200 after offering costs of $11,800. In August 1996, the Company acquired the net assets of an affiliated company through the issuance of 179,076 shares of the Company's common stock to certain shareholders of the affiliate and granted options to purchase 97,000 shares of the Company's common stock (see Note 5) to certain other shareholders of the affiliate. The assets acquired totalling $72,749 and liabilities assumed totalling $22,756 were recorded by the Company at the affiliate's net book value. Pro forma information combining the results of operations of the Company and the affiliate as if the acquisition had occurred at the beginning of fiscal 1996 and 1997 has not been presented as such information would not differ significantly from the reported amounts. During the year ended April 30, 1997, the Company sold convertible notes totalling $320,000. The notes, bearing interest at 10%, are convertible into shares of the Company's common stock at a conversion price equal to 90% of the average of the bid and ask price on the day prior to conversion. As of April 30, 1997, the holders of notes totalling $270,000 principal amount had converted their notes and accrued interest of $4,342 into 326,027 shares of stock; upon conversion, the Company charged the remaining unamortized deferred financing costs of $22,834 relating to such notes against the recorded amount of common stock. During the six months ended October 31, 1997, the Company sold an additional $95,000 principal amount of the convertible notes, and F-14 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) noteholders converted notes totalling $105,000 principal amount and accrued interest of $175 into 213,986 shares of stock. Upon conversion, the Company charged unamortized deferred financing costs of $708 relating to such notes against the recorded amount of common stock. During the year ended April 30, 1997, the Company issued 140,000 shares of its common stock in exchange for financial and technological consulting services. The cost of the services provided of $34,224 has been charged to operations. The Company has notes receivable from a shareholder totalling $35,000 which resulted from the issuance of stock, bear interest at 10% and are payable on demand. In August 1997, the Company entered into settlement agreements with two former employees who were also shareholders of the Company to repurchase 841,126 shares of its common stock from such individuals for $.55 per share, or a total price of $462,619. The agreements require payments by the Company of $220,000 no later than September 12, 1997, $110,000 no later than February 11, 1998, and $132,619 no later than August 11, 1998. As of October 31, 1997, the Company has made payments totalling $220,000 to these individuals and received 400,000 shares of its common stock which have been retired. As of October 31, 1997, the Company has recorded a liability for the remaining payments totalling $242,619 and treasury stock for the shares that it is committed to purchase. In a private placement in September and October 1997, the Company sold 908,641 shares of its common stock for $499,752, or $.55 per share, the proceeds of which were partially used to repurchase the shares described in the preceding paragraph. 5. STOCK OPTIONS Under the terms of the Company's non-qualified stock option plan, options to purchase shares of the Company's common stock are to be granted at prices to be determined by the Board of Directors. The options' expiration date may not be more than 10 years from the date of the grant. The aggregate number of shares of the Company's common stock which may be issued upon the exercise of options granted under the plan shall not exceed 3,000,000. The Company has granted the following stock options:
EXERCISE NUMBER OF PRICE PER EXPIRATION OPTIONS SHARE DATE --------- ----------- ---------- April 30, 1996.............................. 899,150 $.50--$2.00 1998--2006 April 30, 1997.............................. 884,200 $.50--$2.88 1998--2007 October 31, 1997............................ 954,800 $.20--$2.88 1998--2007
Information with respect to options granted under the plan is as follows: Outstanding at May 1, 1995......................................... -- Granted.......................................................... 899,150 Exercised........................................................ -- Expired or cancelled............................................. -- -------- Outstanding at April 30, 1996...................................... 899,150 Granted.......................................................... 440,650 Exercised........................................................ (60,000) Expired or cancelled............................................. (395,600) -------- Outstanding at April 30, 1997...................................... 884,200 Granted.......................................................... 317,700 Exercised........................................................ -- Expired or cancelled............................................. (247,100) -------- Outstanding at October 31, 1997.................................... 954,800 ========
F-15 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date for awards in the years ended April 30, 1996 and 1997 consistent with the provisions of SFAS No. 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below:
APRIL 30, APRIL 30, 1996 1997 ----------- --------- Net loss--as reported............................... $(2,524,000) $(259,000) Net loss--pro forma................................. (2,724,000) (575,000) Net loss per share--as reported..................... (.30) (.03) Net loss per share--pro forma....................... (.32) (.06)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended April 30, 1996 and 1997; expected volatility of 132%; risk-free interest rate of 6% and expected lives of three to ten years. 6. WARRANTS During the year ended April 30, 1996, the Company issued warrants in connection with common stock in exchange for financial services. The warrants provide for the purchase of 150,000 shares of the Company's common stock at prices ranging from $1.50 to $3.50, and expire in 2000 and 2001. In connection with the issuance of the convertible and 15% promissory notes (see Note 3), the Company also is committed to deliver to the noteholders 58,500 warrants to purchase shares of the Company's common stock. The exercise price of the warrants is equal to the bid price of such stock on the date the note was executed and ranges from $0.27 to $1.38 per share; the warrants expire in 1998 and 1999. 7. INCOME TAXES The tax effects of temporary differences to significant portions of deferred taxes are as follows:
APRIL 30, 1997 ---------- Deferred tax asset-- Net operating loss carryforwards................................. $1,330,000 Less valuation allowance......................................... 1,330,000 ---------- $ -- ==========
As of April 30, 1997, the Company's net operating loss carryforwards of approximately $3,400,000 will begin expiring in the year 2009. The carryforwards will be available for the reduction of future income tax liabilities. As of April 30, 1997, the Company has recorded a valuation allowance to reduce the existing deferred tax asset to an amount that is more likely than not to be realized. The valuation allowance increased by $860,000 and $60,000 during the years ended April 30, 1996 and 1997, respectively. The utilization of approximately $540,000 of tax loss carryforwards is limited to approximately $80,000 each year as a result of an ownership change in the Company (as defined by Section 382 of the Internal Revenue Code of 1986, as amended), which occurred in 1995. The amount of the remaining carryforwards that can be used in any given year may be limited in the event of additional future changes in the ownership of the Company. F-16 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 8. RELATED PARTY TRANSACTIONS The Company leases office space from a partnership in which the Company's principal shareholder owns a general partnership interest. Rental expense under such leases totalled $37,592 and $87,259 for the years ended April 30, 1996 and 1997, respectively. Future annual minimum lease payments required under such leases are as follows as of April 30, 1997: Fiscal year ending April 30: 1998............................................................ $136,633 1999............................................................ 118,101 2000............................................................ 54,822 -------- Total......................................................... $309,556 ========
The Company receives periodic advances from its principal shareholder. At April 30, 1997 and October 31, 1997, the Company had an unsecured note payable of $148,761 to its principal shareholder, payable on May 31, 1999 and bearing interest at 10%. 9. MAJOR CUSTOMERS, SUPPLIERS AND FOREIGN MARKETS The Company's major markets are currently in Argentina, Brazil, Europe and South Africa. As a result, the Company's operations may be adversely affected by significant fluctuations in the value of the U.S. dollar against certain foreign currencies, the enactment of exchange controls, or foreign governmental or regulatory restrictions on the transfer of funds. The Company currently prices all its products and services in terms of U.S. dollars. Significant fluctuations in the value of the U.S. dollar in relation to currencies in countries where the Company conducts operations can greatly affect the competitive price position of the Company's products and services. The Company's distributors in Argentina and Brazil generated revenues (as a percentage of the Company's total revenues) as follows:
YEAR ENDED APRIL 30, ------------- 1996 1997 ----- ----- Argentina.................................................... 49% 56% Brazil....................................................... 14 10
The Company's ability to provide its telephone services is heavily dependent upon the agreements the Company has with its long distance telephone carriers. The Company's long distance services were provided by various carriers as follows:
YEAR ENDED APRIL 30, ------------- 1996 1997 ----- ----- Carrier A.................................................... 39% 59% Carrier B.................................................... 49 23 Other carriers............................................... 12 18
10. COMMITMENTS AND CONTINGENCIES In October 1997, the Company entered into a release and settlement agreement with one of its carriers, pursuant to which the carrier has agreed to accept payment of $391,800 for usage charges for the period February 1996 through August 1997 and $150,000 as a security deposit to ensure payment of future usage charges. The carrier also agreed, upon receipt of the Company's payment on December 30, 1997, to release the Company from its minimum usage commitment shortfall and early termination charges which totalled $3,651,300. The Company also concurrently entered into an agreement for minimum annual usage, as discussed in the last paragraph of this note. F-17 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In September 1996, the Company entered into a consulting and royalty agreement to acquire the rights of to a switching system which is installed at customer locations. Under the terms of the agreement, the Company is required to pay the developer a monthly royalty equal to 4% of the Company's gross collected revenues related to the system. In addition, the Company is also required to provide monthly funding for the installation of two systems. In the event that the Company fails to provide such funds and installation is prevented or delayed by more than sixty days, the royalty payment to the developer is increased to 6%. The Company has the option to buy out the royalty obligation for $1,500,000 prior to September 1997; after September 1997, the buyout amount is the greater of $2,500,000 or an amount equal to three times the aggregate royalty payments for the first twelve months of the agreement. In addition, for each installation, the Company agrees to pay the developer $1,500 if such installation produces gross revenues between $10,000 and $20,000 in the first full billing month, and $3,000 if such revenues exceed $20,000. The developer has agreed to provide ongoing maintenance, support and consulting while the system is in operation at a rate of $4,000 per month through September 1, 1997, and $5,200 thereafter. The agreement is in effect for as long as the system is operational until September 1, 2006, unless earlier terminated. The Company has employment agreements with certain of its officers which provide for annual salaries totalling $400,000 and expire in 1999 and 2000. One of the agreements requires annual increases of 4%. In fiscal year 1998, the Company entered into a settlement agreement with one of its former officers which provides for payments totalling $188,000 through January 1998. Such amount has been reflected as a general and administrative expense for the six months ended October 31,1997. The Company is subject to a $100,000 claim by a manufacturer from which the Company received telecommunications equipment. The Company believes that the equipment is not suitable for its intended purpose and that the manufacturer misrepresented certain matters pertaining to this equipment. The Company has offered to return the equipment in exchange for a release of the manufacturer's claim and the manufacturer has rejected the Company's offer. The Company has not made a provision for any loss that might result from the outcome of this matter; however, the Company believes that the ultimate resolution of this claim will not have a material adverse effect on its financial position or results of operations. The Company has agreements with certain of its carriers which provide for guaranteed rates and minimum annual usage. The agreements expire through 1999 and require minimum annual usage as follows: Fiscal year ending April 30: 1998............................................................. $3,700,000 1999............................................................. 1,450,000 ---------- Total.......................................................... $5,150,000 ==========
11. PROPOSED STOCK SPLIT In December 1997, the Company's Board of Directors authorized a reverse split of the Company's common stock (not to exceed 1-for-30) whereby the Company will issue one share of common stock in exchange for a number of shares yet to be determined. The authorization for the reverse split is subject to approval by the Company's shareholders. All references to numbers of shares, options and warrants and per share amounts, including exercise prices, in the accompanying financial statements and related notes have not been restated to reflect any potential reverse stock split. 12. PROPOSED PUBLIC OFFERING The Company is planning a public offering of its common stock in 1998, the net proceeds from which are expected to be used to complete the acquisition described in Note 13, to repay the debt described in Note 14, for working capital, development of new product and service offerings, and enhancement and expansion of existing products and services. F-18 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 13. PENDING ACQUISITION The Company has entered into an agreement to acquire all of the outstanding stock of another telecommunications company which provides services similar to that of the Company. The purchase price of $5,170,000 is to be satisfied by the payment of $3,100,000 cash and the issuance of shares of the Company's common stock valued at $2,070,000 (before any discount) based on the public offering per share price in the Company's proposed public offering (see Note 12). The agreement provides that $1,325,000 of the cash payment will be placed into an escrow account to satisfy any potential claims against the selling shareholders, and for the shares of the Company's common stock to be issued to the selling shareholders one year after the acquisition is completed to ensure compliance with the specific performance provisions of the agreement. Included in deposits in the accompanying balance sheets at April 30, 1997 and October 31, 1997 are deposits totalling $25,000 and $125,000, respectively, which are nonrefundable and to be credited against the purchase price. The Company made an additional deposit of $100,000 on December 30, 1997 with a portion of the proceeds received from the issuance of the mandatorily redeemable convertible promissory notes (see Note 14). The acquisition is expected to occur upon closing of the Company's proposed public offering. 14. MANDATORILY REDEEMABLE CONVERTIBLE PROMISSORY NOTES The Company issued mandatory redeemable convertible promissory notes totalling $2,840,000 on December 30, 1997 in a private placement offering. The notes, which bear interest at 10% and are payable semiannually, are due one year from the date of issuance or five days after the closing of the proposed public offering, whichever is earlier. The notes are collateralized by a first security interest on all unpledged assets of the Company and a second security interest on all assets subject to a prior lien. The notes are personally guaranteed as to $1,500,000 of principal and interest by two of the Company's officers and directors ($750,000 guaranteed by each, severally). The net proceeds from the issuance of the notes were primarily used to satisfy the Company's obligations to carriers (see Note 3), to pay the consulting fee incurred in connection with obtaining the reduction in an obligation to a carrier (see Note 3), and to make an additional deposit for the Company's pending acquisition (see Note 13). The Company is to file a registration statement for a public offering that meets certain conditions by February 28, 1998; if the filing is not made by the required date, the notes become freely convertible. The notes otherwise are convertible into the Company's common stock after nine months at a 50% discount to the average of the closing bid price for the immediately preceding 20 trading days. The holders of the converted shares have certain registration rights. As additional consideration for purchasing the notes, if the public offering is (a) not completed within nine months of the closing of the offering, the noteholder is to receive 30,000 shares of the Company's common stock for each $100,000 of principal or (b) completed, the noteholder will receive a certain number of shares valued at $40,000 based on the proposed public offering price per share. The Company also issued to the placement agent 284,000 warrants to purchase shares of the Company's common stock. The warrants are exercisable at 125% of proposed public offering price per share; if no offering occurs within one year from the closing of the offering of the notes, the exercise price is reduced to 50% of the closing bid price, as defined above. F-19 INDEPENDENT AUDITORS' REPORT To the Board of Directors International Telephone Company Meriden, Connecticut We have audited the accompanying balance sheet of International Telephone Company (the "Company") as of October 31, 1997 and the related statements of operations, changes in stockholders' equity and cash flows for the ten months ended October 31, 1997 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of International Telephone Company, at October 31, 1997, and the results of its operations and its cash flows for the ten months ended October 31, 1997 and the year ended December 31, 1996 in accordance with generally accepted accounting principles. As discussed in Note G[2], one of the Company's carriers has initiated litigation against the Company for collection of approximately $1.1 million. Richard A. Eisner & Company, LLP New York, New York December 12, 1997 F-20 INTERNATIONAL TELEPHONE COMPANY BALANCE SHEET OCTOBER 31, 1997 ASSETS Current assets: Cash and cash equivalents (Notes B[1] and D)................... $ 848,000 Accounts receivable (net of allowance for doubtful accounts of $25,000)...................................................... 1,045,000 Other current assets........................................... 57,000 ----------- Total current assets......................................... 1,950,000 Furniture and equipment (net of accumulated depreciation of $87,000) (Notes B[4] and C)..................................... 640,000 Security deposits................................................ 130,000 ----------- $ 2,720,000 =========== LIABILITIES Current liabilities: Loan payable (Note D).......................................... $ 3,000 Accounts payable............................................... 2,463,000 Accrued expenses............................................... 167,000 Accrued commissions............................................ 145,000 Customer advances.............................................. 150,000 Equipment lease obligations--current portion (Note E).......... 281,000 ----------- Total current liabilities.................................... 3,209,000 Equipment leases obligations, less current portion (Note E)...... 292,000 ----------- 3,501,000 ----------- Commitments and contingencies (Note G) STOCKHOLDERS' EQUITY Common stock--$.01 par value, 1,200 shares authorized, 1,200 shares issued and outstanding Additional paid-in capital..................................... 1,000 Accumulated deficit............................................ (782,000) ----------- Total stockholders' equity................................... (781,000) ----------- $ 2,720,000 ===========
See notes to financial statements F-21 INTERNATIONAL TELEPHONE COMPANY STATEMENT OF OPERATIONS
TEN MONTHS ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, 1997 1996 ----------- ------------ Operating revenue: Telecommunication services (Notes B[2] and H)..... $ 8,054,000 $ 7,603,000 ----------- ----------- Operating expenses: Cost of telecommunication services (Note B[3]).... 6,790,000 5,070,000 Selling expenses (Note B[3])...................... 715,000 1,099,000 General and administrative expenses............... 1,205,000 1,022,000 Officers salaries................................. 256,000 493,000 ----------- ----------- 8,966,000 7,684,000 ----------- ----------- Loss from operations before other income (expense).. (912,000) (81,000) Other income (expense): Miscellaneous..................................... 101,000 Consulting fee.................................... 113,000 Loss on sale of equipment......................... (22,000) Interest income................................... 28,000 12,000 Interest expense.................................. (57,000) (21,000) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAX PROVISION........... (850,000) 11,000 Income tax provision (Note F)....................... 0 4,000 ----------- ----------- NET INCOME (LOSS)................................... $ (850,000) $ 7,000 =========== ===========
See notes to financial statements F-22 INTERNATIONAL TELEPHONE COMPANY STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
COMMON STOCK 1,200 SHARES AUTHORIZED ---------------- RETAINED STOCKHOLDERS' NUMBER OF ADDITIONAL EARNINGS EQUITY SHARES PAID-IN (ACCUMULATED (CAPITAL ISSUED AMOUNT CAPITAL DEFICIT) DEFICIENCY) --------- ------ ---------- ------------ ------------- Balance--January 1, 1996................... 1,200 $ 0 $1,000 $ 61,000 $ 62,000 Net income for the year ended December 31, 1996................... 7,000 7,000 ----- --- ------ --------- --------- Balance--December 31, 1996................... 1,200 0 1,000 68,000 69,000 Net loss for the ten months ended October 31, 1997............... (850,000) (850,000) ----- --- ------ --------- --------- Balance--October 31, 1997................... 1,200 $ 0 $1,000 $(782,000) $(781,000) ===== === ====== ========= =========
See notes to financial statements F-23 INTERNATIONAL TELEPHONE COMPANY STATEMENTS OF CASH FLOWS
TEN MONTHS ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, 1997 1996 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)................................... $ (850,000) $ 7,000 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation....................................... 73,000 69,000 Provision for doubtful accounts.................... 25,000 43,000 Loss on sale of equipment.......................... 22,000 Deferred taxes..................................... (6,000) 2,000 Changes in: Accounts receivable............................... 180,000 (33,000) Other assets...................................... (42,000) 1,000 Customer advance payments......................... (20,000) 38,000 Commissions payable............................... (20,000) (24,000) Accrued expenses.................................. 26,000 91,000 Accounts payable.................................. 1,239,000 108,000 Income taxes payable.............................. (1,000) (16,000) ---------- --------- Net cash provided by operating activities....... 626,000 286,000 ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of furniture and equipment................ (17,000) (29,000) Proceeds from sale of equipment..................... 259,000 ---------- --------- Net cash provided by (used in) investing activities..................................... 242,000 (29,000) ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repayments of) loan payable.......... (63,000) 66,000 Payments under capital leases....................... (175,000) (112,000) Repayment of note payable........................... (140,000) ---------- --------- Net cash used in financing activities........... (238,000) (186,000) ---------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS............. 630,000 71,000 Cash and cash equivalents--beginning of year.......... 218,000 147,000 ---------- --------- CASH AND CASH EQUIVALENTS--END OF YEAR................ $ 848,000 $ 218,000 ========== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest.......................................... $ 57,000 $ 21,000 Income taxes...................................... $ 26,000 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Equipment acquired under capital lease obligations (Note E).............................................
See notes to financial statements F-24 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS OCTOBER 31, 1997 NOTE A--ORGANIZATION AND BUSINESS International Telephone Company (the "Company") was organized in the state of Delaware on March 3, 1993. The Company operates an international telecommunications system offering long distance telephone service to corporations and individuals located outside the United States. The Company incurred a loss of $850,000 during the ten months ended October 31, 1997, resulting principally from the accrual of a $1.1 million claim against the Company by a carrier for usage charges that the Company is disputing (see Note G[2]). The Company intends to vigorously defend such claim and is attempting to settle with the carrier. If the Company is not successful in its defense or in reaching a settlement, the Company believes that by reducing its administrative expenses, including officers' compensation, the cash flow from operations will be sufficient for the Company to pay such claim and to operate as a going concern. In addition, the Company believes that it will be able to obtain financing, if necessary. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Cash equivalents: The Company considers money-market funds to be cash equivalents. (2) Revenue recognition: Telecommunication revenues are recognized at the time services are provided. (3) Cost of telecommunication revenues and selling expenses: Cost of telecommunication services are recorded as incurred and consist principally of charges from carriers for long distance services. Selling expenses includes commissions to agents, which are recorded net of chargebacks for amounts deemed uncollectible in the period the related services were provided. (4) Depreciable assets: Depreciable assets, consisting principally of telecommunication related equipment such as switches and computer equipment, are stated at cost. Equipment acquired under capital leases is stated at the present value of the future minimum lease payments. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets which range from five to seven years. Equipment under capital leases is depreciated over the estimated useful life of the equipment, which is generally longer than the terms of the leases since the leases generally contain bargain purchase options which the Company intends to exercise. (5) Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (6) Deferred income taxes: The Company provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax consequences attributable to net operating loss carryforwards F-25 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OCTOBER 31, 1997 and temporary differences between the basis of assets and liabilities for financial and tax reporting purposes. Such differences relate primarily to depreciation and equipment acquired under capital leases. NOTE C--FURNITURE AND EQUIPMENT Furniture and equipment at October 31, 1997 consists of the following: Telecommunications equipment....................................... $634,000 Furniture and fixtures............................................. 6,000 Office equipment................................................... 87,000 -------- 727,000 Less accumulated depreciation and amortization..................... 87,000 -------- $640,000 ========
NOTE D--LOAN PAYABLE The Company has a $250,000 line of credit, which expires on September 30, 1998, with a financial institution. At October 31, 1997 the balance due under this line of credit was $3,000, which is collateralized by the assets of the Company, including cash on deposit with such institution. Amounts due under the line of credit bear interest at prime plus 1.5%. NOTE E--CAPITAL LEASE OBLIGATIONS The Company leases equipment under agreements with terms of thirty-six months, which are accounted for as capital leases. During the ten months ended October 31, 1997 the Company acquired telecommunications equipment with a cost of $634,000 under a capital lease. Simultaneously, the Company exchanged telecommunications equipment with a book value of $281,000 and received proceeds of $259,000, resulting in a loss on the exchange of $22,000. The net book value of equipment held under capital lease was $609,000 at October 31, 1997. Future annual lease payments at October 31, 1997 are as follows: 1998............................................................... $288,000 1999............................................................... 247,000 2000............................................................... 111,000 -------- 646,000 Less amounts representing interest................................. 73,000 -------- Present value of future lease payments at October 31, 1997......... 573,000 Less amounts due within one year................................... 281,000 -------- Amounts due after one year......................................... $292,000 ========
F-26 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OCTOBER 31, 1997 NOTE F--INCOME TAXES The provision for federal and state income taxes for the year ended December 31, 1996 is comprised of the following: Current: Federal............................................................. $1,000 State............................................................... 0 ------ 1,000 ------ Deferred: Federal............................................................. 2,000 State............................................................... 1,000 ------ 3,000 ------ $4,000 ======
At October 31, 1997 the Company has a net operating loss carryforward of $1,008,000 resulting from its loss for income tax purposes for the ten months then ended. As a result the Company has a deferred tax asset of $393,000 at October 31, 1997. The Company has provided a valuation allowance, which increased by $323,000 during the ten months ended October 31, 1997, against the entire deferred tax asset. Accordingly, there is no provision for federal and state income taxes for the ten months ended October 31, 1997. The deferred tax liability of $88,000 at October 31, 1997, represents the anticipated future tax consequences attributable to temporary differences between the basis of assets and liabilities for financial and tax reporting purposes. Such differences relate to depreciation and the acquisition of equipment under a capital lease. The difference between the tax provision (benefit) and the amount that would be computed by applying the statutory federal income tax rate to income before taxes is attributable to the following:
TEN MONTHS ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, 1997 1996 ----------- ------------ Federal income tax provision (benefit) at statutory rate................................... $(289,000) $3,000 Provision (benefit) for state income taxes--net of U.S. federal taxes............................... (34,000) 1,000 Valuation allowance............................... 323,000 --------- ------ $ 0 $4,000 ========= ======
NOTE G--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS [1] Operating leases: The Company is subject to operating leases for its office space in Florida and Connecticut, which include escalation clauses for increases in real estate taxes and certain operating expenses. Rent expense for the period ended October 31, 1997 totaled $73,000. F-27 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OCTOBER 31, 1997 Future minimum lease payments at October 31, 1997 are as follows:
YEAR ENDING OCTOBER 31, ----------- 1998................................................................. $50,000 1999................................................................. 26,000 2000................................................................. 21,000 ------- $97,000 =======
[2] Carrier payables: Pursuant to an agreement, the Company was committed to purchase transmission capacity from a certain carrier. The Company has requested credits from the carrier for minimum usage charges and losses incurred in connection with the unavailability of sufficient capacity. As a result a significant balance due to the carrier became past due. The carrier has initiated litigation against the Company for collection of approximately $1.1 million, which is included in accounts payable at October 31, 1997. The Company intends to vigorously defend its position and will continue to try to reach a settlement with the carrier. In May 1997, a carrier agreed to issue a credit for $210,000 in connection with the settlement of charges disputed by the Company and the Company agreed to pay the outstanding balance by December 1, 1997. The carrier subsequently presented an invoice to the Company which did not reflect such credit and the Company believes that such statement does not acknowledge a $100,000 payment made in January 1997. As a result, the Company has not made the scheduled payments and accounts payable at October 31, 1997 includes $400,000 due to this carrier. [3] Concentration of carriers: The Company purchases transmissions capacity from a limited number of domestic telephone carriers 85% of such capacity was purchased from 3 telephone carriers and 75% of such capacity was purchased from 3 carriers during the ten months ended October 31, 1997 and the year ended December 31, 1996, respectively. [4] Concentration of agents: During the ten months ended October 31, 1997 and the year ended December 31, 1996 3 agents were responsible for 53% and 3 agents were responsible for 66% of the Company's telecommunications revenues, respectively. NOTE H--TELECOMMUNICATION REVENUES: The information below summarizes telecommunication revenues by geographic area:
TEN MONTHS ENDED YEAR ENDED OCTOBER 31, DECEMBER 31, 1997 1996 ----------- ------------ Europe................................................. $2,416,000 $ 2,742,000 Africa................................................. 2,511,000 2,508,000 Middle East............................................ 1,593,000 1,095,000 Latin America.......................................... 1,110,000 626,000 Asia................................................... 74,000 529,000 Other.................................................. 350,000 103,000 ---------- ----------- $8,054,000 $ 7,603,000 ========== ===========
F-28 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) OCTOBER 31, 1997 NOTE I--OTHER INCOME During the year ended December 31, 1996 the Company recognized $100,000 of income from a nonrefundable deposit received in connection with a potential transaction which did not close by the agreed upon date. During the ten months ended October 31, 1997 the Company recognized $113,000 of consulting fees in connection with assisting another telecommunications company in settling its charges with a carrier. NOTE J--REGULATORY MATTERS In June 1993, the Federal Communications Commission (the "FCC") granted the Company's Application for Authority under Section 214 of the Communications Act of 1934, as amended. Pursuant to such action the Company is authorized to resell the public switched telecommunications services of other U.S. carriers. The Company is subject to regulation in other countries in which it does business. The Company believes that an adverse determination as to the permissibility of the Company's services under the laws and regulations of any such country would not have a material adverse long-term effect on its business. NOTE K--PROPOSED SALE OF THE COMPANY The Company has received a letter of intent related to the purchase, by another telecommunications company, of all of the outstanding shares of common stock of the Company. A final agreement has not been executed. The Company's stockholders have received $125,000 from this telecommunications company in connection with such anticipated sale. F-29 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY DISTRIBUTIONS MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THE PRO- SPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY CSI OR THE UNDERWRITERS. THIS PRO- SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTI- TUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURI- TIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICA- TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSE- QUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Summary.................................................................. 1 Risk Factors............................................................. 6 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 17 Price Range of Common Stock.............................................. 18 Dilution................................................................. 19 Capitalization........................................................... 20 Selected Financial Data.................................................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Business................................................................. 32 Management............................................................... 47 Principal Shareholders................................................... 52 Certain Transactions..................................................... 53 Description of Securities................................................ 55 Shares Eligible for Future Sale.......................................... 56 Underwriting............................................................. 58 Legal Matters............................................................ 59 Experts.................................................................. 60 Additional Information................................................... 60 Index to Financial Statements............................................ F-1
---------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF- FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT- ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1,100,000 SHARES OF COMMON STOCK COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ---------------- P R O S P E C T U S ---------------- COHIG & ASSOCIATES, INC. , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES + +EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE + +SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH + +STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ [ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS] SUBJECT TO COMPLETION, DATED FEBRUARY 27, 1998 PRELIMINARY PROSPECTUS SHARES [LOGO OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC.] COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. COMMON STOCK This Prospectus relates to the offer and sale by certain Securityholders (collectively, the "Selling Securityholders") of a maximum of 113,600 shares of Common Stock of Communications Systems International, Inc. that were issued in a private placement completed in December 1997 and shares issuable upon the exercise of certain warrants (collectively, the "Selling Securityholders' Shares"). The Selling Securityholders' Shares are not part of the concurrent underwritten offering and may not be offered or sold prior to 180 days from the date of this Prospectus. The Company will not receive any proceeds from the sale of the Selling Securityholders' Shares. See "Selling Securityholders and Plan of Distribution." The Common Stock is traded sporadically in limited amounts on the OTC Bulletin Board under the symbol CSYG. On February 25, 1998, the last reported closing high bid price of the Common Stock was $ per share. It is currently estimated that the offering price of the Common Stock will be between $9.00 and $11.00 per share after giving effect to a proposed reverse stock split to be effective prior to the date of this Prospectus. The Company has applied to have the Common Stock quoted on The Nasdaq SmallCap Market under the symbol [CSIL]. See "Price Range of Common Stock." The distribution of shares of Common Stock offered hereby by the Selling Securityholders may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary broker's transactions, privately negotiated transactions or through sales to one or more dealers for sale of such securities as principals, at market prices prevailing at the time of sale, at prices relating to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Selling Securityholders. THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Selling Securityholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act") with respect to the securities offered, and any profits realized or commission received may be deemed underwriting compensation. On the date of this Prospectus, a registration statement including a prospectus of even date filed under the Securities Act with respect to an underwritten public offering by the Company of 1,100,000 shares of Common Stock and up to an additional 165,000 shares of Common Stock to cover over- allotments, if any, was declared effective by the Securities and Exchange Commission (the "Commission"). The Company will receive net proceeds of approximately $ from the sale of the shares of Common Stock included in the underwritten public offering, and will receive approximately $ in additional net proceeds if the over-allotment option is exercised in full after payment of underwriting discounts and commission and estimated expenses of the underwritten public offering. See "Concurrent Offering." [ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS] THE OFFERING Common Stock offered....................... shares Common Stock outstanding before the Offer- ing....................................... shares (1) Common Stock outstanding after the Offer- ing....................................... shares (1) Use of proceeds............................ The Company will receive no pro- ceeds from the sale of the Sell- ing Securityholders' Shares. Upon exercise of warrants underlying certain selling Securityholders' Shares, the Company will receive the applicable exercise price. Proposed Nasdaq SmallCap Market Symbol for the Common Stock.......................... [CSIL]
- -------- (1) Includes 1,100,000 shares of Common Stock to be issued in connection with an underwritten public offering by the Company and 113,600 Bridge Shares to be issued immediately prior to the closing of this Offering based on an assumed offering price of $10.00 per Share. Does not include (i) up to shares of Common Stock issuable upon exercise of outstanding options, which have weighted average exercise prices of $ per share, (ii) up to shares of Common Stock issuable upon the exercise of outstanding warrants, which have weighted average exercise prices of $ per share, (iii) an indeterminate number of shares of Common Stock issuable upon conversion of outstanding promissory notes in the aggregate principal amount of $ , which have a conversion price per share equal to 90% of the average bid and ask price of the Common Stock on the day before conversion, (iv) up to 110,000 shares of Common Stock issuable upon exercise of the Representative's Warrants and (v) any shares issuable in connection with the ITC Acquisition (collectively referred to herein as "Additional Securities"). See "Management," "Description of Securities" and "Underwriting." A-4 [ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS] CONCURRENT OFFERING On the date of this Prospectus, a registration statement including a prospectus of even date filed under the Securities Act with respect to an underwritten public offering by the Company of 1,100,000 shares of Common Stock and up to an additional 165,000 shares of Common Stock to cover over- allotments, if any, was declared effective by the Commission. The Company will receive net proceeds of approximately $ from the sale of the shares of Common Stock included in the underwritten public offering, and will receive approximately $ in additional net proceeds if the over-allotment option is exercised in full after payment of underwriting discounts and commission and estimated expenses of the underwritten public offering. A-5 [ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS] SELLING SECURITYHOLDERS AND PLAN OF DISTRIBUTION Up to Selling Securityholders' Shares, comprised of 113,600 Bridge Shares and Selling Securityholders' Warrant Shares, may be offered and sold pursuant to this Prospectus by the Selling Securityholders. The Combined Company has agreed to register the public offering of the Selling Securityholders' Shares under the Securities Act concurrently with this Offering and to pay all expenses in connection therewith. The Selling Securityholders' Shares have been included in the Registration Statement of which this Prospectus forms a part. None of the Selling Securityholders' Shares may be sold by the Selling Securityholders prior to 180 days after the date of this Prospectus. Except as set forth below, none of the Selling Securityholders nor their affiliates has ever held any position or office with the Combined Company or had any other material relationship with the Combined Company. The Combined Company will not receive any of the proceeds from the sale of the Selling Securityholders' Shares by the Selling Securityholders. The following table sets forth certain information with respect to the Selling Securityholders:
AMOUNT OF BENEFICIAL SELLING OWNERSHIP OF SECURITYHOLDERS' COMMON SHARES STOCK AFTER SELLING SECURITYHOLDERS OFFERED SALE (1) - ----------------------- ---------------- ------------ Lee E. Schlessman................................. 8,000 -0- Swedbank Luxembourg S.A........................... 16,000 -0- Lee Schlessman, POA Sandra Garnett................ 4,000 -0- Susan M. Duncan................................... 4,000 -0- Susan M. Duncan Irrevocable Gift Trust............ 4,000 -0- The Schlessman Family Foundation.................. 4,000 -0- Lee Schlessman, POA Gary Schlessman............... 4,000 -0- Lee Schlessman, POA Cheryl Bennett................ 4,000 -0- Cal J. Rickel & Amanda Mae Rickel................. 4,000 -0- Arab Commerce Bank Ltd............................ 4,000 -0- Dr. Thomas R. Phelps, M.D......................... 3,600 -0- Todd & Tom Rafalovich............................. 2,000 -0- First Mortgage Income Trust....................... 4,000 -0- ProFutures Special Equities Fund, L.P............. 42,000 -0- Adams 1977 Family Trust........................... 2,000 -0- Ted Rafalovich Living Trust....................... 2,000 -0- Germaine Robineau O'Hare Trust.................... 2,000 -0- Network 1 Financial Securities, Inc............... (2) -0- ------ National Financial Services Group, Inc............ (2) ------ --- Richard Sullivan.................................. (2) ====== ===
- -------- (1) Assumes all of the Bridge Shares and Selling Securityholders' Warrant Shares are sold. (2) Includes Selling Securityholders' Warrant Shares issuable upon exercise of the Selling Securityholders' Warrants. No Selling Securityholder other than Richard Sullivan ("Sullivan") and National Financial Services Group, Inc. ("National") currently owns any shares other than those being offered hereby. Accordingly, upon the sale of all the Selling Securityholders' Shares registered concurrently herewith, no Selling Securityholder other than Sullivan and National will own any of the Combined Company's outstanding shares of Common Stock. The Selling Securityholders' Shares may be offered and sold from time to time as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The Selling Securityholders' Shares may be sold by one or A-6 [ALTERNATE PAGE FOR SELLING SECURITYHOLDERS' PROSPECTUS] more of the following methods, without limitations: (a) a block trade in which a broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) face-to-face transactions between sellers and purchaser without a broker or dealer. In effecting sales, brokers or dealers engaged by the Selling Securityholders may arrange for other brokers or dealers may be deemed to be "underwriters" within the meaning of the Securities Act, in connection with such sales. From time to time, one or more of the Selling Securityholders named herein may pledge, hypothecate or grant a security interest in some or all of the Bridge Shares and Network/National Warrants, owned by them, and the pledgees, secured parties or persons to whom such securities have been hypothecated shall, upon foreclosure in the event of default, be deemed to be Selling Securityholders for purposes hereof. If any of the following occurs: (a) the securities are sold at a fixed price or by option at a price other than the prevailing market price, (b) the securities are sold in block transactions and the purchaser takes the securities with an intent to resell, or (c) the compensation paid to broker- dealers is other than usual and customary discounts, this Prospectus must be amended to include additional disclosure relating to such price, arrangements and compensation terms before offers and sales of the Selling Securityholders' Shares may be made. A-7 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Registrant's Bylaws require the Registrant to indemnify all of its present and former officers and directors, or any person who may have served at the Registrant's request as an officer or a director of another corporation in which the Registrant owns shares of capital stock or of which the Registrant is a creditor, and the personal representatives of all such persons, against expenses actually and necessarily incurred in connection with the defense of any legal proceeding in which any such person was made a party by reason of having served in such capacity, unless such person is adjudged to be liable for negligence or misconduct in the performance of any duty owed to the Registrant. The Registrant's Articles of Incorporation provide that no director of the Registrant shall be liable to the Registrant or any of its shareholders for damages caused by a breach of a fiduciary duty by such director except for the breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, acts as specified in the Colorado Business Corporation Act, or any transaction from which such director received an improper personal benefit. Section 7-109-102 of the Colorado Business Corporation Act authorizes the indemnification against reasonable expenses of current and former directors made party to a proceeding if the director conducted himself in good faith, in the case of conduct in his official capacity with the corporation, the director reasonably believed that his conduct was in the best interests of the corporation, in the case of a criminal proceeding, the director had no reasonable cause to believe that his conduct was unlawful, and in all other cases, the director reasonably believed that his conduct was at least not opposed to the corporation's best interest. A corporation may not indemnify a director in connection with a proceeding (1) in which a director was adjudged liable to the corporation or, (2) charging that the director derived an improper personal benefit in which the director was adjudged liable. Section 7-109-107 provides that a corporation may indemnify an officer to the same extent that it may indemnify a director. The above discussion of the Registrant's Bylaws, Articles of Incorporation and the Colorado Business Corporation Act is only a summary and is qualified in its entirety by the full text of each of the foregoing. Reference is made to the Underwriting Agreement, the proposed form of which is filed as Exhibit 1.1, in which the Underwriters agree, under certain circumstances, to indemnify the directors and officers of the Registrant and certain other persons against certain civil liabilities. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses expected to be incurred in connection with the issuance and distribution of the Securities offered hereby. SEC registration fee............................................. $ 5,309 NASD filing fee.................................................. 2,054 Blue Sky filing fees............................................. 5,000* Nasdaq SmallCap Market application fee........................... 10,000 Legal fees and expenses.......................................... 80,000* Blue Sky legal fees.............................................. 20,000* Accounting fees and expenses..................................... 129,000* Registrar and transfer agent fees................................ 8,000 Printing and engraving........................................... 50,000* Representative's nonaccountable/expense allowance................ 330,000 Miscellaneous.................................................... 40,637 -------- TOTAL.......................................................... $680,000 ========
- -------- * Estimated. II-1 ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Note: The information contained in this Item 26 is based on the actual current share and per share amounts. These numbers are subject to change pursuant to the Registrant's proposed reverse stock split. The Registrant made the following sales of securities within the past three years without registering such securities under the Securities Act: Unless otherwise stated, no underwriters or placement agents were used in connection with any of the issuances of securities described below. During 1995, the Registrant issued 175,000 shares of Common Stock to certain directors, officers and key employees of the Registrant and consultants and advisors who have rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction, pursuant to its Stock Bonus Plan. (Note 3) From 1995 to the present, the Registrant has granted options to purchase 1,108,800 shares of Common Stock to certain directors, officers and key employees of the Registrant and consultants and advisors who have rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction, pursuant to its Non-Qualified Stock Option Plan (the "Plan"). (Note 3) From March 1995 through June 1995, the Registrant issued an aggregate of 1,091,500 shares of Common Stock to accredited investors as defined under Regulation D of the Securities Act ("Accredited Investors") at a price of $.50 per share. (Note 2) On July 1, 1995, the Registrant granted options for 600,000 shares to two employees who rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction. (Note 3) On September 14, 1995, the Registrant issued 818,774 shares of the Common Stock to Redden Dynamics Corporation ("Redden") pursuant to a plan of merger to acquire all of the outstanding shares of capital stock of Redden. (Note 1) On September 26, 1995, the Registrant issued 30,000 shares of Common Stock to one purchaser for $3.00 per share. (Note 1) From December 1995 through March 1996, the Registrant issued 180,000 shares of Common Stock and warrants to purchase 150,000 shares of the Registrant's Common Stock to three persons in exchange for financial consulting services. Warrants to purchase 50,000 shares of Common Stock are exercisable at $1.50 per share, warrants to purchase 50,000 shares of Common Stock are exercisable at $2.50 per share, and warrants to purchase 50,000 shares of Common Stock are exercisable at $3.50 per share. As of the date hereof, no warrants have been exercised. (Note 2) From June 1996 through September 1996, the Registrant issued 61,500 shares of Common Stock to 11 Accredited Investors at a price of $2.00 per share. Jason Harmon received a commission of $11,800 for acting as placement agent. (Note 2) In July 1996, the Registrant issued 179,076 shares of Common Stock to 37 shareholders of WIN in exchange for shares of common stock of WIN held by them. (Note 1) In October 1996, the Registrant issued 140,000 shares of Common Stock to Gary Kamienski in consideration for technological consulting services rendered between February 1994 and July 1995. (Note 2) II-2 From October 1996 to July 1997, the Registrant issued 10% convertible promissory notes in the original aggregate principal amount of $415,000 and warrants to purchase up to 41,500 shares of Common Stock to 23 investors. The notes are convertible into shares of Common Stock at the option of the holder, at a conversion price equal to 90% of the average between the bid and asked prices of the Registrant's Common Stock on the day prior to the conversion date. Warrants to purchase 1,500 shares of Common Stock are exercisable at $.27 per share, warrants to purchase 4,000 shares of Common Stock are exercisable at $.52 per share, warrants to purchase 4,000 shares of Common Stock are exercisable at $.53 per share, warrants to purchase 2,000 shares of Common Stock are exercisable at $.63 per share, warrants to purchase 7,000 shares of Common Stock are exercisable at $.75 per share, warrants to purchase 9,000 shares of Common Stock are exercisable at $.81 per share, warrants to purchase 7,000 shares of Common Stock are exercisable at $.88 per share and warrants to purchase 7,000 shares of Common Stock are exercisable at $1.38 per share. From January 1997 through January 1998, 557,453 shares of Common Stock were issued upon conversion of approximately $389,817 principal amount of the notes, and no warrants have been exercised. (Note 2) In February and March 1997, the Registrant issued 15% promissory notes in the aggregate principal amount of $85,000 and warrants to purchase up to 17,000 shares of Common Stock to three investors. Warrants to acquire 6,500 shares of Common Stock are exercisable at $.38 per share, warrants to purchase 7,000 shares of Common Stock are exercisable at $.63 per share and warrants to purchase 3,500 shares of Common Stock are exercisable at $.75 per share. As of the date hereof, no shares of Common Stock have been issued upon conversion of the notes and no warrants have been exercised. (Note 2) From September through December 1997, the Registrant issued 908,641 shares of Common Stock to 30 investors (29 of whom were Accredited Investors) for $.55 per share. (Note 1) In December 1997, the Registrant issued Bridge Notes in the aggregate principal amount of $2,840,000 to 17 Accredited Investors. Upon the closing of this Offering, each investor will receive 4,000 shares of Common Stock for every $100,000 invested in the Bridge Notes based on an initial offering price of $10.00 per share. The Representative acted as placement agent in the December 1997 private placement for which it received $312,400 and warrants to purchase 284,000 shares of Common Stock at a price equal to 125% of the price to public of the shares in this Offering. (Note 2) - -------- (1) The Registrant believes that the issuance of such securities was exempt from registration pursuant to Section 4(2) of the Securities Act. (2) The Registrant believes that the issuance of such securities was exempt from registration pursuant to Rules 504, 505 and/or 506 of Regulation D and Sections 3(b), 4(2) and/or 4(6) of the Securities Act. (3) The Registrant believes that the issuance of such securities was exempt from registration pursuant to Rule 701 and Section 3(b) of the Securities Act. ITEM 27. EXHIBITS.
EXHIBIT NO. DESCRIPTION ----------- ----------- 1.1 Form of Underwriting Agreement between CSI and the Underwriters Form of Selected Dealer Agreement between the Representative and 1.2 certain selected dealers Plan and Articles of Merger dated September 14, 1995 between CSI 2.1 and Redden Dynamics, Inc. Stock Purchase Agreement, dated February , 1997, among the 2.2* Registrant, ITC and its Stockholders 3.1 Articles of Incorporation of CSI 3.2 Bylaws of CSI 4.1 Specimen Common Stock certificate Form of Warrant Agreement, including Form of Representative's 4.2 Warrant
II-3
EXHIBIT NO. DESCRIPTION ----------- ----------- 5* Opinion of Parcel, Mauro & Spaanstra, P.C. Form of 10% Convertible Promissory Note from to Registrant to 10.1 various investors Form of Warrant and Terms of Warrant between Registrant and 10.2 various investors 10.3 Agreement between Registrant and Cable and Wireless 10.4 Promissory Note from CSI to Robert A. Spade 10.5* Stock Option Plan of CSI Lease Agreement dated January 1, 1994 between CSI and The Mining 10.6 Exchange Partners Limited LINK-US/PC Agreement dated September 19, 1996 between CSI and Gary 10.7 Kamienski Form of Distributor Agreement between CSI and certain of its 10.8 distributors Form of Branch Office Agency Agreement between the Registrant and 10.9 certain of its distributors 10.10* Agreement and Tariff Order dated November 1997 between the Registrant and AT&T Communications. 10.11 Employment Agreement with Robert A. Spade 10.12 Employment Agreement with Patrick R. Scanlon 10.13 Employment Agreement with Daniel R. Hudspeth 10.14 Agreement between ITC and AIT 10.15 Agreement between ITC and Trescom 10.16 Agreement between ITC and Cable & Wireless 10.17 Agreement between ITC and Teleglobe 10.18 Promissory Note from CSI to Robert A. Spade, dated April 30, 1996 21 List of Subsidiaries 23.1* Consent of Parcel, Mauro & Spaanstra, P.C. (contained in Exhibit 5) 23.2 Consent of Stockman Kast Ryan & Scruggs, P.C. 23.3 Consent of Richard A. Eisner & Company, LLP 24 Power of Attorney (included on page II-6 hereof) 27 Financial Data Schedule
- -------- * To be filed by amendment. ITEM 28. UNDERTAKINGS. (a) Rule 415 Offering. The Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. II-4 (d) Prompt Delivery. The Registrant undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (e) Indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (f) Rule 430A. The Registrant hereby undertakes that it will: (i) For determining any liability under the Securities Act, treat the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (ii) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of Prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-5 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form SB-2 and authorized this registration statement to be signed on their behalf by the undersigned in Colorado Springs, Colorado, on February 26, 1998. Communications Systems International, Inc. /s/ Robert A. Spade By: _________________________________ Name: Robert A. Spade Title: Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below on this Registration Statement hereby constitutes and appoints Robert A. Spade and Patrick R. Scanlon, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities (until revoked in writing) to sign any and all amendments (including pre-effective amendment and post-effective amendments and amendments thereto) to this Registration Statement on Form SB-2 of Communications Systems International, Inc. and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and gents, each acting alone or his substitute, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated. /s/ Robert A. Spade Chief Executive February 26, - ------------------------------------- Officer and 1998 ROBERT A. SPADE Chairman of the Board (Principal Executive Officer) /s/ Patrick R. Scanlon President, Chief February 26, - ------------------------------------- Operating Officer 1998 PATRICK R. SCANLON and Director /s/ Daniel R. Hudspeth Chief Financial February 26, - ------------------------------------- Officer and 1998 DANIEL R. HUDSPETH Treasurer (Principal Financial and Accounting Officer) /s/ Dean H. Cary Director February 26, - ------------------------------------- 1998 DEAN H. CARY /s/ Richard F. Nipert Director February 26, - ------------------------------------- 1998 RICHARD F. NIPERT II-6 EX-1.1 2 CSI UNDERWRITING AGREEMENT Exhibit 1.1 1,000,000 SHARES OF COMMON STOCK COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. UNDERWRITING AGREEMENT ---------------------- , 1998 Cohig & Associates, Inc. 6300 South Syracuse Way Suite 400 Englewood, Colorado 80111 Dear Sirs: Communications Systems International, Inc., a Colorado corporation (the "Company") hereby confirms its agreement with you (who are sometimes hereinafter referred to as the "Representative") and with the other members of the underwriting group (the "Underwriters") named on Schedule 1 hereto as follows: 1. Introductory. Subject to the terms and conditions contained herein, ------------ the Company proposes to issue and sell to the Underwriters 1,000,000 shares of common stock (the "Firm Shares"). In addition, solely for the purpose of covering over-allotments, the Company grants to the Representative the option to purchase up to an additional 150,000 shares of Common Stock (the "Additional Shares"), which option to purchase shall be exercisable, in whole or in part, from time to time during the forty-five (45) day period commencing on the date on which the Registration Statement (as hereinafter defined) is initially declared effective (the "Effective Date") by the Securities and Exchange Commission (the "Commission"). Unless otherwise noted, the Firm Shares, together with the Additional Shares issuable on exercise of the over-allotment option, are referred to hereinafter as the "Shares". The Shares are more fully described in the Prospectus referred to below. All references to the Company below shall be deemed to include, where appropriate, the Company's subsidiaries, if any. 2. Representations and Warranties of the Company. The Company represents --------------------------------------------- and warrants to, and agrees with, each of the Underwriters that: a. The Company has filed with the Commission a registration statement, and may have filed one or more amendments thereto, on Form SB-2 (Registration No. 333- ), including in such registration statement and each such amendment a facing sheet, audited financial statements for the past two fiscal years or such other period as may be appropriate, the information called for by Part II, the undertakings to deliver certificates, file reports and file post-effective amendments, the required signatures, consents of experts, exhibits, a related preliminary prospectus (a "Preliminary Prospectus") and any other information or documents which are required for the registration of the Shares, the purchase warrants referred to in Section 2(n) and Section 5(p) entitling the Representative or its assigns to purchase shares of Common Stock of the Company (the "Representative's Warrants"), and the shares referred to in Section 2(n) and Section 5(p) purchasable upon exercise of the Representative's Warrants (the "Representative's Warrant Shares"), under the Securities Act of 1933, as amended (the "Act"). As used in this Agreement, the term "Registration Statement" means such registration statement, including incorporated documents, all exhibits and financial statements and schedules thereto, as amended, when it becomes effective, and shall include information with respect to the Shares, the Representative's Warrants, and the Representative's Warrant Shares and the offering thereof permitted to be omitted from the Registration Statement when it becomes effective pursuant to Rule 430A of the General Rules and Regulations promulgated under the Act (the "Regulations"), which information is deemed to be included therein when it becomes effective as provided by Rule 430A; the term "Preliminary Prospectus" means each prospectus included in the Registration Statement, or any amendments thereto, before it becomes effective under the Act and any prospectus filed by the Company with the consent of the Representative pursuant to Rule 424(a) of the Regulations; and the term "Prospectus" means the final prospectus included as part of the Registration Statement, except that if the prospectus relating to the securities covered by the Registration Statement in the form first filed on behalf of the Company with the Commission pursuant to Rule 424(b) of the Regulations shall differ from such final prospectus, the term "Prospectus" shall mean the prospectus as filed pursuant to Rule 424(b) from and after the date on which it shall have first been used. b. When the Registration Statement becomes effective, and at all times subsequent thereto, to and including the Closing Date (as defined in Section 3) and each Additional Closing Date (as defined in Section 3), and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Representative or any dealer, and during such longer period until any post-effective amendment thereto shall become effective, the Registration Statement (and any post-effective amendment thereto) and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement to the Registration Statement or the Prospectus) -2- will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, will comply with the Act and the Regulations, and will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and no event will have occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus which has not then been set forth in such an amendment or supplement; and no Preliminary Prospectus, as of the date filed with the Commission, included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading; except that no representation or warranty is made in this Section 2(b) with respect to statements or omissions made in reliance upon and in conformity with written information furnished to the Company as stated in Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto. c. Neither the Commission nor the "blue sky" or securities authority of any jurisdiction have issued an order (a "Stop Order") suspending the effectiveness of the Registration Statement, preventing or suspending the use of any Preliminary Prospectus, the Prospectus, the Registration Statement, or any amendment or supplement thereto, refusing to permit the effectiveness of the Registration Statement, or suspending the registration or qualification of the Shares, the Representative's Warrants, or the Representative's Warrant Shares, nor has any of such authorities instituted or threatened to institute any proceedings with respect to a Stop Order. d. Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement. e. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, with full power and authority, and all necessary consents, authorizations, approvals, orders, licenses, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, to own, lease, license, and use its properties and assets and to carry on the business in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing in every jurisdiction in -3- which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualifications necessary. The Company has no subsidiaries except as disclosed in the Prospectus. f. The authorized capital stock of the Company consists of 25,000,000 shares of Common Stock, no par value per share, of which __________ shares of Common Stock are issued and outstanding, __________ shares of Common Stock are reserved for issuance upon the exercise of currently outstanding options, __________ shares of Common Stock are reserved for issuance upon the exercise of the remaining options authorized under the Company's option plans, __________ shares of Common Stock are reserved for issuance on exercise of __________ outstanding warrants and convertible promissory notes and 230,000 shares of Common Stock are reserved for issuance on consummation of the Stock Purchase Agreement between the Company and International Telephone Company ("ITC") whereby ITC will become a wholly owned subsidiary of the Company (the "ITC Acquisition"); and 5,000,000 shares of Preferred Stock, no par value per share, none of which are issued or outstanding. Each outstanding share of Common Stock is validly authorized, validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive rights of shareholders. There is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as set forth above, and as may be properly described in the Prospectus. g. The financial statements of the Company included in the Registration Statement and the Prospectus fairly present with respect to the Company and ITC the financial position, the results of operations, and the other information purported to be shown therein at the respective dates and for the respective periods to which they apply. Such financial statements have been prepared in accordance with generally accepted accounting principles, except to the extent that certain footnote disclosures regarding any stub period may have been omitted in accordance with the applicable rules of the Commission under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), consistently applied throughout the periods involved, are correct and complete, and are in accordance with the books and records of the Company and ITC. The accountants whose reports on the audited financial statements are filed with the Commission as a part of the Registration Statement are, and during the periods covered by their report(s) included in the Registration Statement and -4- the Prospectus were, independent certified public accountants with respect to the Company and ITC within the meaning of the Act and the Regulations. No other financial statements are required by Form SB-2 or otherwise to be included in the Registration Statement or the Prospectus. There has at no time been a material adverse change in the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company or ITC from the latest information set forth in the Registration Statement or the Prospectus, except as may be properly described in the Prospectus. h. There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, or, to the knowledge of the Company, threatened, or in prospect with respect to the Company or ITC or any of their operations, businesses, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Company or ITC (sometimes hereinafter collectively, the "Combined Company"). The Combined Company is not in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Combined Company; nor is the Combined Company required to take any action in order to avoid any such violation or default. i. The Combined Company has good and marketable title in fee simple absolute to all real properties and good title to all other properties and assets which the Prospectus indicates are owned by it, free and clear of all liens, security interests, pledges, charges, encumbrances, and mortgages except as may be properly described in the Prospectus or such as in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Combined Company. No real property owned, leased, licensed, or used by the Combined Company lies in an area which is, or to the knowledge of the Combined Company will be, subject to zoning, use, or building code restrictions which would prohibit, and no state of facts relating to the actions or inaction of another person or entity or his or its ownership, leasing, licensing, or use of any real or personal property exists or will exist which would prevent, the continued effective ownership, leasing, licensing, or use of such real property in the business of the Combined Company as presently conducted or as the Prospectus indicates it contemplates conducting, except as may be properly described in the Prospectus or such as in the -5- aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Combined Company. j. Neither the Company nor ITC is now or is expected by the Company to be in violation or breach of, or in default with respect to complying with, any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Company or ITC, and each such contract, agreement, instrument, lease, license, arrangement, and understanding is in full force and is the legal, valid, and binding obligation of the parties thereto and is enforceable as to them in accordance with its terms. The Combined Company enjoys peaceful and undisturbed possession under all leases and licenses under which it is operating. Neither the Company nor ITC is a party to or bound by any contract, agreement, instrument, lease, license, arrangement, or understanding, or subject to any charter or other restriction, which has had or may in the future have a material adverse effect on the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Combined Company. Neither the Company nor ITC is in violation or breach of, or in default with respect to, any term of its respective Articles of Incorporation (or other charter document) or by-laws. k. All patents, patent applications, trademarks, trademark applications, trade names, service marks, copyrights, franchises, technology, know-how and other intangible properties and assets (all of the foregoing being herein called "Intangibles") that the Company or ITC owns or has pending, or under which either of them is licensed, are in good standing and uncontested. Except as otherwise disclosed in the Registration Statement, the Intangibles are owned by the Company or ITC, free and clear of all liens, security interests, pledges, and encumbrances. The Company claims proprietary rights in its stylized logo and "Communications Systems International" and proprietary rights in the "LINK- US" and "DIAL" technologies described in the Registration Statement. There is no right under any Intangible necessary to the business of the Company or ITC as presently conducted or as the Prospectus indicates they contemplate conducting (except as may be so designated in the Prospectus). Neither the Company nor ITC has infringed, is infringing, and has received notice of infringement with respect to asserted Intangibles of others. To the knowledge of the Company, there is no infringement by others of Intangibles of the Company or ITC. To the knowledge of the Company, there is no Intangible of others which has had or may in the future have a materially adverse effect on the financial condition, results of operations, business, properties, assets, liabilities, or future prospects of the Company or ITC. -6- l. Neither the Company nor ITC, nor any director, officer, agent, employee, or other person associated with or acting on behalf of the Company or ITC has, directly or indirectly: used any corporate funds for unlawful contributions, gifts, entertainment, or other unlawful expenses relating to political activity; made any unlawful payment to foreign or domestic government officials or employees or to foreign or domestic political parties or campaigns from corporate funds; violated any provision of the Foreign Corrupt Practices Act of 1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback, or other unlawful payment. Neither the Company nor ITC has accepted any material advertising allowances or marketing allowances from suppliers to the Company or ITC and, to the extent any advertising allowance has been accepted, the Company or ITC has provided proper documentation to the supplier with respect to such advertising as to which the advertising allowance has been granted. m. The Company has all requisite power and authority to execute and deliver, and to perform thereunder each of this Agreement and the Representative's Warrants. All necessary corporate proceedings of the Company have been duly taken to authorize the execution and delivery, and performance thereunder by the Company of this Agreement and the Representative's Warrants. This Agreement has been duly authorized, executed, and delivered by the Company, is a legal, valid, and binding obligation of the Company, and is enforceable as to the Company in accordance with its terms. The Representative's Warrants have been duly authorized by the Company and, when executed and delivered by the Company, will be a legal, valid, and binding obligation of the Company, and will be enforceable against the Company in accordance with their terms. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution and delivery, or performance thereunder by the Company of this Agreement or the Representative's Warrants except filings under the Act which have been or will be made before the Closing Date and such consents consisting only of consents under "blue sky" or securities laws which are required in connection with the transactions contemplated by this Agreement and which have been obtained at or prior to the date of this Agreement. No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution or delivery, or performance thereunder of this Agreement or the Representative's Warrants; and the execution and delivery, and performance thereunder of this Agreement and the Representative's Warrants -7- will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement, or understanding, or violate or result in a breach of any term of the Articles of Incorporation or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties, or assets are subject. n. The Shares, the Representative's Warrants and the Representative's Warrant Shares are validly authorized and reserved for issuance. The Shares, when issued and delivered in accordance with this Agreement, the Representative's Warrant Shares, when issued and delivered upon exercise of the Representative's Warrants and upon payment of the exercise price therefor, will be validly issued, fully paid, and nonassessable, without any personal liability attaching to the ownership thereof, and will not be issued in violation of any preemptive rights of shareholders, and the Underwriters will receive good title to the Shares, the Representative will receive good title to the Representative's Warrants purchased and any purchaser of the Representative's Warrant Shares will receive good title thereto, all such title free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements, and voting trusts. o. The Shares, the Representative's Warrants and the Representative's Warrant Shares conform to all statements relating thereto contained in the Registration Statement and the Prospectus. p. Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as may otherwise be properly described in the Prospectus, neither the Company nor ITC has (i) issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money, (ii) entered into any transaction not in the ordinary course of business, or (iii) declared or paid any dividend on its capital stock. q. Neither the Company, nor ITC, nor any of their officers, directors, or affiliates (as defined in the Regulations), has taken or will take, directly or indirectly, prior to the termination of the distribution of securities contemplated by this Agreement, any action designed to stabilize or manipulate the price of any security of the Company, or which has caused or resulted in, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any security of the Company, to facilitate the sale or resale of the Shares. -8- r. Neither the Company nor ITC has incurred any liability for, nor is any period entitled, directly or indirectly, to receive a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this Agreement. Further, neither the Company nor ITC has any agreement with any financial consultant or advisor nor has it paid any financial consulting or advisory fees or other compensation in connection with the transactions contemplated by this Agreement, except as the Company has advised the Representative in writing and as disclosed in the Registration Statement. s. The Company has obtained from each officer, director and person known to the Company who beneficially owns 2% or more of the Company's capital stock (including derivative securities convertible into shares of the Company's capital stock) his or her enforceable written agreement that for a period of 270 days from the Effective Date, he or she will not, without the Representative's prior written consent, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of capital stock or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock except that, subject to compliance with applicable securities laws, any such officer, director or shareholder may transfer his or her stock in a private transaction, provided that any such transferee shall agree, as a condition to such transfer, to be bound by the restrictions set forth in this Agreement. Moreover, the Company, on behalf of itself, and all officers, directors and holders of five percent or more of the Common Stock of the Company, agrees that if will not, for a minimum period of twenty-four (24) months from the Effective Date, sell, transfer, hypothecate capital stock or derivative securities of the Company in an offering under the exemption from the registration requirements afforded under Regulation S as promulgated under the Act without the prior written consent of the Representative. The Company has obtained from each of the three shareholders of ITC who will receive shares of the Company's capital stock upon consummation of the ITC Acquisition, his enforceable agreement that all such shares will be placed in escrow for a period of one year from the Effective Date and that each such person will not, without the Representative's prior written consent, offer, pledge, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of capital stock or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock. -9- t. Except as otherwise provided in the Registration Statement, no person or entity has the right to require registration of any shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement. The Rights Holders (as defined in the Registration Statement) have waived their rights to have shares of Common Stock included in the Registration Statement. u. The Company is eligible to use Form SB-2 for registration of the Shares, the Representative's Warrants and the Representative's Warrant Shares. v. No unregistered securities of the Company, of an affiliate of the Company or of a predecessor of the Company have been sold within three years prior to the date hereof, except as described in the Registration Statement. w. Except as set forth in the Registration Statement, there is and at the Closing Date there will be no action, suit or proceeding before any court, arbitration tribunal or governmental agency, authority or body pending or, to the knowledge of the Company, threatened which might result in judgments against the Company or ITC not adequately covered by insurance or which collectively might result in any material adverse change in the condition (financial or otherwise), the business or the prospects of the Company or ITC or would materially affect the properties or assets of the Company or ITC. x. Each of the Company and ITC has filed all federal and state tax returns which are required to be filed by it and has paid all taxes shown on such returns and all assessments received by it to the extent such taxes have become due. All taxes with respect to which the Company or ITC is obligated have been paid or adequate accruals have been set up to cover any such unpaid taxes. y. Except as set forth in the Registration Statement: i. The Company and ITC have obtained all permits, licenses and other authorizations which are required under the Environmental Laws for the ownership, use and operation of each location operated or leased by the Company and/or ITC (the "Property"), all such permits, licenses and authorizations are in effect, no appeal nor any other action is pending to revoke any such permit, license or authorization, and the Combined Company is in full compliance with all terms and conditions of all such permits, licenses and authorizations. ii. The Combined Company and the Property are in compliance with all Environmental Laws including, without limitation, all restrictions, conditions, standards, limitations, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulation, code, -10- plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder. iii. The Combined Company has not, and to the best knowledge of the Company's executive officers, no other person has, released, placed, stored, buried or dumped any Hazardous Substances, Oils, Pollutants or Contaminants or any other wastes produced by, or resulting from, any business, commercial, or industrial activities, operations, or processes, on, beneath, or adjacent to the Property or any property formerly owned, operated or leased by the Combined Company except for inventories of such substances to be used, and wastes generated therefrom, in the ordinary course of business of the Company and ITC, (which inventories and wastes, if any, were and are stored or disposed of in accordance with applicable laws and regulations and in a manner such that there has been no release of any such substances into the environment). iv. Except as provided to the Representative, there exists no written or tangible report, synopsis or summary of any asbestos, toxic waste or Hazardous Substances, Oils, Pollutants or Contaminants investigation made with respect to all or any portion of the assets of the Company or ITC (whether or not prepared by experts and whether or not in the possession of the executive officers of the Company or ITC). v. Definitions: As used herein: (1) Environmental Laws means all federal, state and local ------------------ laws, regulations, rules and ordinances relating to pollution or protection of the environment, including, without limitation, laws relating to Releases or threatened Releases of Hazardous Substances, Oils, Pollutants or Contaminants into the indoor or outdoor environment (including, without limitation, ambient air, surface water, groundwater, land, surface and subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, Release, transport or handling of Hazardous Substances, Oils, Pollutants or Contaminants. (2) Hazardous Substances, Oils, Pollutants or Contaminants ------------------------------------------------------ means all substances defined as such in the National Oil and Hazardous Substances Pollutant Contingency Plan, 40 C.F.R. (S)300.6, or defined as such under any Environmental Law. -11- (3) Release means any release, spill, emission, discharge, ------- leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the indoor or outdoor environmental (including, without limitation, ambient air, surface water, groundwater, and surface or subsurface strata) or into or out of any property, including the movement of Hazardous Substances, Oils, Pollutants or Contaminants through or in the air, soil, surface water, groundwater or any property. z. Neither the Company nor ITC have any subsidiaries. aa. Neither the Company nor ITC has distributed, and will not distribute, any prospectus or other offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectus or the Prospectus or other materials that the Act or the Exchange Act permit to be distributed by the Company. bb. The Company and ITC maintain systems of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. cc. Neither the Company, nor ITC, nor any of their subsidiaries or affiliates is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. dd. Each of the Company and ITC maintains insurance which is in full force and effect, of the types and in the amounts that are adequate, in its reasonable opinion, for its business and in line with the insurance maintained by similar companies and businesses. All of the above representations and warranties shall survive the performance or termination of this Agreement. Any certificate signed by any officer of the Company and delivered to you or to counsel for the Representative shall be deemed a representation and warranty by the Company to the Representative as to the matters covered thereby. 3. Purchase, Sale, and Delivery of the Shares. On the basis of the ------------------------------------------ representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters, severally and not -12- jointly, and the Underwriters, severally and not jointly, agree to purchase from the Company the number of Firm Shares set forth opposite the Underwriters' names in Schedule 1 hereto. The purchase price per Firm Share to be paid by the Underwriters shall be $________ and the initial public offering price per Firm Share shall be $________. Payment for the Firm Shares by the Underwriters shall be made by certified or official bank check in clearing house funds, payable to the order of the Company at the offices of Cohig & Associates, Inc., Suite 400, 6300 South Syracuse Way, Englewood, Colorado 80111, or at such other place as the Representative shall determine and advise the Company by at least two full days' notice in writing, upon delivery of the Shares. Such delivery and payment shall be made at 10:00 a.m., Mountain Time, on the third business day following the time of the initial public offering, as defined in Section 10(a). The time and date of such delivery and payment are herein called the "Closing Date." In addition, the Company hereby grants to the Representative the option to purchase all or a portion of the Additional Shares as may be necessary to cover over-allotments, at the same purchase price per Additional Share as the price per Share of the Firm Shares provided for in this Section 3. The Representative may purchase Additional Shares when exercising such option, in its sole discretion. This option may be exercised by the Representative on the basis of the representations, warranties, covenants, and agreements of the Company herein contained, but subject to the terms and conditions herein set forth, at any time and from time to time on or before the 45th day following the Effective Date of the Registration Statement, by written notice by the Representative to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised, and the time and date, as determined by the Representative, when such Additional Shares are to be delivered (such time and date are herein called an "Additional Closing Date"); provided, however, that no Additional Closing Date shall be earlier than the Closing Date nor earlier than the third business day after the date on which the notice of the exercise of the option shall have been given nor later than the eighth business day after the date on which such notice shall have been given. Payment for the Additional Shares shall be made by certified or official bank check in clearing house funds payable to the order of the Company at the offices of Cohig & Associates, Inc., Suite 400, 6300 South Syracuse Way, Englewood, Colorado, or at such other place as you shall determine and advise the Company by at least two full days' notice in writing, upon delivery of certificates representing the Additional Shares to you. Certificates for the Shares purchased shall be registered in such name or names and in such authorized denominations as you may request in writing at least two full business days prior to the -13- Closing Date or Additional Closing Date, as applicable. The Company shall permit you to examine and package such certificates for delivery at least one full business day prior to any such closing with respect thereto. If for any reason one or more Underwriters shall fail or refuse (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 10 hereof) to purchase and pay for Shares agreed to be purchased by such Underwriter, the Company shall immediately give notice thereof to the Representative, and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representative of such notice, to purchase or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representative and such purchasing Underwriter or Underwriters and upon the terms herein set forth, the Shares which such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to make such arrangements with respect to all such Shares, the Shares which each non-defaulting Underwriter is otherwise obligated to purchase under the Agreement shall be automatically increased pro rata to absorb the remaining Shares which the defaulting Underwriter or Underwriters agreed to purchase; provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Shares which the defaulting Underwriter or Underwriters agreed to purchase in excess of 10% of the total number of Shares which such non-defaulting Underwriter agreed to purchase hereunder, and provided further that the non-defaulting Underwriters shall not be obligated to purchase any Shares which the defaulting Underwriter or Underwriters agreed to purchase if such additional purchase would cause the Underwriter to be in violation of the net capital rule of the Commission or other applicable law. If the Shares which the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representative for the purchase of such Shares on the terms herein set forth. In any such case, either the Representative or the Company shall have the right to postpone the Closing for not more than seven business days after the date originally fixed as the Closing in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company shall make arrangements within the 24-hour periods stated above for the purchase of all the Shares which the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter, except the Company -14- shall be liable for actual expenses incurred by the Representative as provided in Section 10 hereof, and without any liability on the part of any non- defaulting Underwriter to the Company. Nothing contained herein shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. 4. Offering. The Underwriters are to make a public offering of the -------- Shares as soon, on or after the effective date of the Registration Statement, as the Representative deems it advisable so to do. The Shares are to be initially offered to the public at the initial public offering price provided for in Section 3 (such price being herein called the "public offering price"). After the initial public offering, you may from time to time increase or decrease the price of the Shares, in your sole discretion, by reason of changes in general market conditions or otherwise. 5. Covenants of the Company. The Company covenants that it will: ------------------------ a. Use its best efforts to cause the Registration Statement to become effective as promptly as possible. If the Registration Statement has become or becomes effective with a form of Prospectus omitting certain information pursuant to Rule 430A of the Regulations, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed, pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to you of such timely filing. b. Notify you immediately, and confirm such notice in writing, (i) when the Registration Statement and any post-effective amendment thereto become effective, (ii) of the receipt of any comments from the Commission or the "blue sky" or securities authority of any jurisdiction regarding the Registration Statement, any post-effective amendment thereto, the Prospectus, or any amendment or supplement thereto, and (iii) of the receipt of any notification with respect to a Stop Order or the initiation or threatening of any proceeding with respect to a Stop Order. The Company will use its best efforts to prevent the issuance of any Stop Order and, if any Stop Order is issued, to obtain the lifting thereof as promptly as possible. c. During the time when a prospectus relating to the Shares are required to be delivered hereunder or under the Act or the Regulations, comply so far as it is able with all requirements imposed upon it by the Act, as now existing and as hereafter amended, and by the Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Shares in accordance with the provisions hereof and the Prospectus. If, at any time when a prospectus relating to the Shares is required to be delivered hereunder or under the Act or the Regulations, any event shall have occurred as a result of which, in the reasonable opinion of counsel for the Company or counsel for the -15- Representative, the Registration Statement or the Prospectus, as then amended or supplemented, contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or if, in the opinion of either of such counsel, it is necessary at any time to amend or supplement the Registration Statement or the Prospectus to comply with the Act or the Regulations, the Company will immediately notify you and promptly prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to you) which will correct such statement or omission or which will effect such compliance and will use its best efforts to have any such amendment declared effective as soon as possible. d. Deliver without charge to you such number of copies of each Preliminary Prospectus as you may reasonably request and, as soon as the Registration Statement or any amendment thereto becomes effective or a supplement is filed, deliver without charge to you two signed copies of the Registration Statement or such amendment thereto, as the case may be, including exhibits, and two copies of any supplement thereto, and deliver without charge to you such number of copies of the Prospectus, the Registration Statement, and amendments and supplements thereto, if any, without exhibits, as you may reasonably request for the purposes contemplated by the Act. e. Endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Shares for offering and sale under the "blue sky" or securities laws of such jurisdictions as you may reasonably request; provided, however, that no such qualification shall be required in any jurisdiction where, as a result thereof, the Company would be subject to service of general process or to taxation as a foreign corporation doing business in such jurisdiction to which it is not then subject. In each jurisdiction where such qualification shall be effected, the Company will, unless you agree in writing that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may be required by the laws of such jurisdiction. f. Make generally available (within the meaning of Section 11(a) of the Act and the Regulations) to its security holders as soon as practicable, but not later than fifteen (15) months after the date of the Prospectus, an earnings statement (which need not be certified by independent certified public accountants unless required by the Act or the Regulations, but which shall satisfy the provisions of Section 11(a) of the Act and the Regulations) covering a period of at least 12 months beginning after the effective date of the Registration Statement. -16- g. For a period of 12 months after the date of the Prospectus, not, without your prior written consent, offer, issue, sell, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock (or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock) except as provided in Section 3 and except for (i) the issuance of Common Stock underlying options outstanding on the date hereof which are properly described in the Prospectus, (ii) the issuance of Representative's Warrant Shares, (iii) the grant or exercise of options pursuant to the Company's existing stock option plan or (iv) the issuance of Common Stock in the ITC Acquisition. h. For a period of five years after the Effective Date of the Registration Statement, furnish you, without charge, the following: i. Within 90 days after the end of each fiscal year, three copies of financial statements certified by independent certified public accountants, including a balance sheet, statement of operations, and statement of cash flows of the Company and its then existing subsidiaries, with supporting schedules, prepared in accordance with generally accepted accounting principles, at the end of such fiscal year and for the 12 months then ended; ii. As soon as practicable after they have been sent to shareholders of the Company or filed with the Commission, three copies of each annual and interim financial and other report or communication sent by the Company to its shareholders or filed with the Commission; iii. As soon as practicable, two copies of every press release and every material news item and article in respect of the Company or its affairs which was released by the Company; iv. Notice of any regular quarterly or special meeting of the Company's Board of Directors concurrently with the sending of such notice to the Company's directors; and v. Such additional documents and information with respect to the Company and its affairs and the affairs of any of its subsidiaries as you may from time to time reasonably request. i. Designate an Audit Committee, the members of which shall be subject to your reasonable approval, which will generally supervise the financial affairs of the Company, and a Compensation Committee, which will supervise and act upon executive compensation and issuance of options. The Audit Committee and the Compensation Committee will be -17- comprised of a majority of independent, outside directors. The Company agrees that at least two members of the Board of Directors shall be independent, outside directors and that the Company will keep at least two independent, outside persons as members of the Board of Directors and as a majority of the members of the Audit Committee and the Compensation Committee for at least two full fiscal years from the Effective Date or as otherwise required by The Nasdaq Stock Market, Inc. j. Furnish to you as early as practicable prior to the Closing Date and any Additional Closing Date, as the case may be, but not less than two full business days prior thereto, a copy of the latest available unaudited interim financial statements of the Company which have been read by the Company's independent certified public accountants, as stated in their letters to be furnished pursuant to Section 7(f). k. File no amendment or supplement to the Registration Statement or Prospectus at any time, whether before or after the Effective Date of the Registration Statement, unless such filing shall comply with the Act and the Regulations and unless you shall previously have been advised of such filing and furnished with a copy thereof, and you and counsel for the Representative shall have approved such filing in writing within a reasonable time of receipt thereof. l. Comply with all periodic reporting and proxy solicitation requirements which may from time to time be applicable to the Company as a result of the Company's registration under Section 12 of the Exchange Act on a Registration Statement on Form 8-A. m. Comply with all provisions of all undertakings contained in the Registration Statement. n. Prior to the Closing Date or any Additional Closing Date, as the case may be, issue no press release or other communication, directly or indirectly, and hold no press conference and grant no interviews with respect to the Company, the financial condition, results of operations, business, properties, assets, or liabilities of the Company, or this offering, without your prior written consent. o. File timely with the Commission and the National Association of Securities Dealers, Inc. (the "NASD"), if required, a report on Form 10-C in accordance with the Rules and Regulations of the Commission under the Exchange Act. p. On or prior to the Closing Date, sell to the Representative for a total purchase price of $50, Representative's Warrants entitling the Representative or its assigns to purchase 100,000 shares of Common Stock at a price equal to 125% of the public offering price of the Shares, with the terms of the Representative's Warrants, including exercise period, anti- -18- dilution provisions, exercise price, exercise provisions, transferability, and registration rights, to be substantially in the form filed as an exhibit to the Registration Statement. With respect to such registration rights, the holders of the Representative's Warrants may demand registration without first exercising the Representative's Warrants. q. Until expiration of the Representative's Warrants, keep reserved sufficient shares of Common Stock for issuance as Representative's Warrant Shares upon exercise of the Representative's Warrants. r. If the Representative, any employee of the Representative or any company controlled by or under control of the Representative acts as a broker or finder during the five year period commencing on the Effective Date with regard to (i) the sale of all or substantially all of the assets and properties of the Company, (ii) the merger or consolidation of the Company (other than a merger or consolidation effected for the purpose of changing the Company's domicile or the ITC Merger) or (iii) the acquisition by the Company of the assets or stock of another business entity, which agreement or understanding is thereafter consummated, whether or not during such five (5) year period, pay to the Representative or such person(s) as the Representative may designate an amount equal to 5% of the first $1,000,000 or portion thereof in value or consideration received by the Company, 4% of the second $1,000,000 or portion thereof in value or consideration received by the Company and 3% of such value or consideration received by the Company in excess of the first $2,000,000 of such value or consideration. The fee payable to the Representative will be in the same form of consideration as that paid by or to the Company, as the case may be, in any such transaction. s. Prior to the Closing Date and for at least one year thereafter, retain a financial public relations firm acceptable to the Representative, to assist the Company in preparing regular announcements and disseminating such information to the financial community. t. Qualify the Shares for secondary trading, as soon as legally possible, in California and Texas and such other states as are requested by the Representative from time to time and within 120 days of the Effective Date, cause its counsel to issue an after-market "blue sky" survey which shall address all states in which "after-market" trading of the Common Stock is permissible. u. Adopt procedures for the application of the net proceeds it receives from the sale of the Shares and apply the net proceeds from the sale of the Shares substantially in the manner set forth in the Registration Statement unless any deviation from such application is -19- in accordance with the Registration Statement and occurs only after review and approval by the Board of Directors of the Company and then only after the Board of Directors has obtained the written opinion of recognized legal counsel experienced in the federal and state securities laws as to the propriety of any such deviation. v. Within the time period which the Prospectus is required to be delivered under the Act, comply, at its own expense, with all requirements imposed upon it by the Act, as now or hereafter amended, by the Rules and Regulations, as from time to time may be enforced, and by any order of the Commission, so far as necessary to permit the continuance of sales or dealing in the Shares. w. At the Closing, deliver to the Representative true and correct copies of the Articles of Incorporation of the Company and all amendments thereto, all such copies to be certified by the Secretary of the Company; true and correct copies of the by-laws of the Company and of the minutes of all meetings of the directors and shareholders of the Company held prior to the Closing which in any way relate to the subject matter of this Agreement or the Registration Statement. x. Use all reasonable efforts to comply or cause to be complied with the conditions precedent to the several obligations of the Underwriters in Section 7 hereof. y. File with the Commission all required reports in accordance with the provisions of Section 13, 14 or 15(d) under the Exchange Act and to provide a copy of such reports to the Representative and its counsel. z. Supply to the Representative and the Representative's counsel at the Company's cost, three bound volumes each containing material documents relating to the offering of the Shares within a reasonable time after the Closing, not to exceed 90 days. aa. As soon as possible prior to the Effective Date, and as a condition of the Underwriter's obligations hereunder, (i) have the Company listed on an accelerated basis, and to maintain such listing for not less than ten years from the Closing Date, in Standard & Poor's Standard Corporation Records; and (ii) have the Common Stock included on The Nasdaq SmallCap Market(SM) as of the Effective Date, on the Closing Date, on the Additional Closing Date and thereafter for at least ten years provided the Company is in compliance with The Nasdaq SmallCap Market(SM) maintenance requirements. bb. As soon as possible prior to the Effective Date and at such time as the Company qualifies for listing on the Nasdaq National Market(R), take all steps necessary to -20- have the Company's Common Stock, to the extent eligible, listed on the Nasdaq National Market(R). cc. Take all necessary and appropriate measures to insure continuity of management. dd. Continue, for a period of at least five years following the Effective Date of the Registration Statement, to appoint such auditors as are reasonably acceptable to the Representative, which auditors shall (i) prepare financial statements in accordance with Regulation S-B or, if required, Regulation S-X under the General Rules and Regulations of the Act and (ii) examine (but not audit) the Company's financial statements for each of the first three (3) fiscal quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-QSB quarterly report and the mailing of quarterly financial information to security holders. ee. Within 90 days of the Effective Date of the Registration Statement, obtain "key man" life insurance policies in the amount of $1,000,000 each on the lives of such key employees as may be mutually agreed upon between the Company and the Representative, with the Company designated as the beneficiary of such policies, and pay the annual premiums thereon for a period of not less than five years from the Effective Date of the Registration Statement. ff. Cause its transfer agent to furnish the Representative a duplicate copy of the daily transfer sheets prepared by the transfer agent during the six-month period commencing on the Effective Date of the Registration Statement and instruct the transfer agent to timely provide, upon the request of the Representative, duplicate copies of such transfer sheets and/or a duplicate copy of a list of shareholders, all at the Company's expense, for a period of 1 1/2 years after such six-month period. In addition, if requested to do so in writing by the Representative, the Company shall furnish to the Representative, at the Company's expense, copies of the DTC Special Security Position Listing Reports for a period of five years commencing on the Effective Date. gg. Refrain from filing a Form S-8 Registration Statement (or successor form of registration statement) in connection with the issuance of the Company's securities to consultants or advisors for services for a period of twenty-four (24) months from the Effective Date of the Registration Statement without the Representative's prior written consent. -21- hh. During a period of three years from the Effective Date of the Registration Statement, afford the Representative the right, either using its own personnel or through a consultant retained by the Representative at its expense, to review the Company's books, records and operations upon seven days' prior written notice; provided that the Representative and any person designated by the Representative to conduct such review will execute a confidentiality agreement, if requested to do so by the Company, which will in relevant part prohibit disclosure of information to any party except the Representative and which shall specify that the information received as a result of such review shall be held in confidence unless otherwise agreed to by the parties thereto. ii. Afford the Representative the right, but not the obligation, commencing on the Closing Date and surviving for a period of thirty-six (36) months, to designate an observer to attend meetings of the Board of Directors; give notice to the designee, if any, and the Representative of each meeting of the Board of Directors in accordance with Colorado law, of which no less than four in-person meetings will be held each year; reimburse any such designee for all reasonable costs and expenses incurred in attending meetings of the Board of Directors, including but not limited to, food, lodging and transportation, together with such other fee or compensation as is paid by the Company to other members of the Board of Directors; and to the extent permitted by law, indemnify the Representative and its designee for the actions of such designee as an observer to the Board of Directors and in the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and/or directors, to the extent permitted under such policy, cause each of the Representative and its designee to be named as an insured under such policy. jj. Maintain American Securities Transfer & Trust, Inc. as its transfer agent for a minimum period of two years from the Effective Date, unless the prior written consent of the Representative to substitution is obtained. kk. Declare and hold an annual meeting of shareholders for the election of directors and such other business as may properly come before the shareholders of the Company within 180 days after the end of each of the Company's fiscal years for a minimum period of five years from the Effective Date; and provide the shareholders an annual report meeting the requirements of Rule 14c-3 under the Exchange Act and with quarterly summary operating financial statements. -22- ll. For a period of two years after the Effective Date the Company will not conduct, and for a period of at least five years following the Effective Date of the Registration Statement will provide the Representative at least 30 days' prior written notice of, a sale of any securities of the Company in a "Regulation S" transaction, with such notice to specify the type of securities to be offered, the purchase price thereof and the proposed closing date of the Regulation S transaction. mm. Inform the Florida Department of Banking and Finance at any time prior to the consummation of the distribution of the Firm Shares and the Additional Shares by the Representative if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba. Such information will be provided within 90 days after the commencement thereof or after a change occurs with respect to previously reported information. nn. Grant to the Representative the right to act as managing underwriter for any public or private offerings of the Company's securities or of its subsidiaries for a period of twelve (12) months from the Effective Date. Such right will continue in effect during the entire twelve (12) month period despite the exercise of the right or the refusal to exercise the right during such period. The Representative shall have thirty (3) days after receipt of notice of an offering within which to determine whether to exercise the right. 6. Payment of Expenses. The Company hereby agrees to pay all expenses ------------------- (subject to the last sentence of this Section 6) in connection with the offering, including but not limited to (a) the preparation, printing, filing, distribution, and mailing of the Registration Statement and the Prospectus, including NASD, SEC, Nasdaq filing and/or application fees, and the printing, filing, distribution, and mailing of this Agreement, any Agreement Among Underwriters, Selected Dealers Agreement, preliminary and final Blue Sky Memorandums, material to be circulated to the Underwriters by you and other incidental or related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus, and any amendments or supplements thereto, supplied to the Representative in quantities as hereinabove stated, (b) the is suance, sale, transfer, and delivery of the Firm Shares, the Additional Shares, the Representative's Warrants and the Representative's Warrant Shares, including, without limitation, any original issue, transfer or other taxes payable thereon and the costs of preparation, printing and delivery of certificates representing such securities, as applicable, (c) the qualification of the Firm Shares, Additional Shares, Representative's Warrants and the Representative's Warrant Shares under state or -23- foreign "blue sky" or securities laws, (d) the fees and disbursements or counsel for the Company and the accountants for the Company, (e) the listing of the Common Stock on The Nasdaq SmallCap Market(SM), and (f) the Representative's non-accountable expense allowance equal to 3% of the aggregate gross proceeds from the sale of the Firm Shares and the Additional Shares. In addition, the Company shall, upon receipt of an invoice from the Representative, reimburse the Representative for any expenses of its attendance at informational (roadshow) meetings related to the offering. Prior to the Closing Date, the Company shall bear the costs of tombstone announcements not to exceed $10,000, if requested to do so by the Representative. The Company has remitted to the Representative the sum of $40,000 prior to the date hereof, all of which has been credited as partial payment in advance of the non-accountable expense allowance provided for in Section 6(f) above. Except as otherwise provided herein, such advances shall be non-refundable. 7. Conditions of Underwriters' Obligations. The Underwriters' obligation --------------------------------------- to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the continuing accuracy of the representations and warranties of the Company contained herein and in each certificate and document contemplated under this Agreement to be delivered to you, as of the date hereof and as of the Closing Date (or the Additional Closing Date, as the case may be), to the performance by the Company of its obligations hereunder, and to the following conditions: a. The Registration Statement shall have become effective not later than 5:00 p.m., Mountain time, on the date of this Agreement or such later date and time as shall be consented to in writing by you. b. At the Closing Date and any Additional Closing Date, you shall have received the favorable opinion of Parcel, Mauro, Hultin & Spaanstra, P.C., counsel for the Company, dated the date of delivery, addressed to you, and in form and scope satisfactory to your counsel, to the effect that: i. The Company is a corporation duly organized, validly existing, and in good standing under the laws of the State of Colorado, with full power and authority, and all necessary consents, authorizations, approvals, orders, certificates, and permits of and from, and declarations and filings with, all federal, state, local, and other governmental authorities and all courts and other tribunals, including all necessary Grant of Equipment Authorizations issued by the Federal Communications Commission under FCC Rule Part 15, to own, lease, license, and use its properties -24- and assets and to conduct its business in the manner described in the Prospectus. The Company is duly qualified to do business and is in good standing in every jurisdiction in which its ownership, leasing, licensing, or use of property and assets or the conduct of its business makes such qualification necessary; ii. The authorized capital stock of the Company as of the date of this Agreement consisted of 25,000,000 shares of Common Stock, no par value per share, of which __________ shares of Common Stock were issued and outstanding, __________ shares of Common Stock were reserved for issuance upon the exercise of outstanding options, __________ shares of Common Stock were reserved for issuance upon the exercise of the remaining options authorized under the Company's option plan, ___________ shares of Common Stock were reserved for issuance upon the exercise of outstanding warrants and convertible promissory notes and debentures and 230,000 shares of Common Stock were reserved for issuance on consummation of the Stock Purchase Agreement between the Company and ITC; and 5,000,000 shares of Preferred Stock, no par value per share, none of which were issued and outstanding; and there have been no changes in the authorized and outstanding capital stock of the Company since the date of this Agreement, except as contemplated by the Registration Statement and the Prospectus. Each outstanding share of capital stock is validly authorized, validly issued, fully paid, and nonassessable, with no personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive right of shareholders. There is no commitment, plan, or arrangement to issue, and no outstanding option, warrant, or other right calling for the issuance of, any share of capital stock of the Company or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the Company, except as set forth above, and except as is properly described in the Prospectus. There is outstanding no security or other instrument which by its terms is convertible into or exchangeable for capital stock of the Company, except as described in the Prospectus; iii. There is no litigation, arbitration, claim, governmental or other proceeding (formal or informal), or investigation pending, threatened, or in prospect (or any basis therefor) with respect to the Company, ITC or any of their respective -25- operations, businesses, properties, or assets, except as may be properly described in the Prospectus or such as individually or in the aggregate do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Combined Company. Neither the Company nor ITC is in violation of, or in default with respect to, any law, rule, regulation, order, judgment, or decree, except as may be properly described in the Prospectus or such as in the aggregate have been disclosed to the Representative and do not now have and will not in the future have a material adverse effect upon the operations, business, properties, or assets of the Combined Company; nor is the Company or ITC required to take any action in order to avoid any such violation or default; iv. Neither the Company, nor ITC nor any other party is now or is expected by the Company or ITC to be in violation or breach of, or in default with respect to, complying with any material provision of any contract, agreement, instrument, lease, license, arrangement, or understanding which is material to the Combined Company; v. The Company is not in violation or breach of, or in default with respect to, any term of its Articles of Incorporation or by-laws; vi. The Company has all requisite power and authority to execute and deliver and to perform thereunder this Agreement and the Representative's Warrants. All necessary corporate proceedings of the Company have been taken to authorize the execution and delivery and performance thereunder by the Company of this Agreement and the Representative's Warrants. Each of this Agreement and the Representative's Warrants has been duly authorized, executed and delivered by the Company, and is a legal, valid, and binding obligation of the Company, and (subject to applicable bankruptcy, insolvency, and other laws affecting the enforceability of creditors' rights generally) enforceable as to the Company in accordance with its respective terms. No consent, authorization, approval, order, license, certificate, or permit of or from, or declaration or filing with, any federal, state, local, or other governmental authority or any court or other tribunal is required by the Company for the execution or delivery, or performance thereunder by the Company of this Agreement and the Representative's Warrants (except filings under the Act which have been made prior to the Closing Date and consents consisting only of consents -26- under "blue sky" or securities laws which are required in connection with the transactions contemplated by this Agreement, and which have been obtained on or prior to the date the Registration Statement becomes effective under the Act). No consent of any party to any contract, agreement, instrument, lease, license, arrangement, or understanding to which the Company is a party, or to which any of its properties or assets are subject, is required for the execution or delivery, or performance thereunder of this Agreement or the Representative's Warrants; and the execution and delivery and performance thereunder of this Agreement and the Representative's Warrants will not violate, result in a breach of, conflict with, or (with or without the giving of notice or the passage of time or both) entitle any party to terminate or call a default under any such contract, agreement, instrument, lease, license, arrangement, or understanding, or violate or result in a breach of any term of the Articles of Incorporation or by-laws of the Company, or violate, result in a breach of, or conflict with any law, rule, regulation, order, judgment, or decree binding on the Company or to which any of its operations, businesses, properties, or assets are subject; vii. The Shares are, and the Representative's Warrant Shares will be upon exercise of the Representative's Warrants, validly authorized, validly issued, fully paid, and nonassessable and are not issued in violation of any preemptive rights of shareholders, and the Underwriters have received good title to the Shares purchased by them from the Company, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements, and voting trusts. The Representative's Warrant Shares have been duly and validly reserved for issuance pursuant to the terms of the Representative's Warrants. The Shares, the Representative's Warrants and the Representative's Warrant Shares conform to all statements relating thereto contained in the Registration Statement or the Prospectus; viii. Any contract, agreement, instrument, lease, or license required to be described in the Registration Statement or the Prospectus has been properly described therein. Any contract, agreement, instrument, lease, or license required to be filed as an exhibit to the Registration Statement has been filed with the Commission as an exhibit to or has been incorporated as an exhibit by reference into the Registration Statement; -27- ix. Insofar as statements in the Prospectus purport to summarize the status of litigation or the provisions of laws, rules, regulations, orders, judgments, decrees, contracts, agreements, instruments, leases, or licenses, such statements have been prepared or reviewed by such counsel and accurately reflect the status of such litigation and provisions purported to be summarized and are correct in all material respects; x. Except as provided in the Registration Statement, no person or entity has the right to require registration of shares of Common Stock or other securities of the Company because of the filing or effectiveness of the Registration Statement; xi. The Registration Statement has become effective under the Act. No Stop Order has been issued and no proceedings for that purpose have been instituted or threatened; xii. The Registration Statement and the Prospectus, and any amendment or supplement thereto, comply as to form in all material respects with the requirements of the Act and the Regulations; xiii. Such counsel has no reason to believe that either the Registration Statement or the Prospectus, or any amendment or supplement thereto, contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (except that no opinion need be expressed as to financial statements and other financial data and schedules which are or should be contained therein); xiv. Since the Effective Date of the Registration Statement, any event which has occurred which should have been set forth in an amendment or supplement to the Registration Statement or the Prospectus has been set forth in such an amendment or supplement; xv. The Company is not currently offering any securities for sale except as described in the Registration Statement; xvi. Such counsel has no knowledge of any promoter, affiliate, parent or subsidiaries of the Company except as are described in the Registration Statement; xvii. The Company has no subsidiaries; xviii. The Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or -28- other rights to use all trademarks, copyrights, service marks, service names, trade names and licenses necessary to conduct its business (including without limitation, any such licenses or rights described in the Registration Statement as being owned or possessed by the Company or any subsidiary) (all of which are collectively referred to herein as the "Intellectual Property"); there is no actual or pending, or threatened claim, proceeding or action by any person pertaining to or which challenges the exclusive rights of the Company with respect to any of the Company's Intellectual Property; xix. Neither the Company nor ITC is a party to any agreement giving rise to any obligation by the Company, any subsidiary or ITC to pay any third-party royalties or fees of any kind whatsoever with respect to any technology developed, employed, used or licensed by the Company or any subsidiary, other than is disclosed in the Prospectus; xx. The Common Stock is eligible for quotation on The Nasdaq SmallCap Market; xxi. All issued and outstanding shares of Common Stock and all other securities issued and sold or exchanged by the Company or its subsidiaries have been issued and sold or exchanged in compliance with all applicable state and federal securities laws and regulations; and xxii. The Company, ITC and all of their Property are in compliance with all Environmental Laws and the Company and ITC are in full compliance with all permits, licenses and authorizations relating to Environmental Laws. xxiii. At the Closing Date and upon payment of the consideration set forth in the Registration Statement, the Company shall have purchased all of the outstanding common stock of ITC, and shall have received good title to such shares of common stock of ITC, free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. Each outstanding share of common stock of ITC is validly authorized, validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive right of shareholders. There is no commitment, plan or arrangement to issue, and no outstanding option, warrant and or other right for the issuance of any share of capital -29- stock of ITC or any other security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of ITC, except as is properly described in the Prospectus. In rendering such opinion, counsel for the Company may rely (A) as to matters involving the application of laws other than the laws of the United States and the laws of the State of Colorado, to the extent counsel for the Company deems proper and to the extent specified in such opinion, upon an opinion or opinions (in form and substance satisfactory to counsel for the Representative) of other counsel, acceptable to counsel for the Representative, familiar with the applicable laws, in which case the opinion of counsel for the Company shall state that the opinion or opinions of such other counsel are satisfactory in scope, form, and substance to counsel for the Company and that reliance thereon by counsel for the Company is reasonable; (B) as to matters involving ITC, upon an opinion or opinions of other counsel (in form and substance satisfactory to counsel for the Representative); (C) as to matters of fact, to the extent the Representative deems proper, on certificates of responsible officers of the Company; and (D) to the extent they deem proper, upon written statements or certificates of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to counsel for the Representative. c. At the Closing Date and any Additional Closing Date, you shall have received the favorable opinion of Haligman & Lottner, P.C., telecommunications counsel for the Company, dated the date of delivery, addressed to you, and in form and scope satisfactory to your counsel, to the effect that: i. Each of the Company and ITC is in compliance in all material respects with all applicable telecommunications-related rules and regulations of the United States and their respective state of incorporation, compliance with which is necessary to their business as currently conducted, including with respect to rules, regulations and tariffs promulgated by the Federal Communications Commission; ii. To the best knowledge of such counsel after due investigation, each of the Company and ITC is in compliance in all material respects with applicable telecommunications-related rules and regulations of foreign countries in which the Company or ITC currently operates, including specifically the countries of Argentina, Brazil, Italy, Lebanon, South Africa and South Korea; -30- iii. The statements of international or federal law or regulations contained under the captions "Risk Factors" and "Business - Regulation" and other references in the Registration Statement and Prospectus to telecommunications regulatory matters (collectively, the "Regulatory Portion") are, in all material respects, correct and accurate statements or summaries of applicable international, federal and state law and regulation, subject to the qualifications set forth therein; and iv. The Regulatory Portion of the Registration Statement and the Prospectus, at the time the Registration Statement became effective and at the Closing Date and any Additional Closing Date, did not contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. d. On or prior to the Closing Date and any Additional Closing Date, as the case may be, you shall have been furnished such information, documents, certificates, and opinions as you may reasonably require for the purpose of enabling you to review the matters referred to in Sections 7(b) and (c), and in order to evidence the accuracy, complete ness, or satisfaction of any of the representations, warranties, covenants, agreements, or conditions herein contained, or as you may reasonably request. e. At the Closing Date and any Additional Closing Date, as the case may be, you shall have received a certificate of the chief executive officer and of the chief financial officer of the Company, dated the Closing Date or such Additional Closing Date, as the case may be, to the effect that the conditions set forth in Section 7(a) have been satisfied, that as of the date of this Agreement and as of the Closing Date or such Additional Closing Date, as the case may be, the representations and warranties of the Company contained herein were and are accurate, and that as of the Closing Date or such Additional Closing Date, as the case may be, the obligations to be performed by the Company hereunder on or prior thereto have been fully performed. f. At the time this Agreement is executed and at the Closing Date and any Additional Closing Date, as the case may be, you shall have received a letter from Stockman Kast Ryan & Scruggs, P.C., Certified Public Accountants, addressed to you and dated the date of delivery but covering a period within three business days of such date, in form and substance satisfactory to you. -31- g. All proceedings taken in connection with the issuance, sale, transfer, and delivery of the Firm Shares and the Additional Shares shall be satisfactory in form and substance to you and to counsel for the Representative, and you shall have received a favorable opinion from counsel to the Company, dated as of the Closing Date or the Additional Closing Date, as the case may be, with respect to such of the matters set forth under Sections 7(b) and 7(c), respectively, and with respect to such other related matters, as you may reasonably request. h. The NASD, upon review of the terms of the public offering of the Firm Shares and the Additional Shares, shall not have objected to your participation in such offering. i. The Company shall have received notice that the Company's Common Stock will be quoted on The Nasdaq SmallCap Market/sm/ as of the Effective Date. j. The ITC Acquisition shall have been completed or shall be completed simultaneously with the Closing. k. The Company shall have engaged the services of the Representative pursuant to the terms of a corporate consulting agreement for a minimum of nine (9) months for a monthly fee payable to the Representative of $7,250. Any certificate or other document signed by any officer of the Company and delivered to you or to counsel for the Representative shall be deemed a representation and warranty by such officer individually and by the Company hereunder to the Representative as to the statements made therein. If any condition to your obligations hereunder to be fulfilled prior to or at the Closing Date or any Additional Closing Date, as the case may be, is not so fulfilled, you may terminate this Agreement or, if you so elect, in writing waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 8. Indemnification and Contribution. -------------------------------- a. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriters, the Representative, and each of their officers, directors, partners, employees, agents, and counsel, and each person, if any, who controls the Representative or any one of the Underwriters within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of this Section 8, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim -32- whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in this Section 8 collectively called an "application") in any jurisdiction in order to qualify the Common Stock under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in this Agreement. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Agreement; however, the Company shall have no liability under this Section 8 if such statement or omission was made in reliance upon and in conformity with written information furnished to the Company as stated in Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action is brought against the Underwriters, the Representative or any of their officers, directors, partners, employees, agents, or counsel, or any controlling persons of an Underwriter or the Representative (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may have other than pursuant to this Section 8(a)) and the Company shall promptly assume the defense of such action, including the employment of counsel (satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel satisfactory to such indemnified party or parties to have charge of the defense of such action -33- or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. The Company agrees promptly to notify the Underwriters and the Representative of the commencement of any litigation or proceedings against the Company or against any of its officers or directors in connection with the sale of the Shares, any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or any application. In addition to its other obligations under this Section 8(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of, or based upon, any statement or omission, or any alleged statement or omission, which is the subject of indemnification hereunder, it will reimburse the Representative and each of the Underwriters on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Representative or Underwriters for such expenses and notwithstanding the possibility that payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Representative and each Underwriter which is the recipient of an interim reimbursement payment shall promptly return such payment to the party or parties that made such payment, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Norwest Bank Colorado, N.A. (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Representative or the Underwriters within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This expense indemnity shall be in addition to any other liabilities which the Company may otherwise have hereunder. b. The Underwriters agree to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed the Registration -34- Statement, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriters in Section 8(a), but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Regis tration Statement, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in con formity with written information furnished to the Company as stated in this Section 8(b) with respect to the Underwriters by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be; provided, however, that the obligation of the Underwriters to provide indemnity under the provisions of this Section 8(b) shall be limited to the amount which represents the product of the number of Firm Shares and Additional Shares sold hereunder and the initial public offering price per Share set forth on the cover page of the Prospectus. For all purposes of this Agreement, the amounts of the selling concession and reallowance set forth in the Prospectus, the information under "UNDERWRITING" and the identification of counsel to the Representative under "LEGAL MATTERS" constitute the only information furnished in writing by or on behalf of the Underwriters expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended or supplemented), or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or any application, and in respect of which indemnity may be sought against the Underwriters pursuant to this Section 8(b), the Underwriters shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 8(a). c. In order to provide for just and equitable contribution in circumstances in which the indemnity agreement provided for in this Section 8 is for any reason held to be unavailable to the Underwriters or the Company, then the Company shall contribute to the damages paid by the several Underwriters, and the several Underwriters shall contribute to the damages paid by the Company; provided, however, that no person guilty of fraudulent -35- misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. In determining the amount of contribution to which the respective parties are entitled, there shall be considered the relative benefits received by each party from the sale of the Firm Shares and Additional Shares (taking into account the portion of the proceeds of the offering realized by each), the parties' relative knowledge and access to information concerning the matter with respect to which the claim was asserted, the opportunity to correct and prevent any statement or omission, and any other equitable considerations appropriate in the circumstances. The Company and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose). No Underwriter or person controlling such Underwriter shall be obligated to make contribution hereunder which in the aggregate exceeds the total public offering price of the Firm Shares and Additional Shares purchased by such Underwriter under this Agreement, less the aggregate amount of any damages which such Underwriter and its controlling persons have otherwise been required to pay in respect of the same or any substantially similar claim. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Act, shall have the same rights to contribution as the Company. Anything in this Section 8(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8(c) is intended to supersede any right to contribution under the Act, the Exchange Act, or otherwise. 9. Representations and Agreements to Survive Delivery. All -------------------------------------------------- representations, warranties, covenants, and agreements contained in this Agreement shall be deemed to be representations, warranties, covenants, and agreements at the Closing Date and any Additional Closing Date, and such representations, warranties, covenants, and agreements of the Underwriters and the Company, including the indemnity and contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the -36- Representative, the Underwriters or any indemnified person, or by or on behalf of the Company or any person or entity which is entitled to be indemnified under Section 8(b), and shall survive termination of this Agreement or the delivery of the Firm Shares and the Additional Shares to the Underwriters. In addition, the provisions of Sections 5(a), 6, 8, 9, 10, and 12 shall survive termination of this Agreement, whether such termination occurs before or after the Closing Date or any Additional Closing Date. 10. Effective Date of This Agreement and Termination Thereof. -------------------------------------------------------- a. This Agreement shall be executed within 24 hours of the Effective Date of the Registration Statement and shall become effective on the Effective Date or at the time of the initial public offering of the Shares, whichever is earlier. The time of the initial public offering shall mean the time, after the Registration Statement becomes effective, of the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Shares or the time, after the Registration Statement becomes effective, when the Shares are first released by the Representative for offering by dealers by letter or telegram, whichever shall first occur. The Representative or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except as noted below in this Section 10, by giving the notice indicated in Section 10(c) before the time this Agreement becomes effective. b. The Representative shall have the right to terminate this Agreement at any time prior to the Closing Date or any Additional Closing Date, as the case may be, by giving notice to the Company if there shall have been a general suspension of, or a general limitation on prices for, trading in securities on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market; or if there shall have been an outbreak of major hostilities or other national or international calamity; or if a banking moratorium has been declared by a state or federal authority; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if there shall have been a material interruption in the mail service or other means of communication within the United States; or if the Company shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage, or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative's opinion, make it inadvisable to proceed with the offering, sale, or delivery of the Firm Shares or the Additional Shares, as the case may be; or if there shall have been such material and -37- adverse change in the market for securities in general so as to make it inadvisable to proceed with the offering, sale, and delivery of the Firm Shares and the Additional Shares, as the case may be, on the terms contemplated by the Prospectus due to the impaired investment quality of the Firm Shares or the Additional Shares; or if the Dow Jones Industrial Average shall have fallen by 15% or more from its closing price on the day immediately preceding the date that the Registration Statement is declared effective by the Commission. c. If the Representative elects to prevent this Agreement from becoming effective as provided in this Section 10, or to terminate this Agreement, it shall notify the Company promptly by telephone, telex, or telegram, confirmed by letter. If, as so provided, the Company elects to prevent this Agreement from becoming effective, the Company shall notify the Representative promptly by telephone, telex, or telegram, confirmed by letter. d. If this Agreement shall not become effective by reason of an election pursuant to this Section 10 or if this Agreement shall terminate or shall otherwise not be carried out for any reason, the Company shall be obligated to reimburse the Representative for its out-of-pocket expenses. Should the Representative be required to account for "out-of-pocket" expenses, any expense incurred by the Representative shall be deemed to be reasonable and unobjectionable upon a reasonable showing by the Representative that such expenses were incurred, directly or indirectly, in connection with the proposed transaction and/or relationship of the parties hereto, as described herein. e. Notwithstanding any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Sections 5(a), 6, 8, 9, and 10 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. f. Anything in this Agreement to the contrary notwithstanding other than Section 10(e), if this Agreement shall not become effective by reason of the Company being acquired, merging, selling all or substantially all of its assets or otherwise affecting a corporate reorganization with any other entity or the taking of any other action by the Company which prevents the Representative from proceeding with the offering and, as a result, the offering contemplated hereby is abandoned, the Representative shall be entitled to receive from the Company an amount equal to the non-accountable expense allowance described in Section 6 above which the Company and the Representative mutually agree is a fair measure of compensation to the Representative for the contemplated offering. Such cash fees shall be -38- for services to include, but not be limited to, advising the Company in connection with the acquisition, merger, sale or reorganization, financial planning in connection with such acquisition, merger, sale or corporate re- organization, and other financial assistance. Such cash fees shall be in addition to payment for expenses and fees as discussed in Section 10(d) above. 11. Notices. All communications hereunder, except as may be otherwise ------- specifically provided herein, shall be in writing and, if sent to the Representative, shall be mailed, delivered, or sent by facsimile transmission and confirmed by original letter, to Cohig & Associates, Inc., Suite 400, 6300 South Syracuse Way, Englewood, Colorado 80203, Attention: Harold M. Golz, Esq., with a copy to Robert W. Walter, Esq., Berliner Zisser Walter & Gallegos, P.C., 1700 Lincoln Street, Suite 4700, Denver, Colorado 80203; or if sent to the Company shall be mailed, delivered, or telexed or telegraphed and confirmed by letter, to Communications Systems International, Inc., Suite 101, 8 South Nevada Avenue, Colorado Springs, Colorado 80903, Attention: Robert A. Spade, President, with a copy to Douglas R. Wright, Esq., Parcel, Mauro, Hultin & Spaanstra, P.C., Suite 3600, 1801 California Street, Denver, Colorado 80202. All notices hereunder shall be effective upon receipt by the party to which it is addressed. 12. Parties. This Agreement shall inure solely to the benefit of, and ------- shall be binding upon, the Underwriters, the Company, and the persons and entities referred to in Section 8 who are entitled to indemnification or contribution, and their respective successors, legal representatives, and assigns (which shall not include any buyer, as such, of the Firm Shares or the Additional Shares) and no other person shall have or be construed to have any legal or equitable right, remedy, or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 13. Construction. This Agreement shall be construed in accordance with ------------ the laws of the State of Colorado, without giving effect to conflict of laws. Time is of the essence in this Agreement. If the foregoing correctly sets forth the understanding between us, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By:___________________________________________ Robert A. Spade, Chief Executive Officer -39- ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN. COHIG & ASSOCIATES, INC., for itself By: _________________________________ Harold M. Golz, Esq., Director of Corporate Finance -40- COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. (A COLORADO CORPORATION) SCHEDULE 1 This Schedule sets forth the name of each Underwriter referred to in the Underwriting Agreement and the number of Firm Shares of Common Stock to be sold by the Company. NUMBER OF FIRM SHARES OF NAME COMMON STOCK -------------------------------- ------------ Cohig & Associates, Inc. _________ Total 1,000,000 ========= RWW\CSI\UNDERWRI.AG2 -41- EX-1.2 3 FORM OF SELECTED DEALERS AGREEMENT Exhibit 1.2 SELECTED DEALERS AGREEMENT PUBLIC OFFERING OF 1,000,000 SHARES OF COMMON STOCK OFFERING PRICE OF $_________________ PER SHARE COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ___________________________, 1998 Cohig & Associates, Inc., on behalf of itself and other underwriters (the "Underwriters") for which it is the representative (the "Representative"), has severally agreed with Communications Systems International, Inc., a Colorado corporation (the "Company"), to purchase 1,000,000 shares (the "Firm Shares") of common stock, par value $.001 per share (the "Common Stock") of the Company, and the Representative has been granted the right to purchase up to an additional 150,000 shares (the "Additional Shares") at its option for the sole purpose of covering over-allotments in the sale of the Firm Shares (the Firm Shares and Additional Shares being collectively referred to as the "Shares"). The Underwriters are offering the Shares to the public at an offering price of $_____ per Share. Certain other capitalized terms used herein are defined in the Underwriting Agreement and are used herein as therein defined. The Representative is offering the Shares to certain selected dealers (the "Selected Dealers"), when, as and if accepted by the Representative and subject to withdrawal, cancellation or modification of the offer without notice and further subject to the terms of (i) the Company's current Prospectus, (ii) the Underwriting Agreement, (iii) this Agreement, and (iv) the Representative's instructions which may be forwarded to the Selected Dealer from time to time. A copy of the Underwriting Agreement will be delivered to you forthwith for inspection or copying or both, upon your request therefor. This invitation is made by the Representative only if the Shares may be offered lawfully to dealers in your state. The further terms and conditions of this invitation are as follows: 1. Acceptance of Orders. Orders received by the Representative from the -------------------- Selected Dealer will be accepted only at the price, in the amounts and on the terms which are set forth in the Company's current Prospectus, subject to allotment in the Representative's uncontrolled discretion. The Representative reserves the right to reject any orders, in whole or in part. 2. Selling Concession. As a Selected Dealer, you will be allowed on all ------------------ Shares purchased by you, which the Underwriters have not repurchased or contracted to repurchase prior to termination of this Agreement at or below the public offering price, a concession of ______% of the full 10% Underwriting discount, i.e., $________ per Share as shown in the Company's current Prospectus. No selling concession will be allowed to any domestic broker-dealer who is not a member of the National Association of Securities Dealers, Inc. (the "Association"), or to any foreign broker-dealer eligible for membership in the Association who is not a member of the Association. Payment of such selling concession to you will be made only as provided in Section 4 hereof. After the Shares are released for sale to the public, the Representative is authorized to, and may, change the public offering price and the selling concession. 3. Reoffer of Shares. Shares purchased by you are to be bona fide ----------------- reoffered by you in conformity with this Agreement and the terms of offering set forth in the Prospectus. You agree that you will not bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any Shares except as contemplated by this Agreement and except as a broker pursuant to unsolicited orders. You confirm that you have complied and agree that you will at all times comply with the provisions of Rule 10b-6 of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") applicable to this offering. In respect of Shares sold by you and thereafter purchased by the Representative at or below the public offering price prior to the termination of this Agreement as described hereinafter (or such longer period as may be necessary to cover any short position with respect to the offering), you agree at the Representative's option either to repurchase the Shares at a price equal to the cost thereof to the Representative, including commissions and transfer taxes on redelivery, or to repay the Representative such part of your Selected Dealers' concessions on such Shares as the Representative designates. 4. Payment for Shares. Payment for the Shares purchased by you is to be ------------------ made at the net Selected Dealers' price of $______ per Share, at the offices of Cohig & Associates, Inc., Suite 430, 6300 South Syracuse Way, Englewood, Colorado 80203, Attention: Syndicate Department, at such time and on such date as the Representative may designate, by certified or official bank check, payable in clearing house funds to the order of the Representative, against delivery of certificates for the Shares so purchased. If such payment is not made at such time and on such date, you agree to pay the Representative interest on such funds at the current interest rates. The Representative may in its discretion deliver the Shares purchased by you through the facilities of the Depository Trust Company or, if you are not a member, through your ordinary correspondent who is a member unless you promptly give the Representative written instructions otherwise. 5. Offering Representations. The Representative has been informed that a ------------------------ Registration Statement in respect of the Shares is expected to become effective under the Securities Act of 1933, as amended (the "Act"). You are not authorized to give any information or to make any representations other than those contained in the Prospectus or to act as agent for the Company or for the undersigned when offering the Shares to the public or otherwise. 6. Blue Sky. Neither the Representative nor the Underwriters assume any -------- responsibility or obligations as to your right to sell the Shares in any jurisdiction, notwithstanding any information furnished in that connection. The Selected Dealer shall report in writing to the Representative the number of Shares which have been sold by it in each state and the number of transactions made in each such state. This state report shall be submitted to the Representative as soon as possible after completion of billing, but in any event not more than three days after the closing. 7. Dealer Undertakings. By accepting this Agreement, the Selected Dealer ------------------- in offering and selling the Shares in the Public Offering (i) acknowledges its understanding of (a) the Conduct Rules (the "Rules") of the Association and the interpretations of such Rules promulgated by the Board of Governors of the Association (the "Interpretations") including, but not limited to the Rule and Interpretation with respect to "Free-Riding and Withholding" defined therein, (b) Rule 174 of the rules and regulations promulgated under the Act, (c) Rules 10b-5 and 10b-6 promulgated under the Exchange Act, (d) Release No. 3907 under the Act, (e) Release No. 4150 under the Act, and (f) Sections 2730, 2740, 2420 and 2750 of the Rules and Interpretations thereunder, and (ii) represents, warrants, covenants and agrees that it shall comply with all applicable requirements of the Act and the Exchange Act in addition to the specific provisions cited in subparagraph (i) above and that it -2- shall not violate, directly or indirectly, any provision of applicable law in connection with its participation in the Public Offering of the Shares. 8. Conditions of Public Offering. All sales shall be subject to delivery ----------------------------- by the Company of certificates evidencing the Shares against payment therefore. 9. Failure of Order. If an order is rejected or if a payment is received ---------------- which proves insufficient or worthless, any compensation paid to the Selected Dealer shall be returned by (i) restoration by the Representative to the Selected Dealer of the latter's remittance or (ii) a charge against the account of the Selected Dealer with the Representative, as the latter may elect without notice being given of such election. 10. Additional Representations, Covenants and Warranties of Selected ---------------------------------------------------------------- Dealer. By accepting this Agreement, the Selected Dealer represents that it is - ------ registered as a broker-dealer under the Exchange Act; is qualified to act as a dealer in the states or the jurisdictions in which it shall offer the Shares; is a member in good standing of the Association; and shall maintain such registrations, qualifications and membership in full force and effect and in good standing throughout the term of this Agreement. If the Selected Dealer is not a member of the Association, it represents that it is a foreign dealer not registered under the Exchange Act and agrees to make no sales within the United States, its territories or its possessions or to persons who are citizens thereof or residents therein, and in making any sales to comply with the Association's Rules and Interpretations with respect to Free-Riding and Withholding. Further, the Selected Dealer agrees to comply with all applicable federal laws including, but not limited to, the Act and Exchange Act and the rules and regulations of the Commission thereunder; the laws of the states or other jurisdictions in which Shares may be offered or sold by it; and the Constitution, Bylaws, and rules of the Association. Further, the Selected Dealer agrees that it will not offer or sell the Shares in any state or jurisdiction except those in which the Shares have been qualified or qualification is not required. The Selected Dealer acknowledges its understanding that it shall not be entitled to any compensation hereunder for any period during which it has been suspended or expelled from membership in the Association. 11. Employees and other Agents of the Selected Dealer. By accepting this ------------------------------------------------- Agreement, the Selected Dealer assumes full responsibility for thorough and proper training of its employees and other agents and representatives concerning the selling methods to be used in connection with the Public Offering of the Shares, giving special emphasis to the principles of full and fair disclosure to prospective investors and the prohibitions against "Free-Riding and Withholding" as set forth in Section 2110 of the Rules and the Interpretations thereunder. 12. Indemnification by the Company. The Company has agreed in Section 8 ------------------------------ of the Underwriting Agreement to indemnify and hold harmless the Underwriters, the Representative and each person if any, who controls the Representative or any one of the Underwriters within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against any and all loss, liability, claim, damage, and expense whatsoever (which shall include, for all purposes of Section 8 of the Underwriting Agreement, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing, or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation) as and when incurred arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended and supplemented), or -3- any amendment or supplement thereto, or (B) in any application or other document or communication (in the Underwriting Agreement collectively called an "application") in any juris diction in order to qualify the Common Stock under the "blue sky" or securities laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any breach of any representation, warranty, covenant, or agreement of the Company contained in the Underwriting Agreement. The Representative has agreed to give the Company an opportunity and the right to participate in the defense or preparation of the defense of any action brought against the Representative, any Underwriter or any controlling person thereof to enforce any such loss, claim, demand, liability or expense. The agreement of the Company under this indemnity is conditioned upon notice of any such action having been promptly given by the indemnified party to the Company. Failure to notify the Company as provided in the Underwriting Agreement shall not relieve the Company of its liability which it may have to the Representative, the Underwriters, or any controlling person thereof other than pursuant to Section 8(a) of the Underwriting Agreement. This agreement is subject in all respects, especially insofar as the foregoing description of the indemnification provisions set forth in the Underwriting Agreement is concerned, to the terms and provisions of the Underwriting Agreement, a copy of which will be made available for inspection or copying or both to the Selected Dealer upon written request to the Representative therefor. The Selected Dealer acknowledges and confirms that, by signing a counterpart of this Agreement, it shall be deemed an agent of the Underwriters or a "Representative" for all purposes of Section 8 of the Underwriting Agreement, as expressly set forth therein. 13. Indemnification by the Selected Dealer. The Selected Dealer shall -------------------------------------- indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed the Registration Statement, each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the indemnity from the Company to the Underwriters in Section 8(a) of the Underwriting Agreement, but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement, or the Prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with information furnished to the Representative or the Company with respect to the Selected Dealer by or on behalf of the Selected Dealer expressly for inclusion in any Preliminary Prospectus, the Registration Statement, or the Prospectus, or any amendment or supplement thereto, or in any application, as the case may be, or are based upon alleged misrepresentations or omissions to state material facts in connection with statements made by the Selected Dealer or the Selected Dealer's employees or other agents to the Company or the Representative orally or by any other means; provided, however, that the obligation of the Selected Dealer to provide indemnity hereunder shall be limited to the amount which represents the product of the number of Firm Shares and Additional Shares sold and the initial public offering price per Share set forth on the cover page of the Prospectus. If any action shall be brought against the Company or any other person so indemnified in respect of which indemnity may be sought against the Selected Dealer pursuant to this provision, the Selected Dealer shall have the rights and duties given to the Company in the Underwriting Agreement, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of Section 8(a) of the Underwriting Agreement; and the Selected Dealer shall reimburse the Company and the Representative for any legal or other expenses reasonably incurred by them in connection with the investigation of or the defense of any such action or claim. The Representative shall, after receiving the first summons or other legal process disclosing the nature of the action being brought against it or the Company in any -4- proceeding with respect to which indemnity may be sought by the Company or the Representative hereunder, notify promptly the Selected Dealer in writing of the commencement thereof; and the Selected Dealer shall be entitled to participate in (and, to the extent the Selected Dealer shall wish, to direct) the defense thereof at the expense of the Selected Dealer, but such defense shall be conducted by counsel satisfactory to the Company and the Representative. If the Selected Dealer shall fail to provide such defense, the Company or the Representative may defend such action at the cost and expense of the Selected Dealer. The Selected Dealer's obligation under this Section 13 shall survive any termination of this Agreement, the Underwriting Agreement and the delivery of and payment for the Shares under the Underwriting Agreement, and shall remain in full force and effect regardless of the investigation made by or on behalf of any Representative within the meaning of Section 15 of the Act. 14. No Authority to Act as Partner or Agent. Nothing herein shall --------------------------------------- constitute the Selected Dealers as an association or other separate entity or partners with or agents of the Representative or with each other, but each Selected Dealer shall be responsible for its pro rata share of any liability or expense based upon any claims to the contrary. The Representative shall not be under any liability for or in respect of the value, validity or form of the Shares, or the delivery of certificates for the Shares or the performance by any person of any agreement on its part, or the qualification of the Shares for sale under the laws of any jurisdiction, or for or in respect of any matter in connection with this Agreement, except for lack of good faith and for obligations expressly assumed by the Representative in this Agreement. 15. Expenses. No expenses incurred in connection with offers and sales of -------- the Shares under the Public Offering will be chargeable to the Selected Dealers. A single transfer tax, if any, on the sale of Shares by the Selected Dealer to its customers will be paid when such Shares are delivered to the Selected Dealer for delivery to its customers. Notwithstanding the foregoing, the Selected Dealer shall pay its proportionate share of any transfer tax or any other tax (other than the single transfer tax described above) if any such tax shall at any time be assessed against the Representative and other Selected Dealers. 16. Notices. All notices, demands or requests required or authorized ------- hereunder shall be deemed given sufficiently if in writing and sent by registered or certified mail, return receipt requested and postage prepaid, or by tested telex, telegram, cable or facsimile to, in the case of the Representative, the address set forth above directed to the attention of the President of the Representative, and in the case of the Selected Dealer, to the address provided below by the Selected Dealer, directed to the attention of the President. 17. Termination. This Agreement may be terminated by the Representative ----------- with or without cause upon written notice to Selected Dealer to such effect; and such notice having been given, this Agreement shall terminate at the time specified therein. Additionally, this Agreement shall terminate upon the earlier of the termination of the Underwriting Agreement, or at the close of business thirty days after the Shares are released by the Representative for sale to the public. 18. General Provisions. This Agreement shall be construed and enforced in ------------------ accordance with and governed by the laws of the State of Colorado. This Agreement embodies the entire agreement and understanding between the Representative and the Selected Dealer and supersedes all prior agreements and understandings related to the subject matter hereof, and this Agreement may not be modified or amended or any term or provision hereof waived or discharged except in writing -5- signed by the party against whom such amendment, modification, waiver or discharge is sought to be enforced. All the terms of this Agreement, whether so expressed or not, shall be binding upon, and shall inure to the benefit of, the respective successors, legal representatives and assigns of the parties hereto; provided, however, that none of the parties hereto can assign this Agreement or any of its rights hereunder without the prior written consent of the other party hereto, and any such attempted assignment or transfer without the other party's prior written consent shall be void and without force or effect. The headings of this Agreement are for purposes of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. If the foregoing correctly sets forth the terms and conditions of your agreement to purchase the Shares allotted to you, please indicate your acceptance thereof by signing and returning to Cohig and Associates, Inc. the duplicate copy of this Agreement, whereupon this letter and your acceptance shall become and evidence a binding contract between you and the Representative. COHIG & ASSOCIATES, INC. By: _______________________________ Title:_____________________________ -6- Gentlemen: The undersigned confirms its agreement to purchase ____________ Shares of Communications Systems International, Inc., upon the terms and subject to the conditions of the foregoing Selected Dealers Agreement, and further agrees that any agreement by it to purchase additional Shares during the life of such Agreement will be upon the same terms and subject to the same conditions. The undersigned acknowledges receipt of the Prospectus relating to the public offering of the Shares and confirms that in agreeing to purchase such Shares it has relied on such Prospectus and not on any other statement whatsoever written or oral. Firm Name: ______________________________ (Print or Type name of Firm) By: _____________________________________ (Authorized Agent) _____________________________________ (Print or Type Name and Title of Authorized Agent) Address: ________________________________ _________________________________________ Telephone No. ___________________________ IRS Employer Identification No.: ________ Dated: ____________________________, 1998 -7- EX-2.1 4 PLAN AND ARTICLES OF MERGER EXHIBIT 2.1 PLAN OF MERGER (a) CONSTITUENT CORPORATIONS: Redden Dynamics, Inc. (A Delaware Corporation) Communications Systems International, Inc. (A Colorado Corporation) Redden Dynamics, Inc. has only one class of stock outstanding, that being common stock. Redden Dynamics, Inc. has 11,050,382 shares of common stock outstanding, with each share entitled to one vote. Communications Systems International, Inc. has only one class of stock outstanding, that being common stock. Communications Systems International, Inc. has 490,104 shares of common stock issued and outstanding, with each share entitled to one vote. (b) SURVIVING CORPORATION: Communications Systems International, Inc. (A Colorado Corporation) (c) Effective as of the date of the merger, (i) all shares of Redden Dynamics, Inc. shall be cancelled, (ii) all assets of Redden Dynamics, Inc. shall become assets of Communications Systems International, Inc., (iii) all liabilities of Redden Dynamics, Inc. shall be assumed by Communications Systems International, Inc., (iv) each shareholder of Redden Dynamics, Inc. shall receive one share of Communications Systems International, Inc. for each 13.5 shares of Redden Dynamics, Inc. held by such shareholder, and (v) Redden Dynamics, Inc. shall cease to exist. ARTICLES OF MERGER (1) CONSTITUENT CORPORATIONS: Redden Dynamics, Inc. (A Delaware Corporation) Communications Systems International, Inc. (A Colorado Corporation) (2) PLAN OF MERGER: Effective as of the date of the merger, (i) all shares of Redden Dynamics, Inc. shall be cancelled, (ii) all assets of Redden Dynamics, Inc. shall become assets of Communications Systems International, Inc., (iii) all liabilities of Redden Dynamics, Inc. shall be assumed by Communications Systems International, Inc., (iv) each shareholder of Redden Dynamics, Inc. shall receive one share of Communications Systems International, Inc. for each 13.5 shares of Redden Dynamics, Inc. held by such shareholder, and (v) Redden Dynamics, Inc. shall cease to exist. (3) The effective date of the merger is September 14, 1995. The number of votes cast for the Plan of Merger by each voting group entitled to vote separately on the merger was sufficient for approval by that voting group. (4) An Agreement of Merger has been approved, adopted, certified, executed and acknowledged by each of the Constituent Corporations in accordance with Section 252(c) of the Delaware Corporation Law. (5) SURVIVING CORPORATION: Communications Systems International, Inc. (A Colorado Corporation) (6) The Certification of Incorporation of the Surviving Corporation shall be its Certificate of Incorporation. (7) The executed Agreement of Merger is on file at the principal place of business of the Surviving Corporation. The address of the Surviving Corporation is: Communications Systems International, Inc. 8 South Nevada Avenue, Suite 101 Colorado Springs, CO 80903 (8) A copy of the Agreement of Merger wi11 be furnished by the Surviving Corporation, on request and without cost, to any stockholder of any Constituent Corporation. (9) AUTHORIZED CAPITAL STOCK OF Redden Dynamics, Inc. (A Delaware corpora- EACH CONSTITUENT CORPORATION tion had, prior to the merger, an authorized TO THE MERGER WHICH IS NOT A capital of 20,000,000 shares of Common Stock, COLORADO CORPORATION: $0.001 par value. DATED: September 14, 1995 REDDEN DYNAMICS, INC. (A Delaware Corporation) By /s/ ROBERT SPADE ____________________________ Robert Spade, President By /s/ ANTHONY THOMASON ____________________________ Anthony Thomason, Secretary COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. (A Colorado Corporation) By /s/ ROBERT SPADE ____________________________ Robert Spade, President By /s/ ANTHONY THOMASON ____________________________ Anthony Thomason, Secretary MERGER___________________________CONSOLIDATION_________________________________ CANCELLATION OF LIMITED PARTNERSHIP DUE TO MERGER______________________________ DOMESTIC_____________ FOREIGN___________ PROFIT__________ NONPROFIT_________ _______________________________________________________________________________ _______________________________________________________________________________ _______________________________________________________________________________ MERGER #951138197 REDDEN DYNAMICS, INC. (DELAWARE CORP NQ) INTO COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. (COLORADO CORP DP 931044294) THE SURVIVOR EX-3.1 5 CSI ARTICLES OF INCORPORATION EXHIBIT 3.1 ARTICLES OF INCORPORATION OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. KNOW ALL MEN BY THESE PRESENTS, that PAUL W. FIX, 1457 Teller County Road 12, Florissant, Colorado 80816, J. RUDY BAUER, 9190 Chipita Park Rd., Chipita Park, Colorado 80809, CURTIS BURRIS, 311 E. Sheridan Ave. #21, Woodland Park, Colorado 80866 desiring to associate ourselves together for the purpose of becoming a body corporate and politic under and by virtue of the Colorado Corporation Act of the State of Colorado, do hereby make, execute and verify these Articles of Incorporation of COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ARTICLE I -------- NAME ---- The name and style of said corporation shall be COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ARTICLE II ---------- TERM ---- The said corporation is to have perpetual existence. ARTICLE III ----------- PURPOSES -------- The purposes for which this corporation is organized and the nature of the business to be transacted, promoted and carried on are as follows, to-wit: 1. To carry on all lawful business as permitted by the Colorado Corporation Act. ARTICLE IV ---------- CAPITAL STOCK ------------- The aggregate number of shares which the corporation shall have authority to issue is five hundred thousand (500,000) shares of common stock, which shall be of no par value. Each and every share of stock may be issued from time to time at the option, choice or discretion of the Board of Directors of the corporation for any considerations deemed sufficient by the Board and none of said shares of stock in the hands of any person whomsoever shall be liable or render such person liable for the payment of any assessment or any obligation or payment on account of debts and obligations of the corporation. The directors may purchase property and rights necessary for the business of the corporation and issue shares to the amount of the value thereof in payment thereof and in payment of any obligation of the corporations and the shares so issued shall be declared and taken to be fully paid and non-assessable and not liable to any further call nor shall the holders thereof be liable for any further payments under the Statutes of this State. The judgment and discretion of the Board of Directors in all matters pertaining to the issuance of such shares shall be conclusive for all purposes. ARTICLE V -------- DIRECTORS --------- The number of directors constituting the Board of Directors shall be not less than five (5) nor more than seven (7). The number of directors constituting the initial Board of Directors shall be five (5). The names and addresses of the persons who are to serve as directors until the first annual meeting of shareholders or until their successors be elected and qualify are as follows: Paul W. Fix, 1457 Teller County Road 12, Florissant, CO 80816 J. Rudy Bauer, 9190 Chipita Park Rd., Chipita Park, CO 80813 Curtis Burris, 311 E. Sheridan Ave., #21, Woodland Park, CO 80866 Bruce Hubby, 557 Gold King Dr., CCME, Cripple Creek, CO 80813 Robert A. Spade, 121 E. Pikes Peak Ave. #335, Colorado Springs, CO 80903 ARTICLE VI ---------- MEETINGS -------- Any and all meetings of the stockholders and of the Board of Directors of the Corporation may be held within or beyond the limits of the State of Colorado, at such place or places as may be determined from time to time by the Board of Directors and the said Board of Directors shall have the power and authority to meet and transact any business of the company requiring the action of said Board without the State of Colorado and in such other states as the exigencies of the company's business may demand, or as may be deemed expedient or convenient and the proceedings at all such meetings, or any of them, shall have the same binding force and effect as if such meetings were held in the principal office of the Corporation in the State of Colorado. ARTICLE VII ----------- OFFICE ------ The initial registered office of the Corporation shall be located at 318 So. 8th Street, Colorado Springs, Colorado 80905, and the name of its initial Registered Agent at such address shall be Wendell R. Goodbee. ARTICLE VIII ------------ SALE OR DISPOSITION OF PROPERTY ------------------------------- The Corporation may, at any meeting of its Board of Directors, by a majority vote of the whole Board, sell, lease, exchange and/or convey all of its property and assets, including its good will and its corporate franchises, upon such terms and conditions and for such consideration or considerations as its Board of Directors shall deem expedient and for the best interests of the corporation and said consideration may consist in whole or in part of shares of stock in, and/or other securities of any other corporation or corporations; provided, however, in all such cases, the affirmative vote of the holders of a two-thirds majority of the stock of said corporation then issued and outstanding and having voting power, shall be voted in ratification of the action of the Board of Directors, said vote to be taken at the stockholders' meeting of said corporation duly called for that purpose; provided, however, nothing herein shall be construed to limit the power of the Board of Directors of the corporation to sell, lease, exchange and/or convey such parts or parcels of its real or personal property or assets as the Board of Directors determines are no longer necessary or expedient to be held by the corporation. ARTICLE IX ---------- CUMULATIVE VOTING ----------------- The cumulative system of voting for directors shall be allowed. ARTICLE X --------- BY-LAWS ------- The Board of Directors of the corporation shall have the power to make and adopt such prudential by-laws as it may consider proper and expedient for the conduct and management of its business and affairs and to repeal, alter and amend the same from time to time as it may see fit; provided, however, that the same shall in no way be inconsistent with the provisions of these Articles or with the laws of the State of Colorado. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day of April, 1993. /s/ Paul W. Fix ------------------------------------ Paul W. Fix /s/ J. Rudy Bauer ------------------------------------ J. Rudy Bauer /s/ Curtis Burris ------------------------------------ Curtis Burris STATE OK. COLORADO ) )ss. EL PASO COUNTY ) I, Gwen E. Francis, a Notary Public, hereby certify that on the 12th day of April, 1993, Paul W. Fix, J. Rudy Bauer and Curtis Burris personally appeared before me, who being by me first duly sworn, declared themselves to be the incorporators and that the statements therein contained are true. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 12th day of April, 1993. My commission expires: June 7, 1994 /s/ Gwen E. Francis ------------------------------------- Notary Public 318 So. 8th Street Colorado Springs, CO 80905 Please include a typed MAIL TO. FOR OFFICE USE ONLY self-addressed envelope. SECRETARY OF STATE CORPORATIONS SECTION MUST BE TYPED 1560 Broadway, Suite 200 FILING FEE: S25.00* Denver, CO 80202 MUST SUBMIT TWO COPIES (303) 894-2251 --- Fax (303) 894-2242 ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado Business Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ------------------------------------------ SECOND: The following amendment to the Articles of Incorporation was adopted on Jan. 14, 1995, as prescribed by the Colorado Business Corporation Act, in the manner marked with an X below: ______ No shares have been issued or Directors Elected--Action by Incorporators ______ No shares have been issued but Directors Elected--Action by Directors ______ Such amendment was adopted by the board of directors where shares have been issued. X Such amendment was adopted by a vote of the shareholders. The number of - ------ shares voted for the amendment was sufficient for approval. If these amendments are to have a delayed effective date, please list that date: - ------------------------------------------------------------------------------- (Not to exceed ninety (90) days from the date of filing) Amendment(s): Authorization of 500,000 additional shares of no par value common - ------------------------------------------------------------------------------- stock; - ------------------------------------------------------------------------------- Removal of cumulative voting for directors of the Company; - ------------------------------------------------------------------------------- Removal of preemptive rights for stock subscriptions. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THIRD: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: N/A FOURTH: The manner in which such amendment effects a change in the amount of stated capital and the amount of stated capital as changed by such amendment, is as follows: The amount of authorized no par value common stock is increased from 500,000 shares to 1,000,000 shares. ----------------------------------------- By SIGNATURE ILLEGIBLE -------------------------------------- Its CHAIRMAN ------------------------------------- TITLE * Fees are subject to change and should be confirmed before filing. ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado Business Corporation Act, Communications Systems International, Inc. adopts the following Articles of Amendment to its Articles of Incorporation: The following amendments were adopted on September 14, 1995, in the manner prescribed by the Colorado Business Corporation Act, in the manner marked with an "X" below: _____ Such amendments were adopted by the Board of Directors. X Such amendments were adopted by a vote of the shareholders. The ---- number of votes cast for the amendments by each voting group entitled to vote separately on the amendments was sufficient for approval by that voting group. ARTICLE IV is amended in its entirety to read as follows: ARTICLE IV Capital Stock ------------- 1. The authorized capital stock of the Corporation shall consist of 25,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, no par value. 2. No share of the common stock shall have any preference over or limitation in respect to any other share of such common stock. All shares of common stock shall have equal rights and privileges. 3. Each outstanding share of common stock shall be entitled to one vote at stockholders' meetings, either in person or by proxy. 4. The designations, powers, rights, preferences, qualifications, restrictions and limitations of the preferred stock shall be established from time to time by the Corporation's Board of Directors, in accordance with the Colorado Business Corporation Act. 5. Cumulative voting shall not be allowed in elections of directors or for any purpose. 6. No holders of shares of the capital stock of the Corporation shall be entitled, as such, to any preemptive or preferential right to subscribe to any unissued stock or any other securities which the Corporation may now or hereafter be authorized to issue. The Board of Directors of the Corporation, however, in its discretion by resolution, may determine that any un- issued securities of the Corporation shall be offered for subscription solely to the holders of common stock of the Corporation, or solely to the holders of any class or classes of such stock, which the Corporation may now or hereafter be authorized to issue, in such proportions based on stock ownership as said board in its discretion may determine. 7. The Board of Directors may restrict the transfer of any of the Corporation's stock issued by giving the Corporation or any stockholder "first right of refusal to purchase" the stock, by making the stock redeemable, or by restricting the transfer of the stock under such terms and in such manner as the directors may deem necessary and as are not inconsistent with the laws of this State. Any stock so restricted must carry a conspicuous legend noting the restriction and the place where such restriction may be found in the records of the Corporation. 8. The judgment of the Board of Directors as to the adequacy of any consideration received or to be received for any shares, options, or any other securities which the Corporation at any time may be authorized to issue or sell or otherwise dispose of shall be conclusive in the absence of fraud, subject to the provisions of these Articles of Incorporation and any applicable law. ARTICLE V is amended in its entirety to read as follows: ARTICLE V DIRECTORS --------- The affairs of the Corporation shall be governed by a board of not less than one (1) director. Directors who shall be elected in accordance with the Bylaws of the Corporation. Subject to such limitation, the number of directors shall be fixed by or in the manner provided in the Bylaws of the Corporation, as may be amended from time to time. ARTICLE VII is amended in its entirety to read as follows: ARTICLE VII PLACE OF BUSINESS ----------------- The principal office and the principal place of business of the Corporation shall be: 8 South Nevada, Suite 101 Colorado Springs, CO 80903 The Board of Directors, however, from time to time may establish such other offices, branches, subsidiaries, or divisions which it may consider to be advisable. The address of the Corporation's registered office in Colorado shall be: 8 South Nevada, Suite 101 Colorado Springs, CO 80903 --2-- The name of the Corporation's registered agent at the address of the aforesaid registered office shall be: Robert Spade ARTICLE VIII is amended in its entirety to read as follows: ARTICLE VIII TRANSACTIONS WITH DIRECTORS AND ------------------------------- OTHER INTERESTED PARTIES ------------------------ No contract or other transaction between the Corporation and any other corporation, whether or not a majority of the shares of the capital stock of such other corporation is owned by the Corporation, and no act of the Corporation shall in any way be affected or invalidated by the fact that any of the directors of the Corporation are pecuniarily or otherwise interested in, or are directors or officers of, such other corporation. Any director of the corporation, individually, or any firm with which such director is affiliated may be a party to or may be pecuniarily or otherwise interested in any contract or transaction of the Corporation; provided, however, that the fact that he or such firm is so interested shall be disclosed or shall have been known to the Board of Directors of the Corporation, or a majority thereof, at or before the entering into such contract or transaction; and any director of the Corporation who is also a director or officer of such other corporation, or who is so interested, may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which shall authorize such contract or transaction, with like force and effect as if he were not such director or officer of such other corporation or not so interested. ARTICLE IX is amended in its entirety to read as follows: ARTICLE IX VOTING ------ When, with respect to any action to be taken by stockholders of this Corporation, the Colorado Business Corporation Act requires the affirmative vote of the holders of more than a majority of the outstanding shares entitled to vote thereon, or of any class or series, such action may be taken by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote on such action. ARTICLE X is amended in its entirety to read as follows: ARTICLE X LIMITATION OF DIRECTOR LIABILITY -------------------------------- AND INDEMNIFICATION ------------------- No director of the Corporation shall have liability to the Corporation or to its stockholders or to other security holders for monetary damages for breach of fiduciary duty as a director; provided, however, that such provisions shall not eliminate or limit the liability of a director to the Corp- --3-- oration or to its shareholders or other security holders for monetary damages for: (i) any breach of the director's duty of loyalty to the Corporation or to its shareholders or other security holders; (ii) acts or omissions of the director not in good faith or which involve intentional misconduct or a knowing violation of the law by such director; (iii) acts by such director as specified by the Colorado Business Corporation Act; or (iv) any transaction from which such director derived an improper personal benefit. No officer or director shall be personally liable for any injury to person or property arising out of a tort committed by an employee of the Corporation unless such officer or director was persona11y involved in the situation giving rise to the injury or unless such officer or director committed a crimina1 offense. The protection afforded in the preceding sentence shall not restrict other common law protections and rights that an officer or director may have. The word "director" shall include at least the following, unless limited by Colorado law: an individual who is or was a director of the Corporation and an individual who, while a director of a Corporation is or was serving at the Corporation's request as a director, officer, partner, trustee, employee or agent of any other foreign or domestic corporation or of any partnership, joint venture, trust, other enterprise or employee benefit plan. A director shall be considered to be serving an employee benefit plan at the Corporation's request if his duties to the Corporation also impose duties on or otherwise involve services by him to the plan or to participants in or beneficiaries of the plan. To the extent allowed by Colorado law, the word "director" shall also include the heirs and personal representatives of all directors. This Corporation shall be empowered to indemnify its officers and directors to the fullest extent provided by law, including but not limited to the provisions set forth in the Colorado Business Corporation Act, or any successor provision. COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. DATED: September 14, 1995 /s/ Robert A. Spade ------------------------------------------ Robert A. Spade, President 1887D --4-- EX-3.2 6 BYLAWS OF CSI, INC. EXHIBIT 3.2 BYLAWS OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ARTICLE I OFFICES ------- SECTION 1. OFFICES: - ------------------ The principal office of the Corporation shall be at 8 South Nevada Avenue, Suite 101, Colorado Springs, CO 80903, and the Corporation shall have other offices at such places as the Board of Directors may from time to time determine. ARTICLE II STOCKHOLDER'S MEETINGS ---------------------- SECTION 1. PLACE: - ---------------- The place of stockholders' meetings shall be the principal office of the Corporation unless some other place either within or without the State of Colorado shall be determined and designated from time to time by the Board of Directors. SECTION 2. ANNUAL MEETING: - ------------------------- The annual meeting of the stockholders of the Corporation for the election of directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held each year on a date to be determined by the Board of Directors beginning in the year 1996. If the annual meeting of the stockholders be not held, or if held and directors shall not have been elected for any reason, then the election of directors may be held at any meeting of stockholders thereafter called pursuant to these Bylaws and the laws of Colorado. SECTION 3. SPECIAL MEETINGS: - --------------------------- Special meetings of the stockholders for any purpose or purposes may be called by the President, the Board of Directors, or the holders of ten percent (1O%) or more of all the shares entitled to vote at such meeting, by the giving of notice in writing as hereinafter described. SECTION 4. VOTING: - ----------------- At all meetings of stockholders, voting may be viva voce; but any qualified voter may demand a stock vote, whereupon such vote shall be taken by ballot and the Secretary shall record the name of the stockholder voting, the number of shares voted, and, if such vote shall be by proxy, the name of the proxy holder. Voting may be in person or by proxy appointed in writing, manually signed by the stockholder or his duly authorized attorney-in-fact. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided therein. Each stockholder shall have such rights to vote as the Articles of Incorporation provide for each share of stock registered in his name on the books of the Corporation, except where the transfer books of the Corporation shall have been closed or a date shall have been fixed as a record date, not to exceed, in any case, sixty (60) days preceding the meeting, for the determination of stockholders entitled to vote. The Secretary of the Corporation shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each, which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the principal office of the Corporation and shall be subject to inspection by any stockholder at any time during usual business hours. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any stockholder during the whole time of the meeting. SECTION 5. ORDER OF BUSINESS: - ---------------------------- The order of business at any meeting of stockholders shall be as follows: 1. Calling the meeting to order. 2. Calling of roll. 3. Proof of notice of meeting. 4. Report of the Secretary of the stock represented at the meeting and the existence or lack of a quorum. 5. Reading of minutes of last previous meeting and disposal of any unapproved minutes. 6. Reports of officers. 7. Reports of committees. 8. Election of directors, if appropriate. 9. Unfinished business. 10. New business. 11. Adjournment. 12. To the extent that these Bylaws do not apply, Roberts' Rules of Order shall prevail. -2- SECTION 6. NOTICES: - ------------------ Written or printed notice stating the place, day, and hour of the meeting and, in case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered not less than ten (10) nor more than fifty (50) days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting, except that, if the authorized capital stock is to be increased, at least thirty (30) days' notice shall be given. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail addressed to the shareholder at his address as it appears on the stock transfer books of the Corporation, with postage thereon prepaid. SECTION 7. QUORUM: - ----------------- A quorum at any annual or special meeting shall consist of the representation in person or by proxy of a majority in number of shares of the outstanding capital stock of the Corporation entitled to vote at such meeting. In the event a quorum be not present, the meeting may be adjourned by those present for a period not to exceed sixty (60) days at any one adjournment; and no further notice of the meeting or its adjournment shall be required. The stockholders entitled to vote, present either in person or by proxy at such adjourned meeting, shall, if equal to a majority of the shares entitled to vote at the meeting, constitute a quorum, and the votes of a majority of those present in numbers of shares entitled to vote shall be deemed the act of the shareholders at such adjourned meeting. SECTION 8. ACTION BY SHAREHOLDERS WITHOUT A MEETING: - --------------------------------------------------- Any action required to be or which may be taken at a meeting of the shareholders of the Corporation may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the shareholders entitled to vote with respect to the subject matter thereof. ARTICLE III BOARD OF DIRECTORS ------------------ SECTION 1. ORGANIZATION AND POWERS: - ---------------------------------- The Board of Directors shall constitute the policy-making or legislative authority of the Corporation. Management of the affairs, property, and business of the Corporation shall be vested in the Board of Directors, which shall consist of not less than one (1) member. Directors shall be elected at the annual meeting of stockholders by a plurality vote for a term of one (1) year, and shall hold office until their successors are elected and qualify. Directors need not be stockholders. Directors shall have all powers with respect to the management, control, and determination of policies of the Corporation that are not limited by these Bylaws, the Articles of Incorporation, or the statutes of the State of Colorado, and the enumeration of any power shall not be considered a limitation thereof. -3- SECTION 2. VACANCIES: - -------------------- Any vacancy in the Board of Directors, however caused or created, shall be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board, or at a special meeting of the stockholders called for that purpose. The directors elected to fill vacancies shall hold office for the unexpired term and until their successors are elected and qualify. SECTION 3. REGULAR MEETINGS: - --------------------------- A regular meeting of the Board of Directors shall be held, without other notice than this Bylaw, immediately after and at the same place as the annual meeting of stockholders or any special meeting of stockholders at which a director or directors shall have been elected. The Board of Directors may provide by resolution the time and place, either within or without the State of Colorado, for the holding of additional regular meetings without other notice than such resolution. SECTION 4. SPECIAL MEETINGS: - --------------------------- Special meetings of the Board of Directors may be held at the principal office of the Corporation, or such other place as may be fixed by resolution of the Board of Directors for such purpose, at any time on call of the President or of any member of the Board, or may be held at any time and place without notice, by unanimous written consent of all the members, or with the presence and participation of all members at such meeting. A resolution in writing signed by all the directors shall be as valid and effectual as if it had been passed at a meeting of the directors duly called, constituted, and held. SECTION 5. NOTICES: - ------------------ Notices of both regular and special meetings, save when held by unanimous consent or participation, shall be mailed by the Secretary to each member of the Board not less than three (3) days before any such meeting and notices of special meetings may state the purposes thereof. No failure or irregularity of notice of any regular meeting shall invalidate such meeting or any proceeding thereat. SECTION 6. QUORUM AND MANNER OF ACTING: - -------------------------------------- A quorum for any meeting of the Board of Directors shall be a majority of the Board of Directors as then constituted. Any act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Any action of such majority, although not at a regularly called meeting, and the record thereof, if assented to in writing by all of the other members of the Board, shall always be as valid and effective in all respects as if otherwise duly taken by the Board of Directors. -4- SECTION 7. EXECUTIVE COMMITTEE: - ------------------------------ The Board of Directors may by resolution of a majority of the Board designate two (2) or more directors to constitute an executive committee, which committee, to the extent provided in such resolution, shall have and may exercise all of the authority of the Board of Directors in the management of the Corporation; but the designation of such committee and the delegation of authority thereto shall not operate to relieve the Board of Directors, or any member thereof, of any responsibility imposed on it or him by law. SECTION 8. ORDER OF BUSINESS: - ---------------------------- The order of business at any regular or special meeting of the Board of Directors, unless otherwise prescribed for any meeting by the Board, shall be as follows: 1. Reading and disposal of any unapproved minutes. 2. Reports of officers and committees. 3. Unfinished business. 4. New business. 5. Adjournment. 6. To the extent that these Bylaws do not apply, Roberts' Rules of Order shall prevail. SECTION 9. REMUNERATION: - ----------------------- No stated salary shall be paid to directors for their services as such, but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board. Members of special or standing committees may be allowed like compensation for attending meetings. Nothing herein contained shall be construed to preclude any director from receiving compensation for serving the Corporation in any other capacity, subject to such resolutions of the Board of Directors as may then govern receipt of such compensation. ARTICLE IV OFFICERS -------- SECTION 1. TITLES: - ----------------- The officers of the Corporation shall consist of a President, one or more Vice Presidents, a Secretary, and a Treasurer, the last two of which offices may be combined and held by one person, who shall be elected for one (1) year by the directors at their first meeting following the annual meeting of stockholders. Such officers shall hold office until their successors are elected and qualify. The Board of Directors may appoint from time to time -5- such other officers as it deems desirable who shall serve during such terms as may be fixed by the Board at a duly held meeting. The Board, by resolution, shall specify the titles, duties and responsibilities of such officers. SECTION 2. PRESIDENT: - -------------------- The President shall preside at all meetings of stockholders and, in the absence of a, or the, Chairman of the Board of Directors, at all meetings of the directors. He shall be generally vested with the power of the chief executive officer of the Corporation and shall countersign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors or required by law. He shall make reports to the Board of Directors and stockholders and shall perform such other duties and services as may be required of him from time to time by the Board of Directors. SECTION 3. VICE PRESIDENT: - ------------------------- The Vice President shall perform all the duties of the President if the President is absent or for any other reason is unable to perform his duties and shall have such other duties as the Board of Directors shall authorize or direct. SECTION 4. SECRETARY: - -------------------- The Secretary shall issue notices of all meetings of stockholders and directors, shall keep minutes of all such meetings, and shall record all proceedings. He shall have custody and control of the corporate records and books, excluding the books of account, together with the corporate seal. He shall make such reports and perform such other duties as may be consistent with his office or as may be required of him from time to time by the Board of Directors. SECTION 5. TREASURER: - -------------------- The Treasurer shall have custody of all moneys and securities of the Corporation and shall have supervision over the regular books of account. He shall deposit all moneys, securities, and other valuable effects of the Corporation in such banks and depositories as the Board of Directors may designate and shall disburse the funds of the Corporation in payment of just debts and demands against the Corporation, or as they may be ordered by the Board of Directors, shall render such account of his transactions as may be required of him by the President or the Board of Directors from time to time and shall otherwise perform such duties as may be required of him by the Board of Directors. The Board of Directors may require the Treasurer to give a bond indemnifying the Corporation against larceny, theft, embezzlement, forgery, misappropriation, or any other act of fraud or dishonesty resulting from his duties as Treasurer of the Corporation, which bond shall be in such amount as appropriate resolution or resolutions of the Board of Directors may require. -6- SECTION 6. VACANCIES OR ABSENCES: - -------------------------------- If a vacancy in any office arises in any manner, the directors then in office may choose, by a majority vote, a successor to hold office for the unexpired term of the officer. If any officer shall be absent or unable for any reason to perform his duties, the Board of Directors, to the extent not otherwise inconsistent with these Bylaws, may direct that the duties of such officer during such absence or inability shall be performed by such other officer or subordinate officer as seems advisable to the Board. SECTION 7. COMPENSATION: - ----------------------- No officer shall receive any salary or compensation for his services unless and until the Board of Directors authorizes and fixes the amount and terms of such salary or compensation. ARTICLE V STOCK ----- SECTION 1. CERTIFICATES OF SHARES: - -------------------------------- Each holder of stock of the Corporation shall be entitled to a stock certificate signed by the President or Vice President and also by the Secretary or an assistant secretary of the Corporation. The certificates of shares shall be in such form, not inconsistent with the Certificate of Incorporation or Articles of Incorporation, as shall be prepared or approved by the Board of Directors. (All certificates shall be prepared or approved by the Board of Directors). All certificates shall be consecutively numbered. Each certificate shall state upon its face that the Corporation is organized under the laws of this state; the name of the person to whom issued; the number and class of shares; and the designation of the series, if any, which such certificate represents; the par value of each share represented by the certificate, or a statement that the shares are without par value. The name of the person owning the shares represented thereby, with the number of such shares and the date of issue, shall be entered on the Corporation's books, and no certificate shall be valid unless it be signed by the President or Vice President and by the Secretary or an assistant secretary of the Corporation. The seal of the Corporation affixed to stock certificates may be a facsimile. The signatures of officers as above described on any such certificate may be a facsimile if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. SECTION 2. NEW CERTIFICATES: - --------------------------- All certificates surrendered to the Corporation shall be canceled and no new certificate shall be issued, except to evidence transfer of stock from the unissued stock or treasury of the Corporation, or, in the case of a lost certificate, except upon posting a bond of indemnity in such form and with such surety or sureties and for such amount as shall be satisfactory to the directors and upon producing by affidavit or otherwise such evidence of loss -7- or destruction as the Board may require, until the former certificates for the same number of shares have been surrendered and canceled. SECTION 3. TRANSFER OF SHARES: - ----------------------------- Shares in the capital stock of the Corporation shall be transferred only on the books of the Corporation by the holder thereof in person, or by his attorney, upon surrender and cancellation of certificates for a like number of shares. The delivery of a certificate of stock of this Corporation to a bona fide purchaser or pledgee for value, together with a written transfer of the same or a written power of attorney to sell, assign, and transfer the same, signed by the owner of the certificate, shall be a sufficient delivery to transfer the title against all persons except the Corporation. No transfer of stock shall be valid against the Corporation until it shall have been registered upon the books of the Corporation. SECTION 4. CLOSING OF TRANSFER BOOKS OR PROVISIONS FOR RECORD DATE: - ------------------------------------------------------------------ The stock transfer books may be closed by the Board of Directors for a period not exceeding fifty (50) days prior to any meeting of the stockholders or prior to the payment of dividends; or the Board of Directors may fix in advance a day not more than fifty (50) days prior to the holding of any such meeting of stockholders or payment of dividends as the day as of which stockholders entitled to notice of and to vote at such meeting or to payment of dividends, as the case may be, shall be determined; and only stockholders of record on such day shall be entitled to notice or to vote at such meeting, or to receive dividends, as the case may be. SECTION 5. REGULATIONS: - ---------------------- The Board of Directors shall have power and authority to take all such rules and regulations as they deem expedient concerning the issue, transfer, and registration of certificates for shares of the capital stock of the Corporation. The Board of Directors may appoint a Transfer Agent and a Registrar and may require all stock certificates to bear the signature of such Transfer Agent or such Registrar. SECTION 6. RESTRICTIONS ON STOCK: - -------------------------------- The Board of Directors may restrict any stock issued by giving the Corporation or any stockholder "first right of refusal to purchase" the stock, by making the stock redeemable or by restricting the transfer of the stock, under such terms and in such manner as the directors may deem necessary and as are not inconsistent with the Articles of Incorporation or the laws of the State of Colorado. Any stock so restricted must carry a stamped legend setting out the restriction or conspicuously noting the restriction and stating where it may be found in the records of the Corporation. -8- ARTICLE VI DIVIDENDS AND FINANCES ---------------------- SECTION 1. DIVIDENDS: - -------------------- Dividends may be declared by the directors and paid out of any funds legally available therefor under the laws of Colorado, as may be deemed advisable from time to time by the Board of Directors of the Corporation. Before declaring any dividends, the Board of Directors may set aside out of net profits or earned or other surplus such sums as the Board may think proper as a reserve fund to meet contingencies or for other purposes deemed proper and to the best interests of the Corporation. SECTION 2. MONIES: - ----------------- The monies, securities, and other valuable effects of the Corporation shall be deposited in the name of the Corporation in such banks or trust companies as the Board of Directors shall designate and shall be drawn out or removed only as may be authorized by the Board of Directors from time to time. SECTION 3. FISCAL YEAR: - ---------------------- Unless and until the Board of Directors by resolution shall determine otherwise, the fiscal year shall begin on the 1st day of May and end on the 30th day of April. ARTICLE VII SEAL ---- The Board of Directors may adopt a corporate seal which shall be in the form of a circle and shall have inscribed thereon the name of the Corporation and the words "SEAL, Colorado," and shall be entrusted in the care of the Secretary or such other officer of the Corporation as the Board of Directors shall designate. ARTICLE VIII NOTICES ------- SECTION 1. REQUIREMENTS: - ----------------------- Whenever a notice shall be required by the statutes of the State of Colorado or by these Bylaws, such notice may be given in writing by depositing the same in the United States mails in a postpaid, sealed envelope addressed to the person for whom such notice is intended to his or her home or other address, as the same shall appear on the stock transfer books of the Corporation. The time of mailing shall be deemed to be the time of giving such notice. A waiver of any notice in writing, signed by a stockholder, director, -9- or officer, whether before, at, or after the time stated in such waiver for holding a meeting, shall be deemed the equivalent of duly giving such notice. SECTION 2. PRESENCE: - ------------------- The presence of any officer at a meeting, or the presence of any stockholder or director at a meeting, unless such presence is for the sole purpose of objecting to the holding of such meeting on the ground that it is not duly held or convened, shall in all events be considered a waiver of notice thereof; and failure to vote thereat shall not defeat the effectiveness of such waiver. SECTION 3. RATIFICATION: - ----------------------- The ratification or approval in writing of the minutes of any meeting of officers, stockholders, or directors shall have the same force and effect as if the ratifying or approving officer, director, or stockholder were present in person at said meeting. ARTICLE IX AMENDMENTS ---------- These Bylaws may be altered, amended, or repealed by the Board of Directors by resolution of a majority of the Board. ARTICLE X INDEMNIFICATION --------------- The Corporation shall indemnify any and all of its directors or officers, or former directors or officers, or any person who may have served at its request as a director or officer of another corporation in which this Corporation owns shares of capital stock or of which it is a creditor and the personal representatives of all such persons, against expenses actually and necessarily incurred in connection with the defense of any action, suit, or proceeding in which they, or any of them, were made parties, or a party, by reason of being or having been directors or officers or a director or officer of the Corporation, or of such other corporation, except in relation to matters as to which any such director or officer or person shall have been adjudged in such action, suit, or proceeding to be liable for negligence or misconduct in the performance of any duty owed to the Corporation. Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled, independently of this Article X, by law, under any Bylaw agreement, vote of stockholders, or otherwise. -10- ARTICLE XI CONFLICTS OF INTEREST --------------------- No contract or other transaction of the Corporation with any other persons, firms or corporations, or in which the Corporation is interested, shall be affected or invalidated by the fact that any one or more of the directors or officers of the Corporation is interested in or is a director or officer of such other firm or corporation; or by the fact that any director or officer of the Corporation, individually or jointly with others, may be a party to or may be interested in any such contract or transaction; and relieves every person who may become a director or officer of the Corporation from any liability that might otherwise arise by reason of his contracting with the Corporation for the benefit of himself or any firm or corporation in which he may in any way be interested. CERTIFICATE ----------- I do hereby certify that I was Secretary of the meeting of the Board of Directors duly called and held on the 6th day of August, 1995, and I do hereby certify that the above and foregoing Bylaws were duly adopted as the Bylaws of said Corporation at such meeting. /s/ ANTHONY THOMASON _________________________________ Anthony Thomason, Secretary (SEAL) -11- EX-4.1 7 SPECIMEN COMMON STOCK CERTIFICATE EXHIBIT 4.1 ________________________________________________________________________________ NUMBER SHARES [0363] COMMUNICATIONS SYSTEMS [ ] INTERNATIONAL, INC. ORGANIZED UNDER THE LAWS OF THE STATE OF COLORADO 25,000,000 SHARES AUTHORIZED [CUSIP 20342C 10 8] THIS CERTIFIES THAT SEE REVERSE FOR CERTAIN DEFINITIONS Is The Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. transferable only on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this Certificate properly endorsed. IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its duly authorized officers and its facsimile Corporate Seal to be hereunto duly affixed. Dated: /s/ C A ZAJAC /s/ [SIGNATURE ILLEGIBLE] SECRETARY PRESIDENT [CORPORATE SEAL APPEARS HERE] COUNTERSIGNED: AMERICAN SECURITIES TRANSFER & TRUST, INC. P.O. Box 1596 Denver, Colorado 80201 By _______________________________________________ Transfer Agent & Registrar Authorized Signature ________________________________________________________________________________ COMMUNICATIONS SYSTEMS INTERNATIONAL The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT-..........Custodian............ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act.......................... in common (State)
Additional abbreviations may also be used though not in the above list. _______________________________________________________________________________ For Value Received, _____________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _______________________________________ _______________________________________ _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________________________________________________________ _______________________________________________________________________________ _________________________________________________________________________Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _____________________________________________ attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated _______________________ ____________________________________________________ ____________________________________________________ NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: _____________________________ The signature(s) should be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15. EX-4.2 8 FORM OF WARRANT AGREEMENT Exhibit 4.2 THE REPRESENTATIVE'S WARRANTS EVIDENCED AND REPRESENTED BY THIS CERTIFICATE (THE "REPRESENTATIVE'S WARRANTS") AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF (THE "WARRANT SHARES") HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND WITH THE SECURITIES ADMINISTRATORS OF CERTAIN STATES UNDER THE SECURITIES ("BLUE SKY") LAWS OF SUCH STATES. HOWEVER, NEITHER THE REPRESENTATIVE'S WARRANTS NOR SUCH WARRANT SHARES MAY BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED EXCEPT PURSUANT TO (I) A POST-EFFECTIVE AMENDMENT TO SUCH REGISTRATION STATEMENT, (II) A SEPARATE REGISTRATION STATEMENT UNDER SUCH ACT, OR (III) AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND UNDER THE APPLICABLE BLUE SKY LAWS. THIS REPRESENTATIVE'S WARRANT MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED EXCEPT AS OTHERWISE PROVIDED HEREIN AND THE HOLDER OF THIS REPRESENTATIVE'S WARRANT, BY ITS ACCEPTANCE HEREOF, AGREES THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS REPRESENTATIVE'S WARRANT EXCEPT AS OTHERWISE PROVIDED HEREIN. COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. Representative's Warrant for the Purchase of Common Stock --------------------------------------------------------- No. UW-001 100,000 Representative's Warrants THIS CERTIFIES that, for receipt in hand of $50 and other value received, COHIG & ASSOCIATES, INC. (the "Holder"), is entitled to subscribe for and purchase from COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation (the "Company"), upon the terms and conditions set forth herein, at any time, or from time to time, after _________, 1999, and before 5:00 p.m. Mountain time on __________, 2003 (the "Exercise Period"), 100,000 shares of Common Stock (the "Warrant Shares"), at a price of $_________ per Warrant Share (the "Exercise Price"), or _____% of the offering price of Common Stock to be sold by the Company in a public offering (the "Public Offering") at or prior to the date hereof. The term the "Holder" as used herein shall include any transferee to whom this Representative's Warrant has been transferred in accordance with the above. As used herein the term "this Representative's Warrant" shall mean and include this Representative's Warrant and any Representative's Warrant or Representative's Warrants hereafter issued as a consequence of the exercise or transfer of this Representative's Warrant in whole or in part, and the term "Common Stock" shall mean and include the Company's Common Stock with ordinary voting power, which class at the date hereof is publicly traded. 1. This Representative's Warrant may not be sold, transferred, assigned, pledged or hypothecated until ________, 1999 (12 months from the Effective Date of the Registration Statement on which it is initially registered) except that it may be transferred, in whole or in part, (i) to one or more officers or partners of the Holder (or the officers or partners of any such partner); (ii) to a member of the underwriting syndicate and/or its officers or partners; (iii) by reason of reorganization of the Company; or (iv) by operation of law. After _________, 1999, this Representative's Warrant may be sold, transferred, assigned or hypothecated in accordance with applicable law. 2. a. This Representative's Warrant may be exercised during the Exercise Period as to the whole or any lesser number of Warrant Shares, by the surrender of this Representative's Warrant (with the election attached hereto duly executed) to the Company at its office at Suite 101, 8 South Nevada Avenue, Colorado Springs, Colorado 80903, or such other place as is designated in writing by the Company, together with a certified or bank cashier's check payable to the order of the Company in an amount equal to the Exercise Price multiplied by the number of Warrant Shares for which this Representative's Warrant is being exercised. b. Upon written request of the Holder, and in lieu of payment for the Warrant Shares by check in accordance with paragraph 2(a) hereof, the Holder may exercise the Representative's Warrant (or any portion thereof) for and receive the number of Warrant Shares equal to a fraction, the numerator of which equals (i) the amount by which the Current Market Price of the Common Stock for the ten (10) trading days preceding the date of exercise exceeds the Exercise Price per Share, multiplied by (ii) the number of Warrant Shares to be purchased; the denominator of which equals the Current Market Price. c. For the purposes of any computation under this Representative's Warrant, the "Current Market Price" at any date shall be the closing price of the Common Stock on the business day next preceding the event requiring an adjustment hereunder. If the principal trading market for such securities is an exchange, the closing price shall be the reported last sale price on such exchange on such day provided if trading of such Common Stock is listed on any consolidated tape, the closing price shall be the reported last sale price set forth on such consolidated tape. If the principal trading market for such securities is the over-the-counter market, the closing price shall be the last reported sale price on such date as set forth by The Nasdaq Stock Market, Inc., or, if the security is not quoted on such market, the average closing bid and asked prices as set forth in the National Quotation Bureau pink sheet or the Electronic Bulletin Board System for such day. Notwithstanding the foregoing, if there is no reported last sale price or average closing bid and asked prices, as the case may be, on a date prior to the event requiring an adjustment hereunder, then the current market price shall be determined as of the latest date prior to such day for which such last sale price or average closing bid and asked price is available. 2 3. Upon each exercise of this Representative's Warrant, the Holder shall be deemed to be the holder of record of the Warrant Shares issuable upon such exercise, notwithstanding that the transfer books of the Company shall then be closed or certificates representing such Warrant Shares shall not then have been actually delivered to the Holder. As soon as practicable after each such exercise of this Representative's Warrant, the Company shall issue and deliver to the Holder a certificate or certificates for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Representative's Warrant should be exercised in part only, the Company shall, upon surrender of this Representative's Warrant for cancellation, execute and deliver a new Representative's Warrant evidencing the right of the Holder to purchase the balance of the Warrant Shares (or portions thereof) subject to purchase hereunder. 4. The Representative's Warrants shall be registered in a Representative's Warrant Register as they are issued. The Company shall be entitled to treat the registered holder of any Representative's Warrant on the Representative's Warrant Register as the owner in fact thereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Representative's Warrant on the part of any other person. The Representative's Warrants shall be transferable only on the books of the Company upon delivery thereof duly endorsed by the Holder or by his duly authorized attorney or representative, or accompanied by proper evidence of succession, assignment or authority to transfer. In all cases of transfer by an attorney, executor, administrator, guardian or other legal representative, duly authenticated evidence of his or its authority shall be produced. Upon any registration of transfer, the Company shall deliver a new Representative's Warrant or Representative's Warrants to the person entitled thereto. The Representative's Warrants may be exchanged, at the option of the Holder thereof, for another Representative's Warrant, or other Representative's Warrants of different denominations, of like tenor and representing in the aggregate the right to purchase a like number of Warrant Shares (or portions thereof) upon surrender to the Company or its duly authorized agent. Notwithstanding the foregoing, the Company shall have no obligation to cause Representative's Warrants to be transferred on its books to any person if, in the opinion of counsel to the Company, such transfer does not comply with the provisions of the Securities Act of 1933, as amended (the "Act"), or applicable state blue sky laws and the rules and regulations thereunder. 5. The Company shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of providing for the exercise of this Representative's Warrant, such number of shares of Common Stock as shall, from time to time, be sufficient therefor. 3 The Company covenants that all Warrant Shares issuable upon exercise of this Representative's Warrant shall be validly issued, fully paid, nonassessable, and free of preemptive rights. 6. a. In case the Company shall sell or issue hereafter either its Common Stock or any rights, options, warrants or obligations or securities containing the right to subscribe for or purchase any Common Stock ("Options") or exchangeable for or convertible into Common Stock ("Convertible Securities"), at a price per share, as determined pursuant to paragraph (b) of this section, less than the Exercise Price then in effect on the date of such sale or issuance, then the number of Warrant Shares thereafter purchasable upon exercise of this Representative's Warrant shall be determined by multiplying the number of Warrant Shares theretofore purchasable upon exercise of this Representative's Warrant by a fraction, (i) the numerator of which shall be the number of shares of Common Stock outstanding on the date of issuance of such Common Stock, Options or Convertible Securities and (ii) the denominator of which shall be the number of shares of Common Stock outstanding on the date prior to the date of issuance of such Common Stock or Convertible Securities plus the number of shares of Common Stock which the aggregate consideration received by the Company upon such issuance would purchase on such date at the Exercise Price then in effect. b. The following provisions, in addition to other provisions of this section shall be applicable in determining any adjustment under (a) above: i. In case of the issuance or sale of Common Stock part or all of which shall be for cash, the cash consideration received by the Company therefor shall be deemed to be the amount of cash proceeds of such sale of shares less any compensation paid or discount allowed in the sale, underwriting or purchase thereof by underwriters or dealers or others performing similar services or any expenses incurred in connection therewith, plus the amounts, if any, determined as provided in (b)(ii) below. ii. In case of the issuance or sale of Common Stock wholly or partly for a consideration other than cash, the amount of the consideration other than cash received by the Company for such Common Stock shall be deemed to be the fair value of such consideration as determined by a resolution adopted by the Board of Directors of the Company acting in good faith, less any compensation paid or incurred by the Company for any underwriting of, or otherwise in connection with such issuance, provided, however, the amount of such consideration other than cash 4 shall in no event exceed the cost thereof as recorded on the books of the Company. In case of the issuance or sale of Common Stock (otherwise than upon conversion or exchange) together with other stock or securities or other assets of the Company for a consideration which is received for both such Common Stock and other securities or assets, the Board of Directors of the Company acting in good faith shall determine what part of the consideration so received is to be deemed to be the consideration for the issuance of such Common Stock, less any compensation paid or incurred by the Company for any underwriting of, or otherwise in connection with such issuance, provided, however, the amount of such consideration other than cash shall in no event exceed the cost thereof as recorded on the books of the Company. In case at any time the Company shall declare a dividend or make any other distribution upon any stock of the Company payable in Common Stock then such Common Stock issuable in payment of such dividend or distribution shall be deemed to have been issued or sold without consideration. iii. The price per share of any Common Stock sold or issued by the Company (other than pursuant to Options or Convertible Securities) shall be equal to a price calculated by dividing (A) the amount of the consideration received by the Company, as determined pursuant to (b)(i) and (b)(ii) above, upon such sale or issuance by (B) the number of shares of Common Stock sold or issued. iv. In case the Company shall at any time after the date hereof issue any Options or Convertible Securities, the following provisions shall apply in making any adjustment: (A) The price per share for which Common Stock is issuable upon the exercise of the Options or upon conversion or exchange of the Convertible Securities shall be determined by (1) dividing the total amount, if any, received or receivable by the Company as consideration for the issuance of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon exercise of such Options or the conversion or exchange of such Convertible Securities, by (2) the aggregate maximum number of shares of Common Stock issuable upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities. 5 (B) In determining the price per share for which Common Stock is issuable upon exercise of the Options or conversion or exchange of the Convertible Securities as set forth above and in computing any adjustment pursuant to (a) above: the aggregate maximum number of shares of Common Stock issuable upon the exercise of such Convertible Securities shall be considered to be outstanding at the time such Options or Convertible Securities were issued and to have been issued for such price per share as determined pursuant to (b)(iv)(A), and the consideration for the issuance of such Options or Convertible Securities and the amount of additional consideration payable to the Company upon exercise of such Options or upon the conversion or exchange of such Convertible Securities shall be determined in the same manner as the consideration received upon the issuance or sale of Common Stock as provided in paragraphs (b)(i) and (b)(ii). (C) On the expiration of such Options or the termination of any right to convert or exchange any Convertible Securities, the number of Warrant Shares subject to this Representative's Warrant shall forthwith be readjusted to such number of Warrant Shares as would have been obtained had the adjustments made upon the issuance of such Options or Convertible Securities been made upon the basis of the delivery of only the number of shares of Common Stock actually delivered upon the exercise of such Options or upon conversion or exchange of such Convertible Securities. (D) If the minimum purchase price per share of Common Stock provided for in any Option, or the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock, shall change or a different purchase price or rate shall become effective at any time or from time to time (other than pursuant to any anti-dilution provisions of such Options or Convertible Securities) then upon such change becoming effective, the number of Warrant Shares subject to this Representative's Warrant shall forthwith be increased or decreased to such number of Warrant Shares as would have been obtained had the adjustments made upon the granting or issuance of such Options or Convertible Securities been made upon the basis of (1) the issuance of the number of shares of Common Stock theretofore 6 actually delivered upon the exercise of such Options or upon the conversion or exchange of such Convertible Securities, and the total consideration received therefor, and (2) the granting or issuance at the time of such change of any such Options or Convertible Securities then still outstanding for the consideration, if any, received by the Company therefor and to be received on the basis of such changed price or rate of exchange or conversion. v. Except as otherwise specifically provided herein, the date of issuance or sale of Common Stock shall be deemed to be the date the Company is legally obligated to issue such Common Stock or the date the Company is legally obligated to issue any Option or Convertible Security. If the Company shall take a record date for the purpose of determining holders of Common Stock entitled to (A) receive a dividend or other distribution payable in Common Stock or in Options or Convertible Securities or (B) subscribe for or purchase Common Stock, Options or Convertible Securities, such record date shall be deemed to be the date of issue or sale of the Common Stock, Options or Convertible Securities. vi. The number of shares of Common Stock outstanding at any given time shall not include treasury shares but the disposition of any such treasury shares shall be considered an issue or sale of Common Stock for the purposes of this section. vii. Anything hereinabove to the contrary notwithstanding, no adjustment shall be made pursuant to (a) above to the Exercise Price or to the number of Warrant Shares purchasable upon: (A) The issuance or sale by the Company of any Common Stock pursuant to these Representative's Warrants, any securities offered in a public offering underwritten by Cohig & Associates, Inc., any shares, Options or Convertible Securities issued and outstanding at the effective date of such public offering, any shares issuable pursuant to the Company's stock option plan currently in effect or warrants outstanding prior to the Company's initial public offering, provided the total number of shares issuable pursuant to such plan and warrants does not exceed 600,000. (B) The issuance or sale by the Company of any Common Stock pursuant to any Options or Convertible Securities issued and outstanding prior to the date of Effective Date of the Registration Statement or with 7 respect to the issuance or sale by the Company of any shares of Common Stock to the shareholders of International Telephone Company in a transaction completed simultaneously with the original issuance of this Representative's Warrant. (C) The issuance or sale of Common Stock pursuant to the exercise of Options or conversion or exchange of Convertible Securities hereinafter issued for which an adjustment has been made (or was not required to be made) pursuant to the provisions hereof. (D) The increase in the number of shares of Common Stock subject to any Option or Convertible Security referred to in subsections (A), (B) or (C) hereof pursuant to the provisions of such Option or Convertible Securities designed to protect against dilution. c. If the Company shall at any time subdivide its outstanding Common Stock by recapitalization, reclassification or split-up thereof, the number of Warrant Shares subject to this Representative's Warrant immediately prior to such subdivision shall be proportionately increased, and if the Company shall at any time combine the outstanding Common Stock by recapitalization, reclassification or combination thereof, the number of Warrant Shares subject to this Representative's Warrant immediately prior to such combination shall be proportionately decreased. Any corresponding adjustment to the Exercise Price shall become effective at the close of business on the record date for such subdivision or combination. d. If the Company after the date hereof shall distribute to the holders of its Common Stock any securities or other assets (other than a distribution of Common Stock or a cash distribution made as a dividend payable out of earnings or out of any earned surplus legally available for dividends under the laws of the jurisdiction of incorporation of the Company), the Board of Directors shall be required to make such equitable adjustment in the Exercise Price in effect immediately prior to the record date of such distribution as may be necessary to preserve the rights substantially proportionate to those enjoyed hereunder by the Holder immediately prior to such distribution. Any such adjustment made in good faith by the Board of Directors shall be final and binding upon the Holder and shall become effective as of the record date for such distribution. e. No adjustment in the number of Warrant Shares subject to this Representative's Warrant shall be required unless such adjustment would require an increase 8 or decrease in such number of Warrant Shares of at least 1% of the then adjusted number of Warrant Shares issuable upon exercise of this Representative's Warrant, provided, however, that any adjustments which by reason of the foregoing are not required at the time to be made shall be carried forward and taken into account and included in determining the amount of any subsequent adjustment; and provided further, however, that in case the Company shall at any time subdivide or combine the outstanding Common Stock or issue any additional Common Stock as a dividend, said percentage shall forthwith be proportionately increased in the case of a combination or decreased in the case of a subdivision or dividend of Common Stock so as to appropriately reflect the same. If the Company shall make a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or distribution and legally abandon its plan to pay or deliver such dividend or distribution then no adjustment in the number of Warrant Shares subject to this Representative's Warrant shall be required by reason of the making of such record. f. Whenever the number of Warrant Shares purchasable upon the exercise of this Representative's Warrant is adjusted as provided herein, the Exercise Price shall be adjusted (to the nearest one tenth of a cent) by respectively multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares purchasable upon the exercise of this Representative's Warrant immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares purchasable immediately thereafter. g. In case of any reclassification of the outstanding Common Stock (other than a change covered by (c) hereof or which solely affects the par value of such Common Stock) or in the case of any merger or consolidation of the Company with or into another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification or capital reorganization of the outstanding Common Stock), or in the case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety in connection with which the Company is dissolved, the Holder of this Representative's Warrant shall have the right thereafter (until the expiration of the right of exercise of this Representative's Warrant) to receive upon the exercise hereof, for the same aggregate Exercise Price payable hereunder immediately prior to such event, the kind and amount of shares of stock or other securities or property receivable upon such reclassification, capital reorganization, merger 9 or consolidation, or upon the dissolution following any sale or other transfer, by a holder of the number of Warrant Shares obtainable upon the exercise of this Representative's Warrant immediately prior to such event; and if any reclassification also results in a change in Common Stock covered by (c) above, then such adjustment shall be made pursuant to both this paragraph (g) and paragraph (c). The provisions of this paragraph (g) shall similarly apply to successive re-classifications, or capital reorganizations, mergers or consolidations, sales or other transfers. If the Company after the date hereof shall issue or agree to issue Common Stock, Options or Convertible Securities, other than as described herein, and such issuance or agreement would in the opinion of the Board of Directors of the Company materially affect the rights of the Holders of the Representative's Warrants, the Exercise Price and the number of Warrant Shares purchasable upon exercise of the Representative's Warrants shall be adjusted in such matter, if any, and at such time as the Board of Directors of the Company, in good faith, may determine to be equitable in the circumstances. The minutes or unanimous consent approving such action shall set forth the Board of Director's determination as to whether an adjustment is warranted and the manner of such adjustment. In the absence of such determination, any Holder may request in writing that the Board of Directors make such determination. Any such determination made in good faith by the Board of Directors shall be final and binding upon the Holders. If the Board fails, however, to make such determination within sixty (60) days after such request, such failure shall be deemed a determination that an adjustment is required. h. i. Upon occurrence of each event requiring an adjustment of the Exercise Price and of the number of Warrant Shares purchasable upon exercise of this Representative's Warrant in accordance with, and as required by, the terms hereof, the Company shall forthwith employ a firm of certified public accountants (who may be the regular accountants for the Company) who shall compute the adjusted Exercise Price and the adjusted number of Warrant Shares purchasable at such adjusted Exercise Price by reason of such event in accordance herewith. The Company shall give to each Holder of the Representative's Warrants a copy of such computation which shall be conclusive and shall be binding upon such Holders unless contested by Holders by written notice to the Company within thirty (30) days after receipt thereof. 10 ii. In case the Company after the date hereof shall propose (A) to pay any dividend payable in stock to the holders of its Common Stock or to make any other distribution (other than cash dividends) to the holders of its Common Stock or to grant rights to subscribe to or purchase any additional shares of any class or any other rights or options, (B) to effect any reclassification involving merely the subdivision or combination of outstanding Common Stock, or (C) any capital reorganization or any consolidation or merger, or any sale, transfer or other disposition of its property, assets and business substantially as an entirety, or the liquidation, dissolution or winding up of the Company, then in each such case, the Company shall obtain the computation described above and if an adjustment to the Exercise Price is required, the Company shall notify the Holders of the Representative's Warrants of such proposed action, which shall specify the record date for any such action or if no record date is established with respect thereto, the date on which such action shall occur or commence, or the date of participation therein by the holders of Common Stock if any such date is to be fixed, and shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action on the Exercise Price and the number, or kind, or class of shares or other securities or property obtainable upon exercise of this Representative's Warrant after giving effect to any adjustment which will be required as a result of such action. Such notice shall be given at least twenty (20) days prior to the record date for determining holders of the Common Stock for purposes of any such action, and in the case of any action for which a record date is not established then such notice shall be mailed at least twenty (20) days prior to the taking of such proposed action. iii. Failure to file any certificate or notice or to give any notice, or any defect in any certificate or notice, shall not effect the legality or validity of the adjustment in the Exercise Price or in the number, or kind, or class of shares or other securities or property obtainable upon exercise of the Representative's Warrants or of any transaction giving rise thereto. i. The Company shall not be required to issue fractional Warrant Shares upon any exercise of the Representative's Warrants. As to any final fraction of a Share which the Holder of a Representative's Warrant would otherwise be entitled to purchase upon such 11 exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the same fraction of the market price of a share of such stock on the business day preceding the day of exercise. The Holder of a Representative's Warrant, by his acceptance of a Representative's Warrant, expressly waives any right to receive any fractional Warrant Shares. j. Regardless of any adjustments pursuant to this section in the Exercise Price or in the number, or kind, or class of shares or other securities or other property obtainable upon exercise of a Representative's Warrant, a Representative's Warrant may continue to express the Exercise Price and the number of Warrant Shares obtainable upon exercise at the same price and number of Warrant Shares as are stated herein. k. The number of Warrant Shares, the Exercise Price and all other terms and provisions of the Company's agreement with the Holder of this Representative's Warrant shall be determined exclusively pursuant to the provisions hereof. l. The above provisions of this section 6 shall similarly apply to successive transactions which require adjustments. m. Notwithstanding any other language to the contrary herein, the anti-dilution terms of this Representative's Warrant will not be enforced so as to provide the Holder the right to receive, or for the accrual of, cash dividends prior to the exercise of this Representative's Warrant. 7. The issuance of any Warrant Shares or other securities upon the exercise of this Representative's Warrant and the delivery of certificates or other instruments representing such securities, or other securities, shall be made without charge to the Holder for any tax or other charge in respect of such issuance. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. 8. a. If, at any time after _____________, 1998 (the Effective Date of the Registration Statement), and ending ____________, 2005 (seven years after the Effective Date of the Registration Statement), the Company shall file a registration statement (other than on Form S-4, Form S-8, or any successor form) with the Securities and Exchange Commission 12 (the "Commission") while Warrant Shares are available for purchase upon exercise of this Representative's Warrant or while any Warrant Shares (collectively, the "Representative's Warrants and the underlying Warrant Shares, the "Representative's Securities") are outstanding, the Company shall, on two occasions only, give the Holder and all the then holders of such Representative's Securities at least 30 days prior written notice of the filing of such registration statement. If requested by the Holder or by any such holder in writing within 20 days after receipt of any such notice, the Company shall, at the Company's sole expense (other than the fees and disbursements of counsel for the Holder or such holder and the underwriting discounts, if any, payable in respect of the securities sold by the Holder or any such holder), register or qualify the Representative's Securities of the Holder or any such holders who shall have made such request concurrently with the registration of such other securities, all to the extent requisite to permit the public offering and sale of the Representative's Securities requested to be registered, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable. Notwithstanding the foregoing, if the managing underwriter of any such offering shall advise the Company in writing that, in its opinion, the distribution of all or a portion of the Representative's Securities requested to be included in the registration concurrently with the securities being registered by the Company would materially adversely affect the distribution of such securities by the Company for its own account, then the Holder or any such holder who shall have requested registration of his or its Representative's Securities shall delay the offering and sale of such Representative's Securities (or the portions thereof so designated by such managing underwriter) for such period, not to exceed 90 days, as the managing underwriter shall request, provided that no such delay shall be required as to any Representative's Securities if any securities of the Company are included in such registration statement for the account of any person other than the Company and the Holder unless the securities included in such registration statement for such other person shall have been reduced pro rata to the reduction of the Representative's Securities which were requested to be included in such registration. b. If at any time after __________, 1998 (the Effective Date of the Registration Statement), and before ___________, 2003 (five years after the Effective Date of the Registration Statement), the Company shall receive a written request from holders of Representative's Securities who, in the aggregate, own (or upon exercise of all Warrant 13 Shares will own) a majority of the total number of Warrant Shares, the Company shall, as promptly as practicable, prepare and file with the Commission a registration statement sufficient to permit the public offering and sale of the Representative's Securities, and will use its best efforts through its officers, directors, auditors and counsel to cause such registration statement to become effective as promptly as practicable; provided, however, that the Company shall only be obligated to file and -------- ------- obtain effectiveness of one such registration statement for which all expenses incurred in connection with such registration (other than the fees and disbursements of counsel for the Holder or such holders and underwriting discounts, if any, payable in respect of the Representative's Securities sold by the Holder or any such holder) shall be borne by the Company. In addition to the one demand registration provided for hereinabove, the holders of the Representative's Securities who, in the aggregate, own (or upon exercise of all Representative's Warrants will own) a majority of the total number of Warrant Shares issued or issuable upon exercise of the Representative's Warrants may request that the Company prepare and file a registration statement to permit the public offering and sale of the Representative's Securities on two additional occasions only, but the costs of preparation and filing of such additional registration statements shall be at the then holders' cost and expense unless the Company elects to register additional shares of Common Stock, in which case the cost and expense of such registration statements will be prorated between the Company and the holders of the Representative's Securities according to the aggregate sales price of the securities being issued. c. In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall use its best efforts to cause the Representative's Securities so registered to be registered or qualified for sale under the securities or blue sky laws of such jurisdictions as the Holder or such holders may reasonably request; provided, however, that the -------- ------- Company shall not be required to qualify to do business in any state by reason of this paragraph 8(c) in which it is not otherwise required to qualify to do business and provided further, that the Company has no obligation to qualify the Representative's Securities where such qualification would cause any unreasonable delay or expenditure by the Company. d. The Company shall keep effective any registration or qualification contemplated by this paragraph 8 and shall from time to time amend or supplement each applicable registration statement, preliminary prospectus, final prospectus, application, document and communication for such period of time as shall be required to permit the 14 Holder or such holders to complete the offer and sale of the Representative's Securities covered thereby. The Company shall in no event be required to keep any such registration or qualification in effect for a period in excess of nine months from the date on which the Holder and such holders are first free to sell such Representative's Securities; provided, -------- however, that if the Company is required to keep any such registration or ------- qualification in effect with respect to securities other than the Representative's Securities beyond such period, the Company shall keep such registration or qualification in effect as it relates to the Representative's Securities for so long as such registration or qualification remains or is required to remain in effect in respect of such other securities. e. In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish to the Holder and to each such holder such reasonable number of copies of the registration statement and of each amendment and supplement thereto (in each case, including all exhibits), such reasonable number of copies of each prospectus contained in such registration statement and each supplement or amendment thereto (including each preliminary prospectus), all of which shall conform to the requirements of the Act and the rules and regulations thereunder, and such other documents as the Holder or such holders may reasonably request in order to facilitate the disposition of the Representative's Securities included in such registration. f. In the event of a registration pursuant to the provisions of this paragraph 8, the Company shall furnish the Holder and each holder of any Representative's Securities so registered with an opinion of its counsel to the effect that (i) the registration statement has become effective under the Act and no order suspending the effectiveness of the registration statement, preventing or suspending the use of the registration statement, any preliminary prospectus, any final prospectus, or any amendment or supplement thereto has been issued, nor to such counsel's actual knowledge has the Securities and Exchange Commission or any securities or blue sky authority of any jurisdiction instituted or threatened to institute any proceedings with respect to such an order and (ii) the registration statement and each prospectus forming a part thereof (including each preliminary prospectus), and any amendment or supplement thereto, complies as to form with the Act and the rules and regulations thereunder. Such counsel shall also provide a Blue Sky Memorandum setting forth the jurisdictions in which the Representative's Securities have been registered or qualified for sale pursuant to the provisions of paragraph 8(c). 15 g. The Company agrees that until all the Representative's Securities have been sold under a registration statement or pursuant to Rule 144 under the Act, it shall keep current in filing all reports, statements and other materials required to be filed with the Commission to permit holders of the Representative's Securities to sell such securities under Rule 144. h. The Holder and any holders who propose to register their Representative's Securities under the Act shall execute and deliver to the Company a selling shareholder questionnaire on a form to be provided by the Company. 9. a. Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Holder, any holder of any of the Representative's Securities, their officers, directors, partners, employees, agents and counsel, and each person, if any, who controls any such person within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and against any and all loss, liability, charge, claim, damage and expense whatsoever (which shall include, for all purposes of this Section 9, but not be limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), as and when incurred, arising out of, based upon, or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any registration statement, preliminary prospectus or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or (B) in any application or other document or communication (in this Section 9 collectively called an "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to register or qualify any of the Representative's Securities under the securities or blue sky laws thereof or filed with the Commission or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to the Holder or any holder of any of the Representative's Securities by or on behalf of such person expressly for inclusion in any registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may 16 be, or (ii) any breach of any representation, warranty, covenant or agreement of the Company contained in this Representative's Warrant. The foregoing agreement to indemnify shall be in addition to any liability the Company may otherwise have, including liabilities arising under this Representative's Warrant. If any action is brought against the Holder or any holder of any of the Representative's Securities or any of its officers, directors, partners, employees, agents or counsel, or any controlling persons of such person (an "indemnified party") in respect of which indemnity may be sought against the Company pursuant to the foregoing paragraph, such indemnified party or parties shall promptly notify the Company in writing of the institution of such action (but the failure so to notify shall not relieve the Company from any liability it may otherwise have to Holder or any holder of any of the Representative's Securities) and the Company shall promptly assume the defense of such action, including the employment of counsel (reasonably satisfactory to such indemnified party or parties) and payment of expenses. Such indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action or the Company shall not have promptly employed counsel reasonably satisfactory to such indemnified party or parties to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be one or more legal defenses available to it or them or to other indemnified parties which are different from or additional to those available to the Company, in any of which events such fees and expenses shall be borne by the Company and the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties. Anything in this paragraph to the contrary notwithstanding, the Company shall not be liable for any settlement of any such claim or action effected without its written consent. b. The Holder and each holder agrees to indemnify and hold harmless the Company, each director of the Company, each officer of the Company who shall have signed any registration statement covering the Representative's Securities held by the Holder and each holder and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Holder and each holder in paragraph 9(a), but 17 only with respect to statements or omissions, if any, made in any registration statement, preliminary prospectus, or final prospectus (as from time to time amended and supplemented), or any amendment or supplement thereto, or in any application, in reliance upon and in conformity with written information furnished to the Company with respect to the Holder and each holder by or on behalf of the Holder and each holder expressly for inclusion in any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, as the case may be. If any action shall be brought against the Company or any other person so indemnified based on any such registration statement, preliminary prospectus, or final prospectus, or any amendment or supplement thereto, or in any application, and in respect of which indemnity may be sought against the Holder and each holder pursuant to this paragraph 9(b), the Holder and each holder shall have the rights and duties given to the Company, and the Company and each other person so indemnified shall have the rights and duties given to the indemnified parties, by the provisions of paragraph 9(a). c. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to paragraph 9(a) or 9(b) (subject to the limitations thereof) but it is found in a final judicial determination, not subject to further appeal, that such indemnification may not be enforced in such case, even though this Agreement expressly provides for indemnification in such case, or (ii) any indemnified or indemnifying party seeks contribution under the Act, the Exchange Act or otherwise because the indemnification provided for in this Section 9 is for any reason held to be unenforceable by the Company and the Holder and any holder, then the Company (including for this purpose any contribution made by or on behalf of any director of the Company, any officer of the Company who signed any such registration statement and any controlling person of the Company), as one entity, and the Holder and any holder of any of the Representative's Securities included in such registration in the aggregate (including for this purpose any contribution by or on behalf of the Holder or any holder), as a second entity, shall contribute to the losses, liabilities, claims, damages and expenses whatsoever to which any of them may be subject, on the basis of relevant equitable considerations such as the relative fault of the Company and the Holder or any such holder in connection with the facts which resulted in such losses, liabilities, claims, damages and expenses. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission, shall be 18 determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company, by the Holder or by any holder of Representative's Securities included in such registration, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Holder agree that it would be unjust and inequitable if the respective obligations of the Company and the Holder for contribution were determined by pro rata or per capita allocation of the aggregate losses, liabilities, claims, damages and expenses (even if the Holder and the other indemnified parties were treated as one entity for such purpose) or by any other method of allocation that does not reflect the equitable considerations referred to in this paragraph 9(c). No person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this paragraph 9(c), each person, if any, who controls the Holder or any holder of any of the Representative's Securities within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer, director, partner, employee, agent and counsel of each such person, shall have the same rights to contribution as such person and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed any such registration statement, and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the provisions of this paragraph 9(c). Anything in this paragraph 9(c) to the contrary notwithstanding, no party shall be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This paragraph 9(c) is intended to supersede any right to contribution under the Act, the Exchange Act or otherwise. 10. Unless the Representative's Securities have been registered or an exemption from such registration is available, the Warrant Shares issued upon exercise of the Representative's Warrants shall be subject to a stop transfer order and the certificate or certificates evidencing any such Warrant Shares shall bear the following legend: THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, NOR HAVE THEY BEEN REGISTERED UNDER THE SECURITIES ("BLUE SKY") LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED, OR HYPOTHECATED UNLESS THEY HAVE FIRST BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 AND UNDER THE APPLICABLE STATE SECURITIES ("BLUE SKY") LAWS OR UNLESS THE AVAILABILITY OF AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND LAWS IS ESTABLISHED TO THE SATISFACTION OF THE 19 COMPANY, WHICH MAY NECESSITATE A WRITTEN OPINION OF SELLER'S COUNSEL SATISFACTORY TO COMPANY COUNSEL. 11. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Representative's Warrant (and upon surrender of any Representative's Warrant if mutilated), and upon reimbursement of the Company's reasonable incidental expenses, the Company shall execute and deliver to the Holder thereof a new Representative's Warrant of like date, tenor and denomination. 12. The Holder of any Representative's Warrant shall not have, solely on account of such status, any rights of a stockholder of the Company, either at law or in equity, or to any notice of meetings of stockholders or of any other proceedings of the Company, except as provided in this Representative's Warrant. 13. This Representative's Warrant shall be construed in accordance with the laws of the State of Colorado, without giving effect to conflict of laws. Dated: _____________, 1998 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By:________________________________________ Robert A. Spade, Chief Executive Officer [SEAL] 20 FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the attached Representative's Warrant.) FOR VALUE RECEIVED, ___________________________________ hereby sells, assigns and transfers unto ________________________ Representative's Warrants to purchase __________ shares of Common Stock of Communications Systems International, Inc. (the "Company"), together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ____________________________ attorney to transfer such Representative's Warrants on the books of the Company, with full power of substitution. Dated:_____________________ Signature:_______________________________________ Signature Guaranteed: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Warrant in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. 21 ELECTION TO EXERCISE (To be executed by the holder if such holder desires to exercise the attached Representative's Warrant) The undersigned hereby exercises his or its rights to subscribe for __________ shares of Common Stock covered by the within Representative's Warrant (each as defined in the within Representative's Warrant) and tenders payment herewith in the amount of $__________ in accordance with the terms thereof, and requests that certificates for such Warrants be issued in the name of, and delivered to: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ (Print Name, Address and Social Security or Tax Identification Number) and, if such number of Warrants (or portions thereof) shall not be all the Warrants covered by the within Representative's Warrant, that a new Representative's Warrant for the balance of the Representative's Warrants (or portions thereof) covered by the within Representative's Warrant be registered in the name of, and delivered to, the undersigned at the address stated below. Name:_________________________________________________________________________ (Print) Address:______________________________________________________________________ ________________________________________ (Signature) Dated:__________________________________ Signature Guaranteed: NOTICE The signature on the foregoing Assignment must correspond to the name as written upon the face of this Representative's Warrant in every particular, without alteration or enlargement or any change whatsoever. Signature(s) must be guaranteed by an eligible guarantor institution which is a participant in a Securities Transfer Association recognized program. 22 EX-10.1 9 FORM OF 10% CONVERTIBLE PROMISSORY NOTE Exhibit 10.1 10% CONVERTIBLE PROMISSORY NOTE $_____________ ___________ , 1996 This PROMISSORY NOTE (this "Note") is executed as of this ___ day of ____, 1996, by COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("Maker"), whose address is 8 S. Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903, in favor of ___________ ("Holder"), whose legal address is __________________. 1. Promise to Pay. For value received, Maker hereby promises to pay to -------------- the order of Holder the principal sum of $ ("Loan Amount"), together with interest thereon at the rate as hereinafter specified, all in lawful money of the United States of America which constitutes legal tender for payment of debts, public and private, at the time of payment. 2. Interest Rate. Interest on the unpaid principal balance of this Note ------------- outstanding from the date hereof and from time to time shall be paid at a rate equal to 10% per annum ("Interest Rate"). Interest payable hereunder shall be calculated on a 360-day year based on the actual number of days for which any amounts payable hereunder remain outstanding. 3. Maturity Date. The "Maturity Date" shall mean __________________, ------------- 1998. The entire outstanding principal balance of this Note, together with all accrued but unpaid interest, shall, if not previously paid, be finally due and payable on the Maturity Date. 4. Payment Schedule. Interest shall accrue on the outstanding principal ---------------- balance hereunder at the Interest Rate. Payments of interest only shall be payable commencing March 31, 1997 and continuing semi-annually thereafter until the Maturity Date at which time the entire outstanding principal balance of this Note together with all accrued but unpaid interest hereunder shall, if not previously paid, be fully due and payable. 5. Prepayment Privilege. Maker shall have the right to prepay all or any -------------------- portion of the Loan Amount, together with accrued interest thereon, at any time with no prepayment penalty whatsoever. Any such prepayment shall be made pro rata among the holders of all Convertible Promissory Notes based on their then outstanding Loan Amounts. Maker shall give Holder at least 30 days' prior written notice of any proposed prepayment. 6. Warrants. For each $10,000 of Loan Amount evidenced by this Note, -------- Holder shall receive 1,000 warrants to purchase common stock, no par value ("Common Stock"), of Maker (the "Warrants"). The Warrants shall be subject to the terms set forth in the "Agreement and Terms of Warrants" attached hereto as Exhibit A. --------- 7. Conversion. At any time on or before the earlier of (i) the Maturity ---------- Date, or (ii) the prepayment date if the Note is to be prepaid under Section 5, Holder by delivery of this Note and written notice to Maker may convert all of the outstanding Loan Amount and interest due hereunder as of the date of delivery of such notice (the "Outstanding Amount") into the number of shares (the "Shares") of Common Stock of Maker equal to the Outstanding Amount divided by 90% of the average of the bid price and the ask price of Maker's Common Stock on the day before the date of conversion (the "Conversion Price"). In the event of any capital reorganization or reclassification of the Shares, any consolidation or merger of Maker with or into another corporation, limited partnership, limited liability company or other entity or any sale, lease or other disposition of all or substantially all of the assets of Maker, that is effected in such a manner that holders of Common Stock are entitled to receive securities and/or property (including cash) with respect to or in exchange for Common Stock and that does not result in a prepayment by Maker pursuant to Section 5, Maker shall, as a condition precedent to such transaction, cause effective provision to be made so that Holder shall have the right thereafter to convert this Note for the kind and amount of securities and/or other property receivable upon such event by a holder of the number of Shares for which this Note could have been converted immediately prior to such event, subject to the adjustments which shall be as nearly equivalent as practicable to the adjustments provided for in this Note. 8. Put Feature. At the end of each six-month period during the term of ----------- this Note (i.e., each March 31 or September 30) (the "Tender Date"), Holder shall have the right to tender this Note and to cause Maker to repay the outstanding Loan Amount and accrued and unpaid interest thereon as of such Tender Date. Holder shall give Maker written notice of its intention to so tender the Note at least 30 days prior to the Tender Date. 9. Application of Payments. All payments hereunder shall be applied first ----------------------- to the payment of accrued and unpaid interest on the principal of this Note, including interest accrued at the Default Rate as hereinafter provided; and second, to the reduction of principal of this Note. 10. Default Interest Rate. Any payment not made within five days after --------------------- the same is due hereunder, and including the entire balance of principal, interest, and other sums then due, shall bear interest at 3% above the then current Interest Rate ("Default Rate"), such interest to accrue from the date due until paid. 11. Default. Each of the following shall constitute an "Event of Default" ------- under this Note: -2- (a) The failure of Maker to pay in full any amount due hereunder by the date the same is due, as provided herein, and such failure shall continue for 10 days after written notice from Holder to Maker of such failure, or Maker's failure to pay in full any amount due hereunder upon maturity of this Note, by acceleration or otherwise; or (b) The failure of Maker to perform, satisfy and observe in full, when due, any of the obligations, covenants, conditions and restrictions under this Note, not involving the payment of money, and such failure shall continue for 30 days after written notice from Holder to Maker of such failure, or if said failure cannot reasonably be cured within said 30-day period, Maker shall not have cured such failure within a reasonable time after the written notice from Holder to Maker described above. 12. Right to Accelerate on Event of Default. Upon the occurrence of any --------------------------------------- Event of Default hereunder, the entire balance of principal, accrued interest, and any other sums owing hereunder shall, at the option of Holder, become at once due and payable without prior notice or demand. 13. Waivers of Demand, etc. Maker and all parties now or hereafter liable ----------------------- for the payment hereof, primarily or secondarily, directly or indirectly, and whether as endorser, guarantor, surety, or otherwise, severally waive demand, presentment, notice of dishonor or nonpayment, protest and notice of protest, and diligence in collecting, and consent to extensions of time for payment, renewals of this Note and acceptance of partial payments, whether before, at, or after maturity, all or any of which may be made without notice to any of said parties and without affecting their liability to Holder. 14. Costs of Collection. Maker and all parties now or hereafter liable ------------------- for the payment hereof agree to pay all costs and expenses, including reasonable attorneys' fees, incurred in collecting this Note or any part thereof. 15. No Usury Payable. The provisions of this Note and of all agreements ---------------- between Maker and Holder are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid, to Holder for the use, forbearance, or retention of the Loan Amount ("Interest") exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, the performance or fulfillment of any provision hereof or of any other agreement between Maker and Holder shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law, then, ipso facto, the obligation to be performed or fulfilled shall be reduced to such limit, and if, from any circumstance whatsoever, Holder should ever receive as Interest an amount which would exceed the highest lawful rate, the amount which would be excessive Interest shall be applied to the reduction of the principal balance owing hereunder (or, at Holder's option, or if no principal shall be outstanding, be paid over to Maker) and not to the payment of Interest. -3- 16. Subordination; No Security. The indebtedness evidenced by this Note, -------------------------- including all principal, interest and other sums owing hereunder, are subordinate and subject in right of payment to the payment in full of all other indebtedness of Maker. This Note is not secured by any assets of Maker or other collateral. 17. Severability of Provisions. If any provision hereof shall, for any -------------------------- reason and to any extent, be invalid or unenforceable, then the remainder of the instrument in which such provision is contained, the application of the provision to other persons, entities or circumstances, and any other instrument referred to herein shall not be affected thereby but instead shall be enforceable to the maximum extent permitted by law. 18. Successors to Maker or Holder. The term "Maker" as used herein shall ----------------------------- include the original maker of this Note and any party who may subsequently become primarily liable for the payment hereof. The term "Holder" as used herein shall mean the original payee of this Note or, if this Note is transferred, the then holder of this Note, provided that, until written notice is given to Maker designating another party as Holder, Maker may consider the Holder to be the original payee or the party last designated as Holder in a written notice to Maker. 19. Notices. All notices, consent or other instruments or communications ------- provided for under this Note shall be in writing, signed by the party giving the same, and shall be deemed properly given and received when actually delivered and received or three business days after mailed, if sent by registered or certified mail, postage prepaid, to the address set forth in the first paragraph of this Note, or to such other address as a party may designate by written notice to the other party. 20. Captions for Convenience. The captions to the Sections hereof are for ------------------------ convenience only and shall not be considered in interpreting the provisions hereof. 21. Governing Law. Regardless of the place of its execution, this Note ------------- shall be construed and enforced in accordance with the laws of the State of Colorado. MAKER: COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By: ______________________________________ Name: ________________________________ Title: _______________________________ -4- EX-10.2 10 FORM OF WARRANT AND TERMS OF WARRANTS Exhibit 10.2 AGREEMENT AND TERMS OF WARRANTS 1. Definitions. As used herein: ----------- (a) "Common Stock" shall mean the Common Stock, no par value per ------------ share, of the Company, whether now or hereafter authorized, holders of which have the right to participate in the distribution of earnings and assets of the Company without limit as to the amount or percentage. (b) "Company" shall mean Communications Systems International, Inc., a ------- Colorado corporation. (c) "Convertible Promissory Notes" shall mean the 10% Convertible ---------------------------- Promissory Notes given by the Company as Maker dated as of ______________, 1996. (d) "Corporate Office" shall mean the principal office of the Company, ---------------- which is presently located at 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903. (e) "Exercise Date" shall mean the date of surrender for exercise of ------------- any Warrant Certificate, provided the exercise form on the back of the Warrant Certificate, or a form substantially similar thereto has been completed in full by the Warrant Holder or a duly appointed attorney and the Warrant Certificate is accompanied by payment in full of the Exercise Price. (f) "Exercise Period" shall mean the period commencing on the date the --------------- Warrants are issued and extending to and through the Expiration Date. (g) "Exercise Price" shall mean a purchase price of $_______ per share -------------- of Common Stock; provided, however, that in the event the Company reduces the Exercise Price in accordance with Section 8(h) hereof, the Exercise Price shall be as established by the Company in accordance with such Section. (h) "Expiration Date" shall mean 5:00 p.m. Colorado Springs, Colorado --------------- time on the earlier of (i)_____________, 1998, or (ii) the date on which the Company prepays the Convertible Promissory Notes pursuant to the terms of Section 5 thereof, or (iii) the date on which the Company repays the Warrant Holder's Convertible Promissory Note pursuant to the terms of Section 8 thereof; provided, however, if such date shall be a holiday or a day on which banks are authorized to close in the State of Colorado, the Expiration Date shall mean 5:00 p.m. Colorado Springs, Colorado time on the next following day which in the State of Colorado is not a holiday or a day on which banks are authorized to close. (i) "Subsidiary" shall mean any corporation of which shares having ---------- ordinary voting power to elect a majority of the Board of Directors of such corporation (regardless of whether the shares of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or one or more Subsidiaries of the Company. (j) "Warrant" or the "Warrants" shall mean up to 15,000 warrants which ------- -------- shall be issued pursuant to the terms of the Convertible Promissory Notes and which may be exercised for Warrant Shares. (k) "Warrant Certificate" shall mean the Warrant Certificate ------------------- substantially in the form of Attachment 1 hereto with such changes as may be provided for in this Agreement. (l) "Warrant Holder" shall mean the person in whose name any Warrant -------------- Certificate shall be registered on the books maintained by the Company pursuant to Section 6 of this Agreement. (m) "Warrant Shares" shall mean and include up to 15,000 authorized -------------- and unissued shares of Common Stock reserved for issuance on exercise of the Warrants, and unless otherwise noted, shall include any additional shares of Common Stock or other property which may hereafter be issuable or deliverable on exercise of the Warrants pursuant to Section 8 of this Agreement. 2. Warrants and Issuance of Warrant Certificates. --------------------------------------------- (a) One Warrant shall initially entitle the Warrant Holder to purchase one share of Common Stock on exercise thereof, subject to modification and adjustment as hereinafter provided in Section 8. Warrant Certificates representing 15,000 Warrants and evidencing the right to purchase an aggregate of 15,000 shares of Common Stock of the Company shall be executed by the proper officers of the Company. The Company shall deliver Warrant Certificates in required whole number denominations to the person entitled thereto in connection with any transfer or exchange permitted under this Agreement. (b) Except as provided in Section 7 hereof, share certificates representing the Warrant Shares shall be issued only on or after the Exercise Date upon exercise of the Warrants or upon transfer or exchange of the Warrant Shares following exercise of the Warrants. 3. Form and Execution of Warrant Certificates. ------------------------------------------ (a) The Warrant Certificates shall be substantially in the form attached hereto as Exhibit A and may have such letters, numbers or other marks --------- of identification and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement. The Warrant Certificates shall be dated as of the date of issuance, whether on initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates. (b) The Warrant Certificates shall be executed on behalf of the Company by its President and Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. 4. Exercise. -------- (a) The Warrants will become exercisable on their issuance. The exercise of the Warrants in accordance with this Agreement shall only be permitted during the Exercise Period. Warrants shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date. The exercise form shall be executed by the Warrant Holder thereof or his attorney duly authorized in writing and shall be delivered together with payment to the Company, in cash or by official bank or certified check, of an amount in lawful money of the United States of America to the order of the Company in an amount equal to the aggregate Exercise Price. (b) The Company shall not be obligated to issue any fractional share interests in Warrant Shares. If Warrants represented by more than one Warrant Certificate shall be exercised at one time by the same Warrant Holder, the number of full Warrant Shares which shall be issuable on exercise thereof shall be computed on the basis of the aggregate number of full Warrant Shares issuable on such exercise. (c) The person entitled to receive the number of Warrant Shares deliverable on such exercise shall be treated for all purposes as the Warrant Holder as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date and in any event within 30 days after such date, the Company shall issue and deliver to the person or persons entitled to receive the same, a certificate or certificates for the number of Warrant Shares deliverable on such exercise. No adjustment shall be made in respect of cash dividends, if any, on Warrant Shares deliverable on exercise of any Warrant. Following the determination by the Company that collected funds have been received, the Company shall issue share certificates representing the number of Warrant Shares purchased by the Warrant Holder. No issuance of Warrant Shares shall be made unless there is an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), and registration or qualification of the Warrant Shares, or an exemption therefrom has been obtained -3- from state or other regulatory authorities in the jurisdiction in which such Warrant Shares are sold. The Company is authorized to refuse to honor the exercise of any Warrant if such exercise would result, in the opinion of the Company upon advice of counsel, in the violation of any law. 5. Reservation of Shares and Payment of Taxes. ------------------------------------------ (a) The Company covenants that it will at all times reserve and have available from its authorized shares of Common Stock such number of shares of Common Stock as shall then be issuable on exercise of all outstanding Warrants. The Company covenants that all Warrant Shares issuable shall be validly issued, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. (b) The Warrant Holder shall pay all documentary, stamp or similar taxes and other government charges that may be imposed with respect to the issuance of the Warrants, or the issuance, transfer or delivery of any Warrant Shares on exercise of the Warrants. In the event the Warrant Shares are to be delivered in a name other than the name of the Warrant Holder, no such delivery shall be made unless the person requesting the same has paid to the Company the amount of any such taxes or charges incident thereto. 6. Registration of Transfer. ------------------------ (a) The Warrant Certificates may be transferred in whole or in part but only with the prior consent of the Company and only in compliance with applicable law, including applicable federal and state securities laws. Warrant Certificates to be exchanged shall be surrendered to the Company at its Corporate Office. The Company shall execute, issue and deliver in exchange therefor, the Warrant Certificate or Certificates which the holder making the transfer shall be entitled to receive and the Company shall promptly cancel the surrendered Warrant Certificate. (b) The Company shall keep at its Corporate Office books for registration of ownership and transfer of Warrant Certificates on which Warrant Certificates and the transfer thereof shall be registered. Such books shall show the names and addresses of the respective holders of the Warrant Certificates and the number of Warrants evidenced by each such Warrant Certificate. All Warrant Certificates presented for registration of transfer or exercise shall be duly endorsed or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company. The Company may require payment of a sum by the Warrant Holder sufficient to cover any tax or other governmental charge that may be imposed in connection with the transfer of Warrant Certificates. On due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute, issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. -4- (c) Prior to due presentment for registration of transfer thereof, the Company may treat the Warrant Holder as the absolute owner thereof (notwithstanding any notations of ownership or writing thereon made by anyone other than the Company) and the parties hereto shall not be affected by any notice to the contrary. 7. Loss or Mutilation. On receipt by the Company of evidence ------------------ satisfactory as to the ownership of and the loss, theft, destruction or mutilation of any Warrant Certificate, the Company shall execute and deliver in lieu thereof, a new Warrant Certificate representing an equal aggregate number of Warrants. In the case of loss, theft or destruction of any Warrant Certificate, the Warrant Holder requesting issuance of a new Warrant Certificate shall be required to secure an indemnity bond in favor of the Company in an amount satisfactory to each of them. In the event a Warrant Certificate is mutilated, such Warrant Certificate shall be surrendered and canceled by the Company prior to delivery of a new Warrant Certificate. Applicants for a substitute Warrant Certificate shall also comply with such other regulations and pay such other reasonable charges as the Company may prescribe. 8. Adjustment of Exercise Price and Shares. --------------------------------------- (a) If any time prior to the expiration of the Warrants by their terms or by exercise of the Warrants, the Company increases or decreases the number of its issued and outstanding shares of Common Stock, or changes in any way the rights and privileges of such shares of Common Stock, by means of (i) the payment of a share dividend or the making of any other distribution on such shares of Common Stock payable in its shares of Common Stock, (ii) a split or subdivision of shares of Common Stock, or (iii) a consolidation or combination of shares of Common Stock, then the Exercise Price in effect at the time of such action and the number of Warrants required to purchase each Warrant Share at that time shall be proportionately adjusted so that the numbers of rights and privileges relating to the Warrant Shares then purchasable upon the exercise of the Warrants shall be increased, decreased or changed in like manner, for the same aggregate purchase price set forth in the Warrants, as if the Warrant Shares purchasable upon the exercise of the Warrants immediately prior to the event had been issued, outstanding, fully paid and nonassessable at the time of such event. Any dividend paid or distributed on the shares of Common Stock in shares of any other class of the Company or securities convertible into shares of Common Stock shall be treated as a dividend paid in shares of Common Stock to the extent shares of Common Stock are issuable on the payment or conversion thereof. Any adjustment made pursuant to this Section 8(a) shall, in the case of a stock dividend or distribution, become effective as of the record date therefor and, in the case of a split, subdivision, consolidation or combination, be made as of the effective date thereof. (b) If, prior to the expiration of the Warrants by exercise or by their terms, the Company shall be recapitalized by reclassifying its outstanding shares of Common Stock into -5- shares with a par value or in the event of any other material change of the capital structure of the Company or of any successor corporation by reason of any reclassification, equitable, lawful and adequate provision shall be made whereby any Warrant Holder shall thereafter have the right to purchase, on the basis and the terms and conditions specified in this Agreement, in lieu of the Warrant Shares theretofore purchasable on the exercise of any Warrant, such securities or assets as may be issued or payable with respect to or in exchange for the number of Warrant Shares theretofore purchasable on exercise of the Warrants had such reclassification, recapitalization or conveyance not taken place; and in any such event, the rights of any Warrant Holder to any adjustment in the number of Warrant Shares purchasable on exercise of such Warrant, as set forth above, shall continue to be preserved in respect of any stock, securities or assets which the Warrant Holder becomes entitled to purchase. (c) In the event the Company, at any time while the Warrants shall remain unexpired and unexercised, shall sell all or substantially all of its property, or dissolves, liquidates or winds up its affairs, prompt, proportionate, equitable, lawful and adequate provision shall be made as part of the terms of such sale, dissolution, liquidation or winding up such that the Warrant Holder may thereafter receive, on exercise thereof, in lieu of each Warrant Shares which he would have been entitled to receive, the same kind and amount of any stock, securities or assets as may be issuable, distributable or payable on any such sale, dissolution, liquidation or winding up with respect to each share of Common Stock; provided, however, that in the event of any such sale, dissolution, liquidation or winding up, the right to exercise the Warrants shall terminate on a date fixed by the Company, such date to be not earlier than 5:00 p.m. Colorado Springs, Colorado time on the 45th day next succeeding the date on which notice of such termination of the right to exercise the Warrants has been given by mail to the Warrant Holders thereof at such addresses as may appear on the books of the Company. (d) On exercise of the Warrants by the Warrant Holders, the Company shall not be required to deliver fractions of shares of Common Stock; provided, however, that the Company shall purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the average bid price on the trading day immediately preceding the day upon which such Warrant Certificate was surrendered for exercise in accordance with Section 4 hereof. By accepting a Warrant Certificate, the holder thereof expressly waives the right to receive a Warrant Certificate evidencing any fraction of a Warrant or to receive any fractional share of securities upon exercise of a Warrant, except as expressly provided in this Section 8(d). (e) If, prior to expiration of the Warrants by exercise or by their terms, the Company shall determine to take a record of the holders of its shares of Common Stock for the purpose of determining shareholders entitled to receive any stock dividend, distribution or other right which will cause any change or adjustment in the number, amount, price or nature of the shares of Common Stock or other stock, securities or assets deliverable on exercise of the -6- Warrants pursuant to the foregoing provisions, the Company shall give to the Warrant Holders at the addresses as may appear on the books of the Company at least 20 days' prior written notice to the effect that it intends to take such a record. Such notice shall specify the date as of which such record is to be taken; the purpose for which such record is to be taken; and the number, amount, price and nature of the shares of Common Stock or other stock, securities or assets which will be deliverable on Warrant Shares following exercise of the Warrants, if such exercise occurs prior to the record date for such action. Without limiting the obligation of the Company to provide notice to the Warrant Holders of any corporate action hereunder, failure of the Company to give notice shall not invalidate such corporate action of the Company. (f) The Warrants shall not entitle the Warrant Holder to any of the rights of shareholders or to any dividend declared on the shares of Common Stock unless the Warrant is exercised and the Warrant Shares purchased prior to the record date fixed by the Board of Directors of the Company for the determination of holders of shares of Common Stock entitled to such dividend or other right. (g) Except as provided in Section 8(a) above, no adjustment of the Exercise Price shall be made as a result of or in connection with the issuance of shares of Common Stock. (h) The Company shall be empowered, in the sole and unconditional discretion of the Board of Directors, at any time during the Exercise Period, to reduce the applicable Exercise Price of the Warrants. Any such reduction in the applicable Exercise Price shall only be effective on 10 days' written notice to the Warrant Holders, which notice shall be given pursuant to a duly and validly authorized resolution of the Board of Directors of the Company. Any such reduction in the Exercise Price shall not entitle the Warrant Holders to issuance of any additional shares of Common Stock pursuant to the adjustment provisions set forth elsewhere herein, regardless of whether the reduction in the Exercise Price was effected either prior to or following exercise of Warrants by the Warrant Holders. A nonexercising Warrant Holder shall have no remedy or rights to receive any additional Warrant Shares as a result of any reduction in any applicable Exercise Price pursuant to this subsection. (i) Before taking any action that would cause an adjustment pursuant to this Section 8 reducing the Exercise Price required to purchase one share of Common Stock below the then par value (if any) of a share of such Common Stock, the Company will use its best efforts to take any corporate action which, in the opinion of its counsel, may be necessary in order that the Company may validly and legally issue fully paid and non-assessable shares of such Common Stock. 9. Modification of Agreement. The Company may by supplemental agreement ------------------------- make any changes or corrections in this Agreement it shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or mistake or error herein -7- contained. Additionally, the Company may make any changes or corrections deemed necessary which shall not adversely affect the interests of the Warrant Holders; provided, however, this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Warrant Holders who hold not less than a majority of the Warrants outstanding and provided further that no such amendment shall accelerate the Warrant Expiration Date or increase the Exercise Price without the approval of all the holders of all outstanding Warrants. 10. Notices. All notices, demands, claims, elections, opinions, requests ------- or other communications hereunder (however characterized or described) shall be in writing and shall be deemed duly given or made if (and then two business days after) sent by registered or certified mail, return receipt requested, postage prepaid and addressed to, in the case of the Company: Communications Systems International, Inc. 8 South Nevada Avenue, Suite 101 Colorado Springs, Colorado 80903 Attention: ________________________ and if the Warrant Holder, at the address of the Company as set forth on the books maintained by the Company. The Company may send any notice, demand, claim, election, opinion, request or communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail or electronic mail), but no such notice, demand, claim, election, opinion, request or other communication shall be deemed to have been duly given or made unless and until it actually is received by the intended recipient. The Company may change the address to which notices, demands, claims, elections, opinions, requests and other communications hereunder are to be delivered by giving the Warrant Holders notice in the manner herein set forth. 11. Persons Benefiting. This Agreement shall be binding upon and inure to ------------------ the benefit of the Company and its respective successors and assigns and the Warrants Holders. Nothing in this Agreement is intended or shall be construed to confer on any other person any right, remedy or claim or to impose on any other person any duty, liability or obligation. 12. Severability. If any term contained herein shall be held, declared or ------------ pronounced void, voidable, invalid, unenforceable or inoperative for any reason by any court of competent jurisdiction, government authority or otherwise, such holding, declaration or pronouncement shall not affect adversely any other term, which shall otherwise remain in full force and effect, and the effect of such holding, declaration or pronouncement shall be limited to the territory or jurisdiction in which made. -8- 13. Termination. This Agreement shall terminate as of the close of ----------- business on the Expiration Date, or such earlier date upon which all Warrants shall have been exercised. 14. Governing Law. These terms and each Warrant Certificate issued ------------- hereunder shall be deemed to be a contract under the laws of the State of Colorado and for all purposes shall be construed in accordance with the laws of said state without giving effect to conflicts of laws provisions of such state. 15. Agreement Available to Warrant Holders. A copy of these terms shall -------------------------------------- be available at all reasonable times at the office of the Company for inspection by any Warrant Holder. As a condition of such inspection, the Company may require any Warrant Holder to submit a Warrant Certificate held of record for inspection. -9- ATTACHMENT 1 [FORM OF WARRANT CERTIFICATE] The Warrants evidenced by this certificate were issued in connection with a Convertible Promissory Note dated as of ____________, 1996 given by the Company as Maker to the Warrant Holder ("Warrant"). One Warrant entitles the Warrant Holder to purchase one share of Common Stock. The Warrants may only be exercised when either (a) a current registration statement under the Securities Act of 1993, as amended, is effective or (b) an exemption from such registration is available to the Company, in either case, without undue expense or hardship. Additionally, Warrants are only exercisable when such exercise, and the issuance of the underlying Common Stock, can be effected in compliance with applicable state Blue Sky laws. The Company will be under no obligation whatsoever to take any steps in states other than California to allow Warrants to be exercised. W-____________________ _____________ Warrants WARRANT CERTIFICATE This Warrant Certificate certifies that _________ or registered assigns (the "Warrant Holder"), is the registered owner of the above-indicated number of Warrants ("Warrants") expiring at 5:00 p.m., Colorado Springs, Colorado local time, on _____________, 1998 (as extended or accelerated pursuant to the Agreement and Terms of Warrants (the "Warrant Terms"), the "Expiration Date"). One Warrant entitles the Warrant Holder to purchase from Communications Systems International, Inc., a Colorado corporation (the "Company"), at any time before the Expiration Date, one fully paid and non-assessable share of Common Stock of the Company at a purchase price of $_______ per share (the "Exercise Price") in lawful money of the United States of America for one Warrant represented hereby upon surrender of this Warrant Certificate, with the exercise form hereon duly completed and executed, with payment of the Exercise Price at the principal office of the Company, but only subject to the conditions set forth herein and in the Agreement and Terms of Warrants. The Exercise Price, the number of shares purchasable upon exercise of each Warrant, the number of Warrants outstanding and the Expiration Date are subject to adjustments upon the occurrence of certain events set forth in the Warrant Terms. Reference is hereby made to the other provisions of this Warrant Certificate and the provisions of the Warrant Terms, all of which are hereby incorporated by reference herein and made a part of this Warrant Certificate and which shall for all purposes have the same effect as though fully set forth at this place. Upon due presentment for registration of transfer of this Warrant Certificate at the office of the Company a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Warrants, subject to any adjustments made in accordance with the Attachment 1-1 Warrant Terms, shall be issued to the transferee in exchange of this Warrant Certificate, subject to the limitations provided in the Warrant Terms entered into between the Company and the original holder of the Warrant regarding restrictions on transfer and, upon payment of the transfer fee and any tax or other governmental charge imposed in connection with such transfer. The Warrant Holder of the Warrants evidenced by this Warrant Certificate may exercise all or any whole number of such Warrants in the manner stated hereon and in the Warrant Terms. The Exercise Price shall be payable in lawful money of the United Sates of America in cash or by certified or cashier's check or bank draft payable to the order of the Company. Upon any exercise of any Warrants evidenced by this Warrant Certificate in an amount less than the number of Warrants so evidenced, there shall be issued to the Warrant Holder a new Warrant Certificate evidencing the number of Warrants not so exercised. No adjustment shall be made for any dividends on any shares issued upon exercise of this Warrant. No Warrant may be exercised after 5:00 p.m. Colorado Springs, Colorado, local time, on the Warrant Expiration Date (as defined in the Warrant Terms), and any Warrant not exercised by such time shall become void. COPIES OF THE WARRANT TERMS, WHICH DEFINE THE RIGHTS, RESPONSIBILITIES AND OBLIGATIONS OF THE COMPANY AND THE WARRANT HOLDERS ARE ON FILE WITH THE COMPANY. ANY WARRANT HOLDER MAY OBTAIN A COPY OF THE WARRANT TERMS, FREE OF CHARGE, BY A REQUEST TO THE PRINCIPAL OFFICES OF THE COMPANY, ATTENTION: SECRETARY. This Warrant Certificate, when surrendered to the Company at its principal office by the Warrant Holder, in person or by attorney duly authorized in writing, may be exchanged, in the manner and subject to the limitations provided in the Warrant Terms, without payment of a charge, except for any tax or other governmental charge impose in connection with such exchange, for another Warrant Certificate or Warrant Certificates of like tenor and evidencing a like number of Warrants, subject to any adjustments made in accordance with the Warrant Terms. The Company may deem and treat the registered holder hereof as the absolute owner of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone) for all purposes and the Company shall not be affected by any notice to the contrary. No Warrant Holder, as such, shall have any rights of a shareholder of the Company, either at law or in equity, and the rights of the Warrant Holder, as such, are limited to those rights expressly provided in the Warrant Terms and in the Warrant Certificates. Attachment 1-2 The Company shall not be required to issue fractions of warrants upon any such adjustment or to issue fractions of shares upon the exercise of any Warrants after any such adjustment, but the Company, in lieu of issuing any such fractional interest, shall pay an amount in cash equal to such fraction times the current market value of one share, determined in accordance with the Warrant Terms. Unless the amendment is able to be effected by the Company in accordance with the Warrant Terms, the Warrant Terms are subject to amendment upon the approval of holders of not less than a majority of the outstanding Warrants, except that no such amendment shall accelerate the Warrant Expiration Date or increase the Exercise Price without the approval of all the holders of all outstanding Warrants. A copy of the Warrant Terms shall be available at all reasonable times at the principal office of the Company for inspection by any Warrant Holder. As a condition of such inspection, the Company may require any Warrant Holder to submit his Warrant Certificate for inspection. IMPORTANT: The Warrants represented by this Certificate may not be --------- exercised by a Warrant Holder unless at the time of exercise the underlying shares of Common Stock are qualified for sale, by registration or otherwise, in the state where the Warrant Holder resides or unless the issuance of the shares of Common Stock would be exempt under the applicable state securities laws. Further, a registration statement under the Securities Act of 1933, as amended, covering the exercise of the Warrants must be in effect and current at the time of exercise unless the issuance of shares of Common Stock upon any exercise is exempt from the registration requirements of the Securities Act of 1933, as amended. Notwithstanding the provisions hereof, unless such registration statement and qualification are in effect and current at the time of exercise, or unless exemptions are available, the Company may decline to permit the exercise of the Warrants and the holder hereof would then only have the choice of either attempting to sell the Warrants, if a market existed therefor, or letting the Warrants expire. The certificates representing the shares of Common Stock to be received by the Warrant Holder upon any exercise of the Warrants shall bear a restrictive legend substantially as follows: The shares represented by this Certificate may only be transferred by operation of law or with the prior written consent of the Company. The shares represented by this Certificate are also subject to restrictions on transfer under the Securities Act of 1933, as amended, and state securities laws, and may not be offered for sale, sold, assigned, transferred, pledged or otherwise disposed of unless registered and qualified under all applicable securities laws or unless an exemption exists and can be satisfied by the transferor, the availability of which is to be established by an opinion of Attachment 1-3 counsel (which opinion and counsel shall both be reasonably satisfactory to the Company). The Company is under no obligation to register or qualify the shares which this Certificate represents under any applicable securities laws. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be signed by its President and by its Secretary, each by a facsimile of said officers' signatures, and has caused a facsimile of its corporate sale to be imprinted hereon. Dated: _____________________ COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By: ________________________ By: __________________________ ____________, Secretary Robert A. Spade, President Attachment 1-4 EX-10.3 11 AGREEMENT BETWEEN CSI AND CABLE & WIRELESS EXHIBIT 10.3 GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS [LOGO OF CABLE AND WIRELESS, INC. APPEARS HERE] 1. Service to be Provided by CWI: CWI will provide the following long-distance ----------------------------- services; Domestic Outbound, Domestic Inbound, International Outbound and Directory Assistance (hereinafter collectively, "Services"). The Carrier will access CWIs network, as soon as is reasonably possible, via dedicated T-1 lines ("Access Lines") ordered from local exchange carriers or alternate access carriers (collectively "Local Carriers") and paid for by the Carrier. If the Carrier orders an Access Line from a Local Carrier, the Carrier will pay the Local Carrier directly for the Access Line. If the Carrier requests CWI to order the Access Line and if permitted by the Local Carrier, CWI will order the Access Line on behalf of the Carrier and will have the Local Carrier bill the Carrier directly for the Access Line. 2. Term and Termination: The initial term of this Agreement will end the number -------------------- of full CWI monthly billing periods ("Month(s)") after service is initiated as set forth in the "Initial Term" portion of the Order Information section of this Agreement ("Initial Term"). Either party may terminate this Agreement at the end of the Initial Term, by providing thirty (30) days' prior written notice. If no such notice is given, this Agreement will continue after the Initial Term, until terminated by either party providing the other with thirty (30) days' prior written notice. The term "Term" as used herein will mean the Initial Term plus any subsequent period of time during which this Agreement continues beyond the end of the Initial Term. If CWI shall have undertaken efforts to provide Services prior to the date of full execution of this Agreement, the provisions of this Agreement shall apply retroactively with respect to such efforts and such Services. At any time prior to the end of the Initial Term, the Carrier may, for its convenience, terminate this Agreement in its entirety by providing CWI with thirty (30) days' prior written notice. In such event, in addition to paying for all charges incurred through the date service is discontinued, including any applicable shortfall charges, the Carrier will pay (as a contract discontinuance fee and not as a penalty) an amount equal to the sum of the minimum monthly payment obligations for each of the remaining Months in the Initial Term. If CWI has not received any traffic from Carrier hereunder within sixty (60) days after full execution of this Agreement, CWI shall have the right to terminate this Agreement upon written notice to Carrier. If the Carrier fails to do any of the following when due and then does not cure such failure within two (2) days after receiving notice thereof from CWI, CWI may, in addition to any other remedies available to it and without any further written notice to the Carrier, immediately terminate this Agreement in its entirety and discontinue providing Services: (i) make a payment in full; (ii) provide any required security deposit amount; or (iii) provide any required financial report. In addition to any other remedies available to it, CWI may immediately terminate this Agreement in its entirety if Carrier fails to comply with the terms of any license accompanying any software relating to E-BIS(R) reporting options. 3. Rates and Taxes: The Carrier will pay the monthly, non-recurring and usage --------------- charges set forth in this Agreement. Each call will be billed in 6-second increments and will be subject to a 30-second minimum charge except that domestic outbound calls (both interstate and intrastate) will be subject to a 6-second minimum charge. The Carrier will pay any applicable federal, state, or local taxes, surcharges, or similar fees for the Services. CWI may, upon fifteen (15) days written notice to Carrier, increase any of the rates, fees and other charges, including any assessment and amount of any surcharges for a particular Service. If CWI increases any of the international rates set forth in this Agreement and Carrier subsequently discontinues routing traffic to CWI for a country for which such increased rate applies, then providing traffic to such country would have contributed to the Carrier's minimum monthly payment obligations set forth in the Order Information section of the Agreement, for so long as Carrier discontinues routing traffic to such country to CWI, the amount of such minimum monthly payment obligations will be reduced by a percentage that is equivalent to the average total charges incurred by the Carrier for calls placed to that country in each of the three (3) Months immediately preceding the date the Carrier discontinues routing such traffic to CWI, divided by the average of the Carrier's total charges for Services in each such Month. Any software which CWI supplies for use in connection with the E-BIS(R) reporting options shall be provided subject to the software license agreement that accompanies such software. Carrier agrees to comply with all terms and conditions set forth in such software license agreement. Title to, all rights to and all interest in, such software shall at all times remain with CWI or its third-party suppliers. 4. Payment: CWI will provide monthly invoices covering CWI-designated periods ------- which will be due and payable within the number of days after the invoice date as set forth in the "Payment Period" section of the Order Information section of this Agreement. The "invoice date" for a particular monthly billing period will be the day immediately following the last day of such monthly billing period. For example, if the monthly billing period runs from January 24th to February 23rd, the invoice date for such billing period will be February 24th, and, if the "Payment Period" set forth in the Order Information section of the Agreement is "10 days after the invoice date", then payment for such monthly billing period is due no later than the tenth (10th) day after February 24th. If the Order Information section of this Agreement indicates that estimated payments are required, CWI will notify the Carrier on the last day of the "Estimated Usage Period," or if such day is not a business day, on the next business day, as to CWIs estimate of the charges incurred by the Carrier during such period. The Carrier will pay CWI such estimated amount ("Estimated Payment") no later than the "Estimated Payment Due Date". At the end of a Month, CWI will provide an invoice for the usage charges actually incurred that Month less that Month's Estimated Payment; provided, however, that if a minimum monthly payment obligation applies for that Month and such minimum has not been met, then the invoice amount will be that Month's minimum payment obligation less that Month's Estimated Payment. The Carrier will pay the invoiced amount within the Payment Period. A late payment charge will be applied on balances that remain unpaid after the Payment Period in the amount of the lesser of (a) 1 1/2% per month of the amount of the late payment starting from the day following the Payment Period, or (b) maximum amount allowed under applicable law. The Carrier must pay all invoices when due; any questions which the Carrier may have concerning an invoice must be brought to CWI's attention within forty-five (45) days of the invoice date. The Carrier shall reimburse CWI for any expenses, including, without limitation, reasonable attorney's fees, CWI may incur in collecting amounts due hereunder. If so indicated in the Order Information section of this Agreement, all payments by the Carrier will be made via wire transfer (in immediately available funds) to Mellon Bank, 3 Mellon Bank Center, Room 153-2718, Pittsburgh, PA 15259-0001, ABA #0430-00261/Account #1705643. __Or 5. Financial Reports: If the Order Information section of this Agreement ----------------- indicates that financial reports are required, within thirty (30) days after the end of each calendar quarter, the Carrier will provide CWI with a written report updating the Carrier's financial status ("Quarterly Report"), and within ninety (90) days after the end of each calendar year, the carrier will provide CWI with an audited annual report. Each Quarterly Report will contain, as a minimum, an updated balance sheet and income statement. The Carrier represents and warrants that no Quarterly Report will contain any material misstatement or omission. 6. Security Deposits: If the Order Information section of this Agreement ----------------- indicates that security deposits are required, each required security deposit will be either in cash (paid by check or via wire transfer) or an irrevocable stand-by letter of credit in a form and from a financial institution reasonably acceptable to CWI. The "Initial Security Deposit" amount will be provided prior to the initiation of service. Thereafter, if requested in writing by CWI, the Carrier will add additional amounts to the Initial Security Deposit such that the total amount of the security deposit being held by CWI at all times is at least equal to the "Continuing Security Deposit". The Carrier will provide any such required additional amounts within five (5) business days after receiving CWI's written request. CWI will refund or release, as applicable, any security deposit it is holding (plus, if the security deposit is in the form of cash, accrued interest at the applicable rate set by regulation of the state in which CWI invoices the Carrier, or if no such rate is set by regulation, CWI's then-prevailing interest rate for security deposit refunds) if the following conditions are met by the Carrier: (i) for the entire "Deposit Release Period", the Carrier pays CWI in full when each payment is due; and (ii) CWI determines that the Carrier's Quarterly Reports covering the Deposit Release Period indicate that the Carrier's financial condition has had no materially adverse change as compared to the equivalent period of time immediately prior to the start of the Deposit Release Period. If CWI does not refund or release the security deposit during the Term as set forth above, the security deposit will be refunded or released, as applicable, at the end of the Term. If, at any time during the term of the Agreement, CWI determines that there has been a materially adverse change in the Carrier's financial condition as compared with the equivalent period of time immediately prior to the Effective Date, CWI may require Carrier to provide a security deposit or an additional security deposit in an amount to be determined by CWI. The Carrier shall provide any such required amounts within five (5) business days after receiving CWI's written request therefor. 7. Minimum Payment Obligations: If the total amount of usage charges incurred by --------------------------- the Carrier for international service in any Month is less than the amount of the then-applicable minimum monthly payment obligation set forth in the Order Information section of this Agreement, then in addition to paying for its actual usage that Month, the Carrier will pay (as an underutilization fee and not as a penalty) a shortfall charge equal to the difference between (i) the actual usage charges incurred for international service that Month, and (ii) the amount of the then-applicable minimum monthly payment obligation. If this Agreement remains in effect after the Initial Term, the minimum monthly payment obligation for each subsequent Month, shall be equal to the amount of the minimum monthly payment obligation for the last Month of the Initial Term. 8. Additional Terms: This is a carrier-to-carrier agreement subject to (S)211 of ---------------- the Communications Act of 1934, as amended. The Carrier is responsible for and shall comply with any and all legal and regulatory requirements with respect to the Carrier's use and resale of the Services, including those of the Federal Communications Commission and state public utility commissions. The Services are governed by this Agreement and all Carrier obligations and CWI rights set forth in the "General Rules and Regulations" section of CWI's interstate tariff, as may be amended by CWI in accordance with applicable laws and regulations, or if such tariff is withdrawn by CWI, as the tariff was in effect as of the date of withdrawal. The Carrier shall defend, indemnify and hold CWI harmless from and against all claims, demands, actions, causes of action, judgments, costs and reasonable attorneys' fees and expenses of any kind arising from or related to any use of the Service or otherwise arising under this Agreement. In no event shall CWI be liable for any loss of profits, or for any indirect, incidental, special, exemplary or consequential damages. This Agreement is effective as of the date of signature of the last party to sign and it is governed by and subject to the laws and the jurisdiction of the courts of the Commonwealth of Virginia. The Carrier shall not disclose any of the terms of this Agreement. This Agreement is the sole and exclusive understanding between parties with respect to the Services. CWI and Carrier expressly agree that this Agreement shall not give rise to any third party being entitled to any right whatsoever. CARRIER'S REPRESENTATIVE INITIALS /S/ INITIALS ILLEGIBLE DATE ----------------------- ---------- CARRIER AGREEMENT [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] This Carrier Agreement ("Agreement") is entered into by and between Cable & Wireless, Inc. ("CWI") and its carrier customer signing below ("Carrier"). The General Terms and Conditions for Carrier Agreements CAR-96B (12/96) attached hereto are part of this Agreement. - -------------------------------------------------------------------------------- ORDER INFORMATION - --------------------------------------------------------------------------------
1. Initial Term: 13 Months ------------ ------ 2. Rates: (per minute except for Directory Assistance, T-1 Port Charges and Reporting Options) Domestic Inbound, Domestic Outbound and International Outbound: -------------------------------------------------------------- See attached schedule entitled Communications Systems International, Inc. and dated 3/4/97 ------------------------------------------------ ---------- Intrastate rates are applicable within: Colorado ------------------------------------------------------------- Directory Assistance: CWIs then-standard per-call rates -------------------- T-1 Port Charges: Monthly Charge per T-1 Port............................ $ 70.00 ---------------- ------- Non-Recurring Installation Charge per T-1 Port......... $ 150.00 ------- Initial Quantity of T-1 Ports.......................... 2 ------- Reporting Options: (insert "X" in box for the required option) ----------------- [_] Second copy of call detail: Monthly Charge $ n/a ------- E-BIS(R) Options: ---------------- [_] On-line [_] Magnetic Tape [_] CD-ROM [_] Floppy Disk (3.5") [_] Floppy Disk (5.25") Charges for selected E-BIS(R) option: Set-up........................ $ n/a ------- Monthly....................... $ n/a ------- 3. Payments/Security Deposits (insert "Yes" or "No" where applicable) -------------------------- Payment Period: 10 -------------- -------------- days after invoice date Payment by Wire Transfer Required yes --------------------------------- ------- Financial Reports Required....... yes -------------------------- ------- Security Deposits Required....... yes -------------------------- ------- Initial Security Deposit Amount:... $ 50,000 ---------- Continuing Security Deposit Amount:.. one times the amount of usage charges incurred over any six week period ---------- ---------- Deposit Release Period:.............. 12 Months ---------- Estimated Payments Required:........... n/a --------------------------- ---------- Estimated Usage Period:.........first n/a days of each Month ---------- Estimated Payment Due Date........... n/a business days after CWI notifies the Customer of the Estimated Payment Amount ---------- 4. Minimum Monthly Payment Obligations: ----------------------------------- Month after Service Initiation Minimum Amount each Month* Month after Service Initiation Minimum Amount each Month* ------------------------------ -------------------------- ------------------------------ -------------------------- 1 $ 0.00 2 $ 10,000 ------------- ------------- ------------- ------------- 3 $ 15,000 4 $ 20,000 ------------- ------------- ------------- ------------- 5-25 $ 25,000 $ ------------- ------------- ------------- ------------- $ $ ------------- ------------- ------------- ------------- * Minimums apply to international usage only; domestic usage shall not contribute towards meeting minimum monthly payments obligations COMMUNICATIONS SYSTEMS ---------------------- CABLE & WIRELESS, INC. INTERNATIONAL, INC. ---------------------- ------------------- Signature: Signature: ------------------------------- ------------------------------- Printed Name: Printed Name: Elaine M. Beiseigel ------------------------------- ------------------------------- Title: Title: Contract Manager ------------------------------- ------------------------------- Date: Date: ------------------------------- -------------------------------
SERVICE QUALITY ADDENDUM TO CARRIER AGREEMENT [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] Cable & Wireless, Inc. ("CWI") and its carrier customer signing this Service Quality Addendum ("Carrier") agree that their Carrier Agreement ("Agreement") is modified as follows: - -------------------------------------------------------------------------------- If Carrier is not satisfied with the quality of calls placed over CWI's network during the first thirty (30) days after service is initiated ("INITIAL MONTH"), Carrier may so notify CWI in writing no later than ten (10) days after the end of such Initial Month. Carrier may, upon prior written notice to CWI, terminate the Agreement and all services provided thereunder if CWI does not correct the problem(s) with call quality to Carrier's satisfaction within thirty (30) days of CWI's receipt of the initial notice. In the event of such termination, the following shall apply: (i) Carrier shall pay CWI for all charges incurred up through the date service is discontinued; (ii) the contract discontinuance fee shall be waived; and (iii) neither party shall have any liability or obligation to one another resulting from CWI not correcting the service quality or resulting from such a termination. Communications Systems Cable & Wireless, Inc. International, Inc. ---------------------- ---------------------- Signature: /s/ R. A. Spade Signature: -------------------------- ---------------------- Printed Name: R. A. Spade Printed Name: Elaine M. Beiseigel -------------------------- ---------------------- Title: CEO Title: Contract Manager -------------------------- ---------------------- Date: 4-10-97 Date: -------------------------- ---------------------- SPECIAL TERMS AND CONDITIONS ADDENDUM TO CARRIER AGREEMENT [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] Cable & Wireless, Inc. ("CWI") and its Carrier customer signing this Special Terms and Conditions Addendum ("Carrier") agree that the Carrier Agreement ("Agreement") is modified as set forth below. Any capitalized terms not defined herein shall have the meaning defined in the General Terms and Conditions for Carrier Agreements. - -------------------------------------------------------------------------------- 1. Payment ------- Reference to "forty-five (45) days" in the third paragraph of Section 4 (Payment) of the General Terms and Conditions for Carrier Agreements is --------- deleted and replaced by "sixty (60) days". 2. Confidentiality --------------- Each party may, either orally, in written form, or otherwise, disclose to the other party or the other party may otherwise obtain the disclosing party's confidential information ("Confidential Information") in connection with this Agreement. The terms and conditions of this Agreement are Confidential Information except that CWI shall have the right to disclose the terms and conditions of this Agreement to its affiliates. In order to be Confidential Information, any information disclosed in tangible form must be conspicuously marked as being the disclosing party's confidential information, and any other information must be clearly indicated as being confidential at the time of disclosure and reduced to writing and sent to the receiving party within ten (10) days of disclosure. Regardless of when disclosed or obtained, Confidential Information shall only be used by the receiving party in its performance under this Agreement, and it shall not be disclosed by the receiving party except to those employees, affiliates, advisors, and consultants who have a need to know and an obligation to treat Confidential Information in accordance with this clause. If any of the following apply to any information, such information shall not be considered as Confidential Information: (i) it is or becomes available to the public through no wrongful act of the receiving party; (ii) it is already in the possession of the receiving party and not subject to any agreement of confidence between the parties; (iii) it is received from a third party without any restriction known to the receiving party for the benefit of the disclosing party; or (iv) it is independently developed by the receiving party. The receiving party may disclose the disclosing party's Confidential Information pursuant to a requirement of a duly empowered government agency or a court of competent jurisdiction after due notice and an adequate opportunity to intervene is given to the disclosing party unless legally prohibited. Upon termination or expiration of this Agreement, the receiving party shall, at the disclosing party's written direction, either return to the disclosing party or destroy all of the disclosing party's Confidential Information and so certify in writing. The obligations of this provision shall survive for three (3) years after any termination or expiration of this Agreement. 3. Additional Charges ------------------ It is acknowledged that Carrier shall access CWI's network at CWI's Denver POP. In addition to all other charges, Carrier shall pay CWI $800.00 per month for backhaul from such POP to a CWI switch site designated by CWI ("BACKHAUL CHARGE"). Notwithstanding the provisions of the second paragraph of Section 2 (Term and -------- Termination) of the General Terms and Conditions for Carrier Agreements to ----------- the contrary, in the event that Carrier terminates this Agreement prior to the end of the Initial Term, as provided for therein, in addition to paying for all charges incurred through the date service is discontinued including any applicable shortfall charges, the Carrier will pay (as a contract discontinuance fee and not as a penalty) an amount equal to (i) the sum of the minimum monthly payment obligations for each of the remaining Months in the Initial Term, plus (ii) the sum of the Backhaul Charges for each of the remaining Months in the Initial Term. Communications Systems International, Inc. Cable & Wireless, Inc. - ------------------------------------------ ---------------------- Signature: /s/ R. A. Spade Signature: --------------------------- ---------------------- Printed Name: R. A. Spade Printed Name: --------------------------- ---------------------- Title: CEO Title: --------------------------- ---------------------- Date: 4-10-97 Date: --------------------------- ---------------------- EX-10.4 12 PROMISSORY NOTE RE. ROBERT A. SPADE EXHIBIT 10.4 PROMISSORY NOTE $ ____________ ____________, 1997 This PROMISSORY NOTE (this "Note") is executed as of this ___ day of ________________, 1997, by COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("Maker"), whose address is 8 S. Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903, in favor of _______________ ("Holder"), whose legal address is _______________ . 1. Promise to Pay. For value received, Maker hereby promises to pay to -------------- the order of Holder the principal sum of $_____ ("Loan Amount"), together with interest thereon at the rate as hereinafter specified, all in lawful money of the United States of America which constitutes legal tender for payment of debts, public and private, at the time of payment. 2. Interest Rate. Interest on the unpaid principal balance of this Note ------------- outstanding from the date hereof and from time to time shall be paid at a rate equal to 15% per annum ("Interest Rate"). Interest payable hereunder shall be calculated on a 360-day year based on the actual number of days for which any amounts payable hereunder remain outstanding. 3. Maturity Date. The "Maturity Date" shall mean __________________, ------------- 1997 [6 MONTHS FROM NOTE DATE]; provided, however, that Maker at its sole option on 10 days' prior written notice to Holder may extend the Maturity Date to __________________, 1998 [12 MONTHS FROM NOTE DATE]. The entire outstanding principal balance of this Note, together with all accrued but unpaid interest, shall, if not previously paid, be finally due and payable on the Maturity Date. 4. Payment Schedule. Interest shall accrue on the outstanding principal ---------------- balance hereunder at the Interest Rate and shall be due and payable on the Maturity Date along with the entire outstanding principal balance of this Note, if not previously paid. 5. Prepayment Privilege. Maker shall have the right to prepay all or any -------------------- portion of the Loan Amount, together with accrued interest thereon, at any time with no prepayment penalty whatsoever. Any such prepayment shall be made pro rata among the holders of all promissory notes having the same interest rate and terms as this Note based on their then outstanding loan amounts. Maker shall give Holder at least 10 days' prior written notice of any proposed prepayment. 6. Warrants. For each $10,000 of Loan Amount evidenced by this Note, -------- Holder shall receive 1,000 warrants to purchase common stock, no par value ("Common Stock"), of Maker (the "Warrants"); provided, however, that if Maker shall extend the term of this Note as of the Maturity Date pursuant to Paragraph 3 hereof, Maker shall issue to Holder additional Warrants in an amount equal to the number of Warrants issued pursuant to this Note. The Warrants (and such additional Warrants), if any, shall be subject to the terms set forth in the "Agreement and Terms of Warrants" attached hereto as Exhibit A. --------- 7. Application of Payments. All payments hereunder shall be applied ----------------------- first to the payment of accrued and unpaid interest on the principal of this Note, including interest accrued at the Default Rate as hereinafter provided; and second, to the reduction of principal of this Note. 8. Default Interest Rate. Any payment not made within five days after --------------------- the same is due hereunder, and including the entire balance of principal, interest, and other sums then due, shall bear interest at 3% above the then current Interest Rate ("Default Rate"), such interest to accrue from the date due until paid. 9. Default. Each of the following shall constitute an "Event of Default" ------- under this Note: (a) The failure of Maker to pay in full any amount due hereunder by the date the same is due, as provided herein, and such failure shall continue for 10 days after written notice from Holder to Maker of such failure, or Maker's failure to pay in full any amount due hereunder upon maturity of this Note, by acceleration or otherwise; or (b) The failure of Maker to perform, satisfy and observe in full, when due, any of the obligations, covenants, conditions and restrictions under this Note, not involving the payment of money, and such failure shall continue for 30 days after written notice from Holder to Maker of such failure, or if said failure cannot reasonably be cured within said 30-day period, Maker shall not have cured such failure within a reasonable time after the written notice from Holder to Maker described above. 10. Right to Accelerate on Event of Default. Upon the occurrence of any --------------------------------------- Event of Default hereunder, the entire balance of principal, accrued interest, and any other sums owing hereunder shall, at the option of Holder, become at once due and payable without prior notice or demand. 11. Waivers of Demand, etc. Maker and all parties now or hereafter liable ----------------------- for the payment hereof, primarily or secondarily, directly or indirectly, and whether as endorser, guarantor, surety, or otherwise, severally waive demand, presentment, notice of dishonor or nonpayment, protest and notice of protest, and diligence in collecting, and consent to extensions of time for payment, renewals of this Note and acceptance of partial payments, whether before, at, or after maturity, all or any of which may be made without notice to any of said parties and without affecting their liability to Holder. 2 12. Costs of Collection. Maker and all parties now or hereafter liable ------------------- for the payment hereof agree to pay all costs and expenses, including reasonable attorneys' fees, incurred in collecting this Note or any part thereof. 13. No Usury Payable. The provisions of this Note and of all agreements ---------------- between Maker and Holder are hereby expressly limited so that in no contingency or event whatsoever shall the amount paid, or agreed to be paid, to Holder for the use, forbearance, or retention of the Loan Amount ("Interest") exceed the maximum amount permissible under applicable law. If, from any circumstance whatsoever, the performance or fulfillment of any provision hereof or of any other agreement between Maker and Holder shall, at the time performance or fulfillment of such provision shall be due, exceed the limit for Interest prescribed by law, then, ipso facto, the obligation to be performed or fulfilled shall be reduced to such limit, and if, from any circumstance whatsoever, Holder should ever receive as Interest an amount which would exceed the highest lawful rate, the amount which would be excessive Interest shall be applied to the reduction of the principal balance owing hereunder (or, at Holder's option, or if no principal shall be outstanding, be paid over to Maker) and not to the payment of Interest. 14. Subordination; No Security. The indebtedness evidenced by this Note, -------------------------- including all principal, interest and other sums owing hereunder, are subordinate and subject in right of payment to the payment in full of all other indebtedness of Maker. This Note is not secured by any assets of Maker or other collateral. 15. Severability of Provisions. If any provision hereof shall, for any -------------------------- reason and to any extent, be invalid or unenforceable, then the remainder of the instrument in which such provision is contained, the application of the provision to other persons, entities or circumstances, and any other instrument referred to herein shall not be affected thereby but instead shall be enforceable to the maximum extent permitted by law. 16. Successors to Maker or Holder. The term "Maker" as used herein shall ----------------------------- include the original maker of this Note and any party who may subsequently become primarily liable for the payment hereof. The term "Holder" as used herein shall mean the original payee of this Note or, if this Note is transferred, the then holder of this Note, provided that, until written notice is given to Maker designating another party as Holder, Maker may consider the Holder to be the original payee or the party last designated as Holder in a written notice to Maker. 17. Notices. All notices, consent or other instruments or communications ------- provided for under this Note shall be in writing, signed by the party giving the same, and shall be deemed properly given and received when actually delivered and received or three business days after mailed, if sent by registered or certified mail, postage prepaid, to the address set forth in the first paragraph of this Note, or to such other address as a party may designate by written notice to the other party. 18. Captions for Convenience. The captions to the Sections hereof are for ------------------------ convenience only and shall not be considered in interpreting the provisions hereof. 3 19. Governing Law. Regardless of the place of its execution, this Note ------------- shall be construed and enforced in accordance with the laws of the State of Colorado. MAKER: COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By: ____________________________________ Name: ______________________________ Title: _____________________________ 4 EX-10.6 13 LEASE AGREEMENT WITH MINING EXCHANGE EXHIBIT 10.6 LEASE THIS AGREEMENT OF LEASE made and entered into on this 9th ------------------------ day of October , l996 by and between THE MINING EXCHANGE PARTNERS, LTD., ------------- -- a Partnership organized under the laws of the State of Colorado, hereinafter referred to as Landlord and Communications Systems International (CSI) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- hereinafter referred to as Tenant, WITNESSETH: For and in consideration of the covenants and agreements herein contained, Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord the premises known and described as Suites 001/200/201 (5,128 Rentable Sq. Ft.) -------------------------------------------- - -------------------------------------------------------------------------------- in the Mining Exchange Building at 8 South Nevada Ave. ---------------------- ---------------------------------------- - ---------------------------- in the City of Colorado Springs for such term and such rental and subject to the convents and agreements set forth hereinafter. 1. TERM: The term of this lease shall be for a period of Two Years Four Months (2 1/3) --------------------------------- year(s) commencing on September 1 , l996 and -------------------------- -- terminating on December 31 , l998. ------------- -- 2. RENTAL: Tenant agrees to pay to Landlord as rent for said premises for the full term aforesaid the total sum of One Hundred Twelve Thousand Four Hundred and -------------------------------------------------- 40/100 - - - - - - - - - - - - - - - - - - ($ 112,400.40) Dollars, payable as - ------------------------------------------- follows: 9/O1/96 - 11/30/96 $2,035.00 per month $6,105.00 12/01/96 - 12/31/97 4,047.00 per month 52,611.00 01/01/98 - 12/31/98 4,473.70 per month 53,684.40 which said sum shall be due and payable in advance on the First day of ------- each and every calendar month during said term at the office of Landlord, or such other place in the City of Colorado Springs, Colorado as the Landlord from time to time in writing may designate. 1 3. SERVICES: Landlord agrees, during the period of this lease: a. To heat the demised premises whenever necessary during reasonable business hours or customary heating season. b. To provide the use of the passenger elevators (if the building is so equipped) at all time during reasonable business hours, Sundays and Holidays excepted. c. To provide janitor service for the demised premises (trash everyday, vacuuming three days a week). d. To cause to be supplied, during ordinary business hours, a reasonable amount of electric current for lighting said premises and public halls, during the time and in the manner customary in said building. Tenant agrees to use only such electric current as shall be supplied by Landlord for lighting, air conditioning, and business machines and shall pay on demand for use of electric current after ordinary business hours (8:00 AM to 6:00 PM) for any other purpose, or for any waste of electric current. Tenant agrees that Landlord shall not be held liable for failure to supply such heating, elevator, janitor or lighting services, or any of them, when such failure is not due to negligence on Landlord's part, it being understood that Landlord reserves the right to temporarily discontinue such services, or any of them, at such times as may be necessary by reason of accident, repairs, alterations or improvements, or whenever, by reason of strikes, lockouts, riots, acts of God, or any other happening, Landlord is unable to furnish such services. Tenant agrees that if any payment of rent as herein provided shall remain unpaid for more than ten (10) days, after the same shall become due, Landlord may, without notice to Tenant, discontinue furnishing lighting, heating and janitor services, or any of them, until all areas of rent shall have the first been paid and discharged, and that Landlord shall not be liable for damages and that such action shall in no way operate to release Tenant from the obligations hereunder. 4. CHARACTER OF OCCUPANCY Tenant agrees: a. That the demised premises shall be used and occupied only as General ----------- 0ffices in a careful, safe and proper manner. ----------- b. That it will pay on demand for any damage to the premises 2 caused by the misuse of same by it, or its agents or employees or invitees. c. That it will not use or permit the demised premises to be used for any purposes prohibited by the laws of the United States or the State of Colorado, or the ordinances of the City of Colorado Springs. d. That it will not use or keep any substance or material in or about the demised premises which may vitiate or endanger the validity of the insurance on said building or increase the hazard of the risk, or which may prove of offensive or annoying to other Tenants of the building. e. That it will not permit any nuisance in the demised premises. 5. ALTERATIONS: a. Landlord shall have the right at any time to enter the demised premises to examine and inspect the same, or to make such repairs, additions, or alterations as it may deem necessary or proper for the safety, improvement or preservation thereof, and shall at all times have the right, at its election, to make such alterations or changes to other portions of said building as it may from time to time deem necessary and desirable. b. Tenant shall make no alterations in or additions to the demised premises without first obtaining the written consent of Landlord, and all additions or improvements made by Tenant (except only moveable office furniture) shall be deemed a part of the real estate and the permanent structure thereon and shall remain upon and be surrendered with said premises as a part thereof at the end of the said term, by lapse of time, or otherwise, or at the option of Landlord, shall be removed at Tenant's expense and the premises restored to their original state. 6. SUBLETTING: Tenant agrees that it will not sublet the demised premises, or any part thereof, nor assign this lease, or any interest therein, without the written consent of Landlord first had and obtained. 7. INSOLVENCY: Any assignment for the benefit of creditors or by operation of law shall not be effective to transfer any rights hereunder to the said assignee without the written consent of Landlord first having been obtained. It is further agreed between the parties hereto that if Tenant shall be declared insolvent or bankrupt, or if any assignment of Tenant's property shall be made for the 3 benefit of creditors or otherwise, or if Tenant's leasehold interest herein shall be levied upon under execution, or seized by virtue of any writ of any court of law, or a Trustee in Bankruptcy or a Receiver be appointed for the property of Tenant, whether under the operation of State or Federal statues, then and in any such case, Landlord may, at its option, immediacy, with or without notice (notice being expressly waived) terminate this lease and immediately retake possession of said premises, using such force as may be necessary without being guilty of any manner of trespass or forcible entry or detainer, and without same working any forfeiture of the obligations of Tenant hereunder. 8. DEFAULT: a. The following events are referred to, collectively, as "events of default" or, individually, as an "event of default": (1) Tenant defaults in the due and punctual payment of rent, and such default continues for five days after written notice from Landlord; however, Tenant will not be entitled to more than one written notice for monetary defaults during any 12-month period, and if after such written notice any rent is not paid when due, an event of default will be considered to have occurred without further notice; (2) Tenant vacates or abandons the premises; (3) This lease or the premises or any part of the premises are taken upon execution or by other process of law directed against Tenant, or are taken or subject to any attachment by any creditor of Tenant or claimant against Tenant, and said attachment is not discharged or disposed of within fifteen days after its levy; (4) Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States or under any insolvency act of any state, or admits the material allegations of any such petition by answer or other wise, or is dissolved or makes an assignment for the benefit or creditors; (5) Involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for all or substantially all of the property of Tenant, and such proceeding is not dismissed or such receivership or trusteeship vacated within sixty days after such institution or appointment; (6) Tenant breaches any of the other agreements, terms, covenants, or conditions that this lease requires Tenant to perform, and such breach continues for a period of thirty days after written notice from Landlord to Tenant or, if such breach cannot be cured reasonably within such thirty day period, if Tenant fails to diligently commence to cure such breach within 4 thirty days after written notice from Landlord and to complete such cure within a reasonable time thereafter. b. If any one or more events of default set forth in Section "a." occurs then Landlord has the right, at its election: (1) To give Tenant one written notice of Landlord's intention to terminate this lease on the earliest date permitted by law or on any later date specified in such notice, in which case Tenant's right to possession of the premises will cease and this lease will be terminated, except as to Tenant's liability, as if the expiration of the term fixed in such notice were the end of the term; (2) Without further demand or notice, to reenter and take possession of the premises or any part of the premises, repossess the same, expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution, without being deemed guilty of any manner or trespass, and without prejudice to any remedies for arrears of monthly rent or other amounts payable under this lease or as a result of any preceding breach of covenants or conditions; or (3) Without further demand or notice to cure any event of default and to charge Tenant for the cost of effecting such cure, including without limitation reasonable attorneys' fees and interest on the amount so advanced at the rate of eighteen percent (18%) per annum, provided that Landlord will have no obligation to cure any such event of default of Tenant. Should Landlord elect to reenter as provided in subsection (2), or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provide by law, Landlord may, from time to time, without terminating this lease, relet the premises or any part of the premises in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the premises) as Landlord, in its reasonable discretion, may determine, and Landlord may collect and receive the rent. Landlord will in no way be responsible or liable for any failure to relet the premises, or any part of the premises, or for any failure to collect any rent due on such reletting. No such reentry or taking possession of the premises by Landlord will be construed as an election on Landlord's part to terminate this lease unless a written notice of such intention is given to Tenant. No written notice from Landlord under this Section or under a forcible or unlawful entry and detainer 5 statute or similar law will constitute an election by Landlord to terminate this lease unless such notice specifically so states. Landlord reserves the right following any such reentry or reletting to exercise its right to terminate this lease by giving Tenant such written notice, in which event this lease will terminate as specified in such notice. c. In the event that Landlord does not elect to terminate this lease as permitted in Section 8 b.(l), but on the contrary elects to take possession as provided in Section 8 b.(2), Tenant will pay to Landlord monthly rent and other sums as provided in this lease that would be payable under this lease if such repossession had not occurred, less the net proceeds, if any, of any reletting of the premises after deducting all of Landlord's reasonable expenses in connection with such reletting, including without limitation all repossession costs, brokerage commissions, attorneys' fees, expenses of employees, alteration and repair costs, and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing term, or part of the premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Section will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Tenant will pay such rent and other sums to Landlord monthly on the day on which the monthly rent would have been payable under this lease if possession had not been retaken, and Landlord will be entitled to receive such rent and other sums from Tenant on each such day. d. If this lease is terminated on account of the occurrence of an event of default, Tenant will remain liable to Landlord for damages in an amount equal to monthly rent and other amounts that would have been owing by Tenant for the balance of the term, had this lease not been terminated, less the net proceeds, if any, of any reletting of the premises by Landlord subsequent to such termination, after deducting all of Landlord's expenses in connection with such reletting, including without limitation the expenses enumerated in Section c. (above). Landlord will be entitled to collect such damages from Tenant monthly on the day on which monthly rent and other amounts would have been payable under his lease if this lease had not been terminated. Alternatively, at the option of Landlord, in the event this lease is so terminated, Landlord will be entitled to recover against Tenant as damages for loss of the bargain and not as penalty: (1) The worth at the time of award of the unpaid rent that had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent that would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; 6 (3) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this lease (had the same not been so terminated by Landlord) after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (1) and (2) above is computed by adding interest at the per annum interest rate described in Section 8 a. (3) (above) on the date on which this lease terminated from the date of termination until the time of the award. e. Any suit or suits for the recovery of the amounts and damages set forth in Sections 8 c. and 8 d. may be brought by Landlord, from time to time, at Landlord's election, and nothing in this lease will be deemed to require Landlord to await the date upon which this lease or the term would have expired had there occurred no event of default. Each right and remedy provided for in this lease is cumulative and is in addition to every other right or remedy for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise will not preclude the simultaneous or later exercise Landlord of any or all other rights or remedies provided for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise. All costs incurred by Landlord in collecting any amounts and damages owing by Tenant pursuant to the provisions of this lease or to enforce any provision of this lease, including reasonable attorneys' fees from the date any such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, will also be recoverable by Landlord from Tenant. f. Tenant waives any right of redemption arising as a result of Landlord's exercise of its remedies under this Article 8. g. Any rent that is not paid when due will accrue interest at the rate of eighteen percent (18%) per annum (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the date on which it was due until the date on which it is paid in full with accrued interest. In addition, in the event any payment due under this lease is not received on or before the tenth day after the due date, Tenant shall pay to Landlord a late charge equal to five percent (5%) of the past due amount, which charge will help compensate Landlord for the administrative and other expenses incurred by Landlord as a result of the late payment. 7 9. PREMISES VACATED DURING TERM OF LEASE: If Tenant shall abandon or vacate said premises before the end of the term of this lease, Landlord may, at its option and without notice, enter said premises, remove any signs of Tenant therefrom, and re-let the same, or any part of thereof, as it may see fit, without thereby voiding or terminating this lease, and, for the purpose of such re-letting, Landlord is authorized to make any repairs, changes, alterations or additions in or to said premises, as may, in the option of Landlord, be necessary or desirable for the purpose of such re- letting, all at the cost of Tenant, and if a sufficient sum shall not be realized from said re-letting (after payment of all costs and expenses of such repairs, changes or alterations, and the expense of said re-letting and the collection of rent accruing therefrom), each month to equal the monthly rental agreed to be paid by Tenant under the provisions of this lease, then Tenant agrees to pay such deficiency each month upon demand therefor. 10. REMOVAL OF TENANTS PROPERTY: If Tenant shall fail to remove all effects from said premises upon the abandonment thereof or upon the termination of this lease for any cause whatsoever, Landlord, at its option, may remove the same in any manner that it shall choose and store the said effects without liability to Tenant for loss thereof, and Tenant agrees to pay Landlord on demand, any and all expenses incurred in such removal, including court costs and attorney's fees and storage charges on such effects for any length of time the same shall be in Landlords possession; or Landlord, at its option, without notice, may sell said effects, or any of the same, at private sale and without legal process, for such prices as Landlord may obtain, and apply the proceeds of such sale upon any amounts due under this lease from Tenant to Landlord and upon the expense incident to the removal and sale of said effects, rendering the surplus if any, to Tenant. 11. LOSS OR DAMAGE TO TENANTS PROPERTY: All personal property or leasehold improvements of any kind or description whatsoever in the demised premises shall be at Tenant's sole risk, and Landlord shall not be held liable for any damage done to or loss of such personal property, or for damage or loss suffered by the business or occupation of Tenant arising from any act or neglect of covenants or other occupants of the building, or of their employees or the employees of the Landlord or of other persons, or from fire of other casualty, bursting, overflowing or leaking of water, sewer or steam pipes, or from heating or plumbing fixtures, or from electric wires, or from gases, or odors, or caused in any other manner whatsoever, except in the case of willful neglect on the part of Landlord. 8 12. LIEN ON TENANT'S FURNISHINGS: Tenant hereby conveys to Landlord all of the personal property situated on the leases premises as security for the payment of all rentals due or to become due hereunder. Said property shall not be removed therefrom without the consent of Landlord until all rentals due or to become due hereunder shall have first been paid and discharged. It is intended by the parties hereto that this instrument shall have the effect of a mortgage and lien upon such property, and Landlord, upon default of Tenant in the payment of rent, may take possession of said property either to its own use or to sell the same for the best price that can be obtained at public or private sale, and out of the money arising therefrom pay the amount due to Landlord, and all costs growing out of the execution of the provisions hereof, paying the surplus, if any, to Tenant. If said property, or any portion thereof, shall be offered at public auction, Landlord may become the purchaser thereof. 13. SURRENDER OF POSSESSION: Tenant agrees to deliver up and surrender to Landlord possession of said premises at the expiration or termination of this lease, by lapse of time or otherwise, in as good repair as when Tenant obtained the same at the commencement of said term, excepting only ordinarily wear and decay. 14. ACCEPTANCE OF PREMISES BY TENANT: The taking possession of said premises by Tenant shall be conclusive evidence as against Tenant that said premises were in good and satisfactory conditions when possession of the same was taken. 15. WAIVER: No waiver of any breach of any one or more of the conditions or covenants of this lease by Landlord shall be deemed to imply or constitute a waiver of any succeeding or other breach hereunder. 16. AMENDMENT OR MODIFICATION: Tenant acknowledges and agrees that it has not relied upon any statements, representations, agreements or warranties, except such as are expressed herein, and that no amendment or modifications of this lease shall be valid or binding unless expressed in writing and executed by the parties hereto in the same manner as the execution of this lease. 9 17. PAYMENTS AFTER TERMINATION: No payments of money by Tenant to Landlord after the termination of this lease, in any manner, or after the giving of any notice (other than a demand for the payment of money) by Landlord to Tenant shall reinstate, continue or extend the term of this lease or affect any notice given to Tenant prior to the payment of such money, it being agreed that after the service of notice or the commencement of a suit or after final judgment granting Landlord possession of said premises, Landlord may receive and collect any sums of rent due, or any other sums of money due under the terms of this lease, and the payment of such sums of money whether as rent of otherwise, shall not waive said notice, or in any manner affect any pending suit or any judgment therefore. 18. HOLDING AFTER TERMINATION: It is mutually agreed that if, after the expiration of this lease, Tenant shall remain in possession of said premises without a written agreement as to such holding, then such holding over shall be deemed and taken to be a holding upon a tenancy from month to month at a monthly rental equivalent to one and one-half times the last monthly payment hereinbefore provided for, payable in advance on the same day of each month as above provided, all other terms and conditions of this lease remaining the same. 19. RULES AND REGULATIONS: Landlord reserves the right to adopt rules and regulations from time to time governing the management of the building and use thereof by Tenants. Tenant agrees that its employees and agents, or any others permitted by Tenant, to occupy or enter said premises, will at all times abide by said rules and regulations as they may be amended from time to time, and that a default in the performance and observance thereof shall operate the same as any other defaults herein. Attached hereto as Exhibit "A" is the current list of rules and regulations presently in force and effect. At such time as Landlord adopts any amendments to such rules and regulations, Landlord shall provide Tenant with copy thereof at least ten (10) days prior to the enforcement of the provisions of any such amendments. 20. SECURITY DEPOSITS: It is agreed that Tenant, concurrently with the execution of this lease, has deposited with Landlord, and will keep $680.00, as security for the ------- payment by Tenant of the rent and other charges herein agreed to be paid, and for the performance of all the terms, conditions and covenants of this lease. If, at any time during the term of this lease, Tenant shall be in default in the performance of any provision of this lease, Landlord shall have the right to use said deposit, or so much thereof as necessary, in payment of any rental in default as aforesaid and in reimbursement of any expense incurred by Landlord 10 and in payment of any damages incurred by Landlord by reason or Tenant's default, or at the option of Landlord, the same may be retained by Landlord, and applied in Liquidation or any damages suffered by it by reason of Tenant's default. In such event, Tenant shall, on written demand of Landlord, forwith remit to Landlord a sufficient amount in cash to restore said deposit to its original amount. In the event said deposit has not been utilized as aforesaid, said deposit, or so much thereof as has not been utilized for said purposes, shall be refunded to Tenant, without interest, upon full performance of this lease by Tenant. Said return shall be made within 60 days after the termination date of this lease. Landlord shall have the right to commingle said deposit with other funds or Landlord. Landlord shall deliver the balance of said funds, if any, deposited herein by Tenant to the purchaser or Landlord's interest in the leased premises in the event such interest be sold and, thereupon, Landlord shall be discharged from further liability with respect to such deposit. 21. QUIET POSSESSION: Provided Tenant is not in default under this lease, Landlord shall warrant and defend Tenant in the enjoyment and peaceful possession of the premises during the term aforesaid and all terms, conditions and convenience to be observed and performed by the parties hereto shall be applicable to and binding upon their heirs, administrator, executors, successors or assigns. 22. DEMOLITION NOTICE: It is agreed that at any time during the terms of this lease, Lessor, (Landlord) shall have the right to terminate this lease if it or it's assignees, grantees or any successor in interest should desire to demolish the building containing the demised premises. Termination shall be made by delivering written notice to Lessee of such intention to demolish, which notice shall require Lessee to vacate said premises no sooner than ninety (90) days from the date of said notice. Lessor or it's assignees, grantees or any successor in interest may commence the demolition of said building at any time subsequent to the date Lessee is required to vacate the premises. 23. OTHER PROVISIONS: 11 IN WITNESS WHEREOF, the said Landlord and Tenant have caused their respective names and seals to be affixed hereto in triplicate the day and year first above written. LANDLORD ATTEST: THE MINING EXCHANGE PARTNERS, LTD. By: /s/ signature illegible - ------------------------- ------------------------------ MANAGER TENANT By: /s/ signature illegible - ------------------------- ------------------------------ 12 Exhibit A RULES AND REGULATIONS --------------------- 1. The sidewalks, entries, passages, stairways and elevators shall not be obstructed by the Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from their offices. 2. a. Furniture, equipment or supplies shall be moved in or out of the building only during such hours and in such manner as may be prescribed by Landlord. b. No safe or article, the weight of which may constitute a hazard or danger to the building or its equipment shall be moved into the premises. c. Safes and other equipment, the weight of which is not excessive, shall be moved into, from or about the building only during such hours and in such manner as shall be prescribed by Landlord, and Landlord shall have the right to designate the location of such articles in the space hereby demised. 3. Signs, notices, advertisements or other inscriptions shall not be placed upon any part of the building except in such locations and by such sign writers, and of such size, form and color, as shall be first specified by Landlord. 4. Water closets and other water fixtures shall not be used for any purpose other than that for which the same are intended, and any damage resulting to the same from misuse on the part of Tenant, its agents or employees, shall be paid for by Tenant, no person shall waste water by tying back or wedging the faucets, or in any other manner. 5. No animals, except handicap aid dogs, shall be allowed in the offices, halls, corridors and elevators in the building. 6. Bicycles or other vehicles shall not be permitted in the offices, halls, corridors and elevators in the building, nor shall any obstruction of sidewalks or entrances of the building by such be permitted. 7. No person shall disturb the occupants of this or adjoining buildings or premises by the use of any radio or musical instrument or by the making of loud or improper noises. 8. No additional lock or locks shall be placed by Tenant on any door in the building unless written consent of the Landlord shall first have been obtained. A reasonable number of keys to the demised premises and to the toilet rooms will be furnished by Landlord, and neither Tenant, its agents or employees, shall have any duplicate key made. At the termination of this tenancy, Tenant shall promptly return to Landlord all keys to offices, toilet rooms or vaults. 9. No equipment, awnings, or any other items shall be placed on the exterior of the building or on any window ledge without written consent from the Landlord. 10. Tenant, before closing and leaving the demised premises at any time, shall see that all windows are closed, in order to avoid possible damage from fire, storm or freezing, and shall re-lock all outside building doors if used during non-business hours. 11. Tenant shall not install or operate any steam or gas engine or boiler, or carry on any mechanical business in the demised premises. The use of oil, gas or flammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought in to the building. 12. Any painting or decorating as may be agreed to be done by and at the expense of Landlord shall be done during regular working hours, should Tenant desire such work done on Sundays, holidays or outside of regular working hours, Tenant shall pay for the extra cost thereof. 13. Tenant shall not mark upon, paint signs upon, cut drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of the demised premises or of the building, and any defacement, damage or injury caused by Tenant, its agents or employees, shall be paid for by Tenant. 14. No parking is permitted in the alleys except for deliveries and workmen. 15. All requests for service, repair or other maintenance shall be made directly to the office of Landlord. 16. Smoking is not permitted in any area of the building, including individual offices. 17. Landlord shall at all times have the right, by its officer or agents, to enter the demised premises to inspect and examine the same, and to show the same to persons wishing to lease them, and may at any time within fifteen days next preceding the termination of this tenancy, place upon the doors and windows of the premises the notice "For Rent", which said notice shall not be removed by Tenant. 18. Landlord reserves the right to make such other and further reasonable rules and regulations as, in its judgment, may from time to time be needful and desirable for the safety, care and cleanliness of premises and for the preservation of good order therein. LEASE THIS AGREEMENT OF LEASE made and entered into on this 9th day of October, 1996, --- ------- -- by and between THE MINING EXCHANGE PARTNERS, LTD., a Partnership organized under the laws of the State of Colorado, hereinafter referred to as Landlord and Communications Systems International (CSI) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- hereinafter referred to as Tenant, WITNESSETH: For and in consideration of the covenants and agreements herein contained, Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord the premises known end described as Suites 001/200/201 (5,128 Rentable Sq. Ft.) ------------------------------------------- in the Mining Exchange Building at 8 South Nevada Ave. in the City of Colorado --------------- ------------------- Springs for such term and such rental and subject to the convents and agreements set forth hereinafter. 1. TERM: The terms of this lease shall be for a period of Two Years Four Months (2 1/3) ----------------------------- year(s) commencing on September 1, 1996 and terminating on December 31, 1998. ----------- -- ----------- -- 2. RENTAL: Tenant agrees to pay to Landlord as rent for said premises for the full term aforesaid the total sum of One Hundred Twelve Thousand Four Hundred and ----------------------------------------------------- 40/100 - - - - - - - -($ 112,400.40 Dollars, payable as follows: - ---------------------- 9/01/96 - 11/30/96 $2,035.00 per month $6,105.00 12/01/96 - 12/31/97 4,047.00 per month 52,611.00 01/01/98 - 12/31/98 4,473.70 per month 53,684.40 which said sum shall be due and payable in advance on the First day of each and ----- every calendar month during said term at the office of Landlord, or such other place in the City of Colorado Springs, Colorado as the Landlord from time to time in writing may designate. 1 MINING EXCHANGE PARTNERS, LTD. 121 East Pikes Peak, Suite 335 Colorado Springs, CO 80903 (719) 575-0075 (Fax) 575-0065 March 31, 1997 ADDENDUM TO LEASE This addendum to the lease dated October 9, 1996 between the Mining Exchange Partners, Ltd., Landlord, and Communications Systems International (CSI), Tenant is for the purpose to add Vault No. 2B on the second floor through the term of the lease (December 31, 1998) and the voice mail unit currently under a master lease with Union Federal Savings, Indianapolis, Indiana which extends through September 5, 1998. The lease for the mail unit, carries a buy- out option at the end of the lease at the then current market value. The additional rent is a follows: Vault 2B 25.00 per Month Voice Mail Unit 130.00 per Month Mining Exchange Partners, Ltd. /s/ Charles C. Brown ---------------------------------- Charles C. Brown Property Manager Acknowledged and Accepted: /s/ SIGNATURE ILLEGIBLE - --------------------------- CS International, Tenant MINING EXCHANGE PARTNERS, LTD. 121 East Pikes Peak, Suite 335 Colorado Springs, CO 80903 (719) 575-0075 (Fax) 575-0065 January 24, 1997 ADDENDUM TO LEASE This addendum to the lease between Mining Exchange Partners, Ltd., Landlord, and Communications Systems International, (CSI), Tenant, dated October 9, 1996, is for the purpose to add 517 rentable square feet adjacent to the leased area known as Suite 200/202 in the Mining Exchange Building. This additional lease space will increase the above noted lease payments as follows: February 1, 1997 - December 31, 1997 $4,477.80 per month January 1, 1998 - December 31, 1998 4,947.60 per month All other conditions of the lease will remain in effect. Mining Exchange Partners, Ltd. /s/ Charles C. Brown ------------------------------- Charles C. Brown Property Manager Acknowledged and Accepted: SIGNATURE ILLEGIBLE - ------------------------------ CS International, Tenant MINING EXCHANGE PARTNERS, LTD. 121 EAST PIKES PEAK AVENUE, SUITE 335 Colorado Springs, CO 80903 (719) 575-0075 Fax 575-0065 November 11, 1996 Mr. Ken Weiland CS International 8 South Nevada Avenue, #101 Colorado Spring, CO 80903 Dear Ken, According to the lease dated December 1, 1994 between the Mining Exchange Partners, Ltd. and CSI, CSI has the option to extend the lease for three (3) years at the following rates: Jan. 1, 1997 - Dec. 1997 $5,528.00 per month Jan. 1, 1998 - Dec. 1998 6,449.00 per month Jan. 1, 1999 - Dec. 1999 7,371.00 per month If you intend to exercise this option please acknowledge this letter by signing in the appropriate place. Thanks for your attention. Mining Exchange Partners, Ltd. /s/ Charles C. Brown ------------------------------ Property Manager Acknowledged and Accepted SIGNATURE ILLEGIBLE - ------------------------------ CS International LEASE THIS AGREEMENT OF LEASE made and entered into on this 1 (first) day of --------- December , 1994, by and between THE MINING EXCHANGE PARTNERS, LTD., a - ---------------- Partnership organized under the laws of the State of Colorado, hereinafter referred to as Landlord and Communication Systems International (CSI) ----------------------------------------- hereinafter referred to as Tenant, WITNESSETH: For and in consideration of the covenants and agreements herein contained, Landlord does hereby lease to Tenant and Tenant does hereby lease from Landlord the premises known and described as Suite 101 in the Mining Exchange Building at --------- -------------- 8 S. Nevada in the City of Colorado Springs for such term and such rental and - ----------- subject to the convents and agreements set forth hereinafter. 1. TERM: The term of this lease shall be for a period of 2 (two) year(s) commencing on ------- December 1, 1994 and terminating on December 31, 1996. - ---------------- ----------------- 2. RENTAL: Tenant agrees to pay to Landlord as rent for said premises for the full term aforesaid the total sum of $105,794.00 (One hundred thousand five, seven hundred ----------------------------------------------------- ninety-four dollars. ($ ) Dollars, payable as follows: - -------------------- $3300/Month x 4 = $13,200 = $7.16/sq. ft. 12-1-94 through 3-31-95 $4146/Month x 9 = $37,314 = $9.00/sq. ft. 4-1-95 through 12-31-95 $4606/Month x 12 = $55,280 = $10.00/sq. ft. 1-1-96 through 12-31-96 Total of 5528 sq.ft. which said sum shall be due and payable in advance on the 1 (first) day of --------- each and every calendar month during said term at the office of Landlord, or such other place in the City of Colorado Springs, Colorado as the Landlord from time to time in writing may designate. 1 3. SERVICES: Landlord agrees, during the period of this lease: a. To heat the demised premises whenever necessary during reasonable business hours or customary heating season. b. To provide the use of the passenger elevators (if the building is so equipped) at all time during reasonable business hours, Sundays and Holidays excepted. c. To provide janitor service for the demised premises (trash everyday, vacuuming three days a week). Tenant agrees that Landlord shall not be held liable for failure to supply such heating, elevator, janitor or lighting services, or any of them, when such failure is not due to negligence on Landlord's part, it being understood that Landlord reserves the right to temporarily discontinue such services, or any of them, at such times as may be necessary by reason of accident, repairs, alterations or improvements, or whenever, by reason of strikes, lockouts, riots, acts of God, or any other happening, Landlord is unable to furnish such services. Tenant agrees that if any payment of rent as herein provided shall remain unpaid for more than ten (10) days, after the same shall become due, Landlord may, without notice to Tenant, discontinue furnishing lighting, heating and janitor services, or any of them, until all areas of rent shall have the first been paid and discharged, and that Landlord shall not be liable for damages and that such action shall in no way operate to release Tenant from the obligations hereunder. 4. CHARACTER OF OCCUPANCY Tenant agrees: a. That the demised premises shall be used and occupied only as general ------- offices in a careful, safe and proper manner. ------- b. That it will pay on demand for any damage to the premises 2 caused by the misuse of same by it, or its agents or employees or invitees. c. That it will not use or permit the demised premises to be used for any purposes prohibited by the laws of the United States or the State of Colorado, or the ordinances of the City of Colorado Springs. d. That it will not use or keep any substance or material in or about the demised premises which may vitiate or endanger the validity of the insurance on said building or increase the hazard of the risk, or which may prove offensive or annoying to other Tenants of the building. e. That it will not permit any nuisance in the demised premises. 5. ALTERATIONS: a. Landlord shall have the right at any time to enter the demised premises to examine and inspect the same, or to make such repairs, additions, or alterations as it may deem necessary or proper for the safety, improvement or preservation thereof, and shall at all times have the right, at its election, to make such alterations or changes to other portions of said building as it may from time to time deem necessary and desirable. b. Tenant shall make no alterations in or additions to the demised premises without first obtaining the written consent of Landlord, and all additions or improvements made by Tenant (except only moveable office furniture) shall be deemed a part of the real estate and the permanent structure thereon and shall remain upon and be surrendered with said premises as a part thereof at the end of the said term, by lapse of time, or otherwise, or at the option of Landlord, shall be removed at Tenant's expense and the premises restored to their original state. 6. SUBLETTING: Tenant agrees that it will not sublet the demised premises, or any part thereof, nor assign this lease, or any interest therein, without the written consent of Landlord first had and obtained. 7. INSOLVENCY: Any assignment for the benefit of creditors or by operation of law shall not be effective to transfer any rights hereunder to the said assignee without the written consent of Landlord first having been obtained. It is further agreed between the parties hereto that if Tenant shall be declared insolvent or bankrupt, or if any assignment of Tenant's property shall be made for the 3 benefit of creditors or otherwise, or if Tenant's leasehold interest herein shall be levied upon under execution, or seized by virtue of any writ of any court of law, or a Trustee in Bankruptcy or a Receiver be appointed for the property of Tenant, whether under the operation of State or Federal statues, then and in any such case, Landlord may, at its option, immediacy, with or without notice (notice being expressly waived) terminate this lease and immediately retake possession of said premises, using such force as may be necessary without being guilty of any manner of trespass or forcible entry or detainer, and without same working any forfeiture of the obligations of Tenant hereunder. 8. DEFAULT: a. The following events are referred to, collectively, as "events of default" or, individually, as an "event of default": (1) Tenant defaults in the due and punctual payment of rent, and such default continues for five days after written notice from Landlord; however, Tenant will not be entitled to more than one written notice for monetary defaults during any 12-month period, and if after such written notice any rent is not paid when due, an event of default will be considered to have occurred without further notice; (2) Tenant vacates or abandons the premises; (3) This lease or the premises or any part of the premises are taken upon execution or by other process of law directed against Tenant, or are taken or subject to any attachment by any creditor of Tenant or claimant against Tenant, and said attachment is not discharged or disposed of within fifteen days after its levy; (4) Tenant files a petition in bankruptcy or insolvency or for reorganization or arrangement under the bankruptcy laws of the United States or under any insolvency act of any state, or admits the material allegations of any such petition by answer or other wise, or is dissolved or makes an assignment for the benefit or creditors; (5) Involuntary proceedings under any such bankruptcy law or insolvency act or for the dissolution of Tenant are instituted against Tenant, or a receiver or trustee is appointed for all or substantially all of the property of Tenant, and such proceeding is not dismissed or such receivership or trusteeship vacated within sixty days after such institution or appointment; (6) Tenant breaches any of the other agreements, terms, covenants, or conditions that this lease requires Tenant to perform, and such breach continues for a period of thirty days after written notice from Landlord to Tenant or, if such breach cannot be cured reasonably within such thirty day period, if Tenant fails to diligently commence to cure such breach within 4 thirty days after written notice from Landlord and to complete such cure within a reasonable time thereafter. b. If any one or more events of default set forth in Section "a." occurs then Landlord has the right, at its election: (1) To give Tenant one written notice of Landlord's intention to terminate this lease on the earliest date permitted by law or on any later date specified in such notice, in which case Tenant's right to possession of the premises will cease and this lease will be terminated, except as to Tenant's liability, as if the expiration of the term fixed in such notice were the end of the term; (2) Without further demand or notice, to reenter and take possession of the premises or any part of the premises, repossess the same, expel Tenant and those claiming through or under Tenant, and remove the effects of both or either, using such force for such purposes as may be necessary, without being liable for prosecution, without being deemed guilty of any manner or trespass, and without prejudice to any remedies for arrears of monthly rent or other amounts payable under this lease or as a result of any preceding breach of covenants or conditions; or (3) Without further demand or notice to cure any event of default and to charge Tenant for the cost of effecting such cure, including without limitation reasonable attorneys' fees and interest on the amount so advanced at the rate of eighteen percent (18%) per annum, provided that Landlord will have no obligation to cure any such event of default of Tenant. Should Landlord elect to reenter as provided in subsection (2), or should Landlord take possession pursuant to legal proceedings or pursuant to any notice provide by law, Landlord may, from time to time, without terminating this lease, relet the premises or any part of the premises in Landlord's or Tenant's name, but for the account of Tenant, for such term or terms (which may be greater or less than the period which would otherwise have constituted the balance of the term) and on such conditions and upon such other terms (which may include concessions of free rent and alteration and repair of the premises) as Landlord, in its reasonable discretion, may determine, and Landlord may collect and receive the rent. Landlord will in no way be responsible or liable for any failure to relet the premises, or any part of the premises, or for any failure to collect any rent due on such reletting. No such reentry or taking possession of the premises by Landlord will be construed as an election on Landlord's part to terminate this lease unless a written notice of such intention is given to Tenant. No written notice from Landlord under this Section or under a forcible or unlawful entry and detainer 5 statute or similar law will constitute an election by Landlord to terminate this lease unless such notice specifically so states. Landlord reserves the right following any such reentry or reletting to exercise its right to terminate this lease by giving Tenant such written notice, in which event this lease will terminate as specified in such notice. c. In the event that Landlord does not elect to terminate this lease as permitted in Section 8 b.(1), but on the contrary elects to take possession as provided in Section 8 b.(2), Tenant will pay to Landlord monthly rent and other sums as provided in this lease that would be payable under this lease if such repossession had not occurred, less the net proceeds, if any, of any reletting of the premises after deducting all of Landlord's reasonable expenses in connection with such reletting, including without limitation all repossession costs, brokerage commissions, attorneys' fees, expenses of employees, alteration and repair costs, and expenses of preparation for such reletting. If, in connection with any reletting, the new lease term extends beyond the existing term, or part of the premises, a fair apportionment of the rent received from such reletting and the expenses incurred in connection with such reletting as provided in this Section will be made in determining the net proceeds from such reletting, and any rent concessions will be equally apportioned over the term of the new lease. Tenant will pay such rent and other sums to Landlord monthly on the day on which the monthly rent would have been payable under this lease if possession had not been retaken, and Landlord will be entitled to receive such rent and other sums from tenant on each such day. d. If this lease is terminated on account of the occurrence of an event of default, Tenant will remain liable to Landlord for damages in an amount equal to monthly rent and other amounts that would have been owing by Tenant for the balance of the term, had this lease not been terminated, less the net proceeds, if any, of any reletting of the premises by Landlord subsequent to such termination, after deducting all of Landlord's expenses in connection with such reletting, including without limitation the expenses enumerated in Section c. (above). Landlord will be entitled to collect such damages from Tenant monthly on the day on which monthly rent and other amounts would have been payable under his lease if this lease had not been terminated. Alternatively, at the option of Landlord, in the event this lease is so terminated, Landlord will be entitled to recover against Tenant as damages for loss of the bargain and not as penalty: (1) The worth at the time of award of the unpaid rent that had been earned at the time of termination; (2) The worth at the time of award of the amount by which the unpaid rent that would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; 6 (3) The worth at the time of award of the amount by which the unpaid rent for the balance of the term of this lease (had the same not been so terminated by Landlord) after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (4) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this lease or which in the ordinary course of things would be likely to result therefrom. The "worth at the time of award" of the amounts referred to in clauses (1) and (2) above is computed by adding interest at the per annum interest rate described in Section 8 a.(3) (above) on the date on which this lease terminated from the date of termination until the time of the award. e. Any suit or suits for the recovery of the amounts and damages set forth in Sections 8 c. and 8 d. may be brought by Landlord, from time to time, at Landlord's election, and nothing in this lease will be deemed to require Landlord to await the date upon which this lease or the term would have expired had there occurred no event of default. Each right and remedy provided for in this lease is cumulative and is in addition to every other right or remedy for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Landlord of any one or more of the rights or remedies provided for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise will not preclude the simultaneous or later exercise Landlord of any or all other rights or remedies provided for in this lease or now or after the lease date existing at law or in equity or by statute or otherwise. All costs incurred by Landlord in collecting any amounts and damages owing by Tenant pursuant to the provisions of this lease or to enforce any provision of this lease, including reasonable attorney's fees from the date any such matter is turned over to an attorney, whether or not one or more actions are commenced by Landlord, will also be recoverable by Landlord from Tenant. f. Tenant waives any right of redemption arising as a result of Landlord's exercise of its remedies under this Article 8. g. Any rent that is not paid when due will accrue interest at the rate of eighteen percent (18%) per annum (but in no event in an amount in excess of the maximum rate allowed by applicable law) from the date on which it was due until the date on which it is paid in full with accrued interest. In addition, in the event any payment due under this lease is not received on or before the tenth day after the due date, Tenant shall pay to Landlord a late charge equal to five percent (5%) of the past due amount, which charge will help compensate Landlord for the administrative and other expenses incurred by Landlord as a result of the late payment. 7 9. PREMISES VACATED DURING TERM OF LEASE: If Tenant shall abandon or vacate said premises before the end of the term of this lease, Landlord may, at its option and without notice, enter said premises, remove any signs of Tenant therefrom, and re-let the same, or any part of thereof, as it may see fit, without thereby voiding or terminating this lease, and, for the purpose of such re-letting, Landlord is authorized to make any repairs, changes, alterations or additions in or to said premises, as may, in the option of Landlord, be necessary or desirable for the purpose of such re- letting, all at the cost of Tenant, and if a sufficient sum shall not be realized from said re-letting (after payment of all costs and expenses of such repairs, changes or alterations, and the expense of said re-letting and the collection of rent accruing therefrom), each month to equal the monthly rental agreed to be paid by Tenant under the provisions of this lease, then Tenant agrees to pay such deficiency each month upon demand therefor. 10. REMOVAL OF TENANTS PROPERTY: If Tenant shall fail to remove all effects from said premises upon the abandonment thereof or upon the termination of this lease for any cause whatsoever, Landlord, at its option, may remove the same in any manner that it shall choose and store the said effects without liability to Tenant for loss thereof, and Tenant agrees to pay Landlord on demand, any and all expenses incurred in such removal, including court costs and attorney's fees and storage charges on such effects for any length of time the same shall be in Landlords possession; or Landlord, at its option, without notice, may sell said effects, or any of the same, at private sale and without legal process, for such prices as Landlord may obtain, and apply the proceeds of such sale upon any amounts due under this lease from Tenant to Landlord and upon the expense incident to the removal and sale of said effects, rendering the surplus if any, to Tenant. 11. LOSS OR DAMAGE TO TENANTS PROPERTY: All personal property or leasehold improvements of any kind or description whatsoever in the demised premises shall be at Tenant's sole risk, and Landlord shall not be held liable for any damage done to or loss of such personal property, or for damage or loss suffered by the business or occupation of Tenant arising from any act or neglect of covenants or other occupants of the building, or of their employees or the employees of the Landlord or of other persons, or from fire of other casualty, bursting, overflowing or leaking of water, sewer or steam pipes, or from heating or plumbing fixtures, or from electric wires, or from gases, or odors, or caused in any other manner whatsoever, except in the case of willful neglect on the part of Landlord. 8 12. LIEN ON TENANT'S FURNISHINGS: Tenant hereby conveys to Landlord all of the personal property situated on the leases premises as security for the payment of all rentals due or to become due hereunder. Said property shall not be removed therefrom without the consent of Landlord until all rentals due or to become due hereunder shall have first been paid and discharged. It is intended by the parties hereto that this instrument shall have the effect of a mortgage and lien upon such property, and Landlord, upon default of Tenant in the payment of rent, may take possession of said property either to its own use or to sell the same for the best price that can be obtained at public or private sale, and out of the money arising therefrom pay the amount due to Landlord, and all costs growing out of the execution of the provisions hereof, paying the surplus, if any, to Tenant. If said property, or any portion thereof, shall be offered at public auction, Landlord may become the purchaser thereof. 13. SURRENDER OF POSSESSION: Tenant agrees to deliver up and surrender to Landlord possession of said premises at the expiration or termination of this lease, by lapse of time or otherwise, in as good repair as when Tenant obtained the same at the commencement of said term, excepting only ordinarily wear and decay. 14. ACCEPTANCE OF PREMISES BY TENANT: The taking possession of said premises by Tenant shall be conclusive evidence as against Tenant that said premises were in good and satisfactory conditions when possession of the same was taken. 15. WAIVER: No waiver of any breach of any one or more of the conditions or covenants of this lease by Landlord shall be deemed to imply or constitute a waiver of any succeeding or other breach hereunder. 16. AMENDMENT OR MODIFICATION: Tenant acknowledges and agrees that it has not relied upon any statements, representations, agreements or warranties, except such as are expressed herein, and that no amendment or modifications of this lease shall be valid or binding unless expressed in writing and executed by the parties hereto in the same manner as the execution of this lease. 9 17. PAYMENTS AFTER TERMINATION: No payments of money by Tenant to Landlord after the termination of this lease, in any manner, or after the giving of any notice (other than a demand for the payment of money) by Landlord to Tenant shall reinstate, continue or extend the term of this lease or affect any notice given to Tenant prior to the payment of such money, it being agreed that after the service of notice or the commencement of a suit or after final judgment granting Landlord possession of said premises, Landlord may receive and collect any sums of rent due, or any other sums of money due under the terms of this lease, and the payment of such sums of money whether as rent of otherwise, shall not waive said notice, or in any manner affect any pending suit or any judgment therefore. 18. HOLDING AFTER TERMINATION: It is mutually agreed that if, after the expiration of this lease, Tenant shall remain in possession of said premises without a written agreement as to such holding, then such holding over shall be deemed and taken to be a holding upon a tenancy from month to month at a monthly rental equivalent to one and one-half times the last monthly payment hereinbefore provided for, payable in advance on the same day of each month as above provided, all other terms and conditions of this lease remaining the same. 19. RULES AND REGULATIONS: Landlord reserves the right to adopt rules and regulations from time to time governing the management of the building and use thereof by Tenants. Tenant agrees that its employees and agents, or any others permitted by Tenant, to occupy or enter said premises, will at all times abide by said rules and regulations as they may be amended from time to time, and that a default in the performance and observance thereof shall operate the same as any other defaults herein. Attached hereto as Exhibit "A" is the current list of rules and regulations presently in force and effect. At such time as Landlord adopts any amendments to such rules and regulations, Landlord shall provide Tenant with copy thereof at least ten (10) days prior to the enforcement of the provisions of any such amendments. 20. SECURITY DEPOSITS: It is agreed that Tenant, concurrently with the execution of this lease, has deposited with Landlord, and will keep $______________, as security for the payment by Tenant of the rent and other charges herein agreed to be paid, and for the performance of all the terms, conditions and covenants of this lease. If, at any time during the term of this lease, Tenant shall be in default in the performance of any provision of this lease, Landlord shall have the right to use said deposit, or so much thereof as necessary, in payment of any rental in default as aforesaid and in reimbursement of any expense incurred by Landlord 10 and in payment of any damages incurred by Landlord by reason of Tenant's default, or at the option of Landlord, the same may be retained by Landlord, and applied in liquidation of any damages suffered by it by reason of Tenant's default. In such event, Tenant shall, on written demand of Landlord, forwith remit to Landlord a sufficient amount in cash to restore said deposit to its original amount. In the event said deposit has not been utilized as aforesaid, said deposit, or so much thereof as has not been utilized for said purposes, shall be refunded to Tenant, without interest, upon full performance of this lease by Tenant. Said return shall be made within 60 days after the termination date of this lease. Landlord shall have the right to commingle said deposit with other funds of Landlord. Landlord shall deliver the balance of said funds, if any, deposited herein by Tenant to the purchaser of Landlord's interest in the leased premises in the event such interest be sold and, thereupon, Landlord shall be discharged from further liability with respect to such deposit. 21. QUIET POSSESSION: Provided Tenant is not in default under this lease, Landlord shall warrant and defend Tenant in the enjoyment and peaceful possession of the premises during the term aforesaid and all terms, conditions and convenience to be observed and performed by the parties hereto shall be applicable to and binding upon their heirs, administrator, executors, successors or assigns. 22. DEMOLITION NOTICE: It is agreed that at any time during the terms of this lease, Lessor, (Landlord) shall have the right to terminate this lease if it or it's assignees, grantees or any successor in interest should desire to demolish the building containing the demised premises. Termination shall be made by delivering written notice to Lessee of such intention to demolish, which notice shall require Lessee to vacate said premises no sooner than ninety (90) days from the date of said notice. Lessor or it's assignees, grantees or any successor in interest may commence the demolition of said building at any time subsequent to the date Lessee is required to vacate the premises. 23. OTHER PROVISIONS: Tenant has the option to renew lease per the following: Three year option: $5528/Month x 12 = $66,336 = $12.00/sq.ft. 1-1-97 through 12-31-97 $6449/Month x 12 = $77,392 = $14.00/sq.ft. 1-1-98 through 12-31-98 $7371/Month x 12 = $88,448 = $16.00/sq.ft. 1-1-99 through 12-31-99 11 IN WITNESS WHEREOF, the said Landlord and Tenant have caused their respective names and seals to be affixed hereto in triplicate the day and year first above written. LANDLORD ATTEST: THE MINING EXCHANGE PARTNERS, LTD. BY: /s/ signature illegible - ------------------------ ------------------------------- PROPERTY MANAGER TENANT BY: /s/ signature illegible ------------------------ ------------------------------- 12 Exhibit A RULES AND REGULATIONS --------------------- 1. The sidewalks, entries, passages, stairways and elevator shall not be obstructed by the Tenant or its agents or used by them for any purpose other than ingress and egress to and from their offices. 2. Furniture, equipment or supplies shall be moved in or out of the building only during such hours and in such manner as may be prescribed by Landlord. b. No safe or article, the weight of which may constitute a hazard or danger to the building or its equipment shall be moved into the premises. c. Safes and other equipment, the weight of which is not excessive, shall be moved into. from or about the building only during such hours and in such manner as shall be prescribed by Landlord, and Landlord shall have the right to designate the location of such articles in the space hereby demised. 3. Signs, notices, advertisements or other inscriptions shall not be placed upon any part or the building except in such locations and by such sign writers, and of such size, form and color, as shall be first specified by Landlord. 4. Water closets and other water fixtures shall not be used for any purpose other than the for which the same are intended, and any damage resulting to the same from misuse on the part of Tenant, its agents or employees, shall be paid for by Tenant, no person shall waste water by tying back or wedging the faucets, or in any other manner. 5. No animals, except handicap aid dogs, shall be allowed in the office halls, corridors and elevators in the building. 6. Bicycles or other vehicles shall not be permitted in the office halls corridors and elevators in the building, nor shall any obstruction of sidewalks or entrances of the building by such be permitted. 7. No person shall disturb the occupants of this or adjoining buildings or premises by the use of any radio or musical instrument or by the making of loud or improper noises. 8. No additional lock or locks shall be placed by Tenant on any door in the building unless written consent of the Landlord shall first have been obtained. A reasonable number of keys to the demised premises and to the toilet rooms will be furnished by Landlord, and neither Tenant, its agents or employees, shall have any duplicate key made. At the termination of this tenancy, Tenant shall promptly return to Landlord all keys to offices, toilet rooms or vaults. 9. No equipment, awnings, or any other items shall be placed on the exterior of the building or on any window ledge without written consent from the Landlord. 10. Tenant, before closing and leaving the demised premises at any time, shall see that all windows are closed, in order to avoid possible damage from fire, storm or freezing, and shall re-lock all outside building doors if used during non-business hours. 11. Tenant shall not install or operate any steam or gas engine or boiler, or carry on any mechanical business in the demised premises. The use of oil, gas or flammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought in to the building. 12. Any painting or decorating as may be agreed to be done by and at the expense of Landlord shall be done during regular working hours, should Tenant desire such work done on Sundays, holidays or outside of regular working hours, Tenant shall pay for the extra cost thereof. 13. Tenant shall not mark upon, paint signs upon, cut drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of the demised premises or of the building, and any defacement, damage or injury caused by Tenant, its agents or employees, shall be paid for by Tenant. 14. No parking is permitted in the alleys except for deliveries and workmen. 15. All requests for service, repair or other maintenance shall be made directly to the office of Landlord. 16. Smoking is not permitted in any area of the building, including individual offices. 17. Landlord shall at all times have the right, by its officer or agents, to enter the demised premises to inspect and examine the same, and to show the same to persons wishing to lease them, and may at any time within fifteen days next preceding the termination of this tenancy, place upon the doors and windows of the premises the notice "For Rent", which said notice shall not be removed by Tenant. 18. Landlord reserves the right to make such other and further reasonable rules and regulations as, in its judgment, may from time to time be needful and desirable for the safety, care and cleanliness of premises and for the preservation of good order therein. EX-10.7 14 LINK-US/PC AGREEMENT EXHIBIT 10.7 LINK-US/PC AGREEMENT This Agreement is entered into between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("CSI"), and GARY KAMIENSKI ("Developer"), for the purpose of specifying the conditions under which Developer will develop a computerized transparent callback switch to be used at hotels and other large businesses for the exclusive use and ownership of CSI. I. DEFINITIONS 1.1 "CPU" shall mean a single computer or central processing unit. 1.2 "CSI" shall mean and include CSI's divisions and departments within CSI's organization, but shall not include wholly or partially owned subsidiaries or affiliates (unless such subsidiaries or affiliates are directly involved in the deployment or business of Link-Us/PC) or independent third parties. 1.3 "Link-Us/PC" shall mean the PC-based implementation of an automatic dialback switch developed by Developer to be deployed at remote locations as described in EXHIBIT A, as the same may be modified or improved from time to time. 1.4 "Supporting Documentation" shall mean information that describes the format, organization, and content of the computer-readable program to be supplied to CSI under the terms of this Agreement. 1.5 "User's Manual" shall mean a written guide describing the use and operation of the Link-Us/PC, together with any related Supporting Documentation. II. TRANSFER OF LINK-US/PC 2.1 Developer hereby grants, conveys and transfers to CSI, and CSI hereby accepts, subject to the terms and conditions set forth in this Agreement, the ownership and all exclusive rights in and to the Link-Us/PC, the Supporting Documentation, User's Manual, and all associated software, source code, tables, and related items, data, and information, as each of such items may be modified or improved from time to time. To the extent any of such items are not currently available, such items shall be developed and delivered to CSI by Developer as soon as reasonably possible. The term "exclusive rights" as used in this Agreement shall mean and include all rights of ownership, and Developer shall retain no rights in and to the Link-Us/PC except as may be specifically set forth in this Agreement. 2.2 In transferring the Link-Us/PC, Developer agrees that he shall not: a. Transfer or allow the transfer or delivery of any materials, equipment, programs, or other information related to the Link-Us/PC to any party other than CSI, unless requested by CSI; b. Use or install the Link-Us/PC at locations other than those owned, operated, under contract with, or controlled by CSI or any of CSI's designated affiliates; c. Make copies or make use of the Link-Us/PC or User's Manual except as expressly set forth in this Agreement; or d. Attempt to do anything that might adversely affect the operation of the system or otherwise tamper with the program in such a way as to interfere with the efficient operation of the system. III. ITEMS PROVIDED BY DEVELOPER AND CSI 3.1 On or before October 1, 1996, Developer shall deliver to CSI a completed fully operational Link-Us/PC system, Supporting Documentation, and User's Manual which performs the functions set forth in Exhibit A. 3.2 CSI will pay the costs of installation of the Link-Us/PC in the field, including all marketing costs, travel costs and costs of supplying and installing hardware, including the delivery and installation of any enhancements, which will utilize the system. Upon complete execution of this Agreement, CSI agrees to purchase from Developer the NMS telephone switching hardware suitable for development of the Link-Us/PC system at a cost of approximately $5,100, which cost shall be substantiated by Developer delivering copies of invoices or other reasonable evidence establishing the value of such hardware. IV. ROYALTY AND SUPPORT PAYMENTS 4.1 In consideration of the rights granted and conveyed by Developer and the other services supplied by Developer pursuant hereto for the use of the Link-Us/PC as set forth herein, CSI agrees to pay a royalty in accordance with terms set forth herein: a. CSI shall pay to Developer within forty-five days after the end of each calendar month a royalty payment equal to four percent (4%) of the gross revenues actually received by CSI in such calendar month from users utilizing the entire three component Link-Us/PC system. The three components include the Hotel Component Telephone Switch, the Trigger Sender, and the Trigger Receiver, all as more particularly described in EXHIBIT B attached hereto. Notwithstanding the foregoing, the obligation to pay such royalty shall remain in effect whether the triggering 2 mechanism is X.25 or any other suitable trigger delivery mechanism developed by Developer. By way of example, the royalty shall not be paid with respect to the Argentine-type situation in which the Tina boxes are providing the trigger sending function. In the event a substantial modification or substantial enhancement to the Link-Us/PC system is made by someone other than Developer, or if enhancement or adaptation are deemed necessary or appropriate by CSI to keep the Link-Us/PC system working satisfactorily, and the Developer is unwilling or unable to make those changes, the royalty payment set forth in this subparagraph shall be equitably adjusted by the parties. If the parties cannot agree on the adjustment to the royalty, the parties may submit such issue to binding arbitration pursuant to the rules of the American Arbitration Association. b. The royalty provided in this Section shall be paid with respect to all telephone call receipts for calls utilizing the Link-Us/PC system during the term of this Agreement. c. The parties agree that the royalty payment set forth in this Section is the sole means of compensation for Developer's services, and no salary or other compensation shall be payable, except as provided in subparagraph e below. d. Developer will provide support, as needed, in connection with the deployment of the Link-Us/PC system, and for each installation Developer will be paid a flat fee of $1,500 if such installation produces gross revenues of between $10,000 and $20,000 in its first full calendar month of operation, and a flat fee of $3,000 if such installation produces gross revenues of more than $20,000 in its first full calendar month of operation. Developer agrees that once a site is selected by CSI, Developer will work diligently to install or assist in the installation of such system at the earliest possible time. Such installation fee shall be paid forty-five days after CSI has determined, in its reasonable discretion, that the system has operated accurately and efficiently in accordance with its projected specifications for one full calendar month after deployment. Developer shall install, with the assistance of CSI personnel, the first five systems, and CSI shall thereafter supply support personnel to assist Developer in subsequent installations. e. Developer will provide on-going maintenance, support and consulting services to CSI, including, without limiting the generality of the foregoing, general supervision of CSI's maintenance and support personnel to the extent they are involved in the Link-Us/PC operation, to assure the successful operation of the Link-Us/PC systems, and shall be paid for such services for so long as such systems are in operation for CSI at the rate of $4,000 per month through September 1, 1997, and $5,200 per month thereafter until the earlier of (i) the end of the term 3 of this Agreement; or (ii) the date upon which Developer no longer provides on- going consulting services on a day-to-day basis in accordance with the specifications set forth on EXHIBIT C attached hereto and incorporated herein by this reference. f. CSI shall have the right, at its sole election to buy out all future royalty obligations to Developer on the following terms: (1) at any time from the effective date hereof through and including the last day of the 12th calendar month following such effective date for the sum of $1,500,000. (2) at any time from and after the first day of the 13th calendar month following such effective date for a cash buyout price of an amount equal to three times the total royalties paid and payable to Developer during the twelve month period immediately preceding the date of notice of the buyout, which amount shall in no event be less than $2,500,000. 4.2 Effective immediately upon the closing of a royalty buyout pursuant to this section and payment of the required cash consideration to Developer, Developer shall be released from any further obligations or requirements with respect to installation or maintenance, operation or upgrade of any existing or future deployment of the System and CSI shall be released from any further obligations or requirements under this Agreement, including any monetary obligations hereunder. 4.3 Developer understands and agrees that the royalty rights set forth above shall provide the sole royalty compensation to be paid to Developer for work performed for CSI. In the event that during the term of this Agreement Developer develops computer systems and technology which are unrelated to the Link-US/PC system and for which CSI is willing to negotiate a compensation package for Developer, such compensation shall be based upon stock option incentives rather than royalty or commission-type compensation. At the option of CSI, in order to assist in the determination of a compensation structure for such additional systems or technology, a committee composed of designated persons within the technology department of CSI may be formed to make recommendations to CSI with regard to such compensation. CSI may consider the recommendations made by such committee, but shall not be bound by any such proposals. Throughout the term of this Agreement, Developer agrees to work and cooperate with the other technical development employees of CSI to develop new technology for the benefit of CSI which is unrelated to the Link-US/PC system. It is the intent of the parties that each shall endeavor to promote a spirit of cooperation and teamwork among the technical development persons to help enhance the possibility of developing creative and beneficial technologies for the benefit of 4 CSI. V. ENHANCEMENTS AND SUPPORT 5.1 Developer shall make available and transfer, assign, and convey to CSI all updates and enhancements to the Link-Us/PC as the same become available. The ownership and use of all such updates and enhancements by CSI shall be exclusively reserved to CSI and shall be subject to the terms and conditions of this Agreement. 5.2 Developer shall supply maintenance and support of the Link-Us/PC system pursuant to the terms and conditions of the attached Maintenance Agreement, including, without limitation, correcting any technical defects in order to ensure that the system works in accordance with the specifications set forth on Exhibit A attached hereto. During the term of this Agreement, if CSI notifies Developer of program or system errors or defects, Developer shall use his best efforts to verify and correct the problems within three days. Developer shall promptly notify CSI if a problem cannot be corrected within the time specified in this Section. If such a problem materially and adversely affects the operation of the system, CSI shall have the right to terminate this Agreement by delivering written notice thereof to Developer. 5.3 For the duration of this Agreement, Developer shall supply, as developed and at no additional charge to CSI, program enhancements that improve performance or utility of the systems, including all appropriate updates and revisions to the User Manual and Supporting Documentation which shall be delivered promptly upon the development of any such enhancements. Delivery of updated User Manuals and Supporting Documentation promptly is a material factor in Developer's performance under this Agreement. 5.4 CSI currently anticipates that it will develop a support staff to assist in the deployment, maintenance and support of the Link-Us/PC system. The timing and structure of the development of such support personnel shall be at the sole discretion of CSI. Developer agrees to train such support personnel in all aspects of the system, and will provide such assistance until the staff is adequately trained, as determined by CSI. VI. TERM OF AGREEMENT 6.1 The term of this Agreement shall commence as of the last date this Agreement is executed by CSI and Developer and shall continue for the period during which the Link-Us/PC is in active operation by CSI, until no later than September 1, 2006, unless earlier terminated as provided below. 5 VII. TERMINATION OF AGREEMENT 7.1 In the event of a material default by either party or such party's agent or representative, of any provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice, except that the defaulting party shall have thirty (30) days from receipt of notice of termination in which to cure any such defaults, and upon any such cure, this Agreement will continue in full force and effect. If this Agreement is terminated by CSI due to a default by Developer, Developer shall not have any rights with respect to the Link-Us/PC system. This restriction shall survive the termination of this Agreement. This Agreement shall also terminate upon the death of Developer, with the exception that the royalty payment provided in Section 4.1 above shall continue until the end of the term of this Agreement so long as the Link US/PC system continues to be utilized in the format developed by Developer. 7.2 In the event of any violation or threatened violation of this Agreement CSI shall be entitled to injunctive and other equitable relief on the grounds that such conduct, if not restrained and/or other equitable relief not granted, would result in irreparable and serious harm for which damages would be an inadequate remedy. 7.3 Unless agreed otherwise by the parties, if this Agreement is terminated for any reason other than (i) CSI's buyout pursuant to Section 4.1f of this Agreement; (ii) the material default of Developer under this Agreement; or (iii) the expiration of the term of this Agreement, the royalty payments shall continue to be paid for those sites which are operational and providing revenue for CSI through the use of the Link-Us/PC system. VIII. COPYRIGHT AND PROPRIETARY INFORMATION 8.1 Developer acknowledges that the Link-Us/PC system and all User's Manuals and other Supporting Documentation constitute valuable property of CSI and that all title and ownership rights in the Link-Us/PC and related materials remain exclusively with CSI. 8.2 CSI reserves all rights with respect to the Link-Us/PC, User's Manual, and all Supporting Documentation under all applicable laws for the protection of proprietary information, including, but not limited to, trade secrets, copyrights, trademarks and patents. 8.3 Except as otherwise provided in this Agreement, Developer shall not cause or permit unauthorized copying, reproduction or disclosure of any portion of the program, or any 6 instructions, manuals, or other documentation in any way related to the Link- US/PC system or any other technology, information, or data relating to the operations of CSI, or the delivery or distribution of any part thereof to any third person or entity, for any purpose whatsoever, without the prior written permission of CSI. This restriction shall continue to bind Developer and his agents and representatives for a period of ten years beyond the termination of this Agreement. 8.4 Within ten days after any twelve month period in which Developer has been paid a minimum of $500,000 by CSI whether in the form of compensation, salary, bonuses, royalties, benefits realized from the exercise of stock options (which benefits are equal to the difference between the option price of the stock and the bid price of the stock on the date the options were exercised), or other payments by CSI, and thereafter promptly upon their creation, Developer shall completely disclose in writing, to such person as the Board of Directors of CSI may designate, all developments, codes, inventions and improvements heretofore or hereafter made, developed, perfected, devised, conceived or acquired by Developer, either solely or in collaboration with others, during the period in which Developer has provided consulting services to CSI commencing February 1, 1994, and throughout the term of this Agreement, whether or not made during regular working hours or made with facilities, funds, or equipment of CSI, relating in any way to the business, developments, products, or potential products of CSI; and if so requested by CSI, shall assign, transfer and convey to CSI all right, title and interest in and to all such developments, inventions and improvements. CSI shall have the right to designate an individual to study, test, and analyze the Link-US/PC system and any other development, invention, or improvement to be conveyed to CSI pursuant to this Agreement, to ensure that the system will be fully operational without the presence or involvement of Developer, and Developer shall provide complete cooperation with such individual. All information pertaining to the operating and programming of the Link-Us PC system and related systems and technology shall be maintained in a lock-box or other secured area pursuant to CSI's technical policy in order to preserve the confidentiality of such information. Such repository shall include such information and instructions as would permit a competent technical person to fully operate the Link-Us/PC system and all aspects of such system. 8.5 Developer agrees at the request and expense of CSI to make, execute and deliver any and all application papers, assignments or instruments, and to perform or cause to be performed such other lawful acts as CSI may deem desirable or necessary in making or prosecuting applications, domestic or foreign, for patents, copyright and re-issues and extensions thereof, and to assist and cooperate (without expense to 7 Developer) with CSI or its representative in any controversy or legal proceedings relating to said developments, inventions and improvements and the patents or copyrights which may be procured thereon. 8.6 Developer agrees that he will not directly or indirectly use or disclose to others at any time any of CSI's designs, devices, methods of production, systems, technology, dealings or the like or information relating thereto, knowledge of which he may acquire directly or indirectly during the period of his consulting work with CSI. 8.7 At all times hereafter, both during and after the term of this Agreement, and whether or not this Agreement is terminated for cause, Developer shall treat as confidential all information, in any media or form (referred to in this Agreement as "Information") that may be disclosed to him or which he may acquire as a result of or through his consulting arrangement with CSI (unless the same has clearly come into the public domain) concerning the operations, business or financial affairs, know-how, process, techniques, trade secrets, products, services, properties, research and development, plans or projections of CSI or any of its affiliated companies, or of any entity including, without limit, any actual or potential customer, dealer, distributor, supplier, joint venturer or licensor. Toward the objective of maintaining such confidentiality, Developer shall keep the information secret, neither directly nor indirectly using, divulging or furnishing it nor making it available either to or for the benefit of any person or entity (other than to or for CSI exclusively) or to any employee or officer of CSI with the exception of any person designated in writing by the Board of Directors of CSI. IX. WARRANTIES 9.1 Developer warrants that the Link-Us/PC will be fully functional, that it will reliably perform its intended functions, and that the system will perform in accordance with Exhibit A. In the event such system is not operating in accordance with its intended functions or Exhibit A, and such system problems are not remedied within thirty days of the date notice of such problems is given by CSI to Developer, the royalty payments will cease and CSI will be entitled to exercise such other remedies as may be permitted by applicable law. If CSI in good faith determines that the Link-Us/PC system does not meet the specifications set forth in Exhibit A, CSI will have the right to terminate this Agreement upon written notice to Developer. If CSI elects to not deploy any additional Link-US/PC systems for a continuous period of one year, then CSI's exclusive rights to the Link-Us/PC system will terminate and thereafter the royalty payment required by Section 8 4.1 of this Agreement shall be reduced to two percent (2%) of the gross revenues actually received by CSI. 9.2 Developer warrants that Developer has the legal right to grant CSI the rights conveyed under this Agreement, and such grant does not infringe any third parties' property or rights. 9.3 CSI warrants as follows: a. That it has the full legal right and power to enter into this Agreement and that all requisite corporate approvals have been obtained; b. CSI shall supply funds to permit the installation of two average Link-Us/PC installations in any month, provided that such installations have been authorized by CSI in advance. In the event CSI fails to supply such funds and as a result an installation is prevented or delayed by more than sixty days, Developer's royalty payment pursuant to Section 4.1 above shall be increased to six percent of gross revenues until such time as the funds are made available for the additional installation. Such increase in the royalty payment shall be Developer's sole remedy in the event of CSI's failure to maintain the required funds. X. INDEMNIFICATION 10.1 CSI agrees to indemnify and hold Developer harmless from claims by third parties which arise out of CSI's use or operation of the Link-Us/PC system, except to the extent any of such claims result from the actions or inactions of Developer. 10.2 Developer agrees to indemnify and hold CSI harmless from claims by third parties arising out of any breach by Developer of its warranties or obligations set forth in this Agreement. 10.3 The indemnifying party shall pay all costs and attorneys' fees incurred in connection with any claim for which such party is required to indemnify the other party under this Article X. XI. NON-COMPETITION 11.1 Developer agrees not to develop or market programs in the subject area of computerized transparent callback service at hotel and large business sites or which in any way might compete with the Link-Us/PC system or other business in which CSI is involved or has contemplated becoming involved with for a period of ten years, or during any period in which CSI is utilizing the technology, whichever is longer, except with respect to enhancements or modifications to the system obtained for the exclusive use of CSI pursuant to this Agreement, or except as may be approved in writing by CSI. 9 XII. ASSIGNMENT 12.1 This Agreement shall be binding upon the parties hereto and their respective successors and assigns. CSI shall have the right to assign and delegate its rights and obligations under this Agreement to any third party which may acquire or control all or part of CSI or its business or which is otherwise affiliated with CSI. With the exception of an assignment of his right to receive royalties hereunder, Developer may not assign or delegate his rights or duties under this Agreement without the prior written consent of CSI. XIII. GENERAL PROVISIONS 13.1 All warranty and indemnification obligations set forth in this Agreement shall survive the termination of this Agreement. 13.2 This Agreement may be modified or amended only by means of a writing executed by both parties to this Agreement. 13.3 This Agreement shall be governed and construed in accordance with the laws of the State of Colorado. 13.4 In the event of any legal action concerning the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs from the other party. 13.5 This Agreement sets forth the entire agreement between the parties concerning the subject matter hereof. 13.6 Any written notice from one party to the other required by this Agreement shall be deemed made on the earlier of the date actually received or three days after such notice was sent by certified mail, return receipt requested, and addressed as follows: Communication Systems International, Inc 121 East Pikes Peak Avenue, Suite 335 Colorado Springs, Colorado Attention: Robert A. Spade 80903 with a copy to: Richard F. Nipert, Esq. Bright, Gibson & Nipert, P.C. 1140 Grant Street, Suite 100 Denver, Colorado 80203 10 Gary Kamienski P.O. Box 6566 220 Pennsylvania Avenue Woodland Park, Colorado 80866 13.7 Developer acknowledges that he has consulted legal counsel with respect to this Agreement and that this Agreement 11 shall be construed as if both parties equally participated in the creation of this Agreement. COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation By:_____________________________________ Its:____________________________________ DEVELOPER ________________________________________ GARY KAMIENSKI 12 AMENDMENT NO. 1 TO LINK-US/PC AGREEMENT This Amendment No. 1 to Link-Us/PC Agreement is entered into as of the ___ day of April, 1997 between Communications Systems International, Inc. ("CSI") and Gary Kamienski ("Developer"). WHEREAS, Developer and CSI have entered into that certain Link-Us/PC Agreement ("Agreement") which concerns Developer's development of certain technology ("Technology") for use by CSI; and WHEREAS, Developer has developed an enhancement to the Technology and desires to ensure that this enhancement is covered by the terms of the Agreement; NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and conditions contained herein, the parties agree as follows: 1. DEVELOPMENT OF CABO. Developer has developed a software enhancement ------------------- which will allow the use of the entire Link-Us/PC system with an operator assisted call, which technology is know as the calls assisted by operator or "CABO" system. The parties agree that this CABO system is an enhancement to the Link-US/PC system and, as a result, is and will be assigned, transferred, and conveyed to CSI for the exclusive use of CSI, as is more particularly described in the Agreement. 2. CABO INCLUDED IN AGREEMENT. Since CABO is acknowledged to be an -------------------------- enhancement to the Link-US/PC System and utilizes all aspects of the Link-US/PC system, the terms and conditions of the Agreement shall be fully applicable to such technology, including, without limiting the generality of the foregoing, Developer's right to royalty payments for use of the Link-US/PC system. 3. AGREEMENT IN FULL FORCE AND EFFECT. Except as specifically amended ---------------------------------- hereby, the parties acknowledge that the Agreement shall remain in full force and effect. COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. BY:___________________________ ROBERT A. SPADE, PRESIDENT ______________________________ GARY KAMIENSKI EX-10.8 15 FORM OF DISTRIBUTOR AGREEMENT EXHIBIT 10.8 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. DISTRIBUTOR AGREEMENT ______________________________________________________________________________ THIS AGREEMENT is made and entered into by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("CSI"), whose address is 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903, and ______________________________________ ("Distributor"), whose address is _________________________________________________________________. I. AGENCY RELATIONSHIP The following are the basic terms of the Distributor Agreement, which terms are supplemented with the "Additional Provisions" which are attached hereto. 1.1 Engagement of Distributor. CSI hereby agrees to engage Distributor as ------------------------- CSI's agent for selling all of CSI's products and services, whether currently available or developed and provided in the future. Distributor hereby accepts engagement as CSI's agent for selling such services, which may include Callback Services, Phone Debit Cards and other services designated by CSI, in accordance with the terms and conditions contained in this Agreement. 1.2 Term and Renewal. The term of this Agreement shall commence as of the ---------------- date that it has been signed by an authorized officer of CSI, and shall continue in effect until ____________, 199_, unless sooner terminated in accordance with the provisions of this Agreement. The term of this Agreement may be renewed for ______ additional terms of _____ years each upon strict compliance with the Additional Provisions. 1.3 Fees and Costs. The rights granted to Distributor by this Agreement -------------- are granted free of charge, and no distributor fee shall be payable by Distributor. Distributor shall be responsible for paying all expenses relating to the establishment and conduct of the business contemplated by this Agreement, except as specifically set forth otherwise in this Agreement. 1.4 Authority of Agent. Distributor shall have the authority to solicit ------------------ offers from potential customers to subscribe to or purchase CSI's products and services. Distributor has no right to enter into a contract on behalf of CSI or to bind CSI in any manner not expressly authorized under this Agreement. 1.5 Territory. Distributor may exercise the rights granted by this --------- Agreement and market CSI products and services throughout _____________. Distributor shall not be entitled to market CSI products and services anywhere else in the world without the execution by CSI of an Addendum to this Agreement specifying such additional approved territory. 1.6 Status of Parties. CSI and Distributor agree that their relationship ----------------- is that of principal and agent for the limited purpose of selling CSI's products and services in accordance with this Agreement. Distributor is an independent contractor and not an employee, partner, or joint venturer of or with CSI. II. PAYMENT AND COLLECTION TERMS 2.1 Customer Orders, Billing and Collection, and Customer Service. All ------------------------------------------------------------- customer orders shall be processed on CSI's standard form Service Agreement which shall be executed by Distributor and the customer. CSI will maintain responsibility to bill and collect from all customers. Distributor shall be responsible for all direct customer service and contact with Distributor's customers. These customer-oriented responsibilities are defined with more specificity in the Additional Provisions attached hereto. III. DISTRIBUTOR'S COMPENSATION 3.1 Commission Rate. CSI shall pay to Distributor within fifteen days of --------------- the second month following its receipt of Distributor's Collected Revenues (as defined in the Additional Provisions) ____________ percent (___%) of Distributor's Collected Revenues for such month of collections. IV. MARKETING STANDARDS 4.1 Marketing and Advertising Standards. Distributor shall comply with ----------------------------------- the marketing standards, advertising requirements, and other requirements as set forth in Section IV of the Additional Provisions. 4.2 Performance Standards. Within the earlier of: (i) _______ months --------------------- after the effective date of this Agreement; or (ii) ______ months after Distributor has obtained its license from _________, Distributor must achieve and maintain thereafter a minimum of $_______ U.S. Dollars per month in Callback Services billing and collections. The failure to meet the foregoing billing requirements in a timely manner will be a material breach of this Agreement and shall give CSI the right to terminate this Agreement upon ______ days' written notice of termination to Distributor. V. ADDITIONAL PROVISIONS This Agreement shall include all of the terms and conditions contained in the attached "Additional Provisions" which are hereby incorporated herein by this reference. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year so indicated. 2 CSI: COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation By:___________________________________________ Title:_______________________________________________ Date:___________________________________________ By:___________________________________________ Title:_______________________________________________ Date:___________________________________________ DISTRIBUTOR: By:___________________________________________ Title:_______________________________________________ Date:___________________________________________ 3 DISTRIBUTOR AGREEMENT ADDITIONAL PROVISIONS The following Additional Provisions are attached to and made a part of that certain Distributor Agreement between Communications Systems International, Inc. ("CSI") and ____________________________ ("Distributor"). CSI is in the business of providing international long distance telecommunications services. Such services include, but are not limited to, callback services consisting of CSI's normal automated callback services that route international long distance calls through Colorado Springs, Colorado, at United States long distance rates, "Tina" boxes for routing international long distance calls through Colorado Springs, Colorado, and an X.25 network for routing telecommunications (collectively referred to as "Callback Services"), and long distance telephone debit cards ("Phone Debit Cards"). CSI may develop new and additional products and services during the term of this Agreement. Distributor wishes to represent CSI and market CSI's products and services, and, in doing so, is willing to utilize CSI's standards, methods and operating procedures, as the same are more specifically described in this Agreement. From time to time, CSI may make reasonable changes in the standards, methods and operating procedures, and Distributor agrees to comply with such changes within thirty days after it has received written notice of the changes so long as such changes do not unreasonably burden Distributor and do not materially conflict with the spirit and intent of this Agreement. CSI is willing to engage Distributor as its agent pursuant to the terms and conditions set forth in this Agreement. ARTICLE I AGENCY RELATIONSHIP -------------------- 1.1 Renewal. ------- (a) Renewal. If Distributor has complied with all of the terms and ------- conditions of this Agreement and has complied with the marketing standards established by CSI for its agents throughout the term of this Agreement, then, at the expiration of the original term, this Agreement may be renewed, but only if: (1) Distributor agrees to comply with CSI's standards for agents then in effect, subject to the limitations set forth in the second paragraph of Page 1 of this Agreement, and agrees to make other changes in products, services, marketing and business practices to be consistent with the then current requirements and practices of CSI; and (2) Distributor provides CSI with written notice of Distributor's intention to renew at least six months prior to expiration of the original term of this Agreement. Within 30 days after receipt of such notice of Distributor's intention to renew, CSI shall provide Distributor with a statement as to whether it is entitled to renew. If Distributor is entitled to renew, this Agreement will be extended for the additional period on the same terms and conditions as are contained in this Agreement. There shall be no renewal fee. If Distributor desires any changes in this Agreement, such changes will only be effective upon agreement by both Distributor and CSI, and such agreement must be reached at least thirty days prior to the end of the original term. 1.2 Fees and Costs. Expenses payable by Distributor include but are not -------------- limited to travel, entertainment, supplies, postage, shipping and any and all compensation to agents and employees of Distributor. Any charges incurred by Distributor for using any of CSI's vendor accounts, such as overnight delivery services, shall be charged back to Distributor by CSI and Distributor shall promptly pay CSI for any and all such charges. 1.3 Authority of Agent. Offers from customers solicited by Distributor ------------------ shall be subject to acceptance by CSI and no contract for the provision of products or services shall exist until CSI and the customer have entered into an agreement for services pursuant to Section 2.1 of this Agreement. CSI has the right, in its sole discretion, to reject any customer who is not creditworthy or who is not legally eligible to receive certain CSI products or services. 1.4 Limitation on Liability. Distributor has no power or authority to ----------------------- bind or obligate CSI to third parties. CSI shall have no liability whatsoever for the acts and omissions of Distributor, and Distributor shall have no liability whatsoever for the acts and omissions of CSI. ARTICLE II PAYMENT AND COLLECTION TERMS ------------------------------- 2.1 Customer Orders. If a customer obtained by Distributor wishes to --------------- purchase any of CSI's products and services, the Distributor and the customer shall both sign CSI's standard form service agreement ( a "Service Agreement"), which CSI will provide to Distributor. Distributor shall submit the signed Service Agreement to CSI. Every order must be approved by CSI before the account becomes effective, and the account will become effective only when CSI signs the Service Agreement. Prior to the time CSI signs the Service Agreement, no commission shall be paid to Distributor. 2.2 Billing and Collection. CSI, and not Distributor, will be responsible ---------------------- for all billing of and collection from customers relating to this Initial _____ Agreement. CSI will directly bill all customers obtained by Distributor for all products and services used by those customers. Distributor shall have no right or obligation to bill or collect any payments from customers or potential customers for products or services provided or to be provided under this Agreement. Distributor will not represent to potential or existing customers that it has the right to bill or collect from customers, and will not so bill or collect. In the event that Distributor collects or attempts to collect fees from customers, CSI may promptly terminate this Agreement without notice to Distributor. CSI will provide Distributor with a list of delinquent accounts during the middle of the billing cycle each month in order to allow Distributor to inquire as to problems customers may be experiencing or to monitor delinquent accounts. 2.3 Customer Service. Distributor shall be responsible for soliciting and ---------------- servicing customers, and for all contact with customers. Distributor's duties prior to obtaining orders include educating and informing potential customers of the products and services of CSI. CSI shall be responsible for all billing and collection responsibilities after CSI has signed a Service Agreement with that customer. After acceptance of a Service Agreement by CSI, Distributor shall be obligated only to provide ongoing customer service. ARTICLE III DISTRIBUTOR'S COMPENSATION --------------------------- 3.1 Distributor's Commissions. Commissions will be paid to Distributor by ------------------------- CSI based on the amount of revenue actually collected and received by CSI from customers who have been solicited by Distributor and have entered into a Service Agreement with Distributor. (Such revenues from customers obtained by Distributor that are received and collected by CSI are referred to in this Agreement as "Distributor's Collected Revenues.") CSI shall pay commissions owed to Distributor no later than the 15th day of the second month after CSI receives the Distributor's Collected Revenues on which the commissions are based. For example, CSI shall pay the commissions owed for Distributor's Collected Revenues received by CSI in the month of May no later than July 15. CSI's obligation to pay commissions earned pursuant to this Section 3.1 shall survive such termination. 3.2 Residual Commissions. After the end of the term of this Agreement, -------------------- CSI shall continue to pay to Distributor commissions equal to ___ percent of Distributor's Collected Revenues received by CSI, with respect to telephone services provided during the term of this Agreement. Once CSI has paid commission equal to ___ percent of Distributor's Collected Revenues received by CSI, Distributor shall have no right to receive, and C. S. International shall have no obligation to pay, any additional commissions. CSI's obligation to pay commissions in accordance with this Section 3.2 shall survive termination of this Agreement, unless CSI terminates this Agreement because of a default by Distributor, as provided in Section 7.2. ARTICLE IV MARKETING STANDARDS -------------------- 4.1 Sales Literature; Assistance. CSI will provide Distributor with an ---------------------------- understanding of CSI's products and services and assistance in selling these products and services. Assistance will not include expenses for brochures, stationery, sales scripts, rate sheets and marketing letters, all of which shall be produced at the expense of Distributor. Distributor will also pay all other marketing and advertising expenses in connection with all of CSI's products and services. 4.2 Demo Lines. To assist Distributor in marketing Callback Services, CSI ---------- will make a long distance calling demonstration line (a "Demo Line") available to Distributor on the following basis: (a) Distributor must supply CSI with an active credit card account to assure payment of all charges on the Demo Line; (b) Distributor will receive a $50.00 per month credit against charges on the Demo Line for each $50,000.00 per month billed to customers obtained by Distributor, not to exceed a total credit of $500.00 per month; and (c) Each $50.00 credit earned may be applied to only one Demo Line. 4.3 Trade Names and Trademarks. During the term of this Agreement, -------------------------- Distributor shall use the trade names, trademarks and service marks of CSI in connection with the marketing and sale of products and services pursuant to this Agreement, subject to the approval of C.S.. International as provided below in Section 4.4. All trade names, trademarks and service marks owned or employed by CSI or any subsidiary or affiliate of CSI used or employed in CSI's business operations shall remain the sole and exclusive property of CSI, or such subsidiary or affiliate. No title or rights whatsoever to any of CSI's trade names, trademarks, service marks and other intellectual property shall pass to Distributor by this Agreement or any actions undertaken pursuant to this Agreement. Distributor shall immediately discontinue any use of CSI's marks and names upon termination of this Agreement. 4.4 Advertising. From time to time, CSI shall establish standards for all ----------- advertising, promotional and customer training materials used or distributed by Distributor that relate to CSI's products and services, and Distributor, at its expense, shall comply with such standards. The current standards for advertising, promotional and customer training materials are described with more particularity in Exhibit A attached hereto. Distributor Initial _____ 2 agrees to comply with any changes to such standards as CSI may propose from time to time within thirty days after written notice of such changes is given by CSI to Distributor, provided that the changes do not unreasonably burden Distributor and do not involve a substantial increase in the cost of providing such materials. Distributor shall provide to CSI, for its prior review and written approval, all promotional, advertising or other materials or activity using or displaying CSI's trade name, trademarks, service marks, products or services or referring to Distributor as an authorized agent, branch office or distributor of CSI. 4.5 Presentation of Products, Services and Rates. Distributor will -------------------------------------------- present CSI and CSI's products and services to potential customers in a responsible way, never making claims of greater savings or service than actually exist. Distributor will adhere to the appropriate CSI rate and price structure applicable at the time of soliciting customers unless a different structure is agreed to in writing by CSI. Distributor shall quote prices for CSI's products and services only at the levels authorized by CSI. These rates may be revised from time to time by CSI in accordance with CSI's generally applicable criteria and as required by the prevailing rate schedules. CSI will inform Distributor of any changes in its rates in a timely manner such that Distributor may continue to accurately represent the services to the public. CSI shall have the absolute right to establish the long distance rates, payment terms and advertising and promotional policies for its services. Distributor shall comply with all of CSI's customer service procedures regarding CSI's products and services. 4.6 Distributor's Agents and Employees. Distributor has the right to hire ---------------------------------- and train agents and employees working for Distributor under the following terms and conditions: (a) Distributor shall disclose to each agent and employee the relationship between Distributor and CSI; (b) Distributor shall require all agents and employees of Distributor to abide by all of the terms and conditions of this Agreement; (c) CSI will not actively solicit any of Distributor's agents or employees to become agents of CSI; (d) all customers obtained by Distributor's agents or employees will be customers of Distributor and will not be allowed to become customers of the agent or employee without Distributor's consent; (e) Distributor's agents and employees shall not be considered agents or employees of CSI for any purpose whatsoever; (f) CSI will provide Distributor with a monthly accounting of sales made by Distributor's agents; and (g) Distributor shall be solely responsible for paying any and all compensation owed to its agents or employees, together with any and all taxes associated with such compensation. CSI shall have no obligation whatsoever to Distributor's agents and employees. All agents engaged by Distributor will be assigned their own account numbers by CSI solely for the purpose of accounting for sales made by such agents so that Distributor may calculate any commissions payable by Distributor. ARTICLE V ASSIGNMENT ---------- 5.1 Assignment by CSI. This Agreement may be assigned by CSI to an ----------------- affiliate or successor of CSI or any other firm or entity capable of performing CSI's obligations under this Agreement with the approval of Distributor, unless CSI determines, in its reasonable discretion, that the assignment is likely to materially and adversely affect Distributor's ability to perform its obligations under this Agreement, or if the assignee is not able to provide reasonably competitive rates, in which case Distributor shall have the right to deliver written notice to CSI of its refusal to permit the assignment within twenty days after Distributor has received notice of the proposed assignment. The failure to deliver such notice within ten days shall be deemed a waiver of Distributor's right to reject the proposed assignment. Such assignment will not release CSI from its obligations under this Agreement. 5.2 Assignment by Distributor. This Agreement may not be assigned by ------------------------- Distributor to any other person or entity without the prior written approval of CSI, which approval may be withheld or granted in CSI's sole and absolute discretion. ARTICLE VI NON-COMPETITION --------------- 6.1 Non-Competition. Distributor understands, acknowledges and agrees --------------- that, during the term of this Agreement, and for a period of three years thereafter, Distributor shall not undertake any conduct or activity or engage in any business, either directly or indirectly, that competes in any way with the business of CSI, and Distributor shall not contract with, or provide money, goods or services to, any other person or entity who is engaged in the business of providing international long distance telecommunications or otherwise competes with CSI. Distributor, for its own account, may engage in other businesses and activities that are not in competition with CSI, provided that such activities do not interfere with Distributor's performance of its obligations under this Agreement. Notwithstanding the foregoing, in the event CSI is unable to supply reasonably competitive services to customers of Distributor, Distributor shall give written notice of such fact to CSI. If CSI has not improved its services such that its services are reasonably competitive in the market within thirty days after the receipt of such written notice, Distributor shall have the right to terminate this Agreement by delivering written notice of termination to CSI within another thirty days after the end of CSI's thirty day "cure" period. Upon the termination pursuant to this paragraph, the provisions of this Article VI concerning non-competition occurring after the term of this Agreement will not be applicable. 6.2 Proprietary Information. During the term of this Agreement and for a ----------------------- period of ten years thereafter, Distributor shall retain in confidence, and shall require its directors, officers, employees, consultants, representatives and agents to retain in confidence, any and all Proprietary Information (as defined below). The parties agree that Proprietary Information constitutes trade secrets of CSI and that the disclosure of Proprietary Initial _____ 3 Information in contravention of this Agreement would constitute an unfair trade practice. "Proprietary Information" means information relating to the business and operations of CSI or its subsidiaries, affiliates, clients, customers, consultants and agents, including, but not limited to, all customer lists and all technical, marketing and financial information relating thereto, any information relating to the pricing, methods, processes, financial data, lists, apparatus, statistics, programs, research, development or related information of CSI, its subsidiaries or affiliates, or CSI's clients and customers, concerning past, present or future business activities or operations of said entities or the results of the provision of services performed by Distributor under this Agreement. Distributor shall take reasonable steps to prevent unauthorized disclosure or misuse of Proprietary Information by any of its agents or employees or by any other person having access to such information. 6.3 No Disclosure of Terms of Agreement. Neither CSI nor Distributor ----------------------------------- shall disclose the terms and conditions of this Agreement to any person or entity without the prior written consent of the other party. ARTICLE VII DEFAULT, REMEDIES AND TERMINATION ------------------------------------ 7.1 Events of Default. Each of the following shall constitute an "Event ----------------- of Default": (a) the failure of Distributor to comply with or to satisfy any of the terms of this Agreement; and (b) the violation or failure by either party to comply with any term or provision of this Agreement and the failure of such defaulting party to cure such violation or failure within thirty days after receiving written notice of the violation or failure. 7.2 Remedies. Upon the occurrence of an Event of Default, the -------- nondefaulting party shall have all rights and remedies expressly set forth in this Agreement and all other rights and remedies available at law or in equity, including but not limited to specific performance, damages, injunctive relief and termination of this Agreement. If the nondefaulting party elects to terminate this Agreement because of Event of Default caused by the other party, the nondefaulting party may terminate this Agreement by delivering written notice of termination to the defaulting party at least thirty days prior to the effective date of termination. CSI's obligation to pay commissions under Section 3.1 that have been earned prior to termination shall survive termination, but CSI's termination pursuant to this Section 7.2 shall release the parties from all other obligations to each other, including CSI's obligation to pay residual commissions under Section 3.2. 7.3 Regulatory Approval. This Agreement shall terminate automatically and ------------------- without liability or further obligation on the part of either party to the other party if, by order, act or omission of any court or government agency with regulatory authority over CSI or long distance telephone services, or as the result of the revocation or expiration of any required licenses or other authority, CSI is denied or loses the right, power or authority to provide Callback Services as contemplated by this Agreement. If such authority is lost, suspended or not renewed with regard to only part of Callback Services or only within a certain geographic area or areas where Callback Services have been provided, then this Agreement shall terminate automatically and without liability or further obligation on the part of either party to the other party with regard only to the Callback Service or area affected. The provisions of this Section 7.3 shall only apply to Callback Services; other services shall not be affected by the terms of this Section 7.3. In the event of a termination pursuant to this Section 7.3, CSI shall continue to have the obligation to pay to Distributor the commissions required to be paid pursuant to Section 3.1 and 3.2 of this Agreement. 7.4 Fees and Expenses. In any action to enforce this Agreement, or to ----------------- collect damages on account of any Event of Default, the prevailing party shall, in addition to any damages and other relief awarded, be entitled to collect all of its costs in such action, including court costs, costs of investigation and settlement, reasonable attorneys' fees and all additional costs incurred in collecting any judgment rendered in such action. ARTICLE VIII MISCELLANEOUS ------------- 8.1 Applicable Law. This Agreement shall be governed by the laws of the -------------- State of Colorado, United States of America. With regard to international service, this Agreement shall be governed by applicable federal statutes and regulations of the United States of America. The parties stipulate to jurisdiction and venue in the State of Colorado, United States of America. 8.2 Notices. Any notice or other documents or materials required or ------- permitted to be delivered under this Agreement may be personally delivered or sent by mail, with postage prepaid, by commercial delivery service or by electronic facsimile. Notices shall be deemed effective upon receipt by the party to whom the same are to be delivered, and shall be addressed as follows: If to CSI, to Communications Systems International, Inc., 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80920, Attention: ___________________________, Facsimile Number 719-471-2893. If to Distributor, to ___________________________________________________________________________ ___________________________________________________________________________ __________________________________________________________________________. Either party may, by notice properly delivered, change the person or address to which future notices and deliveries to that party shall be made. Initial _____ 4 8.3 Headings. The article and section headings in this Agreement are for -------- convenience only, and shall not be used in its interpretation or considered part of this Agreement. 8.4 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5 Effect of Agreement. All negotiations relative to the matters ------------------- contemplated by this Agreement are merged herein and there are no other understandings or agreements relating to the matters and things herein set forth other than those incorporated in this Agreement. This instrument sets forth the entire agreement between the parties and rescinds and replaces any and all prior understandings and agreements, whether written or verbal, between Distributor and CSI or any of its officers, directors or employees, and any such understandings and agreements are hereby rendered null and void and shall have no effect on or consequence to either party. No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing signed by the party to be charged with such amendment, revocation or waiver. Subject to the provisions of Article V, this Agreement shall be binding upon the shall inure to the benefit of the parties hereto and their respective successors and assigns. 8.6 No Implied Waiver. The failure of either party at any time to require ----------------- the performance by the other party of any obligation under this Agreement shall not affect in any way the right to require such performance at any later time, nor shall the waiver by either party of one breach of any provision of this Agreement be taken or held to be a waiver of any other breach of that provision or any other provision of this Agreement. 8.7 Severability. If any clause or provision of this Agreement is ------------ illegal, invalid or unenforceable under applicable present or future laws, then it is the intention of the parties that the remainder of this Agreement shall not be affected, and that in lieu of any such clause or provision there be added as a part hereof a substitute clause or provision as similar in terms and effect to such illegal, invalid or unenforceable clause or provision as may be possible. 8.8 Time. Time is of the essence of this Agreement. ---- 8.9 Arbitration. Any controversy or claim arising out of or relating to ----------- this Agreement, or the breach thereof, shall be settled by arbitration in Colorado Springs, Colorado, before a single arbitrator in accordance with applicable Colorado law concerning arbitration, and pursuant to the Commercial Rules of the American Arbitration Association. Judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction. Initial _____ 5 EX-10.9 16 FORM OF BRANCH OFFICE AGENCY AGREEMENT EXHIBIT 10.9 C.S. INTERNATIONAL BRANCH OFFICE AGENCY AGREEMENT ------------------------------ THIS AGREEMENT is made and entered into by and between COMMUNICATIONS SYSTEMS INTERNATIONAL INCORPORATED, a Colorado corporation ("C.S. International"), whose address is 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80903, and __________________________________, a ___________________________ ("Managing Agent"), whose address is ___________________________ ____________________________________. C.S. International is in the business of providing international long distance telecommunications services. Such services include, but are not limited to, callback services consisting of C.S. International's normal automated callback services that route international long distance calls through Colorado Springs, Colorado at United States long distance rates, "Tina" boxes for routing international long distance calls through Colorado Springs, Colorado, and an X.25 network for routing telecommunications (collectively referred to as "Callback Services"), and long distance telephone debit cards ("Phone Debit Cards"). C.S. International may develop new and additional products and services during the term of this Agreement. C.S. International wishes to establish a branch office to market C.S. International's products and services and to provide customer service. Managing Agent wishes to represent C.S. International, market C.S. International's products and services and manage a branch office for C.S. International. In doing so, Managing Agent is willing to utilize C.S. International's standards, methods and operating procedures in accordance with the terms and conditions contained in this Agreement. C.S. International is willing to engage Managing Agent as its agent to manage a branch office pursuant to the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants set forth below, the parties agree as follows: ARTICLE I BRANCH OFFICE ------------- 1.1 Engagement of Managing Agent. C.S. International hereby agrees to engage ---------------------------- Managing Agent to open and operate a branch office for C.S. International in ________________________, as C.S. International's agent for selling all of C.S. International's products and services, whether currently available or developed and provided in the future. Managing Agent hereby agrees to open a branch office and accepts engagement as C.S. International's agent for selling Callback Services, Phone Debit Cards and all of C.S. International's other products and services presently or subsequently available, in accordance with the terms and conditions contained in this Agreement. 1.2 Establishment of Office. No later than _______________, 199__, Managing ----------------------- Agent shall obtain office space and establish a branch office in _______________ at a location selected by Managing Agent, subject to the reasonable approval of C.S. International. The office shall be identified as C.S. International of ______________________. Managing Agent shall market C.S. International's products and services through the branch office established by Managing Agent under C.S. International's trademarks and service marks. Managing Agent, all agents and employees engaged or hired by Managing Agent as provided below in section 1.3 and all other personnel selling C.S. International's products and services and servicing C.S. International's customers through the branch office established by Managing Agent pursuant to this Agreement are collectively referred to in this Agreement as the "Branch Office." 1.3 Branch Office Agents and Employees. Managing Agent has the right to hire ---------------------------------- and train agents and employees working for Managing Agent under the following terms and conditions: (a) Managing Agent shall disclose to each agent and employee the relationship between Managing Agent and the Branch Office and C.S. International; (b) Managing Agent shall require all agents and employees of Managing Agent to abide by all of the terms and conditions of this Agreement; (c) C.S. International will not actively solicit any of Managing Agent's agents or employees to become agents of C.S. International; (d) all customers obtained by Managing Agent's agents or employees will be customers of Managing Agent and the Branch Office and will not be allowed to become customers of the agent or employee without Managing Agent's consent; (e) Managing Agent's agents and employees shall not be considered agents or employees of C.S. International for any purpose whatsoever; (f) C.S. International will provide Managing Agent with a monthly accounting of sales made by the Branch Office and Managing Agent's agents; and (g) Managing Agent shall be solely responsible for paying any and all compensation owed to its agents and employees, together with any and all taxes associated with such compensation. C.S. International shall have no obligation whatsoever to Managing Agent's agents and employees or other personnel of the Branch Office, except as expressly st forth in this Agreement. 1.4 Term and Renewal. ---------------- (a) Term. This Agreement shall become effective ---- -2- only after it has been duly signed by a principal or authorized officer of each party to this Agreement. This Agreement shall remain in effect for a period of three years thereafter unless sooner terminated in accordance with the provisions of this Agreement. (b) Renewal. If the Branch Office and Managing Agent have complied with ------- all of the terms and conditions of this Agreement and have complied with the marketing standards and criteria established by C.S. International for the Branch Office throughout the term of this Agreement, then, at the expiration of the original three-year term, this Agreement may be renewed for one additional term of three years, but only if: (1) Managing Agent agrees to upgrade or change the Branch Office so that it complies with C.S. International's standards for branch offices then in effect and agrees to make other changes in products, services, marketing and business practices to be consistent with the then current requirements and practices of C.S. International; and (2) Managing Agent provides C.S. International with written notice of Managing Agent's intention to renew at least six months prior to expiration of the original three-year term of this Agreement. Within 30 days after receipt of such notice of Managing Agent's intention to renew, C.S. International shall provide Managing Agent with a statement as to whether it is entitled to renew. If Managing Agent is entitled to renew, C.S. International shall provide to Managing Agent with such statement of renewal a new Branch Office Agency Agreement, which may differ from this Agreement (the "Renewal Agreement"). Managing Agent shall sign and return the Renewal Agreement to C.S. International within 30 days after receiving it from C.S. International. There shall be no renewal fee. If Managing Agent desires any changes in the Renewal Agreement proposed by C.S. International, such changes will only be effective upon agreement by both Managing Agent and C.S. International, and such agreement must be reached at least 30 days prior to the end of the original three-year term. If Managing Agent fails to comply with the requirements contained in this section 1.4(b), or if a Renewal Agreement has not been signed by both C.S. International and Managing Agent at least 30 days prior to the end of the original three-year term, then C.S. International may revoke any approval of renewal given by C.S. International, in which case this Agreement and the agency relationship between Managing Agent and C.S. International shall terminate and the Branch Office and Managing Agent shall cease operations on behalf of -3- C.S. International as of the end of the original three-year term. 1.5 Fees and Costs. As consideration for the rights granted to Managing -------------- Agent and the Branch Office by this Agreement, Managing Agent shall pay to C.S. International, upon execution of this Agreement, a fee in the amount of $10,000.00 U.S.D. Managing Agent and the Branch Office shall be responsible for paying all expenses relating to the establishment of the Branch Office and all costs and expenses incurred in operating the Branch Office and conducting the business contemplated by this Agreement. 1.6 Authority of Branch Office. The Branch Office shall have the authority -------------------------- to solicit offers from potential customers to subscribe to or purchase C.S. International's products and services. Neither Managing Agent nor any other personnel of the Branch Office can enter into a contract on C.S. International's account or bind C.S. International in any manner not expressly authorized under this Agreement. Offers from customers solicited by the Branch Office shall be subject to acceptance by C.S. International and no contract for the provision of products or services shall exist until C.S. International and the customer have entered into an agreement for services pursuant to section 2.1 of this Agreement. C.S. International has the right, in its sole discretion, to reject any customer who is not creditworthy or who is not legally eligible to receive certain C.S. International products or services. 1.7 Territory. Managing Agent, operating through the Branch Office and its --------- personnel, may exercise the rights granted by this Agreement and market C.S. International's products and services throughout _____________________ and in all other regions of the world. Before soliciting customers in any region outside of _______________________, the Branch Office shall contact C.S. International to determine whether or not another C.S. International branch office (an "Existing Office") exists in that region, and, if there is such an Existing Office, Managing Agent shall notify that Existing Office of the intention of the Branch Office to conduct business in that region. The Branch Office shall not solicit existing customers of the Existing Office in that region. 1.8 Status of Parties. C.S. International and Managing Agent acknowledge and ----------------- agree that their relationship is that of principal and agent for the limited purpose of selling C.S. International's products and services in accordance with this Agreement. Managing Agent is an independent contractor. Neither Managing Agent nor any other person associated with the Branch Office is an employee or partner of C.S. International. -4- Managing Agent and the Branch Office have no power or authority to bind or obligate C.S. International to third parties. C.S. International shall have no liability whatsoever for the acts and omissions of the Branch Office or Managing Agent, and Managing Agent and the Branch Office shall have no liability whatsoever for the acts and omissions of C.S. International. ARTICLE II PAYMENT AND COLLECTION TERMS ---------------------------- 2.1 Customer Orders. If a customer obtained by the Branch Office wishes to --------------- purchase any of C.S. International's products and services, Managing Agent (or an authorized agent of the Branch Office) and the customer shall both sign C.S. International's standard form service agreement (a "Service Agreement"), which C.S. International will provide to the Branch Office. The Branch Office shall submit the signed Service Agreement to C.S. International. Every order must be approved by C.S. International before the account becomes effective, and the account will become effective only when C.S. International signs the Service Agreement. 2.2 Billing and Collection. The Branch Office will be responsible for all ---------------------- billing of and collection from customers relating to this Agreement. The Branch Office will directly bill all customers obtained by Branch Office personnel for all products and services used by those customers, except as provided in the following sentence. If a customer pays his bill by means of a credit card account established with C.S. International, those credit card revenues will be paid directly to C.S. International, and the Branch Office will not be responsible for collecting those revenues. The Branch Office will remit all revenues collected from customers to C.S. International twice a month, on the _____ and _____ days of each month. In the event that any customer of the Branch Office has not paid any charges to the Branch Office or C.S. International within 120 days after the customer has been billed for such charges, the amount unpaid shall be considered a bad debt. The Branch Office shall be liable to C.S. International for 100 percent of all bad debts, and shall pay such 100 percent to C.S. International with the next remittance to C.S. International after the charges become a bad debt. 2.3 Customer Service. The Branch Office shall be responsible for soliciting ---------------- customers, and for all customer service and other contact with customers. The Branch Office's duties prior to obtaining orders include educating and informing potential customers of the products and services of C.S. International. After acceptance of a Service Agreement by C.S. International, the Branch Office shall be responsible for -5- providing service to customers, handling customer complaints and otherwise responding to customer demands. ARTICLE III COMMISSIONS ----------- 3.1 Branch Office Commissions. As compensation for the services of Managing ------------------------- Agent and the personnel of the Branch Office pursuant to this Agreement, C.S. International will pay to the Branch Office commissions based on the amount of revenue actually collected and received by C.S. International, including revenues received through the Branch Office, from customers who have been solicited by the Branch Office and have entered into a Service Agreement with the Branch Office. (Such revenues from customers obtained by the Branch Office that are received by C.S. International are referred to in this Agreement as "Branch Office Collected Revenues.") C.S. International shall pay the Branch Office commissions in accordance with the following schedule:
AMOUNT OF MONTHLY PERCENTAGE OF COLLECTED BILLINGS BY BRANCH OFFICE REVENUES PAYABLE AS COMMISSIONS ------------------------- ------------------------------- $0-49,999.99 U.S.D. 13 percent $50,000.00-99,999.99 U.S.D. 14 percent $100,000.00 or more U.S.D. 15 percent
C.S. International shall pay commissions owed to the Branch Office no later than the 15th day of the second month after C.S. International receives the Branch Office's Collected Revenues on which the commissions are based. For example, C.S. International shall pay the commissions owed for the Branch Office's Collected Revenue received by C.S. International in the month of May no later than July 15. C.S. International shall provide Managing Agent with a monthly accounting of all commissions earned by the Branch Office. Managing Agent shall be responsible for dividing up the commissions paid by C.S. International among the Branch Office personnel entitled to share in such commissions and shall pay all compensation owed to the Branch Office personnel. 3.2 Residual Commissions. After the end of the term of this Agreement or any -------------------- Renewal Agreement, C.S. International shall continue to pay to Managing Agent commissions equal to 10 percent of the Branch Office's Collected Revenues received by C.S. International for a period of six months after this Agreement terminates. Once C.S. International has paid commissions equal to 10 percent of the Branch Office's Collected Revenues received by C.S. International during the six-month period following termination of this Agreement, Managing Agent -6- shall have no right to receive, and C.S. International shall have no obligation to pay, any additional commissions. C.S. International's obligation to pay commissions in accordance with this section 3.2 shall survive termination of this Agreement, unless C.S. International terminates this Agreement because of a default by Managing Agent or the Branch Office, as provided below in section 7.2. 3.3 Only Compensation. The commissions payable pursuant to sections 3.1 and ----------------- 3.2 are the only compensation required to be paid to Managing Agent an the Branch Office by C.S. International. ARTICLE IV MARKETING STANDARDS ------------------- 4.1 Sales Literature; Assistance. C.S. International will provide the Branch ---------------------------- Office with an understanding of C.S. International's products and services and assistance in selling these products and services. Assistance will not include expenses for brochures, stationery, sales scripts, rate sheets and marketing letters, all of which shall be produced at the expense of the Branch Office. The Branch Office will also pay all other marketing and advertising expenses in connection with all of C.S. International's products and services. 4.2 Demo Lines. To assist the Branch Office in marketing Callback Services, ---------- C.S. International will make a long distance calling demonstration line (a "Demo Line") available to the Branch Office on the following basis: (a) The Branch Office must supply C.S. International with an active credit card account to assure payment of all charges on the Demo Line; (b) The Branch Office will receive a $50.00 per month credit against charges on the Demo Line for each $50,000.00 per month billed to customers obtained by the Branch Office, not to exceed a total credit of $500.00 per month; and (c) each $50.00 credit earned may be applied to only one Demo Line. 4.3 Trade Names and Trademarks. During the term of this Agreement, the -------------------------- Branch Office shall use the tradenames, trademarks and service marks of C.S. International in connection with the marketing and sale of products and services pursuant to this Agreement, subject to the approval of C.S. International as provided below in section 4.4. All trade names, trademarks and -7- service marks owned or employed by C.S. International or any subsidiary or affiliate of C.S. International used or employed in C.S. International's business operations shall remain the sole and exclusive property of C.S. International, or such subsidiary or affiliate. No title or rights whatsoever to any of C.S. International's trade names, trademarks, service marks and other intellectual property shall pass to Managing Agent or the Branch Office by this Agreement or any actions undertaken pursuant to this Agreement. The Branch Office and Managing Agent shall immediately discontinue any use of C.S. International's marks and names upon termination of this Agreement. 4.4 Advertising. From time to time, C.S. International shall establish ----------- standards for all advertising, promotional and customer training materials used or distributed by the Branch Office that relate to C.S. International's products and services, and the Branch Office, at its expense, shall comply with such standards. The Branch Office shall provide to C.S. International, for its prior review and written approval, all promotional, advertising or other materials or activity using or displaying C.S. International's tradename, trademarks, service marks, products or services or referring to Managing Agent or the Branch Office as an authorized agent, branch office or distributor of C.S. International. 4.5 Conduct of Branch Office. The Branch Office will present C.S. ------------------------ International and C.S. International's products and services to potential customers in a responsible way, never making claims of greater savings or service than actually exist. The Branch Office will adhere to the appropriate C.S. International rate and price structure applicable at the time of soliciting customers unless a different structure is agreed to in writing by C.S. International. The Branch Office shall quote prices for C.S. International's products and services only at the levels authorized by C.S. International. These rates may be revised from time to time by C.S. International in accordance with C.S. International's generally applicable criteria and as required by the prevailing rate schedules. C.S. International will inform the Branch Office of any changes in its rates in a timely manner such that the Branch Office may continue to accurately represent the services to the public. C.S. International shall have the absolute right to establish the long distance rates, payment terms and advertising and promotional policies for its services. The Branch Office shall comply with all of C.S. International's customer service procedures regarding C.S. International's products and services. 4.6 Performance Requirements. The Branch Office must achieve the following ------------------------ levels of billings for Callback Services used by the Branch Office's customers during the respective time periods set forth below: -8-
TIME AFTER EFFECTIVE CALLBACK SERVICES DATE OF THIS AGREEMENT BILLING REQUIREMENTS ---------------------- -------------------- 6 Months $ 20,000.00 U.S.D./Month 12 Months 50,000.00 U.S.D./Month 18 Months 100,000.00 U.S.D./Month 24 Months 150,000.00 U.S.D./Month 30 Months 200,000.00 U.S.D./Month 36 Months 250,000.00 U.S.D./Month
Failure to meet any of the foregoing billing requirements in a timely manner will be a material breach of this Agreement on the part of Managing Agent and shall give C.S. International the right to terminate this Agreement upon 30 days written notice. The foregoing billing requirements apply only to Callback Services and do not include or affect any other products or services. ARTICLE V ASSIGNMENT ---------- 5.1 Assignment by C.S. International. This Agreement may be assigned -------------------------------- by C.S. International to an affiliate or successor of C.S. International or any other firm or entity capable of performing C.S. International's obligations under this Agreement without the approval of Managing Agent. Such assignment will not release C.S. International from its obligations under this Agreement. 5.2 Assignment by Managing Agent. This Agreement may not be assigned ---------------------------- by Managing Agent to any other person or entity without the prior written approval of C.S. International, which approval may be withheld or granted in C.S. International's sole and absolute discretion. -9- ARTICLE VI NON-COMPETITION --------------- 6.1 Non-Competition. Managing Agent understands, acknowledges and --------------- agrees that, during the term of this Agreement, Managing Agent shall not undertake any conduct or activity or engage in any business, either directly or indirectly, that competes in any way with the business of C.S. International, and Managing Agent shall not contract with, or provide money, goods or services to, any other person or entity who is engaged in the business of providing international long distance telecommunications or otherwise competes with C.S. International. Managing Agent, for its own account, may engage in other businesses and activities that are not in competition with C.S. International, provided that such activities do not interfere with Managing Agent's performance of its obligations under this Agreement. 6.2 Proprietary Information. During the term of this Agreement and ----------------------- for a period of three years thereafter, Managing Agent shall retain in confidence, and shall require its directors, officers, employees, consultants, representatives, agents and all personnel of the Branch Office to retain in confidence, any and all Proprietary Information (as defined below). The parties agree that Proprietary Information constitutes trade secrets of C.S. International and that the disclosure of Proprietary Information in contravention of this Agreement would constitute an unfair trade practice. "Proprietary Information" means information relating to the business and operations of C.S. International or its subsidiaries, affiliates, clients, customers, consultants and agents, including, but not limited to, all customer lists and all technical, marketing and financial information relating thereto, any information relating to the pricing, methods, processes, financial data, lists, apparatus, statistics, programs, research, development or related information of C.S. International, its subsidiaries or affiliates, or C.S. International's clients and customers, concerning past, present or future business activities or operations of said entities or the results of the provision of services performed by Managing Agent or the Branch Office under this Agreement. Managing Agent shall take reasonable steps to prevent unauthorized disclosure or misuse of Proprietary Information by any of its agents or employees or by any other person having access to such information. 6.3 No Disclosure of Terms of Agreement. Neither C.S. International ----------------------------------- nor Managing Agent shall disclose the terms and conditions of this Agreement to any person or entity without the prior written consent of the other party. -10- ARTICLE VII DEFAULT, REMEDIES AND TERMINATION --------------------------------- 7.1 Events of Default. Each of the following shall constitute an ----------------- "Event of Default": (a) the failure of Managing Agent or the Branch Office to comply with or to satisfy the terms of section 2.2, section 4.4, section 4.5, section 4.6, section 5.2, section 6.1 or section 6.2 of this Agreement; and (b) the violation or failure by either Managing Agent or C.S. International to comply with any term or provision of this Agreement and the failure of such defaulting party to cure such violation or failure within 30 days after receiving written notice of the violation or failure. 7.2 Remedies. Upon the occurrence of an Event of Default, the -------- nondefaulting party shall have all rights and remedies expressly set forth in this Agreement and all other rights and remedies available at law or in equity, including but not limited to specific performance, damages, injunctive relief and termination of this Agreement. If the nondefaulting party elects to terminate this Agreement because of an Event of Default caused by the other party, the nondefaulting party may terminate this Agreement by delivering written notice of termination to the defaulting party at least 30 days prior to the effective date of termination. C.S. International's obligation to pay commissions under section 3.1 that have been earned prior to termination shall survive termination, but termination pursuant to this section 7.2 shall release the parties from all other obligations to each other, including C.S. International's obligation to pay residual commissions under section 3.2. 7.3 Regulatory Approval. This Agreement shall terminate automatically ------------------- and without liability or further obligation on the part of either party to the other party if, by order, act or omission of any court or government agency with regulatory authority over C.S. International or long distance telephone services, or as the result of the revocation or expiration of any required licenses or other authority, C.S. International is denied or loses the right, power or authority to provide Callback Services as contemplated by this Agreement. If such authority is lost, suspended or not renewed with regard to only part of Callback Services or only within a certain geographic area or areas where Callback Services have been provided, then this Agreement shall terminate automatically and without liability or further obligation on the part of either party to the other party with regard only to the Callback Service or area affected. The provisions of this section 7.3 shall only apply to Callback Services; other services shall not be affected by the terms of this section 7.3. -11- 7.4 Fees and Expenses. In any action to enforce this Agreement, or ----------------- to collect damages on account of any Event of Default, the prevailing party shall, in addition to any damages and other relief awarded, be entitled to collect all of its costs in such action, including court costs, costs of investigation and settlement, reasonable attorneys' fees and all additional costs incurred in collecting any judgment rendered in such action. ARTICLE VIII MISCELLANEOUS ------------- 8.1 Applicable Law. This Agreement shall be governed by the laws of -------------- the State of Colorado, United States of America. With regard to international service, this Agreement shall be governed by applicable federal statutes and regulations of the United States of America. The parties stipulate to jurisdiction and venue in the State of Colorado, United States of America. 8.2 Notices. Any notice or other documents or materials required or ------- permitted to be delivered under this Agreement may be personally delivered or sent by mail, with postage prepaid, by commercial delivery service or by electronic facsimile. Notices shall be deemed effective upon receipt by the party to whom the same are to be delivered, and shall be addressed as follows: If to C.S. International, to Communications Systems International Incorporated, 8 South Nevada Avenue, Suite 101, Colorado Springs, Colorado 80920, Attention: _________________________, Facsimile Number _______________. If to Managing Agent, to _______________________________________________ _____________________________________________________________________________ _________________________, Facsimile Number ________________________________. Either party may, by notice properly delivered, change the person or address to which future notices and deliveries to that party shall be made. 8.3 Headings. The article and section headings in this Agreement are -------- for convenience only, and shall not be used in its interpretation or considered part of this Agreement. 8.4 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8.5 Effect of Agreement. All negotiations relative to ------------------- -12- the matters contemplated by this Agreement are merged herein and there are no other understandings or agreements relating to the matters and things herein set forth other than those incorporated in this Agreement. This instrument sets forth the entire agreement between the parties. No provision of this Agreement shall be altered, amended, revoked or waived except by an instrument in writing signed by the party to be charged with such amendment, revocation or waiver. Subject to the provisions of Article V, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. 8.6 No Implied Waiver. The failure of either party at any time to require ----------------- the performance by the other party of any obligation under this Agreement shall not affect in any way the right to require such performance at any later time, nor shall the waiver by either party of one breach of any provision of this Agreement be taken or held to be a waiver of any other breach of that provision or any other provision of this Agreement. 8.7 Severability. If any clause or provision of this Agreement is illegal, ------------ invalid or unenforceable under applicable present or future laws, then it is the intention of the parties that the remainder of this Agreement shall not be affected, and that in lieu of any such clause or provision there be added as a part hereof a substitute clause or provision as similar in terms and effect to such illegal, invalid or unenforceable clause or provision as may be possible. 8.8 Time. Time is of the essence of this Agreement. ---- IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized officers as of the day and year so indicated. -13- C.S. INTERNATIONAL: ------------------ COMMUNICATIONS SYSTEMS INTERNATIONAL INCORPORATED, a Colorado corporation By_________________________________ Title____________________________ Date_____________________________ By_________________________________ Title____________________________ Date_____________________________ MANAGING AGENT: -------------- __________________________________, a _______________________________ By_________________________________ Title____________________________ Date_____________________________ Tax ID #___________________________ -14- EX-10.11 17 EMPLOYMENT AGREEMENT WITH ROBERT A. SPADE EXHIBIT 10.11 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of _______________, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("Company or CSI"), and ROBERT A. SPADE ("Employee"). WHEREAS, the Company has retained Employee to serve as President and Chief Executive Officer of the Company upon the terms and conditions set forth herein; and WHEREAS, Employee believes he can contribute substantially to the future success of the Company and desires to continue employment upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Company and Employee, intending to be legally bound hereby, agree as follows: I. SCOPE OF EMPLOYMENT ------------------- 1.1 The Company agrees to employ Employee in the capacity of President and Chief Executive Officer, and Employee agrees to accept such employment, upon the terms and conditions set forth herein. Employee shall faithfully and to the best of his abilities perform such responsibilities and exercise such authority as may from time to time be assigned or delegated to him by the Board of Directors of the Company. II. REPRESENTATIONS AND WARRANTIES ------------------------------ 2.1 Employee represents and warrants to the Company that his execution, delivery and performance of this Agreement does not violate or constitute a breach of any other agreement, whether oral or written, binding upon Employee. 2.2 The Company warrants that it has the full legal right and power to enter into this Agreement and that all requisite corporate approvals have been obtained. III. TERM OF EMPLOYMENT ------------------ 3.1 The term of Employee's employment under this Agreement shall commence May 1, 1997 and shall continue for a term of three years unless earlier terminated as provided in this Agreement. IV. COMPENSATION ------------ 4.1 The Company shall compensate Employee for his service as set forth below: (a) Benefits. During the term of employment under this Agreement, -------- Employee shall be entitled to participate in such benefit programs as may be available from time to time to other executives of the Company, such as medical coverage. (b) Salary. Employee will be paid at the rate of $150,000.00 per ------ year, which amount shall be subject to annual increases of four percent effective on the first day of May each year commencing in the year 1998. (c) Incentive Bonus. Employee shall have the opportunity to earn --------------- annual bonuses equal to a maximum of sixty-five percent of the per annum base salary set forth above pursuant to the Company's bonus plan as adopted from time to time by the Company's Board of Directors. The bonus, if any is earned, shall be calculated based upon the performance of the Company and Employee for each fiscal year of the Company, and shall be paid within thirty days after the end of each fiscal year. (d) Stock Options. Employee shall be eligible to receive stock ------------- options under the incentive stock option plan in effect from time to time, as adopted by the Board of Directors. (e) Option to Convert Bonus to Stock Options. Subject to the ---------------------------------------- availability of stock options, as determined by the Board, at the election of Employee, Employee shall have the right to convert his right to receive a cash bonus pursuant to subparagraph (c) above to the acquisition of additional stock options. Such options shall be fixed at the price of such stock on the first day of the fiscal year for which such right to a bonus is calculated. Employee shall have five (5) years within which to exercise such option. (f) Option to Defer and Accrue Salary and/or Bonus. At the sole ---------------------------------------------- option of Employee, Employee may elect to defer receipt of all or any portion of his salary or bonus, and to receive such deferred amounts, together with interest at the rate of ten percent per annum, at any later date upon his demand. V. CONFIDENTIAL INFORMATION ------------------------ 5.1 At all times hereafter, both during and after the term of Employee's employment with the Company, Employee shall not use any Confidential Information (as hereinafter defined) for his own benefit or the benefit of others, and shall not publish or disclose any Confidential Information to any person, firm, or corporation, except as authorized and approved in writing by the Board of Directors. Employee agrees that upon leaving the Company's employ, he shall not take with him, without the prior written consent of the Board of Directors, any or all documents, papers, drawings, magnetic media or other tangible property, or any copies thereof, belonging or relating to the Company. Any and 2 all documents, papers, drawings, magnetic media and other tangible property made or compiled by, or made available to Employee prior to or during the course of his employment and any copies thereof, which relate to the Company, whether or not they contain Confidential Information, are and shall be the property of the Company and shall be delivered to the Company by Employee immediately upon the termination of his employment. For purposes of this paragraph, Confidential Information shall mean trade secrets and confidential and proprietary technical, business and financial information, whether or not in written form, including, but not limited to, information with respect to know-how, process, techniques, products, research and development information, plans or projections of the Company, customer lists, marketing and financial information, personnel, sales and statistical data, computer programs and information with respect to various techniques, procedures, programs, processes and methods and any other information learned or created by Employee during the course of his employment with the Company. Toward the objective of maintaining such confidentiality, Employee shall keep the information secret, neither directly nor indirectly using, divulging or furnishing it nor making it available either to or for the benefit of any person or entity (other than to any person designated in writing by the Board of Directors or the Company). VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY ------------------------------------------------- 6.1 Employee agrees that during the term of his employment and for a period of three years after termination of his employment, Employee: (a) shall not undertake any employment, ownership, or financial involvement with, or render any assistance to, any person, firm, association, partnership, corporation or enterprise which is engaged in operating, developing, or marketing the same or functionally similar products as the Company is operating, developing, or marketing or plans to operate, develop, or market or has services or products competitive with or similar to the services or products of the Company and its affiliates, if such products or services are to be used within an area within a radius of 500 miles from where the Company is or contemplates doing business at the time of termination; and (b) shall not persuade or attempt to persuade any of the Company's employees to terminate their employment with the Company. 6.2 In the event that a court of law finds this Article to be overly broad, and therefore unenforceable, the court shall modify this Article to reflect the maximum restraint allowable, and shall then enforce this Article as so modified. 3 VII. REMEDIES FOR BREACH ------------------- 7.1 Employee agrees that his violation of any terms contained in Articles IV, V, or VI of this Agreement will cause irreparable damage to the Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that the Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violations of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which the Company might have. Employee further agrees that his violation of any of the terms of Articles IV, V, or VI during the course of his employment with the Company shall be a cause for his termination under this Agreement. Such covenants contained in Articles IV,V,or VI shall be severable, and if the same shall be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 7.2 In the event of a material default by either party, or such party's agent or representative, of any provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice, except that the defaulting party shall have thirty (30) days from receipt of notice of termination in which to cure any such defaults, and upon any such cure, this Agreement will continue in full force and effect; provided, that no such notice or cure period shall be required with respect to a violation of the provisions of Articles IV,V, or VI. This restriction shall survive the termination of this Agreement. This Agreement shall also terminate upon the death of Employee. In addition, any material default by any party to the Employment Agreement which is not cured within any applicable cure periods provided in such agreement shall constitute a material default under this Agreement. 7.3 In the event of any violation or threatened violation of this Agreement CSI shall be entitled to injunctive and other equitable relief on the grounds that such conduct, if not restrained and/or other equitable relief not granted, would result in irreparable and serious harm for which damages would be an inadequate remedy. 7.4 CSI shall have the right to enforce the provisions of Articles IV, V, and VI even after a wrongful termination of Employee. VIII. TERMINATION ----------- 8.1 Employee's employment under this Agreement and all rights to compensation pursuant hereto, shall terminate upon the 4 occurrence of any of the following: (a) Death of Employee; (b) Employee's mental or physical inability to perform substantially all his duties under this Agreement for a period of three consecutive months, or his absence from his duties for a period of three consecutive months because of such mental or physical inability, or certification by a competent physician that such inability will persist for three months or more; (c) An occurrence that constitutes "cause" for termination, or Employee engages in any act, omission or conduct that constitutes "cause" for termination. For purposes of this Agreement, Company shall have "cause" to terminate Employee's employment and compensation under any of the following circumstances: (1) a breach by Employee of any provision of this Agreement including, but not limited to, the provisions under Articles IV, V and/or VI; (2) the failure by Employee to perform or fulfill his duties, after the Company identifies reasonable deficiencies in his performance and gives his a reasonable opportunity to correct those deficiencies (for purposes of this subparagraph, "reasonable opportunity" means three months notice with periodic intervening reports to Employee); (3) the refusal or willful failure to follow the lawful directions of the Board of Directors; (4) an act of dishonesty in the performance of his duties; (5) any conduct that is disloyal and prejudicial to the business of the Company; (6) the commission by Employee of any felony or other crime that would adversely affect the reputation of Employee or the Company; (7) any misrepresentation or concealment of a material fact by Employee for the purpose of securing employment hereby; or (8) any act of willful misconduct by Employee which is injurious to the material business interests of the Company. 5 IX. INDEMNIFICATION --------------- 9.1 The Company agrees to indemnify and hold Employees harmless from claims by third parties which arise out of breach by the Company of its warranties or obligations set forth in this Agreement. 9.2 Employee agrees to indemnify and hold the Company harmless from claims by third parties arising out of any breach by Employee of his warranties or obligations set forth in this Agreement. 9.3 The indemnifying party shall pay all costs and attorneys' fees incurred in connection with any claim for which such party is required to indemnify the other party under this Article IX. X. MISCELLANEOUS ------------- 10.1 Notices. Any and all notices and communications provided for herein ------- shall be given in writing and hand delivered or mailed by registered or certified mail, return receipt requested, and shall be addressed as follows: Communication Systems International, Inc 8 S. Nevada Colorado Springs, Colorado 80903 Attention: Chief Financial Officer with a copy to: Richard F. Nipert, Esq. Bright, Gibson & Nipert, P.C. 1140 Grant Street, Suite 100 Denver, Colorado 80203 Robert A. Spade Communications Systems International, Inc. 8 S. Nevada Colorado Springs, Colorado 80903 10.2 Legal Counsel. Employee acknowledges that he has been advised to ------------- consult legal counsel with respect to this Agreement and that this Agreement shall be construed as if both parties equally participated in the creation of this Agreement. 10.3 Titles not to Affect Interpretation. The headings of paragraphs in ----------------------------------- this Agreement are inserted for the convenience of reference only and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 6 10.4 Invalid Provision. The invalidity or unenforceability of any ----------------- provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable provisions are omitted. 10.5 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Colorado, notwithstanding any conflict- of-laws doctrines of such state. 10.6 Entire Agreement; Modification. This Agreement contains the entire ------------------------------ agreement between the parties relating to the subject matter hereof and supersedes all prior agreements, whether written or oral, with respect to the subject matter hereof. This Agreement may be modified by a writing signed by the Company and Employee. 10.7 Attorneys' Fees and Costs. In the event of any legal action ------------------------- concerning the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs from the other party. 10.8 Survival. All warranty, indemnification, and obligations set forth in -------- Articles IV, V, and VI of this Agreement shall survive the termination of this Agreement. 10.9 Board Action. Wherever the term "Board" or "Board of Directors" is ------------ used herein, it refers to the action of a majority of the Board members as provided in the Bylaws of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. Attest: Communications Systems International, Inc., a Colorado corporation _______________________ By:_____________________________________ "Employee" ________________________________________ Robert A. Spade Accepted and approved this ___ day of ______________, 1997 by the Board of Directors of Communications Systems International: _______________________________ Secretary 7 EX-10.12 18 EMPLOYMENT AGREEMENT WITH PATRICK R. SCANLON EXHIBIT 10.12 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of October, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("Company or CSI"), and PATRICK R. SCANLON ("Employee"). WHEREAS, the Company has retained Employee to serve as President of the Company upon the terms and conditions set forth herein; and WHEREAS, Employee believes he can contribute substantially to the future success of the Company and desires to continue employment upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Company and Employee, intending to be legally bound hereby, agree as follows: I. SCOPE OF EMPLOYMENT ------------------- 1.1 The Company agrees to employ Employee in the capacity of President, and Employee agrees to accept such employment, upon the terms and conditions set forth herein. Employee shall faithfully and to the best of his abilities perform such responsibilities and exercise such authority as may from time to time be assigned or delegated to him by the Board of Directors of the Company. II. REPRESENTATIONS AND WARRANTIES ------------------------------ 2.1 Employee represents and warrants to the Company that his execution, delivery and performance of this Agreement does not violate or constitute a breach of any other agreement, whether oral or written, binding upon Employee. 2.2 The Company warrants that it has the full legal right and power to enter into this Agreement and that all requisite corporate approvals have been obtained. III. TERM OF EMPLOYMENT ------------------ 3.1 The term of Employee's employment under this Agreement shall commence August 25, 1997 and shall continue for a term of three years unless earlier terminated as provided in this Agreement. IV. COMPENSATION ------------ 4.1 The Company shall compensate Employee for his services as set forth below: (a) Benefits. During the term of employment under this Agreement, -------- Employee shall be entitled to participate in such benefit programs as may be available from time to time to other executives of the Company, such as medical coverage. (b) Salary. Employee will be paid at the initial rate of $140,000.00 ------ per year. The Company agrees that upon the approval of the Board of Directors of the Company, such salary may be increased to reflect the market rate for a person in a comparable position, or, in the alternative, the Board may elect to offer cash bonuses in lieu of an increase in salary in order to reasonably compensate Employee for his services. (c) Incentive Bonus. Employee shall have the opportunity to earn --------------- annual bonuses equal to a maximum of ________ percent of the per annum base salary set forth above pursuant to the Company's bonus plan as adopted from time to time by the Company's Board of Directors. The bonus, if any is earned, shall be calculated based upon the performance of the Company and Employee for each fiscal year of the Company, and shall be paid within thirty days after the end of each fiscal year. (d) Stock Options. Employee shall be eligible to receive stock ------------- options under the incentive stock option plan in effect from time to time, as adopted by the Board of Directors of the Company. As an initial reward for outstanding performance, effective ______________, 1997, Employee shall be granted 100,000 stock options upon the terms set forth in the Resolution of the Board of Directors set forth on EXHIBIT A attached hereto and incorporated herein by this reference. (e) Option to Convert Bonus to Stock Options. Subject to the ---------------------------------------- availability of stock options, as determined by the Board of Directors, at the election of Employee, Employee shall have the right to convert his right to receive a cash bonus pursuant to subparagraph (c) above to the acquisition of additional stock options. Such options shall be fixed at the price of such stock on the first day of the fiscal year for which such right to a bonus is calculated. Employee shall have five (5) years within which to exercise such option. V. CONFIDENTIAL INFORMATION ------------------------ 5.1 At all times hereafter, both during and after the term of Employee's employment with the Company, Employee shall not use any Confidential Information (as hereinafter defined) for his own benefit or the benefit of others, and shall not publish or disclose any Confidential Information to any person, firm, or corporation, except as authorized and approved in writing by the Board of Directors. Employee agrees that upon leaving the Company's employ, he shall not take with him, without the prior written consent of the Board of Directors, any or all documents, papers, drawings, magnetic media or other tangible property, or any copies thereof, belonging or relating to the Company. Any and all documents, 2 papers, drawings, magnetic media and other tangible property made or compiled by, or made available to Employee prior to or during the course of his employment and any copies thereof, which relate to the Company, whether or not they contain Confidential Information, are and shall be the property of the Company and shall be delivered to the Company by Employee immediately upon the termination of his employment. For purposes of this paragraph, Confidential Information shall mean trade secrets and confidential and proprietary technical, business and financial information, whether or not in written form, including, but not limited to, information with respect to know-how, process, techniques, products, research and development information, plans or projections of the Company, customer lists, marketing and financial information, personnel, sales and statistical data, computer programs and information with respect to various techniques, procedures, programs, processes and methods and any other information learned or created by Employee during the course of his employment with the Company. Toward the objective of maintaining such confidentiality, Employee shall keep the information secret, neither directly nor indirectly using, divulging or furnishing it nor making it available either to or for the benefit of any person or entity (other than to any person designated in writing by the Board of Directors or the Company). VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY ------------------------------------------------- 6.1 Employee agrees that during the term of his employment and for a period of three years after termination of his employment, Employee: (a) shall not undertake any employment, ownership, or financial involvement with, or render any assistance to, any person, firm, association, partnership, corporation or enterprise which is engaged in operating, developing, or marketing the same or functionally similar products as the Company is operating, developing, or marketing or plans to operate, develop, or market or has services or products competitive with or similar to the services or products of the Company and its affiliates, if such products or services are to be used within an area within a radius of 500 miles from where the Company is or contemplates doing business at the time of termination; and (b) shall not persuade or attempt to persuade any of the Company's employees to terminate their employment with the Company. 6.2 In the event that a court of law finds this Article to be overly broad, and therefore unenforceable, the court shall modify this Article to reflect the maximum restraint allowable, and shall then enforce this Article as so modified. 3 VII. REMEDIES FOR BREACH ------------------- 7.1 Employee agrees that his violation of any terms contained in Articles IV, V, or VI of this Agreement will cause irreparable damage to the Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that the Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violations of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which the Company might have. Employee further agrees that his violation of any of the terms of Articles IV, V, or VI during the course of his employment with the Company shall be a cause for his termination under this Agreement. Such covenants contained in Articles IV,V,or VI shall be severable, and if the same shall be held invalid by reason of length of time, area covered, or activity covered, or any or all of them, shall be reduced to the extent necessary to cure such invalidity. 7.2 In the event of a material default by either party, or such party's agent or representative, of any provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice, except that the defaulting party shall have thirty (30) days from receipt of notice of termination in which to cure any such defaults, and upon any such cure, this Agreement will continue in full force and effect; provided, that no such notice or cure period shall be required with respect to a violation of the provisions of Articles IV,V, or VI. This restriction shall survive the termination of this Agreement. This Agreement shall also terminate upon the death of Employee. In addition, any material default by any party to the Employment Agreement which is not cured within any applicable cure periods provided in such agreement shall constitute a material default under this Agreement. 7.3 In the event of any violation or threatened violation of this Agreement CSI shall be entitled to injunctive and other equitable relief on the grounds that such conduct, if not restrained and/or other equitable relief not granted, would result in irreparable and serious harm for which damages would be an inadequate remedy. 7.4 CSI shall have the right to enforce the provisions of Articles IV, V, and VI even after a wrongful termination of Employee. VIII. TERMINATION ----------- 8.1 Employee's employment under this Agreement and all 4 rights to compensation pursuant hereto, shall terminate upon the occurrence of any of the following: (a) Death of Employee; (b) Employee's mental or physical inability to perform substantially all his duties under this Agreement for a period of three consecutive months, or his absence from his duties for a period of three consecutive months because of such mental or physical inability, or certification by a competent physician that such inability will persist for three months or more; (c) An occurrence that constitutes "cause" for termination, or Employee engages in any act, omission or conduct that constitutes "cause" for termination. For purposes of this Agreement, Company shall have "cause" to terminate Employee's employment and compensation under any of the following circumstances: (1) a breach by Employee of any provision of this Agreement including, but not limited to, the provisions under Articles IV, V and/or VI; (2) the failure by Employee to perform or fulfill his duties, after the Company identifies reasonable deficiencies in his performance and gives his a reasonable opportunity to correct those deficiencies (for purposes of this subparagraph, "reasonable opportunity" means three months notice with periodic intervening reports to Employee); (3) the refusal or willful failure to follow the lawful directions of the Board of Directors; (4) an act of dishonesty in the performance of his duties; (5) any conduct that is disloyal and prejudicial to the business of the Company; (6) the commission by Employee of any felony or other crime that would adversely affect the reputation of Employee or the Company; (7) any misrepresentation or concealment of a material fact by Employee for the purpose of securing employment hereby; or (8) any act of willful misconduct by Employee which is injurious to the material business interests of the Company. 5 IX. INDEMNIFICATION --------------- 9.1 The Company agrees to indemnify and hold Employees harmless from claims by third parties which arise out of breach by the Company of its warranties or obligations set forth in this Agreement. 9.2 Employee agrees to indemnify and hold the Company harmless from claims by third parties arising out of any breach by Employee of his warranties or obligations set forth in this Agreement. X. MISCELLANEOUS ------------- 10.1 Notices. Any and all notices and communications provided for herein ------- shall be given in writing and hand delivered or mailed by registered or certified mail, return receipt requested, and shall be addressed as follows: Communication Systems International, Inc 8 S. Nevada Colorado Springs, Colorado 80903 Attention: Chief Financial Officer with a copy to: Richard F. Nipert, Esq. Bright, Gibson & Nipert, P.C. 1140 Grant Street, Suite 100 Denver, Colorado 80203 Patrick R. Scanlon ______________________ ______________________ 10.2 Legal Counsel. Employee acknowledges that he has been advised to ------------- consult legal counsel with respect to this Agreement and that this Agreement shall be construed as if both parties equally participated in the creation of this Agreement. 10.3 Titles not to Affect Interpretation. The headings of paragraphs in ----------------------------------- this Agreement are inserted for the convenience of reference only and they neither form a part of this Agreement nor are they to be used in the construction or interpretation hereof. 10.4 Invalid Provision. The invalidity or unenforceability of any ----------------- provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable provisions are omitted. 10.5 Governing Law. This Agreement shall be governed by and ------------- 6 construed in accordance with the laws of the State of Colorado, notwithstanding any conflict-of-laws doctrines of such state. 10.6 Entire Agreement; Modification. This Agreement contains the entire ------------------------------ agreement between the parties relating to the subject matter hereof and supersedes all prior agreements, whether written or oral, with respect to the subject matter hereof. This Agreement may be modified by a writing signed by the Company and Employee. 10.7 Attorneys' Fees and Costs. In the event of any legal action ------------------------- concerning the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs from the other party. 10.8 Survival. All warranty, indemnification, and obligations set forth in -------- Articles IV, V, and VI of this Agreement shall survive the termination of this Agreement. 10.9 Board Action. Wherever the term "Board" or "Board of Directors" is ------------ used herein, it refers to the action of a majority of the Board members as provided in the Bylaws of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. Attest: Communications Systems International, Inc., a Colorado corporation _______________________ By:_____________________________________ Robert A. Spade, Chairman of the Board "Employee" ________________________________________ Patrick R. Scanlon Accepted and approved this ___ day of ______________, 1997 by the Board of Directors of Communications Systems International: _______________________________ Secretary 7 EX-10.13 19 EMPLOYMENT AGREEMENT WITH DANIEL R. HUDSPETH EXHIBIT 10.13 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made on the ___ day of December, 1997, by and between COMMUNICATIONS SYSTEMS INTERNATIONAL, INC., a Colorado corporation ("Company or CSI"), and DANIEL HUDSPETH ("Employee"). WHEREAS, the Company has retained Employee to serve as Vice President of Finance and Chief Financial Officer of the Company upon the terms and conditions set forth herein; and WHEREAS, Employee believes he can contribute substantially to the future success of the Company and desires to continue employment upon the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Company and Employee, intending to be legally bound hereby, agree as follows: I. SCOPE OF EMPLOYMENT ------------------- 1.1 The Company agrees to employ Employee in the capacity of Vice President of Finance and Chief Financial Officer, and Employee agrees to accept such employment, upon the terms and conditions set forth herein. Employee shall be responsible for overseeing and managing the Company's financial affairs and performing such other duties as are customarily undertaken by the Chief Financial Officer of similar companies, all of which responsibilities shall be performed under the direction of the President and Chairman of the Board of Directors of the Company. Employee shall faithfully and to the best of his abilities perform such responsibilities and exercise such authority as may from time to time be assigned or delegated to him by the President and Chairman of the Board of Directors of the Company. II. REPRESENTATIONS AND WARRANTIES ------------------------------ 2.1 Employee represents and warrants to the Company that his execution, delivery and performance of this Agreement does not violate or constitute a breach of any other agreement, whether oral or written, binding upon Employee. 2.2 The Company warrants that it has the full legal right and power to enter into this Agreement and that all requisite corporate approvals have been obtained. III. TERM OF EMPLOYMENT ------------------ 3.1 The term of Employee's employment under this Agreement shall commence December 1, 1997 and shall continue for a term of one year unless earlier terminated as provided in this Agreement. IV. COMPENSATION AND RELOCATION EXPENSES ------------------------------------ 4.1 The Company shall compensate Employee for his services as set forth below: (a) Benefits. During the term of employment under this Agreement, -------- Employee shall be entitled to participate in such benefit programs as may be available from time to time to other executives of the Company, such as health insurance and vacation plans. In the event the Company's health insurance plan does not permit Employee's daughter to continue seeing her existing physicians, Employee may elect to waive coverage under the Company's plan. In such event, the Company will reimburse Employee for all reasonable premiums incurred to maintain Employee's existing health insurance plan. (b) Salary. Employee will be paid at the rate of $110,000.00 per ------ year, payable in semi-monthly payments of $4,583.33 each. (c) Incentive Bonus. Employee shall have the opportunity to earn --------------- annual bonuses equal to a maximum of thirty-five percent of the per annum base salary set forth above pursuant to the Company's bonus plan as adopted from time to time by the Company's Board of Directors, in its sole discretion. The payment of any bonus shall in any event be made in the sole discretion of the Company's Board of Directors. The bonus, if any is earned, shall be calculated based upon the performance of the Company and Employee for each fiscal year of the Company, and shall be paid within thirty days after the end of each fiscal year. (d) Stock Options. Employee shall be eligible to receive stock ------------- options under the incentive stock option plan in effect from time to time, as adopted by the Board of Directors of the Company. Employee shall be granted 50,000 stock options (pre-reverse split) upon completion of the Company's initial public offering upon the terms set forth in the Resolution of the Board of Directors set forth on EXHIBIT A attached hereto and incorporated herein by this reference. All stock options given Employee shall vest upon any sale of substantially all of the assets of the Company or other sale of a controlling interest in the Company. (e) Relocation Expenses. The Company shall reimburse Employee for all ------------------- reasonable moving expenses incurred by Employee in connection with the relocation of his home, including all packing, transporting and unpacking of household goods and furnishings, and any temporary living expenses. In addition to the above reimbursement of expenses, the Company shall pay Employee upon the completion of its initial public offering a relocation 2 fee in the amount of $10,000 to compensate Employee for any other costs related to the relocation. V. CONFIDENTIAL INFORMATION ------------------------ 5.1 At all times hereafter, both during and after the term of Employee's employment with the Company, Employee shall not use any Confidential Information (as hereinafter defined) for his own benefit or the benefit of others, and shall not publish or disclose any Confidential Information to any person, firm, or corporation, except as authorized and approved in writing by the Board of Directors. Employee agrees that upon leaving the Company's employ, he shall not take with him, without the prior written consent of the Board of Directors, any or all documents, papers, drawings, magnetic media or other tangible property, or any copies thereof, belonging or relating to the Company. Any and all documents, papers, drawings, magnetic media and other tangible property made or compiled by, or made available to Employee prior to or during the course of his employment and any copies thereof, which relate to the Company, whether or not they contain Confidential Information, are and shall be the property of the Company and shall be delivered to the Company by Employee immediately upon the termination of his employment. For purposes of this paragraph, Confidential Information shall mean trade secrets and confidential and proprietary technical, business and financial information, whether or not in written form, including, but not limited to, information with respect to know-how, process, techniques, products, research and development information, plans or projections of the Company, customer lists, marketing and financial information, personnel, sales and statistical data, computer programs and information with respect to various techniques, procedures, programs, processes and methods and any other information learned or created by Employee during the course of his employment with the Company. Toward the objective of maintaining such confidentiality, Employee shall keep the information secret, neither directly nor indirectly using, divulging or furnishing it nor making it available either to or for the benefit of any person or entity (other than to any person designated in writing by the Board of Directors or the Company). VI. COVENANT NOT TO COMPETE UNREASONABLY WITH COMPANY ------------------------------------------------- 6.1 Employee agrees that during the term of his employment and for a period of three years after termination of his employment, Employee: (a) shall not undertake any employment, ownership, or financial involvement with, or render any assistance to, any person, firm, association, partnership, corporation or enterprise which is engaged in operating, developing, or marketing the same or functionally similar products as the Company is operating, developing, or marketing or plans to operate, develop, or market 3 or has services or products competitive with or similar to the services or products of the Company and its affiliates, if such products or services are to be used within an area within a radius of 500 miles from where the Company is or contemplates doing business at the time of termination; and (b) shall not persuade or attempt to persuade any of the Company's employees to terminate their employment with the Company. 6.2 In the event that a court of law finds this Article to be overly broad, and therefore unenforceable, the court shall modify this Article to reflect the maximum restraint allowable, and shall then enforce this Article as so modified. VII. REMEDIES FOR BREACH ------------------- 7.1 Employee agrees that his violation of any terms contained in Articles IV, V, or VI of this Agreement will cause irreparable damage to the Company, the amount of which will be impossible to estimate or determine. Therefore, Employee further agrees that the Company shall be entitled, as a matter of course, to an injunction restraining any violation or further violations of any such covenant or covenants by Employee, his employees, partners, agents or associates, such right to an injunction to be cumulative and in addition to any other remedies, at law or otherwise, which the Company might have. Employee further agrees that his violation of any of the terms of Articles IV, V, or VI during the course of his employment with the Company shall be a cause for his termination under this Agreement. 7.2 In the event of a material default by either party, or such party's agent or representative, of any provision of this Agreement, the other party may terminate this Agreement upon thirty (30) days written notice, except that the defaulting party shall have thirty (30) days from receipt of notice of termination in which to cure any such defaults, and upon any such cure, this Agreement will continue in full force and effect; provided, that no such notice or cure period shall be required with respect to a violation of the provisions of Articles IV,V, or VI. This restriction shall survive the termination of this Agreement. This Agreement shall also terminate upon the death of Employee. In addition, any material default by any party to the Employment Agreement which is not cured within any applicable cure periods provided in such agreement shall constitute a material default under this Agreement. 7.3 In the event of any violation or threatened violation of this Agreement CSI shall be entitled to injunctive and other equitable relief on the grounds that such conduct, if not restrained and/or other equitable relief not granted, would result in irreparable and serious harm for which damages would be an 4 inadequate remedy. 7.4 CSI shall have the right to enforce the provisions of Articles IV, V, and VI even after a wrongful termination of Employee. VIII. TERMINATION ----------- 8.1 Employee's employment under this Agreement and all rights to compensation pursuant hereto, shall terminate upon the occurrence of any of the following: (a) Death of Employee; (b) Employee's mental or physical inability to perform substantially all his duties under this Agreement for a period of three consecutive months, or his absence from his duties for a period of three consecutive months because of such mental or physical inability, or certification by a competent physician that such inability will persist for three months or more; (c) An occurrence that constitutes "cause" for termination, or Employee engages in any act, omission or conduct that constitutes "cause" for termination. For purposes of this Agreement, Company shall have "cause" to terminate Employee's employment and compensation under any of the following circumstances: (1) a breach by Employee of any provision of this Agreement including, but not limited to, the provisions under Articles IV, V and/or VI; (2) the failure by Employee to perform or fulfill his duties, after the Company identifies reasonable deficiencies in his performance and gives his a reasonable opportunity to correct those deficiencies (for purposes of this subparagraph, "reasonable opportunity" means three months notice with periodic intervening reports to Employee); (3) the refusal or willful failure to follow the lawful directions of the Board of Directors; (4) an act of dishonesty in the performance of his duties; (5) any conduct that is disloyal and prejudicial to the business of the Company; (6) the commission by Employee of any felony or other crime that would adversely affect the reputation of Employee or the Company; 5 (7) any misrepresentation or concealment of a material fact by Employee for the purpose of securing employment hereby; or (8) any act of willful misconduct by Employee which is injurious to the material business interests of the Company. IX. INDEMNIFICATION --------------- 9.1 The Company agrees to indemnify and hold Employees harmless from claims by third parties which arise out of breach by the Company of its warranties or obligations set forth in this Agreement. 9.2 Employee agrees to indemnify and hold the Company harmless from claims by third parties arising out of any breach by Employee of his warranties or obligations set forth in this Agreement. X. MISCELLANEOUS ------------- 10.1 Notices. Any and all notices and communications provided for herein ------- shall be given in writing and hand delivered or mailed by registered or certified mail, return receipt requested, and shall be addressed as follows: Communication Systems International, Inc 8 S. Nevada Colorado Springs, Colorado 80903 Attention: Chief Financial Officer with a copy to: Richard F. Nipert, Esq. Bright, Gibson & Nipert, P.C. 1140 Grant Street, Suite 100 Denver, Colorado 80203 Daniel Hudspeth ______________________ ______________________ 10.2 Legal Counsel. Employee acknowledges that he has been advised to ------------- consult legal counsel with respect to this Agreement and that this Agreement shall be construed as if both parties equally participated in the creation of this Agreement. 10.3 Titles not to Affect Interpretation. The headings of paragraphs in ----------------------------------- this Agreement are inserted for the convenience of reference only and they neither form a part of this Agreement nor 6 are they to be used in the construction or interpretation hereof. 10.4 Invalid Provision. The invalidity or unenforceability of any ----------------- provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed as if such invalid or unenforceable provisions are omitted. 10.5 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of Colorado, notwithstanding any conflict- of-laws doctrines of such state. 10.6 Entire Agreement; Modification. This Agreement contains the entire ------------------------------ agreement between the parties relating to the subject matter hereof and supersedes all prior agreements, whether written or oral, with respect to the subject matter hereof. This Agreement may be modified by a writing signed by the Company and Employee. 10.7 Attorneys' Fees and Costs. In the event of any legal action ------------------------- concerning the terms of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys' fees and costs from the other party. 10.8 Survival. All warranty, indemnification, and obligations set forth in -------- Articles IV, V, and VI of this Agreement shall survive the termination of this Agreement. 10.9 Board Action. Wherever the term "Board" or "Board of Directors" is ------------ used herein, it refers to the action of a majority of the Board members as provided in the Bylaws of the Company. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. Attest: Communications Systems International, Inc., a Colorado corporation _______________________ By:_____________________________________ Patrick R. Scanlon, President "Employee" ________________________________________ Daniel Hudspeth Accepted and approved this ___ day of ______________, 1997 by the Board of Directors of Communications Systems International: 7 _______________________________ Secretary 8 EX-10.14 20 AGREEMENT BETWEEN ITC & AIT EXHIBIT 10.14 AIT CARRIER SERVICE AGREEMENT FOR ITC ------------------------------------- THIS AGREEMENT is entered into with the effective date of June 1, 1997, by and between AMERICAN INTERNATIONAL TELEPHONE, INC., a Delaware corporation (the "Company" or "AIT"), having its main office at 287 Bowman Avenue, Purchase, NY 10577 and INTERNATIONAL TELEPHONE COMMUNICATIONS, INC. d/b/a ITC ("ITC" or "Customer") having an address at 110 East Broward Boulevard, Suite 6l0, Ft. Lauderdale, Florida 33301. This Agreement supersedes the agreement between AIT and Customer dated January 23, 1996 and all other prior agreements by and among the parties. W I T N E S S E T H ------------------- WHEREAS, the Company is in the business of providing long distance telecommunications services as a reseller and Customer desire to utilize the Company's services; WHEREAS, ITC and the Company desire to replace the January 23, 1996 agreement; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements set forth herein, the parties agree as follows: 1. Long Distance Service. AIT will provide Customer long distance telephone --------------------- service pursuant to T-l access (the "Facilities") for international, interstate and intrastate calls. 2. Term. The term of this agreement is for one year unless earlier terminated by ---- either party upon 30 days notice, if without cause, and immediately if for cause. For cause is defined herein as a breach of this agreement, bankruptcy or assignment for the benefit of creditors, fraud or material misrepresentation or the failure of Customer to provide financial information set forth in paragraph 13. AIT shall also have the right to terminate this agreement or modify its rates in the event its underlying carriers cancel service, change their rates, provide unacceptable services or change the way they conduct business so as to materially impact AIT or if Customer becomes financially unsound. 3. Billing and Charges for Facilities. AIT shall bill ITC on the basis of the ---------------------------------- rates set forth on Schedules A and A-1 attached hereto. ITC shall be ------------------- responsible for all Federal excise taxes, telecommunications taxes, surcharges and sales tax since it is a carrier reselling services. AIT will periodically advise ITC of any changes in its rates. Billing shall be 30/06 for international, except Mexico shall be 60/60. Domestic billing will be in 6 second increments. Customer shall pay AIT one-half of all access charges or other facilities charges which AIT is billed by third parties related to maintaining the private lines. 4. Payment of Bills. ITC agrees to pay its bills in a timely fashion and in all ---------------- events a manner which preserves AIT's credit with its carriers. In the event AIT is charged interest by its underlying carriers, it will pass on such charges to ITC and ITC agrees to pay them in the event they are not waived. In the event AIT is required to make prepayments, AIT will have the right to request prepayments in return from Customer. 5. Confidentiality. Customer agrees to keep all rate information strictly --------------- confidential and acknowledges that Company may be irreparably harmed by any disclosure of rate information. Customer agrees that AIT may seek an injunction to enforce this clause. AIT will keep all relevant information regarding Customer confidential. 6. Compliance With Federal and State Laws. Customer agrees to abide by all -------------------------------------- Federal, state and local rules, regulations and laws and Customer shall be responsible for any tariff filings it may be required to make and payment of all applicable local, state and federal taxes. 7. Notices. All communications, notices, requests, instructions, consents or ------- demands given under this agreement will be in writing and will be deemed to have been duly given when delivered to, or mailed prepaid registered or certified mail addressed to, the party for whom intended, as follows, or to such other address as may be furnished by such party in the manner provided herein: If to AIT: American International Telephone, Inc. 287 Bowman Avenue Purchase, NY 10577 Attention: Charles S. Eisenberg If to Customer: International Telephone Communications, Inc. 110 East Broward Boulevard Suite 610 Ft. Lauderdale, Florida 33301 Attention: Phil Thomas 8. Liability and Indemnification. AIT shall not be liable for consequential, ----------------------------- special, punitive or incidental damages or lost profits relating to service interruptions or the providing of service. AIT shall not be liable for any fraudulent calls relating to Customer's account. Customer agrees to indemnify and hold harmless AIT from any claims of third parties associated with Customer. 9. Governing Law. This agreement will in all respects be governed by and ------------- construed under the laws of the State of New York without giving effect to provisions thereof concerning conflict of laws. The parties agree to jurisdiction within the State of New York and all disputes relating hereto shall be brought in state or Federal Courts located within the State of New York. 10. Entire Agreement. This agreement sets forth the entire understanding of the ---------------- parties hereto with respect to the subject matter, merges and supersedes all prior and contemporaneous understandings and may not be waived or modified, in whole or in part, except by a writing signed by each of the parties hereto. No waiver of any provision of this agreement in any instance may be deemed to be a waiver of the same or any other provisions in any other instance. -2- 11. Binding Agreement. This agreement will be binding upon, unenforceable ----------------- against, and inure to the benefit of, the parties hereto and their respective successors and assigns, and nothing herein is intended to confer any right, remedy or benefit upon any other person. 12. Enforceability. If any provision of this agreement is held to be invalid or -------------- unenforceable by a court of competent jurisdiction, this agreement will be interpreted and enforceable as if such provision were not contained herein, the provisions of this agreement being severable in any such instance. 13. Further Assurances. Customer hereby authorizes AIT to obtain credit ------------------ information on Customer. Customer will, upon request, provide financial statements, tax returns, business plans, TRW and D&B Reports, company brochures or other literature on Customer which is reasonably available to Customer. Customer hereby grants AIT the right to file UCC-1 Financing Statements or other liens in the event Customer does not pay its bills within 30 days. AMERICAN INTERNATIONAL TELEPHONE, INC. INTERNATIONAL TELEPHONE INC. By: SIGNATURE ILLEGIBLE By: SIGNATURE ILLEGIBLE ----------------------------- ------------------------------ Title: President Title: President -------------------------- --------------------------- -3- EX-10.15 21 AGREEMENT BETWEEN ITC & TRESCOM EXHIBIT 10.15 CARRIER SERVICES AGREEMENT -------------------------- THIS AGREEMENT by and between TresCom U.S.A., Inc. a Florida Corporation with its principal place of business located at TresCom International, Inc., 200 East Broward Boulevard, Fort Lauderdale, Florida 33301 ("TresCom") and International Telephone Company a Florida Corporation with its principal place of business located at 110 East Broward Blvd. - Suite 610, Fort Lauderdale, FL 33301 ("Customer"). RECITALS TRESCOM is in the business of providing switched and dedicated, international telecommunications services. Customer desires to purchase, and TRESCOM desires to sell to Customer, such services, in accordance with the terms and conditions set forth in this Agreement. ACCORDINGLY, in consideration of the premises herein contained and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto mutually agree as follows: ARTICLE 1 --------- PROVISION OF SERVICES --------------------- 1.1 PURCHASE AND SALE OF SERVICES. Subject to the terms and ----------------------------- conditions of this Agreement and, through incorporation by reference, the terms and conditions of TRESCOM's Tariff on file with the Federal Communications Commission ("FCC") and any changes thereto ("Tariff"), Customer agrees to purchase from TRESCOM and TRESCOM agrees to sell to Customer, switched, international telecommunications services to the points and at the rates set forth in Schedule 1.1 hereto ("Services"). If there is any conflict or inconsistency between any of the terms and conditions of this Agreement and any of the terms and conditions of the Tariff, the terms of the Tariff shall control. 1.2 REPRESENTATION. TRESCOM represents to Customer that it has and will --------------- maintain during the term of the Agreement all licenses, approvals and other authorizations necessary or appropriate to provide the Services under this Agreement. 1.3 RESALE OF SERVICES. All Services provided under this Agreement are ------------------- provided for resale to Customer's subscribers. Customer is solely responsible for billing and collection from its subscribers. Customer is solely responsible for obtaining and maintaining all licenses, approvals and other authorizations necessary or appropriate for the resale of Services to its subscribers. Customer represents to TRESCOM that it has and will maintain during the term of this Agreement all such licenses, approvals and authorizations. ARTICLE 2 --------- TERM AND TERMINATION -------------------- 2.1 TERM. This Agreement shall commence on June 20th, 1996 (the ---- "Effective Date") and shall continue for one (1) year from the "Effective Date." This Agreement shall automatically continue beyond the Termination Date unless terminated by either party upon thirty (30) days prior written notice or otherwise terminated in accordance with the terms of this Agreement. 2.2 TERMINATION. This Agreement shall terminate prior to the expiration ----------- of its then current term upon the happening of any of the following events: 2.2.1 A material breach of this Agreement by either party and the breaching party fails to cure the breach within thirty (30) calendar days after notice of the breach from the nonbreaching party. 2.2.2 Notwithstanding the foregoing Section 2.2.1, a failure by Customer to pay any amounts due to TRESCOM under this Agreement after ten (10) calendar days from the due date, upon notice of nonpayment from TRESCOM and failure of Customer to pay the amount due within five (5) calendar days thereafter. 2.2.3 Either party ceases doing business as a going concern, makes an assignment for the benefit of creditors, admits in writing its inability to pay debts as they become due, files a voluntary petition in bankruptcy, is adjudicated bankrupt or insolvent, seeks reorganization, arrangement, composition, adjustment, liquidation, dissolution or similar arrangement under any statute, law or regulation or, consents to or acquiesces in the appointment of a trustee, receiver, or liquidator for all or any substantial part of its assets or properties, or its shareholders attempt to dissolve or liquidate. 2.2.4 A petition in bankruptcy is filed against either party or, without the party's consent or acquiescence, a trustee, receiver or liquidator of it or of all or any substantial part of its assets and properties is appointed. 2.2.5 Immediately upon a determination by any governmental authority with jurisdiction over the parties that the provision of the Services under this Agreement is contrary to existing laws, rules or regulations. 2.2.6 Upon thirty (30) days' prior written notice that in the reasonable judgment of TRESCOM the passage or adoption of any law, rule or regulation will make it materially more expensive or difficult to provide the Services under this Agreement. 2.2.7 Notwithstanding the provisions of Section 3.5 below, Customer does not meet the monthly minimum usage commitment within three (3) months of this Agreement and for each succeeding month for the term of this Agreement. 2.2.8 During the first ninety (90) days of Services, Customer may terminate without cause. After such ninety (90) day period, if TRESCOM fails to provide the Services to customer in accordance with industry standards, the Customer shall notify TRESCOM in writing of its concerns and allow a reasonable amount of time for TRESCOM to resolve such Services issues. If issues remain unresolved after a thirty (30) day period, then Customer may terminate the Agreement. 2.2.9 By the mutual consent of the parties. -2- 2.3 CONSEQUENCES OF EXPIRATION OR TERMINATION. Upon the expiration or ----------------------------------------- termination of this Agreement for any reason, TRESCOM shall immediately cease providing Services to Customer. All amounts due to TRESCOM from Customer shall become due and payable immediately upon such expiration or termination. In addition, the non-breaching party shall have any other rights as are available in law or equity. Notwithstanding the expiration or termination of this Agreement for any reason, the provisions of Articles 4, 5, and 6 shall continue to apply. ARTICLE 3 --------- PAYMENT TERMS ------------- 3.1 INVOICING. TRESCOM shall invoice all Service charges, as set forth on --------- Schedule 1.1, on a monthly basis. Payment is due upon receipt of invoice. 3.1.1 Invoices shall be provided on magnetic tape or computer floppy disk, with all necessary usage data to permit Customer to bill its subscribers. 3.1.2 Payment of each invoice shall be in U.S. currency either by wire transfer or in accordance with instructions provided to Customer by TRESCOM. 3.2 TAXES. The prices in this Agreement do not include any applicable ----- federal, state, or local taxes. Unless Customer is exempt, Customer shall pay such taxes upon receipt of an itemized invoice. Such taxes, duties and charges shall be separately stated on the invoice and shall be paid directly to TRESCOM at the same time as all other charges set forth on the invoice. If Customer claims any exemption from such taxes, it shall provide TRESCOM with a valid tax exemption certificate or other evidence reasonably satisfactory to TRESCOM that Customer is not subject to such taxes, duties or charges. 3.3 PAYMENT SECURITY. Customer is required to place a security deposit of ---------------- $_______ with TRESCOM prior to TRESCOM providing Services. 3.3.1 TRESCOM may offset against the security any amount due under this Agreement owed by Customer that is not paid when due. Upon the expiration or termination of this Agreement for any reason, TRESCOM shall have the right to offset against the security any amounts owed to it by Customer whether or not such amounts are in dispute and shall remit the balance promptly to Customer, without interest. Any disputed amounts shall be noticed and resolved in the manner set forth in Section 3.4 below. 3.4 DISPUTED CHARGES. If Customer in good faith disputes the amount or ---------------- appropriateness of a charge included in an invoice from TRESCOM, Customer shall notify TRESCOM in writing and provide supporting documentation establishing such claim. Short calls are deemed to be completed calls and are not subject to dispute. Such documentation supporting disputed charges shall include a detailed analysis showing the difference between the specific invoice amount and the Customer's specific asserted amount. A summary of the disputed charges will not be accepted. Customer shall further provide all information reasonably requested by TRESCOM including, but not limited to, CDR's to resolve the dispute. Such notification shall not relieve Customer of the obligation to make all payments, including the amounts disputed, by the due date as set forth in this Agreement. Any resolutions made by TRESCOM in favor of Customer will be credited to Customer's next invoice. -3 - Failure to contest a charge within forty-five (45) days of the date of the invoice shall create an irrebuttable presumption of the correctness of the charge. 3.5 MINIMUM USAGE. Customer will ramp up to $________ in Services per ------------- month within ninety (90) days of this Agreement; after the fourth month and for each month during the term of this Agreement thereafter, Customer will utilize $____ in Services per month. If Customer fails to satisfy the monthly minimum, Customer shall be subject to an increase in rates charged at the rate of $_____ for each minute less than the monthly minimum not utilized by Customer. TRESCOM shall have the right, upon seven (7) days, prior written notice to Customer, to change the amount of such charge set forth in Schedule 1.1 to reflect documented changes in TRESCOM's costs. Upon receipt of such notice, Customer shall have the option of terminating this Agreement by delivery of a written notice to TRESCOM within such 7-day period. If Customer has not terminated this Agreement within such 7-day period, the new charges shall apply from the first day of the billing week immediately following the expiration of the 7-day period. ARTICLE 4 --------- LIABIILITY ---------- 4.1 SERVICE INTERRUPTIONS AND OUTAGES. TRESCOM shall not be liable for --------------------------------- interruptions or outages in the provision of Services to Customer caused by or resulting from any act of God, flood, earthquake, storm, lightning, fire epidemic, war, outbreak of hostilities (whether or not war is declared), riot, strikes or other labor unrest, civil disturbance, sabotage, mechanical failures, fiber or cable cut, accidents, defects in transmission, expropriation by governmental authorities, interruptions by regulatory or judicial authorities or other acts or events that are outside the reasonable control of TRESCOM. In the event of interruptions or outages of Services as a result of mechanical failures, fiber or cable cut, accidents, defects in transmission or interruptions by regulatory or judicial authorities that are caused by the acts or omissions of TRESCOM or its representatives, TRESCOM's liability shall be limited to a reduction of Customer's monthly minimum requirement or any other recurring charge pro rata of the number of days of interruption or outages of Services during such month. 4.2 DAMAGES. In no event will TRESCOM be liable for indirect, ------- consequential, special, incidental or punitive damages, or lost profits, revenue, customers, goodwill or opportunity, of any kind whatsoever, resulting from a breach of this Agreement. 4.3 WARRANTY. TRESCOM WARRANTS TO CUSTOMER ONLY THAT IT WILL PROVIDE THE -------- SAME QUALITY OF LONG DISTANCE SERVICE IT PROVIDES TO ITS OTHER CUSTOMERS WHICH SHALL EITHER MEET OR EXCEED INDUSTRY STANDARDS. 4.4 FRAUDULENT CALLS. TRESCOM shall not be liable for any fraudulent ---------------- calls processed by TRESCOM and billed to Customer's account. TRESCOM shall notify Customer promptly of any fraudulent calling of which TRESCOM has actual knowledge, it being understood that TRESCOM is under no obligation to investigate the authenticity of calls charged to Customer's account. However, the parties agree that any fraudulent calls billed to Customer must originate from telephones served by Customer. -4- ARTICLE 5 --------- CONFIDENTIALITY --------------- 5.1 CONFIDENTIALITY. During the term of this Agreement, the parties may --------------- disclose to each other certain "proprietary" and/or "confidential" information. The parties desire to assure the confidential and proprietary status of such information which may be disclosed to each other and therefore for themselves, their subsidiaries and their affliates, agree as follows: 5.1.1 All information disclosed shall be deemed to be confidential and proprietary. All information contained in this Agreement, including Schedule 1.1 hereto, as well as all traffic volume and distribution information and rate information of TRESCOM given to or learned by Customer in connection with this Agreement shall be considered Proprietary, information without further act of either party. 5.1.2 Each party agrees to use the Proprietary Information received from the other party only for the purpose of this Agreement and shall not be reproduced in any form or orally communicated except as required to accomplish the intent of this Agreement. 5.1.3 The receiving party shall provide at a minimum the same care to avoid disclosure or unauthorized use of the Proprietary Information as it provides to protect its own proprietary information. It is agreed that all Proprietary Information shall be retained by the receiving party in a secure place with access limited to only such of the receiving party's employees or agents who need to know such information for purposes of this Agreement. 5.1.4 All Proprietary Information shall remain the property of the disclosing party, shall be used by the receiving party only for the purpose intended and shall be returned to the disclosing party or destroyed after the receiving party's need for it has expired or upon the request of the disclosing party, and, in any event, upon termination of this Agreement. 5.1.5 Each party agrees not to reveal the terms of this Agreement to any third party except as contemplated by this Agreement or unless required by law, provided that any written information describing the relationship of the parties that one party desires or is obligated to disclose shall first be disclosed to the other party which shall have an opportunity to object to such disclosure. 5.2 USE OF NAME. Each party agrees that, without the other party's written ----------- consent, it will not use the name, service marks or trademarks of the other party or of any of its affliated companies in any advertising, publicity releases or sales presentations. Neither party shall take any action that will in any manner compromise the other party's registered trademarks or service marks. 5.3 REMEDIES FOR BREACH. The parties agree that a breach or threatened ------------------- breach of the terms of this Article 5 may result in irreparable injury to the non-breaching party for which a remedy in damages would be inadequate. The parties agree that in the event of such breach or threatened breach, the non- breaching party shall be entitled to seek an injunction to prevent the breach or threatened breach, and the breaching party hereby waives any defense that an adequate remedy in law exists and acknowledges that such a breach or threatened breach would result in irreparable injury to the non-breaching party. - 5 - ARTICLE 6 --------- MISCELLANEOUS ------------- 6.1 MISCELLANEOUS. This Agreement which includes Schedule 1.1: (a) ------------- constitutes the entire agreement of the parties and supersedes all previous agreements or understandings, whether oral or written; (b) may not be amended or modified except by a written instrument signed by all parties; (c) is binding upon and will inure to the benefit of the parties and their respective successors, and permitted assigns; (d) may not be assigned without the prior written consent of the other party; and (e) may be executed in duplicate originals. 6.2 NOTICES. Any notices, consents or other communications required or ------- permitted under this Agreement must be in writing and executed by the party giving the notice or its authorized representative. Any such notice or communication must be given, and will be deemed to have been duly given, if either (a) hand delivered by independent courier or (b) mailed by U.S. first class mail, postage prepaid, certified or registered, in either case to the following addresses: If to TRESCOM: If to Customer: TresCom U.S.A., Inc. International Telephone Company c/o TresCom International, Inc. 110 East Broward Boulevard., Suite 610 200 East Broward Boulevard, Suite 2100 Fort Lauderdale, Florida 33301 Fort Lauderdale, Florida 33301 Attn: Sean Thomas Attn: Thomas Scott Any notice given in the manner set forth in this section shall be deemed delivered (i) at the time of the actual delivery, if hand delivered, (ii) five (5) days after mailing, if mailed, or (iii) one (1) day after sending next day delivery. Any party may change its address for the giving of notices by notifying the other party of the change in the manner set forth in this section. Any such change of address shall not be effective until five (5) days after receipt of the notice by the other party, as determined under this section. 6.3 WAIVER. The failure of any party to exercise any right or remedy ------ under this Agreement shall not constitute a waiver of such right or remedy, and the waiver of any violation or breach of this Agreement by a party shall not constitute a waiver of any prior or subsequent violation or breach. No waiver under this Agreement shall be valid unless in writing and executed by the waiving party. 6.4 SEVERABILITY. If any provision of this Agreement is determined by a ------------ court or other governmental authority to be invalid, illegal or unenforceable, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement. Further, the provision that is determined to be invalid, illegal or unenforceable shall be reformed and construed to the extent permitted by law so that it will be valid, legal and enforceable to the maximum extent possible. -6- 6.5 HEADINGS. The headings used in this Agreement are included for the -------- convenience of the parties for reference purposes only and are not to be used in construing or interpreting this Agreement. 6.6 JURISDICTION AND VENUE. Any action brought to enforce this Agreement ---------------------- shall be brought in the federal or state courts of Florida, and the parties acknowledge and agree that venue in Broward County, Florida shall be proper for such action. 6.7 LITIGATION COSTS. The prevailing party in any proceeding brought to ---------------- enforce the provisions of this Agreement or to seek a remedy for any breach (including arbitration or an administrative proceeding) will be entitled to receive its attorneys' and paralegal fees as well as court costs, litigation expenses and other disbursements incurred in connection with such proceedings, induding fees and expenses incurred in any appellate proceedings. 6.8 NO PARTNERSHIP. Nothing in this Agreement shall be deemed to create a -------------- partnership, joint venture or other relationship other than a vendor-customer relationship. 6.9 ASSIGNMENT. This Agreement and all of the provisions hereof shall be ---------- binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests, or obligations hereunder shall be assigned by any of the parties hereto without the prior written consent of the other party. Notwithstanding the foregoing, TRESCOM may assign this Agreement at any time to any person or entity affiliated with, controlled by, or under common control with TRESCOM. 6.10 INDEMNIFICATION. Customer agrees to defend, hold harmless and --------------- indemnify TRESCOM from and against all claims, demands, actions, causes of action, judgments, costs, attorney's fees and expenses of any kind or nature for bodily injury, death, property damage, goodwill, or other damages of any kind incurred by Customer, its employees, or third parties arising under this Agreement due to Customer's negligence or willful misconduct. IN WIINESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TRESCOM U.S.A., INC. By: _______________________________________ Print Thomas Scott _______________________________________ Title Vice President - Carrier Sales _______________________________________ CUSTOMER: By: ______________________________________ Print Sean Thomas ______________________________________ Title: Vice President - Operations ______________________________________ FEL # ______________________________________ -7- Initials ___ ___ EX-10.16 22 AGREEMENT BETWEEN ITC & CABLE & WIRELESS [LOGO OF CABLE & WIRELESS, INC.] EXHIBIT 10.16 CARRIER AGREEMENT This Carrier Agreement ("Agreement") is entered into by and between Cable & Wireless, Inc. ("CWI") and its carrier customer signing below ("Carrier"). The Dedicated Access Services Agreement signed by the Carrier on the date indicated below and the General Terms and Conditions for Carrier Agreements CAR-95A (4/95) attached hereto are part of this Agreement. - -------------------------------------------------------------------------------- ORDER INFORMATION - -------------------------------------------------------------------------------- 1. Services to be Provided by CWI: (insert "X" in box for each type of service ------------------------------ to be provided by CWI) [X] Domestic Outbound [_] Domestic Inbound [X] International Outbound [_] Directory Assistance 2. Term: 15 months ---- ---- 3. Rates: (per minute except for Directory Assistance) ----- Interstate Outbound (US mainland originated): Terminating in a "Super Saver" LATA as listed in the attachment hereto: .. $0. 06 ---- Terminating in a US mainland LATA other than a "Super Saver" LATA: ....... $0. 07 ---- Terminating in Alaska, Hawaii, Puerto Rico, and US Virgin Islands: ....... $0. 09 ---- Intrastate Outbound: ....................................................... $0. 07 within Connecticut ---- ------------- ....................................................... $0. 085 within Florida ---- ------------- Interstate Inbound (US mainland originated and terminated): ................ $0. NA ---- Intrastate Inbound: ........................................................ $0. NA within NA ---- ------------- International Outbound: See attached schedule entitled International Telephone Co. and dated 8/1/95 ----------------------------- -------- Directory Assistance: CWI's then-standard per-call rates
4. Payment/Security Deposits (insert "Yes" or "No" where applicable) ------------------------- Payment Period: 10 days after invoice date -------------- ---- Payment by wire transfer required ................................. YES --------------------------------- ---------- Financial Reports Required ........................................ YES -------------------------- ---------- Security Deposits Required ........................................ YES -------------------------- ---------- Initial Security Deposit Amount: ................................ $113,000 ---------- Continuing Security Deposit Amount: ............................. 1.5 times the amount of usage charges incurred ---------- over any 30 period ---- Deposit Release Period: ......................................... 12 months ---------- Estimated Payments Required: ...................................... YES --------------------------- ---------- Estimated Usage Period: ....................................first 20 days of each monthly billing period ---------- Estimated Payment Due Date: .................................... 1 business days after CWI notifies the
5. Minimum Monthly Payment Obligations: -----------------------------------
Month after Service Initiation Minimum Amount each Month Month after Service Initiation Minimum Amount each Month ------------------------------ ------------------------- ------------------------------ ------------------------- 1 $ 0 2 $ 50,000 --------- --------- --------- --------- 3-15 $ 75,000 $ --------- --------- --------- --------- $ $ --------- --------- --------- --------- $ $ --------- --------- --------- ---------
Dedicated Access Services Agreement dated ------------- INTERNATIONAL TELEPHONE COMPANY CABLE & WIRELESS, INC. ------------------------------- ---------------------- Signature: /s/ Phillip Thomas Signature: /s/ Richard A. Berman ------------------- --------------------- Printed Name: Phillip Thomas Printed Name: Richard A. Berman ------------------- --------------------- Title: CFO Title: CFO ------------------- --------------------- Date: 8/21/95 Date: 8/29/95 ------------------- --------------------- [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS 1. Service to be Provided by CWI: CWI will provide the long-distance services ----------------------------- set forth in the Order Information section of this Agreement (hereinafter collectively, "Services"). The Carrier will access CWI's network via dedicated T-1 lines ("Access Lines") ordered from local exchange carriers or alternate access carriers (collectively, "Local Carriers") and paid for by the Carrier. If the Carrier orders an Access Line from a Local Carrier, the Carrier will pay the Local Carrier directly for the Access Line. If the Carrier requests CWI to order the Access Line and if permitted by the Local Carrier, CWI will order the Access Line on behalf of the Carrier and will have the Local Carrier bill the Carrier directly for the Access Line. 2. Term: The term of this Agreement will start as of the date it is fully ---- executed and it will continue thereinafter for the number of months after service is initiated set forth in the "Term" portion of the Order Information section of this Agreement ("Term"). 3. Rates and Taxes: The Carrier will pay any monthly, usage, and one-time --------------- charges set forth in the Dedicated Access Service Agreement, and the rates set forth or referenced in the Order Information section of this Agreement. Each call will be billed in 6-second increments and will be subject to a 30-second minimum charge except that domestic outbound calls (both interstate and intrastate) will be subject to a 6-second minimum charge. The Carrier will pay any applicable federal, state, or local taxes, surcharges, or similar fees for the Services. 4. Payment: CWI will provide monthly involves covering designated 30-day ------- periods which will be due and payable within the "Payment Period" set forth in the Order Information section of this Agreement. If the Order Information section of this Agreement indicates that estimated payments are required, CWI will notify the Carrier on the last day of the "Estimated Usage Period," or if such day is not a business day, on the next business day, as to CWI's estimate of the charges incurred by the Carrier during such period. The Carrier will pay CWI such estimated amount ("Estimated Payment") no later than the "Estimated Payment Due Date". At the end of a CWI monthly billing period, CWI will provide an invoice for the usage charges actually incurred that month less that month's Estimated Payment; provided, however, that if a minimum monthly payment obligation applies for that month and such minimum has not been met, then the invoice amount will be that month's minimum payment obligation less that month's Estimated Payment. The Carrier will pay the invoiced amount within the Payment Period. A late payment charge will be applied on balances that remain unpaid after the Payment Period in the amount of the lesser of (a) 1 1/2% per month of the amount of the late payment starting from the day following the Payment Period, or (b) maximum amount allowed under applicable law. The Carrier must pay all invoices when due; any questions which the Carrier may have concerning an invoice must be brought to CWI's attention within forty-five (45) days of the invoice date. The Carrier shall reimburse CWI for any expenses, including, without limitation, reasonable attorney's fees, CWI may incur in collecting amounts due hereunder. If so indicated in the Order Information section of this Agreement, all payments by the Carrier will be made via wire transfer (in immediately available funds) to Mellon Bank, 3 Mellon Bank Center, Room 153-2718, Pittsburgh, PA 15259-0001, ABA #0430-00261/Account#1705643. 5. Financial Reports: If the Order Information section of this Agreement ----------------- indicates that financial reports are required, within thirty (30) days after the end of each calendar quarter, the Carrier will provide CWI with a written report updating the Carrier's financial status ("Quarterly Report"), and within ninety (90) days after the end of each calendar year, the Carrier will provide CWI with an audited annual report. Each Quarterly Report will contain, as a minimum, an updated balance sheet and income statement. The Carrier represents and warrants that no Quarterly Report will contain any material misstatement or omission bearing on the Carrier's financial condition. 6. Security Deposits: If the Order Information section of this Agreement ----------------- indicates that security deposits are required, each required security deposit will be either in cash (paid by check or via wire transfer) or an irrevocable stand-by letter of credit in a form and from a financial institution reasonably acceptable to CWI. The "Initial Security Deposit" amount will be provided prior to the initiation of service. Thereafter, if requested in writing by CWI, the Carrier will add additional amounts to the Initial Security Deposit such that the total amount of security deposit being held by CWI at all times is at least equal to the "Continuing Security Deposit". The Carrier will provide any such required additional amounts within five (5) business days after receiving CWI's written request. CWI will refund or release, as applicable, any security deposit it is holding (plus, if the security deposit is in the form of cash, accrued interest at the applicable rate set by regulation of the state in which CWI invoices the Carrier, or if no such rate is set by regulation, CWI's then- prevailing interest rate for security deposit refunds) if the following conditions are met by the Carrier: (i) for the entire "Deposit Release Period", the Carrier pays CWI in full when each payment is due; and (ii) CWI determines that the Carrier's Quarterly Reports covering the Deposit Release Period indicate that the Carrier's financial condition has had no materially adverse change as compared to the equivalent period of time immediately prior to the start of the Deposit Release Period. If CWI does not refund or release the security deposit during the Term as set forth above, the security deposit will be refunded or released, as applicable, at the end of the Term. 7. Minimum Payment Obligations: If the total amount of usage charges incurred --------------------------- by the Carrier in any month is less than the amount of the then-applicable minimum monthly payment obligation set forth in the Order Information section of this Agreement, then in addition to paying for its actual usage that month, the Carrier will pay (as an underutilization fee and not as a penalty) a shortfall charge equal to the difference between (i) the actual usage charges incurred that month, and (ii) the amount of the then-applicable minimum monthly payment obligation. 8. Termination: Prior to the end of the Term, the Carrier may, for its ----------- convenience, terminate this Agreement in its entirety by providing CWI with thirty (30) days' prior written notice. In such event, in addition to paying for all charges incurred through the date service is discontinued, including any applicable shortfall charges, the Carrier will pay (as a contract discontinuance fee and not as a penalty) a discontinuance charge equal to the sum of the minimum monthly payment obligations for each of the remaining months in the Term. If the Carrier fails to do any of the following when due and then does not cure such failure within three (3) business days after receiving notice thereof from CWI, CWI may, in addition to any other remedies available to it and without any further written notice to the Carrier, immediately terminate this Agreement in its entirety and discontinue providing Services: (i) make a payment in full; (ii) provide any required security deposit amount; or (iii) provide any required financial report. 9. Additional Terms: This is a carrier-to-carrier agreement subject to (S)211 ---------------- of the Communications Act of 1934, as amended. The Carrier is responsible for and shall comply with any and all legal and regulatory requirements with respect to the Carrier's use and resale of the Services, including those of the Federal Communications Commission and state public utility commissions. The Services are governed by this Agreement and all Carrier obligations and CWI rights set forth in the "General Rules and Regulations" section of CWI's interstate tariff, as may be amended by CWI in accordance with applicable laws and regulations. The Carrier shall defend, indemnify and hold CWI harmless from and against all claims, demands, actions, causes of action, judgments, costs and reasonable attorneys' fees and expenses of any kind arising from or related to any use of the Service or otherwise arising under this Agreement. In no event shall CWI be liable for any loss of profits, or for any indirect, incidental, special, exemplary or consequential damages. This Agreement is effective as of the date of signature of the last party to sign and it is governed by and subject to the laws and the exclusive [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] GENERAL TERMS AND CONDITIONS FOR CARRIER AGREEMENTS jurisdiction of the courts of the Commonwealth of Virginia. The Carrier shall not disclose any of the terms of this Agreement. This Agreement is the sole and exclusive understanding between the parties with respect to the Services. The terms and conditions pre-printed on the front and reverse side of the Dedicated Access Services Agreement form are not part of this Agreement. CARRIER AGREEMENT AMENDMENT [LOGO OF CABLE & WIRELESS, INC. APPEARS HERE] The Carrier Agreement identified below which was entered into by and between Cable & Wireless, Inc. ("CWI") and its carrier customer identified below, as such Agreement may have previously been modified ("AGREEMENT"), is modified (or if applicable, is further modified) as set forth in this Carrier Agreement Amendment ("AMENDMENT"). This Amendment is effective upon the date of signature of the last party to sign - -------------------------------------------------------------------------------- 1. AGREEMENT: The Agreement being modified by this Amendment was entered into by and between CWI and ("CARRIER") effective as of August 29, l995. 2. TERM: The number of months set forth in Section 2 (Term) of the Order Information section of the Agreement is deleted and replaced by "18". 3. MINIMUM MONTHLY PAYMENT OBLIGATIONS: Section 5 (Minimum Monthly Payment ----------------------- Obligations) of the Order Information Section is replaced by the following: ----------- ----------------------------------------------------------------- MONTH AFTER SERVICE INITIATION MINIMUM AMOUNT EACH MONTH ----------------------------------------------------------------- 1 0 ----------------------------------------------------------------- 2 50,000 ----------------------------------------------------------------- 3-4 75,000 ----------------------------------------------------------------- 5 50,000 ----------------------------------------------------------------- 6-18 75,000 ----------------------------------------------------------------- It is acknowledged that (i) Carrier has not met the minimum payment obligations for Months 3 and 4 as set forth above and that CWI has the right to bill Carrier a shortfall amount for each such month pursuant to Section 7 of the General Terms and Conditions for Carrier Agreements, and (ii) although CWI has not billed Carrier for the shortfall amounts, CWI is not waiving its right to bill Carrier such amounts or any future shortfall amounts that may arise. The Agreement as modified herein, constitutes the entire understanding of the parties with respect to the subject matter hereof, and it supersedes all prior or contemporaneous oral or written agreements, understandings and representations with respect thereto. INTERNATIONAL TELEPHONE COMPANY CABLE & WIRELESS, INC. ------------------------------- ---------------------- Signature: /s/Sean Thomas Signature: /s/Elaine M. Beiseigel ----------------------- ----------------------- Printed Name: Sean Thomas Printed Name: Elaine M. Beiseigel ----------------------- ----------------------- Title: Vice President Title: Contract Manager ----------------------- ----------------------- Date: 3-11-96 Date: 3-25-96 ----------------------- ----------------------- EX-10.17 23 AGREEMENT BETWEEN ITC & TELEGLOBE EXHIBIT 10.17 TELECOMMUNICATIONS SERVICES AGREEMENT THIS TELECOMMUNICATIONS SERVICES AGREEMENT ("Agreement") is entered into on 17 March, 1997 (the "Effective Date"), between: TELEGLOBE USA INC., a Delaware corporation having a business address at 1751 Pinnacle Drive, McLean, Virginia 22102 (hereinafter "Teleglobe"); and INTERNATIONAL TELEPHONE COMPANY, a corporation having a business address at 290 Pratt Street, Meridan, CT 06450 (hereinafter the "Customer"); and with Teleglobe, collectively referred to as the "Parties" and individually, a "Party". W I T N E S S E T H: -------------------- WHEREAS, Teleglobe is a provider of international telecommunications services; and WHEREAS, Customer desires to purchase certain telecommunications services provided by Teleglobe and described below on the terms and conditions contained herein. WHEREAS, the Parties desire to enter into an agreement pursuant to Section 211 of the Communications Act of 1934, as amended, for carrier to carrier telecommunications services; NOW THEREFORE, the Parties, in consideration of the mutual covenants and agreements hereinafter set forth, agree as follows: 1. DESCRIPTION OF SERVICES 1.1 Teleglobe shall provide those telecommunications switching services and facilities to Customer to route Customer's international telecommunications traffic to and from various destinations around the world, as more particularly described in Annex 1 attached hereto and incorporated herein by reference (the "Services"). Additional services may be added from time to time to this Agreement upon terms and conditions to be mutually agreed upon by the Parties and to be included by adding an amended Annex 1 to this Agreement. 1.2 The destinations offered by Teleglobe for the provision of the Services are listed in Annex 2 attached hereto and incorporated herein by reference (the "Destinations"), which Destinations may be amended from time to time by Teleglobe by providing Customer with fifteen (15) days prior written notice. 2. TERM 2.1 This Agreement shall commence on the Effective Date and shall continue for an initial term ("Term") of one (1) year. Thereafter this Agreement shall remain in effect unless terminated by either party by providing a written six (6) months notice of termination to the other party. 2.2 Teleglobe will endeavour to provide the Services on the date of completion of testing (the "Service Date"), and will notify Customer when such testing is completed. 1 3. VOLUME COMMITMENT 3.1 As of the Service Date, Customer shall send annually to the Destinations, via Teleglobe's facilities, the minimum volume of minutes of traffic, if any, set forth in Annex 3. 3.2 In addition to the Minimum Volume Commitment, if any, specified in Annex 3, commencing with the second month after the Service Date, Customer shall send a minimum of 150,000 minutes of traffic per month per each T1 facility ("Facility") provisioned by Teleglobe. In the event Customer fails to meet such minimum traffic volume for such Facility, Teleglobe shall have the right to terminate any and all such Facilities immediately and to provide written notice thereof to Customer. 4. OPERATIONAL AND COMMERCIAL MATTERS 4.1 The point of interconnection with the Customer shall be Teleglobe's facilities at 60 Hudson Street, New York, NY (the "Interconnection Location"). Customer shall be responsible to procure, at its own expense, the necessary facilities or equipment required to bring traffic to the Interconnection Location. The initial traffic routing will be via Teleglobe's arranged gateways. 4.2 The Parties shall coordinate the management of their respective system facilities, with each Party being responsible for providing and operating, at its own expense, its respective network facilities. The Parties also shall interface on a 24 hours/7 days a week basis to assist each other with the isolation and repair of any facility faults in their respective networks, and with the identification, investigation and mitigation of real time traffic flow problems to/from any Destinations. 4.3 Customer shall provide Teleglobe with prompt and accurate traffic forecasting information in order to allow Teleglobe to provision the Services. Such forecasts shall be provided by Customer prior to implementation of the Services and thereafter as may be reasonably requested by Teleglobe. Such forecasts shall be in form satisfactory to Teleglobe and shall specify the traffic volumes, daily and seasonal profiles and peak periods for each Destination. 4.4 Customer hereby appoints Teleglobe as its agent for purposes of establishing related services with domestic and international underlying carriers as may be required in connection with this Agreement. 4.5 Teleglobe reserves the right to cancel and/or temporarily suspend any or all of the Services if Customer engages in activities which, in the reasonable opinion of Teleglobe, may cause disruption or damage to Teleglobe's network of facilities. Teleglobe shall use commercially reasonable efforts to provide Customer with advance notice of such suspension and or cancellation and in any case shall endeavour to provide written confirmation of such suspension and or cancellation within a commercially reasonable time thereafter. 5. PRICING AND BILLING 5.1 For the Services provided pursuant to this Agreement, Customer shall pay Teleglobe the rates by Destination set forth in Annex 2 attached hereto and incorporated herein by 2 reference (the "Rates"), which Rates may be adjusted by Teleglobe from time to time by providing fifteen (15) days prior written notice to Customer. 5.2 Teleglobe shall provide a monthly invoice for the Services provided hereunder in accordance with the then-current Rates as soon as practicable after the end of each month. Such invoice will be based on the chargeable duration of the calls routed pursuant to this Agreement and rounded to the nearest six (6) second increment. The invoice will include traffic by destination, tariffs by destination and total amount due. Chargeable calls for Services shall begin on the earlier of Teleglobe receiving answer supervision or when Teleglobe is charged by its carrier supplier and/or provider. 5.3 All amounts due hereunder by Customer shall be payable to Teleglobe in U.S. Dollars in immediately available funds within thirty (30) days of the date of Teleglobe's invoice. If Customer in good faith disputes any invoiced amount, it shall submit to Teleglobe within thirty (30) days following receipt of such disputed invoice, full payment of the undisputed portion of the invoice and written documentation identifying the minutes and/or rates which are in dispute. The Parties shall investigate the matter and upon mutual agreement, either a credit against future invoices will be issued by Teleglobe or the withheld amount shall be paid by Customer, along with interest as set forth below. Any amounts due hereunder that are not paid when due shall accrue interest at the rate of one and one-half percent (1.5%) per month, compounded daily, beginning with the day following the date on which payment was due, and continuing until paid in full. Further, Teleglobe shall have the right to set off any amounts due hereunder which are not paid when due against any amounts owed to Customer by Teleglobe or any of its affiliates pursuant to any other agreement or arrangement. 5.4 Teleglobe reserves the right at any time to require Customer to issue a deposit, irrevocable letter of credit or other form of security acceptable to Teleglobe if Customer's financial circumstances or payment history is or becomes unacceptable to Teleglobe. 5.5 All Rates and other charges due hereunder are exclusive of all applicable taxes, including value added tax, sales taxes, and duties or levies imposed by any authority, government or government agency, all of which shall be paid promptly when due by Customer, and Customer agrees to indemnify and hold Teleglobe harmless from any liability therefor. 6. TERMINATION 6.1 In addition to any other rights at law or in equity and notwithstanding Article 2.1 above, Teleglobe may terminate this Agreement immediately in the event that Customer (i) fails to make any payment when due hereunder; (ii) becomes insolvent or bankrupt or ceases paying its debts generally as they mature; or (iii) commits a breach of any of the terms of this Agreement (other than a breach of a payment obligation as addressed in (i) above) and fails to remedy such breach within thirty (30) days after receipt of written notice thereof from Teleglobe. 6.2 In the event of any termination pursuant to this Article 6, Customer shall pay to Teleglobe any Rates for Services rendered through and including the date of termination as well as any amounts due on account of any minimum volume commitment obligations and Shortfall charges, if any, arising pursuant to Annex 3. 3 7. LIMITATION OF LIABILITY 7.1 Customer acknowledges that Teleglobe has no control over how a foreign administration or third party carrier establishes its own rules and conditions pertaining to international telecommunications services. Customer agrees that Teleglobe shall not be liable for any loss or damage sustained by Customer, its interconnecting carriers or its end users due to any failure in or breakdown of the communication facilities associated with providing the Services, for any interruption or degradation of the Services whatsoever shall be the cause or duration thereof, or for any other cause or claim whatsoever arising under this Agreement. 7.2 In no event shall Teleglobe be liable to the Customer for consequential, special or indirect losses or damages howsoever arising and whether under contract, tort or otherwise (including, without limitation, third party claims, loss of profits, loss of customers, or damage to reputation or goodwill). 8. ASSIGNMENT This Agreement is personal to the Parties hereto and may not be assigned or transferred by either Party without the prior written consent of the other Party; except that Teleglobe may assign this Agreement without consent to any affiliated entity or successor in interest whether by merger, reorganization, or transfer of all or substantially all of its assets or otherwise. 9. FORCE MAJEURE No failure or omission by Teleglobe to carry out or observe any of the terms and conditions of this Agreement by Teleglobe shall give rise to any claim against Teleglobe or be deemed a breach of this Agreement if such failure or omission arises from an act of God or any other circumstance commonly known as force majeure, an act of Government, or any other cause beyond the reasonable control of Teleglobe. 10. PUBLICITY, CONFIDENTIALITY 10.1 For a period of two (2) years from the date of disclosure thereof, each Party shall maintain the confidentiality of all information or data of any nature ("Information") provided to it by the other Party hereto provided such Information contains a conspicuous marking identifying it as "Confidential" or "Proprietary". Each party shall use the same efforts (but in no case less than reasonable efforts) to protect the Information it receives hereunder as it accords to its own Information. The above requirements shall not apply to Information which is already in the possession of the receiving Party through no breach of an obligation of confidentiality to the disclosing Party or any third party, is already publicly available through no breach of this Article 10, or has been previously independently developed by the receiving Party. This Agreement shall not prevent any disclosure of Information pursuant to applicable law or regulation, provided that prior to making such disclosure, the receiving Party shall use reasonable efforts to notify the disclosing Party of this required disclosure. All Information provided by any Party to the other hereunder shall be used solely for the purpose for which it is supplied. 10.2 Without Teleglobe's prior written consent, Customer shall not (i) refer to itself as an authorized representative of Teleglobe in promotional, advertising, or other materials, (ii) use 4 Teleglobe's logos, trade marks, service marks, or any variations thereof in any of its promotional, advertising, or other materials, or (iii) release any public announcements referring to Teleglobe or this Agreement without first having obtained Teleglobe's prior written consent. 11. NOTICE 11.1 All notices, requests, or other communications hereunder shall be in writing, addressed to the parties as follows: If to Customer: International Telephone Company 290 Pratt Street Meridan CT 06450 Attention: John Lynch, President Facsimile:(203) 238-1699 If to Teleglobe: Teleglobe USA Inc. 1751 Pinnacle Drive, Suite 1600 McLean, Virginia 22102 Attention: Vice President, US Sales Facsimile: (703) 714-6653 11.2 Notices mailed by registered or certified mail shall be conclusively deemed to have been received by the addressee on the fifth business day following the mailing of sending thereof. Notices sent by telex or facsimile shall be conclusively deemed to have been received when the delivery confirmation is received if followed by first class mail, postage prepaid. If either Party wishes to alter the address to which communications to it are sent, it may do so by providing the new address in writing to the other Party. 12. COMPLIANCE WITH LAWS 12.1 Customer shall not use the Services in any manner or for any purpose which constitutes a violation of the laws of the United States or the laws of any foreign jurisdiction in which the Services are being provided. Customer further agrees to refrain from engaging in sales, advertising or marketing within or outside of the United States which Teleglobe believes could impair its or its affiliates' relationship with any overseas authority or carrier. 12.2 The Parties hereby acknowledge that this Agreement shall be subject to Section 211 of the Communications Act, as amended, and shall govern Teleglobe's provision of the Services to the Customer. It is also understood and agreed that the terms and conditions hereof shall in all cases supersede any terms set forth in any Teleglobe tariff on file and in effect with the Federal Communications Commission. 12.3 This Agreement and the continuance hereof by the Parties is contingent upon the obtaining and the continuance of such approvals, consents, governmental and regulatory authorizations, licenses and permits as may be required or deemed necessary by the Parties, and the Parties shall use commercially reasonable efforts obtain and continue same in full force and effect. 5 13. MISCELLANEOUS 13.1 Any Article or any other provision of this Agreement which is or becomes illegal, invalid or unenforceable shall be severed herefrom and shall be ineffective to the extent of such illegality, invalidity or unenforceability and shall not affect or impair the remaining provisions hereof, which provisions shall be severed from any illegal, invalid or unenforceable Article or any other provision of this Agreement and shall otherwise remain in full force and effect. 13.2 No waiver by either Party to any provisions of this Agreement shall be binding unless made in writing, any such waiver shall relate only to such specific matter, non-compliance or breach to which it relates to and shall not apply to any subsequent matter, non-compliance or breach. 13.3 The relationship between the Parties shall not be that of partners, and nothing herein contained shall be deemed to constitute a partnership between them or a merger of their assets or their fiscal or other liabilities or undertakings. Neither Party shall have the right to bind the other Party, except as expressly provided for herein. 13.4 This Agreement shall be governed by the laws of the Commonwealth of Virginia, without reference to its principles of conflict of laws. Customer irrevocably consents and submits to personal jurisdiction in the courts of the Commonwealth of Virginia for all matters arising under this Agreement. 13.5 This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. 13.6 This Agreement, including the following Annexes: Annex 1 Service Description Annex 2 Destinations and Rates Annex 3 Minimum Volume Commitments and Shortfall represents the entire understanding between the Parties in relation to the matters herein and supersedes all previous agreements made by either Party, whether oral or written. This Agreement may only be modified by a writing signed by both Parties. IN WITNESS WHEREOF, the Parties have executed this Agreement in duplicate, or caused this Agreement to be executed in duplicate by a duly authorized officer, as of the date first above written. TELEGLOBE USA INC. INTERNATIONAL TELEPHONE COMPANY By: /s/signature illegible By: /s/Sean Thomas ----------------------- ----------------------- Name: name illegible Name: Sean Thomas --------------------- --------------------- Title: V.P./G.M. Title: V.P. Sales -------------------- -------------------- 6 ANNEX 1 SERVICE DESCRIPTION ------------------- 1. International Direct Distance Dialing (IDDD) -- Teleglobe will connect -------------------------------------------- facilities to route international telecommunications traffic (IDDD type) and will arrange with authorized international carriers to provide service to various destinations around the world. 7 EX-10.18 24 PROMISSORY NOTE OF ROBERT A. SPADE Exhibit 10.18 PROMISSORY NOTE --------------- Colorado Springs, CO $159,915.54 April 30, 1996 FOR VALUE RECEIVED, COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. ("Maker") promises to pay to the order of Robert A. Spade ("Payee") at 8 So. Nevada, Suite 200, Colorado Springs, Colorado 80903, the principal sum of ONE HUNDRED FWW-NINE THOUSAND NINE HUNDRED FIFTEEN DOLLARS AND FIFTY-FOUR CENTS ($159,915.54), together with interest at the rate of 10% per annum. Principal, interest and all other sums payable hereunder are to be paid in lawful money of the United States of America. Principal Payments. The principal amount of this note, together with ------------------ accrued interest thereon, shall be payable on May 31, 1999. Prepayment. Maker shall have the privilege of prepaying, in whole or in ---------- part, the unpaid principal balance of this note, together with accrued interest thereon, at any time. Default. If Maker defaults in timely payment of this note, interest shall ------- be computed on the unpaid principal balance of this note at a rate of 18% per annum. Nonwaiver. Neither the failure nor any delay on the part of the holder of --------- this note to exercise any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other right, power or privilege. Presentment, Etc. Maker and any subsequent endorser or guarantor hereof ---------------- hereby waive presentment for payment except at Maturity, notice of nonpayment at Maturity, notice of protest, protest and notice of dishonor. 1 Notices. Any notice which the holder of this note may desire or may be ------- required to give to Maker shall be given by certified or registered United States mail, postage prepaid, return receipt requested, and addressed to Maker as follows: Communications Systems International, Inc. 8 So. Nevada, Suite 200 Colorado Springs, CO 80903 Maker may change the address for notices by written notice to the holder hereof delivered at the place for payment hereof. Collection Expenses. If this note is not paid as agreed and the holder ------------------- hereof undertakes collection of the indebtedness evidenced hereby, Maker agrees to pay all costs reasonably incurred by the holder in collecting the same, including reasonable attorneys' fees. Binding Effect. All of the foregoing promises are the promises of Maker and -------------- shall bind Maker, its successors and assigns. Choice of Law. This note shall be construed in accordance with and governed ------------- by the laws of the State of Colorado. MAKER: COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By: /s/ Robert A. Spade ----------------------------- Robert A. Spade President RAS:nkh 2 EX-21 25 LIST OF SUBSIDIARIES Exhibit 21 List of Subsidiaries Upon the completion of the ITC Acquisition: International Telephone Company, a Delaware corporation EX-23.2 26 CONSENT OF STOCKMAN, KAST RYAN & SCRUGGS P.C. Exhibit 23.2 INDEPENDENT AUDITOR'S CONSENT We consent to the use in this Registration Statement of Communications Systems International, Inc. on Form SB-2 of our report dated June 2, 1997, August 11, 1997, September 17, 1997, October 9, 1997, October 31, 1997 and December 30, 1997 appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. STOCKMAN KAST RYAN & SCRUGGS, P.C. Colorado Springs, Colorado February 27, 1998 EX-23.3 27 CONSENT OF RICHARD A. EISNER & CO. LLP Exhibit 23.3 EXHIBIT 23.3 CONSENT OF INDEPENDENT AUDITORS We consent to inclusion of our report dated December 12, 1997 relating to the financial statements of International Telephone Company as of October 31, 1997 and for the ten months ended October 31, 1997 and the year ended December 31, 1996 in this Registration Statement on Form SB-2 and related Prospectus. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. Richard A. Eisner & Company, LLP New York, New York February 25, 1998 EX-27 28 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMMUNICATIONS SYSTEM INTERNATIONAL SHARES AND STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY PERFORMANCE TO SUCH FINANCIAL STATEMENTS. YEAR 6-MOS APR-30-1997 APR-30-1998 MAY-01-1996 MAY-01-1997 APR-30-1997 OCT-31-1997 146,686 143,632 0 0 1,239,722 1,410,804 (186,489) (318,693) 0 0 1,283,881 1,498,824 650,218 713,325 (194,427) (260,235) 1,946,491 2,278,015 3,615,136 3,531,880 0 0 0 0 0 0 2,366,066 2,750,285 0 0 1,946,491 2,278,015 11,865,412 6,371,549 11,865,412 6,371,549 7,754,897 3,807,066 7,754,897 3,807,066 4,207,386 3,053,588 0 0 (162,602) (87,905) 0 0 0 0 (259,473) (577,010) 0 0 0 0 0 0 (259,473) (577,010) (.03) (.06) 0 0
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