-----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, CUvWRzuxAdonF9BcNl0Q876nGGWzWB8AA10qzu6zCOm2OlQsIHbF0CKlC2j1wE6b kBNKRl/ybFVkQGQjiPpp6A== 0000927356-98-000992.txt : 19980622 0000927356-98-000992.hdr.sgml : 19980622 ACCESSION NUMBER: 0000927356-98-000992 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19980619 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNICATIONS SYSTEMS INTERNATIONAL INC CENTRAL INDEX KEY: 0000945131 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841238018 STATE OF INCORPORATION: CO FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-47045 FILM NUMBER: 98651157 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 S-1/A 1 AMD #2 TO SB-2 ON FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1998. REGISTRATION NO. 333-47045. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM SB-2 ON FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) COLORADO 4813 84-1238018 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NUMBER) 8 SOUTH NEVADA AVENUE, SUITE 200 ROBERT A. SPADE, CHIEF EXECUTIVE COLORADO SPRINGS, COLORADO 80903 OFFICER (719) 471-3332 8 SOUTH NEVADA AVENUE, SUITE 200 COLORADO SPRINGS, COLORADO 80903 (ADDRESS, INLUDING ZIP CODE, (719) 471-3332 AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL (NAME, ADDRESS, INCLUDING ZIP CODE, EXECUTIVE OFFICES) AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE Copies to: DOUGLAS R. WRIGHT, ESQ. ROBERT W. WALTER, ESQ. JEFFREY A. SHERMAN, ESQ. BERLINER ZISSER WALTER & GALLEGOS, PARCEL, MAURO & SPAANSTRA, P.C. P.C. 1801 CALIFORNIA STREET, SUITE 3600 1700 LINCOLN DENVER, COLORADO 80202 SUITE 4700 (303) 292-6400 DENVER, COLORADO 80203 (303) 830-1700 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE (1) - ---------------------------------------------------------------------------------------- Common Stock(2)......... 4,140,000 $ 8.00 $33,120,000 $ 9,770.40 - ---------------------------------------------------------------------------------------- Common Stock(3)......... 369,693 $ 8.00 $ 2,957,544 $ 872.48 - ---------------------------------------------------------------------------------------- Representatives' Warrants(4)............ 360,000 $ -- $ -- $ -- (5) - ---------------------------------------------------------------------------------------- Common Stock Underlying Representatives' Warrants(6)............ 360,000 $ 9.60 $ 3,456,000 $ 1,019.52 - ---------------------------------------------------------------------------------------- TOTAL................................................... $39,533,544 $11,622.40 - ---------------------------------------------------------------------------------------- AMOUNT PREVIOUSLY PAID.................................................. $13,218.83 - ---------------------------------------------------------------------------------------- AMOUNT OWED............................................................. $ --
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Calculated pursuant to Rule 457 of the rules and regulations promulgated under the Securities Act of 1933, as amended. (2) These shares will be offered to the public in the registrant's public offering (including 600,000 shares that the representatives of the underwriters (the "Representatives") have the option to purchase from the registrant to cover over-allotments, if any). (3) These shares consist of the Registered Securityholders' Shares which will be offered to the public by the Registered Securityholders. The number of such shares is estimated solely for the purpose of calculating the Registration Fee. (4) The registrant will issue to the Representatives at the closing of this offering warrants to purchase 400,000 shares of Common Stock (the "Representatives' Warrants"). (5) No fee pursuant to Rule 457(g). (6) These shares of Common Stock are issuable upon exercise of the Representatives' Warrants. An indeterminate number of additional shares of Common Stock are registered hereunder which may be issued as provided in the Representatives' Warrants in the event that the provisions against dilution in the Representatives' Warrants become operative. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTES This Registration Statement contains two prospectuses: one related to the offering of 4,000,000 shares of Common Stock (the "Common Stock") by CSI and certain Selling Shareholders (the "Prospectus"); and one relating to the offering of 369,693 shares of Common Stock by certain securityholders who were granted registration rights (the "Registered Securityholders' Prospectus"). Following the Prospectus are certain substitute pages of the Registered Securityholders' Prospectus, including alternate front outside and back outside cover pages, an alternate "The Offering" section of the "Prospectus Summary" and sections entitled "Concurrent Offering" and "Plan of Distribution." Each of the alternate pages for the Registered Securityholder Prospectus included herein is labeled "Alternate Page for Registered Securityholders' Prospectus" or "Additional Page for Registered Securityholders' Prospectus." All other sections of the Prospectus, other than "Underwriting" and "Concurrent Offering," are to be used in the Registered Securityholders' Prospectus. In addition, cross-references in the Prospectus will be modified in the Registered Securityholders' Prospectus to refer to the appropriate sections. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES + +EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE + +SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH + +STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JUNE 19, 1998 PROSPECTUS 4,000,000 SHARES [LOGO] COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. COMMON STOCK --------- Of the shares of Common Stock offered hereby, 4,000,000 shares are being sold by Communications Systems International, Inc. ("CSI") and shares are being sold by certain shareholders of CSI (the "Selling Shareholders"). See "Principal and Selling Shareholders." The Combined Company will not receive any proceeds from the sale of shares by the Selling Shareholders. The Common Stock is currently traded on the OTC Bulletin Board under the symbol "CSYG." Prior to the offering, there has been a limited public market for the Common Stock of CSI. On June 17, 1998, the closing bid price of the Common Stock was $3.75 per share. See "Price Range of Common Stock." It is currently estimated that the public offering price will be between $6.00 and $8.00 per share. See "Underwriting" for a discussion of factors to be considered in determining the offering price. Application has been made to have the Common Stock approved for quotation on the Nasdaq SmallCap Market under the symbol "CSGL." Following quotation on the Nasdaq SmallCap Market, the Common Stock will no longer be quoted on the OTC Bulletin Board. Concurrent with the offering, 369,693 shares of Common Stock are being registered for offer and sale by certain Securityholders (collectively, the "Registered Securityholders") of the Company. Such shares consist of a maximum of 319,693 shares of Common Stock and shares underlying warrants that were issued in private placements completed in December 1997, May 1998 and June 1998 and 50,000 shares issuable upon the exercise of certain warrants (collectively, the "Registered Securityholders' Shares"). The Registered Securityholders' Shares are not part of the underwritten offering. Other than receipt of the exercise price of certain warrants, the Company will not receive any proceeds from the sale of the Registered Securityholders' Shares. In addition, the Registered Securityholders have agreed with the Representatives not to sell or transfer the Registered Securityholders' Shares for a period of 180 days following the date of this Prospectus. ----------- SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR INFORMATION PROSPECTIVE INVESTORS SHOULD CONSIDER. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM- MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS - --------------------------------------------------------------------------------------------- Per Share.............. $ $ $ $ - --------------------------------------------------------------------------------------------- Total(3)............... $ $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) CSI and the Selling Shareholders have agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. CSI has also agreed to sell to the Representatives of the Underwriters warrants to purchase 400,000 shares of Common Stock exercisable at $ per share (the "Representatives' Warrants"). See "Underwriting." (2) Before deducting expenses payable by CSI estimated at $ and $ payable by the Selling Shareholders, including the Representatives' nonaccountable expense allowance. (3) CSI has granted to the Underwriters a 45-day option to purchase an aggregate of up to 600,000 additional shares of Common Stock solely to cover over-allotments, if any. If this option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." --------- The shares of Common Stock are offered by the Underwriters subject to prior sale when, as and if delivered to and accepted by them, and subject to the right of the Underwriters to withdraw, cancel or modify such offer without notice and reject orders in whole or in part. It is expected that delivery of the certificates for the Common Stock will be made at the offices of Cruttenden Roth Incorporated, Irvine, California or in book entry form through the book entry facilities of The Depository Trust Company on or about , 1998. --------- CRUTTENDEN ROTH INCORPORATED JOHN G. KINNARD AND COMPANY INCORPORATED KAUFMAN BROS., L.P. THE DATE OF THIS PROSPECTUS IS , 1998 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE COMBINED COMPANY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING BIDS, THE IMPOSITION OF PENALTY BIDS, THE PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND OVER-ALLOTMENTS IN CONNECTION WITH THE OFFERING. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). SEE "UNDERWRITING." On the effective date of the Registration Statement of which this Prospectus forms a part, the Combined Company will become a "reporting company" under the Exchange Act. The Combined Company intends to register the Common Stock under the Exchange Act as of the effective date of the Registration Statement. The Combined Company intends to furnish its security holders with annual reports containing audited financial statements and quarterly reports for the first three quarters of each year containing unaudited interim financial information. The Combined Company claims proprietary rights in its logo and the terms "LINK-US" and "DIAL." Primecall(R) is a service mark of GlobalTel. Trade names, trademarks and service marks of other companies appearing in this Prospectus are the property of their respective holders. SUMMARY The following summary is qualified in its entirety by the more detailed information and Financial Statements and the notes thereto appearing elsewhere in this Prospectus. Unless the context otherwise requires, (i) references to the "Combined Company" refer to Communications Systems International, Inc., GlobalTel Resources, Inc. and International Telephone Company, assuming the GlobalTel Merger and the ITC Acquisition are consummated, (ii) references to "CSI" refer to Communications Systems International, Inc., (iii) references to "GlobalTel" refer to GlobalTel Resources, Inc. and its two wholly owned subsidiaries, and (iv) references to "ITC" refer to International Telephone Company. THE COMPANY The Combined Company is a growing provider of international telecommunications services offering long distance, calling cards and enhanced voice and data services. With more than 25,500 customers in over 170 countries, the Combined Company primarily serves markets that have been historically underserved by large telecommunications providers and incumbent telephone operators ("ITOs"). The Combined Company presently focuses on international call-reorigination, capitalizing on the arbitrage opportunity created by differences between U.S. and international long-distance rates. Going forward, the Combined Company intends to leverage the expertise derived from its call- reorigination business, and capitalize on the established customer base generated by its call-reorigination business, to provide higher margin telecommunications services such as call-through, enhanced fax and business grade Internet services. The world's larger telecommunications carriers, such as AT&T, MCI, British Telecom, Deutsche Telecom AG and France Telecom, have focused on developed telecommunications markets that are characterized by high teledensity (ratio of telephone lines to inhabitants), an advanced stage of deregulation, a large volume of international telecommunications traffic and a concentration of multinational corporations. These markets include the United States, the United Kingdom, Germany, France and Japan. The Combined Company focuses on what it characterizes as emerging telecommunications markets, which are (i) smaller developed countries such as Argentina, Austria, Brazil, Switzerland, Ireland, Singapore and South Africa, and (ii) markets that typically have less developed telecommunications infrastructures, are in an earlier stage of deregulation and have more monopolistic distribution profiles. Based on data from the International Telecommunications Union, the Combined Company has calculated that the approximately 145 countries that the Combined Company targets as emerging telecommunications markets generated approximately 23.0 billion minutes in outgoing international telecommunications traffic in 1995. The Combined Company's telecommunications services are marketed and sold through a network of independent sales agents, strategic relationships and in- house direct marketing. The Combined Company relies primarily on over 170 independent sales agents that cover over 170 countries. GlobalTel has an exclusive agreement with the International Business Network for World Commerce and Industry, Ltd. ("IBNET"), the managing member of the Consortium of Global Commerce, under which IBNET will market the services of GlobalTel, and ultimately the Combined Company, through several thousand individual chambers of commerce located in over 200 countries. In addition, GlobalTel has a strategic relationship with Novell that provides it with a distribution channel for its services, and ultimately those of the Combined Company, through a select number of Novell's network of over 25,000 value-added resellers. The Combined Company has a broad customer base including foreign offices of multinational corporations, including Microsoft Corporation, Mitsubishi Corporation and Chrysler Corporation; major international hotels, including the Inter-Continental Hotel and the Copacabana Palace in Rio de Janeiro, Brazil and Southern Sun Group's Holiday Inn Hotels in South Africa; and embassies and international agencies, including the United States embassies in Korea and Australia and the United Nations consulate in South Africa. 1 The Combined Company provides telecommunications services through its (i) voice switching and global fax messaging infrastructure in Los Angeles, California, (ii) voice switching and billing center in Ft. Lauderdale, Florida, (iii) access to third party infrastructure through international telecommunications carriers and through Equant, a global data network services provider, and (iv) enhanced fax nodes in Hong Kong and Mexico City. The Combined Company uses both off-the-shelf technologies, which provide flexibility to adapt to the rapidly changing telecommunications environment, and proprietary automated call processing technologies (DIAL and LINK-US), which enhance the Combined Company's competitive position in serving high volume customers. The principal components of the Combined Company's strategy are to (i) increase penetration of emerging telecommunications markets by capitalizing upon its call-reorigination experience, strategic marketing relationships and proprietary technologies, (ii) pursue and implement additional strategic acquisitions of complementary international customer bases, products and infrastructure, (iii) exploit strategic marketing relationships to expand its customer base and establish new relationships with independent ISPs and other network providers in its target markets, (iv) provide an increasingly broad range of services, such as enhanced voice and data services and a suite of business grade Internet services, (v) employ flexible open architecture technology that is modular, scalable and allows for the integration of a variety of technologies, (vi) utilize proprietary call processing technologies to provide quality telecommunications services to high volume customers, (vii) increase revenue through targeted growth in its carrier and reseller business, and (viii) exploit operating and marketing synergies and efficiencies resulting from the GlobalTel Merger and the ITC Acquisition. CSI is a Colorado corporation formed in April 1993. The Combined Company intends to change its name to "CS GlobalTel, Inc." upon completion of the GlobalTel Merger. The Combined Company's executive offices are located at 8 South Nevada Avenue, Colorado Springs, Colorado 80903, and its telephone number is (719) 471-3332. The Combined Company's Internet address is http://www.csil.com. Unless otherwise indicated, the information contained in this Prospectus (i) assumes no exercise of the Underwriters' over-allotment option or outstanding options, warrants or convertible securities, and (ii) gives effect to a proposed 1 for 3 reverse stock split that will be completed prior to the date of this Prospectus. CSI has entered into an agreement to merge (the "GlobalTel Merger") with GlobalTel, CSI has entered into an agreement to acquire all of the outstanding stock of ITC (the "ITC Acquisition"), which is expected to occur simultaneously with the completion of this offering. References to the present action of the Combined Company refer to activities or matters that are common to each of CSI, GlobalTel and ITC as of the date of this Prospectus. Statements regarding prospective activities or matters relating to the Combined Company refer to activities that may be undertaken or matters that may result following the GlobalTel Merger and the ITC Acquisition. See "Glossary of Terms" for definitions of certain technical and other terms used in this Prospectus. Certain information contained herein is derived from industry sources. Although the Combined Company believes that this information is reliable, it has not independently verified this information. 2 THE OFFERING Common Stock offered 4,000,000 shares By CSI................ By the Selling Shareholders........... shares Common Stock outstanding after the offering......... 9,217,693 shares(1) Use of Proceeds............. To repay certain indebtedness of the Combined Company; to consummate the ITC Acquisition; to install equipment to facilitate transparent call- reorigination services for additional hotels and businesses; for technical development associated with the Combined Company's enhanced services; to pay certain deferred payables; and for general working capital to fund operating expenses. In addition, a portion of the proceeds will be used to fund the repurchase of any securities tendered in connection with the rescission offer that the Combined Company intends to commence immediately after this offering. See "Use of Proceeds," "Business" and "Rescission Offer." Risk Factors................ The Common Stock offered hereby is speculative and involves a high degree of risk and immediate substantial dilution and should not be purchased by investors who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed Nasdaq SmallCap Market symbol.............. - -------- CSGL (1) Includes 162,286 shares of Common Stock (the "Bridge Shares") to be issued immediately prior to the closing of this offering based on an assumed offering price of $7.00 per share in connection with the notes (the "Bridge Notes") issued by CSI in December 1997 (the "December 1997 Financing") and $1,626,489 shares of Common Stock issuable in connection with the GlobalTel Merger. Excludes (i) up to 1,040,094 shares of Common Stock issuable upon exercise of outstanding options, (ii) up to 1,551,612 shares of Common Stock issuable upon the exercise of outstanding warrants, (iii) an indeterminate number of shares of Common Stock issuable upon conversion of outstanding promissory notes in the aggregate principal amount of $30,000 which have a conversion price per share equal to 90% of the average bid and asked price of the Common Stock on the day before conversion, (iv) up to 400,000 shares of Common Stock issuable upon exercise of the Representatives' Warrants, and (v) up to 295,714 shares issuable in connection with the ITC Acquisition, (collectively referred to herein as "Additional Securities"). See "Management," "Description of Securities" and "Underwriting." 3 SUMMARY FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA) The summary financial information set forth below is derived from the separate audited and unaudited financial statements of CSI, GlobalTel and ITC and the unaudited pro forma condensed combined financial statements of CSI, GlobalTel and ITC. Such information should be read in conjunction with such financial statements and the notes thereto and the reports of the Independent Public Accountants.
HISTORICAL--CSI HISTORICAL--GLOBALTEL ------------------------------------ --------------------------- 12 MONTHS EIGHT THREE 12 MONTHS THREE ENDED MONTHS MONTHS ENDED MONTHS APRIL 30, ENDED ENDED DECEMBER 31, ENDED ---------------- DECEMBER MARCH 31, ---------------- MARCH 31, 1996 1997 31, 1997 1998 1996 1997 1998 ------- ------- -------- --------- ------- ------- --------- STATEMENT OF OPERATIONS DATA: Revenue......... $ 6,741 $11,865 $8,115 $ 2,279 $ 9,136 $12,862 $ 1,698 Cost of revenue........ 5,963 7,755 4,879 1,424 8,230 11,171 1,473 ------- ------- ------ -------- ------- ------- ------- Gross margin.... 778 4,110 3,236 855 906 1,691 225 Operating expenses: Sales and marketing...... 1,573 2,080 2,007 557 682 788 120 General and administrative.. 1,652 2,024 2,103 684 5,773 7,119 1,523 Depreciation and amortization .. 58 103 92 42 98 253 91 Acquired in- process research and development.... -- -- -- -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Total operating expenses....... 3,283 4,207 4,202 1,283 6,553 8,160 1,734 ------- ------- ------ -------- ------- ------- ------- Loss from operations..... (2,505) (97) (966) (428) (5,647) (6,469) (1,509) Interest expense, including amortization of debt discount.. (19) (162) (113) (698) (225) (1,368) (1,023) Other income (expense)...... -- -- (85) -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Loss before income taxes and extraordinary item........... (2,524) (259) (1,164) (1,126) (5,872) (7,837) (2,532) Income tax (benefit)...... -- -- -- -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Loss before extraordinary item........... (2,524) (259) (1,164) (1,126) (5,872) (7,837) (2,532) Extraordinary item--gain on extinguishment of debt........ -- -- 747 -- -- -- -- ------- ------- ------ -------- ------- ------- ------- Net loss........ $(2,524) $ (259) $ (417) $ (1,126) $(5,872) $(7,837) $(2,532) ======= ======= ====== ======== ======= ======= ======= Series A convertible preferred stock dividends...... -- -- -- -- -- (39) (16) ------- ------- ------ -------- ------- ------- ------- Net loss applicable to common shareholders... $(2,524) $ (259) $ (417) $ (1,126) $(5,872) $(7,876) $(2,548) ======= ======= ====== ======== ======= ======= ======= EBITDA(1)....... $(2,447) $ 6 $ (874) $ (386) $(5,549) $(6,216) $(1,418) Basic loss per share(excluding extraordinary item).......... $ (.90) $ (.08) $ (.35) $ (.34) $ (5.88) $ (6.48) $ (1.46) Weighted average number of shares outstanding.... 2,798 3,138 3,296 3,353 999 1,215 1,745 HISTORICAL--ITC PRO FORMA AS ADJUSTED --------------------- ---------------------- THREE THREE 10 MONTHS MONTHS 12 MONTHS MONTHS ENDED ENDED ENDED ENDED OCTOBER 31, MARCH 31, DECEMBER 31, MARCH 31, 1997 1998 1997 1998 ----------- --------- ------------ --------- STATEMENT OF OPERATIONS DATA: Revenue......... $8,054 $2,610 $ 35,261 $ 6,587 Cost of revenue........ 6,790 1,978 27,050 4,875 ----------- --------- ------------ --------- Gross margin.... 1,264 632 8,211 1,712 Operating expenses: Sales and marketing...... 715 252 4,468 929 General and administrative.. 1,388 421 12,787 2,628 Depreciation and amortization .. 73 30 8,719 2,211 Acquired in- process research and development.... -- -- 2,800 -- ----------- --------- ------------ --------- Total operating expenses....... 2,176 703 28,774 5,768 ----------- --------- ------------ --------- Loss from operations..... (912) (71) (20,563) (4,056) Interest expense, including amortization of debt discount.. (57) (12) (1,001) (949) Other income (expense)...... 119 12 -- -- ----------- --------- ------------ --------- Loss before income taxes and extraordinary item........... (850) (71) (21,564) (5,005) Income tax (benefit)...... -- -- -- -- ----------- --------- ------------ --------- Loss before extraordinary item........... (850) (71) (21,564) (5,005) Extraordinary item--gain on extinguishment of debt........ -- -- -- -- ----------- --------- ------------ --------- Net loss........ $ (850) $ (71) $ (21,564) $(5,005) =========== ========= ============ ========= Series A convertible preferred stock dividends...... -- -- -- -- ----------- --------- ------------ --------- Net loss applicable to common shareholders... $ (850) $ (71) $ (21,564) $(5,005) =========== ========= ============ ========= EBITDA(1)....... $ (839) $ (41) $ (11,844) $(1,845) Basic loss per share(excluding extraordinary item).......... $ (708) $ (59) $ (2.47) $ (.57) Weighted average number of shares outstanding.... 1 1 8,724 8,815
HISTORICAL-- PRO FORMA HISTORICAL--CSI GLOBALTEL HISTORICAL--ITC AS ADJUSTED ---------------------- ---------------------- --------------------- ----------- DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, OCTOBER 31, MARCH 31, MARCH 31, 1997 1998 1997 1998 1997 1998 1998 ------------ --------- ------------ --------- ----------- --------- ----------- BALANCE SHEET DATA: Cash.................... $ 429 $ 236 $ 849 $ 98 $ 848 $ 980 $19,283 Working capital (deficit).............. (2,612) (3,923) (4,934) (9,094) (1,259) (1,423) (5,028) Total assets............ 2,975 2,612 4,354 3,513 2,720 3,334 50,147 Long-term debt, net of current maturities and debt discount.......... -- -- 3,832 2,000 292 234 2,234 Common stock subject to rescission............. -- -- 2,455 2,455 -- -- 2,455 Total shareholders' equity (deficit)....... (1,112) (2,228) (8,534) (11,002) (781) (899) 27,332
(1) "EBITDA' is defined as net income or loss plus depreciation, amortization and interest expense, income taxes and other non-cash charges, minus extraordinary income and gains and non-cash income, if any, and plus extraordinary losses, if any. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered a substitute for measures of performance prepared in accordance with generally accepted accounting principles. 4 RISK FACTORS In addition to the other information contained in this Prospectus, the following risk factors should be considered carefully in evaluating the Combined Company and its business before purchasing shares of Common Stock offered hereby. This Prospectus contains certain forward-looking statements that involve substantial risks and uncertainties. When used in this Prospectus, the words "may," "will," "expect," "anticipate," "continue," "estimate," "project," "intend," "believe" and similar expressions are intended to identify forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Exchange Act regarding events, conditions and financial trends that may affect the Combined Company's future plan of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results could differ materially from the results expressed in or implied by these forward- looking statements as a result of various factors, many of which are beyond the Combined Company's control. These factors are described under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and in the risk factors set forth below. RISKS RELATED TO THE COMBINED COMPANY AND THE TELECOMMUNICATIONS INDUSTRY LIMITED OPERATING HISTORY; SUBSTANTIAL AND CONTINUING LOSSES; SUBSTANTIAL DOUBT ABOUT THE ABILITY TO CONTINUE AS GOING CONCERNS Both CSI and ITC commenced operations in 1993 and GlobalTel commenced operations in 1995. Accordingly, CSI, GlobalTel and ITC have limited operating histories upon which an evaluation of their performance can be based. The Combined Company has no combined operating history. The Combined Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of operations. There is no assurance that the Combined Company will operate profitably or be successful in capitalizing on perceived synergies. CSI has incurred significant losses, including losses of approximately $2.5 million and $259,000 during the 12 months ended April 30, 1996 and 1997, respectively, a loss of approximately $417,000 during the eight months ended December 31, 1997 and a loss of approximately $1.1 million for the three months ended March 31, 1998, resulting in an accumulated deficit of approximately $5.5 million as of March 31, 1998. GlobalTel has incurred significant losses, including losses of $5.9 million and $7.8 million for the 12 months ended December 31, 1996 and 1997, respectively, and a loss of approximately $2.5 million for the three months ended March 31, 1998 resulting in an accumulated deficit of $18.1 million as of March 31, 1998. In addition, ITC incurred a loss of approximately $850,000 during the 10 months ended October 31, 1997 and a loss of approximately $71,000 for the three months ended March 31, 1998. Losses may continue until such time, if ever, that the Combined Company is able to generate a level of revenue sufficient to offset its cost structure. There can be no assurance that the Combined Company will achieve significantly increased revenue or profitable operations. The Combined Company's results of operations may be below the expectations of public market analysts and investors in future quarters, which would likely result in a decline in the trading price for the Common Stock. CSI's and GlobalTel's independent auditors have each included an explanatory paragraph in their respective reports on the financial statements stating that they have been prepared assuming that each of CSI and GlobalTel, respectively, will continue as separate going concerns. However, recurring losses from operations and projected future cash requirements raise substantial doubt about each company's ability to continue as a going concern. The explanatory paragraphs in the reports on the financial statements do not consider the proposed consummation of this offering. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements. BILLING SYSTEM AND INTERNAL CONTROLS In November 1997, GlobalTel commenced using a new billing system to record revenue from calls made by GlobalTel's customers and the application of cash receipts to customer accounts. In connection with auditing GlobalTel's 1997 financial statements, GlobalTel's independent auditors identified a material weakness in GlobalTel's internal accounting controls with respect to the administration of the billing system that could, if not corrected, lead to errors in revenue reporting which may not be detected by management of GlobalTel on a timely 5 basis. GlobalTel intends to eliminate this material weakness by outsourcing the administration of its billing system to its billing system vendor until the completion of the GlobalTel Merger, at which time GlobalTel's billing functions will be transferred to the Combined Company's billing system. In connection with auditing CSI's financial statements for the eight months ended December 31, 1997, CSI's independent auditors identified a weakness involving CSI's internal control structure and its operation that the auditors believe meets the criteria of a reportable condition. According to the American Institute of Certified Public Accountants, reportable conditions involve matters coming to an auditor's attention relating to significant deficiencies in the design or operation of the internal control structure that, in such auditor's judgment, could adversely affect a company's ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements. CSI believes that it has remedied this condition through the hiring of a Chief Financial Officer and a Controller and the implementation of internal controls. There can be no assurance that these or other control deficiences will not occur in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." NEED FOR ADDITIONAL CAPITAL AND CAPITAL REQUIREMENTS The efforts of CSI, GlobalTel and ITC to develop and introduce an array of enhanced telecommunications services have required, and will continue to require, the Combined Company to invest in network infrastructure and systems development. Also, the Combined Company has incurred substantial pro forma losses and expects to continue to incur losses due, in part, to significant depreciation and amortization expense, through the foreseeable future. At March 31, 1998, CSI, GlobalTel and ITC, respectively, had working capital deficits of approximately $3.9 million, $9.1 million and $1.4 million, respectively. The Combined Company believes that, based upon its present business plan, the net proceeds of this offering, together with revenue from operations, will be sufficient to finance operating losses, the development and introduction of enhanced services and to meet its other currently planned working capital and capital expenditure requirements through the next 12 months. However, due to the need to continue to expand its network operations and service offerings and other factors, the Combined Company expects that it will need to raise additional capital in future periods. The Combined Company also intends to seek lease financing for a portion of the equipment and systems that it acquires in 1998 and beyond, although there can be no assurance that this financing will be available to the Combined Company when needed or on acceptable terms. If the Combined Company experiences greater than anticipated capital requirements, if the implementation of the Combined Company's operating strategy fails to produce anticipated revenue growth and cash flows, if lease financing is not available or if additional working capital is required for any other reason, the Combined Company will be required to obtain additional capital earlier than currently anticipated. The timing of the need for additional capital subsequent to the next 12 months also will be affected by the extent to which the Combined Company's rescission offer is accepted. See "Rescission Offer." There can be no assurance that the Combined Company will be able to obtain equity, debt or lease financing when needed or on terms that the Combined Company finds acceptable. Any issuances of additional equity or convertible debt may cause substantial dilution to the Combined Company's shareholders. If the Combined Company is unable to obtain sufficient funds to satisfy its capital requirements, it will be forced to reduce the scope of its expansion plans, curtail operations, dispose of assets or seek extended payment terms from its vendors, any of which could have a material adverse effect on the Combined Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY INDEPENDENT SALES AGENTS CSI currently depends on approximately 42 independent sales agents to sell its services, including Edward Stoever, who operates in Argentina, and CS do Brazil. These two independent sales agents accounted for approximately 56.9%, and 12.2%, respectively, of CSI's revenue in the eight months ended December 31, 1997, and the ten largest independent sales agents accounted for approximately 98.5% of CSI's revenue in the eight months ended December 31, 1997. GlobalTel currently depends on 81 independent sales agents to sell its services. The 10 largest independent sales agents accounted for approximately 30.9% of GlobalTel's revenue in the 12 months ended December 31, 1997. ITC currently depends on approximately 55 independent sales agents 6 to sell its services, including Generic Telecom, Inc., Zohair Attoue and Janel Richards (collectively, with Mr. Stoever and CS do Brazil, the "Key Independent Sales Agents"). These three independent sales agents accounted for approximately 26.6%, 21.4% and 12.7%, respectively, of ITC's revenue in the 10 months ended October 31, 1997, and the ten largest independent sales agents accounted for approximately 89.1% of ITC's revenue in the 10 months ended October 31, 1997. If the Combined Company fails to retain the services of any of the Key Independent Sales Agents for any reason or loses the services of other independent sales agents that contribute significantly to the Combined Company's revenue, the Combined Company's cash flow and results of operations would be adversely affected because of expected high customer attrition. The Combined Company also depends on its independent sales agents and persons engaged by them to install and service much of the Combined Company's technologies. The failure of such persons to properly install or service the Combined Company's systems could adversely affect the Combined Company. Although independent sales agents are subject to agreements, such agreements may be difficult to enforce because the independent sales agents are domiciled in foreign countries. Under the terms of the agreements, independent sales agents are responsible for collecting customer payments except for credit card payments, and are generally responsible for customer bad debts less, in some cases, an allowance granted by the Combined Company. Failure of independent sales agents to collect and remit customer payments to the Combined Company presents risks to the Combined Company. In August 1997, CSI's former independent sales agent in Singapore failed to remit aggregate payments of $215,000. CSI is aggressively pursuing collection of this receivable, although its ultimate recovery is not assured. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business-- Sales and Marketing." NEED TO INTEGRATE AND MANAGE GLOBALTEL AND ITC Management believes that the consummation of the GlobalTel Merger and the ITC Acquisition will substantially increase the Combined Company's independent sales agent base, technological capabilities, management expertise and carrier relationships. The Combined Company's ability to realize any long-term advantages from the GlobalTel Merger and the ITC Acquisition will depend in large part on successfully integrating, managing and improving the operations of GlobalTel and ITC. The Combined Company's management team has no experience in integrating acquired companies. Risks relating to such integration include the risk of loss of services of executive officers, including Ronald P. Erickson and Philip A. Thomas, the loss of independent sales agents of the Combined Company or adverse changes in strategic or carrier relationships. There can be no assurance that CSI will be able to successfully integrate GlobalTel or ITC, the failure of which would have a material adverse effect on the business of the Combined Company. See "The Acquisitions." SELECTION AND INTEGRATION OF UNSPECIFIED ACQUISITIONS A key element of the Combined Company's strategy is expansion through the additional acquisitions of complementary international customer bases, products and infrastructure. Except for the GlobalTel Merger agreement in principle and the ITC Acquisition agreement, the Combined Company has no agreements, arrangements or understandings for any such acquisition as of the date of this Prospectus. There can be no assurance that the Combined Company will be successful in identifying appropriate acquisition opportunities or negotiating favorable terms. In most cases, the Combined Company will not be required to obtain shareholder approval in order to complete its acquisitions. Under the Colorado Business Corporation Act, a corporation may effect a merger with or an acquisition of another company without shareholder approval if the corporation will be the surviving entity, the articles of incorporation of the corporation are not substantively amended, each shareholder will hold the same number and type of shares after the transaction as he did before, and the outstanding shares of the corporation will not be increased by more than 20% as a result of the transaction. Any future acquisitions or related activity will involve additional risks including, among others, the difficulty of identifying appropriate acquisition candidates, the difficulty of assimilating the operations and personnel of the respective entities, the potential disruption of the Combined Company's ongoing business and the inability of management to capitalize on the opportunities presented by the acquisitions. In addition, the failure to successfully incorporate acquired technology and rights into the Combined Company's services, the inability to maintain uniform standards, controls, procedures and policies, the impairment of relationships with employees 7 and customers as a result of changes in management and an increase in amortization of intangible assets in the Combined Company's financial statements may adversely affect the Combined Company. If the Combined Company completes acquisitions through the issuance of Common Stock, the ownership interest of existing holders would be decreased. There can be no assurance that the Combined Company will be able to finance any future acquisitions. The successful integration of any such acquisition is critical to the future financial performance of the Combined Company. Complete integration of any acquisitions could take several fiscal quarters to accomplish and would require, among other things, coordination of the respective companies' sales, marketing and technical development efforts. The integration process may cause management's attention to be diverted from operating the Combined Company, and any difficulties encountered in the transition process could have an adverse impact on the business, financial condition and results of operations of the Combined Company. There can be no assurance that present and potential customers of the Combined Company and any acquired entity would continue their historic usage patterns without regard to the acquisition, and any significant delay or reduction in usage could have an adverse effect on the Combined Company's business, financial condition and results of operations. The difficulty of combining companies may be increased by geographic distances between companies and the need to integrate personnel. Changes brought about by any acquisition may cause key employees, independent sales agents, or carriers to terminate their relationships with the Combined Company. There can be no assurance that the Combined Company will retain the employees, independent sales agents and carrier relationships of an acquired entity or that the Combined Company will realize any of the other anticipated benefits of any acquisition. There can be no assurance that costs of combining potential acquisitions will not have an adverse effect upon the Combined Company's operating results. There can be no assurance that, following any acquisition, the Combined Company will be able to operate any acquired business on a profitable basis. See "Business--Business Strategy." MANAGEMENT OF GROWTH The Combined Company's expected growth may place significant strains on the Combined Company's management, staff, working capital and operating and financial control systems. There can be no assurance that the Combined Company's management, staff, working capital and systems will be adequate to support its future anticipated growth. The failure to recruit qualified staff, to continue to upgrade operating and financial control systems or to respond effectively to difficulties encountered during expansion could have a material adverse effect on the Combined Company's business, financial condition and results of operations. DEPENDENCE ON CARRIERS AND OTHER SUPPLIERS The Combined Company's ability to achieve and maintain profitable operations is heavily dependent upon the agreements the Combined Company has with certain international long distance carriers. The Combined Company, among other things, must negotiate favorable rates with these long distance carriers. Because of the frequent fluctuations in rates of long distance carriers, the Combined Company believes that it is in its best interest to have short-term agreements with its carriers. Most of the Combined Company's agreements with its carriers will expire, or may be terminated by either party, within one year, and there can be no assurance that these agreements will be renewed or that the Combined Company will be able to obtain favorable rates from these or other carriers. There are a small number of carriers with whom the Combined Company has carrier agreements. The Combined Company's dependence on particular carriers will vary because the Combined Company shifts its use of carriers depending on the rates offered. The Combined Company periodically renegotiates rates with its current carriers and seeks to establish relationships with new long distance carriers that provide the most favorable rates. The Combined Company's ability to obtain favorable rates from the carriers depends, in large part, on the Combined Company's total volume of long distance traffic. There is no guarantee that the Combined Company will be able to maintain the volume of international long distance traffic necessary to obtain favorable rates. The loss of any carrier could have a material adverse effect on the Combined Company. 8 Due to its financial condition, CSI defaulted on payment obligations to certain carriers in 1995, 1996 and 1997. Although CSI was able to negotiate deferred payment arrangements with these carriers (and thereafter made such deferred payments) and was able to continue purchasing minutes from certain of these carriers, there is no assurance that it will be able to make such arrangements with these or other carriers if required in the future. As of March 31, 1998, CSI was in arrears on payments due to one carrier of approximately $780,000. In October 1997, GlobalTel failed to pay amounts due to one of its principal long distance carriers within the time period that this carrier customarily had required payment. As a result, this carrier ceased providing services to GlobalTel and, under the terms of its agreement with GlobalTel, could demand a termination payment of up to $1.2 million. GlobalTel was able to re-route traffic that previously had been carried by this carrier without any interruption in service to GlobalTel's customers. In December 1997, after GlobalTel paid this carrier a substantial portion of the amounts past due, services were restored. GlobalTel has negotiated payment terms on the remaining balance owed and does not believe that it will be required to pay an amount in excess of that owed for carrier services provided. As of March 31, 1998, GlobalTel was in arrears on approximately $641,000 due to this carrier. There can be no assurance that GlobalTel will not be required to pay a penalty to this or any other supplier or that the Combined Company will not be in default of its obligations to its suppliers in the future. In addition, in November 1997, WorldCom, Inc. ("WorldCom") commenced an action against ITC in Connecticut state court seeking damages of approximately $1.1 million for alleged past due carrier bills. ITC recorded a $1.1 million charge against earnings in the ten month period ended October 31, 1997. ITC believes it has meritorious defenses to the suit. ITC intends to vigorously defend its position and will attempt to reach a settlement with this carrier. Under certain carrier contracts, the Combined Company obtains rate commitments (subject to adjustment, as provided in each carrier contract), which are generally more favorable than otherwise would be available by committing to purchase a minimum number of minutes from such carriers. If the Combined Company fails to meet its minimum requirements under a carrier contract, it could still be required to pay some or all of its minimum monthly commitment as a penalty. Historically, CSI failed to meet required minimum purchases and incurred unused usage charges from AT&T and MCI. The Combined Company's aggregate minimum monthly commitments currently are approximately $564,000, which represent approximately 34.6% of the Combined Company's average monthly cost of revenue for the three months ended March 31, 1998. Failure to maintain favorable carrier contracts would increase the Combined Company's cost of revenue and the ability to achieve and maintain profitability. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." A failure by a carrier to deliver quality services or products on a timely basis, or the inability of the Combined Company to develop alternative suppliers if and as required, could result in delays in the provision of service to the Combined Company's customers which could have a material adverse effect on the Combined Company. The Combined Company's remedies against carriers that fail to deliver services or products on a timely basis are limited, in certain cases, by the Combined Company's desire to maintain relationships with its key carriers. In addition, as the Combined Company's carriers upgrade their technology, the Combined Company may encounter difficulties in integrating new technology into the Combined Company's network. The Combined Company is dependent on certain third-party suppliers of equipment and hardware components, including its integrated computer systems and switching platforms, and expects that it will become more dependent on such suppliers as its business expands. A failure by a supplier to deliver quality products on a timely basis, or the inability to develop other sources of supply if required, could result in delays that could adversely affect the Combined Company. In addition, the Combined Company's business is highly dependent on its computer systems, telephone equipment and software. See "Business." RECENT INTRODUCTION AND ONGOING DEVELOPMENT OF ENHANCED SERVICES Substantially all of the Combined Company's revenue to date has been derived from international call- reorigination services and reselling international long distance minutes to other carriers and resellers. The Combined Company believes that as deregulation occurs and competition increases in markets around the world, the pricing advantage of traditional call-reorigination relative to conventional international long-distance service 9 will diminish. In order to maintain its existing customer base, attract new customers and increase its revenue, the Combined Company must offer a variety of enhanced telecommunications services, as well as its own call-through service, at competitive prices. Accordingly, the Combined Company is in the process of developing a number of enhanced telecommunications services such as fax and business grade Internet services. The first of these enhanced services was offered to GlobalTel's customers in November 1997. To date GlobalTel has not generated significant revenue from these services. Several other new services described in this Prospectus are still under development and are not scheduled for implementation until various times in 1998 or later. It is not uncommon for the introduction of new telecommunications services to be delayed or occasioned by technical problems. There can be no assurance that the Combined Company will not encounter delays or technical problems in the introduction of new services which will inhibit the Combined Company's ability to compete. Also, there can be no assurance that the Combined Company will have sufficient capital to complete development and introduction of all of the enhanced services that it currently plans to offer to its customers or that the introduction of such services will result in increased revenue. The failure to introduce enhanced telecommunications and Internet-related services, failures in the systems that would deliver those services or the absence of demand for such services when introduced would have a material adverse effect on the Combined Company's ability to achieve or sustain profitability in the future. See "Business--Services." DEPENDENCE ON NEW NETWORK SYSTEMS The Combined Company's success is dependent upon its ability to deliver high quality, uninterrupted telecommunications services. During 1997, GlobalTel installed new switching software and hardware in its Los Angeles switching center. These facilities did not commence carrying customer traffic until the fourth quarter of 1997. Prior to implementing these new systems, virtually all of GlobalTel's revenue was attributable to international call-reorigination services and sales to carriers. Accordingly, successful implementation and reliable operation of these new systems is essential to the Combined Company's operations. Under terms of its Reciprocal Telecommunications Agreement with ITC, CSI transferred its telecommunications traffic to ITC's switching center in Ft. Lauderdale in early 1998. This transfer occurred after CSI technicians upgraded ITC's switches to accept Internet triggering of its call- reorigination services. There can be no assurance that these recently installed systems and system upgrades will be adequate to perform their intended functions or that the Combined Company will not suffer adverse consequences in connection with their implementation. For example, there can be no assurance that the Combined Company will not encounter material delays in the introduction or provisioning of new services to new or existing customers. There also can be no assurance that the Combined Company will not encounter difficulties in enhancing, or integrating new technology into, its systems. The inability of the Combined Company to implement any required system enhancement, to acquire new systems or to integrate new technology in a timely and cost effective manner could have a material adverse effect on the Combined Company's business, financial condition and results of operations. See "Business--Services" and "--Network and Operations." CHANGING INDUSTRY ENVIRONMENT The majority of the Combined Company's operations involve the international call-reorigination industry. This industry operates under the guidelines of multiple foreign and domestic government regulations. If the Combined Company should lose the authorization to offer call-reorigination services in any of its current markets, the results of operations of the Combined Company could be materially adversely affected. The call-reorigination industry is based upon the arbitrage opportunities created by higher international calling rates charged by ITOs compared to rates charged by U.S.-based long distance carriers. However, ITOs may lower their international calling rates, thereby eliminating or severely affecting the market for call-reorigination services. Representatives of 69 countries, including the United States, recently entered into an agreement with the World Trade Organization ("WTO"), which became effective on February 5, 1998, with the goal of increasing competition among telecommunications providers in those markets. If some or all of the ITOs operating in the Combined Company's current markets lower their rates, the results of operations of the Combined Company in those markets would be adversely affected. In addition, certain European countries have enacted or have proposed enacting a value added tax (VAT) on international call- reorigination services. In February 1997, the government of Argentina enacted legislation that simultaneously lowered the international 10 long distance calling rates from Argentina and increased the domestic rates within Argentina. Historically, the Combined Company has received a significant portion of its revenue from customers in Argentina. To date, this legislation has not had an adverse effect on the Combined Company's results of operations because the rates charged by Argentina's ITOs remain higher than the Combined Company's rates. There can be no assurance such an adverse effect will not occur in the future as a result of this or other legislation. See "Business." COMPETITION General. The Combined Company faces a high level of competition for customers and independent sales agents in all of its markets, and expects competition to intensify in the future. There are no substantial barriers to entry in the call-reorigination industry. The Combined Company believes that there are more than 150 companies engaged in the international call- reorigination business. Many of the Combined Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources, larger networks and a broader portfolio of services than the Combined Company. Additionally, many competitors have strong name recognition and brand loyalty, long-standing relationships with the Combined Company's target customers, and economies of scale that can result in a lower relative cost structure compared to the Combined Company. Competition for customers and independent sales agents in the telecommunication markets in which the Combined Company operates is on the basis of price, type and quality of services offered. Increased competition could force the Combined Company to reduce its prices and profit margins if the Combined Company's competitors are able to procure rates or enter into service agreements comparable to or better than those the Combined Company obtains or if competitors are able to offer other incentives to existing and potential customers and independent sales agents. Similarly, the Combined Company has no control over the prices set by its competitors in the long distance market. The Combined Company is aware that its ability to market its long distance services depends upon the existence of spreads between the rates offered by the Combined Company and those offered by the carriers with which it competes as well as those from which it obtains service. A decrease in such spreads or price competition in the Combined Company's markets could have a material adverse effect on the Combined Company's business, financial condition and results of operations. Other potential competitors include cable television providers, wireless telephone providers, Internet access providers, electric and other utilities with rights of way, railways, microwave carriers and large end users that have private networks. The intensity of such competition has recently increased and the Combined Company believes that such competition will continue to intensify as the number of new entrants increases. If the Combined Company's competitors devote significant additional resources to the provision of international long distance telecommunications services to the Combined Company's target customer base, the Combined Company could suffer a reduction in revenue which could have a material adverse effect on the Combined Company's business, financial condition and results of operations. U.S. Based Competition. The large U.S. long distance carriers have, in the past, been reluctant to compete directly with ITOs by entering the international call-reorigination business and attempting to capture significant market share. This is changing and AT&T, among others, is entering the call-reorigination business. The Combined Company's principal U.S.-based competitors are providers of international call-reorigination services such as Access Authority, AT&T, IDT Corporation, Justice Technology Corporation, International Telecom, Ltd. (Kallback), Telegroup, Inc., USA Global Link, Inc., UTG Communications International, Inc., Viatel, Inc. and Worldpass Communications Corp., and as well as providers of traditional long distance services such as AT&T, Cable & Wireless, Frontier Corp., GTE Communications, LCI International, Inc., MCI, Qwest Communications International, Inc., Sprint, WorldCom, and Regional Bell Operating Companies ("RBOCs") outside their exchange territories. International Based Competition. The Combined Company's principal international-based competitors include, among others, Telefonica de Argentina and Telecom Argentina in Argentina; Optus Communications in Australia, Telebras, Telesp and Telerj in Brazil; France Telecom in France; Deutsche Telecom AG in Germany; Kokusan Denshin Denwa International Telecom Japan (KDD) and International Digital Communications in Japan; PTT Telecom B.V. in the Netherlands; and Telekom S.A. in South Africa; and Cable & Wireless plc, 11 British Telecommunications plc, Mercury Communications Ltd., AT&T, WorldCom, Sprint and ACC Corp., Swiftcall Ltd., Oystel Communications, Ltd. and First Telecom in the United Kingdom. The Combined Company also competes with non- U.S. based providers of international call-reorigination or other alternative international long-distance services. The Combined Company believes that ITOs generally have certain competitive advantages due to their control over local connectivity and close ties with national regulatory authorities. The Combined Company also believes that, in certain instances, regulators have shown a reluctance to adopt policies and grant regulatory approvals that would result in increased competition for the ITO. If an ITO were to successfully pressure national regulators to outlaw the provision of call-reorigination services and prevent the Combined Company from providing its services, the Combined Company could be denied regulatory approval in certain jurisdictions in which its services would otherwise be permitted. Any delay in obtaining regulatory approval, or failure to obtain regulatory approval, could have a material adverse effect on the Combined Company's business, financial condition and results of operations. If the Combined Company encounters anti-competitive behavior in countries in which it operates (such as an ITO attempting to block access to call-reorigination services) or if the ITO in any country in which the Combined Company operates uses its competitive advantages to the fullest extent, the Combined Company's business, financial condition and results of operations could be materially adversely affected. Deregulation and increased competition in international markets could cause prices for international calls to decrease so much that the Combined Company's international call- reorigination services would no longer be attractive to customers. See "Business--Competition" and "--Regulation." REGULATION United States domestic interstate long-distance telecommunications services are subject to limited regulation by the FCC. Intrastate long distance services are regulated by state commissions, which have varying requirements. International call-reorigination services are subject to regulation by both U.S. and foreign regulators. The United States Federal Communications Commission ("FCC") has imposed certain restrictions on international call- reorigination providers, including the requirement that authorized carriers provide service in a manner consistent with the laws of the countries in which they operate. Recently, the International Telephone Union ("ITU") agreed that any country could ban call-reorigination services. The provision of some forms of call-reorigination is illegal in Uruguay, Venezuela, the Philippines and certain other countries. In addition, 34 countries, primarily in Central and South America, the Middle East and Asia (including China), have informed the FCC that they have banned certain forms of call-reorigination. Call- reorigination service providers or customers violating these countries' laws may be subject to fines or penalties. Call-reorigination services in these countries comprised approximately 10.6% of the Combined Company's revenue in the 12 months ended December 31, 1997. Currently, the Combined Company believes that it is not in violation of any country's laws or regulations related to the provision of international long distance services because it has either ceased actively recruiting customers or employed alternate, non- banned forms of call-reorigination in those countries. If the Combined Company is found to have violated such foreign laws it could be subject to fines, penalties or revocation of its FCC license. However, regulations could be adopted by one or more countries that could prevent the Combined Company from operating in such countries, thereby having a material adverse effect on the Combined Company's operations. Local laws and regulations differ significantly among the jurisdictions in which the Combined Company operates, and the interpretation and enforcement of such laws and regulations are often based on the informal views of the local ministries which, in some cases, are subject to influence by ITOs. In addition, failure to interpret accurately the applicable laws and regulations and the mode of their enforcement in particular jurisdictions could result in monetary penalties imposed against the Combined Company that could be significant. There can be no assurance that the Combined Company has accurately predicted or will accurately predict the interpretation of foreign laws and regulations or regulatory and enforcement trends or will be found to be in compliance with all such laws and regulations. The Combined Company generates a significant portion of its revenue from customers originating calls in South America, Europe, the Pacific Rim, Africa, the Middle East and Central America. There can be no assurance that foreign regulation will not have a material adverse effect on the Combined Company's business, financial condition and results of operations. See "Business--Regulation." 12 The Combined Company is regulated by the FCC and is currently authorized by the FCC as a reseller of international long distance telephone services. The Combined Company has not been the subject of any action by the FCC or any other regulatory entity that would affect its ability to resell international long distance services. The FCC has determined that call-reorigination service using uncompleted call signaling, such as that used by the Combined Company, does not violate United States or international law, but has held that United States companies providing such services must comply with the laws of the countries in which they operate as a condition of such companies' FCC authorizations. The FCC reserves the right to condition, modify or revoke any authorizations and impose fines for violations of the Communications Act of 1934, as amended (the "Communications Act"), or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the clear and explicit telecommunications laws of other countries that are unable to enforce their laws against U.S. carriers. See "Business--Regulation." The Telecommunications Act of 1996 (the "1996 Act") and the WTO Agreement substantially altered the regulatory framework for the telecommunications industry for domestic and international telecommunications services. The 1996 Act and the WTO Agreement will require the FCC to conduct a variety of rulemakings to implement various requirements. The Combined Company cannot predict the ultimate effects of the WTO Agreement or the 1996 Act upon the Combined Company's business other than to note that the Combined Company will not be required to contribute to the FCC's Universal Service fund. Such contributions could be as much as 4.5% or more of revenue for the calendar year 1998, and would increase in subsequent years. LEGAL PROCEEDINGS In November 1997, WorldCom commenced an action entitled "WorldCom, Inc. v. International Telephone Company d/b/a Interglobal Telephone Company" against ITC in Connecticut state court (Docket No. CV-970407418, Superior Court, J.D. of New Haven) seeking damages of approximately $1.1 million for alleged past due carrier bills. Although ITC believes it has meritorious defenses to the suit, there can be no assurance that it will be successful in such defense. Failure to successfully defend such suit could have a material adverse effect on the Combined Company. RESCISSION OFFER On approximately June 19, 1998, the Combined Company intends to commence a rescission offer (the "Rescission Offer") in accordance with the federal securities laws and the securities laws of the State of Washington (the "Washington Securities Act") with respect to an aggregate of 496,466 shares of GlobalTel Common Stock (the "Rescission Stock"), $805,000 in aggregate principal amount of promissory notes (the "Rescission Notes") and warrants (the "Rescission Warrants") to purchase an aggregate of approximately 31,000 shares of GlobalTel Common Stock issued in conjunction with the Rescission Stock and Rescission Notes. The Rescission Notes, the Rescission Stock and the Rescission Warrants are hereinafter collectively referred to as the "Rescission Securities." The Rescission Securities were issued or sold by GlobalTel from 1995 through 1997 to approximately 40 individuals and entities who GlobalTel believes at the time of purchase were residents of the State of Washington. GlobalTel believes that the Rescission Securities may have been issued or sold in violation of the registration requirements of the Washington Securities Act. As a precaution against potential claims by holders of Rescission Securities, and without admitting non-compliance with the Washington Securities Act, the Combined Company plans to offer to rescind such prior issuances and sales by offering to repurchase the Rescission Securities at the price paid therefor plus interest at the statutory rate of 8% per annum from the date of purchase to the expiration of the Rescission Offer. The Rescission Offer is contingent on the completion of this offering and the GlobalTel Merger. Accordingly, if such conditions are not satisfied, the Rescission Offer will by its terms terminate without any obligation for the Combined Company to act upon acceptances of the Rescission Offer. The price paid will be based upon the price paid for the original security purchased by the purchaser from GlobalTel, regardless of the type of Rescission Security currently held by the purchaser. The weighted average price paid for the Rescission Stock is $4.66 per share. The aggregate price paid for the Rescission Notes, which are to be repaid from the proceeds of this offering, is $805,000. See "Use of Proceeds." Each of the Rescission Warrants was issued in conjunction with Rescission Stock or Rescission 13 Notes and for no separate consideration. Accordingly, the Rescission Warrants must be surrendered for no separate consideration if the holder of the related Rescission Securities elects to accept the Rescission Offer with respect to its Rescission Securities. The aggregate accrued interest with respect to all of the Rescission Securities as of June 30, 1998 will be approximately $397,000. If all holders of Rescission Securities were to accept the Rescission Offer, the Combined Company would be required to make payments aggregating approximately $3.7 million, plus the aggregate amount of any additional interest thereon that accrues after June 30, 1998. The Rescission Offer will expire 20 business days after the offer is transmitted. The Combined Company currently expects to use a portion of the proceeds from this offering to make payments under the Rescission Offer, if any are required. Offerees who do not accept the Rescission Offer will thereafter hold registered Rescission Securities under the Securities Act which, in the case of the Rescission Stock, will be freely tradeable by non-affiliates in the public market as of the effective date of the Rescission Offer Registration Statement. As of the date hereof, GlobalTel is not aware of any claims for rescission against GlobalTel. Also, current and former officers and directors of GlobalTel holding an aggregate of $1.4 million (including statutory interest accrued thereon as of June 30, 1998) of the Rescission Securities have indicated their intent not to accept the Rescission Offer, although no formal Rescission Offer has been made to them and they have not and may not agree to reject the Rescission Offer until the Rescission Offer has commenced. There can be no assurance that all or a substantial portion of the Rescission Securities will not be tendered in response to the Rescission Offer. Use of a portion of the proceeds of this offering in connection with the Rescission Offer will reduce the amount of working capital available to the Combined Company and require it to seek additional capital sooner than otherwise might be required. The Rescission Offer is being made in order to limit, so far as may be permitted under applicable federal and state securities laws, the potential liability of the Combined Company with respect to the offer and sale of the Rescission Securities. Although the Combined Company believes that the offer and sale of the Rescission Securities were made in compliance with the registration requirements of federal securities laws, if a holder of the Rescission Securities were to assert a claim that the Rescission Securities were sold in violation thereof, the position of the Securities and Exchange Commission is that liabilities under the federal securities laws are not terminated by making a rescission offer. Furthermore, notwithstanding the Rescission Offer, there can be no assurance that the Combined Company will not be subject to penalties or fines relating to past securities issuances or that other holders of the Combined Company's securities will not assert or prevail in claims against the Combined Company for rescission or damages under state or federal securities laws. See "Use of Proceeds," "Rescission Offer," "Shares Eligible for Future Sale" and Note 6 of Notes to GlobalTel's Consolidated Financial Statements. RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS The Combined Company's strategy is to focus on international markets. In many emerging telecommunications markets in which the Combined Company seeks to market its services, ITOs control access to the local networks, enjoy better brand recognition and customer loyalty and possess significant operational economies, including operating agreements with other ITOs. Moreover, an ITO may take many months before allowing competitors, such as the Combined Company, to interconnect to its switches within the target market. There can be no assurance that the Combined Company will be able to obtain the permits and operating licenses required to operate, access transmission facilities or market and sell competitive services in its markets. In addition, pursuit of international growth opportunities may require significant investments for extended periods before returns, if any, on such investments are realized. The Combined Company's operations also will be subject to a wide range of general business risks associated with international operations, including unexpected changes in legal and regulatory requirements; changes in tariffs, exchange rates and other barriers; political and economic instability; restrictions on repatriation of funds or profits from foreign markets; long accounts receivable payment cycles in certain countries; difficulty in protecting the Combined Company's intellectual property; potentially adverse tax consequences and the regulation of ISPs by foreign regulatory authorities. Although the Combined Company's sales to date have been denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign currencies also may adversely affect the Combined Company's results of 14 operations. To the extent the Combined Company changes its pricing practices to denominate prices in foreign currencies, the Combined Company will be exposed to increased risks of currency fluctuation. Any such fluctuation could have a material adverse effect on the Combined Company's earnings or assets when translated into U.S. dollars. Although the Combined Company has not entered into foreign exchange contracts to hedge exchange transactions, it may do so in the future. Additionally, the Combined Company generally will be subject to taxes in foreign countries where the Combined Company operates. The Combined Company's ability to claim a foreign tax credit against its U.S. federal income taxes is subject to various limitations that could result in a high effective tax rate on the Combined Company's earnings, if any. There can be no assurance that laws or administrative practice relating to taxation, foreign exchange or other matters in countries in which the Combined Company operates or will operate will not change in a manner adverse to the Combined Company. There can be no assurance that such factors will not have a material adverse effect on the Combined Company's business, financial condition and results of operations. The Combined Company is subject to the Foreign Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. The Combined Company may be exposed to liability under the FCPA as a result of past or future actions taken without the Combined Company's knowledge by independent sales agents, strategic partners and other intermediaries. Any liability incurred by the Combined Company under the FCPA could be material. RAPID CHANGES IN TECHNOLOGY The telecommunications industry is characterized by rapidly changing technology, evolving industry standards, emerging competition and frequent new service introductions. Examples of some newly developed telecommunications technologies include satellite-based transmission systems such as those proposed by Iridium World Communications Ltd., GlobalStar Telecommunications Limited and Teledesic Corporation, utilization of the Internet for voice and data transmission, and digital wireless communications systems. The Combined Company has invested significantly in sophisticated and specialized telecommunications and computer technologies such as LINK-US and DIAL. The Combined Company anticipates that it will be necessary to continue to select, invest in and develop new and enhanced technology on a timely basis in order to maintain its competitiveness. The Combined Company's future success will also depend, in part, on its ability to continue to evolve and adapt telecommunications technology solutions that keep pace with changing customer demands. There can be no assurance that the Combined Company can successfully identify new service opportunities and develop and bring new services to market in a timely and cost-effective manner, or that services or technologies developed by others will not render the Combined Company's services or technologies noncompetitive or obsolete. In addition, there can be no assurance that service developments or enhancements introduced by the Combined Company will achieve or sustain market acceptance or that the Combined Company's technologies will be compatible with new technology or new industry standards. See "Business--Competition." DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS As a telecommunications service provider, the Combined Company must record and process millions of call detail records quickly and accurately to produce customer bills and financial reports in a timely manner. The Combined Company believes that the integration of its management information systems and switching platforms is essential in order to provide least cost routing and efficient billing. Although the Combined Company's billing systems and switching platforms located at its network switching centers in Ft. Lauderdale and Los Angeles, California are to be integrated following this offering, there can be no assurance that such integration can be completed on a cost effective and timely basis. If its current systems become obsolete or are damaged, the Combined Company may be unable to upgrade or replace such systems with another integrated system at commercially reasonable prices, or at all. Failure to maintain integrated billing and management information systems could have a material adverse effect on the Combined Company. Demands on the Combined Company's information systems will increase significantly if the Combined Company realizes anticipated growth and expands its customer base. There can be no assurance that the Combined Company's information systems will be adequate as the volume of customer traffic increases or that 15 the Combined Company will not suffer adverse consequences should such systems fail to operate effectively. In addition, the Combined Company has not previously reported financial results on a quarterly basis and there can be no assurance that the Combined Company will not encounter material delays or errors in billing of customers or in financial reporting. While the Combined Company believes that its information systems are sufficient for its current operations, it will be necessary to expand the capacities and capabilities of its systems as the Combined Company grows. There can be no assurance that the Combined Company will be able to do so, and the failure to implement enhancements or to make the necessary investments in the Combined Company's information systems in a timely fashion could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business--Network and Operations." The computer system that runs the Combined Company's switches and billing operation has not yet been upgraded to be Year 2000 compliant. The Combined Company is currently evaluating its computer systems to identify potential problems relating to the Year 2000 date change. The Combined Company does not expect the cost to modify its computer systems to address Year 2000 issues will be material to the Combined Company's financial condition or results of operations, and does not anticipate any material disruption in its operations as a result of any Year 2000 issues. The Combined Company does not have any information concerning the potential impact of Year 2000 issues on any of its suppliers or customers. In the event that the Combined Company or any of the Combined Company's significant suppliers or customers does not successfully and timely address Year 2000 issues, the Combined Company's business or operations could be adversely affected. RISK OF NETWORK FAILURE The success of the Combined Company is largely dependent upon the efficient and uninterrupted operation of its network infrastructure. While the Combined Company has fully redundant network switching centers, the Combined Company's systems and operations remain vulnerable to damage or interruption from fire, earthquake or other natural disaster and from power loss, telecommunications failure, break-ins and similar events. The Combined Company's switching centers are located in Los Angeles, California and Ft. Lauderdale, Florida, and the Combined Company has additional equipment located in Hong Kong, Mexico City, Colorado Springs, Colorado and Seattle, Washington. Although the Combined Company carries business interruption insurance, there can be no assurance that such insurance will be sufficient to cover any losses suffered by the Combined Company. In addition, despite the implementation of network security measures by the Combined Company, its servers are vulnerable to computer viruses, electronic break-ins and similar disruptions, any of which could lead to loss of customer data. The occurrence of any of the foregoing could have a material adverse effect on the Combined Company's business, financial condition and results of operations. In the first two quarters of 1997, GlobalTel experienced temporary technical and operational difficulties associated with the relocation of its primary switching platform from Las Vegas to Los Angeles. As the Combined Company attempts to expand its network to accommodate traffic growth, there will be increased stress on its network equipment and traffic management systems. There can be no assurance that the Combined Company will not experience failure of all or part of its network. The Combined Company's operations also are dependent on its ability to successfully expand its network and integrate new and emerging technologies and equipment into its network, which are likely to increase the risk of system failure and cause unforeseen strains upon the network. Significant or prolonged system failures could damage the reputation of the Combined Company and result in the loss of customers, could hinder the Combined Company's ability to obtain new customers and could have a material adverse effect on the Combined Company's business, financial condition and results of operations. See "Business--Network and Operations." DEPENDENCE UPON EXECUTIVE OFFICERS AND MANAGEMENT PERSONNEL The Combined Company's operations are dependent upon the continued services of Ronald P. Erickson, its Chairman of the Board, Robert A. Spade, its Vice- Chairman of the Board and Chief Executive Officer, and Patrick R. Scanlon, its President and Chief Operating Officer. The loss of the services of any of Messrs. Erickson, Spade or Scanlon could have a material adverse effect on the Combined Company. The Combined Company has employment agreements with Messrs. Spade and Scanlon that expire in 2000 and intends to enter into an employment agreement with Mr. Erickson. The Combined Company maintains a key-person life insurance policy 16 on the life of Mr. Spade in the amount of $2 million, and has applied for key- person life insurance on the life of Mr. Scanlon in the amount of $2 million. The Combined Company's success also is dependent on its ability to hire and retain other qualified management, technical, sales and customer service personnel. There can be no assurance that the Combined Company will be successful in recruiting and retaining such personnel. See "Management." LIMITED PROPRIETARY RIGHTS The Combined Company does not have a formal intellectual property protection program. It relies on trade secrets and contractual restrictions to establish and protect its technology. The Combined Company's success depends in part on its ability to enforce intellectual property rights for its proprietary technology, both in the United States and in other countries. The Combined Company's proprietary technology is protected by the use of confidentiality agreements that restrict the unauthorized distribution of the Combined Company's proprietary data. While the Combined Company has attempted to limit unauthorized use of its technology and the dissemination of its proprietary information, there can be no assurance that the Combined Company will be able to retain its proprietary technology and prohibit the unauthorized use of proprietary information. The hardware and other equipment used by the Combined Company for its call-reorigination systems are purchased from third party suppliers and therefore are not proprietary to the Combined Company. See "Business--Technology" and "--Intellectual Property." VALUE ADDED TAX AND SALES TAX COLLECTION The Combined Company does not currently collect value-added tax ("VAT"), sales tax or other similar taxes (other than federal excise tax) in respect of any of its services. In addition, the rules for imposition of VAT vary from country to country. For example, some EU member states deem telecommunications services provided by U.S.-based companies to be performed outside the EU and, therefore, exempt from VAT. Other EU member states, however, impose VAT on telecommunications services provided by non-EU based companies. If the Combined Company is required to collect VAT, sales or similar taxes on the sale of its services, its business, financial condition and results of operations could be materially adversely affected. RISKS RELATED TO THE OFFERING ARBITRARY OFFERING PRICE DETERMINATION; LIMITED PUBLIC MARKET; PRICE FLUCTUATIONS The public offering price of the Common Stock has been determined by the Combined Company and the Representatives of the Underwriters (the "Representatives") and does not necessarily bear any relationship to the assets, book value, or earnings history of the Combined Company or any other investment criteria. Prior to this offering, there has been only a limited public market for the Common Stock of CSI on the OTC Bulletin Board. Although the Common Stock is expected to be approved for quotation on the Nasdaq SmallCap Market upon notice of issuance, there can be no assurance that an active trading market will develop. Factors such as quarterly fluctuations in results of operations, the Combined Company's ability to meet analysts' expectations, changes in financial estimates by securities analysts or market conditions in general may cause the market price of the Common Stock to fluctuate, perhaps substantially. In addition, in recent years the stock market has experienced significant price and volume fluctuations. These fluctuations, which are often unrelated to the operating performance of specific companies, have had a substantial effect on the market price of the stock of many small capitalization companies such as the Combined Company. Factors such as those cited above, as well as other factors that may be unrelated to the operating performance of the Combined Company and may be beyond its control, could adversely affect the price of the Common Stock. See "Underwriting." SIGNIFICANT SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES Following this offering, 4,024,378 shares of the Combined Company's outstanding shares of Common Stock will be "restricted securities" and may in the future be sold upon registration or in compliance with an exemption from registration such as the exemption provided by Rule 144 adopted under the Securities Act. Rule 144 as currently in effect generally provides that beneficial owners of shares who have held such shares for one 17 year may sell within a three-month period a number of shares not exceeding the greater of 1% of the total outstanding shares or the average trading volume of the shares during the four calendar weeks preceding such sale. Of the 2,161,529 shares of restricted stock that are presently outstanding, approximately 231,550 shares of restricted stock will have satisfied the one year holding period required by Rule 144. The remaining shares of restricted stock will become available for resale pursuant to Rule 144 in various amounts each month, with all shares of restricted stock being available for resale by June 1999. All of the officers and directors and persons known by CSI to be the beneficial holders of 2% or greater of the Common Stock outstanding prior to this offering (other than shares to be sold by the Selling Shareholders hereunder) have agreed with the Representatives not to sell such shares for a period of 12 months following the date of this Prospectus. The Registered Securityholders have agreed with the Representatives not to sell their shares for a period of 180 days following the date of this Prospectus. See "Shares Eligible For Future Sale." At the date of this Prospectus, the Combined Company has reserved shares for issuance upon the exercise or conversion of: (i) options to purchase up to 395,667 shares of Common Stock, which have a weighted average exercise price of $2.70 per share, (ii) warrants to purchase up to 105,717 shares of Common Stock, which have a weighted average exercise price of $4.86 per share, (iii) convertible promissory notes in the aggregate principal amount of $30,000 convertible into an undeterminable number of shares of Common Stock, which have a conversion price per share equal to 90% of the average bid and asked price of the Common Stock on the day before conversion, and (iv) 213,581 shares of GlobalTel's Series A Convertible Preferred Stock, which will be converted into approximately 174,437 shares of Common Stock and unpaid dividends on the Series A Convertible Preferred Stock, which will be converted into Common Stock at a price of $5.50 per share. At the completion of this offering, the Representatives will receive warrants (the "Representatives' Warrants") to purchase up to 360,000 shares of Common Stock at an exercise price of $8.40 (120% of the offering price of the Common Stock) during a period of four years commencing one year following the date of this Prospectus. During the terms of the outstanding options and the Representatives' Warrants, the holders thereof are given the opportunity to profit from a rise in the market price of the Common Stock, and the exercise thereof may dilute the ownership interests of existing shareholders, including investors in this offering. The existence of warrants, options and the Representatives' Warrants may adversely affect the terms on which the Combined Company may obtain additional equity financing in the future. Moreover, the holders are likely to exercise their rights to acquire Common Stock at a time when the Combined Company would otherwise be able to obtain capital on terms more favorable than through the exercise of such options and warrants. See "Management--Stock Option Plan" and "Underwriting." BENEFITS TO RELATED PARTIES; RELATED PARTY TRANSACTIONS The Combined Company will use a portion of the net proceeds of the offering to repay the Bridge Notes, as to which Robert A. Spade and Patrick R. Scanlon have provided personal guaranties and pledged a portion of their Common Stock. Such guaranties and pledges will be released upon completion of this offering. A number of the officers and directors of GlobalTel who will become executive officers and directors of the Combined Company hold notes and warrants to purchase common stock of GlobalTel. Messrs. Ronald P. Erickson, Bruce L. Crockett and Lyman C. Hamilton, members of the Board of Directors of the Combined Company, are also directors of IBNET, and each holds options to purchase 50,000 shares of IBNET's common stock. In addition, Mr. Hamilton owns 100,000 shares of IBNET's common stock. IBNET previously entered into a ten- year marketing agreement with GlobalTel. See "Management" and "Certain Transactions." SIGNIFICANT PORTION OF PROCEEDS TO BE USED TO REPAY INDEBTEDNESS The Combined Company will use an aggregate of approximately $16.8 million, or 70.9% of the net proceeds of the offering to the Combined Company, to repay certain indebtedness of the Combined Company. See "Use of Proceeds." 18 ANTI-TAKEOVER EFFECTS OF CERTAIN CHARTER AND STATUTORY PROVISIONS The Combined Company's Articles of Incorporation authorizes the issuance of up to 5,000,000 shares of Preferred Stock. The Preferred Stock may be issued in series with the material terms of any series determined solely by the Board of Directors. Such terms would likely include dividend rights, conversion features, voting rights, redemption rights and liquidation preferences. The Combined Company does not currently anticipate that it will issue any Preferred Stock. However, if the Combined Company does issue any series of Preferred Stock in the future, it is likely that such shares will have dividend privileges and liquidation preferences superior to those of the Common Stock. Further, the Preferred Stock may be issued with voting, conversion or other terms determined by the Board of Directors including, among others, dividend payment requirements, redemption provisions, preferences as to dividends and distributions, and preferential voting rights. In addition, certain provisions of Colorado law could have the effect of delaying, deterring or preventing a change in control of the Combined Company. ABSENCE OF DIVIDENDS The Combined Company does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. The Combined Company intends to retain profits, if any, to fund growth and expansion. See "Dividend Policy." DILUTION This offering will result in immediate substantial dilution of $6.63 (94.7%) per share, which amount represents the difference between the pro forma net tangible book value per share after the offering and an assumed public offering price of $7.00 per share. See "Dilution." LIMITATION OF LIABILITY The Combined Company's Articles of Incorporation provides that directors of the Combined Company shall not be personally liable for monetary damages to the Combined Company or its shareholders for a breach of fiduciary duty in their capacities as directors, subject to limited exceptions. Although such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission, the presence of these provisions in the Articles of Incorporation could prevent the recovery of monetary damages against directors of the Combined Company. See "Management--Limitation of Liability and Indemnification." LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SECURITIES The Combined Company has applied for listing on the Nasdaq SmallCap Market and believes it will meet the recently adopted standards for such listing which require: (i) net tangible assets of $4 million, (ii) a public float of one million shares, (iii) a market value of the public float of $5 million, (iv) three market makers, (v) a minimum $4.00 bid price per share of common stock, and (vi) at least 300 shareholders. Nasdaq has also adopted new criteria for continued Nasdaq SmallCap Market eligibility. In order to continue to be included on the Nasdaq SmallCap Market (thereby exempting a company from the "penny stock" regulations described below), a company must maintain (i) at least two market makers, (ii) 300 holders of its common stock, (iii) a minimum bid price of $1.00 per share of common stock, (iv) net tangible assets of $2 million (unless the company had net income of $500,000 in two of the last three years or a market capitalization of $35 million), (v) 500,000 shares in the public float, and (vi) a market value of the public float of $1 million. The Combined Company's failure to meet these maintenance criteria in the future may result in the termination of listing of the Common Stock on the Nasdaq SmallCap Market. In such event, trading, if any, in the Common Stock may continue to be conducted in the non-Nasdaq over-the-counter market in what are commonly referred to as OTC Bulletin Board and the "pink sheets." As a result, an investor may find it more difficult to dispose of or to obtain accurate quotations as to the market value of the Common Stock. 19 DISCLOSURE RELATED TO PENNY STOCKS The Commission has adopted rules that define a "penny stock" as equity securities priced at under $5.00 per share which are not listed for trading on Nasdaq (unless (i) the issuer has a net worth of $2 million if in business for more than three years or $5 million if in business for less than three years, or (ii) the issuer has had average annual revenue of $6 million or more for the prior three years). The Combined Company's Common Stock will not be considered a "penny stock" initially if listed on the Nasdaq SmallCap Market. In the event that the Common Stock is characterized in the future as penny stock, broker-dealers dealing in the Common Stock will be subject to the disclosure rules for transactions involving penny stocks which require the broker-dealer, among other things, to (i) determine the suitability of purchasers of the Common Stock, and obtain the written consent of purchasers to purchase such Common Stock prior to the transaction, (ii) provide customers with required risk disclosure documents, disclose quotation and compensation information and provide monthly price information and other required information, and (iii) disclose the best (inside) bid and offer prices for such Common Stock and the price at which the broker-dealer last purchased or sold the Common Stock. The additional burdens imposed upon broker-dealers may discourage them from effecting transactions in penny stocks, which usually reduces the liquidity of such securities. RISKS RELATING TO FORWARD-LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include, but are not limited to, statements regarding the Combined Company's marketing plans, expectations concerning growth in the market, and the planned use of proceeds. Actual results could differ from those projected in any forward-looking statement. The forward-looking statements are made as of the date of this Prospectus and the Combined Company assumes no obligation to update such forward-looking statements, or to update the reasons why actual results may differ from those projected in the forward-looking statements. Numerous factors, including without limitation those factors mentioned in this "Risk Factors" section, could cause future results to differ substantially from those contemplated in such forward-looking statements. A number of the factors that may influence future results of operations are outside the Combined Company's control. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 20 THE ACQUISITIONS Following completion of the offering, CSI will complete the GlobalTel Merger and the ITC Acquisition. GlobalTel provides international telecommunications services, principally to small- and medium-sized business customers, in emerging telecommunications markets. Currently, GlobalTel offers international long-distance, calling cards and enhanced voice services to more than 8,500 customers in over 120 countries. GlobalTel began operations in 1995 with its entry into the international call-reorigination business. GlobalTel primarily markets its telecommunications services through a network of over 81 independent sales agents that currently cover more than 80 countries. GlobalTel also has several strategic relationships, including an exclusive marketing agreement with IBNET, the managing member of the Consortium of Global Commerce, which will enable the Combined Company to market its services through several thousand individual chambers of commerce located in over 200 countries. In addition, Novell will provide the Combined Company with a distribution channel for its services through a select number of Novell's 25,000 value-added resellers ("VARs"). GlobalTel's telecommunications network includes an international network switching center in Los Angeles, California consisting of two Summa Four telecommunications switches and the use of a Northern Telecom DMS 250 tandem switch. ITC provides call-reorigination services, primarily targeting individuals and small business customers in Europe, Africa and the Middle East. Currently, ITC offers international long-distance, calling cards and enhanced voice services to more than 8,500 customers. ITC markets its call-reorigination services through a network of approximately 55 independent sales agents. ITC services its customers through a switching platform located at its telecommunications center in Ft. Lauderdale, Florida. The center is a fiber optic facility consisting of two NACT 1000 port class 3 switches that direct international telephone and facsimile traffic and also have a broad spectrum of Internet capabilities. ITC's facility includes an integrated management information system and switching platform, which enhances ITC's ability to provide least cost routing and efficient billing services. Benefit of Acquisitions CSI believes that the GlobalTel Merger and the ITC Acquisition will provide a number of advantages to the Combined Company. These advantages include: Increased Buying Power with Carriers. The Combined Company will continue to purchase minutes from substantial international telecommunications carriers such as AT&T, Sprint, Cable & Wireless and Teleglobe. Upon completion of the GlobalTel Merger and the ITC Acquisition, the Combined Company will use its much larger combined call volume to seek lower rates from its carriers. In addition, the carriers' minimum volume commitments will be easier for the Combined Company to fulfill and redundant carrier deposits may be eliminated. See "Business--Industry and Market Opportunity" and "--Network and Operations." Combined Cost Structures. Although there can be no assurance, management believes the integration of existing cost structures will result in immediate savings for the Combined Company. CSI has traditionally concentrated its marketing efforts on South America, GlobalTel has focused on the Pacific Rim, while ITC has focused on Africa and Europe. Through relationships with its carriers, each company believes it has achieved superior rate structures in its geographic region. The Combined Company anticipates integrating the best of all three rate structures to realize cost reductions. Operating Efficiencies and Geographic Diversification. As the Combined Company attains greater geographic diversity, management believes it will realize efficiencies by having traffic spread more evenly over the 24-hour day. Equipment and personnel can be allocated and optimized more efficiently over 24 hours, rather than over the shorter "peak" periods associated with each continent. Geographic diversity also reduces the concentration of the Combined Company's exposure to regulatory and business risk and reduces its dependence upon individual independent sales agents. 21 Cross-Marketing Additional Services. In addition to the telecommunications services each company presently provides, GlobalTel's and ITC's switches make it possible for the Combined Company to significantly expand its carrier and reseller business, and to introduce new enhanced services such as enhanced fax and business grade Internet services to its existing customers. In addition, the Combined Company's DIAL and LINK-US technologies facilitate transparent call-reorigination, under which the mechanics of the call-reorigination process are invisible to the customer. Elimination of Redundant Overhead. The Combined Company believes it will be able to reduce its number of employees and its outside contractors through the consolidation of functional areas such as accounting, customer service and technical operations. The Combined Company intends that marketing, accounting and administration functions will be centralized in Colorado Springs, Colorado, while technical and customer service functions will be concentrated in Fort Lauderdale, Florida. Some additional technical and administrative functions will continue to be performed in Los Angeles, California and Seattle, Washington. Capitalizing on Personnel Experience and Expertise. CSI, GlobalTel and ITC each possess broad telecommunications industry experience. The Combined Company anticipates that synergies will be achieved in the areas of marketing, collections, customer provisioning, carrier relationships, Internet expertise, and development and enhancement of switch technologies. Pursuant to the Reciprocal Telecommunications Agreement between CSI and ITC, those companies have already integrated certain of their key operations and personnel. Terms of the Acquisitions In May 1998, CSI entered into an agreement to merge with GlobalTel. Following the GlobalTel Merger, the Combined Company will be renamed "CS GlobalTel, Inc." The agreement provides for the exchange of all of the outstanding shares of common stock of GlobalTel for shares of Common Stock of CSI. The holders of GlobalTel common stock will receive approximately .82 shares of Common Stock of CSI for each share of GlobalTel common stock. Upon completion of the GlobalTel Merger, Ronald P. Erickson, the current Chief Executive Officer of GlobalTel, will become Chairman of the Board of the Combined Company. The GlobalTel Merger is conditioned on, among other things, there being no material adverse change in the condition of either company. CSI expects the GlobalTel Merger will be completed shortly after this offering. CSI has entered into an agreement to acquire all of the outstanding capital stock of ITC for $3.3 million in cash ($300,000 of which has already been paid through May 31, 1998) and 295,714 shares of Common Stock based on an assumed initial offering price of $7.00 per share, to be issued on the first anniversary of the closing of this offering. A portion of the cash will be held in escrow for one year to secure certain indemnification obligations of the shareholders of ITC. ITC is currently owned by Lynch Family, LLC, Philip A. Thomas and Sean Thomas. Upon completion of the ITC Acquisition, Philip A. Thomas will become Vice President--General Manager and Sean Thomas will become Director of Business Development for Europe of the Combined Company. The ITC Acquisition is conditioned upon, among other things, there being no material adverse change in the condition of either company. The ITC Acquisition is expected to occur concurrent with the consummation of this offering. Prior Acquisition In September 1995, in an effort to increase the number of shareholders of CSI's Common Stock, and become a publicly traded entity, CSI's shareholders approved a plan of merger to acquire all of the outstanding shares of Redden Dynamics Corporation ("Redden") for $34,500 cash and 272,925 shares of CSI's Common Stock. Under the plan of merger, the shareholders of Redden received one share of the CSI's Common Stock in exchange for each 40.5 shares of Redden stock. Effective as of the date of the merger, all shares of Redden were canceled, the assets of Redden became assets of CSI and Redden ceased to exist. Redden's only recorded asset consisted of $11,050 of organizational costs. Redden had no liabilities and had no revenue or expenses from its inception. Subsequent to the merger, CSI determined that Redden's assets were of no value to CSI. Accordingly, no amounts have been recognized for the issuance of the Common Stock in connection with the merger of Redden. See "Certain Transactions." 22 USE OF PROCEEDS Based on an assumed offering price of $7.00 per share, the net proceeds from the sale of the shares of Common Stock offered hereby are estimated to be approximately $23.7 million ($27.5 million if the Underwriters' over-allotment option is fully exercised). The Combined Company will not receive any proceeds from the sale of shares by the Selling Shareholders or the Registered Securityholders. The Combined Company expects to use the net proceeds during the 12 months following the offering as follows:
PERCENTAGE OF APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS ----------------------- ------------- ------------- Payment of deferred payables (1).................. $3,500,000 14.8% Completion of ITC Acquisition (2)................. 3,100,000 13.1 Repayment of GlobalTel Full Coverage Notes (3).... 3,100,000 13.1 Repayment of Bridge Notes (4)..................... 3,000,000 12.7 Repayment of GlobalTel notes (5).................. 2,300,000 9.7 Repayment of 12% Notes (6)........................ 1,300,000 5.5 Merger and acquisition fee (7).................... 1,050,000 4.4 Repayment of short term debt (8).................. 500,000 2.1 Working capital, capital expenditures and general corporate purposes (9)........................... 5,850,000 24.6 ----------- ----- $23,700,000 100.0% =========== =====
- -------- (1) Represents amounts to be used for the payment of deferred payables, which amounts consist primarily of $2.2 million to carriers and $1.1 million for professional services. (2) Represents amounts to be paid to Lynch Family, LLC, Philip Thomas and Sean Thomas as partial consideration for all of the capital stock of ITC and estimated acquisition costs of $100,000. Through May 31, 1998, the Combined Company has paid $300,000 in connection with the ITC Acquisition. In addition, on the first anniversary of the closing of this offering, Lynch Family, LLC and Messrs. Thomas and Thomas will receive 295,714 shares of Common Stock based on an assumed initial offering price of $7.00 per Share. See "The Acquisitions." (3) Represents amounts to be used for the repayment of the entire $2,981,500 principal amount of GlobalTel Full Coverage Notes and estimated accrued interest thereon. The GlobalTel Full Coverage Notes bear interest a rate of 10% per annum and are repayable in January 1999. The proceeds from the issuance of the GlobalTel Full Coverage Notes were used for working capital and general corporate purposes. See "Description of Securities-- Description of Indebtedness." (4) Represents amounts to be used for the repayment of the entire $2,840,000 amount of Bridge Notes and estimated accrued interest thereon. The Bridge Notes bear interest at a rate of 10% per annum and are repayable on the earlier of five days after the consummation of this offering or December 30, 1998. CSI used the proceeds of the December 1997 Financing principally in connection with the repayment of trade payables and notes payable to telecommunications carriers. See "Description of Securities--Description of Indebtedness." (5) Represents amounts to be used for the repayment of certain notes issued by GlobalTel at various times in 1996 and 1997 and estimated accrued interest thereon. Such note bears interest at a rate of 10% per annum, and are repayable in June 1998 through March 1999. Amounts include notes totaling $805,000 subject to the rescission offer. The proceeds from the issuance of such notes were for working capital and general corporate purposes. (6) Represents amounts to used for the repayment of the entire $1,250,000 principal amount of certain notes issued by CSI (the "12% Notes") and estimated accrued interest thereon. The 12% Notes bear interest at a rate of 12% per annum and are repayable upon the completion of this offering. The proceeds of the issuance of the 12% Notes were used for working capital and general corporate purposes and to advance $500,000 to GlobalTel in May 1998. See "Description of Securities--Description of Indebtedness." 23 (7) Represents amounts to be paid to Cruttenden Roth Incorporated as a fee in conjunction with the GlobalTel Merger. (8) Represents amounts to be used for the repayment of approximately $520,000 of certain short term debt incurred by CSI and estimated accrued interest thereon. Such debt consists of $385,000 owed to certain holders of short term notes issued by CSI and $133,000 for obligations to repurchase shares of Common Stock. The notes bear interest at a rate of either 10% or 15% per annum and are due upon completion of this offering. The proceeds from the issuance of such notes were used for working capital and general corporate purposes. (9) Working capital will be used, among other things, for capital expenditures, to pay security deposits in connection with carrier agreements and to pay general and administrative expenses. This amount includes approximately $94,000 payable to a former employee of CSI and $50,000 payable to a director of CSI. In addition to the notes subject to the Rescission Offer described above, a portion of the proceeds will be used to fund the repurchase of Rescission Stock tendered in connection with the Rescission Offer in an approximate amount of up to $2.5 million, plus approximately $376,000 of statutory interest (as of June 30, 1998), of which up to approximately $1.4 million may be paid to officers and directors of the Combined Company and their affiliates if they accept the Rescission Offer. See "Rescission Offer." The foregoing represents the Combined Company's best estimate of the use of the net proceeds to be received in this offering, based on current planning and business conditions. However, the Combined Company reserves the right to change such uses when and if market conditions or unexpected changes in operating conditions or results of operations occur. The amounts actually expended for each use may vary significantly depending upon a number of factors including, but not limited to, future growth and the amount of cash generated by the Combined Company's operations. The Combined Company believes that its existing capital resources, together with the net proceeds of this offering, will be sufficient to maintain the current and planned operations of the Combined Company for a period of at least 12 months from the date of this Prospectus. Net proceeds not immediately required for the purposes described above will be invested principally in U.S. government securities, short-term certificates of deposit, money market funds or other short-term, interest- bearing securities. DIVIDEND POLICY CSI has never declared or paid any cash dividends or distributions on its capital stock. The Combined Company anticipates that for the foreseeable future all earnings will be retained for use in the Combined Company's business and no cash dividends will be paid to shareholders. Any payment of cash dividends in the future on the Common Stock will be dependent upon the Combined Company's financial condition, results of operations, current and anticipated cash requirements, plans for expansion, restrictions, if any, under debt obligations, as well as other factors that the Board of Directors deems relevant. 24 PRICE RANGE OF COMMON STOCK The Common Stock currently is traded infrequently in limited quantities on the OTC Bulletin Board under the symbol CSYG. The following table sets forth the range of high and low sales prices per share for the Common Stock through the fiscal quarter ending October 31, 1996, and the range of high and low closing bid prices thereafter, as adjusted to give effect to the assumed 1 for 3 reverse stock split. Market quotations represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions, and may not represent actual transactions. There was no market for the Common Stock prior to March 18, 1996.
PRICE RANGE OF FISCAL QUARTER ENDED COMMON STOCK -------------------- --------------- HIGH LOW ------- ------- 1996 April 30, 1996 (commencing March 18, 1996)................... 9.75 4.50 1997 July 31, 1996................................................ 9.75 4.875 October 31, 1996............................................. 10.50 3.75 January 31, 1997............................................. 3.00 1.313 April 30, 1997............................................... 2.625 .563 1998 July 31, 1997................................................ 2.44 .609 October 31, 1997............................................. 1.875 .609 January 31, 1998............................................. 4.875 .939 April 30, 1998............................................... 5.91 1.75 1999 July 31, 1998 (through June 17, 1998)........................ 5.81 3.56
On June 17, 1998, the closing bid price of the Common Stock as reported on the OTC Bulletin Board was $3.75 per share. CSI had approximately 632 holders of record of Common Stock as of June 17, 1998. While CSI is aware that a number of beneficial owners of its Common Stock hold shares in street name, no estimate has been made as to the number of shareholders owning stock of CSI in street name. 25 DILUTION As of March 31, 1998, CSI's net tangible book value was a $2.2 million deficit or $(0.66) per share of Common Stock. After giving effect to the issuance of the 12% Notes, the issuance of 162,286 Bridge Shares, the issuance of 74,074 shares of Common Stock for $250,000 in May 1998, the GlobalTel Merger and the ITC Acquisition (the "Pro Forma Combined adjustments"), and the sale by the Combined Company of 4.0 million shares of Common Stock at an assumed offering price of $7.00 per share and the receipt of the estimated net proceeds thereof, the pro forma net tangible book value of the Combined Company as of March 31, 1998 would have been approximately $3.4 million or $0.37 per share. This represents an immediate increase in pro forma net tangible book value of $4.12 per share to existing shareholders and an immediate dilution of $6.63 per share to new investors. "Dilution" is determined by subtracting pro forma net tangible book value per share after the offering from the assumed offering price per share of Common Stock, as illustrated by the following table: Assumed public offering price................................ $7.00 Net tangible book value (deficit) per share as of March 31, 1998...................................................... $(0.66) Decrease per share of Common Stock attributable to the Pro Forma Combined adjustments ..................................... (3.09) Increase per share of Common Stock attributable to new in- vestors................................................... 4.12 ------ Net tangible book value per share after the offering......... 0.37 ----- Dilution per share of Common Stock to new investors.......... $6.63 ===== Dilution as a percentage of assumed offering price........... 94.7% =====
The following table summarizes as of March 31, 1998, the number of shares of Common Stock purchased for cash, the total consideration paid and the average cash price per share paid by the existing shareholders and by new investors (assuming the sale of 4.0 million shares of Common Stock at the assumed offering price of $7.00 per share, before deduction of underwriting discounts and commissions and other estimated offering expenses):
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE ----------------- ------------------- (PER NUMBER PERCENT AMOUNT PERCENT SHARE) --------- ------- ----------- ------- ------- Existing sharehold- ers(1)(2).............. 5,217,693 56.6% $ 9,144,652 24.6% $1.75 New shareholders(2)..... 4,000,000 43.4 28,000,000 75.4 7.00 --------- ----- ----------- ----- Total................... 9,217,693 100.0% $37,144,652 100.0% ========= ===== =========== =====
- -------- (1) Includes 162,286 Bridge Shares to be issued immediately prior to the closing of this offering based on an assumed offering price of $7.00 per share 1,626,489 shares of Common Stock to be issued in connection with the GlobalTel Merger, and 74,074 shares of Common Stock issued in May 1998. (2) The sale of shares of Common Stock by the Selling Shareholders in this offering will reduce the number of shares of Common Stock held by existing shareholders to , or % of the total share of Common Stock outstanding, and will increase the number of shares held by new investors to , or % of the total shares of Common Stock outstanding after the offering. See "Principal and Selling Shareholders." The foregoing information excludes the Additional Securities and assumes no exercise of the over-allotment option and no exercise of the Representatives' Warrants. See "Description of Securities" and "Underwriting." To the extent that the Additional Securities are issued, there will be further dilution to new investors. 26 CAPITALIZATION The following table sets forth (i) the actual capitalization of CSI at March 31, 1998, (ii) the Pro Forma Combined capitalization to reflect the issuance of the 12% Notes, the December 1997 Financing, the issuance of 74,074 shares of Common Stock for $250,000 in May 1998, the GlobalTel Merger and ITC Acquisition and (iii) the Pro Forma As Adjusted capitalization to reflect the sale of 4.0 million shares of Common Stock at an assumed public offering price of $7.00 (after deducting underwriting discounts and commissions and estimated offering expenses).
MARCH 31, 1998 -------------------------------- PRO FORMA PRO FORMA CSI ACTUAL COMBINED AS ADJUSTED ---------- --------- ----------- (IN THOUSANDS) Cash(3).................................... $ 236 $ 2,634 $ 19,283 ====== ======= ======== Long-term debt, including current maturi- ties of notes payable, bridge loans and capital leases(3)......................... $2,993 $12,062 $ 8,143 Common stock subject to rescission, 405,475 issued and outstanding.................... -- 2,455 2,455 Shareholders' (deficit) equity: Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding............................. -- -- -- Common Stock, no par value; 25,000,000 shares authorized; 3,354,844, 5,217,693 and 9,217,693 shares issued and outstanding, respectively(1)(2)......... 2,651 9,145 32,712 Obligation to issue common stock......... 795 1,179 1,179 Common stock options..................... 37 719 719 Common stock warrants.................... -- 1,873 1,873 Notes receivable from shareholder........ (35) (35) (35) Accumulated deficit...................... (5,543) (8,343) (9,116) Treasury stock, at cost.................. (133) (133) -- ------ ------- -------- Total shareholders' (deficit) equity .... (2,228) 4,405 27,332 ------ ------- -------- Total capitalization..................... $ 765 $18,922 $ 37,930 ====== ======= ========
- -------- (1) Reflects 1,626,489 shares of CSI Common Stock issued to effect the GlobalTel Merger, 162,286 Bridge Shares, 74,074 shares of Common Stock issued in May 1998 on a Pro Forma Combined basis, and the issuance of 4,000,000 shares of Common Stock in the offering at an assumed offering price of $7.00 per share on a Pro Forma As Adjusted basis. (2) Excludes the Additional Securities (3) Net cash proceeds on a Pro Forma As Adjusted basis are net of estimated underwriters discounts and fees of $4,300,000 and the repayment of certain indebtedness. See "Notes to Pro Forma Condensed Combined Financial Statements." 27 SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) The following selected financial data should be read in conjunction with the financial statements of CSI, GlobalTel and ITC and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected financial data below have been derived from CSI's audited financial statements as of April 30 1996 and 1997 and December 31, 1997 and for each of the four years in the period ended April 30, 1997 and the eight months ended December 31, 1997, from GlobalTel's audited consolidated financial statements as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997, from ITC's audited statement of operations data for the ten months ended October 31, 1997 and the years ended December 31, 1995 and 1996, and the balance sheet data as of December 31, 1996, and October 31, 1997. The selected financial data for CSI with respect to the three months ended April 30, 1997 and March 31, 1998 and the balance sheet data as of March 31, 1998 have been derived from CSI's unaudited financial statements. The selected financial data for GlobalTel and ITC with respect to the three months ended March 31, 1997 and 1998 and the balance sheet data as of March 31, 1998 have been derived from GlobalTel's and ITC's unaudited financial statements. Management believes that CSI's, GlobelTel's and ITC's interim financial statements as of March 31, 1998 and for the three months ended March 31, 1997, April 30, 1997 and March 31, 1998 include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position and the results of operations of CSI, GlobelTel and ITC for such interim periods. Prior results are not a prediction of future results of operations. The Pro Forma As Adjusted information does not purport to present the Combined Company's financial position or results of operations that would have occurred had the transactions, to which pro forma effect is given, been consummated as of the dates or for the periods indicated and do not purport to project the Combined Company's financial position or results of operations at any future date or for a future period, and should be read in conjunction with the separate financial statements of CSI, GlobalTel and ITC and the pro forma condensed combined financial statements of CSI, GlobalTel and ITC. 28
HISTORICAL--CSI ------------------------------------------------------------- EIGHT THREE 12 MONTHS ENDED MONTHS MONTHS APRIL 30, ENDED ENDED ------------------------------- DEC. 31, ------------------- APRIL 30, MARCH 31, 1994 1995 1996 1997 1997 1997 1998 ----- ------ ------- ------- -------- --------- --------- Statement of operations data: Revenue......... $ 137 $1,838 $ 6,741 $11,865 $8,115 $3,206 $ 2,279 Cost of revenue........ 191 1,298 5,963 7,755 4,879 2,060 1,424 ----- ------ ------- ------- ------ ------ -------- Gross margin.... (54) 540 778 4,110 3,236 1,146 855 Operating expenses: Sales and marketing...... 29 529 1,573 2,080 2,007 589 557 General and administrative..461 625 1,652 2,024 2,103 628 684 Depreciation and amortization... 13 19 58 103 92 33 42 Acquired in- process research and development.... -- -- -- -- -- -- -- ----- ------ ------- ------- ------ ------ -------- Total operating expenses....... 503 1,173 3,283 4,207 4,202 1,250 1,283 ----- ------ ------- ------- ------ ------ -------- Income (loss) from (557) (633) (2,505) (97) (966) (104) (428) operations.. Interest expense, including amortization of debt discounted..... -- -- (19) (162) (113) (49) (698) Other income (expense)...... -- 139 -- -- (85) -- -- ----- ------ ------- ------- ------ ------ -------- Income (loss) before income taxes and extraordinary item........... (557) (494) (2,524) (259) (1,164) (153) (1,126) Income tax provision (benefit)...... -- -- -- -- -- -- -- ----- ------ ------- ------- ------ ------ -------- Income (loss) before extraordinary item........... (557) (494) (2,524) (259) (1,164) (153) (1,126) Extraordinary item--gain on extinguishment of debt........... -- -- -- -- 747 -- -- ----- ------ ------- ------- ------ ------ -------- Net income (loss)......... $(557) $ (494) $(2,524) $ (259) $ (417) $ (153) $ (1,126) ===== ====== ======= ======= ====== ====== ======== Series A convertible preferred stock dividends...... -- -- -- -- -- -- -- ----- ------ ------- ------- ------ ------ -------- Net income (loss) applicable to common shareholders... $(557) $ (494) $(2,524) $ (259) $ (417) $ (153) $ (1,126) ===== ====== ======= ======= ====== ====== ======== EBITDA.......... $(544) $ (614) $(2,447) $ 6 $ (874) $ (71) $ (386) ===== ====== ======= ======= ====== ====== ======== Basic loss per share (excluding extraordinary item).......... $(.53) $(.39) $(.90) $(.08) $(.35) $(.05) $(.34) ===== ====== ======= ======= ====== ====== ======== Weighted average number of shares outstanding.... 1,051 1,634 2,798 3,138 3,296 3,180 3,353 ===== ====== ======= ======= ====== ====== ======== PRO FORMA HISTORICAL--GLOBALTEL HISTORICAL--ITC AS ADJUSTED -------------------------------------------- ------------------------------------------- -------------------- THREE THREE 12 MONTHS MONTHS 12 MONTHS MONTHS ENDED ENDED ENDED 10 MONTHS ENDED THREE DEC. 31, MARCH 31, DEC. 31, ENDED MARCH 31, 12 MONTHS MONTHS -------------------------- ----------------- --------------- OCTOBER 31, --------------- ENDED ENDED DEC. 31, MARCH 31, 1995 1996 1997 1997 1998 1995 1996 1997 1997 1998 1997 1998 -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Statement of operations data: Revenue......... $ 2,113 $ 9,136 $12,862 $ 4,385 $ 1,698 $8,197 $7,603 $8,054 $2,126 $2,610 $ 35,261 $ 6,587 Cost of revenue........ 1,928 8,230 11,171 3,811 1,473 5,407 5,070 6,790 1,698 1,978 27,050 4,875 -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Gross margin.... 185 906 1,691 574 225 2,790 2,533 1,264 428 632 8,211 1,712 Operating expenses: Sales and marketing...... 238 682 788 227 120 1,220 1,099 715 211 252 4,468 929 General and administrative.. 1,536 5,773 7,119 1,412 1,523 1,149 1,446 1,388 414 421 12,787 2,628 Depreciation and amortization... 111 98 253 29 91 53 69 73 16 30 8,719 2,211 Acquired in- process research and development.... -- -- -- -- -- -- -- -- -- -- 2,800 -- -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Total operating expenses....... 1,885 6,553 8,160 1,668 1,734 2,422 2,614 2,176 641 703 28,774 5,768 -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Income (loss) from operations.. (1,700) (5,647) (6,469) (1,094) (1,509) 368 (81) (912) (213) (71) (20,563) (4,056) Interest expense, including amortization of debt discounted..... (34) (225) (1,368) (192) (1,023) (11) (21) (57) (3) (12) (1,001) (949) Other income (expense)...... -- -- -- -- -- 8 113 119 (17) 12 -- -- -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Income (loss) before income taxes and extraordinary item........... (1,734) (5,872) (7,837) (1,286) (2,532) 365 11 (850) (233) (71) (21,564) (5,005) Income tax provision (benefit)...... -- -- -- -- -- 21 4 -- -- -- -- -- -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Income (loss) before extraordinary item........... (1,734) (5,872) (7,837) (1,286) (2,532) 344 7 (850) (233) (71) (21,564) (5,005) Extraordinary item--gain on extinguishment of debt......... -- -- -- -- -- -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Net income (loss)......... $(1,734) $(5,872) $(7,837) $(1,286) $(2,532) $ 344 $ 7 $ (850) $ (233) $ (71) $(21,564) $(5,005) ======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== ========= Series A convertible preferred stock dividends...... -- -- (39) -- (16) -- -- -- -- -- -- -- -------- -------- -------- -------- -------- ------- ------- ----------- ------- ------- ---------- --------- Net income (loss) applicable to common shareholders... $(1,734) $(5,872) $(7,876) $(1,286) $(2,548) $ 344 $ 7 $ (850) $ (233) $ (71) $(21,564) (5,005) ======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== ========= EBITDA.......... $(1,589) $(5,549) $(6,216) $(1,065) $(1,418) $ 429 $ 101 $ (839) $ (197) $ (41) $(11,844) $(1,845) ======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== ========= Basic loss per share (excluding extraordinary item).......... $(2.75) $(5.88) $(6.48) $(1.28) $(1.46) $287 $5.83 $(708) $194 $(59) $ (2.47) $ (.57) ======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== ========= Weighted average number of shares outstanding.... 630 999 1,215 1,002 1,745 1 1 1 1 1 8,724 8,815 ======== ======== ======== ======== ======== ======= ======= =========== ======= ======= ========== =========
HISTORICAL--CSI HISTORICAL--GLOBALTEL HISTORICAL--ITC -------------------------------------------------- ------------------------- ---------------------------------- APRIL 30, DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31, OCTOBER 31, MARCH 31, -------------------------- ------------ --------- -------------- --------- ------------ ----------- --------- 1994 1995 1996 1997 1997 1998 1996 1997 1998 1996 1997 1998 ---- ---- ------ ------ ------------ --------- ------ ------ --------- ------------ ----------- --------- BALANCE SHEET DATA: Cash............ $ 7 $ 82 $ 57 $ 147 $ 429 $ 236 $ 446 $ 849 $ 98 $ 218 $ 848 $ 980 Working capital (deficit)....... (114) (288) (2,152) (2,331) (2,612) (3,923) (5,248) (4,934) (9,094) (383) (1,259) (1,423) Total assets.... 161 459 1,519 1,946 2,975 2,612 3,701 4,354 3,513 1,956 2,720 3,334 Long-term debt, net of current maturities and debt discount... -- -- -- -- -- -- 2,283 3,832 2,000 21 292 234 Common stock subject to rescission...... -- -- -- -- -- -- 1,519 2,455 2,455 -- -- -- Total shareholders' equity (deficit)....... (42) (182) (1,856) (1,669) (1,112) (2,228) (7,565) (8,534) (11,002) 69 (781) (899) PRO FORMA AS ADJUSTED ------------ MARCH 31, ------------ 1998 ------------ BALANCE SHEET DATA: Cash............ $19,283 Working capital (deficit)....... (5,028) Total assets.... 50,147 Long-term debt, net of current maturities and debt discount... 2,234 Common stock subject to rescission...... 2,455 Total shareholders' equity (deficit)....... 27,332
29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS With the exception of historical matters, the matters discussed herein are forward-looking statements that involve risks and uncertainties. Forward- looking statements include, but are not limited to, statements concerning anticipated trends in revenue and net income, the mix of the Combined Company's revenue, projections concerning operations and available cash flow. The Combined Company's actual results could differ materially from the results discussed in such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed in "Risk Factors" and elsewhere in this Prospectus. THE COMBINED COMPANY OVERVIEW The Combined Company is a growing provider of international telecommunications services offering long distance, calling cards and enhanced voice and data services. With more than 25,500 customers in over 170 countries, the Combined Company primarily serves markets that historically have been underserved by large telecommunications providers and ITOs. The Combined Company provides its telecommunications services through its (i) voice switching and global fax messaging infrastructure in Los Angeles, California, (ii) voice switching and billing center in Ft. Lauderdale, Florida, (iii) access to third party infrastructure through international telecommunications carriers and through Equant, a global data network services provider, and (iv) enhanced fax nodes in Hong Kong and Mexico City. The Combined Company currently focuses on international call-reorigination, capitalizing on the arbitrage opportunity created by differences between U.S. and international long-distance rates. The Combined Company also resells its international long-distance services to other telecommunications carriers and resellers on a wholesale basis. In addition, the Combined Company provides prepaid calling cards and enhanced voice services, consisting of voice-mail and conference calling. For the 12 months ended December 31, 1997, approximately 88.0% of the Combined Company's revenue was derived from call- reorigination and approximately 12.0% was provided by carrier resales. Going forward, the Combined Company intends to leverage the expertise derived from, and capitalize on the established customer base generated by, its call- reorigination business to provide higher margin telecommunications services such as call-through, enhanced fax and business grade Internet services. The Combined Company generally realizes higher gross margins from its call- reorigination services than from sales to carriers and resellers. Sales to carriers and resellers, however, provide a source of additional revenue and add significant minutes originating on the Combined Company's network, which improves the Combined Company's purchasing power with its carriers and enables it to take advantage of volume discounts. Unlike call-reorigination, minutes generated from sales to carriers and resellers generally are "billable" minutes even if the destination segment of the call is not answered or connected. Furthermore, the Combined Company is not responsible for billing end users or paying independent sales agent commissions. Therefore, operating costs generally are lower for sales to carriers and resellers. The Combined Company seeks to minimize costs through negotiation of favorable rates with its existing long distance carriers. Under certain carrier contracts, the Combined Company obtains guaranteed rates, which generally are more favorable than otherwise would be available, by committing to purchase a minimum number of minutes from such carriers. If the Combined Company fails to meet its minimum requirements under a carrier contract, it could still be required to pay its minimum monthly commitment as a penalty. The Combined Company is seeking to enter into agreements with additional long distance carriers in order to apply "least cost routing" techniques, which enable the Combined Company to access the lowest transmission costs charged by its carriers for each call segment. The Combined Company also intends to establish additional switching facilities outside the U.S. in order to utilize a larger number of long distance carriers and reduce its per minute transmission costs. See "Use of Proceeds" and "Business--Business Strategy." 30 As part of its acquisition strategy, CSI has entered into an agreement in principle to merge with GlobalTel and an agreement to acquire ITC. The GlobalTel Merger and the ITC Acquisition will enable the Combined Company to rapidly obtain access to complementary infrastructure, personnel, customer bases, sales and marketing resources and strategic relationships. The integration of GlobalTel and ITC with CSI will afford the Combined Company an opportunity to increase revenue through cross-marketing its services to each company's customer base and the sale of excess international capacity to other carriers and resellers. The Combined Company will seek to improve its margins through the administrative efficiencies and operating synergies created by the combination of the companies and through improved rate structures with carriers. The Combined Company's fiscal year end will be December 31. ACCOUNTING POLICIES AND PROCEDURES Revenue is generated primarily from international call-reorigination services and is based on the minutes of customer use billed by the Combined Company on completed calls. The Combined Company's call-reorigination revenue represents the majority of the Combined Company's revenue and has increased as the Combined Company has added independent sales agents and introduced its services into new countries. The Combined Company also sells international long distance minutes to other telecommunications carriers and resellers on a wholesale basis. The Combined Company's call re-origination customer base is diversified both geographically and by customer type. Approximately 60.0% of all revenue is collected through automatic charges to pre-approved customer credit cards. Under the terms of their agreements, the independent sales agents are responsible for collecting customer payments except for credit card payments, and independent sales agents generally are responsible for customer bad debts less, in some cases, an allowance granted by the Combined Company. Failure of independent sales agents to collect and remit customer payments to the Combined Company presents a risk to the Combined Company. Although collection terms for cash customers are net 30 days, the time necessary to process and collect billings through the Combined Company's independent sales agents may at times result in receivables reaching 60 to 90 days. Cost of revenue consists primarily of costs paid to carriers for the origination and transmission of voice and data telecommunications services and to a lesser extent, debit card costs and allowances and discounts. Currently, a substantial portion of the Combined Company's telecommunications revenue is derived from services that are accessed through the facilities of long distance carriers. Accordingly, a significant portion of the Combined Company's cost of telecommunications services is variable, based on the number of minutes of use, with transmission costs being the Combined Company's most significant expense. In March 1998, the Combined Company's aggregate minimum monthly commitments were approximately $564,000, which represented approximately 34.6% of the Combined Company's monthly variable transmission cost. Sales and marketing expense primarily represents commissions paid to independent sales agents, compensation paid to in-house salespersons and advertising expense. To date, the Combined Company's decision to use independent sales agents has been primarily driven by the low initial fixed costs associated with this distribution channel, and the benefits of independent sales agents' familiarity with local business and marketing practices. See "Risk Factors--Dependence on Key Sales Agents" and "Business-- Sales and Marketing." General and administrative expense primarily represents compensation for customer service, executive and accounting personnel, costs associated with the operation and maintenance of the Combined Company's network switching centers, costs related to the technical development of, and market planning for, the Combined Company's planned enhanced services, professional fees, bad debt expense and other operating and corporate overhead costs. The Combined Company has a policy of aggressively attempting to collect receivables from independent sales agents and customers who fail to remit payment in a timely manner. While the Combined Company seeks to minimize bad debt, the Combined Company's experience indicates that a certain portion of past due receivables will never be collected. 31 Depreciation expense includes depreciation of switching and network equipment, furniture and fixtures. The Combined Company provides for depreciation using the straight line method of depreciation over the estimated useful lives of the assets, which range from five to ten years. The Combined Company will incur amortization expense which relates to the amortization of the intangible assets recorded in the GlobalTel Merger and the ITC Acquisition. The intangible assets will include identifiable intangible assets which will be amortized over a two to seven year period and that relate to distribution and customer arrangements, intellectual property and licenses. Identifiable intangible assets also include in-process research and development which will be charged to operating expense upon completion of the GlobalTel Merger. In addition, intangible assets include goodwill, which will be amortized over a five-year period. Interest and debt discount expense includes interest expense on indebtedness and non-cash financing expenses including amortized debt discount and amortized deferred offering costs associated with debt financing. As used herein, "EBITDA' is defined as net income or loss plus depreciation, amortization and interest expense, income taxes and other non-cash charges, minus extraordinary income and gains and non-cash income, if any, and plus extraordinary losses, if any. EBITDA is not a measure of financial performance under generally accepted accounting principles and should not be considered a substitute for measures of performance prepared in accordance with generally accepted accounting principles. COMPARISON OF 12 MONTHS ENDED DECEMBER 31, 1995, 1996 AND 1997 The Combined Company's historical combined revenue was $15.1 million, $27.1 million and $35.3 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. The increase in revenue resulted from increased usage by existing customers, the addition of new customers as the Combined Company expanded its independent sales agent network and commenced providing services in new countries, and the commencement of sales to carriers and resellers. Call-reorigination revenue represented 100.0%, 95.8% and 88.0% for 1995, 1996 and 1997, respectively, while carrier and reseller revenue represented 2.9% and 12.0% for 1996 and 1997, respectively. The Combined Company anticipates that revenue will increase as it begins to cross-market its services to its customers and continues to focus on carrier sales. The Combined Company's historical combined cost of revenue was $11.2 million, $20.8 million and $27.0 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs were 74.3%, 77.1% and 76.7% for 1995, 1996 and 1997, respectively. The Combined Company anticipates a significant increase in transmission costs associated with greater calling volume. The growth in transmission volume should improve the Combined Company's ability to negotiate preferential rates with its carriers. In addition, integrating the cost structures of the Combined Company may result in reduced costs per minute of use. The Combined Company expects gross margin percentages may decline if carrier and reseller revenue increases as a percentage of revenue or if price reductions occur due to competition. The Combined Company's historical combined sales and marketing expense was $2.6 million, $3.7 million and $4.5 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs were 17.5%, 13.6% and 12.7% for 1995, 1996 and 1997, respectively. The Combined Company anticipates a significant increase in sales and marketing expense in absolute dollars due to an increase in independent sales agent commissions caused by an expected increase in revenue. However, these costs as a percentage of revenue are expected to decrease as the fixed portion of sales and marketing expense, such as costs associated with in-house sales personnel and advertising, are spread across a broader revenue base. In addition, the Combined Company expects sales and marketing expense to decrease as a percentage of revenue if carrier and reseller revenue increase as a percent of total revenue because sales to carriers and resellers do not have advertising and sales commission costs. The Combined Company's historical combined general and administrative expense was $3.6 million, $9.3 million and $11.7 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. General and administrative expense in 1997 included non-recurring costs totaling $670,000 associated with GlobalTel's 32 terminated public offering and $447,000 of non-cash compensation cost. As a percent of revenue, general and administrative expense was 24.0%, 34.5% and 33.3% for 1995, 1996 and 1997, respectively. The Combined Company expects general and administrative expense will decrease as a percent of revenue due to cost savings resulting from operating efficiencies and the elimination of redundant overhead. The Combined Company's historical combined depreciation and amortization expense was $203,000, $251,000 and $480,000 for the 12 months ended December 31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs were 1.3%, .9% and 1.4% for 1995, 1996 and 1997, respectively. The Combined Company anticipates amortization expense will increase by $11.5 million annually due to amortization of the intangible assets related to the GlobalTel Merger, the ITC Acquisition and future acquisitions not yet identified. In addition, the Combined Company expects that depreciation expense may increase due to planned capital expenditures related to the purchase and installation of regional switches and automated switching equipment for its high volume customers. The Combined Company's historical combined interest and debt discount expense was $50,000, $341,000 and $1.6 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. As a percent of revenue, these costs were .3%, 1.3% and 4.5% for 1995, 1996 and 1997, respectively. The Combined Company anticipates non-cash financing expense of $3.5 million will be incurred until completion of this offering due to the amortization of debt discount expense, amortization of deferred offering costs and accrued interest expense related to CSI's December 1997 Financing and the GlobalTel Full Coverage Notes. The Combined Company expects interest expense may increase as the Combined Company seeks other financing arrangements, such as a working capital line of credit, lease financing, acquisition financing and term debt to be used to fund the Combined Company's growth. The Combined Company's historical combined negative EBITDA was $2.4 million, $6.8 million and $8.3 million for the 12 months ended December 31, 1995, 1996 and 1997, respectively. As a percentage of revenue, negative EBITDA was 16.1%, 25.1% and 23.5% for 1995, 1996 and 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES The Combined Company's capital resources have been used to fund operating losses, debt service and capital expenditures associated with development of its customer base and the establishment and upgrade of its network infrastructure. The Combined Company had a working capital deficit of $16.4 million at March 31, 1998. The Combined Company has historically satisfied its capital requirements principally through a combination of sales of equity and debt securities, borrowings from third parties and trade credit extended by carriers. The Combined Company believes that cash on hand, together with cash flow from its operating activities and cash available from this offering, will be sufficient to fund the Combined Company's existing operations at least for the next 12 months. However, the Combined Company intends to continue its strategy of rapid growth, primarily through the expansion of its infrastructure and pursuing other growth opportunities such as acquisitions of complementary international customer bases, products and infrastructure. The Combined Company is currently reviewing various alternatives for obtaining additional financing to fund this strategy. The proceeds from such financing are anticipated to be used to expand the Combined Company's operations, fund the Combined Company's growth and enable the Combined Company to undertake additional strategic initiatives. There can be no assurance that the Combined Company will be able to raise additional capital on acceptable terms or at all. If the Combined Company is unable to obtain such additional capital, the Combined Company may have to curtail its expansion of operations, growth and other strategic initiatives, which could adversely affect the Combined Company's business, financial condition and results of operations and its ability to compete. EFFECTS OF INFLATION AND FOREIGN CURRENCY EXCHANGE Although increases in salaries, carrier costs and operating overhead can adversely affect the Combined Company's operations, the Combined Company does not believe that inflation has had a material effect on its operating results. However, because future increases in inflation may cause the Combined Company's suppliers 33 to increase prices of materials and services to the Combined Company, an increase in inflation could increase the Combined Company's cost of revenue and operating expenses. Although the Combined Company's sales to date have been denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign currencies also may adversely affect the Combined Company's revenue. To the extent the Combined Company changes its pricing practices to denominate prices in foreign currencies, the Combined Company will be exposed to increased risks of currency fluctuation. Any such fluctuation could have a material adverse effect on the Combined Company's earnings or assets when translated into U.S. dollars. Although the Combined Company has not entered into foreign exchange contracts to hedge exchange transactions, it may do so in the future. SEASONALITY The Combined Company's business exhibits a small degree of seasonality. Historically, the Combined Company's revenue (as well as sales in the telecommunications industry in general) has decreased slightly in August and December, which CSI attributes to vacations and holidays in its European and Latin American markets and in the United States. As a result of these factors, reported quarterly revenue in future periods will vary and are not indicative of revenue in subsequent comparable periods. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("Statement 131"), which is effective for financial statements with fiscal years beginning after December 15, 1997. Statement 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. Statement 131 also requires that public business enterprises report certain information about their products and services, the geographic areas in which they operate and their major customers. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("Statement 132"), which revises employers' disclosures about pension and other postretirement benefit plans. Statement 132 does not change the measurement or recognition of those plans, but requires additional information on changes in benefit obligations and fair values of plan assets, and eliminates certain disclosures previously required by SFAS Nos. 87, 88 and 106. Statement 132 is effective for financial statements with fiscal years beginning after December 15, 1997. The Combined Company has not determined what additional disclosures, if any, may be required by the provisions of Statements 131 and 132, but does not expect adoption of either statement to have a material effect on its results of operations. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities and organization costs to be expensed as incurred. The SOP is effective for financial statements with fiscal years beginning after December 15, 1998, although earlier application is encouraged. The adoption of the SOP is not expected to have a material adverse effect on the Combined Company. YEAR 2000 STATEMENT The Combined Company is currently evaluating its computer systems to identify potential problems relating to the Year 2000 date change. The Combined Company does not expect the cost to modify its computer systems to address Year 2000 issues will be material to its financial condition or results of operations, and does not anticipate any material disruption in its operations as a result of any Year 2000 issues. The Combined Company does not have any information concerning the potential impact of Year 2000 issues on any of its suppliers or customers. In the event that the Combined Company or any of the Combined Company's significant suppliers or customers does not successfully and timely address Year 2000 issues, the Combined Company's business or operations could be adversely affected. 34 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to revenue of certain items in CSI's statements of operations:
THREE THREE MONTHS MONTHS YEAR ENDED EIGHT MONTHS ENDED ENDED ENDED APRIL 30, DECEMBER 31, APRIL 30, MARCH 31, --------------------- ------------------ --------- --------- 1995 1996 1997 1997 1997 1998 ----- ----- ----- ------------------ --------- --------- Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue......... 70.6 88.5 65.4 60.1 64.3 62.5 ----- ----- ----- ----- ----- ----- Gross margin............ 29.4 11.5 34.6 39.9 35.7 37.5 Operating expenses: Sales and marketing... 28.8 23.3 17.5 24.7 18.3 24.4 General and adminis- trative.............. 34.0 24.5 17.0 25.9 20.2 30.0 Depreciation and amor- tization............. 1.0 0.9 0.9 1.1 1.0 1.8 ----- ----- ----- ----- ----- ----- Total operating ex- penses................. 63.8 48.7 35.4 51.7 39.5 56.2 ----- ----- ----- ----- ----- ----- Income (loss) from oper- ations................. (34.4) (37.2) (0.8) (11.8) (3.8) (18.7) Interest expense, in- cluding amortization of debt discount.......... -- (0.3) (1.4) (1.4) (1.5) (30.6) Other expense........... -- -- -- (1.0) -- -- ----- ----- ----- ----- ----- ----- Net income (loss) before extraordinary item..... (34.4) (37.5) (2.2) (14.2) (5.3) (49.3) Extraordinary item...... -- -- -- 9.2 -- -- ----- ----- ----- ----- ----- ----- Net income (loss)....... (34.4)% (37.5)% (2.2)% (5.0)% (5.3)% (49.3)% ===== ===== ===== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED APRIL 30, 1997 TO THREE MONTHS ENDED MARCH 31, 1998 Revenue decreased 927,000 or 28.9% from approximately $3.2 million for the three months ended April 30, 1997 to $2.3 million for the three months ended March 31, 1998. This decrease in revenue was due to a decline in customers and usage resulting from service disruptions caused by the transfer of CSI's switching and billing functions into ITC's systems. CSI experienced operational difficulties during this transfer process which resulted in service disruptions for a number of customers. Although CSI's revenue was adversely affected during this period, CSI believes that it has resolved these difficulties. CSI's cost of revenue decrease $636,000 or 30.9% from approximately $2.1 million in the three months ended April 30, 1997 to approximately $1.4 million for the three months ended March 31, 1998. As a percentage of revenue, these costs decreased from 64.3% to 62.5% for the three month periods ended April 30, 1997 and March 31, 1998, respectively. As of March 1998, CSI had new contractual commitments with Sprint reflecting more favorable rates that resulted in improved gross margins during the three months ended March 31, 1998. Sales and marketing expense decreased $32,000 or 5.4 % from $589,000 for the three months ended April 30, 1997 to $557,000 for the three months ended March 31, 1998. As a percentage of revenue, these costs increased from 18.4% to 24.4% for the three month periods ended April 30, 1997 and March 31, 1998, respectively. The decrease in absolute dollars was due in part to a decrease in independent sales agent commissions caused by the decrease in revenue, while the increase as a percentage of revenue was due primarily to a decrease in revenue. General and administrative expense increased $56,000 or 8.9% from $628,000 for the three months ended April 30, 1997 to $684,000 for the three months ended March 31, 1998. As a percentage of revenue, these costs increased from 19.6% to 30.0% for the three month periods ended April 30, 1997 and March 31, 1998, respectively. The increase in costs were due to additional customer support and administrative personnel. Expenses decreased as a percent of revenue, due to the decrease in revenues. 35 Depreciation and amortization expense increased $9,000 or 27.3% from approximately $33,000 for the three months ended April 30, 1997 to approximately $42,000 for the three months ended March 31, 1998. These costs increased primarily as a result of CSI's higher fixed asset base during the three months ended March 31, 1998 as compared with the three months ended April 30, 1997. Interest and anticipation of debt discount expense increased $649,000, from approximately $49,000 for the three months ended April 30, 1997 to approximately $698,000 for the three months ended March 31, 1998. This increase is primarily due to interest expense and amortized costs associated with the December 1997 Financing. Interest and debt discount expense will increase significantly until completion of this offering due to accrued interest and amortized costs associated with the December 1997 Financing and 12% Note financing in April and May 1998. CSI did not record an income tax expense or benefit for the three month periods ended April 30, 1997 or March 31, 1998 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. CSI had a net loss of approximately $153,000 for the three months ended April 30, 1997 compared to a net loss of approximately $1.1 million for the three months ended March 31, 1998. The increase in net loss was due primarily to the decrease in revenue and the increases in interest expenses and amortized costs associated with CSI's financing. CSI had basic loss per share of $.05 for the three months ended April 30, 1997 compared to basic loss per share of $.34 for the three months ended March 31, 1998. The change in per share results was due primarily to an increase in net loss and by an increase in weighted average shares outstanding. CSI had negative EBITDA of $71,000 for the three months ended April 30, 1997 compared to negative EBITDA of $386,000 for the three months ended March 31, 1998. The decrease in EBITDA was primarily due to the decrease in revenue. COMPARISON OF TWELVE MONTHS ENDED APRIL 30, 1997 TO EIGHT MONTHS ENDED DECEMBER 31, 1997 Revenue decreased $3.7 million from $11.9 million for the twelve months ended April 30, 1997 to $8.1 million for the eight months ended December 31, 1997. This decrease is primarily due to the different periods presented. Cost of revenue decreased $2.9 million from $7.8 million for the twelve months ended April 30, 1997 to $4.9 million for the eight months ended December 31, 1997. As a percentage of revenue, cost of revenue decreased from 65.4% to 60.1% respectively. Cost of revenue increased at a lower rate than revenue as CSI recognized the benefit of more favorable carrier rates. Sales and marketing expense decreased $73,000 from $2.1 million for the twelve months ended April 30, 1997 to $2.0 million for the eight months ended December 31, 1997. As a percentage of revenue, these costs increased from 17.5% to 24.7% for the twelve months ended April 30, 1997 and the eight months ended December 31, 1997, respectively. The increase as a percentage of revenue was due primarily to an increase in marketing expense and costs associated with in- house sales persons. General and administrative expense increased $79,000 from $2.0 million for the twelve months ended April 30, 1997 to $2.1 million for the eight months ended December 31, 1997. As a percentage of revenue, these costs increased from 17.0% to 25.9% for the twelve months ended April 30, 1997 and the eight months ended December 31, 1997, respectively. The increase in costs were due to additional customer support and administrative personnel hired to support the growth of CSI's operations and an increase in bad debt expense. Depreciation and amortization expense decreased $11,000 from approximately $103,000 for the twelve months ended April 30, 1997 to approximately $92,000 for the eight months ended December 31, 1997. As a percentage of revenue, these costs increased from .9% to 1.1% for the twelve months ended April 30, 1997 and the eight months ended December 31, 1997, respectively. Interest and amortization of debt discount expense decreased $49,000 from $162,000 for the twelve months ended April 30, 1997 to approximately $113,000 for the eight months ended December 31, 1997. As a percentage of revenue, these costs increased from 1.4% to 1.4% for the twelve months ended April 30, 1997 and the eight months ended December 31, 1997, respectively. 36 CSI did not record an income tax benefit in for the twelve months ended December 31, 1997 or the eight months ended December 31, 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. The net loss before extraordinary item increased $905,000 from $259,000 for the twelve months ended April 30, 1997 to $1.2 million for the eight months ended December 31, 1997. The increase in net loss was primarily due to an increase in general and administrative expenses as a percent of revenue. CSI had basic loss per share before extraordinary item of $.08 for the twelve months ended April 30, 1997 compared to basic loss per share of $.35 for the eight months ended December 31, 1997. The decrease in basic loss per share was due primarily to an increase in net loss and an increase in the weighted average number of shares outstanding. CSI had positive EBITDA of $6,000 for the twelve months ended April 30, 1997 compared to negative EBITDA of $874,000 for the eight months ended December 31, 1997. The decrease in EBITDA was primarily due to an increase in general and administrative expenses as a percent of revenue. COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1996 AND 1997 Revenue increased $5.1 million or 76.0% from $6.7 million for fiscal 1996 to $11.9 million for fiscal 1997. This increase was primarily due to growth in the number of customers. The significant increase in revenue was primarily due to CSI's efforts to increase its independent sales agent base in its target markets. Cost of revenue increased $1.8 million or 30.1% from $6.0 million for fiscal 1996 to $7.8 million for fiscal 1997. As a percentage of revenue, cost of revenue decreased from 88.5% to 65.4%, respectively. Cost of revenue increased at a lower rate than revenue as CSI recognized the benefit of more favorable carrier rates. Sales and marketing expense increased $507,000 or 32.2% from $1.6 million for fiscal 1996 to $2.1 million for fiscal 1997. As a percentage of revenue, these costs decreased from 23.3% to 17.5% for fiscal 1996 and fiscal 1997, respectively. The increase in absolute dollars was due primarily to commissions due on increased revenue while the decrease as a percentage of revenue was due primarily to revenue increasing at a greater rate than marketing expense and costs associated with in-house salespersons. General and administrative expense increased $372,000 or 22.5% from $1.7 million for fiscal 1996 to $2.0 million for fiscal 1997. As a percentage of revenue, these costs decreased from 24.5% to 17.0% for fiscal 1996 and fiscal 1997, respectively. The increase in costs were due to additional customer support and administrative personnel hired to support the growth of CSI's operations. Depreciation and amortization expense increased $45,000 or 77.6% from approximately $58,000 for fiscal 1996 to approximately $103,000 for fiscal 1997. These expenses increased primarily as a result of CSI's higher fixed asset base in fiscal 1997 which was principally due to investments in telecommunications equipment, infrastructure and facility expansion. Interest expense increased $143,000 from approximately $19,000 for fiscal 1996 to approximately $162,000 for fiscal 1997. The increase in interest expense was due primarily to the issuance of notes to satisfy carrier obligations. CSI did not record an income tax benefit in either fiscal 1996 or fiscal 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. The net loss decreased from $2.5 million for fiscal 1996 to $259,000 for fiscal 1997. The decrease in net loss was primarily due to CSI's obtaining more favorable carrier rates and increases in customer volume. CSI had basic loss per share of $.90 for fiscal 1996 compared to basic loss per share of $.08 for fiscal 1997. The decrease in basic loss per share was due primarily to CSI's obtaining more favorable carrier rates and increases in customer volumes as well as an increase in the weighted average number of shares outstanding. 37 CSI had negative EBITDA of $2.4 million for fiscal 1996 compared to positive EBITDA of $6,000 for fiscal year 1997. The increase in EBITDA was primarily due to CSI's obtaining more favorable carrier rates, which improved gross margin percentages. COMPARISON OF FISCAL YEARS ENDED APRIL 30, 1995 AND 1996 Revenue increased $4.9 million or 266.8% from $1.8 million for fiscal 1995 to $6.7 million for fiscal 1996. This increase was primarily due to growth in the number of customers, which resulted from CSI's efforts to increase its independent sales agent base in its target markets. Cost of revenue increased $4.7 million or 359.4% from $1.3 million for fiscal 1995 to $6.0 million for fiscal 1996 and as a percentage of revenue increased from 70.6% to 88.5%, respectively. During fiscal 1996, CSI increased minute volume in advance of its ability to secure more favorable volume discount rates with its carriers. Sales and marketing expense increased $1.0 million or 197.4% from $529,000 for fiscal 1995 to $1.6 million for fiscal 1996. As a percentage of revenue, these costs decreased from 28.8% to 23.3% for fiscal 1995 and fiscal 1996, respectively. The increase in absolute dollars was due primarily to commissions on increased revenue while the decrease as a percentage of revenue was due primarily to revenue increasing at a greater rate than marketing expenses and costs associated with in-house salespersons. General and administrative expense increased $1.0 million or 164.3% from $625,000 for fiscal 1995 to $1.7 million for fiscal 1996. As a percentage of revenue, these costs decreased from 34.0% to 24.5% for fiscal year 1995 and fiscal 1996, respectively. The increase in absolute dollars was due to additional customer support and administrative personnel hired to support the growth of CSI's operations. Depreciation and amortization expense increased $39,000 or 205.3% from approximately $19,000 for fiscal 1995 to approximately $58,000 for fiscal 1996. These expenses increased primarily as a result of CSI's higher fixed asset base in fiscal 1996 which was principally due to investments in telecommunications equipment, infrastructure and facility expansion. Interest expense was approximately $19,000 for fiscal 1996 and was a nominal amount in fiscal 1995. Interest expense was due primarily to the issuance of notes payable to satisfy carrier obligations. CSI did not record an income tax benefit in either fiscal 1995 or fiscal 1996 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. The net loss increased from $494,000 for fiscal 1995 to $2.5 million for fiscal 1996. The increase in net loss was primarily due to CSI's unfavorable carrier rates and significant increase in operating expenses. CSI had basic loss per share of $.31 for fiscal 1995 compared to basic loss per share of $.90 for fiscal 1996. The increase in basic loss per share was due primarily to an increase in CSI's net loss as well as an increase in the weighted average number of shares outstanding. CSI had negative EBITDA of $614,000 for fiscal 1995 compared to negative EBITDA of $2.4 million for fiscal 1996. The decrease in EBITDA was due primarily to a significant increase in operating expenses during fiscal 1996. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain quarterly financial data for the six fiscal quarters ended October 31, 1997, the two month period ended December 31, 1997 and the quarter ended March 31, 1998. CSI changed its year end to December 31. This quarterly information has been derived from CSI's unaudited financial statements which, in the opinion of CSI's management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. Operating results for any one quarter are not necessarily indicative of the results that may be expected in any future period. 38 CSI's quarterly operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, some of which are outside CSI's control. These factors include demand for international telecommunications services, capital expenditures and other costs relating to the expansion of operations, the timing of new service introductions by CSI or its competitors, market availability and acceptance of new and enhanced versions of CSI's or its competitors' services, changes in the mix of revenue, rates of customer acquisition and retention and general economic conditions.
FISCAL 1997 QUARTER ENDED QUARTER ENDED ------------------------------------------ -------------------- TWO MONTHS QUARTER ENDED ENDED JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, DECEMBER 31, MARCH 31, 1996 1996 1997 1997 1997 1997 1997 1998 -------- ----------- ----------- --------- -------- ----------- ------------ --------- --- (IN THOUSANDS) Revenue................. $2,579 $2,952 $3,129 $3,206 $3,370 $3,002 $1,743 $ 2,279 Cost of revenue......... 1,675 1,933 2,086 2,060 2,023 1,784 1,072 1,424 ------ ------ ------ ------ ------ ------ ------ ------- Gross margin............ 904 1,019 1,043 1,146 1,347 1,218 671 855 ------ ------ ------ ------ ------ ------ ------ ------- Operating expenses: Sales and marketing.... 447 496 548 589 654 616 737 557 General and administrative........ 388 455 484 628 798 918 387 684 Depreciation and amortization.......... 19 23 28 33 33 35 24 42 ------ ------ ------ ------ ------ ------ ------ ------- Total operating expenses............... 854 974 1,060 1,250 1,485 1,569 1,148 1,283 ------ ------ ------ ------ ------ ------ ------ ------- Income (loss) from operations............. 50 45 (17) (104) (138) (351) (477) (428) Interest expense........ (40) (36) (38) (49) (47) (42) (24) (698) Other income (expense).. -- -- -- -- -- -- (85) -- ------ ------ ------ ------ ------ ------ ------ ------- Net income (loss) before extraordinary item..... 10 9 (55) (152) (185) (393) (586) (1,126) Extraordinary item...... -- -- -- -- -- -- 747 -- ------ ------ ------ ------ ------ ------ ------ ------- Net income (loss)....... $ 10 $ 9 $ (55) $ (152) $ (185) $ (393) $ 161 $(1,126) ====== ====== ====== ====== ====== ====== ====== =======
CSI experienced declining revenue in the quarters ended October 31, 1997 and March 31, 1998 in comparison to prior quarters. This decline was primarily a result of a decline in customers and usage resulting from service disruptions caused by the transfer of CSI's switching and billing functions into ITC's systems. CSI experienced operational difficulties during this transfer process which resulted in service disruptions for a number of customers. Although CSI's revenue was adversely affected during this period, CSI believes that it has resolved these difficulties. Operating expenses have increased during each quarter, reflecting an increase in general and administrative expense associated with the development of CSI's administrative infrastructure. Installation, sales and marketing expense has increased primarily due to commissions on increased revenue and in-house sales personnel. CSI also increased its reserve for bad debt during quarters ended October 31, 1997, due to unpaid receivables owed by a former independent sales agent. Interest expense increased significantly during the quarter ended March 31, 1998, primarily to non-cash financing activities in the quarter. CSI also recognized gain on extinguishment of debt during the two months ended December 31, 1997, related to the repayment of notes using the proceeds of the December 1997 Financing. LIQUIDITY AND CAPITAL RESOURCES CSI's capital resources have been used to fund operating losses, debt service and capital expenditures associated with development of its customer base and the establishment and upgrade of its network infrastructure. 39 Since its inception, CSI has experienced net losses and negative cash flow from operations. As of March 31, 1998, CSI had a working capital deficit of approximately $3.9 million. CSI has satisfied its capital requirements principally through a combination of sales of equity and debt securities, borrowings from third parties (including its shareholders) and trade credit extended by carriers. The proceeds from the issuance of stock and notes were used for expansion of operations and general corporate purposes. During fiscal 1996 and fiscal 1997, CSI issued shares of its Common Stock for aggregate proceeds of $537,000 and $111,000, respectively, and generated additional working capital of $320,000 in fiscal 1997 through the issuance of convertible notes. The notes bear interest at the rate of 10% per annum and mature two years after issuance. In fiscal 1998, $95,000 of principal amount of such notes were also issued. The notes are convertible into shares of Common Stock at a conversion price equal to 90% of the average of the bid and asked price on the day preceding the date of conversion. As of March 31, 1998, $385,000 of the convertible notes had been converted. In fiscal 1997, CSI also raised $85,000 through the issuance of notes that bear interest at 15% per annum and mature in September 1998. In December 1997, CSI issued Bridge Notes in the principal amount of $2.8 million. The Bridge Notes bear interest at 10% per annum and are due five days following the closing of this offering. CSI has entered into employment agreements that obligate the Combined Company to pay annual salaries of approximately $475,000. CSI also has an agreement to pay certain royalties to Gary Kamienski relating to CSI's LINK-US technology. As a result of CSI's operating losses, working capital has not always been sufficient to satisfy CSI's obligations, and CSI from time to time has been in arrears on its payment obligations to its carriers. During fiscal 1996 and fiscal 1997, CSI incurred usage fees, which it was unable to pay on a current basis, with two of its primary carriers totaling approximately $2.0 million. In February 1997, CSI restructured these obligations and converted all amounts into notes bearing interest ranging from 10% to 12% payable in monthly installments ranging from $40,000 to $123,000 through August 1997 and $40,000 thereafter through January 2001. In December 1997, all carrier obligations were paid in full from the proceeds of the December 1997 Financing. CSI anticipates that its minimum commitments to carriers (exclusive of any carrier commitments of GlobalTel or ITC) will be approximately $4.2 million and $1.5 million for fiscal 1998 and fiscal 1999, respectively. As of March 31, 1998, CSI was again in arrears on carrier payments due to one carrier of approximately $780,000. The Combined Company intends to use a portion of the proceeds of this offering to repay such amount. There can be no assurance CSI will not be required to pay a penalty to this or any other carrier or that CSI will not be in default of its obligations to its carriers in the future. Net cash provided by operating activities was approximately $341,000 for the three months ended March 31, 1998, as compared to cash provided by operating activities of approximately $200,000 for the three months ended April 30, 1997. Adjustments to the $1.1 million net loss for the period to reconcile to net cash provided by operating activities consisted primarily of $623,000 in amortized costs associated with the December 1997 Financing and $42,000 in depreciation and amortization. The increase in cash provided by operating activities was primarily due to a $733,000 increase in accounts payable and a decrease in accounts receivable. Net cash used in investing activities was approximately $85,000 for the three months ended March 31, 1998, compared to approximately $51,000 for the three months ended April 30, 1997. The increase was primarily due to acquisition deposits paid to ITC. Net cash used in financing activities was approximately $450,000 for the three months ended March 31, 1998, compared to cash used in financing activities of approximately $52,000 for the three months ended April 30, 1997. The increase in cash used in financing activities was primarily due to an increase in deferred offering costs and repayments for treasury stock. Net cash used in operating activities was approximately $1.1 million for the eight months ended December 31, 1997, as compared to cash provided by operating activities of approximately $730,000 for the twelve months ended April 30, 1997. Adjustments to the $417,000 net loss for the period to reconcile to net cash used in operating activities consisted primarily of a $747,000 extraordinary gain on extinguishment of debt, and $92,000 in depreciation and amortization. The decrease in cash provided from operating activities was primarily due to a $733,000 increase in net loss for such period partially offset by an increase in accounts payable and accrued expenses. Net cash used in investing activities was approximately $318,000 for the eight months ended December 31, 1997, compared to approximately $244,000 for the twelve months ended April 30, 1997. The increase was 40 primarily due to acquisition deposits paid to ITC. Net cash provided by financing activities was approximately $1.7 million for the eight months ended December 31, 1997, compared to cash used in financing activities of approximately $397,000 for the twelve months ended April 30, 1997. The increase in cash provided by financing activities was primarily due to receipt of proceeds from the Bridge Notes from the December 1997 Financing, issuance of stock, net of cash payments to acquire treasury stock from two former CSI employees, and repayment of a carrier note. Net cash provided by operating activities was approximately $730,000 for fiscal 1997, compared to cash used in operating activities of approximately $362,000 for fiscal 1996. The increase in cash provided was primarily due to a $2.3 million decrease in net loss and by an increase in accounts payable of approximately $911,000. Net cash used in investing activities was approximately $244,000 for fiscal 1997, compared to approximately $223,000 for fiscal 1996. The increase was primarily due to acquisition deposits paid to ITC. Net cash used in financing activities was approximately $397,000 for fiscal 1997, compared to cash provided by financing activities of approximately $560,000 for fiscal 1996. The increase in cash used was primarily due to repayment of notes, net of proceeds from the sale of stock and issuances of additional notes. Net cash used in operating activities was approximately $362,000 for fiscal 1996, as compared to cash used in operating activities of approximately $398,000 for fiscal 1995. The decrease in cash used was primarily due to an increase in accounts payable of approximately $2.7 million partially offset by a $1.9 million increase in net loss. Net cash used in investing activities was approximately $223,000 for fiscal 1996, compared to approximately $54,000 for fiscal 1995. The increase was primarily due to the acquisition of switching equipment. Net cash provided by financing activities was approximately $560,000 for fiscal 1996, compared to cash provided by financing activities of approximately $526,000 for fiscal 1995. The increase in cash provided was primarily due to proceeds from the sale of stock and issuances of notes. 41 GLOBALTEL RESOURCES, INC. RESULTS OF OPERATIONS The following table sets forth for the periods indicated, the percentage relationship to revenue of certain items in GlobalTel's statements of operations.
YEAR ENDED DECEMBER 31, MARCH 31, --------------------- -------------- 1995 1996 1997 1997 1998 ----- ----- ----- ----- ------ Revenue........................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue................... 91.3 90.1 86.9 86.9 86.7 ----- ----- ----- ----- ------ Gross margin...................... 8.7 9.9 13.1 13.1 13.3 Operating expenses: Sales and marketing............. 11.3 7.5 6.1 5.2 7.2 General and administrative...... 72.7 63.1 55.3 32.2 89.6 Depreciation and amortization... 5.2 1.1 2.0 0.7 5.4 ----- ----- ----- ----- ------ Total operating expenses.......... 89.2 71.7 63.4 38.1 102.2 ----- ----- ----- ----- ------ Loss from operations.............. (80.5) (61.8) (50.3) (25.0) (88.9) Interest expense, including amortization of debt discount.... (1.6) (2.5) (10.6) (4.3) (60.2) ----- ----- ----- ----- ------ Net loss.......................... (82.1)% (64.3)% (60.9)% (29.3)% (149.1)% ===== ===== ===== ===== ======
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998 Revenue decreased $2.7 million or 61.3% from $4.4 million for the three month period ended March 31, 1997 to $1.7 million for the three month period ended March 31, 1998. Revenue from call-reorigination decreased $900,000 or 37.5% from $2.4 million for the three month period ended March 31, 1997 to $1.5 million for the three month period ended March 31, 1998. This decrease resulted primarily from GlobalTel's decision in late 1996 to relocate its primary switching platform from Las Vegas to Los Angeles. GlobalTel experienced technical and operational difficulties in connection with this relocation process which resulted in service disruptions for a number of customers resulting in declining call-reorigination revenue for the three month periods ending March 31, June 30, September 30, and December 31, 1997 as well as the three month period ended March 31, 1998. In addition, increased competitive pressures encountered by some of GlobalTel's independent sales agents also contributed to the decline in revenue. Revenue from carrier sales decreased $1.7 million or 88.4% from the three month period ended March 31, 1997 to $228,000 for the three month period ended March 31, 1998. This decrease was primarily a result of GlobalTel's decision in May 1997 to temporarily de-emphasize its carrier sales business. Due to lengthy payment cycles GlobalTel had experienced with certain of its carrier customers and GlobalTel's relatively low cash reserves, GlobalTel reduced its carrier sales in order to limit its credit risk and to reduce its effective carrying costs associated with carrier accounts receivable. Cost of revenue decreased $2.3 million or 61.4% from $3.8 million for the three month period ended March 31, 1997 to $1.5 million for the three month period ended March 31, 1998. This decrease was primarily attributable to decreased transmission costs associated with lower calling volume. As a percentage of revenue, cost of revenue decreased from 86.9% to 86.7% for the three months period ended March 31, 1997 and 1998, respectively. This decrease resulted from lower costs as a percentage of revenue attributable to GlobalTel's call-reorigination revenue. This decrease was partially offset by higher costs of revenue as a percentage of revenue resulting from temporary re-routing of traffic previously carried by one of its principal long-distance carriers after this carrier ceased providing services to GlobalTel. Sales and marketing expense decreased $107,000 or 47.1% to $120,000 for the three month period ended March 31, 1997 from $227,000 for the three month period ended March 31, 1998. This decrease was primarily attributable to decreased sales commissions as related to call-reorigination sales generated by independent sales 42 agents. As a percentage of revenue, sales and marketing expense increased from 5.2% to 7.2% for the three month period ended March 31, 1997 and 1998, respectively, resulting in part from higher levels of call-reorigination revenue as a percentage of total revenue requiring advertising or sales commissions. General and administrative expense increased $112,000 or 7.9% from $1.4 million for the three month period ended March 31, 1997 to $1.5 million for the three month period ended March 31, 1998. This increase was primarily attributable to $282,000 in expense that was charged to operations and associated with GlobalTel's discontinued public offering. As a percentage of revenue, general and administrative expense increased from 32.2% to 89.6% for the three month period ended March 31, 1997 and 1998 respectively, resulting in part from lower levels of revenue during the three month period ended March 31, 1998 compared to the three month period ended March 31, 1997. Depreciation and amortization increased $62,000 or 210.0% from $29,000 for the three month period ended March 31, 1997 to $91,000 for the three month period ended March 31, 1998. This increase was primarily attributable to the depreciation of capital assets acquired during 1997, including facility improvements, fax gateway, switching platform and an electronic billing and customer interface system. Interest expense and amortization of debt discount increased $830,000 or 431.8% from $192,000 for the three month period ended March 31, 1997 to $1.0 million for the three month period ended March 31, 1998. This increase was primarily attributable to an increase in GlobalTel's outstanding indebtedness, together with financing costs associated with the incurrence of additional debt. Included in the three month period ended March 31, 1998 is the amortization of $431,000 of debt issue costs associated with an obligation to issue common stock resulting from the issuance of full coverage bridge notes in December 1997. GlobalTel did not record a provision for income taxes for the three month periods ended March 31, 1997 and 1998 respectively, as a full valuation allowance was recorded for periods to offset net deferred tax assets due to the uncertainty of the ultimate realization of the net operating loss carryforwards. GlobalTel had a net loss of $1.3 million for the three month period ended March 31, 1997 and $2.5 million for the three month period ended March 31, 1998. This increase in net loss was due primarily to increases in general and administrative expense and debt financing costs. GlobalTel had basic loss per share of $1.28 for the three month period ended March 31, 1997 and basic loss per share of $1.46 for the three month period ended March 31, 1998. The increase in basic loss per share was due primarily to an increase in net loss, offset by an increase in weighted average shares outstanding. GlobalTel had negative EBITDA of $1.1 million for the three month period ended March 31, 1997 compared to negative EBITDA of $1.4 million for the three month period ended March 31, 1998. The increase in negative EBITDA was primarily due to the increase in general and administrative expense. COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1997 Revenue increased $3.7 million or 40.8% from $9.1 million in 1996 to $12.9 million in 1997. Revenue from call-reorigination increased $300,000 or 3.6% from $8.3 million in 1996 to $8.6 million in 1997. This increase resulted from higher usage by existing customers, the addition of new customers and the expansion of GlobalTel's agent network. Following the relocation of GlobalTel's primary switching platform to Los Angeles in late 1996, GlobalTel also commenced selling international long-distance minutes on a wholesale basis to several carriers. Revenue from carriers, which commenced in October 1996, increased to $4.3 million in 1997. Call-reorigination and carrier revenue represented 66.9% and 33.1% of GlobalTel's revenue, respectively, in 1997. Cost of revenue increased $2.9 million or 35.7% from $8.2 million in 1996 to $11.2 million in 1997. This increase is primarily attributable to increased transmission costs associated with greater calling volume. As a 43 percentage of revenue, cost of revenue decreased from 90.1% to 86.9% in 1996 and 1997, respectively. This decrease in percentage of revenue is primarily attributable to a decrease in the costs associated with implementation of least-cost call routing in late 1996. This decrease was offset, in part, by higher cost of revenue as a percentage of revenue attributable to GlobalTel's carrier revenue. Sales and marketing expense increased $106,000 or 15.5% from $682,000 in 1996 to $788,000 in 1997. This increase is primarily attributable to increased sales commissions and a higher effective commission rate. Substantially all of GlobalTel's sales commissions are related to call-reorigination sales generated by independent sales agents. As a percentage of revenue, sales and marketing expense declined from 7.5% to 6.1% in 1996 and 1997, respectively, resulting in part from higher levels of carrier sales not requiring advertising or sales commissions. General and administrative expense increased $1.3 million or 23.3% from $5.8 million in 1996 to $7.1 million in 1997. This increase is primarily attributable to $670,000 in expense that was charged to operations and associated with GlobalTel's discontinued public offering and $447,000 of non- cash compensation costs. General and administrative expense also increased due to compensation costs resulting from increased staffing levels. As a percentage of revenue, general and administrative expense declined from 63.1% to 55.3% in 1996 and 1997, respectively. This decrease is primarily attributable to economies of scale associated with GlobalTel's ability to spread general and administrative expense across a broader revenue base. Depreciation and amortization increased $155,000 or 157.7% from $98,000 in 1996 to $253,000 in 1997. This increase is primarily attributable to the depreciation of capital assets acquired in late 1996 and in 1997, including a new voice switching platform, facility improvements, fax gateway switching platform and an electronic billing and customer interface system. Interest expense and amortization of debt discount increased $1.1 million or 508.0% from $225,000 in 1996 to $1.4 million in 1997. This increase is primarily attributable to an increase in GlobalTel's outstanding indebtedness, together with financing costs associated with the incurrence of additional debt. Also included in 1997 is $440,000 of additional amortized debt expense as a result of the conversion of a portion of GlobalTel's indebtedness to common stock, issuance of certain GlobalTel notes, and amendment of certain stock warrant agreements. GlobalTel did not record a provision for income taxes for either 1996 or 1997 as a full valuation allowance was recorded for both periods to offset net deferred tax assets due to the uncertainty of the ultimate realization of the net operating loss carryforwards. GlobalTel had a net loss of $5.9 million for 1996 and $7.9 million for 1997. The increase in net loss was due primarily to the significant increase in general and administrative expense and debt financing costs. GlobalTel had basic loss per share of $5.88 for 1996 and basic loss per share of $6.48 for 1997. The increase in basic loss per share was due primarily to an increase in net loss, offset by an increase in weighted average shares outstanding. GlobalTel had negative EBITDA of $5.5 million for 1996 compared to negative EBITDA of $6.2 million for 1997. The increase in negative EBITDA was primarily due to the increase in general and administrative expense. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996 Revenue increased $7.0 million or 329.2% from $2.1 million in 1995 to $9.1 million in 1996 . Revenue from call-reorigination increased $6.2 million or 295.2% from $2.1 million in 1995 to $8.3 million in 1996. The increase in call-reorigination revenue was primarily due to increased usage by existing customers and the addition of new customers. Revenue in 1996 also included $793,000 of sales to carriers commencing in October 1996. GlobalTel's revenue from call-reorigination and carrier sales represented approximately 91.3% and 8.7%, respectively, of GlobalTel's revenue in 1996. 44 Cost of revenue increased $6.3 million or 326.8% from $1.9 million in 1995 to $8.2 million in 1996. This increase is primarily attributable to increased transmission costs associated with greater calling volume. As a percentage of revenue, these costs decreased from 91.3% to 90.1% in 1995 and 1996, respectively, primarily as a result of better network utilization offset in part by carrier revenue. Sales and marketing expense increased $444,000 or 186.5% from $238,000 in 1995 to $682,000 in 1996. This increase was primarily attributable to higher sales commissions and advertising costs. The increase in sales commissions is attributable to increased levels of sales generated by agents as well as an increase in the effective commission rate. As a percentage of revenue, sales and marketing expense decreased from 11.3% to 7.5% in 1996, respectively. This decrease is primarily attributable to economies of scale associated with GlobalTel's ability to spread costs of operations across a broader revenue base. General and administrative expense increased $4.2 million or 275.8% from $1.5 million in 1995 to $5.8 million in 1996. This increase is primarily attributable to the costs, including wages, travel and facilities, associated with the addition of administrative, technical and customer support personnel as GlobalTel developed its management team and network. During this period GlobalTel also incurred professional, consulting and facilities expense associated with the establishment of its relationship with Equant and the development of GlobalTel's enhanced services. General and administrative expense declined as a percentage of revenue from 72.7% to 63.1% in 1995 and 1996, respectively. This decrease is primarily attributable to economies of scale associated with GlobalTel's ability to spread general and administrative expense across a broader revenue base. Depreciation and amortization decreased $13,000 or 11.5% from $111,000 in 1995 to $98,000 in 1996. This decrease resulted from a one-time write-off in 1995 of certain organizational costs. Interest expense increased $191,000 or 567.9% from $34,000 in 1995 to $225,000 in 1996. This increase is primarily attributable to an increase in GlobalTel's outstanding indebtedness, together with the amortization of debt issuance costs. GlobalTel did not record a provision for income taxes for either 1996 or 1995 as a full valuation allowance was recorded for both periods to offset net deferred tax assets due to the uncertainty of the ultimate realization of net operating loss carryforwards. GlobalTel had a net loss of $1.7 million for 1995 and a net loss of $5.9 million for 1996. The increase in net loss was due primarily to the significant increase in general and administrative expenses and increased debt financing costs. GlobalTel had basic loss per share of $2.75 for 1995 compared to basic loss per share of $5.88 for 1996. The change in basic loss per share was due primarily to an increase in net loss. GlobalTel had negative EBITDA of $1.6 million for 1995 compared to negative EBITDA of $5.5 million for 1996. The increase in negative EBITDA was primarily due to the increase in general and administrative expense. QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain quarterly financial data for the eight quarters ended December 31, 1997. This quarterly information has been derived from unaudited consolidated financial statements which, in the opinion of GlobalTel's management, reflect all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. Operating results for any one quarter are not necessarily indicative of the results that may be expected in any future period. GlobalTel's quarterly operating results have fluctuated in the past and may fluctuate significantly in the future as a result of a variety of factors, some of which are outside GlobalTel's control. These factors include demand for international telecommunications services, capital expenditures and other costs relating to the expansion of operations, the timing of new product introductions by GlobalTel or its competitors, market availability and acceptance of new and enhanced versions of GlobalTel's or its competitors' services, changes in the mix of revenue, customer acquisition and retention and general economic conditions. 45
1996 QUARTER ENDED 1997 QUARTER ENDED 1998 ------------------------------------ ------------------------------------ -------- MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 -------- ------- -------- ------- -------- ------- -------- ------- -------- (IN THOUSANDS) Revenue................. $ 1,507 $ 2,048 $ 2,275 $ 3,306 $ 4,385 $ 3,589 $ 2,665 $ 2,223 $ 1,698 Cost of revenue......... 1,520 1,753 1,882 3,075 3,811 2,992 2,204 2,164 1,473 ------- ------- ------- ------- ------- ------- ------- ------- ------- Gross margin............ (13) 295 393 231 574 597 461 59 225 Operating expenses: Sales and marketing.... 122 199 173 188 227 229 208 124 120 General and administrative........ 1,087 1,538 1,470 1,678 1,411 1,497 1,750 2,461 1,523 Depreciation and amortization.......... 22 24 40 12 29 48 65 111 91 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............... 1,231 1,761 1,683 1,878 1,667 1,774 2,023 2,696 1,734 ------- ------- ------- ------- ------- ------- ------- ------- ------- Loss from operations.... (1,244) (1,466) (1,290) (1,647) (1,093) (1,177) (1,562) (2,637) (1,509) Interest expense, including amortization of debt discount....... (20) (21) (62) (122) (192) (216) (179) (781) (1,023) ------- ------- ------- ------- ------- ------- ------- ------- ------- Net loss................ $(1,264) $(1,487) $(1,352) $(1,769) $(1,285) $(1,393) $(1,741) $(3,418) $(2,532) ======= ======= ======= ======= ======= ======= ======= ======= =======
Following the relocation of GlobalTel's switch to Los Angeles in the fourth quarter of 1996, GlobalTel commenced reselling long-distance minutes to certain carriers. Sales to carriers accounted for a major portion of the 45.3% and 32.6% increase in total revenue for the fourth quarter of 1996 and the first quarter of 1997, respectively. Revenue from carrier sales increased $1.2 million or 152.2% to $2.0 million in the first quarter of 1997 from $793,000 in the fourth quarter of 1996. As a percentage of revenue, GlobalTel's cost of revenue increased as a percentage of revenue in the third and fourth quarters of 1996 due to lower margins associated with carrier sales. In the first quarter of 1997, GlobalTel raised prices on sales to carrier customers, while cost of revenue as a percentage of revenue declined to 86.9% despite the increasing proportion of carrier sales. GlobalTel experienced declining revenue in the quarters ended June 30, 1997, September 30, 1997, December 31, 1997, and March 31, 1998. This decline was primarily a result of GlobalTel's decision in May 1997 to temporarily de- emphasize its carrier sales business. Due to the lengthy payment cycles GlobalTel had experienced with certain of its carrier customers and GlobalTel's relatively low cash reserves, GlobalTel reduced its carrier sales in order to limit its credit risk and to reduce its effective carrying costs associated with carrier accounts receivable. Specifically, GlobalTel ceased doing business with two carriers and reduced its level of business with several others, resulting in a decline in carrier revenue from $2.0 million in the quarter ended March 31, 1997 to $228,000 in the quarter ended March 31, 1998. In order to continue to capitalize on the benefits of greater network utilization and increased buying power, GlobalTel anticipates increasing the level of carrier sales in the next 12 months as GlobalTel seeks to develop business relationships with additional carriers. Additionally, call-reorigination revenue declined moderately during the second, third, and fourth quarters of 1997 and the first quarter of 1998. Due to anticipated capacity constraints and limited access to multiple carriers, GlobalTel relocated its primary switching platform from Las Vegas to Los Angeles in late 1996. GlobalTel experienced technical and operational difficulties in connection with this relocation process which resulted in service disruptions for a number of customers. Although GlobalTel's sales were adversely affected during this period, GlobalTel believes that it resolved these difficulties by June 1997. Increased competitive pressures encountered by some of GlobalTel's independent sales agents also contributed to the decline in revenue during these quarters. During the second half of 1997 GlobalTel installed a new switching platform which became fully operational on November 1, 1997, enabling GlobalTel to offer a wider variety and more competitive package of services to its independent sales agents and customers. 46 GlobalTel also experienced an increase in cost of revenue as a percentage of revenue in the quarters ending December 31, 1997. This increase was primarily due to an increase in transmission costs resulting from the temporary re- routing of traffic previously carried by one of its principal long-distance carriers after this carrier ceased providing services to GlobalTel during the quarter ended March 31, 1998, cost of revenue as a percentage of revenue increased as least cost routing was reestablished. General and administrative expense increased in the quarter ending December 31, 1997 and quarter ended March 31, 1998 primarily due to professional fees charged to operations and relating to GlobalTel's discontinued public offering. In addition, interest expense increased significantly in the quarter ending December 31, 1997 and quarter ended March 31, 1998, resulting primarily from non-cash financing activities in the quarter. LIQUIDITY AND CAPITAL RESOURCES GlobalTel's capital resources have been used to fund operating losses, debt service and capital expenditures associated with development of its customer base and the establishment and upgrade of its network infrastructure. Since its inception, GlobalTel has experienced net losses and negative cash flow from operations. As of March 31, 1998, GlobalTel had a working capital deficit of approximately $9.1 million. Through March 31, 1998, GlobalTel had met these capital requirements largely through financing activities that included $2.7 million in net proceeds from the sale of Common Stock, $1.0 million in net proceeds from the sale of Preferred Stock, $7.9 million in net borrowings from shareholders and others represented by promissory notes (the "Notes"), as well as revenue from operations. See "Certain Transactions." At March 31, 1998, Notes aggregating approximately $7.2 million remained outstanding, of which $5.2 million will mature prior to March 31, 1999. Substantially all of the Notes accrue interest at the rate of 10% per annum, increasing to 12% when the Notes become past due. Warrants to purchase an aggregate of 295,399 shares of Common Stock were issued in connection with the issuance of the Notes, all of which remained outstanding at March 31, 1998. Also, in September 1997, deferred salaries aggregating $1.2 million were converted into warrants to purchase 215,428 shares of Common Stock. In October 1997, GlobalTel obtained an additional $550,000 in connection with the issuance of notes to four individuals. These notes bear interest at a rate of 10% per annum, are due in full on March 1, 1999, and are convertible at any time prior to maturity at the fair market value per share of Common Stock in effect as of the date of conversion. Warrants exercisable for an aggregate of 11,000 shares of Common Stock at an exercise price of $5.50 per share were granted in this round of financing. In November 1997 GlobalTel obtained an additional $325,000 in connection with the issuance of notes to three individuals. These notes bore interest at 10% per annum and were repaid in full from the proceeds of certain notes issued in November and December 1997. In addition, each holder of these notes will receive, following the closing of this offering, shares of Common Stock equal to one-half of the principal amount of such holder's note divided by the initial public offering price of the Common Stock. In November and December 1997 GlobalTel obtained approximately $3.0 million in connection with the issuance of additional notes. These GlobalTel Full Coverage Notes bear interest at the rate of 10% per annum and will be repaid from proceeds of this offering. As a result of GlobalTel's operating losses, available working capital has not always been sufficient to satisfy GlobalTel's obligations and GlobalTel from time to time has been in arrears on payment obligations to its carriers. In October 1997, GlobalTel failed to pay amounts due to one of its principal long-distance carriers within the time period that this carrier customarily had required payment. As a result, this carrier ceased providing services to GlobalTel and, under the terms of its agreement with GlobalTel, could demand a termination payment of up to $1.2 million. GlobalTel was able to re-route traffic that previously had been carried by this carrier without any interruption in service to GlobalTel's customers. In December 1997, after GlobalTel paid this carrier a substantial portion of the amounts past due, services were restored. GlobalTel has negotiated the payment terms of the remaining balance owed and does not believe that it will be required to pay an amount in excess of that owed for carrier services provided. As of March 31, 1998, GlobalTel was in arrears on approximately $641,000 due to this carrier. There can be no assurance that GlobalTel will not be required to pay a penalty to this or any other carrier or that GlobalTel will not be in default of its obligations to its carriers in the future. 47 Net cash used in operating activities was $795,000 for the three month period ended March 31, 1998 compared to net cash used in operating activities of $601,000 for the three month period ended March 31, 1997. The increase in net cash used in operating activities was due primarily to a $1.2 million increase in net loss as well as a $421,000 decrease in accounts payable, accrued liabilities, notes payables and customer deposits which was partially offset by a $935,000 increase in depreciation and amortization, amortization of bridge loan costs and debt discount, and compensation and consulting expenses paid in common stock and warrants as well as a $538,000 decrease in accounts receivable. Net cash used in investing activities was $66,000 for the three month period ended March 31, 1998, compared to $274,000 for the three month period ended March 31, 1997. Investing activities for the three month periods ended 1998 and 1997 primarily represent capital expenditures for hardware and software. Net cash provided by financial activities was $111,000 for the three month period ended March 31, 1998 compared to $621,000 for the three month period ended March 31, 1997. Financial activities for the three month periods ended March 31, 1998 and 1997 primarily represent proceeds from issuance of bridge loans. Net cash used in operating activities was $5.1 million for 1997, as compared to net cash used in operating activities of $2.6 million for 1996. The increase in net cash used in operating activities was due primarily to a $2.0 million increase in net loss as well as a $3.3 million decrease in trade accounts payable, accrued liabilities and notes payable. Net cash used in investing activities was $667,000 for 1997, compared to net cash used in investing activities of $688,000 for 1996. Investing activities for 1997 and 1996 primarily represent capital expenditures for hardware and software. Net cash provided by financing activities was $6.2 million for 1997, compared to net cash provided by financing activities of $3.0 million for 1996. Financing activities in 1997 and 1996 primarily represent proceeds from the issuance of bridge loans and Series A Convertible Preferred Stock in 1997. Net cash used in operating activities was $2.6 million for 1996, as compared to net cash used in operating activities of $1.0 million for 1995. The increase in net cash used in operating activities was due primarily to a $4.1 million increase in net loss which was partially offset by a $3.2 million increase in trade accounts payable, accrued liabilities and notes payable. Net cash used in investing activities was $688,000 for 1996, compared to net cash used in investing activities of $522,000 for 1995. Investing activities for 1996 primarily represent capital expenditures for hardware and software while investing activities for 1995 includes $260,000 in capital equipment and $262,000 in capitalized organization costs. Net cash provided by financing activities was $3.0 million for 1996, compared to net cash provided by financing activities of $2.0 million for 1995. Financing activities in 1996 primarily represent proceeds from the issuance of bridge loans while investing activities in 1995 primarily represent proceeds from the issuance of common stock. 48 INTERNATIONAL TELEPHONE COMPANY RESULTS OF OPERATIONS Due to the pendency of the ITC Acquisition, ITC's financial statements are being presented for the period ending October 31, 1997. The statement of operations data for the ten months ended October 31, 1997 is therefore not directly comparable to the statement of operations data for the year ended December 31, 1996. The results of operations for the ten-month period ended October 31, 1997 may also not be reflective of results achieved in the 12 months ended December 31, 1997. The following table sets forth, for the periods indicated, the percentage relationship to revenue of certain items in ITC's statements of operations:
THREE MONTHS ENDED MARCH YEAR ENDED DECEMBER 31, 31 ------------------------ TEN MONTHS ENDED ------------- 1995 1996 OCTOBER 31, 1997 1997 1998 ----------- ----------- ---------------- ----- ----- Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue............... 65.9 66.7 84.3 79.9 75.8 ----------- ----------- ----- ----- ----- Gross margin.................. 34.1 33.3 15.7 20.1 24.2 Operating expenses: Sales and marketing......... 14.9 14.5 8.9 9.9 9.7 General and administrative.. 14.0 19.0 17.2 19.5 16.1 Depreciation................ 0.7 0.9 0.9 .8 1.1 ----------- ----------- ----- ----- ----- Total operating expenses...... 29.6 34.4 27.0 30.2 26.9 ----------- ----------- ----- ----- ----- Income (loss) from opera- tions........................ 4.5 (1.1) (11.3) (10.1) (2.7) Interest and other income (expense).................... -- 1.2 0.7 (1.0) -- ----------- ----------- ----- ----- ----- Income (loss) before taxes.... 4.5 0.1 (10.6) (11.0) (2.7) Income tax expense............ 0.3 -- -- -- -- ----------- ----------- ----- ----- ----- Net income (loss)............. 4.2% 0.1% (10.6)% (11.0)% (2.7)% =========== =========== ===== ===== =====
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1998 Revenue increased $484,000 or 22.8% from approximately $2.1 million for the three months ended March 31, 1997 to approximately $2.6 million for the three months ended March 31, 1998. The increase is due primarily to an increase in customers and customer usage. During this period of time, the number of customers increased due to additions in ITC's independent sale agent base as well as the improved performance of the existing independent sales agent base. Cost of revenue increased $280,000 or 16.5% from approximately $1.7 million for the three months ended March 31, 1997 to approximately $2.0 million for the three months ended March 31, 1998. As a percentage of revenue, these costs decreased from 79.9% to 75.8% for the periods ended March 31, 1997 and 1998, respectively. The increase in cost of revenue is due to an increase in transmission costs directly related to usage. The decreased cost of revenue as a percentage of total revenue was due to a decrease in revenue from sales to carriers and resellers, which has lower gross margins. Sales and marketing expense increased $41,000 or 19.4% from approximately $211,000 for the three months ended March 31, 1997 to approximately $252,000 for the three months ended March 31, 1998. As a percentage of revenue, sales and marketing expense decreased from 9.9% to 9.7% for the periods ended March 31, 1997 and 1998, respectively. The decrease was due primarily to higher levels of carrier and reseller sales not requiring advertising and sales commissions. 49 General and administrative expense increased $7,000 or 1.7% from $414,000 for the three months ended March 31, 1997 to $421,000 for the three months ended March 31, 1998. The increase in these costs was due primarily to additional operating costs. Depreciation expense increased $14,000 or 87.5% from approximately $16,000 for the three months ended March 31, 1997 to approximately $30,000 for the three months ended March 31, 1998. These costs increased primarily as a result of ITC's higher fixed asset base during the three months ended March 31, 1998. Interest and other expense decreased $20,000 or 100% from approximately $20,000 for the three months ended March 31, 1997 to approximately zero for the three months ended March 31, 1998. The decrease in interest and other expense was due primarily to a loss on sale of equipment in 1997. ITC did not record an income tax benefit for the three months ended March 31, 1997 or 1998 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. ITC reported a net loss of approximately $233,000 for the three months ended March 31, 1997 compared to net loss of approximately $71,000 for the three months ended March 31, 1998. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO THE TEN MONTHS ENDED OCTOBER 31, 1997 Revenue increased $451,000 or 5.9% from approximately $7.6 million for the year ended December 31, 1996 to approximately $8.1 million for the ten months ended October 31, 1997. The increase is due primarily to an increase in customers and customer usage. During this period of time, the number of customers increased due to additions in ITC's independent sale agent base as well as the improved performance of the existing independent sales agent base. Cost of revenue increased $1.7 million or 33.9% from approximately $5.1 million for the year ended December 31, 1996 to approximately $6.8 million for the ten months ended October 31, 1997. As a percentage of revenue, these costs increased from 66.7% to 84.3% for the periods ended December 31, 1996 and October 31, 1997, respectively. The increase in cost of revenue is due to an increase in transmission costs directly related to usage as well as a dispute with a carrier. The increased cost of revenue as a percentage of total revenue was due to an increase in revenue from sales to carriers and resellers, which has lower gross margin percentages, and an increase in costs associated with the carrier dispute. See "Business--Legal Proceedings." Sales and marketing expense decreased $384,000 or 34.9% from approximately $1.1 million for the year ended December 31, 1996 to approximately $715,000 for the ten months ended October 31, 1997. As a percentage of revenue, sales and marketing expense decreased from 14.5% to 8.9% for the periods ended December 31, 1996 and October 31, 1997, respectively. The decrease was due primarily to higher levels of carrier and reseller sales not requiring advertising and sales commissions. General and administrative expense remained relatively constant at $1.4 million for the year ended December 31, 1996 and $1.4 million for the ten months ended October 31, 1997. The similarity in these costs was due primarily to the different length of the time periods presented. Depreciation expense increased $4,000 or 5.8% from approximately $69,000 for the year ended December 31, 1996 to approximately $73,000 for the ten months ended October 31, 1997. These costs increased primarily as a result of ITC's higher fixed asset base during the ten months ended October 31, 1997 as compared with the year ended December 31, 1996. Interest and other income decreased $26,000 or 29.5% from approximately $88,000 for the year ended December 31, 1996 to approximately $62,000 for the ten months ended October 31, 1997. The decrease in 50 interest and other income was due primarily to an increase in other expenses related to a loss on the sale of equipment and an increase in interest expense related to a capital lease obligation. ITC had consulting fees totaling approximately $113,000, net of related consulting expenses, which it received from CSI for assistance in the settlement of a dispute with a carrier. ITC did not record an income tax benefit for the ten months ended October 31, 1997 but recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. ITC recorded an income tax expense of $4,000 for the year ended December 31, 1996. ITC reported a net loss of approximately $850,000 for the ten months ended October 31, 1997 compared to net income of approximately $7,000 for the year ended December 31, 1996. The net loss includes a $1.1 million claim against ITC by a carrier for usage charges, a portion of which ITC is disputing. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND 1996 Revenue decreased $594,000 or 7.3% from approximately $8.2 million for 1995 to approximately $7.6 million for 1996. The decrease is due primarily to a decrease in customers resulting from the loss of a significant independent sales agent. Cost of revenue decreased $337,000 or 6.2% from approximately $5.4 million for 1995 to approximately $5.1 million for 1996. As a percentage of revenue, these costs increased from 65.9% to 66.7% for 1995 and 1996, respectively. The decrease in cost of revenue is due to a decrease in transmission costs directly related to usage resulting from a decrease in customer base. The increased cost of revenue as a percentage of total revenue was due to an increase in revenue from sales to carriers and resellers. Sales and marketing expense decreased $121,000 or 9.9% from approximately $1.2 million for 1995 to approximately $1.1 million for 1996. As a percentage of revenue, sales and marketing expense decreased from 14.9% to 14.5% for 1995 and 1996, respectively. This decrease was due primarily to higher levels of carrier and reseller sales not requiring advertising and sales commissions. General and administrative expense increased $297,000 or 25.8% from $1.1 million for 1995 to $1.4 million for 1996. The increase in this expense was due primarily to an increase in officers' compensation. Depreciation expense increased $16,000 or 30.2% from approximately $53,000 for 1995 to approximately $69,000 for 1996. This expense increased primarily as a result of ITC's higher fixed asset base during 1996 as compared with 1995. Interest and other income/expense increased $112,000 from a net expense of approximately $24,000 for 1995 to net other income of approximately $88,000 for 1996. The increase in interest and other income was due primarily to the receipt of consulting fees totaling approximately $113,000, net of related consulting expenses. ITC recorded valuation allowances to offset the deferred tax asset due to the uncertainty of the ultimate realization of the net operating loss carryforwards. ITC recorded an income tax expense of $21,000 and $4,000 for 1995 and 1996, respectively. ITC reported net income of approximately $344,000 for 1995 compared to net income of approximately $7,000 for 1996. The decrease in net income is due primarily to a decrease in gross margin, the loss of a significant independent sales agent and an increase in general and administrative expense related to officers' compensation. 51 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was approximately $183,000 for the three months ended March 31, 1998, compared to cash used in operating activities of approximately $513,000 for the three months ended March 31, 1997. The increase in cash provided by operating activities was due primarily to the increase in accounts payable, net of an increase in trade receivables related primarily to an increase in revenue from the comparable period in 1996 and a payable due to CSI under the Reciprocal Telecommunications Agreement. Net cash used in investing activities totaling $29,000 during the three months ended March 31, 1998 was due primarily to additional equipment purchases compared to net cash provided by investing activities totaling $256,000 which was due to proceeds from the sale of telecommunications equipment. Net cash used in financing activities totaling $79,000 during the three months ended March 31, 1998 was due to payments on capital lease obligations compared to net cash provided by financing activities totaling $127,000 which was due primarily to proceeds from a loan payable. Net cash provided by operating activities was approximately $626,000 for the ten months ended October 31, 1997, compared to cash provided by operating activities of approximately $286,000 for the year ended December 31, 1996. The increase in cash provided by operating activities was primarily due to a net loss of $850,000 offset by an increase in accounts payable of $1.2 million and a decrease in accounts receivable of $180,000. Net cash provided by investing activities was approximately $242,000 for the ten months ended October 31, 1997, compared to cash used in investing activities of approximately $29,000 for the year ended December 31, 1996. The increase was primarily due to proceeds received from the sale of telecommunications equipment. Net cash used in financing activities was approximately $238,000 for the ten months ended October 31, 1997, compared to cash used in financing activities of approximately $186,000 for the year ended December 31, 1996. The change was due primarily to an increase in capital lease payments related to the acquisition of telecommunications equipment. Net cash provided by operating activities was approximately $286,000 for 1996, compared to cash provided by operating activities of approximately $533,000 for 1995. The decrease in cash provided by operating activities was primarily due to a decrease in net income. Net cash used in investing activities was approximately $29,000 for 1996, compared to cash used in investing activities of approximately $152,000 for 1995. The decrease was primarily due to fewer equipment purchases in 1996. Net cash used in financing activities was approximately $186,000 for 1996, compared to cash used in financing activities of approximately $291,000 for 1995. The decrease was due primarily to proceeds from loan payable. 52 BUSINESS OVERVIEW The Combined Company is a growing provider of international telecommunications services offering long distance, calling cards and enhanced voice and data services. With more than 25,500 customers in over 170 countries, the Combined Company primarily serves markets that have been historically underserved by large telecommunications providers and ITOs. The Combined Company presently focuses on international call-reorigination, capitalizing on the arbitrage opportunity created by differences between U.S. and international long-distance rates. Going forward, the Combined Company intends to leverage the expertise derived from, and capitalize on the established customer base generated by, its call-reorigination business to provide higher margin telecommunications services such as call-through, enhanced fax and business grade Internet services. The Combined Company's telecommunications services are marketed and sold through a network of independent sales agents, strategic relationships and in- house direct marketing. The Combined Company relies primarily on over 170 independent sales agents that cover over 170 countries. GlobalTel has an exclusive agreement with the International Business Network for World Commerce and Industry, Ltd. ("IBNET"), the managing member of the Consortium of Global Commerce, under which IBNET will market the services of GlobalTel, and ultimately the Combined Company, through several thousand individual chambers of commerce located in over 200 countries. In addition, GlobalTel has a strategic relationship with Novell that provides it with a distribution channel for its services, and ultimately those of the Combined Company, through a select number of Novell's network of over 25,000 value-added resellers. The Combined Company intends to pursue additional strategic relationships and to expand its sales channels. The Combined Company's also markets and sells through its small in-house sales staff, which is responsible for call-reorigination sales and carrier resales. The Combined Company has a broad customer base including foreign offices of multinational corporations, including Microsoft Corporation, Mitsubishi Corporation and Chrysler Corporation; major international hotels, including the Inter-Continental Hotel and the Copacabana Palace in Rio de Janeiro, Brazil and Southern Sun Group's Holiday Inn Hotels in South Africa; and embassies and international agencies, including the United States embassies in Korea and Australia and the United Nations consulate in South Africa. The GlobalTel Merger and the ITC Acquisition will enable the Combined Company to rapidly obtain access to complementary infrastructure, personnel, customer bases, sales and marketing resources and strategic relationships. The integration of GlobalTel and ITC with CSI will afford the Combined Company a greater opportunity to enter new markets, acquire new infrastructure, improve its rate structure with carriers, and resell excess international capacity to other carriers and resellers. The Combined Company intends to actively pursue additional acquisitions of complementary international customer bases, products and infrastructure. The Combined Company provides its telecommunications services through its (i) voice switching and global fax messaging infrastructure in Los Angeles, California; (ii) voice switching and billing center in Ft. Lauderdale, Florida; (iii) access to third party infrastructure through international telecommunications carriers and through Equant, a global data network services provider; and (iv) enhanced fax nodes in Hong Kong and Mexico City. The Combined Company uses both off-the-shelf technologies, which provide flexibility to adapt to the rapidly changing telecommunications environment, and proprietary automated call processing technologies (DIAL and LINK-US), which enhance the Combined Company's competitive position in serving larger, high-volume customers. INDUSTRY AND MARKET OPPORTUNITY Historically, telephone service within individual countries has been monopolized by large, typically government-owned or protected entities, often referred to as incumbent telephone operators ("ITOs"). As a result, international callers have had little choice but to use the services provided by and pay the prices charged by local ITOs. Deregulation, together with decreases in the cost of providing services, and the introduction of 53 more sophisticated enhanced services has made it possible for new entrants to compete with the ITOs in providing international telecommunications services. The resulting decrease in non-regulated rates has produced a resale market for long-distance telecommunications services permitting companies to obtain favorable volume-based rates from third party providers and to resell services at competitive rates to other providers and users. These and other factors have contributed to an increase in telecommunications usage and a proliferation of enhanced telecommunications services in these markets. The combination of a continually expanding global telecommunications market, demand for lower prices and improved quality, and ongoing deregulation has created competitive opportunities for new telecommunications companies in many countries. According to the ITU, the international telecommunications industry accounted for $52.8 billion in revenue and 61.9 billion minutes of long distance international telephone calls worldwide in 1995. Based upon trends in revenue growth from 1991 through 1995 measured by the ITU, the Combined Company believes that international long distance telecommunications revenue will surpass $76 billion by the year 2000. The projected revenue and growth rates, as reported by the ITU, should not be relied upon as an indication of the Combined Company's financial future. Emerging Telecommunications Markets. The world's larger telecommunications carriers (AT&T, Sprint, MCI, WorldCom, Deutsche Telecom AG, France Telecom) have focused on developed telecommunications markets that are characterized by high teledensity (ratio of telephone lines to inhabitants), an advanced stage of deregulation, a large volume of international telecommunications traffic and a concentration of large multinational corporations. These markets include the United States, the United Kingdom, Germany, France and Japan. The Combined Company focuses on what it characterizes as emerging telecommunications markets, which are (i) smaller developed countries such as Argentina, Austria, Brazil, Switzerland, Ireland, Singapore and South Africa, and (ii) markets that typically have less developed telecommunications infrastructures, are in an earlier stage of deregulation and have more monopolistic distribution profiles. Based on data from the ITU, the Combined Company has calculated that the approximately 145 countries that the Combined Company targets as emerging telecommunications markets generated approximately 23.0 billion minutes in outgoing international telecommunications traffic in 1995. Convergence of Technology. Deregulation and evolving price competition have coincided with technological innovation in the telecommunications industry. New technologies such as fiber optic cable and improvements in digital compression, computer software and call processing technology have contributed to improvements in telecommunications quality and speed, increased transmission capacities, and decreased transmission costs. For example, fiber optic cable has dramatically increased the capacity and speed of telephone lines and has eliminated capacity constraints as a technical barrier to entry for new international telecommunications providers. The improved quality of these new telephone lines also has facilitated the development of global voice-mail and fax services and has enhanced data communication. Improvements in computer software and processing technology have laid a foundation for services such as itemized and multi-currency billing. In addition, international debit and credit networks now permit customers to pay for long- distance calls made from any telephone using a single home account. The convergence of conventional telephony and computing technologies also has created the opportunity for data networks, and computers in general, to become primary telecommunications tools. Private Networks and Emergence of the Internet. Until recently, the data communications services offered by public carriers had limited security features, were expensive and did not adequately ensure accurate and reliable transmission. As a result, many corporations established private networks to provide network-based services, such as transaction processing, to their customers and to coordinate operations between employees, suppliers and business partners. These private networks were frequently customized and thus had the capability of providing organizations and users with tailored performance, security, reliability and private-label branding. As the demand for private networks has grown, there has been an increase in intranet services and virtual private networks ("VPNs"), which combine the security of a private network and the cost efficiencies of a public network. Despite the benefits of private networks, they still have limitations that reduce their effectiveness. These networks require leased telephone lines, dedicated bandwidth and vendor-specific networking equipment. As a 54 result, such networks are inherently expensive. The Combined Company believes that the costs of maintaining a private network infrastructure and the risks of investing in new technologies have precluded many small- and medium-sized businesses from utilizing private networks, VPNs and intranet infrastructures. The emergence of the Internet and the widespread adoption of internet protocol ("IP") as a data transmission standard, combined with deregulation of the telecommunications industry and advances in telecommunications technology, have significantly increased the attractiveness of providing data communications over a public network. At the same time, the growth in client/server computing, multimedia personal computers, on-line computing services and network technologies has resulted in a large and growing group of people who are accustomed to using networked computers for a variety of purposes, including e-mail, electronic file transfers, on-line computing and electronic financial transactions. These trends increasingly have led businesses to explore opportunities to provide IP-based applications and services within their organizations and to customers and business partners outside the enterprise. The ubiquitous nature and relatively low cost of the Internet have resulted in its widespread usage for certain applications, most notably Internet access and electronic mail. However, use of the Internet for mission-critical business applications has been impeded by the limited security and unreliable performance inherent in the structure and management of the Internet. Therefore, there is a market opportunity to offer a service combining the best features of the Internet with the security of private networks. The Combined Company intends to address this need with its business grade Internet services. Industry analysts expect the market size for both enhanced IP data services and Internet access to continue to grow rapidly as businesses and consumers increase their use of the Internet, intranets, and privately managed IP networks. Industry sources project total Internet service provider ("ISP") enhanced services revenue alone to grow from $197.8 million in 1996 to approximately $11.4 billion in the year 2000, reaching average annual growth of approximately 175.6% during that period. Regulatory Environment. In a deregulated telecommunications market such as the United States, carriers have multiple options for providing telecommunications access to their customers. Carriers can establish switching facilities, own or lease fiber optic cable or enter into operating agreements with foreign carriers. In markets that have not deregulated or are slowly deregulating, international long-distance carriers have used advances in technology to develop innovative alternative access methods, such as call- reorigination and other less regulated enhanced voice and data services. In other countries, such as Japan and most European Union ("EU") member states, where the deregulation process is more advanced but not complete, carriers often are permitted to offer facilities-based data and facsimile services, as well as limited voice services. As countries deregulate telecommunications services, the market for alternative access methods typically becomes more competitive as ITO's and other providers are permitted to offer a wider range of facilities-based services on a more cost-competitive basis. Call-reorigination, which is the most common form of alternative international access, avoids the high international rates charged by the ITO in a particular regulated country by providing a dial tone from a deregulated country, typically the United States. To place a call using traditional call- reorigination, a user dials a unique phone number to an international carrier's switching center and then hangs up. The user then receives an automated call back providing a dial tone from the United States, which enables the user to complete the call using U.S. telecommunications infrastructure. Technical innovations such as inexpensive dialers have enabled telecommunications carriers to offer a newer, more advanced form of call- reorigination (referred to as "transparent call-reorigination") that makes the call-reorigination mechanics transparent to the customer. In addition, in- country switching platforms have enabled carriers to offer "call-through" services, allowing the customer direct access to a provider's network without the need to reoriginate the call in the U.S. The Combined Company believes that as deregulation occurs and competition increases in markets around the world, the pricing advantage of call- reorigination to most destinations will diminish relative to call-through international long-distance service. The Combined Company also believes that deregulation will continue to create opportunities for new entrants in telecommunications services, particularly companies capable of meeting the challenges presented by emerging telecommunications markets. 55 World Trade Organization Agreement. On February 15, 1997, pursuant to the WTO Agreement, which became effective on February 5, 1998, 69 members of the WTO, including the United States, agreed to open their respective telecommunications markets to competition and foreign ownership, and to protect market entrants against anticompetitive behavior by dominant telecommunications providers. By eroding the traditional monopolies held by ITOs, many of which are wholly or partially government owned, implementation of the WTO Agreement will allow U.S.-based providers the opportunity to negotiate more favorable agreements with both ITOs and other providers in emerging telecommunications markets. In addition, deregulation in certain foreign countries will enable U.S.-based providers to establish local switching and transmission facilities in order to terminate their own traffic and carry international long distance traffic originating in those countries. BUSINESS STRATEGY The Combined Company's objective is to become a leading provider of enhanced telecommunications services in markets that historically have been underserved by large telecommunications providers and ITOs. The Combined Company's strategy to accomplish this objective includes the following key elements: Increase Penetration of Emerging Telecommunications Markets. The Combined Company markets its services in emerging telecommunications markets that typically have less developed telecommunications infrastructures, are in an earlier stage of deregulation and have historically faced less competition from larger telecommunications providers. The Combined Company believes that, due to the more monopolistic distribution profile of these markets, customers traditionally have been underserved and consequently are more receptive to higher quality, competitively priced services. The Combined Company believes that its experience in offering call-reorigination, combined with its strategic marketing relationships and proprietary technologies, will enable the Combined Company to more effectively penetrate these markets and provide more sophisticated and higher margin telecommunications services. Pursue and Implement Strategic Acquisitions. The Combined Company intends to actively pursue and execute strategic acquisitions of complementary international customer bases, products and infrastructure. GlobalTel and ITC are its first significant acquisitions. Management believes the worldwide telecommunications industry will continue to undergo a period of strong consolidation activity due to the savings associated with larger operations. The Combined Company intends to actively pursue those customer bases, products and infrastructure that fit its strategy of providing high quality, state-of- the-art telecommunications services. Except for the GlobalTel Merger and the ITC Acquisition agreements in principle, the Combined Company has no agreements, arrangements or understandings for any acquisitions as of the date of this Prospectus. Exploit Strategic Marketing Relationships and Sales Channels. In addition to its over 170 independent sales agents, the Combined Company has access to channels of distribution through its strategic marketing relationships. Management expects that its relationships with IBNET and Novell will enhance the Combined Company's ability to expand its customer base as well as establish new relationships with independent ISPs and other network providers in its target markets. The Combined Company believes that it can most effectively increase its customer base and revenue by recruiting independent sales agents. The Combined Company will be able to recruit independent sales agents because of its advanced technology, its focus on high volume customers and its emphasis on quality service. Leverage Customer Base Through Enhanced Service Offerings. The Combined Company has developed and is introducing additional telecommunications services. To retain existing customers and attract new customers, the Combined Company plans to increase its range of services to include enhanced voice and data services and a suite of business grade Internet services. Most of these services can be provided under the existing regulatory frameworks in the Combined Company's markets. In addition, as regulatory and competitive environments evolve and the availability of capital permits, the Combined Company intends to migrate its call-reorigination customers, including its enhanced service customer base, to a more cost effective call-through service. 56 Employ Flexible, Open Architecture and Proprietary Technology. By using off- the-shelf technology that is modular, scalable and allows for the integration of a variety of technologies, the Combined Company expects to provide its customers with enhanced services in a timely and cost-efficient manner. The Combined Company is committed to continue to invest in improvements in its electronic billing, customer interface and network management systems, all of which are critical to its delivery of services. The Combined Company also uses proprietary call processing technologies that enable it to provide quality telecommunications services to high volume customers. The Combined Company intends to expand its offering of CSI's proprietary DIAL and LINK-US transparent call processing systems and to market such systems to customers of GlobalTel and ITC. Increase Sales to Carriers and Resellers; Reduce Transmission Costs. Utilizing its enhanced telecommunications infrastructure and combined carrier transmission rates, the Combined Company intends to substantially increase its carrier and reseller business. In expanding this business, the Combined Company intends to leverage its extensive relationships and contacts among telecommunications carriers and resellers. In addition to expected increases in revenue, the related growth in transmission volume should also improve the Combined Company's ability to negotiate preferential rates with its carriers. The Combined Company also intends to utilize additional point-to-point private lines, access IP and other data networks to process compressed voice and data telecommunications traffic, and employ alternate telecommunications solutions such as "call-through" to further reduce its overall transmission costs. Capitalize on GlobalTel and ITC Synergies. The Combined Company anticipates that the GlobalTel Merger and the ITC Acquisition will provide operating synergies and efficiencies. In addition to integrating networks of independent sales agents and infrastructure and increasing sales to carriers and resellers, the Combined Company will seek to introduce new enhanced services such as call-through, enhanced fax and business-grade Internet services. The Combined Company also will have the opportunity to cross-market CSI's proprietary DIAL and LINK-US systems to the 17,000 existing customers of GlobalTel and ITC and to take advantage of the new business opportunities provided by GlobalTel's strategic relationships and business grade Internet services. SERVICES The Combined Company seeks to address the evolving telecommunications needs of customers located in emerging telecommunications markets. Currently, the Combined Company offers international long-distance services, calling cards, and enhanced voice and data services such as voice-mail, conference calling and enhanced fax services. As changes in regulatory environments and the availability of capital permits, the Combined Company intends to migrate its call-reorigination customers and its enhanced service customer base to a more cost effective call-through service. The Combined Company believes that the growing globalization of business has increased the mobility of business people and led to the proliferation of multi-office enterprises, creating greater demand for convenient access to electronic information from remote locations worldwide. As a result, the Combined Company is designing and implementing a range of business grade Internet services. The Combined Company expects these services to include business quality messaging, global enhanced VPNs and other enhanced services. GlobalTel also is designing a comprehensive "Turnkey Business ISP" solution that incorporates all of the Combined Company's business grade Internet services. "Turnkey Business ISP" is designed for independent ISPs and other network providers in the Combined Company's target markets. These service offerings are being designed to emphasize authentication, security and notification. The following tabulates the Combined Company's current services and services under development:
CURRENT SERVICES SERVICES UNDER DEVELOPMENT ---------------- -------------------------- International Call-Reorigination Call-Through (Transparent and Non-transparent) Enhanced Fax Carrier Reselling Global Enhanced VPN Prepaid Calling Cards Business Quality Messaging Enhanced Voice Services Global Desktop Hotel Operator Services and Other Hotel Serv- "Turnkey Business ISP" ices Facsimile Services
57 Current Services International Call-Reorigination. The largest segment of the Combined Company's business is call-reorigination services. Call-reorigination service involves connecting international customers to the U.S. telephone system via computer triggering, which makes each international customer's call originate in the U.S. As a result, the customer's call cost structure is based on the lower charges of the U.S. telecommunications marketplace rather than the charges of the ITO. The Combined Company believes that the quality of the calls made using the Combined Company's call-reorigination system is as good as, if not better than, the quality obtained by using the ITO. The Combined Company provides two basic types of call-reorigination: non-transparent and transparent. To place a call using non-transparent call-reorigination, a customer dials a unique phone number to an international carrier's switching center and then hangs up. The customer then receives an automated call back providing a dial tone from the United States, which enables the customer to complete the call using U.S. telecommunications infrastructure. As of the date of this Prospectus, approximately 89.1% of the Combined Company's customers use non-transparent call-reorigination services. Customers who use non- transparent call-reorigination typically are individuals or smaller businesses that do not require the convenience and speed of transparent call- reorigination. Transparent call-reorigination involves the transmission of an international call via a processor at the customer's site and one of the Combined Company's switches in Ft. Lauderdale, Florida or Los Angeles, California. The switch automatically connects the call to the caller's dialed destination. When customers use the Combined Company's transparent call-reorigination service, the call-reorigination mechanics are transparent to the customer. CSI has developed advanced proprietary call processors called "DIAL" and "LINK-US." When used with standard triggering methods and commercially available call processing devices, DIAL and LINK-US provide transparent access to the Combined Company's call-reorigination system. These systems are more expensive than non-transparent call-reorigination systems and are typically installed in hotels and businesses that have PBX telephone systems and require fast, reliable, high-volume service. Less expensive systems are available for small businesses and other customers desiring transparent call-reorigination. These systems initiate all reorigination through global data networks, such as X.25, Internet and frame relay, and local network digital services such as Integrated Services Digital Networks (ISDN). The Combined Company currently utilizes the X.25 network in Brazil and Argentina and the Internet in Brazil, Argentina, Venezuela, South Africa and Lebanon to facilitate the call- reorigination process. The Combined Company plans to have Internet triggering installed in Singapore, Hong Kong and New Zealand in the near future. The Combined Company is able to quickly adapt its call processors to virtually any type of customer requirement, providing extremely fast and reliable service. CSI estimates that approximately 10.9% of the Combined Company's traffic is currently routed through transparent call processors. The Combined Company has installed approximately 200 DIAL and five LINK-US as well as approximately 200 other transparent call processors at various hotels and businesses. Transparent call processors are proposed to be installed in several additional hotels and businesses in Brazil, Argentina, South Africa and Hong Kong. The Combined Company intends to focus its future sales and marketing efforts toward recruitment of hotels and businesses that will use the Combined Company's transparent call-reorigination service. Carrier Reselling. The Combined Company resells its international long- distance services to other telecommunications carriers on a wholesale basis. The Combined Company intends to expand such services and anticipates that the additional traffic from carrier resale customers will enable it to negotiate more favorable rates with its carriers. Prepaid Calling Cards. The Combined Company recently launched prepaid card services to its customers worldwide. The Combined Company's prepaid domestic and international calling cards may be used by customers for international telephone calls from more than 70 countries. Calling card customers also have access to 24-hour multi-lingual customer service and certain customization options. Enhanced Voice Services. The Combined Company offers enhanced voice services, consisting of voice-mail and conference calling. Conference calling enables customers to set up "meet me" dial-in conference calls 58 as well as add-on conference calls, with or without operator intervention. Conference calling has a higher margin than the Combined Company's basic voice services. The Combined Company's services also enable customers to originate international voice calls over the Internet by allowing call-reorigination service to be activated from their PCs. Hotel Operator Services and Other Hotel Services. The Combined Company plans to introduce operator services for hotel customers. With operator services in place, a hotel guest seeking to use a credit card to "dial around" the hotel system is routed via the Combined Company's call-reorigination system to an international operator. The call is billed on the guest's credit card once the card is validated. The hotel normally would not receive any international long-distance revenue from such "dial around" calls. In order to market and expand its hotel operator services, the Combined Company intends to share a percentage of its revenue from operator services with the hotel. The Combined Company also intends to offer a variety of other services to hotel customers, including transparent call-reorigination, facsimile, Internet access, voice- mail and debit card services. Facsimile Services. The Combined Company offers its customers the ability to send high-speed international facsimiles over its network. The Combined Company also intends to offer transmission of facsimiles via the Internet or private data networks. The Combined Company has redundant, dedicated T-1 access to the Internet to enhance this service. The Combined Company intends to use a portion of the proceeds of this offering to implement and expand these services. Services Under Development The Combined Company is developing the following new services: Call-Through. The Combined Company will offer call-through or "direct access" service to customers in selected markets where current regulations and local market access charges make call-reorigination less competitive than call-through. Call-through service involves the installation of an access point in the local market that is connected to one of the Combined Company's switches by a dedicated long-distance line that is leased from a carrier or other network operator. The international customer accesses this connection to the Combined Company's switch either by dialing a local telephone number or, in markets where the regulatory environment permits, through an interconnection with the ITO. Enhanced Fax. The Combined Company's enhanced fax service, currently being tested in Hong Kong and Mexico City, uses advanced technology to provide customers with a higher quality and less expensive method to send facsimile messages than conventional analog fax. Unlike conventional analog fax service, enhanced fax service: (i) results in significantly fewer transmission errors, particularly with international transmissions, because it is transmitted over a digital data network; (ii) is easier to use than conventional fax, with a feature that will retransmit the fax until it is successfully received at its destination; and (iii) is much less expensive because it can be sent as a digital packet in a shorter period of time. A recent study conducted by Pitney Bowes/Gallup found that international faxes transmitted over analog phone lines are transmitted twice on average due to interruptions and quality problems, creating a hidden cost for users. Other features of the enhanced fax offering include commercial-grade broadcast fax, fax on demand (or "fax catalog") and timed delivery. In the first half of 1998, the Combined Company plans to install an Internet-based fax service to its fax gateway in Los Angeles, California. This service will allow customers with Internet access to send faxes to any fax machine worldwide and to any Internet-based e-mail address. Business Grade Internet Services. The Combined Company is developing a suite of enhanced services that will permit business-grade communications utilizing Internet technologies. The Combined Company expects these business grade Internet services to include: (i) Global Enhanced VPN, (ii) Business Quality Messaging, (iii) Global Desktop and (iv) "Turnkey Business ISP." These services will combine the best features of the Internet, such as openness, easy access and low cost, with the advantages of a private network, such 59 as high security and customized features. The Combined Company believes its services will overcome many of the perceived inefficiencies of today's Internet and will allow its customers to conduct business quality transactions via the Combined Company's network infrastructure. The Combined Company, in conjunction with Novell and other technology providers, is developing business grade Internet services. In addition, GlobalTel has become a Novell Business Internet Services ("BIS") partner, an affiliation that the Combined Company believes will further enhance its service delivery strategy and provide it access to certain key networking technologies. Other BIS partners include AT&T, Bell Atlantic Corporation, Nippon Telegraph and Telephone Corporation, Deutsche Telecom AG, Singapore Telecommunications Limited Corporation and Korea Telecom. See "--Network and Operations" and "--Sales and Marketing." Global Enhanced VPN. The Combined Company's Global Enhanced VPN service enables customers to establish a wide area network among several locations by using the Combined Company's network infrastructure, thereby eliminating the cost associated with establishing and maintaining a dedicated private network. For example, a U.S.-based user in Hong Kong would dial a local number to access his or her wide area network in the United States and could then work on the network in the United States in accordance with the user's normal access privileges. The Combined Company's VPN service will be enhanced through the use of a commercial-grade directory infrastructure and certain certification and security mechanisms. Global Enhanced VPN enables electronic commerce by providing the user with controlled, managed and secure access to its VPN for customers, vendors and business partners. Business Quality Messaging. The Combined Company's Business Quality Messaging ("BQM") service will enable customers to exchange messages, faxes, e-mail or voice-mail in a secure and reliable manner via the Combined Company's network infrastructure. BQM also will allow companies to connect dissimilar mail systems. These features can be customized to enable the Combined Company to provide different levels of service based on customer requirements and to price such service levels accordingly. Global Desktop. The Global Desktop product will combine the Global Enhanced VPN, BQM and additional features targeting the global business traveler. Specifically, it will permit the user to access and exchange electronic information from public switched or wireless telephone networks worldwide. "Turnkey Business ISP." The Combined Company believes that the great majority of regional ISPs need to offer additional enhanced services to remain competitive, but have insufficient resources to develop these services internally. According to an August 1997 report by Business Research Group, 77% of all ISPs in the United States were regional ISPs, 83% of which lacked out-of-region access and therefore were required to develop their own billing and tracking systems. The Combined Company is designing a comprehensive turnkey service solution for regional ISPs that will include its business grade Internet services. This "Turnkey Business ISP" solution will enable regional ISPs to access the Combined Company's suite of enhanced services and, when available, voice-over-IP. Completion of Services Under Development. The Combined Company has not generated significant revenue from its enhanced services to date. The new services described above are still under development and are not scheduled for implementation until various times in 1998 or later. Also, the completion of development and introduction of new services will require the investment of significant operating capital. Of the net proceeds from this offering, $300,000 have been allocated to the development and introduction of these new services. It is not uncommon that the introduction of new telecommunications services is delayed or is occasioned by technical problems. SALES AND MARKETING The Combined Company's telecommunications services are marketed and sold through a network of independent sales agents, strategic relationships and direct marketing efforts. Independent Sales Agents In selling its retail services, the Combined Company employs a network of over 170 independent sales agents that sell to customers located in over 170 countries, supplemented by direct marketing efforts. Independent 60 sales agents are recruited through advertising in the Combined Company's target markets and by referrals from customers and industry contacts. The Combined Company's agreements with its independent sales agents typically are non-exclusive and require the independent sales agents to offer the Combined Company's services at rates prescribed by the Combined Company in accordance with the Combined Company's policies. The Combined Company's ten largest independent sales agents accounted for 68.6% of the Combined Company's pro forma revenue for the 12 months ended December 31, 1997. See "Risk Factors-- Dependence on Key Independent Sales Agents." Strategic Relationships The Combined Company intends to leverage its strategic marketing relationships to expand its customer base. In particular, the Combined Company expects that its relationship with IBNET and its access to a select number of Novell's network of over 25,000 VARs will facilitate additional contact with many small- and medium-sized domestic business customers, foreign branch offices of large multinational corporations and local ISPs. IBNET IBNET is the managing member of the Consortium for Global Commerce, which represents thousands of individual chambers of commerce (the "Chambers") in over 200 countries. The Consortium for Global Commerce was established to (i) create a global intranet enabling the Chambers and their members to exchange information and conduct business transactions electronically, and (ii) obtain more favorable pricing and terms for certain products and services for such members. The Consortium's four member organizations are the International Chambers of Commerce, the Paris Chamber of Commerce and Industry, the G77 (a non- governmental organization comprised of 137 developing countries and China) and IBNET, the managing partner of the Consortium. The Combined Company believes that its relationship with the Consortium, through GlobalTel's agreement with IBNET, will enhance its ability to establish relationships with regional ISPs and expand its customer base in its target markets. In April 1997, GlobalTel entered into a ten-year marketing agreement with IBNET to provide the Chambers and their members with telecommunications services including international voice, international fax, calling card services, Internet services, intranet, VPN and messaging. The individual Chambers may act as sales and marketing agents for GlobalTel's, and ultimately, the Combined Company's services. IBNET has agreed to market GlobalTel's services to the Chambers by promoting GlobalTel services in Consortium literature, at Consortium trade shows and speaking engagements, and by listing the Combined Company's services in the Consortium's databases. In November 1997, the Consortium launched its marketing campaign to inform the Chambers about available products and services, including GlobalTel's services. Under its agreement with IBNET, the Combined Company also will have the right to co-brand its services with the Chambers' trademarks, a feature that the Combined Company believes will enhance its marketing and sales efforts because the local chamber brand is typically well recognized and held in high regard by local business communities. Following execution of the agreement, Ronald P. Erickson, who will serve as Chairman of the Board of the Combined Company, and Bruce L. Crockett and Lyman C. Hamilton, who will serve as Directors of the Combined Company, were invited and accepted offers to serve as Directors of IBNET. Novell In October 1997, GlobalTel entered into a three-year technology licensing agreement with Novell that provides the Combined Company with access, and support in marketing, to Novell's over 25,000 VARs. Novell VARs range from small computer networking companies to large system integration firms. The Combined Company, in conjunction with Novell, intends to create a certification program for channel partners with respect to the Combined Company's product offerings. In addition, GlobalTel has become a Novell BIS partner. Other BIS partners include Deutsche Telecom AG, Bell Atlantic Corporation, Nippon Telegraph and Telephone Corporation and Singapore Telecommunications Limited. BIS partners have agreed upon standards for interconnecting their respective Internet networks. The Combined Company believes that its status as a BIS partner will allow it to benefit from any future network connections among the BIS partners. 61 Direct Sales The Combined Company has a direct sales force of ten individuals. The direct sales force is responsible for agent recruitment and development, retail and wholesale sales and development of high volume corporate accounts. The Combined Company plans to expand the existing direct sales force, which will enable it to take advantage of its strategic marketing relationships, expand its carrier resale business, and develop additional relationships with regional ISPs and other network providers. Customer Service The Combined Company provides its customers, independent sales agents and resellers with high-quality customer service. As of March 31, 1998, the Combined Company employed ten customer service representatives in Seattle, Washington and ten customer service representatives at the Combined Company's switching facility in Ft. Lauderdale, Florida. The Combined Company intends ultimately to concentrate its customer service functions in Ft. Lauderdale. The customer service center operates 24 hours a day, seven days a week and offers support in over five languages. CUSTOMERS As of March 31, 1998, the Combined Company's customer base consisted of more than 25,500 customers in over 170 countries. The Combined Company believes that its customers prefer its service compared to the ITO's service for the following reasons: (i) lower international, and in some cases intra-country, telephone rates; (ii) increased system reliability and call completion rates; (iii) improved line quality, with less echo, static and snow; and (iv) available and responsive customer service support. In addition to selling directly to customers, the Combined Company also sells its reorigination service on a wholesale basis to resellers and long- distance carriers. The Combined Company believes that long-distance services, when sold to resellers and other carriers, are generally a commodity product with the purchase decision based primarily on price. Although the margins on sales to other carriers and resellers are lower than the margins on sales to business and government customers, these sales involve lower operating expenses and help the Combined Company optimize the use of its network and reduce its overall carrier transmission costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Business and Government Customers The Combined Company's geographically diversified business and government customers include: foreign offices of multinational corporations, major international hotels and embassies and international agencies. Among these customers are:
FOREIGN OFFICES OF MULTINATIONAL CORPORATIONS INTERNATIONAL HOTELS EMBASSIES AND INTERNATIONAL AGENCIES - -------------------------- ---------------------- ------------------------------------ Microsoft Corpora- tion Holiday Inn Hotels(11) U.S. Embassy in Korea Mitsubishi Corpo- ration InterContinental Hotel U.S. Embassy in Australia Chrysler Interna- tional Copacabana Palace UN Consulate in South Africa Warner-Lambert Corporation Marina Hotel Diners Club Inter- national Caesar Park Hotel DHL Aviation Wal-Mart Stores, Inc. Citibank, N.A. Bank of Tokyo Royal Bank of Can- ada
62 Resellers The Combined Company sells its reorgination service to resellers on a wholesale basis. These resellers purchase service in bulk at a discounted rate for resale to their customers. Resellers are responsible for billing their users and for providing customer service. Resellers may sell the Combined Company's services to their customers under their own company's name. The Combined Company can prepare bills for resellers or resellers can prepare their own bills based on information provided by the Combined Company. Resellers, rather than the Combined Company, are responsible for collecting amounts due from the customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Carriers The Combined Company's carrier customers are long-distance companies that purchase the Combined Company's excess international long distance capacity on a wholesale basis for their own use. These carriers purchase service in bulk at a discounted rate for resale to their customers. The carriers are responsible for billing their customers and for providing customer service. The Combined Company currently provides these services to four carrier customers that are based in the United States. NETWORK AND OPERATIONS The Combined Company provides its telecommunication services through its (i) voice switching and global fax messaging infrastructure in Los Angeles, California, and Ft. Lauderdale, Florida, (ii) access to third party infrastructure through international telecommunications carriers and through Equant, and (iii) enhanced fax nodes in Hong Kong and Mexico City. By using off-the-shelf technology, which is modular and scalable and allows for the integration of a variety of technologies, the Combined Company expects to be able to provide its customers with enhanced services in a timely and cost- efficient manner. The Combined Company is committed to investing in improvements in its electronic billing, customer interface and network management systems, which the Combined Company believes are critical to its delivery of services. The Combined Company expects these systems to provide it with the ability to quickly upgrade its customers from a single service to multiple services. International Network Switching Center--Los Angeles, California. GlobalTel's switching center is located at One Wilshire Boulevard, Los Angeles, California, the West Coast's principal telecommunications gateway. Most major carriers have a switching facility at this location. In 1997, GlobalTel upgraded its switching center to provide fiber optic access for GlobalTel to all major carriers in the facility. As a protective measure, GlobalTel has diversified its access to long-distance providers through contracts with various local access providers supplying redundancy in the event of single point failures. At this facility GlobalTel uses two Summa Four voice switches that are controlled by a real-time rating, billing and switching platform. This switching platform provides enhanced voice telecommunications services and has sufficient capacity to accommodate customer growth. GlobalTel also leases a portion of a Northern Telecom DMS 250 tandem switch, which is connected to the Summa Four switching platform to support GlobalTel's carrier traffic. GlobalTel's switching center also houses a fax gateway switching platform with e-mail to fax conversion capability and software for enhanced service features, including fax broadcasting, fax on demand and fax mail. International Network Switching Center--Ft. Lauderdale, Florida. ITC's switching center is located in Ft. Lauderdale, Florida, which is interconnected to the Miami gateway to the Latin American, African and European telecommunications markets. The switching center consists of a billing and provisioning system and two 1000 port class 4 tandem switches. The switches are designed to handle international call-reorigination, international and domestic long-distance and debit card traffic. The inbound and outbound traffic is cross-connected to eight telecommunications carriers via a DS3 fiber optic line. ITC uses NACT switches, billing platform and interactive voice response ("IVR"). The Combined Company has recently added voice recognition, fax functions and Internet and X.25 triggering to the switching center. These features enable the Combined Company to offer transparent call- 63 reorigination and call-through services, daily agent reports via the Internet and automated credit card debiting. An additional feature under development is customer provisioning via the World Wide Web. The Combined Company's customers are able to access its switches in any one of 12 languages. Redundancy. The Combined Company's operations center will be in Ft. Lauderdale, Florida, which has redundant computer systems and fiber optics. The Combined Company believes that redundancy gives it enhanced service reliability, which gives it an advantage compared to many of the Combined Company's smaller competitors that do not have redundant systems. In addition, the Combined Company's redundant system architecture allows the flexibility to take individual computers off line intentionally for scheduled maintenance, upgrades and enhancements. Fax Nodes--Hong Kong and Mexico City. GlobalTel leases and operates two fax nodes in Hong Kong and Mexico City that are co-located in Equant's network facilities. The nodes are serviced and maintained by Equant on a 24-hour basis and are interconnected to local access providers. The Combined Company intends to deploy fax nodes in additional locations during 1998. Carriers and Network Access. The Combined Company has resale agreements with a number of long-distance carriers in order to obtain the best available pricing and service on certain routes. The Combined Company's enhanced fax and business-grade Internet services will be carried through Equant's global data network. GlobalTel's Los Angeles switching center is connected to the Equant network center through high-speed fiber optic circuits. The Combined Company's switching nodes have the ability to select quality and least cost routes, depending on the quality of service desired by the customer. The Combined Company relies on major telecommunications carriers including AT&T, Sprint, WorldCom Cable & Wireless and Teleglobe to provide service to its customers. Carrier costs constitute the largest portion of the Combined Company's variable costs. The Combined Company has entered into contracts to purchase capacity from various domestic and foreign carriers. Pursuant to these contracts, the Combined Company obtains rates, which are generally more favorable than otherwise would be available. To obtain these rates, the Combined Company commits to purchase minute minimums from such carriers. If the Combined Company fails to meet its minute minimums under a carrier contract, it could still be required to pay its minimum monthly commitment as a penalty or the contracts could be canceled. The Combined Company's aggregate minimum monthly commitments are approximately $564,000, which represent approximately 34.6% of the Combined Company's average monthly cost of revenue for the three months ended March 31, 1998. Because of the frequent fluctuations of long distance carriers' rates, the Combined Company believes that it is in its best interest to have short-term carrier agreements. Most of the Combined Company's carrier agreements will expire, or may be terminated by either party, within one year. The Combined Company's dependence on particular carriers will vary because the Combined Company shifts its use of carriers depending on the rates that are offered. The Combined Company periodically attempts to renegotiate rates with its current carriers and to establish relationships with new long distance carriers that provide the most favorable rates. The Combined Company's ability to obtain favorable rates from the carriers depends, in large part, on the Combined Company's total volume of long distance traffic. The Combined Company does not believe that the loss of any one supplier or contract would have a material adverse impact on the Combined Company's business, financial condition or results of operations. See "Risk Factors--Dependence on Carriers and Other Suppliers" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION General The Combined Company faces a high level of competition for customers and independent sales agents in all of its markets, and expects competition to intensify in the future. There are no substantial barriers to entry in the call-reorigination industry. The Combined Company believes that there are more than 150 companies 64 engaged in the international call-reorigination industry. Many of the Combined Company's competitors are significantly larger, have substantially greater financial, technical and marketing resources, larger networks and a broader portfolio of services than the Combined Company. Additionally, many competitors have strong name recognition and brand loyalty, long-standing relationships with their target customers, and economies of scale resulting in a lower relative cost structure. There can be no assurance that the Combined Company will be able to compete successfully against new or existing competitors. Inasmuch as the Combined Company believes that competition for customers and independent sales agents is based primarily on price, transmission quality, services offered and the ability of the supplier to "bundle" various telecommunications services, the U.S.-based providers of international long distance service typically set pricing, quality, service, and standards that the Combined Company seeks to match or exceed. Increased competition could force the Combined Company to reduce its prices and profit margins if the Combined Company's competitors are able to procure rates or enter into service agreements comparable to or better than those of the Combined Company, or if competitors are able to offer other incentives to existing and potential customers and independent sales agents. Similarly, the Combined Company has no control over the prices set by its competitors in the long distance resale market. The Combined Company is aware that its ability to market its long distance resale services depends upon its ability to offer rates lower than those of ITOs. A decrease in arbitrage spreads between U.S.-based international calling rates and ITO rates could have a material adverse effect on the Combined Company's business, financial condition and results of operations. Other potential competitors include cable television providers, wireless telephone providers, Internet access providers, electric and other utilities with rights of way, railways, microwave carriers and large-end users that have private networks. The intensity of such competition has recently increased, and the Combined Company believes that such competition will continue to intensify as the number of new entrants increases. If the Combined Company's competitors devote significant additional resources to the provision of international and national long distance telecommunications services to the Combined Company's target customer base, the Combined Company could suffer a reduction of revenue and profits that could have a material adverse effect on the Combined Company's business, financial condition and results of operations. On February 15, 1997, representatives of 69 countries, including the United States, finalized the WTO Agreement, which addresses market access, foreign investment and procompetitive regulatory principles for countries generating more than 90% of worldwide telecommunications revenue. The WTO Agreement became effective February 5, 1998. Although certain countries took specific exceptions to the agreement, the WTO Agreement generally provides (i) market access for United States companies to local, long distance and international service through means of network technology on either a resale or facilities basis, (ii) the opportunity for United States companies to hold a significant stake in telecommunications companies in the countries that are parties to the WTO Agreement, and (iii) the ability to take advantage of these opportunities within a framework of pro competitive regulatory principles. The Combined Company expects to benefit from the anticipated effects of the WTO Agreement because of its procompetitive aspects, but it expects that it may take several years before the principles of the agreement are implemented in many countries and it cannot predict the extent of the opportunities that may be presented. U.S. Based Competition Historically, the large U.S. long distance carriers have been reluctant to compete directly with ITOs by entering the international call-reorigination business. AT&T and others, are beginning to enter the call-reorigination business. The Combined Company's principal U.S.-based competitors are providers of international call-reorigination services such as AT&T, Access Authority, IDT Corporation, International Telecom, Ltd.(Kallback), Justice Technology Corporation, Telegroup, Inc., USA Global Link, Inc., UTG Communications International, Inc., Viatel, Inc. and Worldpass Communications Corp. as well as providers of traditional long distance services such as AT&T, Cable & Wireless, Frontier Corp., GTE Communications, LCI International, Inc., MCI, Qwest Communications International, Inc., Sprint, WorldCom and RBOCs that provide long distance services outside their exchange territories. 65 International Based Competition The Combined Company's principal international-based competitors include, among others, Telekom S.A. in South Africa; Telefonica de Argentina and Telecom Argentina in Argentina; Telebras, Telesp and Telerj in Brazil; France Telecom; PTT Telecom B.V. in the Netherlands; ACC Corp., First Telecom plc, Oystel Communications Ltd., Swiftcall Ltd., AT&T, British Telecommunications plc, Cable & Wireless, Mercury Communications Ltd., Sprint and WorldCom in the United Kingdom; Deutsche Telecom AG in Germany; Optus Communications in Australia and Kokusan Denshin, Denwa, International Telecom Japan and International Digital Communications in Japan. The Combined Company also competes with non-U.S. based providers of international call-reorigination services. The Combined Company believes that ITOs generally have certain competitive advantages due to their control over local connectivity and their close ties with national regulatory authorities. The Combined Company also believes that, in certain instances, some regulators have shown a reluctance to adopt policies and grant regulatory approvals that would result in increased competition for the local ITO. If an ITO were to successfully pressure national regulators to outlaw the provision of call-reorigination services, the Combined Company could be denied regulatory approval in certain jurisdictions in which its services would otherwise be permitted, thereby requiring the Combined Company to seek judicial or other legal enforcement of its right to provide services. Any delay in obtaining approval, or failure to obtain approval, could have a material adverse effect on the Combined Company's business, financial condition and results of operations. ITOs may influence regulatory authorities to outlaw the provision of certain call-reorigination services or block access to the call-reorigination services the Combined Company markets. The ITOs generally seek to prevent call- reorigination companies from using uncompleted local telephone calls to trigger international calls. In such environments, the Combined Company uses X.25 or Internet triggering to avoid violating local laws or regulations. The Combined Company has benefited from the high differential between the rates charged by ITOs and the rates charged by the Combined Company. As deregulation continues in foreign markets, this differential in rates is expected to decrease, thus placing pricing pressure on the Combined Company. Furthermore, deregulation may lead to additional competitors entering the international telecommunications market. If the Combined Company encounters anti-competitive behavior in countries in which it operates (such as an ITO attempting to block access to call-reorigination services) or if the ITO in any country in which the Combined Company operates uses its competitive advantages to the fullest extent, the Combined Company's business, financial condition and results of operations could be materially adversely affected. Deregulation and increased competition in foreign markets could cause prices for direct-dial international calls to decrease to such a degree that customers are no longer willing to use the Combined Company's international call-reorigination services. TECHNOLOGY DIAL and LINK-US Technology. CSI utilizes proprietary DIAL and LINK-US technologies in connection with transparent call-reorigination. These technologies are incorporated into a switch that permits transparent call- reorigination to occur when interconnected with PBX's of hotels, large businesses and other high volume customers. As of December 31, 1997, CSI had installed approximately 200 DIAL systems and five LINK-US systems. The DIAL technology, which largely consists of proprietary programming enhancements to third-party switching equipment, is beneficially owned entirely by CSI and is not subject to royalty payments, restrictions or financial penalties whatsoever regarding its deployment. CSI supports two versions of its DIAL technology. The first version is the Enhanced DIAL system, which is installed to facilitate transparent call- reorigination in large hotels and business parks. Enhanced DIAL utilizes a unique combination of X.25 and Internet triggering technologies interconnected with commercial PBX environments. The Combined Company plans to emphasize the installation of its Enhanced DIAL system, which can support the same volume of traffic as 64 of the Basic DIAL systems. The Combined Company's Basic DIAL 66 system is an entry-level system that is installed to facilitate transparent call-reorigination for smaller companies. The Basic DIAL system is also capable of utilizing X.25 and Internet triggering, but is commonly used in locations that do not currently have X.25 or Internet access. The LINK-US system is a PC-based automated call processing system designed to link an internationally located PBX to the CSI switching center. Its design includes multiple call processing redundancies to insure rapid call completion, real time billing, and other enhanced features including voice prompts and remote programming capability. For a description of the license agreement relating to the LINK-US technology see "Management--Consulting Agreement." X.25 Triggering Technology. An X.25 data network can transport data or voice information to any network destination in the world. CSI has proprietary software technology that uses X.25 triggering technology in its call- reorigination system. The Combined Company provides X.25 triggering in Argentina and Brazil and plans to provide it in any locality where it has several high volume customers. In countries with underdeveloped telecommunications systems, it can be difficult and time consuming to make an international phone call. With X.25 triggering technology up to 100% of the trigger calls to the Combined Company's switch are transmitted out of the country and nearly 100% of the call-reorigination calls are transmitted into the country. The combination of X.25 triggering technology with a DIAL or LINK-US switch provides a highly reliable telecommunications service that is especially appealing to hotels and business owners. See "--Services." By utilizing alternate call-triggering mechanisms, the ITO is removed from the call-reorigination process. ITOs typically object to call-reorigination because call-reorigination companies use the ITO's lines to trigger the call- reorigination without paying the ITO for the use of its lines on the long distance segment because that long distance call is not completed. When the Combined Company uses X.25 or Internet triggering technology to trigger its call-reoriginations, the ITO's long distance lines are not used. Instead, a low cost, local call is completed as part of the call-reorigination triggering process. See "Risk Factors--Risks Associated with International Operations." Internet Triggering Technology. Internet triggering is a newer technology and is less expensive than X.25 triggering technology. CSI is currently triggering call-reoriginations via the Internet in Brazil, Argentina, Venezuela, South Africa and Lebanon. It intends to install Internet triggering in Singapore, Hong Kong and New Zealand. CSI has found that call- reoriginations using Internet triggering usually take four to six seconds and are nearly 100% effective. INTELLECTUAL PROPERTY GlobalTel owns U.S. Registration No. 1,944,078 for the mark PRIMECALL for reselling long-distance telecommunications services. GlobalTel has filed applications in the national trademark offices of Australia, Hong Kong and Japan and in the regional European Community trademark office to register the service mark PRIMECALL. GlobalTel filed an Intent to Use with the Patent and Trademark Office for the mark "GLOBALTEL." There can be no assurance that the Combined Company's trademark applications will result in any registration being issued, or that such registration will be held valid and enforceable if challenged. The Combined Company currently does not hold any trademark registrations for the marks CS GLOBALTEL, GLOBALTEL, DIAL or LINK-US. The Combined Company is aware of a pending U.S. application by Cellnet Corporation ("Cellnet") to register the mark GLOBALTEL for providing international wireless telephone communication services on a temporary basis. The Combined Company believes that GlobalTel may have commenced using the mark GLOBALTEL before Cellnet and is assessing whether to oppose Cellnet's application. The Combined Company is also aware that Interactive Media Technologies, Inc. is doing business in the area of international callback services under the trade name GlobalTel. There can be no assurance that the Combined Company's use of the 67 mark GLOBALTEL will continue unimpeded or the Combined Company's measures to protect its intellectual property will deter or prevent the unauthorized use of the Combined Company's intellectual property. The Combined Company could incur substantial costs and diversion of management resources relating to the enforcement of its intellectual property rights. In addition, if the Combined Company is unable to adequately protect its intellectual property, including existing service marks and trademarks, there could be a material adverse effect on the Combined Company's business, financial condition and results of operations. The Combined Company does not have an intellectual property protection program and does not hold any patents or copyrights. It relies on trade secret and contractual restrictions to establish and protect its technology. The Combined Company's success depends in part on its ability to enforce intellectual property rights for its proprietary software technology, both in the United States and in other countries. The Combined Company's proprietary software is protected by the use of confidentiality agreements that restrict the unauthorized distribution of the Combined Company's proprietary information. REGULATION The Combined Company's international call-reorigination services are subject to the jurisdiction of many regulators. The terms and conditions under which the Combined Company provides international communications services are subject to government regulation. The FCC has imposed certain restrictions on international call-reorigination providers, including the requirement that authorized carriers provide service in a manner consistent with the laws of the countries in which they operate. Local laws and regulations differ significantly among the jurisdictions in which the Combined Company operates, and the interpretation and enforcement of such laws and regulations vary. These regulations are often based on the informal views of the local ministries which, in some cases, are subject to influence by ITOs. In addition, since the Combined Company's call-reorigination services effectively bypass the local telephone system, regulators in certain countries have objected to call-reorigination services, and 34 countries have notified the FCC that they have declared certain call-reorigination services illegal. The Combined Company's services in such countries comprised approximately 10.6% of its revenue for the 12 months ended December 31, 1997. The Combined Company generates a significant portion of its revenue from customers originating calls in Europe, the Middle East, South Africa and South America. In the event that countries in these regions that now permit call-reorigination prohibited the Combined Company's services or regulated the pricing or profit levels of such services, the Combined Company's business, financial condition and results of operations could be materially adversely affected. At this time, the Argentine government is attempting to provide sufficient information to demonstrate to the FCC's satisfaction that call-reorigination is unlawful in Argentina. Although the Combined Company believes that it is unlikely that the FCC would rescind the Combined Company's authority to provide call- reorigination, such action by the FCC would have a material adverse effect on the Combined Company's business. To facilitate the Combined Company's expansion plans, it may deploy additional switching facilities to be located in a number of countries. As a result, the Combined Company may be directly subject to regulation in an increasing number of countries. In addition, there can be no assurance that the Combined Company has accurately interpreted or will accurately predict the interpretation of applicable laws and regulations or regulatory and enforcement trends in a given jurisdiction, or that the Combined Company will be found to be in compliance with all such laws and regulations. Failure to interpret accurately the applicable laws and regulations and the mode of their enforcement in particular jurisdictions could cause the Combined Company to lose, or be unable to obtain, regulatory approvals necessary for it to be able to provide certain services in such jurisdictions or to use certain of its transmission methods. Such failure could result in significant monetary penalties being imposed against the Combined Company. See "Risk Factors-- Regulation." Federal regulations, regulatory actions and court decisions have had, and may have in the future, an impact on the Combined Company and its ability to compete. The FCC typically imposes obligations to file tariffs containing the rate, terms and conditions of service. The FCC does not currently regulate the Combined Company's profit levels, although the FCC has the authority to do so. There can be no assurance that regulators 68 will not raise material issues with regard to the Combined Company's compliance with existing or future regulations. The Combined Company offers service by means of call-reorigination pursuant to an FCC authorization ("Section 214 Switched Voice Authorization") pursuant to Section 214 of the Communications Act and certain relevant FCC decisions. The FCC has determined that call-reorigination service using uncompleted call signaling does not violate United States or international law, but has held that United States companies providing such services must comply with the laws of the countries in which they operate as a condition of such companies' Section 214 Switched Voice Authorizations. The FCC reserves the right to condition, modify or revoke any Section 214 Authorizations and impose fines for violations of the Communications Act or the FCC's regulations, rules or policies promulgated thereunder, or for violations of the clear and explicit telecommunications laws of other countries that are unable to enforce their laws against U.S. carriers. FCC policy provides that foreign governments that satisfy certain conditions may request FCC assistance in enforcing their laws against U.S. carriers. Thirty-four countries have formally notified the FCC that certain call-reorigination services violate their laws. Only eight of these countries have submitted copies of actual laws to the FCC that declare certain call-reorigination services unlawful. Two of the 34 countries have requested assistance from the FCC in enforcing their prohibitions on call- reorigination within their respective jurisdictions. The FCC has held that it would consider enforcement action against companies based in the United States engaged in call-reorigination by means of uncompleted call signaling in countries where this activity is expressly prohibited. While the Combined Company believes that the FCC has not initiated any action to date to limit the provisions of call-reorigination services, there can be no assurance that it will not take action in the future. Enforcement action could include an order to cease providing call-reorigination services in such country, the imposition of one or more restrictions on the Combined Company, monetary fines or, ultimately, the revocation of the Combined Company's Section 214 Switched Voice Authorization, any of which could have a material adverse effect on the Combined Company's business, financial condition and results of operations. EMPLOYEES AND CONSULTANTS As of March 31, 1998, CSI had 18 full-time employees and two consultants; GlobalTel had 28 full-time employees and three consultants; and ITC had 18 full-time employees and two consultants. The Combined Company plans to hire additional employees and consultants as may be required to support expansion of the Combined Company's operations and independent sales agent network. None of the Combined Company's employees are covered by a collective bargaining agreement. Management believes that the Combined Company's relationship with its employees is good. PROPERTIES CSI's executive offices are located at 8 South Nevada Avenue, Colorado Springs, Colorado 80903. The Combined Company leases approximately 11,000 square feet of space under a lease that expires January 31, 1999 with respect to 5,100 square feet, and December 31, 1999 with respect to the remainder. CSI pays approximately $10,720 per month for such space. See "Certain Transactions." GlobalTel leases approximately 4,800 square feet of office space for its headquarters and operations center at 1520 Eastlake Avenue East, Seattle, Washington 98102 under a lease that expires on December 31, 1998 and requires monthly payments of $5,850. In addition, GlobalTel leases approximately 1,500 square feet of space in Los Angeles, California, for switch equipment under a lease that expires on June 30, 2006 and requires monthly payments of $5,040. ITC leases approximately 2,310 square feet for its executive offices at 290 Pratt Road, Meriden, Connecticut 06450 at a rate of approximately $2,380 per month. ITC leases approximately 1,027 square feet for its switching center at 110 East Broward Boulevard, Suite 610, Ft. Lauderdale, Florida 33301 at a rate of approximately $4,225 per month. 69 In the opinion of management, each of the properties is adequately covered by insurance and is suitable for each of such properties' current and intended future uses. Following completion of the offering, the Combined Company intends to evaluate and may sub-lease certain properties in order to optimize operating efficiencies. LEGAL PROCEEDINGS In November 1997, WorldCom commenced an action entitled "WorldCom, Inc. v. International Telephone Company d/b/a Interglobal Telephone Company" against ITC in Connecticut state court (Docket No. CV-970407418, Superior Court, J.D. of New Haven) seeking damages of approximately $1.1 million for alleged past due carrier bills. ITC believes it has meritorious defenses to the suit. ITC intends to vigorously defend its position and will attempt to reach a settlement with this carrier. In addition, in the ordinary course of business, the Combined Company may become a party to legal proceedings, the outcome of which, singly or in the aggregate, is not expected to be material to the Combined Company's business, financial condition and results of operations. The Combined Company intends to aggressively pursue collection of debts, including those owed by a former independent sales agent in Singapore. 70 MANAGEMENT OFFICERS AND DIRECTORS The following table contains the name, age and position with the Combined Company of each executive officer and director of the Combined Company as of the date of this Prospectus.
NAME AGE POSITION WITH THE COMBINED COMPANY ---- --- ---------------------------------- Ronald P. Erickson...... 54 Chairman of the Board (upon completion of the GlobalTel Merger) Robert A. Spade......... 51 Chief Executive Officer and Vice Chairman of the Board (upon completion of the GlobalTel Merger) Patrick R. Scanlon...... 52 President, Chief Operating Officer and Director Daniel R. Hudspeth...... 35 Chief Financial Officer, Secretary and Treasurer German F. H. Burtscher.. 39 Vice President Philip A. Thomas........ 55 Vice President and General Manager (upon completion of the ITC Acquisition) Dean H. Cary............ 49 Director Richard F. Nipert....... 41 Director Charles A. Shields...... 53 Director Bruce L. Crockett....... 53 Director (upon completion of the GlobalTel Merger) Lyman C. Hamilton....... 71 Director (upon completion of the GlobalTel Merger) Michael S. Brownfield... 57 Director (upon completion of the GlobalTel Merger)
Officers are appointed by and serve at the discretion of the Board of Directors. Each director holds office until the next annual meeting of shareholders or until a successor has been duly elected and qualified. All of the Combined Company's officers devote full-time to the Combined Company's business and affairs. Ronald P. Erickson has served as Chairman of the Board, President, Chief Executive Officer and a Director of GlobalTel since January 1996 and will serve as Chairman of the Board of the Combined Company following the GlobalTel Merger. From August 1994 to January 1996, he was Managing Director of Globalvision L.L.C., an international strategic consulting firm. From September 1992 to August 1994, he served variously as Chairman and Vice Chairman of the Board, President and Chief Executive Officer of Egghead Software, Inc., a retailer of software and computer peripheral products. He was also the co-founder and a director of Microrim, Inc., a database software developer from November 1981 to May 1992. Currently, he is a director of ITEX Corporation, a trading and financial services company, Westower Corporation, a wireless communications company, Intrinsyc Software, Inc., a developer of software tools and components and IBNET. Mr. Erickson received a B.A. degree from Central Washington University, an M.A. degree from the University of Wyoming and a J.D. from the University of California, Davis, School of Law. Robert A. Spade has been the Chairman of the Board since March 1994 and CSI's Chief Executive Officer since January 1995. Upon completion of the GlobalTel Merger, Mr. Spade will become Vice Chairman of the Board. Mr. Spade also served as President of CSI from April 1995 to June 1997 and as the Treasurer CSI from April 1995 to July 1996. From 1994 to 1995, Mr. Spade was an Adjunct Professor of International Corporate Finance with, and was a director of, the International School of Management in Colorado Springs. In 1991, Mr. Spade founded Diamante Properties, Inc. ("Diamante"), a company engaged in commercial real estate. He served as President of Diamante from inception through 1995 and currently serves as its Chairman and Secretary. Mr. Spade is a director of MedPlus Corporation, a company that operates a workers' compensation medical clinic 71 and arranges financing for patients. He was a director of World Information Networks On The Net, Inc. ("WIN"), a company that provides Internet access, designs web pages and broadcasts facsimiles via the Internet, from August 1995 to March 1997. Mr. Spade received a Masters degree from the Johns Hopkins School of Advanced International Studies and B.A. degree from University of California, Santa Barbara in Economics and Hispanic Civilization. Mr. Spade is fluent in Spanish and Portuguese. Patrick R. Scanlon has been President and Chief Operating Officer of CSI since June 1997 and a director of CSI since January 1996. He also served as Treasurer from June 1997 to December 1997. From May 1991 to June 1996 Mr. Scanlon served as Executive Vice President of BRC Imagination Arts, Inc., a designer and producer of custom exhibits and attractions for world fairs, aquariums, theme parks and visitor centers. Prior to that time, Mr. Scanlon was with Walt Disney Imagineering, the theme park design, engineering, production, and construction division of the Walt Disney Company, for 18 years, most recently as Senior Vice President. Mr. Scanlon is also an owner and partner in a number of real estate ventures, and has served on the Boards of Directors of the Theme Entertainment Association, the Angeles Chorale, and The Learning Company. Mr. Scanlon received an M.S. degree in Finance from the UCLA Graduate School of Management and a B.A. degree in Economics from the University of California, Santa Barbara. Daniel R. Hudspeth has been Chief Financial Officer and Treasurer of CSI since December 1997. From October 1995 to December 1997, Mr. Hudspeth served as Chief Financial Officer and Corporate Secretary of Wireless Telecom, Inc., a company that distributes wireless data products and services for the telecommunications and computer industries. From January 1995 to October 1995, he was Vice President and Corporate Controller of CWE, Inc., a publicly traded computer retail company. From August 1992 to January 1995, Mr. Hudspeth was Vice President of Finance and Administration and Treasurer of OfficeScapes Business Furniture, and from July 1985 to August 1992, he was an Audit Manager of Emerging Business Services for Deloitte & Touche LLP. Mr. Hudspeth is a Certified Public Accountant in Colorado and a member of the Colorado Society of Certified Public Accountants and the American Institute of Certified Public Accountants. He received his B.S. degree in Business Administration from Colorado State University. German F. H. Burtscher has served as GlobalTel's Senior Vice President, Marketing and Sales since February 1997 and served as its Vice President, Strategic Marketing and Product Development from October 1995 to February 1997 and will serve as a Vice President of the Combined Company following the GlobalTel Merger. In January 1995, he co-founded Ratsten International Telecommunications, Inc., a telecommunications services provider, and served as its President until October 1995. He also served as Regional Sales Manager and Senior Account Executive of World Call Telecommunications, a long distance telephone carrier, from June 1992 to January 1995. Mr. Burtscher received a B.A. degree in Business and Sociology from the University of Austria, Innsbruck and an M.B.A. degree in Finance and International Marketing from the University of Austria, Graz. Philip A. Thomas will become Vice President and General Manager of CSI upon the closing of this offering. Mr. Thomas was a co-founder and has served as Vice President of Operations of ITC since March 1993. From 1990 until 1993, Mr. Thomas was a partner of Thomas Powell and Associates, a software developer for voice mail systems, automated attendants and international call- reorigination systems. From 1977 until 1990, Mr. Thomas was principal of Thomas Business Systems, Inc., a computer hardware dealer. Mr. Thomas received his H.N.D. degree in Applied Physics from the Farnborough (England) College of Technology. Dean H. Cary has been a director of CSI since January 1997. Since November 1995 he has served as Executive Director and President of Forval International Telecommunications, Inc., an international long distance carrier based in Japan. From November 1993 to November 1995, he served as Executive Vice President of Viatel, Inc., one of CSI's principal competitors. In 1992 he formed Paragon Management Group, a business engaged in strategic and business planning, and served as its President. From 1988 to 1992, he was the Vice President/General Manager of Metromedia Communications Corp., a U.S.-based long distance carrier. He received a B.A. degree in Business, Education and Psychology from the University of Minnesota. Richard F. Nipert has been a director of CSI since November 1996. Since January 1993, Mr. Nipert has been a partner in the law firm of Bright, Gibson and Nipert, P.C. in Denver, Colorado. Mr. Nipert previously 72 practiced law with three other law firms located in Denver. Mr. Nipert practices law primarily in the fields of business and commercial real estate. He received a J.D. degree from the University of Southern California and a B.A. degree in Social Ecology from the University of California at Irvine. Charles A. Shields has been a director of CSI since April 1998. Since March 1996, Mr. Shields has served as President of Charles A. Shields and Associates, Inc., a human resources consulting firm. From October 1989 until March 1996, he served as Senior Vice President of Human Resources and Administration for Manor Care, Inc., a holding company for Choice Hotels, International and Manor Care Health Services. From 1965 until 1987, Mr. Shields held various positions for the Walt Disney Company including Vice President of Administration and Human Resources for Walt Disney Imagineering, Inc. He received a B.S. degree in Business and Marketing from California State University at Long Beach. Bruce L. Crockett has served as a Director of GlobalTel since September 1997 and will serve as a Director of the Combined Company following the GlobalTel Merger. From February 1992 to July 1996, he served as President, Chief Executive Officer and a Director of COMSAT Corporation, a global telecommunications company. He is also a director, chairman of the compensation committee and member of the audit committee of ACE Limited, a multi-link insurance company, a director and trustee of mutual funds managed by AIM Management Group Inc., a mutual fund company and a director of IBNET. Mr. Crockett received an A.B. degree in Geography from the University of Rochester, a B.S. degree in Accounting from the University of Maryland and an M.B.A. degree in Finance from Columbia University. Lyman C. Hamilton has served as a Director of GlobalTel since November 1997 and will serve as a Director of the Combined Company following the GlobalTel Merger. He also served as President and Chief Executive Officer of Interdigital Communications Corporation from 1994 to 1995. Prior to that, Mr. Hamilton served as Chairman of the Board from 1993 to 1994, and as President and Chief Executive Officer from 1991 to 1993, of Alpine Polyvision, Inc., a developer of flat panel displays. Mr. Hamilton was employed by ITT Corporation from 1962 to 1979 where he served as President from 1977 to 1979 and as Chief Executive Officer in 1978 and 1979. Currently, he is a director of Marine Management Systems, Inc., a provider of shipboard hardware and software management systems, Scan-Optics, Inc., a provider of optical character recognition equipment, Polyvision Inc., a provider of visual display equipment and developer of flat panel displays and IBNET. Mr. Hamilton received a B.A. degree from Principia College and an M.P.A. degree from Harvard University. Michael S. Brownfield has served as a Director of the GlobalTel since January 1996 and will serve as a Director of the Combined Company following the GlobalTel Merger. Mr. Brownfield, a private investor, is also a director of NW Cascade Inc., a construction service and supply company, Cutter & Buck, Inc. a men's apparel company, and Accurate Molded Plastics Inc., a plastics manufacturer. Mr. Brownfield received a B.S. degree from the University of Oregon. BOARD COMMITTEES The Board of Directors maintains a Compensation Committee and an Audit Committee. The Compensation Committee, consisting of Messrs. Shields, Nipert and Hamilton, reviews compensation and option matters and makes recommendations to the Board regarding changes in executive compensation. The Audit Committee, consists of Messrs. Crockett, Nipert and Cary. The function of the Audit Committee is to review and approve financial policies and practices and the scope of audit procedures employed by the Combined Company's independent auditors, review and approve the audit reports rendered by the Combined Company's independent auditors and approve the audit fee charged by the independent auditors. The Audit Committee reports to the Board of Directors with respect to such matters and recommends the selection of the independent auditors. COMPENSATION OF DIRECTORS Directors who are also employees of CSI receive no additional compensation for serving as directors. Non-employee directors have received options to purchase 16,667 shares of Common Stock at the time they commenced service on the Board of Directors. The options are exercisable at the bid price of the Common Stock at the date of grant. The options vest 20% per year over five years from the date of grant. CSI reimburses all of its directors for travel and out-of-pocket expenses in connection with their attendance at meetings of the Board of Directors and for carrying out various board-directed assignments for the benefits of CSI. 73 LIMITATION OF LIABILITY AND INDEMNIFICATION CSI's Articles of Incorporation eliminate the personal liability of its directors to CSI and its shareholders for monetary damages for breach of the directors' fiduciary duties in certain circumstances. CSI's Bylaws provide that CSI will indemnify its officers and directors to the fullest extent permitted by law. In addition, CSI carries officers' and directors' liability insurance with an annual $1 million aggregate limit. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of CSI pursuant to the foregoing provisions, or otherwise, CSI has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. KEY EMPLOYEES Stuart Agranoff has been CSI's Director of Technical Operations since September 1997 and a senior engineer for CSI since January 1996. From 1992 to 1996, Mr. Agranoff worked as an Associate Engineer for Kaman Sciences Corporation. From 1984 to 1992 he served in the United States Navy where he worked as an Aircraft Intermediate Maintenance Department Supervisor and as a Senior Communication/Navigation Technician. Mr. Agranoff earned his degree in Electronics Technology from the University of Phoenix. Keith Busch has been CSI's Director of Business Development in Asia since December 1997. Mr. Busch previously served as President of two other call- reorigination providers. From 1996 to 1997 he founded and served as President of American Fone Network, and from 1995 to 1996 he served as President of Rapid Link USA. Mr. Busch also previously worked as the International Sales Manager for Premiere Communications, an international calling card company. He earned his B.A. Degree from the University of Washington. Ronald Fox has served as GlobalTel's Senior Vice President since October 1997, as President of GlobalTel's subsidiary, Primecall, Inc., since September 1997, and as a Director of GlobalTel since December 1997. From January 1994 to February 1997, he served as Vice President of Hi Rim Communications, Inc., an international facilities-based telecommunications carrier. In April 1997, subsequent to Mr. Fox's resignation as an officer, Hi Rim Communications, Inc. filed a petition under the federal bankruptcy laws in the United States Bankruptcy Court for the District of Nevada. From June 1988 to March 1994, he served as President of Ronald B. Fox & Associates, a telecommunications consulting firm. From 1983 to 1988, Mr. Fox served as National Sales Director of CMI Corporation. From 1981 to 1983, he served as President of National Tel Data Corporation. Mr. Fox received an A.S. degree in Business Marketing from Lansing Community College. Brian Louviere has served as GlobalTel's Chief Technology Officer since February 1998. Until 1998, Mr. Louviere previously served as Director, Service Delivery and Customer Care for Pacific Bell Network Integration. From 1991 to 1996, Mr. Louviere served in various positions with Pacific Bell including Senior Product Manager. From 1979 to 1990, he served in various marketing and product development positions at BT Tymnet. He received a B.S. degree in computer science and mathematics from McNeese State University. Mark Lyons has been CSI's Director of Sales and Marketing since November 1996. From 1990 to 1996 he worked for Sprint as its Senior Business Services Representative. He previously worked as a Branch Manager for Norwest Bank and First Interstate Bank. He received a B.S. degree in Finance from Utah State University in 1983 and has earned graduate credits in telecommunications from the University of Denver. John Spade has been CSI's Director of Technology and Development since September 1997 and Special Projects Manager since March 1997. He has been an employee of CSI since August 1996. From August 1995 to July 1996, Mr. Spade was Vice President and a director of WIN, an Internet services provider. In 1994, he received his B.A. degree from Chico State University, where he also taught courses on Economics and the Internet. John Spade is the son of Robert A. Spade. Sean Thomas will become CSI's Director of Business Development in Europe upon the closing of this Offering. Mr. Thomas was a co-founder of ITC in 1993 and served as Vice President of Sales of ITC since November 1996. From 1991 to 1993, Mr. Thomas served as Sales Manager with Connecticut Computer Technologies. Mr. Thomas attended Loyola University in New Orleans. Mr. Thomas is the son of Philip A. Thomas. 74 CONSULTING AGREEMENT CSI has entered into a consulting agreement with Gary Kamienski, who developed the LINK-US technology for CSI. Pursuant to Mr. Kamienski's agreement, dated September 19, 1996, Mr. Kamienski transferred the LINK-US switch technology to the Combined Company. The Combined Company agreed to pay the costs of installation and associated costs for LINK-US, and to pay Mr. Kamienski a monthly royalty equal to 4% of the Combined Company's gross revenue related to LINK-US. The Combined Company has the option to buy out the royalty for an amount equal to the greater of $2.5 million or three times the aggregate royalty payments for the first 12 months of the agreement. In addition, for each installation of LINK-US, the Combined Company has agreed to pay Mr. Kamienski a flat fee of $1,500 if such installation produces gross revenue between $10,000 and $20,000 in its first full billing month of operation, and a flat fee of $3,000 if such revenue exceeds $20,000 in its first full billing month of operation. In addition, Mr. Kamienski agrees to provide ongoing maintenance, support and consulting with respect to LINK-US for as long as the system is in operation at a rate of $5,200 per month. The agreement will remain in effect for as long as the LINK-US technology is operational or until September 1, 2006, unless earlier terminated. The agreement may be terminated by either party upon 30 days notice to the other of a material default or consummation of the buy out of Mr. Kamienski's royalties. Mr. Kamienski has agreed not to develop or market any technology similar to LINK-US which in any way might compete with the Combined Company for the lesser of ten years or the period of time the Combined Company is utilizing the LINK-US technology. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth certain compensation awarded to, earned by or paid to CSI's Chief Executive Officer (the "Named Executive Officer"). No other executive officer of CSI received annual salary and bonus exceeded $100,000 in the year ended December 31, 1997. SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION ALL OTHER COMPENSATION AWARDS COMPENSATION ------------- ------------ ------------ SECURITIES UNDERLYING NAME AND POSITION YEAR SALARY BONUS OPTIONS ----------------- ---- ------- ----- ------------ Robert A. Spade Vice-Chairman and Chief Executive Officer.......................... 1997 $90,374 -- 33,333 -- 1996 67,500 -- 4,333 -- 1995 41,000 -- 3,333 --
Option Grants Table The following table contains information concerning stock option grants made to the Named Executive Officer during the eight months ended December 31, 1997. See "--Stock Option Plan" for information relating to vesting and exercise terms. OPTION GRANTS IN THE EIGHT MONTHS ENDED DECEMBER 31, 1997
INDIVIDUAL GRANTS ------------------------------------------------ % OF TOTAL OPTIONS NUMBER OF GRANTED TO POTENTIAL REALIZABLE SECURITIES EMPLOYEES EXERCISE VALUE AT ASSUMED UNDERLYING IN THE EIGHT PRICE ANNUAL RATES OF STOCK OPTIONS MONTHS ENDED PER EXPIRATION PRICE APPRECIATION FOR NAME GRANTED DECEMBER 31, 1997 SHARE DATE OPTION TERMS(1) ---- ---------- ----------------- -------- ---------- ---------------------- 5% 10% ---------- ----------- Robert A. Spade......... 33,333 31.1% 1.335 8/29/07 27,986 709,221
- -------- 75 (1) Potential gains are net of the exercise price but before taxes associated with the exercise. The 5% and 10% assumed annual rates of compounded stock appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Combined Company's estimate or projection of the future Common Stock price. Actual gains, if any, on stock option exercises are dependent on the future financial performance of the Combined Company, overall market conditions and the option holders' continued employment through the vesting period. Option Values. The following table contains information concerning options to purchase Common Stock held by the Named Executive Officer as of December 31, 1997. The Named Executive Officer did not exercise any stock options during 1997. 1997 YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1997 (#) DECEMBER 31, 1997 ($) (1) ----------------------------------- ------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- --------------- ---------------- ----------- ------------- Robert A. Spade......... 7,666 33,333 5,813 44,531
- -------- (1) Options are "in the money" if the fair market value of the underlying securities exceeds the exercise price of the options. The exercise prices for all options granted to the Named Executive Officer was equivalent to the fair market value of the Common Stock of the Combined Company, as determined by the Board of Directors, as of December 31, 1997. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION No member of the Compensation Committee was an officer, former officer or employee of CSI, GlobalTel, ITC or their subsidiaries or had any relationship with such companies of the type requiring disclosure in "Certain Transactions." No executive officer of the Combined Company serves as a member of the board of directors or compensation committee of any entity which has one or more executive officers serving as a member of the Combined Company's Board of Directors or Compensation Committee. EMPLOYMENT AGREEMENTS The Combined Company has entered into employment agreements with each of Messrs. Spade, Scanlon and Hudspeth (collectively, the "Executives") for a term of one year. The employment agreements will provide for an annual salary of $175,000, $175,000 and $125,000 for Messrs. Spade, Scanlon and Hudspeth, respectively. The Combined Company may terminate the Executives employment only for cause (as defined in the related agreement). The Executives may also be entitled to receive bonuses pursuant to any cash bonus plan adopted by the Board of Directors. Pursuant to the employment agreements, each Executive will agree not to compete with the Combined Company for a period of three years following termination of his employment. The Combined Company anticipates entering into employment agreements with Messrs. Erickson, Burtscher and Fox effective upon completion of the GlobalTel Merger. Upon the completion of the ITC Acquisition, CSI will enter into one year employment agreements with Philip A. Thomas and Sean Thomas which provide for base salaries of $115,000 and $65,000, respectively. CSI may terminate Messrs. Thomas and Thomas only for cause (as defined in the agreements). Messrs. Thomas and Thomas have each agreed not to compete with the Combined Company for a period of six months following termination of the respective agreements. The Combined Company intends to establish a cash bonus plan with an aggregate of less than $100,000 prior to completion of the offering. STOCK OPTION PLAN In 1995, the Board of Directors adopted, and the shareholders approved, an Incentive Stock Option Plan and a Non-qualified Stock Option Plan, which in January 1998 the shareholders approved combining into one stock option plan (the "Stock Option Plan"). The Stock Option Plan allows for the issuance of stock options to 76 officers, employees, and directors, and to consultants and advisors who render bona fide services to CSI not in connection with the issuance of securities in a capital-raising transaction. CSI has authorized 1,000,000 shares of Common Stock for issuance upon the exercise of options granted under the Stock Option Plan. The aggregate fair market value (measured at the time the options are granted) of all Common Stock issued pursuant to exercise of Incentive Stock Options under the Stock Option Plan to any one individual to be exercisable for the first time in any one calendar year may not exceed $100,000. The Incentive Stock Options granted under the Stock Option Plan are intended to qualify as "Incentive Stock Options" within the meaning of Section 422 of the Internal Revenue Code. The Non-Qualified Stock Options granted under the Stock Option Plan are not intended to meet the requirements of Section 422 of the Internal Revenue Code. The Stock Option Plan is administered by the Compensation Committee. As of March 31, 1998, Non-Qualified Stock Options to purchase up to 395,667 shares of Common Stock have been granted under the Stock Option Plan. No Incentive Stock Options have been granted under the Stock Option Plan. Upon completion of the GlobalTel Merger, the Combined Company will assume the stock options granted by GlobalTel pursuant to its stock option plan. Pursuant to such obligation, the Combined Company will reserve for issuance 389,925 shares of Common Stock. The exercise price and period for the options granted under the plans are as determined by the Board of Directors or committee thereof. For Incentive Stock Options, the exercise price cannot be below the fair market value of the underlying Common Stock at the time the options are granted, and in the case of holders of over 10% of the combined voting power of all classes of voting stock of CSI, the exercise price cannot be below 110% of the fair market value of the underlying Common Stock at the time the options are granted. The exercise period cannot exceed ten years under the Stock Option Plan. Options may not be transferred other than by will and the laws of descent and distribution. The exercise of such options is subject to the satisfaction of any applicable withholding tax or other liabilities and any listing, registration, or qualification with any regulatory authority of the shares of Common Stock to be issued upon exercise of such options. Unless the Common Stock issuable upon exercise of the options has been registered with the Commission and any applicable state regulatory authorities, each optionee represents, by accepting such shares, that such optionee is acquiring such shares for investment and not for resale or distribution. The Board of Directors has reserved the right to modify or terminate the Stock Option Plan, but may not, without the affirmative vote of a majority of shares of capital stock then entitled to vote, do any of the following: abolish the committee then administering the Stock Option Plan, if any, change the qualification of its members, or withdraw the Stock Option Plan from its supervision; make any material change to the class of persons eligible to receive options; increase the total number of shares of Common Stock reserved for issuance under the Stock Option Plan; increase the number of shares for which an option is exercisable to any one employee; extend the term of the Stock Option Plan or the maximum option periods; decrease the minimum exercise price; or materially increase the benefits accruing to participants in the Stock Option Plan. 77 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Combined Company's Common Stock as of March 31, 1998 assuming completion of the GlobalTel Merger and as adjusted to reflect the sale of the Common Stock offered by this Prospectus, by (i) each person who is known by the Combined Company to own beneficially more than 5% of the Combined Company's outstanding Common Stock, (ii) each of the Combined Company's executive officers and directors, (iii) each of the Selling Shareholders and (iv) all executive officers and directors as a group. Common Stock not outstanding but deemed beneficially owned by virtue of the right of an individual to acquire shares within 60 days are treated as outstanding only when determining the amount and percentage of Common Stock owned by such individual. Except as noted, each person has sole voting and investment power with respect to the shares shown. Unless otherwise indicated, the address of each person listed is the Combined Company's address, 8 South Nevada Avenue, Colorado Springs, Colorado 80903.
SHARES BENEFICIALLY NUMBER OF OWNED PRIOR TO OFFERING SHARES TO BE PERCENTAGE ------------------------- SOLD IN OWNED AFTER NAME AND ADDRESS NUMBER(1) PERCENT THE OFFERING OFFERING ---------------- -------------- ---------- ------------ ----------- DIRECTORS AND EXECUTIVE OFFICERS: Ronald P. Erickson(2)...... 196,554 3.7% -- 2.1% Robert A. Spade(3)......... 712,684 13.6 -- 7.7 Patrick R. Scanlon(4)...... 44,444 * -- * Daniel R. Hudspeth......... -- -- -- -- Philip A. Thomas(5)........ -- -- -- -- Dean H. Cary(6)............ 53,333 1.0 -- * 71 Burnwood Lane Upper Saddle River, NJ 07458 Richard F. Nipert(7)....... 12,000 * -- * 1140 Grant Street, Suite 100 Denver, CO 80203 Charles A. Shields(8)...... 23,333 * -- * Bruce L. Crockett(9)....... 6,979 * -- * Lyman C. Hamilton(10)...... 3,267 * -- * Michael S. Brownfield(11).. 170,418 3.2 -- 1.8 All directors and executive officers as a group (11 persons)(12).......... 1,223,012 22.3 -- 12.9 OTHER PRINCIPAL SHAREHOLD- ERS: James L. Williams(13)...... 324,756 6.2 -- 3.5 123 Vientos Road Camarillo, CA 93010 Steven S.V. Wong(14)....... 762,949 12.9 -- 7.7 20 Queen Astrid Park Singapore 266824 DuPont Ltd.(15)............ 636,044 11.0 -- 6.5 20 Queen Astrid Park Singapore 266824 PBIG-GTR Partners 198,884 3.7 -- 2.1 L.P.(16).................. SELLING SHAREHOLDERS:
- -------- * Less than 1%. (1) Shares outstanding before offering include Bridge Shares to be issued immediately prior to this offering and 1,626,489 shares of Common Stock issued in connection with the GlobalTel Merger and the sale of 74,074 shares of Common Stock in May 1998. (2) Includes 17,094 shares of Common Stock issuable upon conversion of outstanding warrants, 109,846 shares of Common Stock issuable upon exercise of options, and 44,101 shares of Common Stock held by North 78 Willow Family L.P., a limited partnership in which Mr. Erickson and his two daughters are partners. See "Certain Transactions." (3) Includes 693,907 shares held of record by Mr. Spade or his spouse and 18,778 shares are issuable upon exercise of options held by Mr. Spade. (4) Includes 17,778 shares issuable upon exercise of options. (5) Excludes 98,571 shares Mr. Thomas will receive on the first anniversary of the closing of this offering in connection with the ITC Acquisition. (6) Includes 40,000 shares issuable upon exercise of options. (7) Includes 3,333 shares issuable upon exercise of options. (8) Includes 6,667 shares of Common Stock issuable upon exercise of warrants. (9) Includes 5,345 shares of Common Stock issuable upon exercise of options and shares of Common Stock issuable upon closing of the offering in connection with a GlobalTel Full Coverage Note in the principal amount of $25,000. See "Description of Securities." (10) Includes 1,633 shares issuable upon exercise of options. (11) Includes 23,093 shares of Common Stock issuable upon exercise of outstanding warrants, 1,633 shares of Common Stock issuable upon exercise of options, and 23,944 shares of Common Stock issuable upon conversion of a promissory note in the principal amount of $150,000, plus accrued interest as of June 30, 1998. See "Certain Transactions." (12) Includes 260,844 shares issuable upon exercise or conversion of outstanding securities. (13) Includes 7,333 shares issuable upon exercise of warrants. (14) Includes 1,633 shares of Common Stock issuable upon exercise of options, 1,134 shares of Common Stock issuable upon the closing of the offering in connection with a bridge loan promissory note in the original principal amount of $20,000 that has been repaid, 12,250 shares of Common Stock issuable upon the exercise of outstanding warrants held by Trans-Pacific Consultants Pte Ltd., 12,250 shares of Common Stock issuable upon the exercise of outstanding warrants held by Gereg Capital Corporation and 98,004 shares of Common Stock held by Gereg Capital Corporation. Includes 81,670 shares of Common Stock issuable upon the exercise of outstanding warrants and 473,771 shares of Common Stock issuable upon conversion of a $1,000,000 in principal, plus accrued interest as of June 30, 1998, pursuant to a promissory note held by Dupont Ltd. See "Certain Transactions."Mr. Wong is Chairman and a 50 percent owner of Dupont Ltd. and is Chairman and a controlling shareholder of Gereg Capital Corporation and Trans-Pacific Consultants Pte, Ltd. (15) Includes 81,760 shares of Common Stock issuable upon exercise of outstanding warrants and 473,771 shares of Common Stock issuable upon conversion of a $2,000,000 in principal, plus accrued interest as of June 30, 1998, pursuant to a promissory note held by Dupont Ltd. See "Certain Transactions." (16) Includes 42,468 shares of Common Stock issuable upon exercise of outstanding warrants and 120,323 shares of Common Stock issuable upon conversion of two outstanding promissory notes in the aggregate principal amount of $1,070,000, plus accrued interest as of June 30, 1998. See "Certain Transactions." PBIG-GTR Partners is controlled by Kenneth Huang. Mr. Huang's address is 20987 Fairwoods Drive, Cupertino, CA 90541. 79 CERTAIN TRANSACTIONS Unless otherwise indicated, for each transaction that involved the issuance of securities, such issuance was exempt from registration pursuant to Section 4(2) of the Securities Act as transactions not involving a public offering. CSI Effective September 14, 1995, Redden Dynamics, Inc. ("Redden") was merged with and into CSI. Shareholders of Redden received a total of 272,925 shares of Common Stock of CSI in connection with the merger. At the time of the merger, Redden had no operations, minimal assets and no liabilities. CSI undertook the merger in order to enable it to have a sufficient number of shareholders to permit CSI to commence trading of its Common Stock on the OTC Bulletin Board, which occurred effective March 18, 1996. To acquire control of Redden in order to facilitate the merger, Robert A. Spade purchased approximately 80% of Redden's outstanding common stock in May 1995 from certain shareholders of Redden for $34,500. Mr. Spade was a principal shareholder, director and President of Redden and was a principal shareholder, Chief Executive Officer, President and Chairman of CSI prior to the merger. In the merger, Mr. Spade exchanged the Redden shares for 218,279 shares of Common Stock. Immediately after the merger, Mr. Spade transferred 141,222 shares of such Common Stock to 21 persons, including Mr. Nipert (3,333 shares) and Mr. Scanlon (13,333 shares). CSI has received periodic advances from Robert A. Spade. In April 1996, CSI issued an unsecured note payable to Mr. Spade in the principal amount of $160,000, payable on May 31, 1999 and bearing interest at 10% to reflect advances made through that date. As of March 31, 1998, the total amount of outstanding advances from Mr. Spade under the note was $149,000. The building in which CSI has its principal executive office is owned by a partnership, the managing general partner of which is owned by Robert A. Spade and his wife. CSI paid the partnership $37,592 and $87,259 in lease expense for the fiscal years ended April 30, 1996 and 1997, respectively. Minimum lease payments for the fiscal years ended April 30, 1998, 1999 and 2000 are approximately $137,000, $118,000 and $55,000 reflecting the increase in leased space from 5,100 square feet in fiscal year 1996 to 11,000 square feet commencing September 1996. See "Business--Facilities" and the Financial Statements. In August 1996, CSI issued 59,692 shares of Common Stock and granted options to purchase 32,333 shares of Common Stock at $8.625 per share to certain minority shareholders of WIN in exchange for their shares of WIN Common Stock. As a result of this exchange, CSI became a shareholder of WIN. CSI then transferred the WIN shares to WIN for certain technology and equipment owned by WIN. Certain family members of Mr. Spade, who were shareholders of WIN, received options to purchase 1,667 and 19,000 shares of Common Stock respectively, in the WIN transaction. The Common Stock was valued at $4.875 per share in the WIN transaction. Following the WIN transaction, John Spade, who was an officer, director and a principal shareholder of WIN, became an employee of CSI. John Spade is the son of Robert A. Spade. Robert A. Spade was a director of WIN at the time of the transaction and therefore this transaction may have been at terms less favorable than one with a third party. See "Management." In January 1997, CSI granted Dean H. Cary, a Director of CSI, options to purchase 16,667 shares of Common Stock at $2.25 per share in connection with consulting services provided by Mr. Cary to CSI. The options vest 20% per year over five years from the date of grant; provided that vesting may be accelerated if the trading price of the Common Stock exceeds certain levels ranging from $6.75 to $18.75 per share. In October 1997, CSI incurred an obligation to pay $50,000 and in January 1998 granted options to purchase 33,333 shares of Common Stock at an exercise price of $1.125 per share to Mr. Cary, in each case in consideration of business consulting services. In March and April 1998, CSI issued $320,000 aggregate principal amount of 10% Notes. For each $10,000 principal amount of 10% Notes, the holder received warrants to purchase 1,333 shares of Common Stock at an exercise price equal to the closing bid price on the date of the 10% Notes. Three CSI directors invested in the notes, including: Richard F. Nipert, who was issued a $40,000 10% Note and granted 5,333 warrants; Charles A. 80 Shields (and his wife Mary Jo Shields), who was issued a $50,000 10% Note and granted 6,667 warrants; Dean H. Cary, who was issued a $100,000 10% Note and granted 13,333 warrants. James L. Williams, was also issued a $40,000 10% Note and granted 5,333 warrants. In December 1997, Robert A. Spade and Patrick R. Scanlon each guaranteed up to $750,000 of the amounts due on the Bridge Notes in connection with the December 1997 Financing. Richard F. Nipert, a Director of CSI, is a partner of the law firm of Bright, Gibson and Nipert P.C., which from time to time has provided legal services to CSI. Fees paid to the firm by CSI were less than 5% of the law firm's gross revenue for each fiscal year in which they have represented CSI. In May and June 1998, Robert A Spade pledged the shares of Common Stock owned by him to secure payment of certain notes issued by CSI as principal amount of $1,250,000. Mr. Spade and Patrick R. Scanlon each guaranteed the amounts due on such notes. Other than as set forth above, the transactions described above were on terms that CSI's Board of Directors believed to be fair to CSI and no less favorable to CSI than terms that could have been obtained from an unrelated party. GLOBALTEL In December 1995, GlobalTel acquired GFP Group. Inc. ("GFP") through the issuance of 216,791 shares of GlobalTel common stock in a one-for-one exchange for all of the outstanding capital stock of GFP. Pursuant to this transaction, North Willow Family L.P., a limited partnership in which Ronald P. Erickson, GlobalTel's Chairman, President and Chief Executive Officer, and his two daughters are limited partners, was issued 54,000 shares of GlobalTel common stock; and Sirius International Communications, a general partnership in which German F. H. Burtscher, GlobalTel's Senior Vice President, Marketing and Sales, and Frank Krentzman, a former director and former Senior Vice President of GlobalTel, were the sole partners, was issued 95,751 shares of GlobalTel common stock. In connection with the acquisition, GlobalTel also agreed to issue to each of Messrs. Burtscher and Krentzman 30,000 shares of GlobalTel common stock, and to grant Mr. Erickson an option to purchase 30,000 shares of GlobalTel common stock, all conditioned upon GlobalTel obtaining certain financing as determined by GlobalTel's Board of Directors. Additionally, GlobalTel assumed GFP's obligations under employment agreements with Messrs. Erickson and Burtscher. By mutual consent of the parties, the terms of these employment agreements were never performed. In December 1995, as part of GlobalTel's acquisition of GFP, GlobalTel assumed GFP's obligations under two demand promissory notes totaling $70,000 that are payable to Michael S. Brownfield, who will become a director of the Combined Company upon completion of the GlobalTel Merger, both bearing interest at a rate of 10% per annum, increasing to 12% per annum when the notes are past due. Both of these notes are secured by a pledge of certain shares of GFP stock held by GlobalTel. In connection with the assumption of these notes, GlobalTel also issued to Mr. Brownfield a warrant to purchase for nominal consideration 5,679 shares of GlobalTel common stock. Concurrently therewith, GlobalTel sold to Mr. Brownfield 90,909 shares of GlobalTel common stock for a purchase price of $5.50 per share and granted Mr. Brownfield a warrant to purchase 9,091 shares of GlobalTel common stock at an exercise price of $5.50 per share. In November 1995, Gereg Capital Corporation ("Gereg") purchased 120,000 shares of GlobalTel common stock from GlobalTel for a purchase price of $5.50 per share. In consideration of this purchase of GlobalTel common stock, GlobalTel granted Gereg a warrant to purchase 12,000 shares of GlobalTel common stock. The warrant has an exercise price of $5.50 per share and expires on December 29, 1998. Stephen S.V. Wong, a former director of GlobalTel, is Chairman and a controlling shareholder of Gereg. In April 1997, GlobalTel entered into an Exclusive Services and Marketing Agreement with IBNET. See "Business--Sales and Marketing." Pursuant to this agreement, GlobalTel granted to IBNET a warrant to 81 purchase 2,000 shares of GlobalTel common stock, and will grant additional warrants if GlobalTel reaches certain revenue targets. The warrants all have an exercise price of $5.50 per GlobalTel share and expire three years from the date of grant. GlobalTel also agreed to pay IBNET certain fees based upon a percentage of GlobalTel's gross margin for services purchased by customers referred to GlobalTel by IBNET. In return, IBNET agreed to issue to GlobalTel 100,000 shares of common stock of IBNET. Bruce L. Crockett, Ronald P. Erickson and Lyman C. Hamilton are directors of IBNET, and each holds options to purchase 50,000 shares of IBNET's common stock. In addition, Mr. Hamilton owns 100,000 shares of IBNET's common stock (or approximately 2% of IBNET's total outstanding common stock). GlobalTel has issued convertible promissory notes and GlobalTel Full Coverage Notes in connection with loans by several directors and executive officers of GlobalTel, including Messrs. Erickson and Brownfield. For a description of the terms of these notes, see "Description of Securities-- Description of Indebtedness." The following table describes promissory notes issued by GlobalTel to persons who will become directors or executive officers of the Combined Company and to Stephen S. V. Wong and his affiliates and PBIG- GTR Partners L.P., each of which will hold more than 5% of the Combined Company's outstanding Common Stock after completion of the offering and the GlobalTel Merger. See "Principal Shareholders."
NAME DATE OF LOAN PRINCIPAL AMOUNT MATURITY ---- ------------ ---------------- -------- Michael S. Brownfield............... 10/95 $ 50,000(2)(11) 1/96 11/95 20,000(2)(11) 2/96 2/96 100,000(1)(2) 2/97 4/96 300,000(1)(2) 4/97 10/97 150,000(1) 3/99 11/97 25,000(3) (4) Ronald P. Erickson.................. 6/96 150,000(1)(5) 6/97 ITEX Corporation (/6/).............. 12/97 200,000(3) (4) Gereg Capital Corporation........... 10/96 150,000(1)(7) 10/97 Dupont Ltd.(/8/).................... 11/96 500,000(1)(9) 5/98 4/97 2,000,000(1) 12/99 PBIG-GTR Partners, L.P.............. 12/96 900,000(1)(10) 6/98 3/97 400,000(10) 6/98
- -------- (1) Convertible note. See "Description of Securities--Description of Indebtedness--GlobalTel Convertible Notes." (2) In November 1997, Mr. Brownfield agreed to convert $235,000 in principal plus interest accrued thereon owed under past due promissory notes into shares of common stock of GlobalTel. Mr. Brownfield also agreed to reschedule an additional $235,000 in principal plus accrued interest owed under past due promissory notes into this new note. (3) GlobalTel Full Coverage Note. See "Description of Securities--Description of Indebtedness--GlobalTel Full Coverage Notes." (4) See "Description of Securities--Description of Indebtedness--GlobalTel Full Coverage Notes." In consideration of the above loans, GlobalTel granted warrants to purchase GlobalTel common stock or, in the case of the GlobalTel Full Coverage Notes, the right to receive shares of GlobalTel common stock upon closing of an initial public offering of GlobalTel's securities. (5) In November 1997, Mr. Erickson converted 171,805 in principal and accrued interest under this note into shares of GlobalTel common stock. (6) A company of which Ronald P. Erickson is a director. (7) This note was repaid in full in April 1997. (8) Stephen S.V. Wong is chairman and a 50% owner of this company. (9) In September 1997, Dupont Ltd. converted the full amount of principal and accrued interest under the note into shares of GlobalTel common stock. (10) In September 1997, PBIG-GTR Partners, L.P. converted a $30,000 principal amount of the $900,000 note and $200,000 principal amount of the $400,000 note into shares of GlobalTel common stock. (11) Demand note. 82 The following table describes the warrants issued or GlobalTel shares issuable by GlobalTel to persons who will become directors or executive officers of the Combined Company and to Stephen S.V. Wong and his affiliates and PBIG-GTR Partners L.P., each of which will hold more than 5% of the Combined Company's outstanding Common Stock after completion of the offering and the GlobalTel Merger.
WARRANTS/GLOBALTEL NAME SHARES ISSUE DATE EXERCISE PRICE ---- ------------------ ---------- -------------- Michael S. Brownfield........ 90,909 12/95 2,000 10/97 $5.50(1) 11,360 4/96-2/98 $5.50(2)(3) 9,371 11/96 $5.50(2) 5,679 10/97 4,545 12/97 $5.50(2)(3) 50,484 11/97 29,318 10/97 $5.50(4) 2,000 3/98 Ronald P. Erickson........... 31,237 11/97 19,131 8/97 $0.05(2) 134,500 6/96-3/98 $5.50(1) 1,800 6/96 $5.50(2)(3) 54,000 12/95 ITEX Capital Corporation..... 72,727 12/97 $5.50(2)(3) Gereg Capital Corporation.... 120,000 12/95 12,000 12/95 $5.50(2) 3,000 10/96 $5.50(2)(3) Dupont Ltd................... 98,693 9/97 100,000 11/96-7/97 $5.50(2)(3) 580,104 4/97 $3.85(4) Trans-Pacific Consultants Pte. Ltd.................... 15,000 4/96 $5.50(2)(3) PBIG-GTR Partners, L.P....... 44,194 9/97 18,000 12/96 $5.50(2)(3) 147,328 9/97 $8.11(4) 34,000 3/97 $5.50(2)(3)
(1)Such options expire 10 years from date of issuance. (2)Such warrants expire three years from date of issuance. (3)Issued in connection with the purchase of notes from GlobalTel. (4)Convertible note. The following table shows the amounts outstanding under GlobalTel notes to the foregoing persons as of March 31, 1998. See "Use of Proceeds."
OUTSTANDING PRINCIPAL AMOUNT -------------- NAME ---- Michael S. Brownfield........................................... $ 410,000 Ronald P. Erickson.............................................. -- ITEX Corporation................................................ 200,000 Gereg Capital Corporation....................................... -- Dupont Ltd...................................................... 2,000,000 Trans-Pacific Consultants Pte. Ltd.............................. -- PBIG-GTR Partners, L.P.......................................... 1,070,000
In November 1997, Stephen S.V. Wong loaned GlobalTel $25,000 pursuant to a promissory note bearing interest at a rate of 10% per annum, increasing to 15% after default. This note was repaid in full in December 1997. 83 In May 1998, GlobalTel borrowed $500,000 from CSI. Repayment of such indebtedness was guaranteed by Ronald P. Erickson. Other than as set forth above, the transactions described above were on terms that GlobalTel's Board of Directors believed to be fair to GlobalTel and no less favorable to GlobalTel than terms that could have been obtained from an unrelated party. ITC In August 1997, CSI entered into a Reciprocal Telecommunications Agreement with ITC. In April 1998, CSI entered into an agreement with ITC and its shareholders, Lynch Family, LLC, Sean Thomas and Philip Thomas by which CSI will purchase all of the outstanding common stock of ITC from its shareholders. Upon consummation of this offering and the ITC Acquisition, Lynch Family, LLC and Messrs. Thomas and Thomas will receive an aggregate of $3.3 million in cash and 295,714 shares of Common Stock based on an assumed initial offering price of $7.00 per share to be issued on the first anniversary of the closing of this offering. Furthermore, John Lynch, the manager of Lynch Family, LLC, will enter into a one year consulting agreement with the Combined Company under which he will receive $125,000, and Philip Thomas and Sean Thomas will enter into one year employment agreements with the Combined Company under which they will receive annual salaries of $115,000 and $65,000, respectively. See "The Acquisitions" and "Management." In December 1997, CSI paid $178,000 to ITC in consideration of consulting services provided by ITC in negotiating an agreement with a carrier on behalf of CSI. The Combined Company has adopted a policy that future transactions between the Combined Company and its officers, directors and 5% or more shareholders are subject to approval by a majority of the disinterested directors of the Combined Company. Any such transactions will be on terms believed to be no less favorable than could be obtained from unaffiliated parties. TRANSACTIONS WITH PROMOTERS CSI believes that Messrs. Robert A. Spade and James L. Williams may be considered "founders" or "promoters" of CSI. In addition to the transactions referenced in "Certain Transactions," Mr. Spade purchased 756,475 shares of Common Stock from CSI at various times from April 1993 to December 1994 at prices ranging from $.54 per share to $.90 per share. Mr. Williams purchased 231,791 shares of Common Stock from CSI at various times from April 1993 to June 1995 at prices ranging from $.57 to $1.56 per share. Mr. Williams also acquired 90,332 shares from Mr. Spade at various times from August 1993 to December 1994. Mr. Williams has received approximately $38,400 from CSI as compensation for services in connection with equity and debt financings by CSI. In addition, Mr. Williams loaned $40,000 to CSI and received a 10% convertible note in October 1996 that he converted into shares of Common Stock in January 1997. In connection with the note, Mr. Williams received warrants to purchase 1,333 shares of Common Stock at $4.125 per share. In June 1997, Mr. Williams purchased an additional 10% convertible note with a $20,000 principal amount. In connection therewith, he received a warrant to purchase 667 shares of Common Stock at an exercise price of $1.59 per share. In October 1997, Mr. Williams purchased 13,333 shares of Common Stock for $1.65 per share in a private placement. In March 1998, Mr. Williams loaned $40,000 to CSI and received a note bearing interest at 10% per annum. In March 1998, Mr. Williams purchased a 10% promissory note with a $40,000 principal amount. In connection therewith, he received a warrant to purchase 5,333 shares of common stock at an exercise price of $2.719 per share. CSI used the proceeds from the sales of Common Stock discussed above to fund its operations. CSI believes that these transactions were conducted on terms that were fair and reasonable to CSI and at prices that approximated the fair market value of the Common Stock at the time of the transactions. See "Principal Shareholders." 84 DESCRIPTION OF SECURITIES The authorized capital stock of CSI consists of 25,000,000 shares of Common Stock, no par value per share, and 5,000,000 shares of Preferred Stock, no par value per share. COMMON STOCK Upon consummation of the offering, 9,217,693 shares of Common Stock will be issued and outstanding (assuming no options are exercised after March 31, 1998, and assuming the Underwriters' over-allotment option is not exercised). If the over-allotment option is exercised in full, 9,817,693 shares of Common Stock will be issued and outstanding. Holders of Common Stock are each entitled to cast one vote for each share held of record on all matters presented to shareholders. Cumulative voting is not allowed; hence, the holders of a majority of the outstanding Common Stock can elect all directors. Holders of Common Stock are entitled to receive such dividends as may be declared by the Board of Directors out of funds legally available therefor and, in the event of liquidation, to share pro rata in any distribution of CSI's assets after payment of liabilities. The Board of Directors is not obligated to declare a dividend and it is not anticipated that dividends will be paid in the foreseeable future. See "Dividend Policy." Holders of Common Stock do not have preemptive rights to subscribe to additional shares if issued by CSI. Except for 20,000 shares which were purchased with a note, which is outstanding, all of the outstanding shares of Common Stock are fully paid and non-assessable and all of the shares of Common Stock offered hereby will be, upon issuance, fully paid and non-assessable. PREFERRED STOCK The Board of Directors has the authority, without further shareholder approval, to issue up to 5,000,000 shares of Preferred Stock from time to time in one or more series, to establish the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The issuance of Preferred Stock may have the effect of delaying or preventing a change in control of CSI. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to the holders of Common Stock or could adversely affect the rights and powers, including voting rights, of the holders of the Common Stock. In certain circumstances, such issuances could have the effect of decreasing the market price of the Common Stock. As of the closing of this offering, no shares of Preferred Stock will be outstanding and CSI currently has no plans to issue any shares of Preferred Stock. DESCRIPTION OF INDEBTEDNESS Mandatorily Redeemable Convertible Promissory Notes. In December 1997, CSI issued Bridge Notes in an aggregate principal amount of $2.8 million. Interest on the Bridge Notes is payable at a rate of 10% per annum, semi-annually. The aggregate outstanding principal amount of the Bridge Notes is due five days following the closing of this offering. Robert A. Spade, the Chairman and Chief Executive Officer of CSI, and Patrick R. Scanlon, the President and Chief Operating Officer of CSI, each guaranteed payment of the Bridge Notes for up to $750,000. For each $100,000 of principal amount of the Bridge Notes, the holder will receive 5,714 Bridge Shares upon the closing of this offering, based on a $7.00 per share initial offering price. Such Bridge Shares are offered by this Registration Statement. 10% Notes. From October 1996 through July 1997, CSI issued unsecured convertible promissory notes (the "10% Notes") in an aggregate principal amount of $415,000. Interest on the 10% Notes is payable at a rate of 10% per annum, semi-annually, commencing on March 31, 1997 and continuing until the maturity date, which is two years from the respective dates of investment. The aggregate outstanding principal amount of the 10% Notes is due on the maturity date. The 10% Notes may be converted into shares of Common Stock at a conversion price of 90% of the average high bid and low asked price of the Common Stock on the day before 85 conversion. CSI may prepay any of the 10% Notes in full at any time without penalty, and any note holders may cause CSI to repay such holder's note at the end of each six-month period that any principal is outstanding upon 30 days written notice. As of March 31, 1998, $385,000 principal amount of 10% Notes have been converted. For each $10,000 of principal amount of the 10% Notes, the holder received warrants to purchase 333 shares of Common Stock of CSI at an exercise price equal to the closing bid price of the Common Stock on the date of the 10% Notes. 12% Notes. In May and June 1998, CSI issued secured promissory notes (the "12% Notes") in an aggregate principal amount of $1,250,000. Interest on the 12% Notes is payable at a rate of 12% per annum and is due and payable on the maturity date, which is the date of the completion of this offering. For each $1,000 of principal amount of 12% Notes purchased, the holder received warrants to purchase 67 shares of Common Stock. The shares of Common Stock underlying the warrants are included among the Registered Securityholders' Shares. 15% Notes. From February 1997 through March 1997, CSI issued $85,000 aggregate principal amount of the 15% Notes. Interest on the 15% Notes, and the aggregate outstanding principal amount of the 15% Notes, are payable on the maturity date, which is six months after the date of each Note. For each $10,000 of principal amount of 15% Notes, the holder received warrants to purchase 333 shares of Common Stock at an exercise price equal to the closing bid price of the Common Stock on the date of the 15% Notes. In March 1998, the note holders agreed to extend their notes until various times between June 1998 and September 1998. GlobalTel Full Coverage Notes. Promissory notes issued by GlobalTel in November and December 1997 (the "GlobalTel Full Coverage Notes") in the aggregate principal amount of $3.0 million are outstanding. These notes bear interest at a rate of 10% per annum, increasing to 15% after default, and are due in January 1999. In addition to repayment of principal and interest, note holders are entitled to receive the number of shares of GlobalTel Common Stock equal to the outstanding principal balance plus accrued interest divided by the per share offering price in GlobalTel's initial public offering, if any. If the offering is not completed by July 1, 1998, noteholders have the right to receive warrants to purchase shares of GlobalTel common stock equal to the principal amount of the note divided by $5.50, in lieu of the shares of common stock to be issuable upon closing of the GlobalTel Merger. These warrants will have an exercise price of $5.50 per share and will expire three years from the date of grant. REGISTRATION RIGHTS CSI has agreed to grant to two holders of 20,000 shares of the Common Stock (the "Rights Holders") certain "piggy-back" registration rights under the Securities Act with respect to such shares. Under the terms of agreements between CSI and these Rights Holders, if CSI proposes to register any of its Common Stock under the Securities Act for its own account or for the account of other security holders (other than pursuant to this offering and certain excluded registration forms), the Rights Holders are entitled to notice of such registration and to include in such registration shares of Common Stock that they hold, subject to cutback limitations that may be imposed by the underwriter of any underwritten public offering of the Common Stock. The Rights Holders are not required to bear any expenses incurred by CSI in connection with registering the Rights Holders' shares, but underwriting fees, discounts, or commissions relating to the sale of each Rights Holder's shares are borne by the applicable Rights Holder. CSI is not required to include any of the shares with registration rights in a registration if the holders of such shares would be able to sell such shares without registration pursuant to Rule 144 of the Securities Act or otherwise. None of the Rights Holders will participate in this offering. CSI has agreed to grant to Lynch Family, LLC, Philip Thomas and Sean Thomas (collectively, the "Former ITC Shareholders") certain "demand" registration rights under the Securities Act with respect to the Common 86 Stock (the "ITC Acquisition Stock") they will receive in connection with the ITC Acquisition. Under the terms of the Stock Purchase Agreement, CSI is obligated, after the first anniversary of the completion of the ITC Acquisition, upon the demand of the Former ITC Shareholders, to file within 30 days of such demand (subject to an extension in the event CSI is then involved in certain transactions not in the ordinary course of business) a registration statement on Form S-3 covering the ITC Acquisition Stock. The Former ITC Shareholders are not required to bear any expenses incurred by CSI in connection with registering the ITC Acquisition Stock. CSI has agreed to grant to the holders of GlobalTel's outstanding securities certain "piggyback" registration rights under the Securities Act. CSI is obligated to include such holders' shares of Common Stock in any registration statement filed during the one year period beginning on the first anniversary of the closing of the GlobalTel Merger. The holders are not required to bear any expenses in connection with registering such shares. TRANSFER AGENT The transfer agent and registrar for CSI's Common Stock is American Securities Transfer & Trust, Inc. RESCISSION OFFER On approximately June 19, 1998, the Combined Company intends to commence the Rescission Offer in accordance with the federal securities laws and the Washington Securities Act with respect to the following securities which were issued or sold by GlobalTel from 1995 through 1997 to approximately 40 individuals and entities who GlobalTel believes at the time of purchase were residents of the State of Washington: (i) an aggregate of 239,112 shares of GlobalTel Common Stock, of which 96,748 and 142,364 shares were issued at $2.65 and $5.50 per share, respectively (the "Cash Rescission Stock"); (ii) an aggregate of 90,909 shares of GlobalTel Common Stock (the "1995 Rescission Stock") which were issued to one individual at $5.50 per share, together with a warrant to purchase approximately 9,091 shares of Common Stock; (iii) an aggregate of 166,446 shares of GlobalTel Common Stock (the "Converted Note Rescission Stock") issued upon conversion of promissory notes, together with warrants to purchase an aggregate of approximately 23,632 shares of GlobalTel Common Stock delivered in conjunction with the issuance of such promissory notes; and (iv) $805,000 in aggregate principal amount of promissory notes (the "Rescission Notes"), together with warrants to purchase an aggregate of approximately 19,320 shares of GlobalTel Common Stock. The Cash Rescission Stock, 1995 Rescission Stock, and Converted Warrants Rescission Stock are hereinafter collectively referred to as the "Rescission Stock." The warrants delivered in connection with the 1995 Rescission Stock and Rescission Notes are hereinafter collectively referred to as the "Rescission Warrants." The Rescission Notes, the Rescission Stock and the Rescission Warrants are hereinafter collectively referred to as the "Rescission Securities." The Combined Company believes that the Rescission Securities may have been issued or sold in violation of the registration requirements of the Washington Securities Act. As a precaution against potential claims by holders of Rescission Securities, and without admitting non-compliance with the Washington Securities Act, the Combined Company plans to offer to rescind such prior issuances and sales by offering to repurchase the Rescission Securities at the price paid therefor plus interest at the statutory rate of 8% per annum from the date of purchase to the expiration of the Rescission Offer. The Rescission Offer is contingent on the completion of this offering and the GlobalTel Merger. Accordingly, if such conditions are not satisfied, the Rescission Offer will by its terms terminate without any obligation for the Combined Company to act upon acceptances of the Rescission Offer. The price paid will be based upon the price paid for the original security purchased by the purchaser from GlobalTel, regardless of the type of Rescission Security currently held by the purchaser. The 87 price paid for the Cash Rescission Stock is $2.65 per share with respect to 96,748 shares and $5.50 per share with respect to 142,364 shares, for an aggregate price of $1.0 million. The price paid for the 1995 Rescission Stock is $5.50 per share for an aggregate price of approximately $500,000. The price paid for the Converted Note Rescission Stock is equal to the principal amount of the original promissory notes related thereto for an aggregate price of $791,000. The aggregate price paid for the Rescission Notes is $805,000. There is no separate price for the Converted Warrants Rescission Stock because by the terms and conditions of the Rescission Offer, the Converted Warrants Rescission Stock must be surrendered if the holder of the related Converted Note Rescission Stock elects to accept the Rescission Offer with respect to its Converted Note Rescission Stock. The aggregate accrued interest with respect to all of the Rescission Securities as of June 30, 1998 will be approximately $397,000. If all holders of Rescission Securities were to accept the Rescission Offer, the Combined Company would be required to make payments aggregating approximately $3.7 million, plus the aggregate amount of any additional interest thereon that accrues after June 30, 1998. The Rescission Offer will expire 20 business days after the offer is transmitted. The Combined Company currently expects to use a portion of the proceeds from this offering to make payments under the Rescission Offer, if any are required. Offerees who do not accept the Rescission Offer will thereafter hold registered Rescission Securities under the Securities Act which, in the case of the Rescission Stock, will be freely tradeable by non-affiliates in the public market as of the effective date of the Rescission Offer Registration Statement. As of the date hereof, management is not aware of any claims for rescission against GlobalTel or the Combined Company. Also, current and former officers and directors of GlobalTel holding an aggregate of $1.4 million (including statutory interest accrued thereon as of February 28, 1998) of the Rescission Securities have indicated their intent not to accept the Rescission Offer, although no formal Rescission Offer has been made to them and they have not and may not agree to reject the Rescission Offer until the Rescission Offer has commenced. There can be no assurance that all or a substantial portion of the Rescission Securities will not be tendered in response to the Rescission Offer. Use of a portion of the proceeds of this offering in connection with the Rescission Offer will reduce the amount of working capital available to the Combined Company and may require it to seek additional capital sooner than otherwise might be required. The Rescission Offer is being made in order to limit, so far as may be permitted under applicable federal and state securities laws, the potential liability of the Combined Company with respect to the offer and sale of the Rescission Securities. Although the Combined Company believes that the offer and sale of the Rescission Securities were made in compliance with the registration requirements of federal securities laws, if a holder of the Rescission Securities were to assert a claim that the Rescission Securities were sold in violation thereof, the position of the Securities and Exchange Commission is that liabilities under the federal securities laws are not terminated by making a rescission offer. Furthermore, notwithstanding the Rescission Offer, there can be no assurance that the Combined Company will not be subject to penalties or fines relating to past securities issuances or that other holders of the Combined Company's securities will not assert or prevail in claims against the Combined Company for rescission or damages under state or federal securities laws. 88 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, CSI will have 9,217,693 shares of Common Stock outstanding, assuming no options are exercised after March 31, 1998 and assuming the Underwriters' over-allotment option is not exercised. If the Underwriters' over-allotment option is exercised in full, 9,817,693 shares of Common Stock will be outstanding. Of these shares, the 4,000,000 shares sold in this offering (and any shares sold by CSI upon exercise of the Underwriters' over-allotment option) will be freely transferable by persons other than "affiliates" of CSI (as that term is defined under the Securities Act) without restriction or further registration under the Securities Act. Of the remaining shares, 4,024,378 outstanding shares of Common Stock are "restricted securities" within the meaning of Rule 144 under the Securities Act and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption contained in Rule 144. All of such shares are eligible for sale under Rule 144 commencing on or after 90 days from the date of this Prospectus. Pursuant to the terms of the Underwriting Agreement, the Representative has required that the Common Stock owned by officers, directors and holders of 2% or greater of the Common Stock may not be sold until 12 months (180 days with respect to the Selling Securityholders' Shares) from the date of this Prospectus without the prior written consent of the Representative. In general, under Rule 144 as currently in effect, a shareholder who has beneficially owned shares for at least one year is entitled to sell, within any three-month period, a number of "restricted" shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume during the four calendar weeks preceding such sale. Sales under Rule 144 are also subject to certain manner of sale limitations, notice requirements and the availability of current public information about CSI. Rule 144(k) provides that a shareholder who is not deemed to be an "affiliate" and who has beneficially owned shares for at least two years is entitled to sell such shares at any time under Rule 144(k) without regard to the limitations described above. In addition to the shares of Common Stock that are currently outstanding, a total of 1,000,000 shares of Common Stock have been reserved for issuance upon exercise of options granted under the Option Plan, under which options to acquire 415,667 shares of Common Stock have been granted. Shares purchased pursuant to options will be freely tradeable without restriction under the Securities Act, except for shares held by an "affiliate" of the Combined Company, which shares will remain subject to certain restrictions. See "Management--Stock Option Plan." The Combined Company is unable to estimate the number of shares that may be sold in the future by the existing shareholders or holders of options or the effect, if any, that sales of shares by the existing shareholders or option holders will have on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock by the existing shareholders or holders of options could adversely affect then prevailing market prices. 89 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, for which Cruttenden Roth Incorporated, John G. Kinnard and Company, Incorporated and Kaufman Bros., L.P. are acting as the representatives (the "Representatives"), have severally agreed to purchase from CSI and the Selling Shareholders the shares of Common Stock offered hereby. Neither the Combined Company nor the Underwriters have any plans, proposals arrangements or understandings to engage in transactions with the Registered Securityholders. Each Underwriter will purchase the number of shares set forth opposite its name below, and will purchase the shares at the price to public less underwriting discounts and commissions set forth on the cover page of this Prospectus.
NUMBER UNDERWRITER OF SHARES ----------- --------- Cruttenden Roth Incorporated...................................... John G. Kinnard and Company, Incorporated......................... Kaufman Bros., L.P................................................ ---- Total............................................................. ====
The Underwriting Agreement provides that the Underwriters' obligations are subject to certain conditions precedent and that the Underwriters are committed to purchase all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if the Underwriters purchase any shares. The Representatives have advised CSI that the several Underwriters propose to offer the shares of Common Stock in part directly to the public at the price to public set forth on the cover page of this Prospectus, and in part to certain dealers at the price to public less a concession not exceeding $ per share. The Underwriters may allow, and such dealers may reallow, a concession not exceeding $ per share to other dealers. After the shares of Common Stock are released for sale to the public, the Representatives may change the initial price to public and other selling terms. No change in such terms shall change the amount of proceeds to be received by CSI and the Selling Shareholders as set forth on the cover page of this Prospectus. The Representatives will also receive a nonaccountable expense allowance equal to 2.5% of the gross proceeds of the offering including the over-allotment option, if exercised, of which $75,000 has been paid. CSI has granted the Underwriters an option, exercisable for 45 days after the date of this Prospectus, to purchase up to 600,000 additional shares of Common Stock at the initial price to public. The Underwriters may purchase these shares solely to cover over-allotments, if any, in connection with the sale of the shares of Common Stock offered hereby. If the Underwriters exercise the over-allotment option, the Underwriters will purchase additional shares in approximately the same proportions as those in the above table. Certain of the Underwriters that currently act as market markers for the CSI's Common Stock may engage in "passive market making" in the Common Stock on Nasdaq in accordance with Rule 103 of Regulation M under the Exchange Act. Subject to certain conditions, Rule 103 permits underwriters participating in a distribution to engage in limited market making transactions during the period when Regulation M would otherwise prohibit such activity. Rule 103 generally prohibits underwriters engaged in passive market making activities from entering a bid or effecting a purchase at a price which exceeds the highest bid by a market maker not participating in the distribution. Rule 103 also limits the volume of purchases which may be made by an underwriter in passive market making activities. Subject to these limitations, certain Underwriters and other members of the selling group may engage in passive market making in CSI's Common Stock. 90 The Representatives have informed CSI and the Selling Shareholders that they do not expect any sales of the shares of Common Stock offered hereby to be made to discretionary accounts by the Underwriters. The Underwriting Agreement provides that CSI and the Underwriters will indemnify each other against certain liabilities under the Securities Act. The Underwriters may engage in over-allotment, stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act. Over-allotment involves syndicate sales in excess of the offering size, which creates a syndicate short position. Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. Syndicate covering transactions involve purchases of the securities in the open market after the distribution has been completed in order to cover syndicate short positions. Penalty bids permit the Underwriters to reclaim a selling concession from a syndicate member when the securities originally sold by such syndicate member are purchased in a syndicate covering transaction to cover syndicate short positions. Such stabilizing transactions, syndicate covering transactions and penalty bids may cause the price of the Common Stock to be higher than it would otherwise be in the absence of such transactions. Neither CSI nor the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. CSI's officers and directors and beneficial owners of greater than 2% of CSI's outstanding Common Stock (excepting those offered to the Selling Shareholders), holding in the aggregate shares of Common Stock, have agreed not to offer, sell or otherwise dispose of any shares of Common Stock for a period of 12 months after the date of this Prospectus without the prior written consent of the Representatives. CSI has also agreed to sell to the Representatives, for nominal consideration, warrants (the "Representatives' Warrants") to purchase 400,000 shares of Common Stock. The Representatives' Warrants will be exercisable, at a price per share equal to 120% of the initial price to public, commencing one year from the date hereof and for a period of four years thereafter. During the exercise period, holders of the Representatives' Warrants are entitled to certain demand and incidental registration rights with respect to the securities issuable upon exercise of the Representatives' Warrants. The Common Stock issuable upon exercise of the Representatives' Warrants is subject to adjustment in certain events to prevent dilution. The Representatives' Warrants cannot be transferred, assigned or hypothecated for a period of one year from the date of issuance except to Underwriters, selling group members and their officers or partners. Cruttenden Roth Incorporated ("Cruttenden Roth"), one of the Representatives, provided GlobalTel with consulting, advisory and valuation services throughout 1997 and agreed to continue to provide such services throughout 1998 for a fee of $125,000. The fee is represented by a promissory note due on the earlier of completion of this offering or July 1, 1999. The note bears interest at the rate of 7% per annum. Following the completion of the GlobalTel Merger, Cruttenden Roth will provide consulting, advisory and valuation services to the Combined Company pursuant to the prior understanding with GlobalTel. In January 1998, GlobalTel entered into a letter agreement with Cruttenden Roth (as amended, the "Letter Agreement") pursuant to which Cruttenden Roth agreed to perform various investment banking services. The Letter Agreement provides that, upon a change in control of GlobalTel, Cruttenden Roth will receive a transaction fee equal to 5% of the consideration received by GlobalTel or its shareholders (the "Transaction Fee"). Consideration is defined by the Letter Agreement to include the cash or securities received, the face amount of debt assumed by a purchaser, change of control compensation and any distributions in contemplation of the change of control. Cruttenden Roth will receive a Transaction Fee equal to $1,050,000 on consummation of the GlobalTel Merger. Other than $10,000 received as an advance, Cruttenden Roth has not received any payments under the Letter Agreement. 91 The Common Stock is traded infrequently in limited quantities on the OTC Bulletin Board under the symbol CSYG. The public offering price of the Common Stock has been determined by arms-length negotiation among CSI, the Selling Shareholders and the Representatives. There is no direct relation between the offering price of the Common Stock and the assets, book value or net worth of CSI. Among the factors considered by CSI and the Representatives in pricing the Common Stock were the results of operations, the current financial condition and future prospects of the Combined Company, the experience of management, the amount of ownership to be retained by the existing shareholders, the general condition of the economy and the securities markets, and the demand for securities of companies considered comparable to CSI. 92 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon by Parcel, Mauro & Spaanstra, P.C., Denver, Colorado. Parcel, Mauro & Spaanstra, P.C. has represented Cruttenden Roth Incorporated from time to time in other matters. Certain legal matters will be passed upon for the Underwriters by Berliner Zisser Walter & Gallegos, P.C., Denver, Colorado. EXPERTS The financial statements of CSI as of April 30, 1996 and 1997 and for each of the three years in the period ended April 30, 1997 and as of and for the eight months ended December 31, 1997 included in this prospectus, have been audited by Stockman Kast Ryan & Scruggs, P.C., independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes an explanatory paragraph referring to matters that raise substantial doubt about CSI's ability to continue as a going concern), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. The consolidated financial statements of GlobalTel as of December 31, 1996 and 1997 and for each of the three years in the period ended December 31, 1997 included in this prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, (which report includes an explanatory paragraph concerning matters that raise substantial doubt about GlobalTel's ability to continue as a going concern) and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The financial statements of ITC as of December 31, 1996 and October 31, 1997 and for the years ended December 31, 1995 and 1996 and the ten months ended October 31, 1997 included in this prospectus, have been audited by Richard A. Eisner & Company, LLP, independent auditors, as stated in their report appearing herein, and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. 93 ADDITIONAL INFORMATION CSI has filed with the Commission, a registration statement (together with all amendments thereto, the "Registration Statement") under the Securities Act with respect to the Common Stock of CSI offered hereby. This Prospectus, filed as part of the Registration Statement, omits certain information contained in the Registration Statement in accordance with the rules and regulations of the Commission. For further information, reference is hereby made to the Registration Statement and to the exhibits filed therewith, which may be inspected without charge at the principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of the material contained therein may be obtained from the Commission upon payment of applicable copying charges. Statements contained in this Prospectus as to the contents of any contract or other document referred to herein are not necessarily complete, and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement. Upon completion of this offering, CSI will be subject to the reporting and other informational requirements of the Exchange Act and, in accordance therewith, will file reports and other information with the Commission. Such reports, proxy statements and other information, once filed by CSI, can be inspected and copied at the public reference facilities maintained by the Commission at the offices of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, New York, New York 10048. The Commission also maintains a Web site on the Internet that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of such site is http://www.sec.gov. Copies of such materials can also be obtained by written request to the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. 94 GLOSSARY OF TERMS access point--A location where a long-distance carrier has installed transmission equipment in a service area that serves as, or relays calls to, a network switching center of that long-distance carrier. business grade Internet--An Internet network offering private network-like security and reliability. call-reorigination (or "call-back")--A form of dial-up access that allows a user to access a telecommunications company's network by placing a telephone call, hanging up, and waiting for an automated callback. The callback then provides the user with dial tone which enables the user to initiate and complete a call. call-through--The provision of international long distance service through the conventional long distance network or via an in-country switch allowing the customer direct access to a long distance carrier's network without the need to reoriginate the call in the United States. co-location--The Combined Company's ability to locate the Combined Company's network equipment at the facility of another telecommunications provider. dedicated or direct access--A means of accessing a network through the use of a permanent point-to-point circuit typically leased from a facilities-based carrier. The advantage of dedicated access is simplified premises-to-anywhere calling, faster call set-up times and potentially lower access and transmission costs (provided there is sufficient traffic over the circuit to generate economies of scale). dial-up access--A form of service whereby access to a network is obtained by dialing an international toll-free number or a paid local access number. Equant--Equant Network Services International Corporation (formerly known as Scitor International Telecommunications Services, Inc.), a global data network service provider. facilities-based carrier--A carrier which transmits a significant portion of its traffic over its own transmission facilities. fiber optic--A transmission medium consisting of high-grade glass fibers through which light beams are transmitted carrying a high volume of telecommunications traffic. Global Enhanced VPN (Virtual Private Network)--The Combined Company's enhanced VPN service. IBNET--International Business Network for World Commerce and Industry, Ltd., the managing member of the Consortium of Global Commerce. IDC--International Data Corporation. intranet--A company's internal wide area network utilizing Internet technologies. IP--Internet Protocol. ISP--Internet services provider. ITO (Incumbent Telephone Operator)--The dominant carrier or carriers in each country, often, but not always, government-owned or protected. 95 ITU--International Telecommunications Union. LAN--Local area network. A data communications network designed to interconnect PCS, workstations, minicomputer, file servers and other communications and computing devices within a localized environment. least cost routing--A method of routing long distance telephone call via the carrier networks that offer the lowest rates. node--A specially configured piece of telecommunications equipment which provides the interface between the local ITO where the node is located and the Combined Company's gateway switch. A node collects and concentrates call traffic from its local area and transfers it to Combined Company's switch via private line for call processing. Nodes permit the Combined Company to extend its network into a new geographic location by accessing the local ITO without requiring the deployment of a switch. private line--A dedicated telecommunications connection between end user locations. resale--Resale by a provider of telecommunications services of services sold to it by other providers or carriers on a wholesale basis. switching facility--A device that opens or closes circuits or selects the paths or circuits to be used for transmission of information. Switching is a process of interconnecting circuits to form a transmission path between users. VAR--Value-Added Reseller. Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods and services in applicable jurisdictions. VPN--Virtual Private Network. A network capable of providing the tailored services of private network (i.e., low latency, high throughput security and customization) while maintaining the benefits of a public network (i.e., ubiquity and economies of scale). WTO--World Trade Organization. 96 INDEX TO FINANCIAL STATEMENTS
PAGE NUMBER ------ COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED).......... F-2 Pro Forma Condensed Combined Balance Sheet as of March 31, 1998........ F-3 Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 1997..................................................... F-5 Pro Forma Condensed Combined Statement of Operations for the three months ended March 31, 1998........................................... F-6 Notes to Pro Forma Condensed Combined Financial Statements............. F-7 HISTORICAL FINANCIAL STATEMENTS Independent Auditors' Report........................................... F-9 Balance Sheets as of April 30, 1996 and 1997, December 31, 1997, and March 31, 1998 (unaudited)............................................ F-10 Statements of Operations for the years ended April 30, 1995, 1996 and 1997, eight months ended December 31, 1997, and three months ended April 30, 1997 and March 31, 1998 (unaudited)......................... F-11 Statements of Shareholders' Deficit for the years ended April 30, 1995, 1996 and 1997, eight months ended December 31, 1997, and three months ended March 31, 1998 (unaudited)...................................... F-12 Statements of Cash Flows for the years ended April 30, 1995, 1996 and 1997, eight months ended December 31, 1997, and three months ended April 30, 1997 and March 31, 1998 (unaudited)......................... F-13 Notes to Financial Statements.......................................... F-15 GLOBALTEL RESOURCES, INC. HISTORICAL FINANCIAL STATEMENTS Report of Independent Public Accountants............................... F-25 Consolidated Balance Sheets as of December 31, 1996 and 1997 and March 31, 1998 (unaudited).................................................. F-26 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 and three months ended March 31, 1997 and 1998 (unaudited)........................................................... F-27 Consolidated Statements of Common Stock Subject to Rescission and Shareholders' Deficit for the years ended December 31, 1995, 1996 and 1997 and three months ended March 31, 1998 (unaudited)................ F-28 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 and three months ended March 31, 1997 and 1998 (unaudited)........................................................... F-29 Notes to Consolidated Financial Statements............................. F-30 INTERNATIONAL TELEPHONE COMPANY HISTORICAL FINANCIAL STATEMENTS Report of Independent Auditors......................................... F-42 Balance Sheets as of December 31, 1996, October 31, 1997 and March 31, 1998 (unaudited)...................................................... F-43 Statements of Operations for the years ended December 31, 1995 and 1996, ten months ended October 31, 1997, three months ended March 31, 1997 and 1998 (unaudited), and five months ended March 31, 1998 (unau- dited)................................................................ F-44 Statements of Changes in Shareholders' Equity (Capital Deficiency) for the years ended December 31, 1995 and 1996, ten months ended October 31, 1997, and five months ended March 31, 1998 (unaudited)............ F-45 Statements of Cash Flows for the years ended December 31, 1995 and 1996, ten months ended October 31, 1997, three months ended March 31, 1997 and 1998 (unaudited), and five months ended March 31, 1998 (unau- dited)................................................................ F-46 Notes to Financial Statements.......................................... F-47
F-1 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma condensed combined financial statements of Communications Systems International, Inc. (CSI) have been prepared to give effect to the completion of the proposed public offering (the Offering) and the proposed acquisitions of GlobalTel Resources, Inc. (GlobalTel) (the Merger) and International Telephone Company (ITC) (the Acquisition), described below. CSI has entered into an agreement and plan of merger with GlobalTel pursuant to which GlobalTel will merge with CSI and CSI will issue an estimated 1,626,489 shares of its Common Stock for all outstanding shares of GlobalTel's preferred and common stock. In addition, outstanding options and warrants to purchase 1,740,983 shares of GlobalTel's common stock will be exchanged for options and warrants to purchase 1,421,902 shares of CSI's Common Stock. The actual number of shares of CSI's Common Stock to be issued will be determined by the actual number of shares of CSI's and GlobalTel's preferred and common stock outstanding at the date of the Merger. The pro forma condensed combined balance sheet as of March 31, 1998 assumes the Merger was consummated on March 31, 1998. The pro forma condensed combined statements of operations for the year ended December 31, 1997 and the three months ended March 31, 1998 assume the Merger was consummated on January 1, 1997. CSI has entered into an agreement to acquire all of the stock of ITC for $3,300,000 cash and the issuance of 295,714 shares of CSI's Common Stock valued at $2,070,000, based on the public offering per share price. The pro forma condensed balance sheet as of March 31, 1998 assumes the Acquisition was consummated on March 31, 1998. The pro forma condensed combined statements of operations for the year ended December 31, 1997 and the three months ended March 31, 1998 assume the Acquisition was consummated on January 1, 1997. In management's opinion, all material adjustments necessary to reflect the transactions are presented in the pro forma adjustments as of and for the three months ended March 31, 1998 and the year ended December 31, 1997 which are based upon available information and the currently agreed upon terms of the Merger and Acquisition. The financial statements of CSI for the twelve months ended December 31, 1997 are unaudited and are not derived from the audited financial statements of CSI as of and for the year ended April 30, 1997 or the eight months ended December 31, 1997. The financial statements of ITC as of and for the twelve months ended December 31, 1997 are unaudited and are not derived from the audited financial statements of ITC as of and for the ten months ended October 31, 1997. The pro forma condensed combined financial statements do not purport to present CSI's financial position or results of operations that would have occurred had the transactions, to which pro forma effect is given, been consummated as of the dates or for the periods indicated and do not purport to project CSI's financial position or results of operations at any future date or for any future period, and should be read in conjunction with the separate financial statements of CSI, GlobalTel, and ITC. F-2 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
BRIDGE GLOBALTEL ITC FINANCING HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE AND RECAPITALIZATION PRO FORMA OFFERING CSI GLOBALTEL ITC ADJUSTMENTS(A) ADJUSTMENTS(C) ADJUSTMENTS COMBINED ADJUSTMENTS ---------- ---------- ---------- -------------- -------------- -------------------- --------- ----------- ASSETS Current assets: Cash............ $ 236 $ 98 $ 980 $ -- $ -- $1,320(g) $ 2,634 $23,801 (h) (2,840)(i) (94)(k) (2,765)(j) (70)(i) (1,250)(i) (133)(k) Restricted cash............ -- -- -- -- -- -- -- 385 (h) Receivables-- net............. 627 741 1,458 -- -- -- 2,826 -- Prepaid expenses and other....... 54 127 138 -- -- -- 319 -- ------- ------- ------- ------- ------ ------ ------- ------- Total current assets 917 966 2,576 -- -- 1,320 5,779 17,034 Property and equipment--net.. 501 1,357 628 -- -- -- 2,486 -- Deferred financ- ing costs....... 225 435 -- (435) -- 150(g) 375 (225)(i) (150)(i) Deposits........ 483 -- 130 -- (250) -- 363 -- Other assets.... 486 755 -- (223) -- -- 1,018 (486)(h) Distribution channels and customer lists.. -- -- -- 14,250 5,093 -- 19,343 -- Intellectual property and li- cense agree- ment............ -- -- -- 3,100 -- -- 3,100 -- Goodwill........ -- -- -- 1,510 -- -- 1,510 -- ------- ------- ------- ------- ------ ------ ------- ------- TOTAL ASSETS.... $ 2,612 $ 3,513 $ 3,334 $18,202 $4,843 $1,470 $33,974 $16,173 ======= ======= ======= ======= ====== ====== ======= ======= PRO FORMA AS ADJUSTED ----------- ASSETS Current assets: Cash............ $19,283 Restricted cash............ 385 Receivables-- net............. 2,826 Prepaid expenses and other....... 319 ----------- Total current assets 22,813 Property and equipment--net.. 2,486 Deferred financ- ing costs....... -- Deposits........ 363 Other assets.... 532 Distribution channels and customer lists.. 19,343 Intellectual property and li- cense agree- ment............ 3,100 Goodwill........ 1,510 ----------- TOTAL ASSETS.... $50,147 ===========
See notes to pro forma condensed combined financial statements. F-3 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED BALANCE SHEET (UNAUDITED) MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
BRIDGE GLOBALTEL ITC FINANCING AND HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING CSI GLOBALTEL ITC ADJUSTMENTS(A) ADJUSTMENTS(C) ADJUSTMENTS COMBINED ADJUSTMENTS ---------- ---------- ---------- -------------- -------------- ---------------- --------- ----------- LIABILITIES AND SHAREHOLDERS' EQ- UITY (DEFICIT) Current liabili- ties: Accounts payable.. $ 1,348 $ 3,151 $ 3,228 $ -- $ -- $ -- $ 7,727 $ -- Accrued expenses.. 499 1,194 311 1,050 -- -- 3,054 (70)(i) Customer deposits and prepayments... -- 990 175 -- -- -- 1,165 -- ITC acquisition consideration..... -- -- -- -- 2,765 -- 2,765 (2,765)(j) Payable to related parties........... 133 132 -- -- -- -- 265 (133)(k) Debt to sharehold- ers............... 243 -- 47 -- -- -- 290 (94)(k) Capitalized lease obligations....... -- -- 238 -- -- -- 238 -- Note payable...... 175 16 -- -- -- -- 191 -- Bridge notes pay- able--net......... 2,442 4,577 -- 575 -- 1,250 (g) 8,844 (2,840)(i) 398 (i) (1,250)(i) ------- -------- ------- ------- ------ ------ ------- ------- Total current liabilities..... 4,840 10,060 3,999 1,625 2,765 1,250 24,539 (6,754) ------- -------- ------- ------- ------ ------ ------- ------- Long-term debt-- net............... -- 2,000 234 -- -- -- 2,234 -- ------- -------- ------- ------- ------ ------ ------- ------- Deferred income taxes............. -- -- -- 341 -- -- 341 -- ------- -------- ------- ------- ------ ------ ------- ------- Common stock sub- ject to rescis- sion.............. -- 2,455 -- -- -- -- 2,455 -- ------- -------- ------- ------- ------ ------ ------- ------- Shareholders' eq- uity (deficit): Series A convert- ible preferred stock............. -- 1,070 -- (1,070) -- -- -- -- Common stock: CSI.............. 2,651 -- -- 5,479 -- 795 (f) 9,145 23,700 (h) (133)(k) GlobalTel........ -- 2,904 -- (2,904) -- 220 (g) -- -- ITC.............. -- -- -- -- -- -- -- -- Additional paid in capital........... -- -- 1 -- (1) -- -- -- Common stock op- tions............. 37 -- -- 682 -- -- 719 -- Obligation to is- sue common stock.. 795 1,012 -- (1,012) 1,179 (795)(f) 1,179 -- Warrants.......... -- 2,118 -- (245) -- -- 1,873 -- Note receivable from shareholder.. (35) -- -- -- -- -- (35) -- Accumulated defi- cit............... (5,543) (18,106) (900) 18,106 900 -- (8,343) (225)(i) (2,800) (398)(i) (150)(i) Treasury stock, at cost.............. (133) -- -- -- -- -- (133) 133 (k) ------- -------- ------- ------- ------ ------ ------- ------- Total sharehold- ers' equity (deficit)....... (2,228) (11,002) (899) 16,236 2,078 220 4,405 22,927 ------- -------- ------- ------- ------ ------ ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).. $ 2,612 $ 3,513 $ 3,334 $18,202 $4,843 $1,470 $33,974 $16,173 ======= ======== ======= ======= ====== ====== ======= ======= PRO FORMA AS ADJUSTED ----------- LIABILITIES AND SHAREHOLDERS' EQ- UITY (DEFICIT) Current liabili- ties: Accounts payable.. $ 7,727 Accrued expenses.. 2,984 Customer deposits and prepayments... 1,165 ITC acquisition consideration..... -- Payable to related parties........... 132 Debt to sharehold- ers............... 196 Capitalized lease obligations....... 238 Note payable...... 191 Bridge notes pay- able--net......... 5,152 ----------- Total current liabilities..... 17,785 ----------- Long-term debt-- net............... 2,234 ----------- Deferred income taxes............. 341 ----------- Common stock sub- ject to rescis- sion.............. 2,455 ----------- Shareholders' eq- uity (deficit): Series A convert- ible preferred stock............. -- Common stock: CSI.............. 32,712 GlobalTel........ -- ITC.............. -- Additional paid in capital........... -- Common stock op- tions............. 719 Obligation to is- sue common stock.. 1,179 Warrants.......... 1,873 Note receivable from shareholder.. (35) Accumulated defi- cit............... (9,116) Treasury stock, at cost.............. -- ----------- Total sharehold- ers' equity (deficit)....... 27,332 ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT).. $50,147 ===========
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 YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
BRIDGE GLOBALTEL ITC FINANCING AND HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING CSI GLOBALTEL ITC ADJUSTMENTS(B) ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS ---------- ---------- ---------- -------------- ----------- ---------------- --------- ----------- REVENUE.......... $ 12,437 $12,862 $9,962 $ -- $ -- $ -- $ 35,261 $-- COST OF REVENUE.. 7,639 11,171 8,240 -- -- -- 27,050 -- --------- ------- ------ -------- ------- -------- --------- ---- GROSS MARGIN..... 4,798 1,691 1,722 -- -- -- 8,211 -- --------- ------- ------ -------- ------- -------- --------- ---- OPERATING EX- PENSES: Sales and market- ing.............. 2,802 788 878 -- -- -- 4,468 -- General and ad- ministrative..... 2,954 7,119 1,664 1,050 -- -- 12,787 -- Depreciation and amortization..... 134 253 93 -- -- -- 480 -- Amortization of acquisition intangibles...... -- -- -- 6,586 1,653 (d) -- 8,239 -- Acquired in-proc- ess research and development...... -- -- -- 2,800 -- -- 2,800 -- --------- ------- ------ -------- ------- -------- --------- ---- Total operating expenses........ 5,890 8,160 2,635 10,436 1,653 -- 28,774 -- --------- ------- ------ -------- ------- -------- --------- ---- LOSS FROM OPERA- TIONS............ (1,092) (6,469) (913) (10,436) (1,653) -- (20,563) -- OTHER INCOME (EX- PENSE)--Net...... (259) (1,368) (3) 742 (178)(e) -- (1,001) -- 65 (e) --------- ------- ------ -------- ------- -------- --------- ---- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............. (1,351) (7,837) (916) (9,694) (1,766) -- (21,564) -- INCOME TAX BENEFIT.......... -- -- -- -- -- -- -- -- --------- ------- ------ -------- ------- -------- --------- ---- LOSS BEFORE EXTRAORDINARY ITEM............. $ (1,351) $(7,837) $ (916) $ (9,694) $(1,766) $ -- $ (21,564) $-- ========= ======= ====== ======== ======= ======== ========= ==== BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM ............ $ (.41) $ (4.21) ========= ========= WEIGHTED AVERAGE SHARES OUTSTAND- ING.............. 3,260,870 5,123,719 ========= ========= PRO FORMA AS ADJUSTED ----------- REVENUE.......... $ 35,261 COST OF REVENUE.. 27,050 ----------- GROSS MARGIN..... 8,211 ----------- OPERATING EX- PENSES: Sales and market- ing.............. 4,468 General and ad- ministrative..... 12,787 Depreciation and amortization..... 480 Amortization of acquisition intangibles...... 8,239 Acquired in-proc- ess research and development...... 2,800 ----------- Total operating expenses........ 28,774 ----------- LOSS FROM OPERA- TIONS............ (20,563) OTHER INCOME (EX- PENSE)--Net...... (1,001) ----------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............. (21,564) INCOME TAX BENEFIT.......... ----------- LOSS BEFORE EXTRAORDINARY ITEM............. $ (21,564) =========== BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM ............ $ (2.47) =========== WEIGHTED AVERAGE SHARES OUTSTAND- ING.............. 8,723,719 ===========
See notes to pro forma condensed combined financial statements. F-5 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
BRIDGE GLOBALTEL ITC FINANCING AND HISTORICAL HISTORICAL HISTORICAL PURCHASE PURCHASE RECAPITALIZATION PRO FORMA OFFERING CSI GLOBALTEL ITC ADJUSTMENTS(B) ADJUSTMENTS ADJUSTMENTS COMBINED ADJUSTMENTS ---------- ---------- ---------- -------------- ----------- ---------------- --------- ----------- REVENUE.......... $ 2,279 $ 1,698 $2,610 $ -- $ -- $ -- $ 6,587 $-- COST OF REVENUE.. 1,424 1,473 1,978 -- -- -- 4,875 -- --------- ------- ------ -------- ----- -------- --------- ---- GROSS MARGIN..... 855 225 632 -- -- -- 1,712 -- --------- ------- ------ -------- ----- -------- --------- ---- OPERATING EX- PENSES: Sales and market- ing.............. 557 120 252 -- -- -- 929 -- General and ad- ministrative..... 684 1,523 421 -- -- -- 2,628 -- Depreciation and amortization..... 42 91 30 -- -- -- 163 -- Amortization of acquisition intangibles...... -- -- -- 1,635 413 (d) -- 2,048 -- --------- ------- ------ -------- ----- -------- --------- ---- Total operating expenses........ 1,283 1,734 703 1,635 413 -- 5,768 -- --------- ------- ------ -------- ----- -------- --------- ---- LOSS FROM OPERA- TIONS............ (428) (1,509) (71) (1,635) (413) -- (4,056) -- OTHER INCOME (EX- PENSE)--Net...... (698) (1,023) -- 772 -- -- (949) -- --------- ------- ------ -------- ----- -------- --------- ---- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............. (1,126) (2,532) (71) (863) (413) -- (5,005) -- INCOME TAX BENEFIT.......... -- -- -- -- -- -- -- -- --------- ------- ------ -------- ----- -------- --------- ---- LOSS BEFORE EXTRAORDINARY ITEM............. $ (1,126) $(2,532) $ (71) $ (863) $(413) $ -- $ (5,005) $-- ========= ======= ====== ======== ===== ======== ========= ==== BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM ............ $ (.34) $ (.96) ========= ========= WEIGHTED AVERAGE SHARES OUTSTAND- ING.............. 3,352,518 5,215,367 ========= ========= PRO FORMA AS ADJUSTED ----------- REVENUE.......... $ 6,587 COST OF REVENUE.. 4,875 ----------- GROSS MARGIN..... 1,712 ----------- OPERATING EX- PENSES: Sales and market- ing.............. 929 General and ad- ministrative..... 2,628 Depreciation and amortization..... 163 Amortization of acquisition intangibles...... 2,048 ----------- Total operating expenses........ 5,768 ----------- LOSS FROM OPERA- TIONS............ (4,056) OTHER INCOME (EX- PENSE)--Net...... (949) ----------- LOSS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM............. (5,005) INCOME TAX BENEFIT.......... -- ----------- LOSS BEFORE EXTRAORDINARY ITEM............. $ (5,005) =========== BASIC LOSS PER SHARE BEFORE EXTRAORDINARY ITEM ............ $ (.57) =========== WEIGHTED AVERAGE SHARES OUTSTAND- ING.............. 8,815,367 ===========
See notes to pro forma condensed combined financial statements. F-6 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) The following pro forma adjustments give effect to (i) the completion of the GlobalTel Merger, the ITC Acquisition and the Offering as of March 31, 1998 for the balance sheet and (ii) the Merger, the Acquisition and the Offering as of January 1, 1997 for the statements of operations: PURCHASE ADJUSTMENTS (a) Reflects the proposed acquisition of GlobalTel through the issuance of 1,626,489 shares of CSI's Common Stock for all outstanding preferred and common stock of GlobalTel, including GlobalTel's common stock subject to rescission. CSI will also deliver options and warrants to purchase 1,421,902 shares of its Common Stock and outstanding options and warrants to purchase 1,740,983 of GlobalTel's common stock will be cancelled. The CSI securities to be issued to GlobalTel's securityholders have been valued at an assumed public offering price of $7.00 per common share, discounted by 30% due to trading restrictions and other limitations on their transferability. The number of CSI's common shares to be issued to GlobalTel's preferred shareholders has been determined based on the liquidation value of such preferred shares. Adjustments made to GlobalTel's assets and liabilities are based on estimates of their fair values. (b) Reflects the increase in amortization expense due to the amortization of the intangible assets and the write-off of in-process research and development recorded in the acquisition of GlobalTel. Such intangible asset amortization assumes the following useful lives: distribution channels and customer lists--2 to 3 years; intellectual property and license agreement--5 to 7 years; goodwill--5 years. A deferred income tax benefit, resulting from the generation of net operating losses subsequent to the GlobalTel Merger and from the decreasing differences between the book and tax bases of intangible assets, is recognized to eliminate the deferred income tax liability. Interest expense, which includes the amortization of debt issuance costs and debt discounts, has been reduced as a result of the adjustment of GlobalTel's debt to its fair value at the date of the Merger. Reflects amounts totalling $1,050,000 to be paid by GlobalTel for merger and acquisition fees in conjunction with GlobalTel Merger. (c) Reflects the proposed acquisition of ITC for $5,470,000 based on currently agreed upon terms which include: estimated cash payments of $2,765,000 (excluding deposits of $250,000 made prior to March 31, 1998) due to the ITC shareholders prior to or at the completion of the Offering; the commitment to issue up to 295,714 shares of CSI Common Stock valued at $1,449,000 to the ITC shareholders, which value is based on the public offering price and discounted by 30% as a result of the timing of the issuance of such stock and the limitations on its transferability; reclassification of deposits given to ITC of $250,000; and the elimination of ITC's historical equity balances in connection with purchase accounting. The recorded values of ITC's assets and liabilities are believed to be reasonable estimates of their fair values. The number of shares to be issued to, and the amount of cash to be paid from escrow to, ITC shareholders, is ultimately dependent upon the resolution of certain ITC liabilities; the acquisition cost, however, is not expected to be affected. The number of shares to be issued may be decreased to a minimum of 240,653 shares, which shares would have an estimated value, when discounted by 30%, of $1,179,200; the amount of cash to be paid may be reduced by an amount not greater than $385,430. (d) Reflects the increase in amortization expense due to the amortization of the distribution channels and customer lists recorded in the acquisition of ITC which are amortized over a three-year period. (e) Reflects the elimination of intercompany transactions and balances between CSI and ITC. F-7 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (UNAUDITED) BRIDGE FINANCING AND RECAPITALIZATION ADJUSTMENTS (f) Reflects the issuance of the CSI Common Stock valued at $795,200 to the holders of the bridge debt issued by CSI in December 1997. Such amount is the estimated value of the equity features of the debt. (g) Reflects the May 1998 issuance of promissory notes totalling $1,250,000 and 74,074 shares of CSI Common Stock for $250,000, and the net proceeds (net of debt issuance costs of $150,000 and stock offering costs of $30,000) therefrom totalling $1,320,000. OFFERING ADJUSTMENTS (h) Reflects the estimated net proceeds of the Offering of $24,186,000, of which $385,000 is to be placed in escrow to satisfy the terms of the ITC acquisition agreement. Reflects deferred offering costs of $486,000 incurred as of March 31,1998, which have been added back in determining the estimated net cash received upon completion of the Offering. (i) Reflects the repayment of CSI's December 1997 bridge debt of $2,840,000 and accrued interest of $70,000 which are payable upon successful completion of the Offering. Reflects the write-offs to accumulated deficit totalling $622,512 of the unamortized debt issuance costs of $224,912 and the unamortized discount on such debt of $397,600. Also reflects the repayment of CSI's May 1998 bridge debt of $1,250,000, which is payable upon successful completion of the Offering, and the write-off to accumulated deficit of the related unamortized debt issuance costs of $150,000. (j) Reflects the cash payment of $2,765,000 (which includes a $100,000 standstill payment which is expected to be paid prior to the date of acquisition and will not be applied against cash to be paid up on closing) due to the shareholders of ITC upon the successful completion of the Offering in accordance with the terms of the acquisition (this pro forma adjustment does not take into consideration any additional deposits which would have been made subsequent to March 31, 1998 and would be applied against the cash to be paid upon closing). (k) Reflects payment amounts of $94,000 due to a former officer of CSI pursuant to a settlement agreement and $133,000 due to shareholders to complete the repurchase and retirement of their shares of CSI's Common Stock. F-8 INDEPENDENT AUDITORS' REPORT Communications Systems International, Inc. Colorado Springs, Colorado We have audited the accompanying balance sheets of Communications Systems International, Inc. as of April 30, 1996 and 1997 and December 31, 1997, and the related statements of operations, shareholders' deficit and cash flows for each of the three years in the period ended April 30, 1997 and the eight months ended December 31, 1997. These financial statements are the responsibility of CSI's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of Communications Systems International, Inc. as of April 30, 1996 and 1997 and December 31, 1997, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 1997 and the eight months ended December 31, 1997 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that CSI will continue as a going concern. As discussed in Note 1 to the financial statements, CSI's substantial losses since inception and working capital deficit at December 31, 1997 raise substantial doubt about CSI's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Stockman Kast Ryan & Scruggs, P.C. Colorado Springs, Colorado May 28, 1998 F-9 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. BALANCE SHEETS
APRIL 30, ------------------------ DECEMBER 31, MARCH 31, 1996 1997 1997 1998 ----------- ----------- ------------ ----------- (UNAUDITED) ASSETS CURRENT ASSETS (Note 3) Cash..................... $ 57,394 $ 146,686 $ 429,373 $ 235,643 Accounts receivable-- net..................... 1,104,606 1,053,233 1,027,217 626,798 Prepaid expenses and other current assets.... 60,893 83,962 19,370 54,030 ----------- ----------- ----------- ----------- Total current assets... 1,222,893 1,283,881 1,475,960 916,471 PROPERTY AND EQUIPMENT-- Net (Notes 2 and 3)......... 271,499 457,791 483,635 501,218 DEFERRED OFFERING COSTS (Note 12)............... -- 83,939 117,719 486,207 DEBT ISSUANCE COSTS (Note 3)...................... -- -- 449,926 224,912 DEPOSITS (Notes 10 and 13)..................... 25,000 120,880 448,065 483,065 ----------- ----------- ----------- ----------- TOTAL ASSETS........... $ 1,519,392 $ 1,946,491 $ 2,975,305 $ 2,611,873 =========== =========== =========== =========== LIABILITIES AND SHARE- HOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable......... $ 965,646 $ 1,287,187 $ 939,773 $ 1,348,353 Accrued commissions...... 254,224 145,352 337,563 278,884 Accrued expenses and cus- tomer deposits.......... 129,007 88,940 123,982 220,220 Payables to former share- holders (Note 4)........ -- -- 242,619 132,619 Debt to related party (Note 8)................ 159,915 148,761 273,761 242,511 Notes payable (Note 3)... 1,866,697 1,944,896 2,169,800 2,617,400 ----------- ----------- ----------- ----------- Total current liabili- ties.................. 3,375,489 3,615,136 4,087,498 4,839,987 ----------- ----------- ----------- ----------- COMMITMENTS AND CONTIN- GENCIES (Notes 8 and 10) SHAREHOLDERS' DEFICIT (Notes 4, 5, 6 and 11) Preferred stock, no par value--5,000,000 shares authorized, none issued or outstanding.......... Common stock, no par value--25,000,000 shares authorized; 2,999,662, 3,255,197, 3,349,030 and 3,354,844 shares issued and outstanding......... 1,889,141 2,366,066 2,750,285 2,650,585 Obligation to issue com- mon stock............... -- -- 795,200 795,200 Common stock options..... -- -- 37,000 37,000 Notes receivable from shareholder............. (5,000) (35,000) (35,000) (35,000) Accumulated deficit...... (3,740,238) (3,999,711) (4,417,059) (5,543,280) Treasury stock, at cost.. -- -- (242,619) (132,619) ----------- ----------- ----------- ----------- Total shareholders' deficit............... (1,856,097) (1,668,645) (1,112,193) (2,228,114) ----------- ----------- ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT............... $ 1,519,392 $ 1,946,491 $ 2,975,305 $ 2,611,873 =========== =========== =========== ===========
See notes to financial statements. F-10 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF OPERATIONS
EIGHT THREE THREE MONTHS MONTHS MONTHS YEAR ENDED APRIL 30, ENDED ENDED ENDED ------------------------------------ DECEMBER 31, APRIL 30, MARCH 31, 1995 1996 1997 1997 1997 1998 ---------- ----------- ----------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUE................. $1,837,580 $ 6,741,022 $11,865,412 $ 8,114,737 $3,205,888 $ 2,279,373 COST OF REVENUE......... 1,297,861 5,962,609 7,754,897 4,878,478 2,060,003 1,423,915 ---------- ----------- ----------- ----------- ---------- ----------- GROSS MARGIN............ 539,719 778,413 4,110,515 3,236,259 1,145,885 855,458 ---------- ----------- ----------- ----------- ---------- ----------- OPERATING EXPENSES Sales and marketing..... 529,161 1,572,747 2,080,020 2,006,727 589,215 557,246 General and administrative (Note 8)..................... 624,585 1,652,374 2,024,383 2,103,622 628,082 684,166 Depreciation and amortization........... 19,107 57,843 102,983 91,729 32,475 41,950 ---------- ----------- ----------- ----------- ---------- ----------- Total operating expenses............. 1,172,853 3,282,964 4,207,386 4,202,078 1,249,772 1,283,362 ---------- ----------- ----------- ----------- ---------- ----------- LOSS FROM OPERATIONS.... (633,134) (2,504,551) (96,871) (965,819) (103,887) (427,904) INTEREST EXPENSE-- Net.. 139 (19,389) (162,602) (113,529) (48,688) (698,317) OTHER EXPENSE........... -- -- -- (85,000) -- -- ---------- ----------- ----------- ----------- ---------- ----------- LOSS BEFORE EXTRAORDINARY ITEM..... (632,995) (2,523,940) (259,473) (1,164,348) (152,575) (1,126,221) EXTRAORDINARY ITEM--Gain on extinguishment of debt (Note 3).......... -- -- -- 747,000 -- -- ---------- ----------- ----------- ----------- ---------- ----------- NET LOSS................ $ (632,995) $(2,523,940) $ (259,473) $ (417,348) $ (152,575) $(1,126,221) ========== =========== =========== =========== ========== =========== BASIC PER SHARE AMOUNTS: Loss before extraordinary item... $ (.39) $ (.90) $ (.08) $ (.35) $ (.05) $ (.34) Extraordinary item.... -- -- -- .22 -- -- ---------- ----------- ----------- ----------- ---------- ----------- Net loss.............. $ (.39) $ (.90) $ (.08) $ (.13) $ (.05) $ (.34) ========== =========== =========== =========== ========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING............ 1,633,680 2,798,150 3,138,079 3,296,455 3,179,591 3,352,518 ========== =========== =========== =========== ========== ===========
See notes to financial statements. F-11 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF SHAREHOLDERS' DEFICIT
OBLIGATION NOTES COMMON STOCK TO ISSUE COMMON RECEIVABLE TREASURY STOCK --------------------- COMMON STOCK FROM ACCUMULATED ------------------- SHARES AMOUNT STOCK OPTIONS SHAREHOLDER DEFICIT SHARES AMOUNT TOTAL --------- ---------- ---------- ------- ----------- ----------- -------- --------- ----------- BALANCES, May 1, 1994........ 1,633,680 $ 530,929 $ 10,412 $ -- $ -- $ (583,303) -- $ -- $ (41,962) Common stock subscribed......... -- -- 493,025 -- -- -- -- -- 493,025 Net loss............ -- -- -- -- -- (632,995) -- -- (632,995) --------- ---------- --------- ------- -------- ----------- -------- --------- ----------- BALANCES, April 30, 1995..... 1,633,680 530,929 503,437 -- -- (1,216,298) -- -- (181,932) Issuance of subscribed stock... 562,421 503,437 (503,437) -- -- -- -- -- Sale of stock for cash and note...... 311,333 542,000 -- -- (5,000) -- -- -- 537,000 Stock issued for services........... 219,303 312,775 -- -- -- -- -- -- 312,775 Stock issued in acquisition........ 272,925 -- -- -- -- -- -- -- -- Net loss............ -- -- -- -- -- (2,523,940) -- -- (2,523,940) --------- ---------- --------- ------- -------- ----------- -------- --------- ----------- BALANCES, April 30, 1996..... 2,999,662 1,889,141 -- -- (5,000) (3,740,238) -- -- (1,856,097) Sale of stock for cash............... 20,500 111,200 -- -- -- -- -- -- 111,200 Stock issued in exchange for note.. 20,000 30,000 -- -- (30,000) -- -- -- -- Stock issued for services........... 46,667 34,224 -- -- -- -- -- -- 34,224 Stock issued in acquisition of affiliate.......... 59,692 49,993 -- -- -- -- -- -- 49,993 Conversion of notes and accrued interest to stock.. 108,676 251,508 -- -- -- -- -- -- 251,508 Net loss............ -- -- -- -- -- (259,473) -- -- (259,473) --------- ---------- --------- ------- -------- ----------- -------- --------- ----------- BALANCES, April 30, 1997..... 3,255,197 2,366,066 -- -- (35,000) (3,999,711) -- -- (1,668,645) Conversion of notes and accrued interest to stock.. 71,328 104,467 -- -- -- -- -- -- 104,467 Sale of stock for cash............... 302,880 499,752 -- -- -- -- -- -- 499,752 Issuance of debt with stock rights.. -- -- 795,200 -- -- -- -- -- 795,200 Stock options granted............ -- -- -- 37,000 -- -- -- -- 37,000 Purchase of common stock.............. -- -- -- -- -- -- (280,375) (462,619) (462,619) Retirement of treasury stock..... (133,333) (220,000) -- -- -- -- 133,333 220,000 -- Net loss............ -- -- -- -- -- (417,348) -- -- (417,348) --------- ---------- --------- ------- -------- ----------- -------- --------- ----------- BALANCES, December 31, 1997.. 3,496,072 2,750,285 795,200 37,000 (35,000) (4,417,059) (147,042) (242,619) (1,112,193) Unaudited: Conversion of notes and accrued interest to stock.. 5,814 10,300 -- -- -- -- -- -- 10,300 Retirement of treasury stock..... (66,667) (110,000) -- -- -- -- 66,667 110,000 -- Net loss............ -- -- -- -- -- (1,126,221) -- -- (1,126,221) --------- ---------- --------- ------- -------- ----------- -------- --------- ----------- BALANCES, March 31, 1998 (unaudited)....... 3,435,219 $2,650,585 $ 795,200 $37,000 $(35,000) $(5,543,280) (80,375) $(132,619) $(2,228,114) ========= ========== ========= ======= ======== =========== ======== ========= ===========
See notes to financial statements. F-12 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
EIGHT THREE THREE MONTHS MONTHS MONTHS YEAR ENDED APRIL 30, ENDED ENDED ENDED --------------------------------- DECEMBER 31, APRIL 30, MARCH 31, 1995 1996 1997 1997 1997 1998 --------- ----------- --------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) OPERATING ACTIVITIES Net loss................ $(632,995) $(2,523,940) $(259,473) $ (417,348) $(152,575) $(1,126,221) Adjustments to reconcile net loss to cash provided by (used in) operating activities: Gain on extinguishment of debt.............. -- -- -- (747,000) -- -- Amortization of debt issuance costs and debt discount........ -- -- -- -- -- 622,614 Stock and options issued or subscribed for services and interest............. 32,000 312,775 38,566 37,000 -- -- Depreciation and amortization......... 19,107 57,843 102,983 91,729 32,475 41,950 Changes in operating assets and liabilities: Accounts receivable......... (123,644) (904,447) 52,565 26,016 (30,111) 400,419 Other assets........ (65,000) (15,393) (115,833) (63,301) (61,099) (44,660) Accounts payable and accrued expenses... 372,697 2,711,390 911,463 (56,278) 411,481 446,439 --------- ----------- --------- ----------- --------- ----------- Net cash provided by (used in) operating activities............. (397,835) (361,772) 730,271 (1,129,182) 200,171 340,541 --------- ----------- --------- ----------- --------- ----------- INVESTING ACTIVITIES Purchases of property and equipment.......... (53,987) (222,813) (218,668) (117,573) (51,245) (59,533) Increase in deposits for acquisition............ -- -- (25,000) (200,000) -- (25,000) --------- ----------- --------- ----------- --------- ----------- Net cash used in investing activities... (53,987) (222,813) (243,668) (317,573) (51,245) (84,533) --------- ----------- --------- ----------- --------- ----------- FINANCING ACTIVITIES Proceeds from issuance of notes............... -- 7,000 405,000 2,485,074 205,000 60,000 Proceeds from the issuance of stock or stock subscriptions.... 461,025 537,000 111,200 499,752 -- -- Repayment of notes...... -- (78,530) (818,418) (1,001,604) (192,835) -- Increase in deferred offering costs......... -- -- (83,939) (33,780) (51,847) (368,488) Payment for treasury stock.................. -- -- -- (220,000) -- (110,000) Net proceeds from issuances (repayments) of debt to related party.................. 65,000 94,915 (11,154) -- (11,966) (31,250) --------- ----------- --------- ----------- --------- ----------- Net cash provided by (used in) financing activities............. 526,025 560,385 (397,311) 1,729,442 (51,648) (449,738) --------- ----------- --------- ----------- --------- ----------- NET INCREASE (DECREASE) IN CASH................ 74,203 (24,200) 89,292 282,687 97,278 (193,730) CASH, Beginning of period................. 7,391 81,594 57,394 146,686 49,408 429,373 --------- ----------- --------- ----------- --------- ----------- CASH, End of period..... $ 81,594 $ 57,394 $ 146,686 $ 429,373 $ 146,686 $ 235,643 ========= =========== ========= =========== ========= ===========
(continued) See notes to financial statements. F-13 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. STATEMENTS OF CASH FLOWS
EIGHT THREE THREE MONTHS MONTHS MONTHS YEAR ENDED APRIL 30, ENDED ENDED ENDED --------------------------- DECEMBER 31, APRIL 30, MARCH 31, 1995 1996 1997 1997 1997 1998 ------- ---------- -------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) SUPPLEMENTAL CASH FLOW INFORMATION Interest paid......... $ -- $ 7,879 $126,066 $ 29,435 $ 51,021 $ 2,454 SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITIES Stock and options issued or subscribed for services and interest............. $32,000 $ 312,775 $ 38,566 $ 37,000 $ -- $ -- Conversion of accounts payable to notes payable.............. -- 1,938,227 761,617 -- 761,617 -- Issuance of stock in exchange for note receivable........... -- 5,000 30,000 -- -- -- Stock issued in acquisition of affiliate............ -- -- 49,993 -- -- -- Conversion of notes and accrued interest to stock............. -- -- 274,342 104,467 202,894 10,300 Purchase of treasury stock................ -- -- -- 242,619 -- --
(concluded) See notes to financial statements. F-14 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED APRIL 30, 1997 AND MARCH 31, 1998 IS UNAUDITED) 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Communications Systems International, Inc. (CSI) is a provider of international telecommunications services principally in South America, Europe, the Pacific Rim, Central America and South Africa. CSI purchases long distance time increments from established international telecommunication carriers and derives its revenue by providing competitively priced international telecommunications services combined with enhanced technical capabilities and services in markets that are underserved by large telecommunications providers and incumbent telephone operators. In April 1998, CSI changed its fiscal year from April 30 to December 31. Basis of Presentation--The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplates continuation of CSI as a going concern. CSI has sustained substantial operating losses since inception through December 31, 1997. In addition, CSI has used substantial amounts of working capital in its operations. At December 31, 1997, current liabilities exceeded current assets by $2,611,538 and total liabilities exceeded total assets by $1,112,193. Beginning in fiscal 1997, CSI's management took actions to increase its revenue through increased calling volume and, as a result, CSI has been able to negotiate more favorable rates with its long distance telephone carriers enabling CSI to reduce its cost of revenues per unit of service sold. These steps have enabled CSI to significantly improve its gross margins during the year ended April 30, 1997 and the eight months ended December 31, 1997. In December 1997, in order to raise additional working capital and satisfy certain obligations, CSI issued mandatorily redeemable convertible promissory notes (see Note 3) in a private offering. Also in 1998, management believes it will be successful in raising a significant amount of equity capital in a public offering (see Note 12) and intends to use the proceeds for repayment of the mandatorily redeemable convertible promissory notes and to complete the pending acquisitions (see Note 13) as well as repay existing obligations, working capital, development of new service offerings and enhancement and expansion of existing services. Management believes that these actions and others presently being taken will allow CSI to successfully meet its obligations and achieve and sustain profitable levels of operations. Accounts Receivable--Accounts receivable are presented net of an allowance for doubtful accounts which is based on management's estimate of uncollectible accounts. At April 30, 1996 and 1997, December 31, 1997 and March 31, 1998, the allowance for doubtful accounts was $164,245, $186,489, $342,276 and $316,067, respectively. Property and Equipment--Property and equipment are recorded at cost. Depreciation is provided on a straight-line method over the estimated useful lives of the respective assets (generally five to seven years). Use of Estimates--The preparation of CSI's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation--Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. CSI has elected to continue to account for stock-based F-15 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of CSI's stock at the date of the grant over the amount an employee must pay to acquire the stock. See Note 5. Per Share Amounts--The net loss per share is based upon the weighted average of common shares outstanding during the period; the effect of outstanding stock options and warrants is antidilutive. Interim Financial Statements--The financial statements of CSI for the three months ended April 30, 1997 and March 31, 1998 are unaudited. In management's opinion, the financial statements reflect all adjustments necessary for a fair presentation of the results for these periods, all adjustments being of a normal and recurring nature. CSI's interim financial statements may not be indicative of the results of operations for a full year. 2.PROPERTY AND EQUIPMENT Property and equipment consists of the following:
APRIL 30, APRIL 30, DECEMBER 31, MARCH 31, 1996 1997 1997 1998 --------- --------- ------------ --------- Equipment....................... $311,446 $574,966 $690,803 $743,163 Furniture and fixtures.......... 44,259 61,601 61,601 62,131 Leasehold improvements.......... 5,238 13,651 15,387 22,030 -------- -------- -------- -------- Total......................... 360,943 650,218 767,791 827,324 Less accumulated depreciation and amortization............... 89,444 192,427 284,156 326,106 -------- -------- -------- -------- Property and equipment--net..... $271,499 $457,791 $483,635 $501,218 ======== ======== ======== ========
F-16 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 3.NOTES PAYABLE Notes payable consist of the following:
APRIL 30, APRIL 30, DECEMBER 31, MARCH 31, 1996 1997 1997 1998 ---------- ---------- ------------ ---------- Mandatorily redeemable convert- ible promissory notes bearing interest at 10% which is pay- able semiannually, due December 29, 1998 or 5 days after the closing of the proposed public offering (see Note 12), which- ever is earlier................ $ -- $ -- $2,840,000 $2,840,000 Unsecured notes payable, bearing interest at 15%, principal and interest due September 1998.... -- 85,000 85,000 85,000 Unsecured convertible notes payable bearing interest at 10%, the outstanding principal and unpaid accrued interest are due in March 1999.............. -- -- -- 60,000 Unsecured convertible notes pay- able bearing interest at 10% which is payable semi-annually on March 31 and September 30; the outstanding principal is due in 1998, however, the notes are callable at the option of the noteholders at any interest payment date................... -- 50,000 40,000 30,000 Unsecured notes payable to long distance carriers, bearing interest at 10% and 12%, repaid December 1997; see below....... 1,859,697 1,809,896 -- -- Other........................... 7,000 -- -- -- ---------- ---------- ---------- ---------- 1,866,697 1,944,896 2,965,000 3,015,000 Less discount on mandatorily re- deemable convertible promissory notes.......................... -- -- 795,200 397,600 ---------- ---------- ---------- ---------- Total......................... $1,866,697 $1,944,896 $2,169,800 $2,617,400 ========== ========== ========== ==========
On October 9, 1997, CSI entered into an agreement with one of its long distance carriers to which CSI had a note payable with an outstanding principal balance of $1,458,292 and accrued and unpaid interest of $116,755. The agreement provided that the carrier would accept a payment of $650,000 in full satisfaction of CSI's obligation to such carrier. CSI was also obligated to pay a fee of $178,047 to one of the companies which CSI intends to acquire (see Note 13) for assistance in obtaining this agreement. CSI recognized a gain of $747,000 in December 1997 upon the payment of the $650,000 liability. CSI issued mandatorily redeemable convertible promissory notes totalling $2,840,000 on December 30, 1997 in a private placement offering, collateralized by a first security interest on all unpledged assets of CSI and a second security interest on all assets subject to a prior lien. The notes are personally guaranteed as to $1,500,000 of principal and interest by two of CSI's officers and directors ($750,000 guaranteed by each, severally). The notes are convertible into CSI's Common Stock after nine months at a 50% discount to the average of the closing bid price for the immediately preceding 20 trading days. The holders of the converted shares have certain registration rights. As additional consideration for purchasing the notes, if the public offering is (a) not completed within nine months of the closing of the offering, the noteholder is to receive 10,000 shares of CSI's Common Stock for each $100,000 of principal or (b) completed, the noteholder will receive a certain number of shares valued at $40,000 based on the proposed public offering price per share. As a result of these stock rights, CSI has recorded a discount on the notes and recognized an obligation to issue Common Stock of F-17 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) $795,200. The discount is being amortized over six months since management believes CSI will complete its offering by June 30, 1998. At March 31, 1998, the unamortized portion of the discount was $397,600. In connection with the placement of the notes, CSI incurred debt issuance costs of $449,926, which are also being amortized over a six-month period. At March 31, 1998, the unamortized portion of the debt issuance costs was $224,912. 4.SHAREHOLDERS' EQUITY During the year ended April 30, 1995, CSI accepted deposits for purchase of 562,421 shares of its Common Stock in excess of the number of shares authorized. In September 1995, CSI's shareholders voted to increase the number of authorized shares of Common Stock to 25,000,000 shares and the subscribed shares were issued. CSI offered up to 333,333 shares of its no par Common Stock at a purchase price of $1.50 per share under a private placement memorandum dated January 31, 1995. At April 30, 1995, 61,667 shares had been subscribed. During the year ended April 30, 1996, the offering was fully subscribed. In September 1995, in an effort to increase the number of shareholders of CSI's Common Stock, CSI's shareholders approved a plan of merger to acquire all of the outstanding shares of Redden Dynamics Corporation (Redden) for $34,500 cash and 272,925 shares of CSI's Common Stock. Under the plan of merger, the shareholders of Redden received one share of CSI's Common Stock in exchange for each 40.5 shares of Redden stock. Effective as of the date of the merger, all shares of Redden were cancelled, the assets of Redden became assets of CSI and Redden ceased to exist. Redden's only recorded asset consisted of $11,050 of organizational costs. Redden had no liabilities and had no revenues or expenses since inception. Subsequent to the merger, CSI determined that Redden's assets were of no value to CSI. Accordingly, no amounts have been recognized for the issuance of the CSI Common Stock in connection with the merger of Redden. During the year ended April 30, 1996, CSI issued 219,303 shares of its Common Stock in exchange for financial and technological consulting services. The cost of the services provided of $312,775 has been charged to operations. During the year ended April 30, 1997, CSI sold 20,500 shares of Common Stock for $6.00 per share and received $111,200 after offering costs of $11,800. In August 1996, CSI acquired the net assets of an affiliated company through the issuance of 59,692 shares of CSI's Common Stock to certain shareholders of the affiliate and granted options to purchase 32,333 shares of CSI's Common Stock (see Note 5) to certain other shareholders of the affiliate. The assets acquired totalling $72,749 and liabilities assumed totalling $22,756 were recorded by CSI at the affiliate's net book value. Pro forma information combining the results of operations of CSI and the affiliate as if the acquisition had occurred at the beginning of fiscal 1996 and 1997 has not been presented as such information would not differ significantly from the reported amounts. During the year ended April 30, 1997, CSI sold convertible notes totalling $320,000, of which $190,000 of such notes were issued to three current directors of CSI. The notes, bearing interest at 10%, are convertible into shares of CSI's Common Stock at a conversion price equal to 90% of the average of the bid and ask price on the day prior to conversion. As of April 30, 1997, the holders of notes totalling $270,000 principal amount had converted their notes and accrued interest of $4,342 into 108,676 shares of stock; upon conversion, CSI charged F-18 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) the remaining unamortized deferred financing costs of $22,834 relating to such notes against the recorded amount of Common Stock. During the eight months ended December 31, 1997, CSI sold an additional $95,000 principal amount of the convertible notes, and noteholders converted notes totalling $105,000 principal amount and accrued interest of $175 into 71,328 shares of stock. Upon conversion, CSI charged unamortized deferred financing costs of $708 relating to such notes against the recorded amount of Common Stock. During the three months ended March 31, 1998, a noteholder converted an additional $10,000 note and accrued interest of $300 into 5,814 shares of stock. During the year ended April 30, 1997, CSI issued 46,667 shares of its Common Stock in exchange for financial and technological consulting services. The cost of the services provided of $34,224 has been charged to operations. In August 1997, CSI entered into settlement agreements with two former employees who were also CSI shareholders to repurchase 280,375 shares of its Common Stock from such individuals for $1.65 per share, or a total price of $462,619. The agreements require payments by CSI of $220,000 no later than September 12, 1997, $110,000 no later than February 11, 1998, and $132,619 no later than August 11, 1998. During the periods ended December 31, 1997 and March 31, 1998, CSI has made payments totalling $220,000 and $110,000, respectively, to these individuals and received 133,333 and 66,667 shares, respectively, of its Common Stock which have been retired. As of December 31, 1997 and March 31, 1998, CSI has recorded a liability for the remaining payments totalling $242,619 and $132,619, respectively, and treasury stock for the shares that it is committed to purchase. In a private placement in September and October 1997, CSI sold 302,880 shares of its Common Stock for $499,752, or $1.65 per share, the proceeds of which were partially used to repurchase the shares described in the preceding paragraph. CSI has notes receivable from a shareholder totalling $35,000 which resulted from the issuance of stock, bear interest at 10% and are payable on demand. 5.STOCK OPTIONS Under the terms of CSI's non-qualified stock option plan, options to purchase shares of CSI's Common Stock are to be granted at prices to be determined by the Board of Directors. The options' expiration date may not be more than 10 years from the date of the grant. The aggregate number of shares of CSI's Common Stock which may be issued upon the exercise of options granted under the plan shall not exceed 1,000,000. CSI has granted the following stock options:
NUMBER OF EXERCISE OPTIONS PRICE PER EXPIRATION OUTSTANDING SHARE DATE ----------- ------------ ---------- April 30, 1996........................... 299,717 $1.50--$6.00 1998--2006 April 30, 1997........................... 294,733 $1.50--$8.64 1998--2007 December 31, 1997........................ 369,600 $.60--$8.64 1998--2007 March 31, 1998........................... 378,167 $.60--$8.64 1998--2008
F-19 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Information with respect to options granted under the plan is as follows: Outstanding at May 1, 1995......................................... -- Granted.......................................................... 299,717 Exercised........................................................ -- Expired or cancelled............................................. -- -------- Outstanding at April 30, 1996...................................... 299,717 Granted.......................................................... 146,883 Exercised........................................................ (20,000) Expired or cancelled............................................. (131,867) -------- Outstanding at April 30, 1997...................................... 294,733 Granted.......................................................... 157,233 Exercised........................................................ -- Expired or cancelled............................................. (82,366) -------- Outstanding at December 31, 1997................................... 369,600 Granted.......................................................... 8,567 Exercised........................................................ -- Expired or cancelled............................................. -- -------- Outstanding at March 31, 1998...................................... 378,167 ========
CSI has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for CSI's stock option plans been determined based on the fair value at the grant date for awards in the years ended April 30, 1996 and 1997 and the eight months ended December 31, 1997 consistent with the provisions of SFAS No.123, CSI's net loss and net loss per share would have increased to the pro forma amounts indicated below. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for grants in the years ended April 30, 1996 and 1997 and the eight months ended December 31, 1997 also indicated below.
APRIL 30, APRIL 30, DECEMBER 31, 1996 1997 1997 ----------- --------- ------------ Net loss--as reported................... $(2,524,000) $(259,000) $(417,000) Net loss--pro forma..................... (2,724,000) (575,000) (564,000) Net loss per share--as reported......... (.90) (.08) (.13) Net loss per share--pro forma........... (.97) (.18) (.17) Risk-free interest rate................. 6.0% 6.0% 6.1% Expected lives (in years)............... 3-10 3-10 3-10
6.WARRANTS During the year ended April 30, 1996, CSI issued warrants in connection with Common Stock in exchange for financial services. The warrants provide for the purchase of 50,000 shares of CSI's Common Stock at prices ranging from $4.50 to $10.50, and expire in 2000 and 2001. In connection with the issuance of the convertible and 15% promissory notes (see Note 3), CSI also is committed to deliver to the noteholders 19,500 warrants to purchase shares of CSI's Common Stock. The exercise price of the warrants is equal to the bid price of such stock on the date the note was executed and ranges from $.81 to $4.14 per share; the warrants expire in 1998 and 1999. F-20 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In connection with the placement of the mandatorily redeemable convertible promissory notes, CSI issued to the placement agent 94,667 warrants to purchase shares of CSI's Common Stock. The warrants are exercisable at 125% of proposed public offering price per share; if no offering occurs within one year from the closing of the offering of the notes, the exercise price is reduced to 50% of the closing bid price, as defined in Note 3. In connection with the issuance of the convertible promissory notes due March 1999, CSI issued to the noteholders 8,000 warrants to purchase shares of CSI's Common Stock at prices ranging from $2.73 to $2.82, which warrants expire in March 1999. 7.INCOME TAXES The tax effects of temporary differences to significant portions of deferred taxes are as follows:
APRIL 30, APRIL 30, DECEMBER 31, 1996 1997 1997 ----------- ----------- ------------ Deferred tax asset-- Net operating loss carryforwards.. $ 1,064,000 $ 1,198,000 $ 1,192,000 Allowance for doubtful accounts... 60,000 69,000 116,000 Other............................. 146,000 69,000 62,000 Less valuation allowance............ (1,270,000) (1,330,000) $(1,370,000) ----------- ----------- ----------- $ -- $ -- $ -- =========== =========== ===========
As of December 31, 1997, CSI's net operating loss carryforwards of approximately $3,500,000 will begin expiring in the year 2009. The carryforwards will be available for the reduction of future income tax liabilities. As of April 30, 1996 and 1997 and December 31, 1997, CSI has recorded valuation allowances to reduce the existing deferred tax asset to an amount that is more likely than not to be realized. The valuation allowance increased by $210,000, $860,000, $60,000 and $40,000 during the years ended April 30, 1995, 1996 and 1997 and eight months ended December 31, 1997, respectively. The utilization of approximately $540,000 of tax loss carryforwards is limited to approximately $80,000 each year as a result of an ownership change in CSI (as defined by Section 382 of the Internal Revenue Code of 1986, as amended), which occurred in 1995. The amount of the remaining carryforwards that can be used in any given year may be limited in the event of additional future changes in the ownership of CSI, including the proposed public offering (see Note 12). 8.RELATED PARTY TRANSACTIONS CSI leases office space from a partnership in which CSI's principal shareholder owns a general partnership interest. Rental expense under such leases totalled $17,346, $37,592, $87,259, $80,263 and $30,092 for the years ended April 30, 1995, 1996 and 1997, eight months ended December 31, 1997 and three months ended March 31, 1998, respectively. Future annual minimum lease payments required under such leases are as follows as of December 31, 1997: Year ending December 31: 1998.............................................................. $138,619 1999.............................................................. 88,452 -------- Total........................................................... $227,071 ========
CSI receives periodic advances from its principal shareholder. At April 30, 1996 and 1997, December 31, 1997 and March 31, 1998, CSI had an unsecured note payable of $159,915, $148,761, $148,761 and $148,761, respectively, to its principal shareholder, payable May 31, 1999 and bearing interest at 10%. In September 1997, CSI entered into a settlement agreement with one of its former officers which provided for payments totalling $63,000 through December 1997 and a promissory note for $125,000 requiring twelve monthly payments of $10,417 beginning January 1998. If the proposed public offering (see Note 12) is completed F-21 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) prior to full payment of the note, the remaining balance is due. Such amount has been reflected as a general and administrative expense for the eight months ended December 31, 1997. 9.MAJOR CUSTOMERS, SUPPLIERS AND FOREIGN MARKETS CSI's major markets are currently in Argentina, Brazil, Europe and South Africa. As a result, CSI's operations may be adversely affected by significant fluctuations in the value of the U.S. dollar against certain foreign currencies, the enactment of exchange controls, or foreign governmental or regulatory restrictions on the transfer of funds. CSI currently prices all its products and services in terms of U.S. dollars. Significant fluctuations in the value of the U.S. dollar in relation to currencies in countries where CSI conducts operations can greatly affect the competitive price position of CSI's products and services. CSI's independent sales agents in Argentina and Brazil generated revenues (as a percentage of CSI's total revenues) as indicated below. In addition, CSI is represented by one independent sales agent in both Argentina and Brazil.
YEAR ENDED EIGHT MONTHS APRIL 30, ENDED ---------------- DECEMBER 31, 1995 1996 1997 1997 ---- ---- ---- ------------ Argentina........................................ -- 49% 56% 57% Brazil........................................... 34% 14 10 12
CSI's ability to provide its telephone services is heavily dependent upon the agreements CSI has with its long distance telephone carriers. CSI's long distance services were provided by various carriers as follows:
YEAR ENDED EIGHT MONTHS APRIL 30, ENDED ---------------- DECEMBER 31, 1995 1996 1997 1997 ---- ---- ---- ------------ Carrier A........................................ 59% 39% 59% 87% Carrier B........................................ 22 49 23 -- Carrier C........................................ -- -- -- 11 Other carriers................................... 19 12 18 2
10.COMMITMENTS AND CONTINGENCIES In September 1996, CSI entered into a consulting and royalty agreement to acquire the rights to a switching system which is installed at customer locations. Under the terms of the agreement, CSI is required to pay the developer a monthly royalty equal to 4% of CSI's gross collected revenue related to the system. In addition, CSI is also required to provide monthly funding for the installation of two systems. In the event that CSI fails to provide such funds and installation is prevented or delayed by more than sixty days, the royalty payment to the developer is increased to 6%. CSI has the option to buy out the royalty obligation for the greater of $2,500,000 or an amount equal to three times the aggregate royalty payments for the first twelve months of the agreement. In addition, for each installation, CSI agrees to pay the developer $1,500 if such installation produces gross revenue between $10,000 and $20,000 in the first full billing month, and $3,000 if such revenue exceed $20,000. The developer has agreed to provide ongoing maintenance, support and consulting while the system is in operation at a rate of $4,000 per month through September 1, 1997, and $5,200 thereafter. The agreement is in effect for as long as the system is operational until September 1, 2006, unless earlier terminated upon the occurrence of certain events. CSI has employment agreements with certain of its officers which provide for annual salaries totalling $400,000 and expire in 1999 and 2000. One of the agreements requires annual increases of 4%. F-22 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) CSI has agreements with certain of its carriers which provide for guaranteed rates and minimum annual usage. Certain agreements require CSI to make deposits with the carriers; such deposits totalled $25,000, $95,000, $220,000 and $230,000 at April 30, 1996 and 1997, December 31, 1997 and March 31, 1998, respectively. The agreements expire through 1999 and require minimum annual usage as follows: Year ending December 31: 1998............................................................ $3,025,000 1999............................................................ 1,500,000 ---------- Total......................................................... $4,525,000 ==========
11.STOCK SPLIT In December 1997, CSI's Board of Directors authorized a reverse split of CSI's Common Stock (not to exceed 1-for-30) whereby CSI will issue one share of Common Stock in exchange for a number of shares yet to be determined. The authorization for the reverse split was approved by CSI's shareholders in January 1998. In June 1998, management of CSI approved a 1-for-3 reverse stock split; all references to numbers of shares, options and warrants and per share amounts, including exercise prices, in the accompanying financial statements and related notes have been restated to reflect the 1-for-3 reverse stock split. 12.PROPOSED PUBLIC OFFERING CSI is planning a public offering of its Common Stock in 1998, the net proceeds from which are expected to be used to complete the acquisition and merger described in Note 13, to repay the mandatorily redeemable promissory notes described in Note 3, for working capital, development of new service offerings, and enhancement and expansion of existing services. CSI has incurred offering costs related to this offering which have been deferred in the accompanying financial statements and will be recorded as a reduction in the proceeds from the offering; if the offering is unsuccessful, costs which have been deferred will be charged to current year's operations. 13.PENDING ACQUISITION AND MERGER CSI has entered into an agreement (the Acquisition Agreement) to acquire all of the outstanding stock of International Telephone Company (ITC), another telecommunications company that provides services similar to that of CSI. The purchase price of $5,370,000 is to be satisfied by the payment of $3,300,000 cash and the issuance of 295,714 shares of CSI's Common Stock valued at $2,070,000 (before any discount) based on the public offering per share price in CSI's proposed public offering (see Note 12). The Acquisition Agreement provides that $385,430 of the cash payment will be placed into an escrow account to satisfy, if necessary, a contingent liability of ITC relating to a disputed claim with one of ITC's carriers. The Acquisition Agreement also provides for the shares of CSI's Common Stock to be issued to the selling shareholders one year after the acquisition is completed to ensure compliance with certain provisions of the Acquisition Agreement. Included in deposits in the accompanying balance sheets at April 30, 1997, December 31, 1997 and March 31, 1998 are deposits totalling $25,000, $225,000 and $250,000, respectively, which are nonrefundable and to be credited against the purchase price. The Acquisition Agreement also requires additional standstill deposits to be made prior to the expected acquisition date. The acquisition is expected to occur upon closing of CSI's proposed public offering. On May 29, 1998, CSI entered into an agreement and plan of merger (the Merger Agreement) with GlobalTel Resources, Inc. (GlobalTel), another telecommunications company which also provides services similar to that of CSI. The Merger Agreement provides for CSI to exchange 1,626,489 shares of its Common Stock for all outstanding shares of GlobalTel's preferred and common stock. F-23 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) CSI's acquisitions of GlobalTel and ITC will be accounted for using the purchase method. 14.SUBSEQUENT EVENTS On May 1, 1998, CSI issued 12% secured promissory notes and 250,000 warrants for $1,250,000 cash. The notes and accrued unpaid interest are due one year after issuance or five days after the closing of a public offering with gross proceeds of greater than $10,000,000. The notes and interest are collateralized by all shares of CSI's Common Stock owned by CSI's Chief Executive Officer. The notes are also personally guaranteed by CSI's Chief Executive Officer and Chief Operating Officer. Each warrant entitles the holder to purchase one share of CSI's Common Stock at an exercise price equal to 80% of the public offering per share price, which shares are subject to certain lock-up provisions. If CSI is unable to obtain an effective registration statement by July 26, 1998, the noteholders are entitled to receive an additional 12,500 warrants for every seven calendar days after such date until an effective registration statement is obtained. CSI also agreed to issue 37,500 warrants to the placement agent, which warrants have an exercise price of 120% of the public offering per share price. On May 19, 1998, CSI sold 74,074 shares of its Common Stock pursuant to a subscription agreement for $250,000, or $3.375 per share. The shares are subject to certain lock-up provisions. If CSI is unable to obtain an effective registration statement by June 26, 1998, the holder of such shares is entitled to receive an additional 889 shares of CSI's Common Stock for every seven calendar days after such date until an effective registration is obtained. In May 1998, CSI loaned $500,000 from the proceeds of the above transactions to GlobalTel. The loan, which bears interest at 20%, is due May 1999, collateralized by certain GlobalTel assets, and personally guaranteed by GlobalTel's Chief Executive Officer. F-24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To GlobalTel Resources, Inc.: We have audited the accompanying consolidated balance sheets of GlobalTel Resources, Inc. (a Washington corporation) and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, common stock subject to rescission and shareholders' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of GlobalTel's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GlobalTel Resources, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that GlobalTel will continue as a going concern. As discussed in Notes 1 and 5, a significant portion of GlobalTel's bridge loans call for principal repayment during 1998. In addition, as discussed in Note 6, GlobalTel plans to commence an offer to rescind a significant portion of GlobalTel's common stock and bridge loans. Management's current projections indicate that there will not be sufficient cash flows from operations to fund these obligations. These matters raise substantial doubt about GlobalTel's ability to continue as a going concern. Management's plans in regard to these matters are discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Seattle, Washington, April 10, 1998 (except with respect to the matters discussed in Notes 1 and 9, as to which the date is June 19, 1998) F-25 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS AS OF MARCH 31, 1998 ARE UNAUDITED)
DECEMBER 31, ------------------------- MARCH 31, 1996 1997 1998 ----------- ------------ ------------ ASSETS ------ Current assets: Cash................................ $ 446,257 $ 848,668 $ 98,467 Receivables: Trade accounts, net of allowance for doubtful accounts of $207,000, $180,000 and $180,000.. 1,288,047 622,154 636,154 Related party..................... -- 35,500 35,500 Other ............................ 333,181 54,859 69,359 Deposits and other.................. 149,178 105,814 126,910 ----------- ------------ ------------ Total current assets.............. 2,216,663 1,666,995 966,390 Property and equipment, net........... 670,712 1,372,154 1,356,655 Other assets: License agreement and customer list, net................................ 163,573 151,749 223,167 Organizational costs, net........... 110,114 75,381 -- Bridge loan issue costs, net........ 107,356 567,804 434,585 Equipment to be placed in service... 374,075 519,688 532,188 Other............................... 58,994 -- -- ----------- ------------ ------------ Total assets...................... $ 3,701,487 $ 4,353,771 $ 3,512,985 =========== ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- Current liabilities: Accounts payable.................... $ 2,570,745 $ 2,278,611 $ 3,150,924 Accounts payable to related parties............................ -- 247,270 132,011 Accrued liabilities................. 1,937,154 1,212,881 1,194,100 Bridge loans, net of unamortized discount of $574,572 in 1998....... 1,840,000 1,995,000 4,576,928 Notes payable....................... 92,310 21,542 15,890 Customer deposits and prepayments... 1,024,743 845,474 990,225 ----------- ------------ ------------ Total current liabilities......... 7,464,952 6,600,778 10,060,078 Bridge loans, net of unamortized discount of $1,208,511 in 1997....... 2,282,500 3,832,289 2,000,000 ----------- ------------ ------------ Total liabilities................. 9,747,452 10,433,067 12,060,078 ----------- ------------ ------------ Commitments and contingencies (see Notes 6 and 8) Common stock subject to rescission; par value $0.05; 326,385, 496,466 and 496,466 shares issued and outstanding.......................... 1,519,387 2,454,829 2,454,829 ----------- ------------ ------------ Shareholders' deficit: Series A convertible preferred stock; par value $0.01; 5,000,000 shares authorized; 0, 275,000 and 275,000 shares issued and outstanding; liquidation preference of $0, $1,138,666 and $1,154,395... -- 1,054,689 1,070,418 Common stock; par value $0.05; 50,000,000 shares authorized; 675,447, 1,233,432 and 1,251,432 shares issued and outstanding...... 56,383 2,804,709 2,903,709 Obligation to issue common stock.... 8,400 1,012,309 1,012,309 Common stock warrants............... 52,306 2,152,460 2,117,502 Accumulated deficit................. (7,682,441) (15,558,292) (18,105,860) ----------- ------------ ------------ Total shareholders' deficit....... (7,565,352) (8,534,125) (11,001,922) ----------- ------------ ------------ Total liabilities and shareholders' deficit............ $ 3,701,487 $ 4,353,771 $ 3,512,985 =========== ============ ============
The accompanying notes are an integral part of these consolidated balance sheets. F-26 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (AMOUNTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 ARE UNAUDITED)
THREE-MONTH PERIOD YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- Revenue................. $ 2,113,047 $ 9,135,935 $12,862,629 $ 4,385,392 $ 1,697,625 Operating expenses: Cost of revenue....... 1,928,396 8,229,546 11,171,220 3,811,258 1,472,901 Sales and marketing... 238,168 682,332 788,191 226,558 119,769 General and administrative....... 1,536,215 5,773,133 7,119,335 1,411,481 1,523,191 Depreciation and amortization......... 111,062 98,288 253,320 29,446 91,160 ----------- ----------- ----------- ----------- ----------- Total operating expenses............... 3,813,841 14,783,299 19,332,066 5,478,743 3,207,021 ----------- ----------- ----------- ----------- ----------- Operating loss.......... (1,700,794) (5,647,364) (6,469,437) (1,093,351) (1,509,396) Interest expense ($1,291, $61,350, $288,962, $41,734 and $61,891 to related parties) and other, including amortization of debt discount....... (33,681) (224,964) (1,367,748) (192,248) (1,022,443) ----------- ----------- ----------- ----------- ----------- Net loss before income taxes.................. (1,734,475) (5,872,328) (7,837,185) (1,285,599) (2,531,839) Provision for income taxes.................. -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Net loss................ $(1,734,475) $(5,872,328) $(7,837,185) $(1,285,599) $(2,531,839) =========== =========== =========== =========== =========== Series A convertible preferred stock dividends.............. -- -- (38,666) -- (15,729) ----------- ----------- ----------- ----------- ----------- Net loss applicable to common shareholders.... $(1,734,475) $(5,872,328) $(7,875,851) $(1,285,599) $(2,547,568) =========== =========== =========== =========== =========== Basic loss per share.... $ (2.75) $ (5.88) $ (6.48) $ (1.28) $ (1.46) =========== =========== =========== =========== =========== Weighted average number of common shares outstanding (includes common shares subject to rescission)......... 629,776 998,735 1,214,797 1,001,832 1,745,498 =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. F-27 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCK SUBJECT TO RESCISSION AND SHAREHOLDERS' DEFICIT (AMOUNTS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 ARE UNAUDITED)
SERIES A COMMON STOCK SUBJECT CONVERTIBLE TO RESCISSION PREFERRED STOCK COMMON STOCK OBLIGATION -------------------- -------------------- ---------------------- TO ISSUE NUMBER DOLLAR NUMBER DOLLAR NUMBER OF DOLLAR COMMON OF SHARES AMOUNT OF SHARES AMOUNT SHARES AMOUNT STOCK --------- ---------- --------- ---------- --------- ----------- ---------- BALANCE, December 31, 1994............ -- $ -- -- $ -- 421,760 $ 330,000 $ -- Issuance of common stock to founders........ -- -- -- -- 23,499 -- -- Issuance of common stock ($0.42 per share) and obligation to issue 60,000 shares ($0.14 per share) to acquire GFP (see Notes 1 and 7).. -- -- -- -- 216,791 91,600 8,400 Sale of common stock ($2.665 per share)...... 96,748 256,382 -- -- 110,910 297,344 -- Sale of common stock ($5.50 per share).......... 214,137 1,177,755 -- -- 180,560 993,078 -- Cost of common stock issuances....... -- -- -- -- -- (126,236) -- Issuance of common stock warrants........ -- -- -- -- -- -- -- Repurchase of common stock ($5.50 per share).......... -- -- -- -- (262,573) (1,444,153) -- Net loss........ -- -- -- -- -- -- -- ------- ---------- ------- ---------- --------- ----------- ---------- BALANCE, December 31, 1995............ 310,885 1,434,137 -- -- 690,947 141,633 8,400 Repurchase of common stock ($5.50 per share).......... -- -- -- -- (18,000) (99,000) -- Sale of common stock to employees ($5.50 per share)...... 15,500 85,250 -- -- -- -- -- Sale of common stock to third party ($5.50 per share).......... -- -- -- -- 2,500 13,750 -- Issuance of common stock warrants........ -- -- -- -- -- -- -- Net loss ....... -- -- -- -- -- -- -- ------- ---------- ------- ---------- --------- ----------- ---------- BALANCE, December 31, 1996............ 326,385 1,519,387 -- -- 675,447 56,383 8,400 Issuance of Series A convertible preferred stock........... -- -- 275,000 1,100,000 -- -- -- Cost of Series A preferred stock issuances....... -- -- -- (83,977) -- -- -- Preferred stock dividends....... -- -- -- 38,666 -- -- -- Partial settlement of 1995 obligation...... -- -- -- -- 30,000 4,200 (4,200) Severance contract paid in common stock ($5.50 per share).......... -- -- -- -- 24,242 133,333 -- Deferred salary converted to common stock warrants........ -- -- -- -- -- -- -- Issuance of common stock warrants ....... -- -- -- -- -- -- -- Bridge loans converted to common stock ($5.50 per share).......... 166,447 915,442 -- -- 408,540 2,218,681 -- Trade payables converted to common stock ($5.50 per share).......... 3,634 20,000 -- -- 34,131 187,705 -- Issuance of common stock ($5.50 per share) to certain related parties......... -- -- -- -- 14,000 77,000 -- Issuance of common stock ($5.50 per share) in consideration of bridge loan issue costs incurred........ -- -- -- -- 23,165 127,407 -- Obligation to issue common stock in connection with certain bridge loan issuances.. -- -- -- -- -- -- 1,008,109 Exercise of common stock warrants........ -- -- -- -- 23,907 -- -- Net loss........ -- -- -- -- -- -- -- ------- ---------- ------- ---------- --------- ----------- ---------- BALANCE, December 31, 1997............ 496,466 2,454,829 275,000 1,054,689 1,233,432 2,804,709 1,012,309 Issuance of common stock warrants........ -- -- -- -- -- -- -- Exercise of common stock warrants........ -- -- -- -- 18,000 99,000 -- Preferred stock dividends....... -- -- -- 15,729 -- -- -- Net loss........ -- -- -- -- -- -- -- ------- ---------- ------- ---------- --------- ----------- ---------- BALANCE, March 31, 1998 (unaudited)..... 496,466 $2,454,829 275,000 $1,070,418 1,251,432 $2,903,709 $1,012,309 ======= ========== ======= ========== ========= =========== ========== COMMON TOTAL STOCK ACCUMULATED SHAREHOLDERS' WARRANTS DEFICIT DEFICIT ----------- ------------- -------------- BALANCE, December 31, 1994............ $ -- $ (75,638) $ 254,362 Issuance of common stock to founders........ -- -- -- Issuance of common stock ($0.42 per share) and obligation to issue 60,000 shares ($0.14 per share) to acquire GFP (see Notes 1 and 7).. -- -- 100,000 Sale of common stock ($2.665 per share)...... -- -- 297,344 Sale of common stock ($5.50 per share).......... -- -- 993,078 Cost of common stock issuances....... -- -- (126,236) Issuance of common stock warrants........ 10,751 -- 10,751 Repurchase of common stock ($5.50 per share).......... -- -- (1,444,153) Net loss........ -- (1,734,475) (1,734,475) ----------- ------------- -------------- BALANCE, December 31, 1995............ 10,751 (1,810,113) (1,649,329) Repurchase of common stock ($5.50 per share).......... -- -- (99,000) Sale of common stock to employees ($5.50 per share)...... -- -- -- Sale of common stock to third party ($5.50 per share).......... -- -- 13,750 Issuance of common stock warrants........ 41,555 -- 41,555 Net loss ....... -- (5,872,328) (5,872,328) ----------- ------------- -------------- BALANCE, December 31, 1996............ 52,306 (7,682,441) (7,565,352) Issuance of Series A convertible preferred stock........... -- -- 1,100,000 Cost of Series A preferred stock issuances....... -- -- (83,977) Preferred stock dividends....... -- (38,666) -- Partial settlement of 1995 obligation...... -- -- -- Severance contract paid in common stock ($5.50 per share).......... -- -- 133,333 Deferred salary converted to common stock warrants........ 1,184,856 -- 1,184,856 Issuance of common stock warrants ....... 915,298 -- 915,298 Bridge loans converted to common stock ($5.50 per share).......... -- -- 2,218,681 Trade payables converted to common stock ($5.50 per share).......... -- -- 187,705 Issuance of common stock ($5.50 per share) to certain related parties......... -- -- 77,000 Issuance of common stock ($5.50 per share) in consideration of bridge loan issue costs incurred........ -- -- 127,407 Obligation to issue common stock in connection with certain bridge loan issuances.. -- -- 1,008,109 Exercise of common stock warrants........ -- -- -- Net loss........ -- (7,837,185) (7,837,185) ----------- ------------- -------------- BALANCE, December 31, 1997............ 2,152,460 (15,558,292) (8,534,125) Issuance of common stock warrants........ 63,142 -- 63,142 Exercise of common stock warrants........ (98,100) -- 900 Preferred stock dividends....... -- (15,729) -- Net loss........ -- (2,531,839) (2,531,839) ----------- ------------- -------------- BALANCE, March 31, 1998 (unaudited)..... $2,117,502 $(18,105,860) $(11,001,922) =========== ============= ==============
The accompanying notes are an integral part of these consolidated statements. F-28 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 ARE UNAUDITED)
THREE-MONTH PERIOD YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................ $(1,734,475) $(5,872,328) $(7,837,185) $(1,285,599) $(2,531,839) Adjustments to reconcile net loss to net cash used in operating activities-- Depreciation and amortization......... 111,062 98,288 253,320 29,446 91,160 Amortization of bridge loan issue costs and debt discount........ 7,904 28,999 741,669 23,396 771,658 Other................. -- 12,538 49,800 -- 66,699 Compensation and consulting expenses paid in common stock and warrants......... -- -- 398,326 -- 58,642 Changes in certain assets and liabilities: Trade and related party accounts receivable.......... (376,118) (911,929) 630,393 (780,285) (99,000) Other receivables and other current assets.............. (160,061) (315,045) 322,592 107,898 (35,596) Trade and related party accounts payable, accrued liabilities and notes payable....... 658,421 3,807,276 514,199 1,480,135 738,273 Customer deposits and prepayments......... 493,908 530,835 (179,269) (176,349) 144,751 ----------- ----------- ----------- ----------- ----------- Net cash used in operating activities... (999,359) (2,621,366) (5,106,155) (601,358) (795,252) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.......... (260,449) (329,390) (649,963) (273,593) (53,397) Proceeds from disposition of assets.. -- 15,000 -- -- -- Organizational costs incurred............... (162,929) -- -- -- -- Acquisition of business, net of cash acquired... (99,003) -- -- -- -- Purchases of equipment to be placed in service................ -- (374,075) (16,773) -- (12,500) ----------- ----------- ----------- ----------- ----------- Net cash used in investing activities... (522,381) (688,465) (666,736) (273,593) (65,897) ----------- ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of bridge loans........ 265,000 3,857,500 6,397,508 651,708 115,700 Payments made on bridge loans.................. -- -- (649,000) -- -- Payments made on due to shareholders........... (707,956) (649,015) -- -- -- Payments on notes payable................ -- (33,342) (70,768) (28,860) (5,652) Cash paid for bridge loan issue costs incurred............... -- (76,954) (518,461) (2,100) -- Proceeds from issuance of common stock, net... 2,598,323 99,000 -- -- 900 Repurchase of common stock.................. (200,000) (99,000) -- -- -- Proceeds from issuance of Series A convertible preferred stock, net... -- (58,088) 1,016,023 -- -- ----------- ----------- ----------- ----------- ----------- Net cash provided by financing activities... 1,955,367 3,040,101 6,175,302 620,748 110,948 ----------- ----------- ----------- ----------- ----------- Net increase (decrease) in cash................ 433,627 (269,730) 402,411 (254,203) (750,201) Cash, beginning of period................. 282,360 715,987 446,257 446,257 848,668 ----------- ----------- ----------- ----------- ----------- Cash, end of period..... $ 715,987 $ 446,257 $ 848,668 $ 192,054 $ 98,467 =========== =========== =========== =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for-- Interest.............. $ 26,585 $ 17,446 $ 33,099 $ -- $ -- Income taxes ......... -- -- -- -- -- SUPPLEMENTAL DISCLOSURE OF SIGNIFICANT NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance of common stock warrants............... $ 10,751 $ 41,555 $ 915,298 $ 31,274 $ 63,142 Trade accounts receivable converted to customer list.......... -- -- -- -- 85,000 Bridge loans and accrued interest converted to common stock, net...... -- -- 3,134,123 -- -- Deferred salaries converted to common stock warrants......... -- -- 1,184,856 -- -- Issuance of notes payable to finance common stock repurchase............. 1,244,153 -- -- -- -- Issuance of notes payable to finance equipment purchases.... -- 125,652 -- -- -- Trade payables converted to common stock........ -- -- 207,705 -- -- Issuance of common stock in consideration of bridge loan issue costs incurred............... -- -- 127,407 -- -- Obligation to issue common stock........... 8,400 -- 1,008,109 -- --
The accompanying notes are an integral part of these consolidated statements. F-29 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 AND IS UNAUDITED) 1. DESCRIPTION OF THE BUSINESS GlobalTel Resources, Inc. ("GlobalTel"), a Washington corporation, was formed on November 17, 1994, to provide international telecommunications services. GlobalTel began operations in 1995 with its entry into the international call-reorigination business. GlobalTel also markets long- distance calling cards and enhanced voice services including voice mail and conference calling. On December 29, 1995, GlobalTel acquired GFP Group, Inc. ("GFP"), a Washington corporation formed on September 15, 1995. GFP was formed primarily for the purpose of acquiring Ratsten International Telecommunications, Inc. d/b/a Netstar Telecommunications, Inc. ("Ratsten") and was thereafter acquired by GlobalTel. Ratsten held certain license rights critical to GlobalTel's mission of providing global telecommunications services. GlobalTel provides global long-distance call-reorigination services through Primecall, Inc., ("Primecall") a wholly owned subsidiary. GlobalTel began generating revenue in March 1995. Prior to January 1, 1995, GlobalTel's sole operations consisted of general and administrative activities, which amounted to $75,638 for the period ended December 31, 1994. GlobalTel has generated substantial operating losses and has a limited operating history. GlobalTel must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of operations. Losses may continue until such time, if ever, that GlobalTel is able to generate a level of revenue sufficient to offset its cost structure. There can be no assurance that GlobalTel will achieve increased revenue or profitable operations. To date, GlobalTel's losses have been principally funded by a combination of common and preferred stock sales and bridge loans, which mature in 1998 and 1999 (see Notes 3 and 5). As of June 19, 1998, approximately $1.1 million in bridge loans were in default. In addition, GlobalTel will require additional capital to effect the Recission Offer (see Note 6), to bring current approximately $2.7 million of certain past due trade accounts payable as of June 19, 1998, and to finance its short- and long-term growth strategies. To meet these obligations, management's plans include merging (the "Merger") with Communications Systems International, Inc. ("CSI"), a communications company located in Colorado Springs, Colorado, which has filed a registration statement for a public offering ("the CSI Offering") of its common stock. However, there is no assurance that the CSI Offering or Merger (which is contingent upon successful completion of the CSI Offering) will be completed or that GlobalTel will operate profitably or will be successful in capitalizing on perceived synergies of the Merger. These matters raise substantial doubt about GlobalTel's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidated Financial Statements The accompanying consolidated financial statements include the financial accounts of GlobalTel and its wholly owned subsidiaries, Primecall and GFP. All intercompany transactions have been eliminated. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. F-30 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Interim Results The accompanying consolidated balance sheet as of March 31, 1998, and the consolidated statements of operations, common stock subject to rescission and shareholders' deficit and cash flows for the three-month periods ended March 31, 1997 and 1998 are unaudited. In the opinion of management, the interim unaudited consolidated statements have been prepared on the same basis as the historical audited consolidated financial statements and include all adjustments, consisting of normal recurring adjustments necessary for the fair statement of interim periods. The data disclosed in these notes to the consolidated financial statements for these interim periods is also unaudited. Recently Issued Accounting Pronouncements In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," (the "SOP") which requires costs of start-up activities and organization costs to be expensed as incurred. Management adopted the SOP during the first quarter of 1998, which did not have a material impact on GlobalTel's financial position or results of operations. Cash For purposes of the consolidated statements of cash flows, cash includes all amounts on deposit with financial institutions. GlobalTel has no short-term investments. Property and Equipment Property and equipment consist primarily of office furniture, computer and telecommunications equipment. Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, which range from 5 to 10 years. Repairs, maintenance and minor renewals are charged to expense as incurred. Major renewals and betterments which substantially extend the useful life of the assets are capitalized. Upon sale or other disposition of assets, the cost and the related accumulated depreciation are removed from the accounts and a gain or loss, if any, is reflected in the consolidated statements of operations. Property and equipment is composed of the following:
DECEMBER 31, --------------------- MARCH 31, 1996 1997 1998 --------- ---------- ---------- Telecommunications equipment.......... $ 336,466 $1,018,292 $1,071,688 Furniture, computers, fixtures and other................................ 457,716 672,598 672,598 --------- ---------- ---------- 794,182 1,690,890 1,744,286 Less--Accumulated depreciation........ (123,470) (318,736) (387,631) --------- ---------- ---------- Property and equipment, net........... $ 670,712 $1,372,154 $1,356,655 ========= ========== ==========
GlobalTel recorded depreciation expense of $55,272, $76,884, $206,763, $17,806 and $68,895 for the years ended December 31, 1995, 1996 and 1997 and for the three-month periods ended March 31, 1997 and 1998, respectively. Other Assets Other assets consist primarily of a license agreement, customer list, organizational costs, bridge loan issue costs and telecommunications equipment to be placed in service. The license agreement purchased by GlobalTel (see Note 7) is being amortized on a straight-line basis over 15 years. GlobalTel recorded amortization expense F-31 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) related to the license agreement of $1,970, $11,825, $11,825, $2,957 and $2,957 for the years ended December 31, 1995, 1996 and 1997 and for the three- month periods ended March 31, 1997 and 1998, respectively. In January 1998, the Company acquired a customer list from one of its wholesale carriers in lieu of payment of accounts receivable owed to the Company of approximately $85,000. The Company is amortizing this intangible asset over a two-year period, and therefore recognized $10,625 in amortization expense for the period ended March 31, 1998. Bridge loan issue costs incurred in connection with obtaining bridge loans have been deferred and are being amortized into interest expense on a straight-line basis (which approximates the effective interest method) over the terms of the loans. GlobalTel recognized $7,904, $28,999, $214,666, $23,396 and $138,019 for the years ended December 31, 1995, 1996 and 1997, and for the three-month periods ended March 31, 1997 and 1998, respectively, in additional interest expense from amortization of the bridge loan issue costs. For the years ended December 31, 1996 and 1997 and for the period ended March 31, 1998, GlobalTel held telecommunications equipment to be placed in service of $374,075, $519,688 and $532,188, respectively. GlobalTel had not yet placed this equipment into service as certain components necessary to complete the installation had not yet been acquired. Certain organizational costs (primarily legal expenses) incurred in connection with establishing and organizing GlobalTel and its subsidiaries had been amortized on a straight-line basis over a period of five years. GlobalTel recorded amortization expense related to these organizational costs of $53,820, $9,579, $34,732, $8,683 and $8,683 for the years ended December 31, 1995, 1996 and 1997 and for the three-month periods ended March 31, 1997 and 1998, respectively. The remaining amount of organizational costs at March 31, 1998 were written off in accordance with GlobalTel's early adoption of the SOP discussed above. Accrued Liabilities
DECEMBER 31, --------------------- 1996 1997 MARCH 31, 1998 ---------- ---------- -------------- Telecommunications costs.............. $ 511,550 $ 215,649 $ 365,646 Deferred salaries..................... 667,000 -- -- Accrued interest...................... 203,456 386,077 572,028 Other................................. 555,148 611,155 256,426 ---------- ---------- ---------- $1,937,154 $1,212,881 $1,194,100 ========== ========== ==========
As of December 31, 1996, GlobalTel had deferred salaries payable to certain members of GlobalTel's management. Interest accrued on the deferred balances at an annual rate of 10%. During 1997, an additional $517,856 of deferred salaries was accrued. During the year ended December 31, 1997, these deferred salaries were converted to common stock warrants (see Note 3). Equity-Based Compensation GlobalTel accounts for employee equity-based compensation following the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." In accordance with the provisions of APB 25, GlobalTel has not recognized deferred compensation or compensation expense in connection with its equity-based plans as the exercise price of the options granted was equal to the fair value of the underlying equity instrument at the date of grant. F-32 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," requires expanded disclosures of equity-based compensation arrangements with employees and does not require, but encourages, compensation cost to be measured based on the fair value of equity instruments when awarded. GlobalTel, as allowed, intends to continue to measure employee equity-based compensation under APB 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. Revenue Recognition and Cost of Revenue Revenue and related cost of revenue are recognized in the period services are provided. The related accruals for revenue, cost of revenue and customer prepayments are included in the accompanying consolidated balance sheets. Research and Development Research and development costs are expensed as incurred, and are included in general and administrative expense in the accompanying consolidated statements of operations. Income Taxes GlobalTel accounts for income taxes using the asset and liability method. To date, GlobalTel has fully reserved all net deferred tax assets. Concentrations of Risk During October 1996, GlobalTel began reselling international long-distance service to other telecommunications carriers on a wholesale basis. As of December 31, 1996, $793,000 of GlobalTel's accounts receivable was due from a single telecommunications carrier. This receivable was fully collected during the first quarter of 1997. The geographic origin of revenue including domestic carrier resale revenue of approximately $0, $793,000, and $4,298,000 for the years ended 1995, 1996 and 1997, respectively, and of approximately $1,970,000 and $228,000 for the periods ended March 31, 1997 and 1998, respectively, approximates the following:
THREE-MONTH PERIOD ENDED YEAR ENDED DECEMBER 31, MARCH 31, --------------------------------- --------------------- 1995 1996 1997 1997 1998 ---------- ---------- ----------- ---------- ---------- Africa.................. $ 731,000 $3,180,000 $ 2,477,000 $ 738,000 $ 570,000 Asia.................... 361,000 1,550,000 1,345,000 355,000 158,000 Australia............... 130,000 557,000 1,352,000 424,000 101,000 Europe.................. 230,000 987,000 593,000 178,000 106,000 North America--United States (includes domestic wholesale carrier revenue)....... 366,000 1,612,000 5,043,000 2,192,000 365,000 North America--other.... 5,000 17,000 285,000 2,000 29,000 South America........... 290,000 1,233,000 1,768,000 496,000 369,000 ---------- ---------- ----------- ---------- ---------- $2,113,000 $9,136,000 $12,863,000 $4,385,000 $1,698,000 ========== ========== =========== ========== ==========
Cost of revenue as a percentage of revenue does not vary significantly from region to region. There are no other direct costs incurred outside the United States, nor does GlobalTel own material assets located outside of the United States. The continued legality and competitive advantage of call-reorigination businesses in certain foreign countries is uncertain due to changing regulatory environments. F-33 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) GlobalTel's call-reorigination business is facilitated by a single switch located in Los Angeles, California. Basic Loss Per Share In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," ("SFAS 128") which revises the calculation and presentation of earnings per share. SFAS 128 is effective for GlobalTel's fiscal year ending December 31, 1997, and retroactive application is required. Basic loss per share for all periods presented in the accompanying consolidated statements of operations has been computed under the provisions of SFAS 128. As such, the anti-dilutive effects of convertible securities have been excluded. Reclassifications Certain prior period amounts have been reclassified to conform with the current period presentation. 3. SHAREHOLDERS' DEFICIT Series A Convertible Preferred Stock Each share of Series A convertible preferred stock is entitled to a dividend at an annual rate of 6% of the issuance price, deferrable at the election of GlobalTel but payable in preference to dividends on any other securities issued by GlobalTel. All accrued and unpaid dividends on a share must be paid before dividends on other securities. Each share is also entitled, in liquidation, to a preferred distribution of the initial issuance price plus all accrued but unpaid dividends. Each share is subject to automatic conversion to common stock upon the sale of all or substantially all of the assets of GlobalTel, an election to convert by two-thirds of the holders of such shares, or upon the closing of an initial public offering ("IPO") of GlobalTel, the net proceeds of which exceed $15 million if certain other conditions are satisfied. Any unpaid cumulative dividends at the time of conversion may be paid at the option of GlobalTel in cash, common stock, or as notes payable to the preferred shareholders. Each share of Series A preferred stock has a voting right based upon the number of shares of common stock into which the Series A preferred stock would then be convertible, in addition to certain demand and piggyback registration rights. During 1996, GlobalTel incurred $58,088 in connection with its issuance of Series A convertible preferred stock. These costs were capitalized as other long-term assets in the accompanying December 31, 1996 consolidated balance sheet and were subsequently reclassified as a charge to equity in connection with GlobalTel's private placement of Series A convertible preferred stock. Common Stock During 1995, GlobalTel executed a stock purchase agreement with certain common shareholders to buy back 262,573 shares of GlobalTel's common stock at a price of $5.50 per share. GlobalTel paid $200,000 in cash and issued $1,244,153 in promissory notes bearing interest at 8% to finance the repurchase. These promissory notes were paid in full as of December 31, 1996. During 1997, several bridge loan holders accepted an offer from GlobalTel to convert their bridge loans in the amount of $2,835,208, and related unpaid interest of $327,218 into 574,987 shares of common stock at a value equal to $5.50 per share. The net amount of bridge loans converted to common stock included a charge of approximately $28,000 relating to the unamortized bridge loan issue costs that were simultaneously written off. During September 1997, GlobalTel issued 24,242 shares of common stock with a value of $133,333 to a former employee in satisfaction of GlobalTel's obligations under the employee's severance agreement. The value F-34 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 IS UNAUDITED) of the common stock issued was charged to compensation expense in the accompanying consolidated statement of operations for the year ended December 31, 1997. In November 1997, the Board of Directors ("the Board") approved a reverse common stock split and increased the authorized number of common shares from 20 million to 50 million. The ratio of the reverse common stock split is 1:5. All share and per share amounts have been retroactively adjusted in these consolidated financial statements to reflect the reverse common stock split. During 1997, an aggregate of $207,705 in trade payables due to certain vendors were converted into 37,765 shares of common stock. Also during 1997, GlobalTel issued 14,000 shares of common stock to certain Board members and others in recognition of past services rendered to GlobalTel. GlobalTel recognized consulting expense of $77,000 in connection with these stock issuances. During the first quarter of 1998, 18,000 shares of common stock were issued upon the exercise of common stock warrants at an exercise price of $0.05 per share. Equity-Based Compensation During 1996, GlobalTel approved the 1996 Stock Option Plan ("the Plan") which provides for the granting of qualified and nonqualified stock options. GlobalTel has reserved 520,000 shares of common stock for granting of stock options under the Plan. During February 1998, GlobalTel's shareholders approved an amendment to the Plan to increase the shares available for grants to 700,000 shares of common stock. GlobalTel's Board has the authority to determine all matters relating to options to be granted under the Plan, including the selection of individuals to be granted options, the number of shares to be subject to each option, the exercise price and the term and vesting period, if any. The following table summarizes activity related to stock options granted to certain executives and employees of GlobalTel:
EXERCISE NUMBER OF PRICE PER SHARES SHARE --------- --------- Balance at December 31, 1994........................... -- $ -- Grants............................................... 73,100 5.50 Exercised............................................ -- -- Canceled............................................. -- -- ------- Balance at December 31, 1995........................... 73,100 5.50 Grants............................................... 128,926 5.50 Exercised............................................ -- -- Canceled............................................. (30,000) 5.50 ------- Balance at December 31, 1996........................... 172,026 5.50 Grants............................................... 143,600 5.50 Exercised............................................ -- -- Canceled............................................. (97,200) 5.50 ------- Balance at December 31, 1997........................... 218,426 5.50 Grants............................................... 259,000 5.50 Exercised............................................ -- -- Canceled............................................. -- -- ------- Balance at March 31, 1998.............................. 477,426 5.50 =======
F-35 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) There were 63,609, 162,546 and 601,413 options exercisable as of December 31, 1996, 1997 and March 31, 1998 respectively. The outstanding options at March 31, 1998 have a weighted average remaining contractual life of 8.9 years. As of March 31, 1998, there were 222,574 shares available for future option grants. Pro forma information regarding results of operations and loss per share is required by SFAS 123 for awards granted after December 31, 1994 as if GlobalTel had accounted for its stock-based awards to employees under a valuation method permitted by SFAS 123. The value of GlobalTel's stock-based awards to employees in 1996 and 1997 was estimated using the minimum value method, which does not consider stock price volatility. Had compensation cost for the Plan been determined consistent with SFAS 123, GlobalTel's net loss for the years ended December 31, 1995, 1996 and 1997 would have been increased to $1,748,144, $5,918,197 and $7,930,158, respectively. Also under SFAS 123, GlobalTel's basic loss per share would have been increased to $2.78, $5.93 and $6.53, respectively. Pro forma information has not been calculated for interim unaudited periods. The weighted average fair value per option of GlobalTel's stock-based awards granted to employees was $1.05, $0.91 and $0.90 for the years ended December 31, 1995, 1996 and 1997, respectively, and was estimated assuming no expected dividends and the following weighted average assumptions:
DECEMBER 31, ----------------------- 1995 1996 1997 ------- ------- ------- Risk-free interest rate............................ 5.4% 6.2% 6.1% Expected life...................................... 4 years 3 years 3 years
Common Stock Warrants The following table summarizes activity related to warrants granted to purchase GlobalTel's common stock (1995 activity was not significant):
THREE-MONTH PERIOD YEAR ENDED 1996 YEAR ENDED 1997 ENDED 1998 ---------------------- ----------------------- ----------------------- NUMBER NUMBER NUMBER OF EXERCISE PRICE OF EXERCISE PRICE OF EXERCISE PRICE SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE ------- -------------- ------- -------------- ------- -------------- Beginning balance....... 23,907 $0.00 158,617 $0.00-$5.50 640,342 $0.05-$5.50 Grants in connection with certain bridge loan issuances......... 78,910 5.50 209,489 3.50-5.50 7,000 5.50 Grants to consultants... 55,800 5.50 80,715 0.05-5.50 10,760 0.05 Deferred salaries converted to warrants.. -- -- 215,428 0.05 -- -- Exercise of warrants.... -- -- (23,907) 0.00 (18,000) 0.05 ------- ------- ------- Ending balance.......... 158,617 0.00-5.50 640,342 0.05-5.50 640,102 0.05-5.50 ======= ======= =======
In connection with the bridge loans issued by GlobalTel, warrants to purchase 78,910, 209,489 and 7,000 shares of GlobalTel's common stock were issued in 1996, 1997 and 1998, respectively. These warrants generally provide for increases in the number of shares of common stock issuable if GlobalTel has not closed a major financing transaction within specified periods. All of these warrants were exercisable immediately upon issuance. GlobalTel estimated the value of these warrants to be $41,555, $197,584 and $4,500 in 1996, 1997 and 1998 respectively. GlobalTel also issued warrants to various individuals in consideration for consulting and other services received. With respect to the 1996 warrants, 30,000 vest upon the earlier of two years or the filing of a registration statement in connection with a public offering. The remaining 25,800 warrants were exercisable F-36 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 IS UNAUDITED) immediately upon issuance. The 1997 and 1998 warrants were also immediately exercisable upon issuance. The fair market value of the 1996 warrants when issued were not considered to be material. GlobalTel recognized consulting expense of $187,993 and $58,642 with respect to the 1997 and 1998 grants, respectively. During 1997, certain former and current employees accepted common stock warrants in lieu of salaries owed to them. Accordingly, deferred salaries of $1,184,856 were converted into warrants to purchase 215,428 shares of common stock with an exercise price of $0.05 per share. These warrants were immediately exercisable upon issuance and have a three-year term. During 1997, the Board amended certain common stock warrant agreements whereby certain warrant holders could exercise their warrants at a price of $3.50 per share in a cashless conversion to common stock rather than at the original exercise price of $5.50 per share upon GlobalTel successfully completing an IPO by April 30, 1998, at which time the amendments expired. Warrant holders representing 264,760 shares of common stock had indicated their intention to exercise their warrants under these amended terms. As a result of the amendment to these warrant agreements, GlobalTel recognized $529,521 of additional debt discount, of which $296,985 and $174,402 resulted in additional interest expense in 1997 and for the first quarter of 1998, respectively. The debt discount is being amortized on a straight line basis to April 30, 1998. 4. INCOME TAXES Significant components of GlobalTel's deferred tax assets and liabilities (which have not been calculated for interim unaudited periods) are as follows:
DECEMBER 31, ------------------------ 1996 1997 ----------- ----------- Deferred tax assets: Net operating loss carryforward................ $ 1,422,000 $ 3,330,000 Start-up costs................................. 813,000 1,618,000 Deferred compensation.......................... 227,000 152,000 Other deferred tax assets...................... 146,000 137,000 Valuation allowance............................ (2,528,000) (5,175,000) ----------- ----------- Total deferred tax assets.................... 80,000 62,000 Deferred tax liabilities: Depreciation of furniture and equipment........ (24,000) (9,000) Amortization of other long-term assets......... (56,000) (53,000) ----------- ----------- Net deferred taxes........................... $ -- $ -- =========== ===========
GlobalTel's net operating loss carryforward of approximately $9,794,000 as of December 31, 1997 is subject to limitations and expires in 2012. GlobalTel has determined that its deferred tax assets do not satisfy the recognition criteria set forth under the provisions of SFAS No. 109, "Accounting for Income Taxes." Accordingly, a valuation allowance has been recorded against the applicable deferred tax assets. Therefore, no tax benefits have been recorded in the accompanying consolidated statements of operations. The valuation allowance increased by $538,000, $1,990,000 and $2,647,000 during 1995, 1996 and 1997, respectively. The difference between the statutory tax rate of approximately 34% and the tax benefit of zero recorded by GlobalTel is primarily due to GlobalTel's full valuation allowance against its net deferred tax assets. F-37 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 5. BRIDGE LOANS To fund operations and capital expenditures, GlobalTel obtained bridge loans from certain investors, some of whom are shareholders or management of GlobalTel. All bridge loans bear interest at 10% annually and in certain cases increase to 12% to 18% if the loans are past due. In addition, stock warrants were granted to certain of these investors as discussed in Note 3. Bridge loans outstanding were:
DECEMBER 31, --------------------- MARCH 31, 1996 1997 1998 ---------- ---------- ---------- Payable to shareholders and management: Maturing through March 1996, due upon demand after maturity date........................ $ 210,000 $ -- $ -- Maturing through January 1999, or upon closing of an IPO, whichever is earlier.... 1,105,000 530,000 530,000 Maturing March 1999, payable in full or convertible at the option of the holder to common stock upon closing of additional equity financing at the price per share paid by investors in the equity financing.. -- 150,000 150,000 Maturing December 1999 or, upon closing of an IPO, $1 million plus accrued interest will be payable out of the proceeds of an IPO and $1 million plus accrued interest will be converted to common stock at a price of $3.85 per share................... -- 2,000,000 2,000,000 Principal and accrued interest converted to common stock in 1997....................... 500,000 -- -- Payable to third parties: Maturing through March 1996, due upon demand after maturity date........................ 55,000 -- -- Due upon demand............................. 150,000 -- -- Maturing through January 1999, or upon closing of an IPO, whichever is earlier ($25,000 in default as of January 15, 1998)...................................... 1,202,500 45,000 45,000 Maturing June 1998 (in default as of June 5, 1998), convertible in whole or in part at the option of the holder to: (i) common stock upon closing of additional equity financing over $15 million, at the price per share paid by investors in the equity financing or, (ii) at a conversion price to common stock of the ratio of 1.5 times annualized revenue over the number of common shares outstanding.................. 900,000 1,070,000 1,070,000 Maturing March 1999, payable in full or convertible at the option of the holder to common stock upon closing of additional equity financing at the price per share paid by investors in the equity financing.. -- 400,000 400,000 Maturing January 1999, or upon closing of an IPO, whichever is earlier.................. -- 2,840,800 2,956,500 ---------- ---------- ---------- Total bridge loans............................ 4,122,500 7,035,800 7,151,500 Less: Current portion (see Note 6)................ 1,840,000 1,995,000 4,576,928 Debt discount............................... -- 1,208,511 574,572 ---------- ---------- ---------- Long-term bridge loans........................ $2,282,500 $3,832,289 $2,000,000 ========== ========== ==========
During November and December 1997, GlobalTel obtained additional bridge note financing of $2,865,800, $25,000 of which was from a related party. During the first quarter of 1998, an additional $115,700 was raised. These notes bear interest at an annual rate of 10% and are due in full at the earlier of the closing of an IPO or January 1999. In addition, following the closing of an IPO, each holder of these notes will receive shares of F-38 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF AND FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 IS UNAUDITED) common stock equal to the initial principal amount of the note divided by the IPO price per share. This obligation to issue stock was valued at $1,008,109 and is included as a component of shareholders' deficit in the accompanying December 31, 1997 consolidated balance sheet. The offsetting charge was recorded as debt discount and will be amortized to June 30, 1998. As of December 31, 1997 and March 31, 1998 GlobalTel had recognized $146,838 and $430,636, respectively, of additional interest expense from amortization of the debt discount. If an IPO has not closed by July 1, 1998, these bridge note holders will have the right to receive warrants to purchase shares of common stock in lieu of the GlobalTel common stock issuable on closing of an IPO equal to the initial principal amount of the note divided by $5.50. The warrants associated with these bridge loans will have an exercise price of $5.50 per share. Closing costs incurred associated with these notes included approximately $280,000 in cash and 23,165 shares of common stock at $5.50 per share. The total amount of this consideration was recorded as bridge loan issue costs to be amortized over the life of the loan. GlobalTel's legal counsel has advised management that the CSI Offering would not qualify as "an IPO" as described above. 6. SECURITIES SUBJECT TO RESCISSION GlobalTel believes that certain of its outstanding shares of common stock ("Rescission Stock") and bridge loans and warrants to purchase shares of common stock (collectively, the "Rescission Securities") may have been issued in violation of certain state securities laws. As a result, prior to completion of the CSI Offering, GlobalTel plans to offer to rescind such prior sales by offering to repurchase the Rescission Securities (the "Rescission Offer") at the price originally paid plus interest at the annual statutory rate of eight percent from the date of purchase to the expiration of the Rescission Offer. However, completion of the Rescission Offer is conditioned upon the successful completion of the proposed Merger and CSI Offering. Accordingly, if such conditions are not satisfied, the Rescission Offer will by its terms terminate without any future obligation to the GlobalTel. Due to the nature of the Rescission Offer, the shares of common stock and bridge loans making up the Rescission Securities have been classified as common stock subject to rescission and current liabilities, respectively, in the accompanying consolidated financial statements. As of March 31, 1998, there were 496,466 shares of common stock, $805,000 in aggregate principal amounts of bridge loans and warrants to purchase an aggregate of approximately 31,000 shares of common stock identified for possible rescission. If all holders of Rescission Securities as of March 31, 1998 were to accept the Rescission Offer, GlobalTel would be required to pay approximately $3.7 million including statutory accrued interest. GlobalTel estimates that the total amount of its obligation for the statutory accrued interest with respect to Rescission Stock could aggregate approximately $327,000 as of March 31, 1998, if all offerees holding Rescission Stock were to accept the Rescission Offer. Because of the contingent nature of this liability and because the ultimate amount to be paid, if any, is not presently known, the potential interest liability with respect to Rescission Stock has not been accrued in the accompanying consolidated financial statements, but will be recorded as an expense and a liability of GlobalTel if and when the shares of common stock subject to rescission are tendered pursuant to the Rescission Offer. The statutory rate of interest with respect to the bridge loans covered by the Rescission Offer is less than the interest that has already been accrued by GlobalTel under the original terms of the bridge loans. Although GlobalTel plans to make the Rescission Offer prior to completion of the CSI Offering, completion of the Rescission Offer and payment for the Rescission Securities tendered pursuant to the Rescission Offer is F-39 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) conditioned upon completion of the CSI Offering and the Merger. A portion of the net proceeds of the CSI Offering will be used to fund payments pursuant to the repurchase of the Rescission Securities, if any are required. However, there can be no assurance that the proposed Merger and CSI Offering will be successfully completed. The consolidated financial statements do not include any adjustments that might result from the outcome of the Rescission Offer. Furthermore, notwithstanding the Rescission Offer, there can be no assurance that GlobalTel will not be subject to penalties or fines relating to past issuances or that other holders of securities from GlobalTel will not assert or prevail in claims against GlobalTel for rescission or damages under state or federal securities laws. 7. ACQUISITIONS Ratsten International Telecommunications, Inc. On October 18, 1995, GFP purchased 50% of the outstanding common stock of Ratsten for $100,000 and the other 50% for 108,791 shares of GFP's common stock in a business acquisition accounted for using the purchase method of accounting, the purpose of which was to acquire certain licensing rights held by Ratsten. Prior to the Ratsten acquisition, GFP had issued 108,000 shares of common stock to its founders. In total, GFP's common stock issued was valued at approximately $91,600. Of the total purchase price, including the obligation to issue shares described below, $177,368 was assigned to the license agreement, with the remainder assigned to certain assets acquired and liabilities assumed. No goodwill was recognized from the purchase. The sellers of Ratsten made certain warranties to GlobalTel, primarily that the license agreement was valid and fully transferable to GFP after the purchase. The acquisition agreement included an obligation for the issuance of an additional 60,000 shares of GlobalTel's common stock to the sellers of one- half of Ratsten, contingent upon GlobalTel obtaining additional financing (other than bridge funding) in excess of a certain amount. This contingent obligation was valued at approximately $8,400 as of the date of the agreement. During the year ended December 31, 1997, 30,000 of these shares had been issued. GFP On December 29, 1995, pursuant to a share exchange agreement and statutory share exchange, GlobalTel issued 216,791 of voting common stock on a one-for- one basis for all of GFP's issued and outstanding common stock. GFP's only significant asset was the license agreement which had been acquired from Ratsten in anticipation of the share exchange agreement. GFP did not have any material operations during the period from its inception through December 29, 1995. 8. COMMITMENTS AND CONTINGENCIES Leases GlobalTel has entered into noncancelable operating lease agreements involving office space and equipment, certain telecommunications equipment and licensing agreements with lease terms extending through 2006. F-40 GLOBALTEL RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Minimum lease payments are subject to change as provided for in the lease agreements. GlobalTel's future minimum noncancelable lease payments as of December 31, 1997, are as follows:
YEARS ENDING DECEMBER 31, ------------ 1998........................................................ $ 577,958 1999........................................................ 329,259 2000........................................................ 276,931 2001........................................................ 61,181 2002........................................................ 60,482 Thereafter.................................................. 216,726 ---------- $1,522,537 ==========
Lease expense for the years ended December 31, 1995, 1996 and 1997 was $125,413, $442,292, and $883,421, respectively, and was $103,339 and $195,619 for the three-month periods ended March 31, 1997 and 1998, respectively. Employment Agreements In March 1998, GlobalTel executed employment agreements with certain of its officers which provide for annual salaries totalling approximately $630,000 and expire in 1999. GlobalTel also issued options pursuant to these agreements to purchase 240,000 shares of common stock under the Plan at an exercise price of $5.50 per share. 9. SUBSEQUENT EVENTS Merger and CSI Offering On April 22, 1998, GlobalTel entered into a letter of intent with CSI whereby CSI will acquire all of the outstanding common stock of GlobalTel through the issuance of CSI's common stock in the Merger based on a conversion formula to be determined. The Merger is contingent on successful completion of the CSI Offering, which must gross at least $20 million of net proceeds. This letter of intent was finalized on May 29, 1998 and is subject to shareholder approval. On June 19, 1998, CSI filed an amended registration statement with the Securities and Exchange Commission related to the CSI Offering. Conversion of Series A Convertible Preferred Stock On May 29, 1998, the Board approved a conversion agreement whereby GlobalTel's Series A preferred stock would be converted into common stock prior to the Merger at a conversion ratio of .727 preferred shares exchanged for one share of common stock. The conversion agreement is subject to preferred shareholder approval. CSI Loan As of May 11, 1998, CSI had loaned GlobalTel $500,000 at 20% interest to be repaid by May 1999, for which CSI obtained a security interest in certain assets of GlobalTel. In addition, CSI obtained a personal guaranty of the loan by GlobalTel's chief executive officer (CEO). In return, GlobalTel's CEO received a second position security interest behind CSI in certain assets of GlobalTel, as well as a guarantor's fee equal to 10% of the amount loaned by CSI to GlobalTel, which was paid in cash out of the proceeds loaned to GlobalTel. F-41 INDEPENDENT AUDITORS' REPORT To the Board of Directors International Telephone Company Meriden, Connecticut We have audited the accompanying balance sheets of International Telephone Company (ITC) as of December 31, 1996 and October 31, 1997 and the related statements of operations, changes in shareholders' equity (capital deficiency) and cash flows for the years ended December 31, 1995 and December 31, 1996 and the ten months ended October 31, 1997. These financial statements are the responsibility of ITC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of International Telephone Company, at December 31, 1996 and October 31, 1997 and the results of its operations and its cash flows for the years ended December 31, 1995 and December 31, 1996 and the ten months ended October 31, 1997, in accordance with generally accepted accounting principles. As discussed in Note G[2], one of ITC's carriers has initiated litigation against ITC for collection of approximately $1.1 million. Richard A. Eisner & Company, llp New York, New York December 12, 1997 F-42 INTERNATIONAL TELEPHONE COMPANY BALANCE SHEETS
DECEMBER 31, OCTOBER 31, MARCH 31, 1996 1997 1998 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents (Notes B[1] and D)............................... $ 218,000 $ 848,000 $ 980,000 Accounts receivable (net of allowance for doubtful accounts of $25,000, $57,000 and $35,000)................. 1,250,000 1,045,000 1,374,000 Due from CSI (Note K)................. 84,000 Other current assets.................. 15,000 57,000 138,000 ----------- ----------- ----------- Total current assets................ 1,483,000 1,950,000 2,576,000 Furniture and equipment (net of accumu- lated depreciation of $130,000, $87,000, and $134,000) (Notes B[4] and C)..................................... 343,000 640,000 628,000 Security deposits....................... 130,000 130,000 130,000 ----------- ----------- ----------- $ 1,956,000 $ 2,720,000 $ 3,334,000 =========== =========== =========== LIABILITIES Current liabilities: Loan payable (Note D)................. $ 66,000 $ 3,000 Accounts payable (Note G)............. 1,224,000 2,463,000 $3,228,000 Accrued expenses...................... 142,000 67,000 111,000 Accrued commissions................... 165,000 145,000 200,000 Customer advances..................... 170,000 150,000 175,000 Due to shareholders................... 100,000 47,000 Deferred taxes........................ 6,000 Equipment lease obligations--current portion (Note E)..................... 93,000 281,000 238,000 ----------- ----------- ----------- Total current liabilities........... 1,866,000 3,209,000 3,999,000 Equipment lease obligations, less cur- rent portion (Note E).................. 21,000 292,000 234,000 ----------- ----------- ----------- 1,887,000 3,501,000 4,233,000 ----------- ----------- ----------- Commitments and contingencies (Note G) SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY) Common stock--$.01 par value, 1,200 shares authorized, 1,200 shares issued and outstanding........................ Additional paid-in capital.............. 1,000 1,000 1,000 Accumulated deficit..................... 68,000 (782,000) (900,000) ----------- ----------- ----------- Total shareholders' equity (capital deficiency)........................ 69,000 (781,000) (899,000) ----------- ----------- ----------- $ 1,956,000 $ 2,720,000 $ 3,334,000 =========== =========== ===========
See notes to financial statements F-43 INTERNATIONAL TELEPHONE COMPANY STATEMENTS OF OPERATIONS
TEN MONTHS THREE MONTHS ENDED FIVE MONTHS YEAR ENDED YEAR ENDED ENDED ---------------------- ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31, MARCH 31, MARCH 31, 1995 1996 1997 1997 1998 1998 ------------ ------------ ----------- ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) Operating revenue: Telecommunication services (Notes B[2] and H)............... $8,197,000 $ 7,603,000 $ 8,054,000 $2,126,000 $2,610,000 $4,563,000 ---------- ----------- ----------- ---------- ---------- ---------- Operating expenses: Cost of telecommunica- tion services (Note B[3])................ 5,407,000 5,070,000 6,790,000 1,698,000 1,978,000 3,499,000 Selling expenses (Note B[3])................ 1,220,000 1,099,000 715,000 211,000 252,000 412,000 General and adminis- trative expenses..... 870,000 1,022,000 1,205,000 353,000 382,000 672,000 Officers salaries..... 332,000 493,000 256,000 77,000 69,000 94,000 ---------- ----------- ----------- ---------- ---------- ---------- 7,829,000 7,684,000 8,966,000 2,339,000 2,681,000 4,677,000 ---------- ----------- ----------- ---------- ---------- ---------- Income (loss) from oper- ations before other in- come (expense)......... 368,000 (81,000) (912,000) (213,000) (71,000) (114,000) Other income (expense): Miscellaneous......... 101,000 Consulting fee........ 113,000 Loss on sale of equip- ment................. (22,000) (22,000) Interest income....... 8,000 12,000 28,000 5,000 12,000 20,000 Interest expense...... (11,000) (21,000) (57,000) (3,000) (12,000) (24,000) ---------- ----------- ----------- ---------- ---------- ---------- Income (loss) before income tax provision... 365,000 11,000 (850,000) (233,000) (71,000) (118,000) Income tax provision (Note F)............... 21,000 4,000 0 0 0 0 ---------- ----------- ----------- ---------- ---------- ---------- Net income (loss)....... $ 344,000 $ 7,000 $ (850,000) $ (233,000) $ (71,000) $ (118,000) ========== =========== =========== ========== ========== ==========
See notes to financial statements F-44 INTERNATIONAL TELEPHONE COMPANY STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
COMMON STOCK 1,200 SHARES AUTHORIZED ---------------- RETAINED SHAREHOLDERS' NUMBER OF ADDITIONAL EARNINGS EQUITY SHARES PAID-IN (ACCUMULATED (CAPITAL ISSUED AMOUNT CAPITAL DEFICIT) DEFICIENCY) --------- ------ ---------- ------------ ------------- Balance--January 1, 1995................... 1,200 $ 0 $1,000 $(283,000) $(282,000) Net income for the year ended December 31, 1995................... 344,000 344,000 ----- --- ------ --------- --------- Balance--December 31, 1995................... 1,200 0 1,000 61,000 62,000 Net income for the year ended December 31, 1996................... 7,000 7,000 ----- --- ------ --------- --------- Balance--December 31, 1996................... 1,200 0 1,000 68,000 69,000 Net loss for the ten months ended October 31, 1997............... (850,000) (850,000) ----- --- ------ --------- --------- Balance--October 31, 1997................... 1,200 0 1,000 (782,000) (781,000) Net loss for the five months ended March 31, 1998 (unaudited)....... (118,000) (118,000) ----- --- ------ --------- --------- Balance--March 31, 1998 (unaudited)............ 1,200 $ 0 $1,000 $(900,000) $(899,000) ===== === ====== ========= =========
See notes to financial statements F-45 INTERNATIONAL TELEPHONE COMPANY STATEMENTS OF CASH FLOWS
TEN MONTHS THREE MONTHS ENDED FIVE MONTHS YEAR ENDED DECEMBER 31, ENDED --------------------- ENDED ------------------------ OCTOBER 31, MARCH 31, MARCH 31, MARCH 31, 1995 1996 1997 1997 1998 1998 ----------- ----------- ----------- ---------- --------- ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)..... $ 344,000 $ 7,000 $ (850,000) $ (233,000) $(71,000) $(118,000) Adjustments to recon- cile net income (loss) to net cash provided by (used in) operating activities: Depreciation......... 53,000 69,000 73,000 16,000 30,000 50,000 Provision for doubt- ful accounts........ 195,000 43,000 25,000 32,000 10,000 Loss on sale of equipment........... 22,000 22,000 Deferred taxes....... 4,000 2,000 (6,000) Changes in: Accounts receiv- able............... (1,206,000) (33,000) 180,000 8,000 (108,000) (339,000) Other assets........ 13,000 1,000 (42,000) (29,000) (17,000) (81,000) Security deposits... (107,000) Customer advance payments........... 129,000 38,000 (20,000) 25,000 Commissions pay- able............... 140,000 (24,000) (20,000) (15,000) 22,000 55,000 Accrued expenses.... 50,000 91,000 (74,000) (98,000) 110,000 44,000 Accounts payable.... 901,000 108,000 1,239,000 142,000 595,000 765,000 Income taxes pay- able............... 17,000 (16,000) (1,000) Due to CSI.......... (344,000) (84,000) Due to Sharehold- ers................ 100,000 104,000 (34,000) (53,000) ----------- ----------- ---------- ---------- -------- --------- Net cash provided by (used in) operating activi- ties............. 533,000 286,000 626,000 (51,000) 183,000 274,000 ----------- ----------- ---------- ---------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of furniture and equipment........ (152,000) (29,000) (17,000) (3,000) (29,000) (38,000) Proceeds from sale of equipment............ 259,000 259,000 ----------- ----------- ---------- ---------- -------- --------- Net cash provided by (used in) investing activi- ties............. (152,000) (29,000) 242,000 256,000 (29,000) (38,000) ----------- ----------- ---------- ---------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from (repay- ments of) loan pay- able................. 66,000 (63,000) 149,000 (3,000) (3,000) Payments under capital leases............... (41,000) (112,000) (175,000) (22,000) (76,000) (101,000) Repayment of loan from shareholder.......... (180,000) Repayment of note pay- able................. (70,000) (140,000) ----------- ----------- ---------- ---------- -------- --------- Net cash provided by (used in) financing activi- ties............. (291,000) (186,000) (238,000) 127,000 (79,000) (104,000) ----------- ----------- ---------- ---------- -------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS....... 90,000 71,000 630,000 332,000 75,000 132,000 Cash and cash equiva- lents--beginning of pe- riod................... 57,000 147,000 218,000 218,000 905,000 848,000 ----------- ----------- ---------- ---------- -------- --------- CASH AND CASH EQUIVALENTS--END OF PERIOD................. $ 147,000 $ 218,000 $ 848,000 $ 550,000 $980,000 $ 980,000 =========== =========== ========== ========== ======== ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest............ $ 11,000 $ 21,000 $ 57,000 $ 3,000 $ 12,000 $ 24,000 Income taxes........ 26,000 SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Equipment acquired under capital lease obliga- tions (Note E)......... 267,000 634,000 634,000 Note payable issued as full settlement of telecommunication costs previously incurred.... 246,000
See notes to financial statements F-46 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS (UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998) NOTE A--ORGANIZATION AND BUSINESS International Telephone Company ( "ITC") was organized in the State of Delaware on March 3, 1993. ITC operates an international telecommunications system offering long distance telephone service to corporations and individuals located outside the United States. ITC incurred a loss of $850,000 during the ten months ended October 31, 1997, including a $1.1 million claim against ITC by a carrier for usage charges that ITC is disputing (see Note G[2]). ITC intends to vigorously defend such claim and is attempting to settle with the carrier. If ITC is not successful in its defense or in reaching a settlement, ITC believes that by reducing its administrative expenses, including officers' compensation, the cash flow from operations will be sufficient for ITC to pay such claim and to operate as a going concern. In addition, ITC believes that it will be able to obtain financing, if necessary. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) Cash equivalents: ITC considers money-market funds to be cash equivalents. (2) Revenue recognition: Telecommunication revenue is recognized at the time services are provided. (3) Cost of telecommunication revenue and selling expenses: Cost of telecommunication services are recorded as incurred and consist principally of charges from carriers for long distance services. Selling expenses includes commissions to agents, which are recorded net of chargebacks for amounts deemed uncollectible in the period the related services were provided. (4) Depreciable assets: Depreciable assets, consisting principally of telecommunication related equipment such as switches and computer equipment, are stated at cost. Equipment acquired under capital leases is stated at the present value of the future minimum lease payments. Depreciation is provided for using the straight-line method over the estimated useful lives of the assets which range from five to seven years. Equipment under capital leases is depreciated over the estimated useful life of the equipment, which is generally longer than the terms of the leases since the leases generally contain bargain purchase options which ITC intends to exercise. (5) Use of estimates in the preparation of financial statements: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. F-47 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998) (6) Deferred income taxes: ITC provides for income taxes using the asset and liability method under which deferred income taxes are recognized for the estimated future tax consequences attributable to net operating loss carryforwards and temporary differences between the basis of assets and liabilities for financial and tax reporting purposes. Such differences relate primarily to depreciation and equipment acquired under capital leases. (7) Interim Financial Statements: In the opinion of management, the unaudited balance sheet as of March 31, 1998, and the unaudited statements of operations and cash flows for the three- month periods ended March 31, 1997 and March 31, 1998, and for the five-month period ended March 31, 1998 reflect all adjustments (which include only normal recurring adjustments) necessary to present fairly the information set forth therein. The results of operations for interim periods are not necessarily indicative of results for the full year. NOTE C--FURNITURE AND EQUIPMENT Furniture and equipment consists of the following:
DECEMBER 31, OCTOBER 31, MARCH 31, 1996 1997 1998 ------------ ----------- --------- Telecommunications equipment............... $398,000 $634,000 $634,000 Furniture and fixtures..................... 6,000 6,000 8,000 Office equipment........................... 69,000 87,000 120,000 -------- -------- -------- 473,000 727,000 762,000 Less accumulated depreciation and amortiza- tion...................................... 130,000 87,000 134,000 -------- -------- -------- $343,000 $640,000 $628,000 ======== ======== ========
NOTE D--LOAN PAYABLE ITC has a $250,000 line of credit, which expires on September 30, 1998, with a financial institution. At October 31, 1997 the balance due under this line of credit was $3,000, which is collateralized by the assets of ITC, including cash on deposit with such institution. At March 31, 1998 this balance was paid. Amounts due under the line of credit bear interest at prime plus 1.5%. NOTE E--CAPITAL LEASE OBLIGATIONS ITC leases equipment under agreements with original terms of thirty-six months, which are accounted for as capital leases. During the ten months ended October 31, 1997, ITC acquired telecommunications equipment with a cost of $634,000 under a capital lease. Simultaneously, ITC exchanged telecommunications equipment with a book value of $281,000 and received proceeds of $259,000, resulting in a loss on the exchange of $22,000. The net book value of equipment held under capital lease was $196,000, $609,000 and $544,000, respectively, at December 31, 1996, October 31, 1997 and March 31, 1998. Future annual lease payments at October 31, 1997 are as follows: 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-48 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998) NOTE F--INCOME TAXES The provision for federal and state income taxes is comprised of the following:
YEAR ENDED DECEMBER 31, -------------- 1995 1996 ------- ------ Current: Federal........................................................ $11,000 $1,000 State.......................................................... 6,000 0 ------- ------ 17,000 1,000 ------- ------ Deferred: Federal........................................................ 3,000 2,000 State.......................................................... 1,000 1,000 ------- ------ 4,000 3,000 ------- ------ $21,000 $4,000 ======= ======
At October 31, 1997 and March 31, 1998, ITC has a net operating loss carryforward of approximately $1,000,000 and $1,100,000, respectively, resulting principally from its loss for income tax purposes for the ten months ended October 31, 1997 and March 31, 1998. As a result, ITC has a deferred tax asset of approximately $400,000 at October 31, 1997 and March 31, 1998. ITC has provided a valuation allowance, which increased by approximately $300,000 and during the ten months ended October 31, 1997, against the entire deferred tax asset. Accordingly, there is no provision for federal and state income taxes for the ten months ended October 31, 1997 and the three months ended January 31, 1998. The deferred tax liability of approximately $100,000 at October 31, 1997 and March 31, 1998, respectively, represents the anticipated future tax consequences attributable to temporary differences between the basis of assets and liabilities for financial and tax reporting purposes. Such differences relate to depreciation and the acquisition of equipment under a capital lease. The difference between the tax provision (benefit) and the amount that would be computed by applying the statutory federal income tax rate to income before taxes is attributable to the following:
THREE MONTHS ENDED -------------------- TEN MONTHS FIVE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31, MARCH 31, MARCH 31, 1995 1996 1997 1997 1998 1998 ------------ ------------ ----------- --------- --------- ----------- Federal income tax pro- vision (benefit) at statutory rate......... $ 124,000 $ 3,000 $(289,000) $(79,000) $(24,000) $(40,000) Provision (benefit) for state income taxes--net of U.S. fed- eral taxes............. 4,000 1,000 (34,000) (10,000) (3,000) (5,000) Valuation allowance..... (107,000) 323,000 89,000 27,000 45,000 --------- -------- --------- -------- -------- -------- $ 21,000 $ 4,000 $ 0 $ 0 $ 0 $ 0 ========= ======== ========= ======== ======== ========
F-49 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998) NOTE G--COMMITMENTS, CONTINGENCIES AND OTHER MATTERS [1] Operating leases: ITC is subject to operating leases for its office space in Florida and Connecticut, which include escalation clauses for increases in real estate taxes and certain operating expenses. Rent expense for the years ended December 31, 1995 and 1996, for the ten months ended October 31, 1997, and the three months and five months ended March 31, 1998 totaled $51,000, $69,000, $73,000, $16,000 and $26,000, respectively. Future minimum lease payments at October 31, 1997 are as follows:
YEAR ENDING OCTOBER 31, ----------- 1998................................................................. $50,000 1999................................................................. 26,000 2000................................................................. 21,000 ------- $97,000 =======
In March 1998 the Company entered into an amendment of its Florida lease, which provides for additional space, an increase in rent of approximately $22,000 per year and an extension of the lease term from August 1998 to July 2001. [2] Carrier payables: Pursuant to an agreement, ITC was committed to purchase transmission capacity from a certain carrier. ITC has requested credits from the carrier for minimum usage charges and losses incurred in connection with the unavailability of sufficient capacity. As a result a significant balance due to the carrier became past due. The carrier has initiated litigation against ITC for collection of approximately $1.1 million, which is included in accounts payable at October 31, 1997. ITC intends to vigorously defend its position and will continue to try to reach a settlement with the carrier. In May 1997, a carrier agreed to issue a credit for $210,000 in connection with the settlement of charges disputed by ITC and ITC agreed to pay the outstanding balance by December 1, 1997. The carrier subsequently presented an invoice to ITC which did not reflect such credit and ITC believes that such statement does not acknowledge a $100,000 payment made in January 1997. As a result, ITC has not made the scheduled payments and accounts payable at October 31, 1997 includes $400,000 due to this carrier. [3] Concentration of carriers: ITC purchases transmissions capacity from a limited number of domestic telephone carriers. ITC purchased 75% of such capacity from 3 telephone carriers and 85% of such capacity from 3 carriers during the year ended December 31, 1996 and the ten months ended October 31, 1997, respectively. ITC purchased substantially all of such capacity from 5 carriers during the five months ended March 31, 1998, including approximately 40% from one carrier. [4] Concentration of agents: During the years ended December 31, 1995 and 1996, the ten months ended October 31, 1997 and the five months ended March 31, 1998, 3 agents were responsible for 65%, 3 agents were responsible for 66%, 3 agents were responsible for 53%, and 5 agents were responsible for 77%, of ITC's telecommunications revenue, respectively. F-50 INTERNATIONAL TELEPHONE COMPANY NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (UNAUDITED WITH RESPECT TO DATA AS OF MARCH 31, 1998 AND FOR THE PERIODS ENDED MARCH 31, 1997 AND MARCH 31, 1998) NOTE H--TELECOMMUNICATION REVENUE: The information below summarizes telecommunication revenue by geographic area:
TEN MONTHS FIVE MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, OCTOBER 31, MARCH 31, 1995 1996 1997 1998 ------------ ------------ ----------- ----------- Europe........................ $ 3,429,000 $ 2,742,000 $2,416,000 $ 972,000 Africa........................ 2,525,000 2,508,000 2,511,000 1,425,000 Middle East................... 1,403,000 1,095,000 1,593,000 1,223,000 Latin America................. 614,000 626,000 1,110,000 722,000 Asia.......................... 88,000 529,000 74,000 11,000 Other......................... 138,000 103,000 350,000 210,000 ----------- ----------- ---------- ---------- $ 8,197,000 $ 7,603,000 $8,054,000 $4,563,000 =========== =========== ========== ==========
NOTE I--OTHER INCOME During the year ended December 31, 1996, ITC recognized $100,000 of income from a nonrefundable deposit received in connection with a potential transaction which did not close by the agreed upon date. During the ten months ended October 31, 1997, ITC recognized $113,000 of consulting fees in connection with assisting another telecommunications company in settling its charges with a carrier. NOTE J--REGULATORY MATTERS In June 1993, the Federal Communications Commission (the "FCC") granted the ITC's Application for Authority under Section 214 of the Communications Act of 1934, as amended. Pursuant to such action, ITC is authorized to resell the public switched telecommunications services of other U.S. carriers. ITC is subject to regulation in other countries in which it does business. ITC believes that an adverse determination as to the permissibility of the ITC's services under the laws and regulations of any such country would not have a material adverse long-term effect on its business. NOTE K--PROPOSED SALE OF ITC ITC and its stockholders have signed an agreement relating to the purchase by Communications Systems International, Inc. ("CSI"), another telecommunications company, of all of the outstanding shares of common stock of ITC. ITC's stockholders have received $125,000 from CSI in connection with such anticipated sale. ITC and CSI utilize each others' transmission capacity. During the three months and five months ended March 31, 1998, ITC incurred telecommunications charges aggregating approximately $179,000 and $294,000 and recognized telecommunications revenue of approximately $203,000 and $246,000 from CSI. There were no significant telecommunications charges incurred or telecommunications revenue earned from CSI during the year ended December 31, 1996 or the ten months ended October 31, 1997. F-51 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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............................................................. 5 The Acquisitions......................................................... 21 Use of Proceeds.......................................................... 23 Dividend Policy.......................................................... 24 Price Range of Common Stock.............................................. 25 Dilution................................................................. 26 Capitalization........................................................... 27 Selected Financial Data.................................................. 28 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 30 Business................................................................. 53 Management............................................................... 71 Principal and Selling Shareholders....................................... 78 Certain Transactions..................................................... 80 Description of Securities................................................ 85 Rescission Offer......................................................... 87 Shares Eligible for Future Sale.......................................... 89 Underwriting............................................................. 90 Legal Matters............................................................ 93 Experts.................................................................. 93 Additional Information................................................... 94 Glossary of Terms........................................................ 95 Index to Financial Statements............................................ F-1
-------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI- PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4,000,000 SHARES COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. COMMON STOCK ---------------------- P R O S P E C T U S ---------------------- CRUTTENDEN ROTH INCORPORATED JOHN G. KINNARD AND COMPANY, INCORPORATED KAUFMAN BROS., L.P. , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO A TIME THE REGISTRATION STATEMENT BECOMES + +EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE + +SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE LAWS OF ANY SUCH + +STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ [ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS] SUBJECT TO COMPLETION, DATED JUNE 19, 1998 PRELIMINARY PROSPECTUS SHARES [LOGO] COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. COMMON STOCK This Prospectus relates to the offer and sale by certain Securityholders (collectively, the "Registered Securityholders") of a maximum of 319,693 shares of Common Stock of Communications Systems International, Inc. and shares underlying warrants that were issued in private placements completed in December 1997, May 1998 and June 1998 and 50,000 shares issuable upon the exercise of certain warrants (collectively, the "Registered Securityholders' Shares"). The Registered Securityholders' Shares are not part of the concurrent underwritten offering and may not be offered or sold prior to 180 days from the date of this Prospectus without the consent of Representatives. The Company will not receive any proceeds from the sale of the Registered Securityholders' Shares. See "Registered Securityholders and Plan of Distribution." Prior to this Offering, the Common Stock was traded sporadically in limited amounts on the OTC Bulletin Board under the symbol CSYG. On June 17, 1998, the last reported closing high bid price of the Common Stock was $3.75 per share. The Company has applied to have the Common Stock quoted on the Nasdaq SmallCap Market under the symbol "CSGL". Upon listing on the Nasdaq SmallCap Market, the Company's Common Stock will no longer be listed on the OTC Bulletin Board. See "Price Range of Common Stock." The distribution of shares of Common Stock offered hereby by the Registered Securityholders may be effected in one or more transactions that may take place on the over-the-counter market, including ordinary broker's transactions, privately negotiated transactions or through sales to one or more dealers for sale of such securities as principals, at market prices prevailing at the time of sale, at prices relating to such prevailing market prices or at negotiated prices. Usual and customary or specifically negotiated brokerage fees or commissions may be paid by the Registered Securityholders. THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Registered Securityholders and intermediaries through whom such securities are sold may be deemed "underwriters" within the meaning of the Securities Act of 1933, as amended (the "Securities Act") with respect to the securities offered, and any profits realized or commission received may be deemed underwriting compensation. On the date of this Prospectus, a registration statement including a prospectus of even date filed under the Securities Act with respect to an underwritten public offering by the Company and certain selling shareholders of 4,000,000 shares of Common Stock and up to an additional 600,000 shares of Common Stock to cover over-allotments, if any, was declared effective by the Securities and Exchange Commission (the "Commission"). The Company will receive net proceeds of approximately $23.7 million from the sale of the shares of Common Stock included in the underwritten public offering, and will receive approximately $27.5 million in additional net proceeds if the over-allotment option is exercised in full after payment of underwriting discounts and commission and estimated expenses of the underwritten public offering. See "Concurrent Offering." [ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS] THE OFFERING Common Stock offered.............. 369,693 shares Common Stock outstanding after the offering..................... 9,217,693 shares (1) Use of Proceeds................... The Combined Company will receive no proceeds from the sale of the Registered Securityholders' Shares. Upon exercise of warrants underlying certain Registered Security-holders' Shares, the Company will receive the applicable exercise price. Risk Factors...................... The Common Stock offered hereby is speculative and involves a high degree of risk and immediate and substantial dilution and should not be purchased by investors, who cannot afford the loss of their entire investment. See "Risk Factors" and "Dilution." Proposed Nasdaq SmallCap symbol ................................. CSGL - -------- (1) Includes 4,000,000 shares of Common Stock to be issued in connection with an underwritten public offering by the Combined Company and certain selling shareholders and 162,286 shares of Common Stock (the "Bridge Shares") to be issued in connection with the notes (the "Bridge Notes") issued by CSI in December 1997 (the "December 1997 Financing") immediately prior to the closing of this Offering based on an assumed offering price of $7.00 per share of Common Stock in the Combined Company's underwritten public offering and 1,626,489 shares of Common Stock issuable in connection with the GlobalTel Merger. Does not include (i) up to 1,040,094 shares of Common Stock issuable upon exercise of outstanding options, (ii) up to 1,551,612 shares of Common Stock issuable upon the exercise of outstanding warrants, (iii) an indeterminate number of shares of Common Stock issuable upon conversion of outstanding promissory notes in the aggregate principal amount of $30,000, which have a conversion price per share equal to 90% of the average bid and ask price of the Common Stock on the day before conversion, (iv) up to 400,000 shares of Common Stock issuable upon exercise of the Representatives' Warrants and, (v) up to 295,714 shares issuable in connection with the ITC Acquisition (collectively referred to herein as "Additional Securities"). See "Management," "Description of Securities" and "Selling Securityholders' and Plan of Distribution." A-4 [ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS] CONCURRENT OFFERING On the date of this Prospectus, a registration statement including a prospectus of even date filed under the Securities Act with respect to an underwritten public offering by the Combined Company and certain selling shareholders of an aggregate of 4,000,000 shares of Common Stock and up to an additional 600,000 shares of Common Stock to cover over-allotments, if any, was declared effective by the Commission. The Combined Company will receive net proceeds of approximately $23.7 million from the sale of the shares of Common Stock included in the underwritten public offering, and will receive approximately $27.5 million in additional net proceeds if the over-allotment option is exercised in full after payment of underwriting discounts and commissions and estimated expenses of the underwritten public offering. A-5 [ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS] REGISTERED SECURITYHOLDERS AND PLAN OF DISTRIBUTION Up to 369,693 Registered Securityholders' Shares, comprised of approximately 162,286 Bridge Shares, 74,074 shares of Common Stock and 133,333 Registered Securityholders' Warrant Shares, may be offered and sold pursuant to this Prospectus by the Registered Securityholders. The Combined Company has agreed to register the public offering of the Registered Securityholders' Shares under the Securities Act concurrently with this offering and to pay all expenses in connection therewith. The Registered Securityholders' Shares have been included in the Registration Statement of which this Prospectus forms a part. Pursuant to an agreement with Cohig & Associates, Inc. ("Cohig") none of the Registered Securityholders' Shares may be sold by the Registered Securityholders prior to 180 days after the date of this Prospectus without the consent of Cohig. Except as set forth below, none of the Registered Securityholders nor their affiliates has ever held any position or office with the Combined Company or had any other material relationship with the Combined Company. The Combined Company will not receive any of the proceeds from the sale of the Registered Securityholders' Shares by the Registered Securityholders. The following table sets forth certain information with respect to the Registered Securityholders:
AMOUNT OF BENEFICIAL REGISTERED OWNERSHIP OF SECURITYHOLDERS' COMMON STOCK SELLING SECURITY HOLDERS SHARES OFFERED AFTER SALE (1) - ------------------------ ---------------- -------------- Lee E. Schlessman.............................. 11,429 -0- Swedbank Luxembourg S.A. ...................... 22,857 -0- Lee Schlessman, POA Sandra Garnett............. 5,714 -0- Susan M. Duncan................................ 5,714 -0- Susan M. Duncan Irrevocable Gift Trust......... 5,714 -0- The Schlessman Family Foundation............... 5,714 -0- Lee Schlessman, POA Gary Schlessman............ 5,714 -0- Lee Schlessman, POA Cheryl Bennett............. 5,714 -0- Cal J. Rickel & Amanda Mae Rickel.............. 5,714 -0- Arab Commerce Bank Ltd. ....................... 5,714 -0- Dr. Thomas R. Phelps, M.D. .................... 5,143 -0- Todd & Tom Rafalovich.......................... 2,857 -0- First Mortgage Income Trust.................... 5,714 -0- Adams 1977 Family Trust........................ 2,857 -0- Ted Rafalovich Living Trust.................... 2,857 -0- Germaine Robineau O'Hare Trust................. 2,857 -0- ProFutures Special Equities Fund, L.P.......... 217,407(2) -0- Network 1 Financial Securities, Inc. .......... 30,000(2) -0- ------- National Financial Services Group, Inc. ....... 10,000(2) 50,000 ------ Richard Sullivan............................... 10,000(2) 10,000
- -------- (1) Assumes all of the Bridge Shares and Registered Securityholders' Warrant Shares are sold. (2) Includes Registered Securityholders' Warrant Shares issuable upon exercise of the Selling Securityholders' Warrants. No Registered Securityholder other than Richard Sullivan ("Sullivan") and National Financial Services Group, Inc. ("National") currently owns any shares other than those being offered hereby. Accordingly, upon the sale of all the Registered Securityholders' Shares registered concurrently herewith, no Registered Securityholder other than Sullivan and National will own any of the Combined Company's outstanding shares of Common Stock. The Registered Securityholders' Shares may be offered and sold from time to time as market conditions permit in the over-the-counter market, or otherwise, at prices and terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The Registered Securityholders' Shares may be sold by A-6 [ALTERNATE PAGE FOR REGISTERED SECURITYHOLDERS' PROSPECTUS] one or more of the following methods, without limitations: (a) a block trade in which a broker or dealer so engaged will attempt to sell the Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchases; and (d) face-to-face transactions between sellers and purchaser without a broker or dealer. In effecting sales, brokers or dealers engaged by the Registered Securityholders may be deemed to be "underwriters" within the meaning of the Securities Act in connection with such sales. From time to time, one or more of the Registered Securityholders named herein may pledge, hypothecate or grant a security interest in some or all of the Registered Securityholders' Shares, owned by them, and the pledgees, secured parties or persons to whom such securities have been hypothecated shall, upon foreclosure in the event of default, be deemed to be Registered Securityholders for purposes hereof. If any of the following occurs: (a) the securities are sold at a fixed price or by option at a price other than the prevailing market price, (b) the securities are sold in block transactions and the purchaser takes the securities with an intent to resell, or (c) the compensation paid to broker- dealers is other than usual and customary discounts, this Prospectus must be amended to include additional disclosure relating to such price, arrangements and compensation terms before offers and sales of the Registered Securityholders' Shares may be made. A-7 PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the expenses expected to be incurred in connection with the issuance and distribution of the Securities offered hereby. SEC registration fee............................................. $ 13,219 NASD filing fee.................................................. 4,981 Blue Sky filing fees............................................. 20,000* Nasdaq Stock Market application fee.............................. 10,000 Legal fees and expenses.......................................... 200,000* Blue Sky legal fees.............................................. 20,000* Accounting fees and expenses..................................... 200,000* Registrar and transfer agent fees................................ 8,000 Printing and engraving........................................... 300,000* Representatives' nonaccountable expense allowance................ 500,000 Miscellaneous.................................................... 163,800* ---------- TOTAL.......................................................... $1,500,000 ==========
- -------- * Estimated. ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Registrant's Bylaws require the Registrant to indemnify all of its present and former officers and directors, or any person who may have served at the Registrant's request as an officer or a director of another corporation in which the Registrant owns shares of capital stock or of which the Registrant is a creditor, and the personal representatives of all such persons, against expenses actually and necessarily incurred in connection with the defense of any legal proceeding in which any such person was made a party by reason of having served in such capacity, unless such person is adjudged to be liable for negligence or misconduct in the performance of any duty owed to the Registrant. The Registrant's Articles of Incorporation provide that no director of the Registrant shall be liable to the Registrant or any of its shareholders for damages caused by a breach of a fiduciary duty by such director except for the breach of the duty of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing violation of the law, acts as specified in the Colorado Business Corporation Act, or any transaction from which such director received an improper personal benefit. Section 7-109-102 of the Colorado Business Corporation Act authorizes the indemnification against reasonable expenses of current and former directors made party to a proceeding if the director conducted himself in good faith, in the case of conduct in his official capacity with the corporation, the director reasonably believed that his conduct was in the best interests of the corporation, in the case of a criminal proceeding, the director had no reasonable cause to believe that his conduct was unlawful, and in all other cases, the director reasonably believed that his conduct was at least not opposed to the corporation's best interest. A corporation may not indemnify a director in connection with a proceeding (1) in which a director was adjudged liable to the corporation or, (2) charging that the director derived an improper personal benefit in which the director was adjudged liable. Section 7-109-107 provides that a corporation may indemnify an officer to the same extent that it may indemnify a director. The above discussion of the Registrant's Bylaws, Articles of Incorporation and the Colorado Business Corporation Act is only a summary and is qualified in its entirety by the full text of each of the foregoing. II-1 Reference is made to the Underwriting Agreement, the proposed form of which is filed as Exhibit 1.1, in which the Underwriters agree, under certain circumstances, to indemnify the directors and officers of the Registrant and certain other persons against certain civil liabilities. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. The Registrant made the following sales of securities within the past three years without registering such securities under the Securities Act. Except as otherwise stated, the Registrant believes that the issuance of such securities was exempt from registration pursuant to Section 4(2) of the Securities Act as transactions not involving a public offering. The purchasers in such private offerings represented their intention to acquire the securities for investment only and not with a view to the distribution thereof and appropriate legends were affixed to the stock certificates issued in such transactions. All purchasers had adequate access, through their employment or other relationships, to sufficient information about the Registrant to make an informed investment decision. No underwriter was employed with respect to any such sales. Unless otherwise stated, no underwriters or placement agents were used in connection with any of the issuances of securities described below. During 1995, the Registrant issued 58,333 shares of Common Stock to certain directors, officers and key employees of the Registrant and consultants and advisors who have rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction, pursuant to its Stock Bonus Plan. The Combined Company believes that such issuances were exempt from Registration pursuant to Rule 701 and Section 3(b) of the Securities Act. From 1995 to the present, the Registrant has granted options to purchase 369,600 shares of Common Stock to certain directors, officers and key employees of the Registrant and consultants and advisors who have rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction, pursuant to its Non-Qualified Stock Option Plan (the "Plan"). The Combined Company believes that such issuances were exempt from Registration pursuant to Rule 701 and Section 3(b) of the Securities Act. From March 1995 through June 1995, the Registrant issued an aggregate of 363,833 shares of Common Stock to accredited investors as defined under Regulation D of the Securities Act ("Accredited Investors") at a price of $1.50 per share. On July 1, 1995, the Registrant granted options for 200,000 shares to two employees who rendered bona fide services to the Registrant not in connection with the issuance of securities in a capital-raising transaction. The Combined Company believes that such issuances were exempt from Registration pursuant to Rule 701 and Section 3(b) of the Securities Act. On September 14, 1995, the Registrant issued 272,925 shares of the Common Stock to Redden Dynamics Corporation ("Redden") pursuant to a plan of merger to acquire all of the outstanding shares of capital stock of Redden. On September 26, 1995, the Registrant issued 10,000 shares of Common Stock to Elmo D. Murphy for $9.00 per share. From December 1995 through March 1996, the Registrant issued 60,000 shares of Common Stock and warrants to purchase 50,000 shares of the Registrant's Common Stock to three persons in exchange for financial consulting services. Warrants to purchase 16,667 shares of Common Stock are exercisable at $4.50 per share, warrants to purchase 16,667 shares of Common Stock are exercisable at $7.50 per share, and warrants to purchase 16,667 shares of Common Stock are exercisable at $10.50 per share. As of the date hereof, no warrants have been exercised. II-2 From June 1996 through September 1996, the Registrant issued 20,500 shares of Common Stock to 11 Accredited Investors at a price of $6.00 per share. Jason Harmon received a commission of $11,800 for acting as placement agent. In July 1996, the Registrant issued 59,692 shares of Common Stock to 37 shareholders of WIN in exchange for shares of common stock of WIN held by them. In October 1996, the Registrant issued 46,667 shares of Common Stock to Gary Kamienski in consideration for technological consulting services rendered between February 1994 and July 1995. From October 1996 to July 1997, the Registrant issued 10% convertible promissory notes in the original aggregate principal amount of $415,000 and warrants to purchase up to 13,833 shares of Common Stock to 23 financially sophisticated investors. The notes are convertible into shares of Common Stock at the option of the holder, at a conversion price equal to 90% of the average between the bid and asked prices of the Registrant's Common Stock on the day prior to the conversion date. Warrants to purchase 500 shares of Common Stock are exercisable at $.(8) per share, warrants to purchase 1,333 shares of Common Stock are exercisable at $1.56 per share, warrants to purchase 1,333 shares of Common Stock are exercisable at $1.59 per share, warrants to purchase 667 shares of Common Stock are exercisable at $1.89 per share, warrants to purchase 2,333 shares of Common Stock are exercisable at $2.25 per share, warrants to purchase 3,000 shares of Common Stock are exercisable at $2.43 per share, warrants to purchase 2,333 shares of Common Stock are exercisable at $.88 per share and warrants to purchase 2,333 shares of Common Stock are exercisable at $4.14 per share. From January 1997 through January 1998, 185,818 shares of Common Stock were issued upon conversion of approximately $389,817 principal amount of the notes, and no warrants have been exercised. In February and March 1997, the Registrant issued 15% promissory notes in the aggregate principal amount of $85,000 and warrants to purchase up to 5,667 shares of Common Stock to three financially sophisticated investors. Warrants to acquire 2,167 shares of Common Stock are exercisable at $1.14 per share, warrants to purchase 2,333 shares of Common Stock are exercisable at $1.89 per share and warrants to purchase 1.167 shares of Common Stock are exercisable at $2.25 per share. As of the date hereof, no shares of Common Stock have been issued upon conversion of the notes and no warrants have been exercised. From September through December 1997, the Registrant issued 302,880 shares of Common Stock to 30 investors (29 of whom were Accredited Investors) for $1.65 per share. In December 1997, the Registrant issued Bridge Notes in the aggregate principal amount of $2,840,000 to 17 Accredited Investors. Upon the closing of this Offering, each investor will receive 5,714 shares of Common Stock for every $100,000 invested in the Bridge Notes based on an initial offering price of $7.00 per share. The Representative acted as placement agent in the December 1997 private placement for which it received $312,400 and warrants to purchase 94,667 shares of Common Stock at a price equal to 125% of the price to public of the shares in this Offering. In March and April 1998, the Registrant issued $320,000 aggregate principal amount of notes bearing interest at 10% per annum to seven financially sophisticated investors, including three directors and a principal shareholder of the Registrant. The investors also received warrants to purchase shares of Common Stock. In May and June 1998, the Registrant issued (a) $1,250,000 principal amount of notes bearing interest at 12% per annum together with 250,000 warrants to purchase shares of Common Stock and (b) 74,074 shares of Common Stock for a $3.375 per share to ProFutures Special Equities Fund, L.P., a financially sophisticated, institutional Accredited Investor. ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement between CSI and the Representatives of the Underwriters 2.1* Plan and Articles of Merger dated September 14, 1995 between CSI and Redden Dynamics, Inc. 2.2* Stock Purchase Agreement, dated April 23, 1998, among the Registrant, ITC and its Shareholders 2.3 Agreement and Plan of Merger, dated May 29, 1998, between CSI and GlobalTel 3.1* Articles of Incorporation of CSI 3.2* Bylaws of CSI
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EXHIBIT NO. DESCRIPTION ------- ----------- 4.1* Specimen Common Stock certificate 4.2* Form of Warrant Agreement, including Form of Representatives' Warrant 5** Opinion of Parcel, Mauro & Spaanstra, P.C. 10.1* Form of 10% Convertible Promissory Note from to Registrant to various investors 10.2* Form of Warrant and Terms of Warrant between Registrant and various investors 10.3* Agreement between Registrant and Cable and Wireless 10.4* Promissory Note from CSI to Robert A. Spade 10.5* Stock Option Plan of CSI 10.6* Lease Agreement dated January 1, 1994 between CSI and The Mining Exchange Partners Limited 10.7* LINK-US/PC Agreement dated September 19, 1996 between CSI and Gary Kamienski 10.8* Form of Distributor Agreement between CSI and certain of its distributors 10.9* Form of Branch Office Agency Agreement between the Registrant and certain of its distributors 10.10* Agreement and Tariff Order dated November 1997 between the Registrant and AT&T Communications. 10.11* Employment Agreement with Robert A. Spade 10.12* Employment Agreement with Patrick R. Scanlon 10.13* Employment Agreement with Daniel R. Hudspeth 10.14* Agreement between ITC and AIT 10.15* Agreement between ITC and Trescom 10.16* Agreement between ITC and Cable & Wireless 10.17* Agreement between ITC and Teleglobe 10.18* Promissory Note from CSI to Robert A. Spade, dated April 30, 1996 10.19* Office lease dated as of June 10, 1996 by and between GlobalTel, as Lessee, and One Wilshire Arcade Imperial, Ltd., as Lessor, together with First Amendment thereto dated June 24, 1997. 10.20+* Carrier Agreement dated as of August 20, 1996 by and between Primecall, Inc. and Cable & Wireless, Inc. 10.21+* Reciprocal Telecommunications Agreement dated as of December 3, 1996 by and between STAR Vending, Inc. and Primecall, Inc. 10.22+* Switch Port Lease and Service Agreement dated as of August 7, 1996 by and between Primecall, Inc. and World Touch, Inc. 10.23+* Trilogy Telemanagement Service Agreement dated as of April 2, 1997 by and between Trilogy Telemanagement, L.L.C. and Primecall, Inc. 10.24+* Agreement for Managed Data Network Services dated April 28, 1995 (the "Equant Agreement") by and between NetStar International Telecommunications, Inc. ("NetStar") and Equant Network Services International Corporation (f/k/a Scitor International Telecommunications Services, Inc.) ("Equant"), together with Amendment No. 1 to the Scitor ITS Agreement dated February 21, 1996 between NetStar, Equant and GFP Group, Inc. 10.25+* Exclusive Services and Marketing Agreement dated as of April 15, 1997 between GlobalTel and International Business Network for World Commerce & Industry, Ltd. 10.26+* Master Task Agreement dated as of September 19, 1997 by and between GFP Group, Inc. and Novell, Inc.
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EXHIBIT NO. DESCRIPTION ------- ----------- 10.27+* Novell Business Internet Services Affiliate Service Platform Statement of Work to Agreement No. 97-GlobalTel-001 dated October 21, 1997 between Novell, Inc. and GFP Group, Inc. 10.28* Share Exchange Agreement dated as of December 29, 1995 by and among GlobalTel and certain holders of shares of capital stock of GFP Group, Inc. 10.29* Letter of Intent dated June 16, 1997 by and among Primecall, Inc., Netlink International Inc. and Kunmung Dayu Biological Engineering Co. Ltd. 10.30* Letter Agreement dated November 6, 1997 by and among GlobalTel, Alan H. Chin and Curtis E. Lew 21* List of Subsidiaries 23.1** Consent of Parcel, Mauro & Spaanstra, P.C. (contained in Exhibit 5) 23.2 Consent of Stockman Kast Ryan & Scruggs, P.C. 23.3 Consent of Richard A. Eisner & Company, LLP 23.4 Consent of Arthur Andersen LLP 24* Power of Attorney (included on page II-6 hereof) 27 Financial Data Schedule
- -------- * Previously filed. ** To be filed by amendment. + Portions of this exhibit have been omitted pursuant to an application for an order granting confidential treatment. The omitted portions have been separately filed with the Commission. ITEM 17. UNDERTAKINGS. (a) Rule 415 Offering. The Registrant hereby undertakes that it will: (1) File, during any period in which it offers or sells securities, a post-effective amendment to this Registration Statement to: (i) Include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the Registration Statement; and (iii) Include any additional or changed material information on the plan of distribution. (2) For determining liability under the Securities Act, treat each post- effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. (d) Prompt Delivery. The Registrant undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (e) Indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. II-5 In the event that a claim for indemnification against such liabilities (other than the payment by the small business issuer of expenses incurred or paid by a director, officer or controlling person of the small business issuer in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the small business issuer will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (f) Rule 430A. The Registrant hereby undertakes that it will: (i) For determining any liability under the Securities Act, treat the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (ii) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of Prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-6 SIGNATURES PURSUANT WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT TO BE SIGNED ON THEIR BEHALF BY THE UNDERSIGNED IN COLORADO SPRINGS, COLORADO, ON JUNE 17, 1998. Communications Systems International, Inc. /s/ Robert A. Spade By: _________________________________ Name: Robert A. Spade Title: Chief Executive Officer In accordance with the requirements of the Securities Act of 1933, this Amendment No. 2 to the registration statement has been signed by the following persons in the capacities and on the dates stated.
Chairman of the * Board designee June 17, 1998 - ------------------------------------- RONALD P. ERICKSON Chief Executive * Officer and Vice June 17, 1998 - ------------------------------------- Chairman of the ROBERT A. SPADE Board (Principal Executive Officer) President, Chief * Operating Officer June 17, 1998 - ------------------------------------- and Director PATRICK R. SCANLON * Chief Financial June 17, 1998 - ------------------------------------- Officer, Secretary DANIEL R. HUDSPETH and Treasurer (Principal Financial and Accounting Officer) Director * June 17, 1998 - ------------------------------------- DEAN H. CARY Director * June 17, 1998 - ------------------------------------- RICHARD F. NIPERT
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Director * June 17, 1998 - ------------------------------------- CHARLES A. SHIELDS Director designee * June 17, 1998 - ------------------------------------- BRUCE L. CROCKETT Director designee * June 17, 1998 - ------------------------------------- LYMAN C. HAMILTON Director designee * June 17, 1998 - ------------------------------------- MICHAEL S. BROWNFIELD /s/ Robert A. Spade *By: ___________________________ Attorney-in-Fact
II-8 EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 COMMUNICATION SYSTEMS INTERNATIONAL, INC. _________________ Shares/1/ Common Stock UNDERWRITING AGREEMENT June ___, 1998 CRUTTENDEN ROTH INCORPORATED JOHN G. KINNARD AND COMPANY, INCORPORATED KAUFMAN BROS., L.P. As Representatives of the Several Underwriters 18301 Von Karman, Suite 100 Irvine, California 92715 Dear Sirs: Communication Systems International, Inc., a Colorado corporation (the "Company"), and certain shareholders of the Company (the "Selling Shareholders") hereby confirm their agreement with the several underwriters named in Schedule 1 hereto (the "Underwriters"), for whom you have been duly authorized to act as representatives (in such capacity, the "Representatives"), as set forth below. If you are the only Underwriters, all references herein to the Representatives shall be deemed to be to the Underwriters. 1. SECURITIES. Subject to the terms and conditions herein contained, the ---------- Company proposes to sell an aggregate of _____ shares and the Selling Shareholders propose to sell an aggregate of _____ shares to the several Underwriters (the "Firm Securities") of the Company's Common Stock, no par value per share (the "Common Stock"). The Company also proposes to sell to the several Underwriters not more than __________ additional shares of Common Stock (15% of the Firm Securities to be sold by the Company) if requested by the Representatives as provided in Section 4 of this Agreement. Any and all shares of Common Stock to be purchased by the Underwriters pursuant to such option are referred to herein as the "Option Securities." The Firm Securities and any Option Securities are collectively referred to herein as the "Securities." 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. --------------------------------------------- (a) The Company represents and warrants to, and agrees with, each of the several Underwriters that: (i) a registration statement on Form S-1 (File No. 333-47045) with respect to the Securities, including a prospectus subject to completion, has been filed by the Company with the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and one or more amendments to ____________________ /1/Plus an option to purchase up to additional shares to cover over-allotments, if any. such registration statement may have been so filed. After the execution of this Agreement, the Company will file with the Commission either (A) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment shall have been filed, in such registration statement), with such changes or insertions as are required by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and as have been provided to and approved by the Representatives prior to the execution of this Agreement, or (B) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means the registration statement initially filed relating to the Securities, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto and including any information omitted therefrom pursuant to Rule 430A under the Act and included in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective); the term "Prospectus" means: the prospectus first filed with the Commission pursuant to Rule 424(b) under the Act; or if no prospectus is required to be filed pursuant to Rule 424(b) under the Act, the prospectus included in the Registration Statement. (ii) The Commission has not issued or, to the best knowledge of the Company, threatened or contemplated any order preventing or suspending the use of any Preliminary Prospectus; no stop order suspending the sale of the Securities in any jurisdiction has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated, and any request of the Commission for additional information (to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been complied with. When the Prospectus or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or any part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Firm Closing Date and any Option Closing Date (both as hereinafter defined), the Prospectus, as amended or supplemented at any such time, (A) contained or will contain all statements required to be stated therein in accordance with, and complied or will comply in all material respects with the requirements of, the Act and the rules and regulations of the Commission thereunder and (B) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (ii) do not apply to statements or omissions made in the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in -2- reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein. (iii) The Company and International Telephone Company, which will be a subsidiary of the Company at the Closing Date (the "subsidiary") have been duly organized and are validly existing as corporations in good standing under the laws of their respective jurisdictions of incorporation and are duly qualified to transact business as foreign corporations and are in good standing under the laws of all other jurisdictions where the ownership or leasing of their respective properties or the conduct of their respective businesses requires such qualification, except where the failure to be so qualified does not result in a material adverse change in the condition (financial or otherwise), business, prospects, net worth or results of operations of the Company and its subsidiary, taken as a whole (a "Material Adverse Effect"). (iv) The Company and its subsidiary have full power (corporate and other) to own or lease their respective properties and conduct their respective businesses as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); the Company has full power (corporate and other) and authority to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; and the Company has full power (corporate and other) and authority to execute and deliver the warrants to purchase Common Stock to be issued and sold to the Representatives under the terms of the Warrant Agreement (as hereinafter defined) in accordance with Section 6(n) hereto (the "Representatives' Warrants"). (v) The issued shares of capital stock of the Company's subsidiary have been duly authorized and validly issued, are fully paid and nonassessable and are owned beneficially by the Company free and clear of any security interests, liens, encumbrances, equities or claims, other than the pledge thereof to secure the Mandatory Redeemable Convertible Promissory Notes issued in December 1997 (the "Bridge Notes"). The Common Stock issuable pursuant to the Representatives' Warrants, when issued in accordance with the terms thereof, will be duly authorized, validly issued, fully paid and nonassessable. The Representatives' Warrants and the shares of Common Stock issuable thereunder were not and will not be issued in violation of any preemptive rights of any security holder of the Company. The Company has reserved a sufficient number of shares of Common Stock for issuance pursuant to the Representatives' Warrants. The holders of the Common Stock issuable pursuant to the Representatives' Warrants will not be subject to personal liability solely by reason of being such holders. The issuance and sale of the Common Stock pursuant to the Representatives' Warrants will be made in conformity with the applicable registration requirements or exemptions therefrom under federal and applicable state securities law. (vi) The Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). All of the issued shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable. The Firm Securities and the Option Securities have been duly authorized and at the -3- Firm Closing Date or the related Option Closing Date (as the case may be), after payment therefor in accordance herewith, will be validly issued, fully paid and nonassessable. At the Firm Closing Date or the Option Closing Date, no holders of outstanding shares of capital stock of the Company will be entitled as such to any preemptive or other rights to subscribe for any of the Securities, and no holder of securities of the Company has any right which has not been fully exercised or waived to require the Company to register the offer or sale of any securities owned by such holder under the Act in the public offering contemplated by this Agreement. (vii) The capital stock of the Company conforms in all material respects to the description thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and this Agreement, the Warrant Agreement and the Representatives' Warrants conform in all material respects to the descriptions thereof contained in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (viii) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding (A) securities or obligations of the Company or its subsidiary convertible into or exchangeable for any capital stock of the Company or its subsidiary, (B) warrants, rights or options to subscribe for or purchase from the Company or its subsidiary any such capital stock or any such convertible or exchangeable securities or obligations, or (C) obligations of the Company or its subsidiary to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options. (ix) The financial statements and schedules of the Company and its subsidiary included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present in all material respects the financial position of the Company and its subsidiary and the results of operations and cash flows as of the dates and periods therein specified. Such financial statements and schedules have been prepared in accordance with generally accepted accounting principles ("GAAP") consistently applied throughout the periods involved (except as otherwise noted therein). The selected financial data set forth under the captions "Summary Financial Information" and "Capitalization" in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) fairly present, in accordance with GAAP, as applicable, on the basis stated in the Prospectus (or such Preliminary Prospectus), the information included therein. No other financial statements or schedules are required to be included in the Registration Statement. (x) Stockman Kast Ryan & Scruggs, P.C., which has audited the financial statements of the Company, and Richard A. Eisner & Company, LLP, which has audited the financial statements of the subsidiary and delivered their reports with respect to the audited financial statements included in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are independent public accountants as required by the Act and the applicable rules and regulations thereunder. -4- (xi) The execution and delivery of this Agreement, the Warrant Agreement and the Representatives' Warrants have been duly authorized by the Company; this Agreement has been duly executed and delivered by the Company and, as of the Closing Date, the Warrant Agreement and the Representatives' Warrants will have been duly executed and delivered by the Company and this Agreement is, and the Warrant Agreement and the Representatives' Warrants when executed and delivered by the Company on the Closing Date, and in the case of the Representatives' Warrants, paid for by the Representatives, will be the valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to rights and remedies of creditors or by general equitable principles. The information in the Registration Statement and the Prospectus insofar as it relates to the Representatives' Warrants, in each case as of the date on which the Registration Statement is declared effective by the Commission, the Closing Date and any Option Closing Date, is true, correct and complete in all material respects. (xii) No legal or governmental proceedings are pending to which the Company or its subsidiary is a party or to which the property of the Company or its subsidiary is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and, to the Company's knowledge, no such proceedings have been threatened against the Company or its subsidiary or with respect to any of their respective properties; and no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or filed as required. (xiii) The issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement and of the Representatives' Warrants to the Representatives by the Company pursuant to the Warrant Agreement; the execution and delivery of this Agreement, the Warrant Agreement and the Representatives' Warrants by the Company; the compliance by the Company with the provisions of this Agreement, the Warrant Agreement and the Representatives' Warrants; and the consummation of all transactions contemplated therein do not (A) require the consent, approval, authorization, registration or qualification of or with any court, government or governmental authority, domestic or foreign, except such as have been obtained, such as may be required under state securities or blue sky laws, such as may be required by the National Association of Securities Dealers, Inc. (the "NASD") and, if the Registration Statement filed with respect to the Securities (as amended) is not effective under the Act as of the time of execution hereof, such as may be required (and shall be obtained as provided in this Agreement) under the Act, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its subsidiary is a party or by which the Company or its subsidiary or any of their respective properties are bound, or the charter documents or by-laws of the Company or its subsidiary, or -5- any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator applicable to the Company or its subsidiary, which would have a Material Adverse Effect. (xiv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), neither the Company nor its subsidiary has sustained any loss or interference with their respective businesses or properties having or resulting in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding and there has not been any event, circumstance, or development that results in, or that the Company believes would result in, a Material Adverse Effect, except in each case as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xv) The Company and its subsidiary have not, directly or indirectly (except for the sale of Securities under this Agreement), (i) taken any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) since the filing of the Registration Statement (A) sold, bid for, purchased, or paid anyone any compensation for soliciting purchases of, the Securities or (B) paid or agreed to pay to any person any compensation for soliciting another to purchase any other securities of the Company. (xvi) (a) The Company and its subsidiary possess all certificates, authorizations and permits issued by the appropriate federal, state or foreign regulatory authorities necessary to conduct their respective businesses except where the failure to possess any such item would not have a Material Adverse Effect, and (b) neither the Company nor its subsidiary has received any notice of proceedings relating to the revocation or modification of any such certificate, authorization or permit that, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, except as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xvii) The Company is not an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"), and this transaction will not cause the Company to become an investment company subject to registration under the 1940 Act. (xviii) The Company and its subsidiary have filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a Material Adverse Effect) and has paid all taxes required to be paid by them and any other assessment, fine or penalty levied against them, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being -6- contested in good faith or as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xix) Except for the shares of capital stock of the subsidiary owned by the Company, and except with respect to the merger pending with GlobalTel Resources, Inc. ("GlobalTel") neither the Company nor its subsidiary owns any shares of stock or any other equity securities of any corporation or has any equity interest in any firm, partnership, association or other entity. (xx) The books, records and accounts of the Company and its subsidiary accurately and fairly reflect, in reasonable detail, the transactions in and dispositions of the assets of the Company and its subsidiary, respectively. The Company and its subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurance that (A) transactions are executed in accordance with management's general or specific authorizations; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (C) access to assets is permitted only in accordance with management's general or specific authorization; and (D) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xxi) Except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), no default exists and no event has occurred that, with notice or lapse of time or both, would constitute a default, in the due performance and observance of any term, covenant or condition of any contract, indenture, mortgage, deed of trust, lease or other agreement or instrument to which the Company or its subsidiary is a party or by which the Company or its subsidiary or any of their respective properties is bound or may be affected, in any respect that would have a Material Adverse Effect. The agreements to which the Company or its subsidiary is a party described in the Registration Statement are valid agreements, enforceable by the Company or its subsidiary, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements. (xxii) The Company and the subsidiary have not distributed and, prior to the later of (A) the Firm Closing Date or any Option Closing Date and (B) the completion of the distribution of the Securities, will not distribute any written offering material in connection with the offering and sale of the Securities other than the Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or other materials, if any, permitted by the Act. (xxiii) The Company and its subsidiary have good and marketable title to all personal property owned by each of them, in each case free and clear of any security -7- interests, liens, encumbrances, equities, claims and other defects, except for those relating to debts of the Company or its subsidiary described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) and those that do not interfere with the use made or proposed to be made of such property by the Company or its subsidiary, and any real property and buildings held under lease by the Company or its subsidiary are held under valid, subsisting and enforceable leases (except as enforceability may be limited by the effect of bankruptcy, insolvency, reorganization, moratorium and other similar laws relating to rights and remedies of creditors or by general equitable principles), with such exceptions as are not material and do not interfere with the use made or proposed to be made of such property and buildings by the Company or its subsidiary, in each case except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The Company and its subsidiary own or lease all such properties as are necessary to their respective operations as now conducted and as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxiv) No labor dispute with the employees of the Company or its subsidiary exists or to the Company's knowledge, is threatened or imminent that could result in a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the Company is not aware of an existing, imminent or threatened labor disturbance by the employees of any principal suppliers, manufacturers, contractors or others that could result in a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxv) The Company and its subsidiary own or possess all material trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by them in connection with their respective businesses, and neither the Company nor its subsidiary has received any notice of infringement of or conflict with asserted rights of any third party with respect to any of the foregoing which, singly or in the aggregate, if the subject of unfavorable decisions, rulings or findings, would have a Material Adverse Effect, except as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). The description of the Company's agreements with its independent sales agents and carriers and resellers, and the agreements relating to its strategic relationships, contained in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), are true and complete in all material respects. All such agreements are valid, binding and in full force and effect and neither the Company nor its subsidiary is, or has received any notice that it is, in default (or with the giving of notice or lapse of time or both, would be in default) under any such agreements. (xxvi) The Company and its subsidiary are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which they are engaged; and neither the -8- Company nor its subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect, except as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). (xxvii) The Common Stock will be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), on the date hereof and is traded on the OTC Bulletin Board and, upon notice of issuance, the Securities will be traded on the Nasdaq SmallCap Market, and the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act or delisting the Common Stock from the OTC Bulletin Board or that could in the future cause the Common Stock to be delisted from the Nasdaq SmallCap Market, nor has the Company received any notification that the Commission or The Nasdaq Stock Market, Inc. is contemplating terminating such registration or listing. (xxviii) Neither the Company nor the subsidiary has at any time during the last five (5) years (A) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (B) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (xxix) Any pro forma financial or other information and related notes included in the Registration Statement, each Preliminary Prospectus and the Prospectus comply (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will comply) in all material respects with the requirements of the Act and the rules and regulations of the Commission thereunder and present fairly in all material respects the pro forma information shown, as of the dates and for the periods covered by such pro forma information. Such pro forma information, including any related notes and schedules, has been prepared on a basis consistent with the historical financial statements and other historical information, as applicable, included in the Registration Statement, the Preliminary Prospectus and the Prospectus, except for the pro forma adjustments specified therein, and give effect to assumptions made on a reasonable basis to give effect to historical and, if applicable, proposed transactions described in the Registration Statement, each Preliminary Prospectus and the Prospectus. (xxx) Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding loans, advances or guaranties of indebtedness by the Company or its subsidiary to or for the benefit of any of (i) its "affiliates," as such term is defined in the Act and the rules and regulations thereof or (ii) any of the members of the families of any of them. (xxxi) The Company and its subsidiary have no liability, absolute or contingent, relating to: (A) public health or safety; (B) worker health or safety; (C) -9- product defect or warranty (except, as to product defect or warranty, as is disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus)); or (D) pollution, damage to or protection of the environment, including, without limitation, relating to damage to natural resources, emissions, discharges, releases or threatened releases of hazardous materials into the environment (including, further without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or otherwise relating to the manufacture, processing, use, treatment, storage, generation, disposal, transport or handling of any hazardous materials, except any such liability that would not result in a material adverse effect. The Company is not aware of the date hereof of the existence of any such liability, absolute or contingent, of the type discussed above. As used herein, "hazardous material" includes chemical substances, wastes, pollutants, contaminants, hazardous or toxic substances, constituents, materials or wastes, whether solid, gaseous or liquid in nature. (xxxii) Neither the Company nor its subsidiary is presently doing business with the government of Cuba or with any person or affiliate located in Cuba. (b) Any certificate signed by any officer of the Company and delivered to the Representatives or to counsel for the Representatives pursuant to this Agreement shall be deemed a representation and warranty by the Company to each Underwriter, as to the matters covered thereby. (c) The Representatives shall receive, at the Firm Closing Date and any Option Closing Date, representations and warranties of GlobalTel which shall be identical in form and substance to the representations and warranties of the Company set forth in Section 2(a) above. Such representations and warranties shall be set forth in a certificate by the executive officers of GlobalTel and delivered to the Representatives or to counsel for the Representatives. 3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDERS. Each ---------------------------------------------------------- Selling Shareholder severally represents and warrants to, and agrees with, the Company and the Underwriters that: (a) Such Selling Shareholder has, and at the Closing Date will have, valid marketable title to the Firm Securities proposed to be sold by such Selling Shareholder hereunder on such date and full right, power and authority to enter into this Agreement and to sell, assign, transfer and deliver such Firm Securities hereunder, free and clear of all voting trust arrangements, liens, encumbrances, equities, claims and community property rights; and upon delivery of and payment for such Firm Securities hereunder, the Underwriters will acquire valid marketable title thereto, free and clear of all voting trust arrangements, liens, encumbrances, equities, claims and community property rights. (b) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or which might be reasonably expected to cause or result, under the Exchange Act (as hereinafter defined) or otherwise, in stabilization or manipulation of the price of the Firm Securities, the Option Securities or other shares of Common Stock to facilitate the sale or resale of the Firm Securities or other shares of Common Stock. (c) Such Selling Shareholder has executed and delivered a Selling Shareholders' Power of Attorney ("Power of Attorney") between the Selling Shareholder and Parcel, Mauro & Spaanstra, P.C. (the "Agent"), naming the Agent as such Selling Shareholder's attorney-in-fact and, by the execution by any Agent of this Agreement, such Agent hereby represents and warrants that he has been duly appointed as Attorney-in-Fact by each Selling Shareholder pursuant to the Power of Attorney for the purpose of entering into and carrying out this Agreement, and the Power of Attorney has been duly executed by such Selling Shareholder and a copy thereof has been delivered to you. (d) Such Selling Shareholder has deposited in custody with the custodian, pursuant to a Letter of Transmittal and Custody Agreement ("Custody Agreement") with Parcel, Mauro & Spaanstra, P.C. (the "Custodian"), certificates in negotiable form for the Firm Securities to be sold hereunder by such Selling Shareholder, for the purpose of further delivery pursuant to this Agreement. Such Selling Shareholder agrees that the Firm Securities to be sold by such Selling Shareholder on deposit with the Custodian are subject to the interests of the Company, the Underwriters and the other Selling Shareholders, that the arrangements made for such deposit are to that extent irrevocable, and that the obligations of such Selling Shareholder hereunder shall not be terminated except as provided in this Agreement or in the Custody Agreement by any act of such Selling Shareholder, by operation of law, whether, in the case of an individual Selling Shareholder, by the death or incapacity of such Selling Shareholder or, in the case of a trust or estate, by the death of the trustee or trustees or the executor or executors or the termination of such trust or estate, or, in the case of a partnership or corporation, by the dissolution, winding-up or other event affecting the legal existence of such entity, or by the occurrence of any other event. If any individual Selling Shareholder, trustee or executor should die or become incapacitated, if any such trust, estate, partnership or corporation should be terminated, or if any other event should occur before the delivery of the Firm Securities to be sold by such Selling Shareholder hereunder, the documents evidencing such Firm Securities then on deposit with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement and of the Custody Agreement as if such death, incapacity, termination or other event had not occurred, regardless of whether or not the Custodian shall have received notice thereof. Each Agent has been duly authorized by such Selling Shareholder to execute and deliver this Agreement and the Custodian has been authorized to receive and acknowledge receipt of the proceeds of sale of the Firm Securities to be sold by such Selling Shareholder against delivery thereof and otherwise act on behalf of such Selling Shareholder. (e) Each Preliminary Prospectus, insofar as it has related to such Selling Shareholder and, to the knowledge of such Selling Shareholder in all other respects, as of its date, has conformed in all material respects with the requirements of the Act and, as of this date, has not included any untrue statement of material fact or omitted to state a material fact necessary to make the statements therein not misleading; and when the Registration Statement became effective, and at all times subsequent thereto, up to the Closing Date, (1) such parts of the Registration Statement and the Prospectus and any amendments or supplements thereto as relate to such Selling Shareholder, and the Registration Statement and the Prospectus and any amendments or supplements thereto, to the knowledge of such Selling Shareholder, in all other respects, will contain all statements that are required to be stated therein in accordance with the Act and the Regulations and will in all material respects conform to the requirements of the Act and the Regulations, and (2) neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, as it relates to such Selling Shareholder, and, to the knowledge of such Selling Shareholder in all other respects, will include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. (f) Such Selling Shareholder will not sell, contract to sell or otherwise dispose of any Common Stock for a period of 180 days after this Agreement becomes effective without the prior written consent of the Company and the Representative. (g) Except as disclosed in the Prospectus, such Selling Shareholder is not a party to any formal or informal voting agreements, understandings or arrangements with respect to the voting of the Common Stock. 4. PURCHASE, SALE AND DELIVERY OF THE SECURITIES. --------------------------------------------- (a) On the basis of the representations, warranties, agreements and covenants herein contained and subject to the terms and conditions herein set forth, (i) the Company and the Selling Shareholders agree to sell Firm Securities, (ii) each of the Underwriters agrees to purchase from the Company and the Selling Shareholders at a purchase price of [$ ] per share, an aggregate number of Firm Securities set forth opposite the name of such Underwriter in Schedule 1 hereto. One or more certificates in definitive form for the Firm Securities that the several Underwriters have agreed to purchase hereunder from the Company and the Selling Shareholders, in such denomination or denominations and registered in such name or names as the Representatives request upon notice to the Company at least 48 hours prior to the Firm Closing Date, shall be delivered by or on behalf of the Company to the Representatives for the respective accounts of the Underwriters, against payment by or on behalf of the Underwriters of the aggregate purchase price therefor by wire transfer in same day funds (the "Wired Funds") to the account of the Company. Such delivery of and payment for the Firm Securities shall be made at the offices of Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715, at 6:30 a.m., Pacific time, on June _____, 1998, or at such other place, time or date as the Representatives and the Company may agree upon or as the Representatives may determine -10- pursuant to Section 10 hereof, such time and date of delivery against payment being herein referred to as the "Firm Closing Date." The Company will make such certificate or certificates for the Firm Securities available for checking and packaging by the Representatives at the offices of the Company's transfer agent or registrar at least 24 hours prior to the Firm Closing Date or, if available, will coordinate the transfer of the Firm Securities to the Underwriters through the book-entry facilities of the Depository Trust Company. (b) For the sole purpose of covering any over-allotments in connection with the distribution and sale of the Firm Securities as contemplated by the Prospectus, on the basis of the covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company hereby grants to the several Underwriters an option to purchase the Option Securities. The purchase price to be paid for any Option Securities shall be the same price per share as the price per share for the Firm Securities set forth above in paragraph (a) of this Section 4. The option granted hereby may be exercised as to all or any part of the Option Securities from time to time within 45 days after the date of the Prospectus (or, if such 45th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the Nasdaq SmallCap Market is open). The Underwriters shall not be under any obligation to purchase any of the Option Securities prior to the exercise of such option. The Representatives may from time to time exercise the option granted hereby by giving notice in writing or by telephone (confirmed within 24 hours in writing) to the Company setting forth the aggregate number of Option Securities as to which the several Underwriters are then exercising the option and the date and time for delivery of and payment for such Option Securities. Any such date of delivery shall be determined by the Representatives but shall not be earlier than two business days or later than five business days after such exercise of the option and, in any event, shall not be earlier than the Firm Closing Date. The time and date set forth in such notice, or such other time on such other date as the Representatives and the Company may agree upon or as the Representatives may determine pursuant to Section 10 hereof, is herein called the "Option Closing Date" with respect to such Option Securities. Upon exercise of the option as provided herein, the Company shall become obligated to sell to each of the several Underwriters, and, subject to the terms and conditions herein set forth, each of the Underwriters (severally and not jointly) shall become obligated to purchase from the Company, the same percentage of the total number of the Option Securities as to which the several Underwriters are then exercising the option as such Underwriter is obligated to purchase of the aggregate number of Firm Securities, as adjusted by the Representatives in such manner as it deems advisable to avoid fractional shares. If the option is exercised as to all or any portion of the Option Securities, one or more certificates in definitive form for such Option Securities, and payment therefor, shall be delivered on the related Option Closing Date in the manner, and upon the terms and conditions, set forth in paragraph (a) of this Section 4, except that reference therein to the Firm Securities and the Firm Closing Date shall be deemed, for purposes of this paragraph 4(b), to refer to such Option Securities and Option Closing Date, respectively. (c) It is understood that you, individually and not as the Representatives, may (but shall not be obligated to) make payment on behalf of any Underwriter or Underwriters for any of the Securities to be purchased by such Underwriter or Underwriters. No such -11- payment shall relieve such Underwriter or Underwriters from any of its or their obligations hereunder. (d) The Company hereby acknowledges that the wire transfer by or on behalf of the Underwriters of the purchase price for any Securities does not constitute closing of a purchase and sale of the Securities. Only execution and delivery of a receipt (by facsimile or otherwise) for the Securities by the Underwriters indicates completion of the closing of a purchase of the Securities from the Company. Furthermore, in the event that the Underwriters wire funds to the Company prior to the completion of the closing of a purchase of Securities, the Company hereby acknowledges that until the Underwriters execute and deliver a receipt for the Securities, by facsimile or otherwise, the Company will not be entitled to the wired funds and shall return the wired funds received by it to the Underwriters as soon as practicable (by wire transfer of same-day funds) upon demand. In the event that the closing of a purchase of Securities is not completed and the wired funds are not returned by the Company to the Underwriters on the same day the wired funds were received by the Company, the Company agrees to pay to the Underwriters in respect of each day the wired funds are not returned by it, in same-day funds, interest at the Prime Rate (as defined in Section 9(a)) on the date hereof on the amount of such wire funds received by them. (e) At the Firm Closing Date and any Option Closing Date, the Company shall pay to the Representatives a non-accountable expense allowance equal to 2 1/2% of the gross proceeds from the sale of the Securities. 5. OFFERING BY THE UNDERWRITERS. Upon your authorization of the release ---------------------------- of the Firm Securities, the several Underwriters propose to offer the Firm Securities for sale to the public upon the terms set forth in the Prospectus. 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with each ------------------------ of the Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If required, the Company will file the Prospectus and any amendment or supplement thereto with the Commission in the manner and within the time period required by Rule 424(b) under the Act. During any time when a prospectus relating to the Securities is required to be delivered under the Act, the Company (i) will comply with all requirements imposed upon it by the Act and the rules and regulations of the Commission thereunder to the extent necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and of the Prospectus, as then amended or supplemented, and (ii) will not file with the Commission the Prospectus or the amendment referred to in the second sentence of Section 2(a)(i) hereof, any amendment or supplement to such Prospectus, or any amendment to the Registration Statement of which the Representatives shall not previously have been advised and furnished with a copy for a reasonable period of time prior to the proposed filing and as to which filing the Representatives shall not have given their consent. The Company will prepare and file with the Commission, in accordance with the rules and regulations of the Commission, promptly upon request by the Representatives or counsel for the Representatives, any amendments to the Registration Statement or amendments or supplements to the Prospectus that may be deemed necessary or advisable in connection with the distribution of the Securities by the several Underwriters, and will use its best efforts to cause any such amendment to the Registration Statement to be declared effective by the Commission as promptly as possible. -12- The Company will advise the Representatives, promptly after receiving notice thereof, of the time when the Registration Statement or any amendment thereto has been filed or declared effective or the Prospectus or any amendment or supplement thereto has been filed and will provide to the Representatives copies of each such filing. (b) The Company will advise the Representatives, promptly after receiving notice or obtaining knowledge thereof, of (i) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any amendment thereto or any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, (ii) the suspension of the qualification of the Securities for offering or sale in any jurisdiction, (iii) the institution, threatening or contemplation of any proceeding for any such purpose, or (iv) any request made by the Commission for amending the Registration Statement, for amending or supplementing the Prospectus or for additional information. The Company will use its best efforts to prevent the issuance of any such stop order and, if any such stop order is issued, to obtain the withdrawal thereof as promptly as possible. (c) The Company will arrange for the qualification of the Securities for offering and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Securities; provided, however, that in connection therewith the Company shall not be required to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction. If, after the public offering of the Securities by the Underwriters and during such period, the Underwriters propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, the Representatives will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or counsel for the Representatives, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Securities may be sold by the Underwriters to use the Prospectus, as from time to time so amended or supplemented, in connection with the sale of the Securities in accordance with the applicable provisions of the Act and the rules and regulations thereunder for such period. (d) If, at any time prior to the later of (i) the final date when a prospectus relating to the Securities is required to be delivered under the Act or (ii) the Option Closing Date, any event occurs as a result of which the Prospectus, as then amended or supplemented, would include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if for any other reason it is necessary at any time to amend or supplement the Prospectus to comply with the Act or the rules or regulations of the Commission thereunder, the Company will promptly notify the Representatives thereof and, subject to Section 6(a) hereof, will prepare and file with the Commission, at the Company's expense, an amendment to the Registration Statement or an amendment or supplement to the Prospectus that corrects such statement or omission or effects such compliance. -13- (e) The Company will, without charge, provide (i) to the Representatives and to counsel for the Representatives a signed copy of the registration statement originally filed with respect to the Securities and each amendment thereto (in each case including exhibits thereto), (ii) to each other Underwriter, a conformed copy of such registration statement and each amendment thereto (in each case without exhibits thereto) and (iii) so long as a prospectus relating to the Securities is required to be delivered under the Act, as many copies of each Preliminary Prospectus or the Prospectus or any amendment or supplement thereto as the Representatives may reasonably request; without limiting the application of clause (iii) of this sentence, the Company shall, as soon as practicable following the determination of the public offering price, deliver to the Underwriters, without charge, as many copies of the Prospectus and any amendment or supplement thereto as the Representatives may reasonably request for purposes of confirming orders that are expected to settle on the Firm Closing Date. (f) The Company, as soon as practicable, will make generally available to its security holders and to the Representatives an earnings statement of the Company and its subsidiary that satisfies the provisions of Section 11(a) of the Act and Rule 158 thereunder. (g) The Company will apply the net proceeds from the sale of the Securities as set forth under "Use of Proceeds" in the Prospectus. (h) The Company will not, directly or indirectly, without the prior written consent of the Representatives on behalf of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of any option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 12 months after the date hereof, except pursuant to this Agreement, issuances pursuant to warrants and options outstanding prior to the date hereof, stock options granted under the company's stock option plan to officers, employees, directors and consultants and any stock issued on exercise thereof or issuances in connection with an acquisition or business combination transaction. If the Company plans to issue any Common Stock or other securities in connection with an acquisition or a business combination transaction, the Company shall provide the Representatives with 15 days' advance written notice of its intention to so issue such securities including the terms of any such proposed transaction. (i) The Company will not, directly or indirectly, (i) take any action designed to cause or to result in, or that has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities or (ii) for a period of 12 months after the date hereof (A) sell, bid for, purchase, or pay anyone any compensation for soliciting purchases of, the Securities or (B) pay or agree to pay to any person any compensation for soliciting another to purchase any other securities of the Company. The Company will not, directly or indirectly, without the prior written consent of the Representatives on behalf of the Underwriters, offer, purchase, offer to purchase, contract to purchase, grant any option to sell or otherwise purchase or acquire (or announce any offer, purchase, offer of purchase, contract to purchase, grant of any option to sell or other purchase or acquisition of) any -14- shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 12 months after the date hereof. (j) The Company will obtain the lockup agreements described in Section 8(e) hereof prior to the Firm Closing Date. (k) The Company will cause the Securities to be duly traded on the Nasdaq SmallCap Market prior to the Firm Closing Date. The Company will use its best efforts to ensure that the Securities continue to be traded on the Nasdaq SmallCap Market following the Firm Closing Date. (l) During a period of five years commencing with the date of this Agreement, the Company will promptly furnish to the Representatives and to each Underwriter who may so request in writing copies of (i) all periodic and special reports furnished by it to shareholders of the Company, (ii) all information, documents and reports filed by it with the Commission, or the Nasdaq SmallCap Market, (iii) all press releases and material news items or articles in respect of the Company, its services or affairs released or prepared by the Company (other than promotional and marketing materials disseminated solely to customers and potential customers of the Company in the ordinary course of business) and (iv) any additional information concerning the Company or its business which the Representatives may reasonably request. (m) The Company will use its best efforts to maintain insurance of the types and in the amounts which it deems adequate for its business consistent with insurance coverage maintained by companies of similar size and engaged in similar businesses including, but not limited to, general liability insurance covering products sold or distributed by the Company, all real and personal property owned or leased by the Company and its subsidiary, and against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (n) On the Closing Date, the Company will sell to the Representatives, at a purchase price of $0.001 per warrant, warrants to purchase shares of Common Stock (in an amount equal to one warrant for each ten Firm Shares sold). Such Representatives' Warrants will be issued pursuant to the terms of the Warrant Agreement and will have an exercise price equal to [$________], subject to adjustment, will be exercisable during the period beginning on the first anniversary of the Effective Date and ending on the fifth anniversary of the Effective Date and will contain customary anti- dilution and registration rights provisions. (o) Comply with all periodic reporting and proxy solicitation requirements which may from time to time be applicable to the Company as a result of the Company's registration under Section 12 of the Exchange Act on a Registration Statement on Form 8-A. (p) Refrain from filing a Form S-8 Registration Statement (or successor form of registration statement) in connection with the issuance of the Company's securities to employees, consultants or advisors for services for a period of twenty-four (24) months from the Effective Date of the Registration Statement without the Representatives' prior written consent. -15- (q) For a period of two years after the Effective Date the Company will not conduct, and for a period of at least five years following the Effective Date of the Registration Statement will provide the Representatives at least 30 days' prior written notice of, a sale of any securities of the Company in a "Regulation S" transaction, with such notice to specify the type of securities to be offered, the purchase price thereof and the proposed closing date of the Regulation S transaction. (r) Inform the Florida Department of Banking and Finance at any time prior to the consummation of the distribution of the Firm Securities and the Option Securities by the Representatives if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba. Such information will be provided within 90 days after the commencement thereof or after a change occurs with respect to previously reported information. 7. EXPENSES. The Company will pay all costs and expenses incident to the -------- performance of its obligations under this Agreement, whether or not the transactions contemplated herein are consummated or this Agreement is terminated pursuant to Section 12 hereof, including all costs and expenses incident to (i) the printing or other production of documents with respect to the transactions, including any costs of printing the Registration Statement originally filed with respect to the Securities and any amendment thereto, any Preliminary Prospectus and the Prospectus and any amendment or supplement thereto, this Agreement and any blue sky memoranda, (ii) all arrangements relating to the delivery to the Underwriters of copies of the foregoing documents, (iii) the fees and disbursements of the counsel, the accountants and any other experts or advisors retained by the Company, (iv) preparation, issuance and delivery to the Underwriters of any certificates evidencing the Securities, including transfer agent's and registrar's fees, (v) the qualification of the Securities under state securities and blue sky laws, including filing fees and fees and disbursements of counsel for the Company, (vi) the filing fees of the Commission and the NASD relating to the Securities, (vii) any additional listing fees of the Securities on the Nasdaq SmallCap Market, (viii) the Company's travel expenses in connection with meetings with the brokerage community and institutional investors and expenses associated with hosting such meetings, including meeting rooms, meals, facilities and ground transportation expenses, as well as any related expense for roadshow presentations transmitted over the Internet, and (ix) the cost of preparing a total of eight bound volumes of the public offering documents for the Representatives and their counsel. If the sale of the Securities provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 8 hereof is not satisfied, because this Agreement is terminated pursuant to Section 12 hereof or because of any failure, refusal or inability on the part of the Company to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder other than by reason of a default by any of the Underwriters, the Company will reimburse the Representatives upon demand for all reasonable out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Securities. The Company shall not in any event be liable to any of the Underwriters for the loss of anticipated profits from the transactions covered by this Agreement. If the sale of the Securities provided for herein is consummated, the Underwriters shall pay all of their own out-of-pocket expenses (including the fees and disbursements of their counsel) and the Company shall have no obligation therefor. 8. CONDITIONS OF THE UNDERWRITERS' OBLIGATIONS. The obligations of the ------------------------------------------- several Underwriters to purchase and pay for the Firm Securities shall be subject, in the sole discretion of -16- the Representatives, to the accuracy of the representations and warranties of the Company and the Selling Shareholders contained herein as of the date hereof and as of the Firm Closing Date, as if made on and as of the Firm Closing Date, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company and the Selling Shareholders of their covenants and agreements hereunder and to the following additional conditions: (a) If the Registration Statement or any amendment thereto filed prior to the Firm Closing Date has not been declared effective as of the time of execution hereof, the Registration Statement or such amendment shall have been declared effective not later than the earlier of (i) 11:00 A.M., Pacific time, on the date on which the amendment to the Registration Statement originally filed with respect to the Securities or to the Registration Statement, as the case may be, containing information regarding the offering price of the Securities has been filed with the Commission, and (ii) such later time and date as shall have been consented to by the Representatives; if required, the Prospectus and any amendment or supplement thereto shall have been filed with the Commission in the manner and within the time period required by Rule 424(b) under the Act; no stop order suspending the effectiveness of the Registration Statement or any amendment thereto shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Representatives, shall be contemplated by the Commission; and the Company shall have complied with any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise). (b) The Representatives shall have received an opinion, dated the Firm Closing Date, of Parcel, Mauro & Spaanstra, P.C., counsel for the Company and the Selling Shareholders, dated the Closing Date (and stating that it may be relied on by Berliner Zisser Walter & Gallegos, P.C., counsel to the Representatives, in rendering their opinion), to the effect that: (i) the Company and its subsidiary have been duly organized and are validly existing as corporations in good standing under the laws of the States of Colorado and Delaware, respectively, and are duly qualified to transact business as foreign corporations and are in good standing under the laws of the jurisdictions in which the operations or business conducted require such qualification; (ii) the Company and the subsidiary have the corporate power to own or lease their properties and conduct their business as described in the Registration Statement and the Prospectus, and the Company has the corporate power to enter into this Agreement and to carry out all the terms and provisions hereof to be carried out by it; (iii) the issued and outstanding shares of capital stock of the Company's Subsidiary has been duly authorized and validly issued, are fully paid and nonassessable and are owned by the Company free and clear of any perfected security interests (other than those disclosed in the Prospectus) and the Prospectus accurately describes, to the extent so described, any material corporation, association, or other entity owned or controlled, or to be owned and controlled, directly or indirectly, by the Company; -17- (iv) the Company has an authorized, issued and outstanding capitalization as set forth in the Prospectus; all of the issued and outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities; the Firm Securities have been duly authorized by all necessary corporate action of the Company and, when issued and delivered to and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable; no holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Securities; no holders of securities of the Company are entitled to have such securities registered under the Registration Statement except for those which have been so registered; the statements set forth under the heading "Description of Securities" in the Prospectus, insofar as such statements purport to summarize certain provisions of the capital stock of the Company, provide a fair summary of such provisions; and the statements set forth under the headings "Risk Factors - Shares Eligible for Future Sale; Rights to Acquire Shares," "Risk Factors - Regulation," "Risk Factors - Risks Associated with International Operations," "Risk Factors - Legal Proceedings," "Risk Factors - Charter and Statutory Provisions," "Business - Services," "Business - Regulation," "Business - Network and Operations," "Management - Stock Option Plan," "Rescission Offer," "Certain Transactions," "Shares Eligible for Future Sale," "Description of Securities" in the Prospectus, insofar as such statements constitute a summary of the legal matters, documents or proceedings referred to therein, provide a fair and accurate summary of such legal matters, documents and proceedings in all material respects; (v) the execution and delivery of this Agreement and the Warrant Agreement have been duly authorized by all necessary corporate action of the Company, and this Agreement and the Warrant Agreement have been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, are binding agreements of the Company, enforceable in accordance with their terms, except insofar as indemnification provisions may be limited by applicable law and to which counsel need not express any opinion and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (vi) no legal or governmental proceedings are pending to which the Company or the subsidiary is a party or to which the property of the Company or the subsidiary is subject that are required to be described in the Registration Statement or the Prospectus and are not described therein and, to counsel's knowledge, no such proceedings have been threatened against the Company or its subsidiary or with respect to any of their respective properties; no contract or other document is required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that is not described therein or filed as required; (vii) to counsel's knowledge, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the -18- Prospectus is not in existence, the most recent Preliminary Prospectus), (A) the Company has not incurred any material liability or obligation, direct or contingent, nor entered into any material transaction not in the ordinary course of business; and (B) the Company has not purchased any of its outstanding capital stock, nor declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, except in each case as described in or contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); (viii) the issuance, offering and sale of the Securities to the Underwriters by the Company pursuant to this Agreement and of warrants to the Representatives by the Company pursuant to the Warrant Agreement; the compliance by the Company with the other provisions of this Agreement and the Warrant Agreement; and the consummation of the other transactions contemplated in such agreements do not (A) require the consent, approval, authorization, registration or qualification of or with any governmental authority, except such as have been obtained and such as may be required under state securities or blue sky laws, by the Nasdaq SmallCap Market and NASD, or (B) conflict with or result in a breach or violation of any of the terms and provisions of, or constitute a default under, any material contract, indenture, mortgage, deed of trust, lease or other agreement or instrument known to such counsel to which the Company is a party or by which the Company or any of its properties are bound, or the charter documents or by-laws of the Company or any statute or any judgment, decree, order, rule or regulation of any court or other governmental authority or any arbitrator having jurisdiction over the Company and no further approval or authorization of the shareholders or the Board of Directors of the Company is required for (Y) the issuance and sale of the Securities to be sold by the Company pursuant to this Agreement or (Z) the issuance and sale of the shares of Common Stock issuable upon exercise of the Warrant Agreement; (ix) the Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or are threatened by the Commission; (x) the Registration Statement originally filed with respect to the Securities and each amendment thereto, and the Prospectus (in each case, other than the financial statements and other financial and statistical information contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the applicable requirements of the Act and the rules and regulations of the Commission thereunder; (xi) the Company is not, and the transactions contemplated by this Agreement will not cause the Company to become, an investment company subject to registration under the 1940 Act; (xii) the specimen stock certificate of the Company filed as an exhibit to the Registration Statement or incorporated by reference from prior filings made under -19- or pursuant to the Act is in due and proper form to evidence shares of Common Stock, has been duly authorized and approved by the Board of Directors of the Company and complies with all legal requirements applicable under the Colorado Business Corporation Act; (xiii) the descriptions in the Registration Statement and the Prospectus of the articles of incorporation and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable rules and regulations (provided that counsel need not express any opinion as to their completeness); (xiv) except as described in the Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company; (xv) the Company is not currently offering any securities for sale except as described in the Registration Statement; (xvi) such counsel has no knowledge of any promoter, affiliate, parent or subsidiaries of the Company except as are described in the Registration Statement; (xvii) the Company has no subsidiaries except as disclosed in the Prospectus; (xviii) the Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, copyrights, service marks, service names, trade names and licenses necessary to conduct its business (including without limitation, any such licenses or rights described in the Registration Statement as being owned or possessed by the Company or any subsidiary) (all of which are collectively referred to herein as the "Intellectual Property"); there is no actual or pending, or threatened claim, proceeding or action by any person pertaining to or which challenges the exclusive rights of the Company with respect to any of the Company's Intellectual Property; (xix) neither the Company nor the subsidiary is a party to any agreement giving rise to any obligation by the Company or the subsidiary to pay any third-party royalties or fees of any kind whatsoever with respect to any technology developed, employed, used or licensed by the Company or the subsidiary, other than is disclosed in the Prospectus; (xx) the Common Stock is eligible for quotation on The Nasdaq Smallcap Market; (xxi) all issued and outstanding shares of Common Stock and all other securities issued and sold or exchanged by the Company or its subsidiaries have been issued and sold or exchanged in compliance with all applicable state and federal securities laws and regulations; (xxii) the Company, the subsidiary and all of their property are in compliance with all environmental laws and the Company and the subsidiary are in full compliance with all permits, licenses and authorizations relating to environmental laws; (xxiii) at the Closing Date and upon payment of the consideration set forth in the Registration Statement, the Company shall have purchased all of the outstanding common stock of the subsidiary, and shall have received good title to such shares of common stock of the subsidiary , free and clear of all liens, security interests, pledges, charges, encumbrances, shareholders' agreements and voting trusts. Each outstanding share of common stock of the subsidiary is validly authorized, validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and has not been issued and is not owned or held in violation of any preemptive right of shareholders. There is no commitment, plan or arrangement to issue, and no outstanding option, warrant and or other right for the issuance of any share of capital stock of the subsidiary or any other security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for capital stock of the subsidiary, except as is properly described in the Prospectus; (xxiv) The conversion and/or extension of promissory notes by promissory note holders of the Company since January 1, 1996 does not result in an integration with any other offering of securities by the Company or with this offering; (xxv) The conversion and/or extension of promissory notes by promissory note holders of the Company since January 1, 1996 is exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended, and from the securities registration requirements of any and all states which have jurisdiction over such conversion and/or extension transactions; (xxvi) Any distribution of recision materials, offering materials or other materials to recipients of the recision offer prior to this offering being consummated, is in compliance with applicable federal and state securities laws; (xxvii) Each Selling Shareholder has duly authorized, executed and delivered a Power of Attorney and Custody Agreement which constitute valid and legally binding agreements of such Selling Shareholder in accordance with their terms, except as enforceability of the same may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors rights generally; (xxviii) This Agreement has been duly and validly executed and delivered by or on behalf of each Selling Shareholder and constitutes the valid and legally binding agreement of each Selling Shareholder in accordance with its terms, except as enforceability of the same may be limited by general equitable principles, bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally and except as to those provisions relating to indemnity or contribution for liability arising under federal or state securities laws or under common law, as to which no opinion need be expressed; (xxix) Based solely upon representations which such counsel has obtained from the Selling Shareholders (as to which nothing has come to the attention of such counsel which has caused such counsel to believe such representations are untrue) and the examination of the certificates representing the Common Stock and, assuming that the Underwriters are good faith purchasers of the Common Stock for value without notice, the Underwriters will be the owners of such Common Stock, free and clear of any claims, liens, encumbrances and security interests whatsoever; (xxx) To the best knowledge of such counsel, all authorizations, orders and consents necessary for the execution and delivery by each Selling Shareholder of this Agreement, the Power of Attorney and the Custody Agreement have been duly and validly given, and each Selling Shareholder has full legal rights, power and authority to enter into this Agreement, the Power of Attorney and the Custody Agreement and to sell, assign, transfer and deliver to the Underwriters the number of shares of Common Stock to be sold by such Selling Shareholder hereunder; and (xxxi) The performance of this Agreement and the consummation of the transaction contemplated hereby and by the Power of Attorney and the Custody Agreement will not result in a breach or violation by such Selling Shareholder of any of the terms or provisions of, or constitute a default by such Selling Shareholder under, any indenture, mortgage, trust (constructive or other), loan agreement or instrument known to such counsel to which such Selling Shareholder is a party or by which such Selling Shareholder is bound, any statute, or any judgment, decree, order, rule or regulation known to such counsel of any court or governmental agency or body applicable to such Selling Shareholder. Such counsel shall also state that such counsel has participated in conferences with officers and other representatives of the Company, the independent public accountants of the Company and the subsidiary, the Representatives and counsel to the Representatives, at which conferences the contents of the Registration Statement and the Prospectus and related matters were discussed and, although such counsel has not undertaken to investigate or verify independently and does not assume any responsibility for factual statements contained in the Registration Statement and Prospectus (except as otherwise expressly set forth herein), on the basis of the foregoing they have no reason to believe that the Registration Statement, as of its effective date, contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or the date of such opinion, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (except such counsel need express no view as to the financial statements and notes thereto, schedules and reports thereon, and other financial data included in the Registration Statement or Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates or opinions of responsible officers of the Company and public officials, and may limit its opinions to the laws of the United States of America and the States of Colorado and Delaware, as appropriate. References to the Registration Statement and the Prospectus in this paragraph (b) shall include any amendment or supplement thereto at the date of such opinion. (c) At the Firm Closing Date, you shall have received the favorable opinion of Haligman & Lottner, P.C., telecommunications counsel for the Company, dated the date of delivery, addressed to you, and in form and scope satisfactory to your counsel, to the effect that: i. Each of the Company and its subsidiary is in compliance in all material respects with all applicable telecommunications-related rules and regulations of the United States and their respective state of incorporation, compliance with which is necessary to their business as currently conducted, including with respect -20- to rules, regulations and tariffs promulgated by the Federal Communications Commission; ii. To the best knowledge of such counsel after review of the Company's and the subsidiary's operations, each of the Company and its subsidiary is in compliance in all material respects with applicable telecommunications-related rules and regulations of foreign countries in which the Company and its subsidiary currently operate, including specifically the countries of Argentina, Brazil, Italy, Lebanon, South Africa and South Korea; iii. The statements of international or federal law or regulations contained under the captions "Risk Factors" and "Business - Regulation" and other references in the Registration Statement and Prospectus to telecommunications regulatory matters (collectively, the "Regulatory Portion") are, in all material respects, correct and accurate statements or summaries of applicable international, federal and state law and regulation, subject to the qualifications set forth therein; and iv. The Regulatory Portion of the Registration Statement and the Prospectus, at the time the Registration Statement became effective and at the Firm Closing Date, did not contain any untrue statement of a material fact, or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (d) The Representatives shall have received from Stockman Kast Ryan & Scruggs, P.C. and Richard A. Eisner & Company, LLP, letters dated, respectively, the date hereof and the Firm Closing Date, in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent accountants with respect to the Company and its subsidiary, respectively, within the meaning of the Act and the applicable rules and regulations thereunder; (ii) in their opinion, the audited financial statements and the as adjusted financial data examined by them and included in the Registration Statement and the Prospectus comply in form in all material respects with the applicable accounting requirements of the Act and the related published rules and regulations; (iii) on the basis of carrying out certain specified procedures (which do not constitute an examination made in accordance with generally accepted auditing standards) that would not necessarily reveal matters of significance with respect to the comments set forth in this paragraph (iii), a reading of the minute books of the shareholders, the board of directors and any committees thereof of the Company and its subsidiary, and inquiries of certain officials of the Company and its subsidiary who have responsibility for financial and accounting matters, nothing came to their attention that caused them to believe that at a specific date not more than five business days prior to the date of such letter, there were any changes in the capital stock or total debt of the Company and its subsidiary or any decreases in total assets or shareholders' equity of the Company and its subsidiary, in each case compared -21- with amounts shown on the latest balance sheet included in the Registration Statement and the Prospectus, or for the period from April 30, 1997 or October 31, 1997 to such specified date there were any decreases, as compared with the same period in the prior year, in total revenue, net loss or net loss per share, respectively, of the Company and its subsidiary, except in all instances for changes, decreases or increases set forth in such letters; (iv) they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information that are derived from the general accounting records of the Company and its subsidiary and are included in the Registration Statement and the Prospectus, and have compared such amounts, percentages and financial information with such records of the Company and its subsidiary and with information derived from such records and have found them to be in agreement, excluding any questions of legal interpretation; and (v) their review of the system of internal controls of the Company and its subsidiary, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as of April 30, 1997 or October 31, 1997 did not disclose any weaknesses in internal controls that they considered to be material weaknesses. In the event that the letters referred to above set forth any such changes, decreases or increases which, in the reasonable discretion of the Representatives, are likely to result in a Material Adverse Effect, it shall be a further condition to the obligations of the Underwriters that such letters shall be accompanied by a written explanation of the Company as to the significance thereof, unless the Representatives deem such explanation unnecessary. References to the Registration Statement and the Prospectus in this paragraph (c) with respect to either letter referred to above shall include any amendment or supplement thereto by the date of such letter. (e) The Representatives shall have received a certificate, dated the Firm Closing Date, of Ronald P. Erickson, Robert A. Spade and Patrick R. Scanlon, in their capacities as Chairman of the Board, Chief Executive Officer and President, respectively, of the Company to the effect that: (i) the representations and warranties of the Company in this Agreement are true and correct as if made on and as of the Firm Closing Date; the Registration Statement, as amended as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading, and the Prospectus, as amended or supplemented as of the Firm Closing Date, does not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company has performed all covenants and agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Firm Closing Date; -22- (ii) no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted or, to the best of the Company's knowledge, threatened or are contemplated by the Commission; and (iii) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor its subsidiary has sustained any loss or interference with their respective businesses or properties having or resulting in a Material Adverse Effect from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any event, circumstance, or development that results in, or that the Company reasonably believes will result in, a Material Adverse Effect, except in each case as described in or contemplated by the Prospectus (exclusive of any amendment or supplement thereto). (f) The Representatives shall have received from each officer and director of the Company and the persons and entities listed in Schedule 3 an agreement to the effect that such person or entity will not, except to the extent otherwise specifically permitted by the terms of each such person's or entity's agreement, directly or indirectly, without the prior written consent of the Representatives, offer, sell, offer to sell, contract to sell, pledge, grant any option to purchase or otherwise sell or dispose (or announce any offer, sale, offer of sale, contract of sale, pledge, grant of an option to purchase or other sale or disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 12 months after the date of this Agreement, without the Representatives' prior written consent, which consent shall not be unreasonably withheld; provided, however, that intra-family transfers or transfers to trust for estate planning purposes shall not be so restricted. (g) On or before the Firm Closing Date, the Representatives and their counsel shall have received such further certificates, documents or other information as they may have reasonably requested from the Company. (h) Upon consummation of the offering of the Securities, the Securities shall have approved for trading, on notice of issuance, on the Nasdaq SmallCap Market. (i) The Representatives shall have received an opinion, dated the Firm Closing Date, of Berliner Zisser Walter & Gallegos, P.C., counsel for the Representatives, with respect to the issuance and sale of the Firm Securities, the Registration Statement and Prospectus, and such other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they may reasonably request for the purpose of enabling them to pass upon such matters. (j) The Company shall have executed and delivered a Warrant Agreement in a form satisfactory to the Representatives (the "Warrant Agreement"), and there shall have been tendered to the Representatives all of the Representatives' Warrants described in Section 6(n) hereof to be purchased by the Representatives on the Closing Date. -23- All opinions, certificates, letters and documents delivered pursuant to this Agreement will comply with the provisions hereof only if they are reasonably satisfactory in all material respects to the Representatives and counsel for the Representatives. The Company shall furnish to the Representatives such conformed copies of such opinions, certificates, letters and documents in such quantities as the Representatives and counsel for the Representatives shall reasonably request. The respective obligations of the several Underwriters to purchase and pay for any Option Securities shall be subject, in their discretion, to each of the foregoing conditions to purchase the Firm Securities, except that all references to the Firm Securities and the Firm Closing Date shall be deemed to refer to such Option Securities and the related Option Closing Date, respectively. 9. INDEMNIFICATION AND CONTRIBUTION. -------------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter, its counsel, each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and each Selling Shareholder, against any losses, claims, damages or liabilities to which such Underwriter or such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any breach by the Company of its representations or warranties set forth in Section 2(a) and (b) of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) the Registration Statement or any amendment thereto, the Prospectus or any amendment or supplement thereto or (B) any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Securities under the securities or blue sky laws thereof or filed with the Commission or any securities association or securities exchange (each, an "Application"); (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto, or the Prospectus or any amendment or supplement thereto, or any Application, a material fact required to be stated therein or necessary to make the statements therein not misleading; or (iv) any untrue statement or alleged untrue statement of any material fact made by the Company or prepared at its direction and contained in any audio, visual, electronic or electronically transmitted materials produced by the Company or at its direction and used in connection with the marketing of the Securities, including without limitation, slides, videos, films, Internet presentations, tape recordings, and, such party or parties, as the case may be, will reimburse, as incurred, each Underwriter and each such controlling person for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; -24- provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement or any amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representatives specifically for use therein; and provided, further, that the Company will not be liable to any Underwriter or any person controlling such Underwriter with respect to any such untrue statement or omission made in any Preliminary Prospectus that is corrected in the Prospectus (or any amendment or supplement thereto) if the person asserting any such loss, claim, damage or liability purchased Securities from such Underwriter but was not sent or given a copy of the Prospectus (as amended or supplemented) at or prior to the written confirmation of the sale of such Securities to such person in any case where such delivery of the Prospectus (as amended or supplemented) is required by the Act, unless such failure to deliver the Prospectus (as amended or supplemented) was a result of noncompliance by the Company with Section 6(d) and (e) of this Agreement. The Company shall not, without the prior written consent of the Representatives, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not any Underwriter or any person who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of all of the Underwriters and such controlling persons from all liability arising out of such claim, action, suit or proceeding. In addition to its other obligations under this Section 9(a), the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry, or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 9(a), it will reimburse the Representatives and each Underwriter on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry, or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Representatives or Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Representatives and the Underwriters shall promptly return it to the party or parties that made such payment, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Representatives and Underwriters within 45 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) The Selling Shareholders shall indemnify and hold harmless the Company, each Underwriter, and each person, if any, who controls the Company and each Underwriter within the meaning of the Act or the Exchange Act, and all officers, directors, employers, agents and counsel of the Company and each Underwriter against any and all loss, liability, claim, damage and expense whatsoever, including, but not limited to, attorneys' fees and any and all expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever or in connection with any investigation or inquiry of, or action or proceeding that may be brought against, the respective indemnified parties, arising out of or based upon any untrue statements or alleged untrue statements of a material fact contained in any Preliminary Prospectus, the Registration Statement or the Prospectus, or any application or other document (in this Section 9 collectively called "application") executed by the Selling Shareholders and based upon written information furnished by or on behalf of the Selling Shareholders filed in any jurisdiction in order to qualify all or any part of the Shares under the securities laws thereof or filed with the SEC or the NASD, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the foregoing indemnity shall not apply in respect of any statement or omission made in reliance upon and in conformity with written information furnished to the Selling Shareholders or any Underwriter through the Representative expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof. This indemnity agreement will be in addition to any liability the Selling Shareholders may otherwise have. (c) Each Underwriter, severally and not jointly, will indemnify hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and each Selling Shareholder against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person of the Company may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged -25- untrue statement of any material fact contained in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application; (ii) the omission or the alleged omission to state therein a material fact required to be stated in the Registration Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or any Application or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representatives specifically for use therein; or (iii) any use of the access code for the "NetRoadshow" by other than qualified investors, registered broker-dealers or investment advisors which results in action taken against the Company and/or the Selling Shareholders by such third party obtaining access to the "NetRoadshow"; provided, however, the Underwriter responsible for distributing such access code to other than a qualified investor shall be the sole party responsible to the Company and the Selling Shareholders in connection therewith. The Representatives shall not, without the prior written consent of the Company and each such named Selling Shareholder, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Company or any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of the Company, such controlling persons and each such named Selling Shareholder from all liability arising out of such claim, action, suit or proceeding. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 9 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 9, notify the indemnifying party of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party, except to the extent that the indemnifying party demonstrates it has been irreparably prejudiced by such failure to receive notice. (e) In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party; provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded or shall have been advised by its counsel that there may be one or more legal defenses available to it and/or other indemnified parties that conflict with those available to the indemnifying party, the indemnifying party shall not have the right to direct the defense of such action on behalf of such indemnified party or parties and such indemnified party or parties shall have the right to select separate counsel to defend such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other -26- expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, designated by the Representatives in the case of paragraph (a) of this Section 9, representing the indemnified parties under such paragraph (a) who are parties to such action or actions) or (ii) the indemnifying party does not promptly retain counsel satisfactory to the indemnified party or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. (f) In circumstances in which the indemnity agreement provided for in the preceding paragraphs of this Section 9 is unavailable or insufficient, for any reason, to hold harmless an indemnified party in respect of any losses, claims, damages or liabilities (or actions in respect thereof), each indemnifying party, in order to provide for just and equitable contribution, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect (i) the relative benefits received by the indemnifying party or parties on the one hand and the indemnified party on the other from the offering of the Securities or (ii) if the allocation provided by the foregoing clause (i) is not permitted by applicable law, not only such relative benefits but also the relative fault of the indemnifying party or parties on the one hand and the indemnified party on the other in connection with the statements or omissions or alleged statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total proceeds from the offering (before deducting expenses) received by the Company and the Selling Shareholders bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault of the parties shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Selling Shareholders on the one hand or by the Underwriters on the other hand, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, and any other equitable considerations appropriate in the circumstances. The Company, the Selling Shareholders and the Underwriters agree that it would not be equitable if the amount of such contribution were determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this paragraph (f). Notwithstanding any other provision of this paragraph (f), no Underwriter shall be obligated to make contributions hereunder that in the aggregate exceed the total public offering price of the Securities purchased by such Underwriter under this Agreement, less the aggregate amount of any damages that such Underwriter has otherwise been required to pay in respect of the same or any substantially similar claim, and no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute hereunder are several in proportion to their respective underwriting obligations and not joint, and as between themselves, contributions -27- among Underwriters shall be governed by the provisions of the Representatives' Agreement Among Underwriters. For the purposes of this paragraph 9(f), each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and each Selling Shareholder, shall have the same rights to contribution as the Company. 10. DEFAULT OF UNDERWRITERS. If one or more Underwriters default in their ----------------------- obligations to purchase Firm Securities or Option Securities hereunder and the aggregate number of such Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase is ten percent or less of the aggregate number of Firm Securities or Option Securities to be purchased by all of the Underwriters at such time hereunder, then the other Underwriters may make arrangements satisfactory to the Representatives for the purchase of such Securities by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives), but if no such arrangements are made by the Firm Closing Date or the related Option Closing Date, as the case may be, the other Underwriters shall be obligated severally in proportion to their respective commitments hereunder to purchase the Firm Securities or Option Securities that such defaulting Underwriter or Underwriters agreed but failed to purchase. If one or more Underwriters so default with respect to an aggregate number of Securities that is more than ten percent of the aggregate number of Firm Securities or Option Securities, as the case may be, to be purchased by all of the Underwriters at such time hereunder, and if arrangements satisfactory to the Representatives are not made within 36 hours after such default for the purchase by other persons (who may include one or more of the non-defaulting Underwriters, including the Representatives) of the Securities with respect to which such default occurs, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company other than as provided in Section 11 hereof. In the event of any default by one or more Underwriters as described in this Section 10, the Representatives shall have the right to postpone the Firm Closing Date or the Option Closing Date, as the case may be, established as provided in Section 4 hereof for not more than seven business days in order that any necessary changes may be made in the arrangements or documents for the purchase and delivery of the Firm Securities or Option Securities, as the case may be. As used in this Agreement, the term "Underwriter" includes any person substituted for an Underwriter under this Section 10. Nothing herein shall relieve any defaulting Underwriter from liability for its default. 11. SURVIVAL. The respective representations, warranties, agreements, -------- covenants, indemnities and other statements of the Company, its officers, the Selling Shareholders and the several Underwriters set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement shall remain in full force and effect, regardless of (i) any investigation made by or on behalf of the Company, any of its officers or directors, any Selling Shareholder, any Underwriter or any controlling person referred to in Section 9 hereof and (ii) delivery of and payment for the Securities. The respective agreements, covenants, indemnities and other statements set forth in Sections 7 and 9 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement. 12. TERMINATION. ----------- (a) This Agreement may be terminated with respect to the Firm Securities or any Option Securities in the sole discretion of the Representatives by notice to the Company -28- given prior to the Firm Closing Date or the related Option Closing Date, respectively, in the event that the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior thereto or, if at or prior to the Firm Closing Date or, such Option Closing Date, respectively, (i) after the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or development involving a prospective adverse change in or affecting particularly the business, properties, condition (financial or otherwise), results of operations or prospects of the Company, whether or not arising in the ordinary course of business, occurs which would, in the Representatives' sole judgment, make the offering or the delivery of the Securities impracticable or inadvisable; (ii) trading in the Common Stock shall have been suspended by the Commission or the Nasdaq SmallCap Market or minimum or maximum prices shall have been established on the Nasdaq SmallCap Market; (iii) a banking moratorium shall have been declared by New York or United States authorities; or (iv) there shall have been (A) an outbreak or escalation of hostilities between the United States and any foreign power, (B) an outbreak or escalation of any other insurrection or armed conflict involving the United States or (C) any other calamity or crisis or material adverse change in general economic, political or financial conditions having an effect on the U.S. financial markets that, in the sole judgment of the Representatives, makes it impractical or inadvisable to proceed with the public offering or the delivery of the Securities as contemplated by the Registration Statement, as amended as of the date hereof. (b) Termination of this Agreement pursuant to this Section 12 shall be without liability of any party to any other party except as provided in Section 11 hereof. 13. INFORMATION SUPPLIED BY UNDERWRITERS. The statements set forth in (a) ------------------------------------ the last paragraph on the front cover page of any Preliminary Prospectus or the Prospectus, (b) under the heading "Underwriting" in any Preliminary Prospectus or the Prospectus and (c) on page 2 in any Preliminary Prospectus or the Prospectus pertaining to stabilization (to the extent such statements relate to the Underwriters) constitute the only information furnished by any Underwriter through the Representatives to the Company and the selling Shareholders for the purposes of Section 9 hereof. The Underwriters confirm that such statements (to such extent) are correct. 14. NOTICES. All communications hereunder shall be in writing and, if ------- sent to any of the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to Cruttenden Roth Incorporated, 18301 Von Karman, Suite 100, Irvine, California 92715, with a copy to Cohig & Associates, Inc., 6300 South Syracuse Way, Suite 400, Englewood, Colorado 80111, and if sent to the Company, shall be delivered or sent by mail, telex or facsimile transmission and confirmed in writing to the Company at 8 South Nevada Avenue, Suite 200, Colorado Springs, Colorado 80903, Attention: Chief Executive Officer. -29- 15. SUCCESSORS. This Agreement shall inure to the benefit of and shall be ---------- binding upon the several Underwriters, the Selling Shareholders, the Company and their respective successors and legal representatives, and nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this Agreement, or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being for the sole and exclusive benefit of such persons and for the benefit of no other person except that (a) the indemnities of the Company contained in Section 9 of this Agreement shall also be for the benefit of any person or persons who control any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act and (b) the indemnities of the Underwriters contained in Section 9 of this Agreement shall also be for the benefit of the directors of the Company and the officers of the Company who have signed the Registration Statement and any person or persons who control the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act. No purchaser of Securities from any Underwriter shall be deemed a successor because of such purchase. 16. APPLICABLE LAW. The validity and interpretation of this Agreement, -------------- and the terms and conditions set forth herein, shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any provisions relating to conflicts of laws. 17. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial ---------------------------------------------- proceedings arising out of or relating to this Agreement may be brought in any state or federal court of competent jurisdiction in the State of California, and by execution and delivery of this Agreement, the Company accepts for itself and in connection with its subsidiaries and properties, and the Selling Shareholders accept, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and waive any defense of forum non conveniens and irrevocably agree to be bound by any judgment rendered thereby in connection with this Agreement. The Company and the Selling Shareholders designate and appoint Robert A. Spade and such other persons as may hereafter be selected by the Company irrevocably agreeing in writing to so serve, as its agent to receive on its behalf service of all process in any such proceedings in any such court, such service being hereby acknowledged by the Company and the Selling Shareholders to be effective and binding service in every respect. A copy of any such process so served shall be mailed by registered mail to the Company at its address provided in Section 14 hereof; provided, however, that, unless otherwise provided by applicable law, any failure to mail such copy shall not affect the validity of service of such process. If any agent appointed by the Company and the Selling Shareholders refuses to accept service, the Company and the Selling Shareholders hereby agree that service of process sufficient for personal jurisdiction in any action against the Company and/or the Selling Shareholders in the State of California may be made by registered or certified mail, return receipt requested, to the Company at its address provided in Section 14 hereof, and the Company and the Selling Shareholders hereby acknowledge that such service shall be effective and binding in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of any Underwriter to bring proceedings against the Company and/or the Selling Shareholders in the courts of any other jurisdiction. 18. NO RULE OF CONSTRUCTION. The parties acknowledge that this Agreement ----------------------- was initially prepared by the Representatives, and that all parties have read and negotiated the language used in this Agreement. The parties agree that, because all parties participated in negotiating and drafting this Agreement, no rule of construction shall apply to this Agreement which construes ambiguous language in favor of or against any party by reason of that party's role in drafting this Agreement. -30- 19. COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. If the foregoing correctly sets forth our understanding please indicate your acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute an agreement binding the Company, each of the Selling Shareholders and each of the several Underwriters. Very truly yours, COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By: ____________________________________________ Robert A. Spade, Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. CRUTTENDEN ROTH INCORPORATED EACH OF THE SELLING SHAREHOLDERS By: _________________________________ By: _________________________________ Name: __________________________ Attorney-in-fact Title: __________________________ For themselves and as Representatives. RWW\IASG\UA.498 -31- SCHEDULE 1 UNDERWRITERS NUMBER OF FIRM SECURITIES UNDERWRITERS TO BE PURCHASED - ------------ --------------- Cruttenden Roth Incorporated........................ _________ John G. Kinnard and Company, Incorporated........... _________ Kaufman Bros., L.P. ................................ _________ Total............................................ ========= -32- SCHEDULE 2 SUBSIDIARY Name Jurisdiction of Incorporation - ---- ----------------------------- International Telephone Company Delaware -33- SCHEDULE 3 PERSONS AND ENTITIES SUBJECT TO LOCK-UP AGREEMENTS Name ---------------------------------------- -34- EX-2.3 3 AGREEMENT AND PLAN OF MERGER EXHIBIT 2.3 EXECUTION COPY -------------- AGREEMENT AND PLAN OF MERGER BETWEEN COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. AND GLOBALTEL RESOURCES, INC. MAY 29, 1998 Table of Contents ----------------- Page ---- AGREEMENT AND PLAN OF MERGER............................................... 1 ARTICLE I Definitions............................................................. 1 ARTICLE II Basic Transaction....................................................... 6 SECTION 2.1 The Merger........................................... 6 SECTION 2.2 Articles of Incorporation; Bylaws.................... 7 SECTION 2.3 Directors and Officers............................... 7 SECTION 2.4 Conversion of Shares................................. 8 SECTION 2.5 Intentionally omitted................................ 8 SECTION 2.6 No Fractional Shares................................. 8 SECTION 2.7 Capital Stock of CSI................................. 8 SECTION 2.8 Procedure for Exchange of Stock Certificates......... 9 SECTION 2.9 Stock Transfer Books.................................11 SECTION 2.10 Dissenting Shares....................................11 SECTION 2.11 Closing..............................................11 SECTION 2.12 Taking of Necessary Action...........................12 SECTION 2.13 Piggyback Registration Rights........................12 ARTICLE III Representations and Warranties of GlobalTel.............................12 SECTION 3.1 Organization and Qualification.......................12 SECTION 3.2 Subsidiaries.........................................12 SECTION 3.3 Articles of Incorporation and Bylaws.................12 SECTION 3.4 Capitalization.......................................13 SECTION 3.5 Authorization of Transaction.........................14 SECTION 3.6 No Conflict; Required Filings and Consents...........14 SECTION 3.7 GlobalTel Financial Statements.......................14 SECTION 3.8 Absence of Certain Changes or Events.................15 SECTION 3.9 No Undisclosed Liabilities...........................15 SECTION 3.10 Absence of Litigation................................16 SECTION 3.11 Employee Benefit Plans; Employment Agreements........16 SECTION 3.12 Labor Matters........................................18 SECTION 3.13 Proxy Statement......................................18 SECTION 3.14 Restrictions on Business Activities..................19 SECTION 3.15 Title to Assets......................................19 SECTION 3.16 Contracts and Licenses...............................19 i Table of Contents ----------------- Page ---- SECTION 3.17 Tax Matters..........................................20 SECTION 3.18 Intellectual Property Matters........................20 SECTION 3.19 Customers and Agents.................................21 SECTION 3.20 Compliance with Laws.................................21 SECTION 3.21 Brokers' Fees........................................21 SECTION 3.22 Continuity of Business Enterprise....................22 SECTION 3.23 Board Approval.......................................22 SECTION 3.24 Vote Required........................................22 SECTION 3.25 Nature of GlobalTel Shareholders.....................22 SECTION 3.26 Determination of Preferred Stock Liquidation Preference..........................................22 ARTICLE IV Representations and Warranties of CSI...................................22 SECTION 4.1 Organization and Qualification.......................23 SECTION 4.2 Articles of Incorporation and Bylaws.................23 SECTION 4.3 Capitalization.......................................23 SECTION 4.4 Authorization of Transaction.........................23 SECTION 4.5 No Conflict; Required Filings and Consents...........24 SECTION 4.6 CSI Financial Statements.............................24 SECTION 4.7 Absence of Certain Changes or Events.................25 SECTION 4.8 No Undisclosed Liabilities...........................25 SECTION 4.9 Absence of Litigation................................25 SECTION 4.10 Employee Benefit Plans; Employment Agreements........25 SECTION 4.11 Labor Matters........................................27 SECTION 4.12 Proxy Statement......................................27 SECTION 4.13 Restrictions on Business Activities..................28 SECTION 4.14 Title to Assets......................................28 SECTION 4.15 Contracts and Licenses...............................28 SECTION 4.16 Tax Matters..........................................29 SECTION 4.17 Intellectual Property Matters........................29 SECTION 4.18 Customers and Agents.................................30 SECTION 4.19 Compliance with Laws.................................30 SECTION 4.20 Brokers' Fees........................................30 SECTION 4.21 Continuity of Business Enterprise....................30 SECTION 4.22 Board Approval.......................................30 SECTION 4.23 Vote Required........................................31 ARTICLE V Covenants of GlobalTel..................................................31 SECTION 5.1 Certain Affirmative Covenants of GlobalTel...........31 ii Table of Contents ----------------- Page ---- SECTION 5.2 Certain Negative Covenants of GlobalTel..............32 SECTION 5.3 No Solicitation......................................34 ARTICLE VI Covenants of CSI........................................................35 SECTION 6.1 Certain Affirmative Covenants of CSI.................35 SECTION 6.2 Certain Negative Covenants of CSI....................37 ARTICLE VII Additional Agreements...................................................39 SECTION 7.1 GlobalTel Shareholders' Meeting......................39 SECTION 7.2 CSI Shareholders' Meeting............................39 SECTION 7.3 Confidentiality......................................39 SECTION 7.4 Stock Options and Warrants...........................40 SECTION 7.5 Public Announcements.................................41 SECTION 7.6 Listing of CSI Shares................................41 SECTION 7.7 Accountants' Letters.................................41 SECTION 7.8 Further Assurances...................................41 SECTION 7.9 Notice of Developments...............................42 SECTION 7.10 Indemnification......................................42 ARTICLE VIII Conditions to the Merger................................................42 SECTION 8.1 Conditions to Obligations of Each Party to Effect the Merger...................................42 SECTION 8.2 Conditions to Obligations of CSI.....................43 SECTION 8.3 Conditions to Obligations of GlobalTel...............46 ARTICLE IX Termination.............................................................48 SECTION 9.1 Termination of Agreement.............................48 SECTION 9.2 Effect of Termination................................49 SECTION 9.3 Fees and Expenses....................................49 ARTICLE X Miscellaneous...........................................................50 SECTION 10.1 Effectiveness of Representations, Warranties and Agreements..........................................50 SECTION 10.2 Notices..............................................50 SECTION 10.3 Amendment............................................51 SECTION 10.4 Waiver...............................................51 SECTION 10.5 Headings.............................................51 iii Table of Contents ----------------- Page ---- SECTION 10.6 Severability.........................................51 SECTION 10.7 Entire Agreement.....................................52 SECTION 10.8 Successors and Assigns...............................52 SECTION 10.9 GOVERNING LAW........................................52 SECTION 10.10 Construction.........................................52 SECTION 10.11 Incorporation of Exhibits and Disclosure Schedules...........................................52 SECTION 10.12 Counterparts.........................................52 Exhibit 1--Amendments to Bylaws of Surviving Corporation Exhibit 2--Additional Directors of Surviving Corporation Exhibit 3--Piggyback Registration Rights iv AGREEMENT AND PLAN OF MERGER This Agreement and Plan of Merger ("Agreement") is entered into as of May 29, 1998, by and between Communications Systems International, Inc., a Colorado corporation ("CSI"), and GlobalTel Resources, Inc., a Washington corporation ("GlobalTel"). CSI and GlobalTel are referred to collectively herein as the "Parties." WHEREAS, the Board of Directors of CSI has determined that it is in the best interest of CSI and its shareholders to merge GlobalTel with and into CSI as described in Article II; ---------- WHEREAS, the Board of Directors of GlobalTel has determined that it is in the best interest of GlobalTel and its shareholders to merge GlobalTel with and into CSI as described in Article II; and ---------- WHEREAS, CSI and GlobalTel desire that the Merger (as defined below) be made on the terms and subject to the conditions set forth in this Agreement and qualify as a reorganization within the meaning of Section 368(a) of the Code; Now, therefore, in consideration of the premises and the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows: ARTICLE I Definitions ----------- As used in this Agreement, the following terms, whether in singular or plural forms, shall have the following meanings: "Acquisition Proposal" has the meaning set forth in Section 5.3(a). -------------- "Affiliate" means, in respect of a specified Person, another Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Person specified. "Business Day" means any day, other than a Saturday, Sunday or other day on which banks are permitted to close in the State of Colorado and the State of Washington. "Certificate" has the meaning set forth in Section 3.4(c). -------------- "Closing" has the meaning set forth in Section 2.11. ------------ "Closing Date" has the meaning set forth in Section 2.11. ------------ 1 "Code" means the Internal Revenue Service Code of 1986, as amended. "Colorado Business Corporation Act" means the Colorado Business Corporation Act, as amended. "Common Stock Conversion Ratio" has the meaning set forth in Section ------- 2.4(a). "Contract" means any written contract, mortgage, deed of trust, bond, indenture, lease, license, note, franchise, certificate, option, warrant, right, or other instrument, document, obligation or agreement and any oral obligation, right or agreement. "Cruttenden" means Cruttenden Roth Incorporated. "CSI" has the meaning set forth in the preface above. "CSI-owned Share" means any GlobalTel Share that CSI owns beneficially. "CSI Common Stock" means any share of the Common Stock, no par value per share, of CSI. "CSI Disclosure Schedule" has the meaning set forth in Article IV. ---------- "CSI Dissenting Share" means any CSI Share as to which the holder thereof possesses and has not effectively withdrawn or otherwise lost such holder's dissenter's rights pursuant to the Colorado Business Corporation Act. "CSI Employee Plans" has the meaning set forth in Section 4.10(a). --------------- "CSI Intellectual Property" has the meaning set forth in Section 4.17(a). --------------- "CSI Interim Balance Sheet" has the meaning set forth in Section 4.6. ----------- "CSI Preferred Stock" means any share of the Preferred Stock, no par value per share, of CSI. "CSI Proxy Statement" has the meaning set forth in Section 3.13. ------------ "CSI Share" means any share of the CSI Common Stock. "CSI Shareholders' Meeting" has the meaning set forth in Section 3.13. ------------ "Effective Time" has the meaning set forth in Section 2.1(b). -------------- "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 2 "ERISA Affiliate" means, with respect to a specified Person, any other Person that, together with the specified Person, would be treated as a single employer under Section 414 of the Code. ----------- "Exchange Agent" has the meaning set forth in Section 2.8 (a). --------------- "GAAP" means United States generally accepted accounting principles as in effect from time to time. "GlobalTel" has the meaning set forth in the preface above. "GlobalTel Balance Sheet" has the meaning set forth in Section 3.7. ----------- "GlobalTel Common Stock" means any share of the Common Stock, $0.05 par value per share, of GlobalTel. "GlobalTel Disclosure Schedule" has the meaning set forth in Article III. ----------- "GlobalTel Dissenting Share" means any GlobalTel Share as to which the holder thereof possesses and has not effectively withdrawn or otherwise lost such holder's dissenter's rights pursuant to the Washington Business Corporation Act. "GlobalTel Employee Plans" has the meaning set forth in Section 3.11(a). --------------- "GlobalTel Financial Statements" has the meaning set forth in Section 3.7. ----------- "GlobalTel Intellectual Property" has the meaning set forth in Section ------- 3.18. "GlobalTel Interim Balance Sheet" has the meaning set forth in Section 3.7. ----------- "GlobalTel Preferred Stock" means any share of the Series A Convertible Preferred Stock, $0.01 par value per share, of GlobalTel. "GlobalTel Proxy Statement" has the meaning set forth in Section 3.13. ------------ "GlobalTel Shareholders' Meeting" has the meaning set forth in Section ------- 3.13. "GlobalTel Shares" means any share of GlobalTel Common Stock or GlobalTel Preferred Stock. "GlobalTel Shareholder" means any Person who or which holds any GlobalTel Shares. "Governmental Authority" means (a) the United States of America, any state, commonwealth, territory or possession thereof and any political subdivision or quasi-governmental authority 3 of any of the same, including courts, tribunals, departments, commissions, boards, bureaus, agencies, counties, municipalities, provinces, parishes and other instrumentalities, and (b) any foreign (as to the United States of America) sovereign entity, including nations, states, republics, kingdoms and principalities, any state, province, commonwealth, territory or possession thereof, and any political subdivision or quasi-governmental authority of any of the same, including limited to courts, tribunals, departments, commissions, boards, bureaus, agencies, counties, municipalities, provinces, parishes and other instrumentalities. "Intellectual Property" has the meaning set forth in Section 3.18. ------------ "IRS" means the Internal Revenue Service. "Judgment" means any judgment, writ, order, injunction, award or decree of any court, judge, justice or magistrate, including any bankruptcy court or judge, and any order of or by any Governmental Authority. "Knowledge" means, in the case of GlobalTel, the actual knowledge after reasonable investigation of Ronald P. Erickson, German F.H. Burtscher, Ronald Fox and Eric Orse and, in the case of CSI, the actual knowledge after reasonable investigation of Robert A. Spade, Patrick R. Scanlon and Daniel R. Hudspeth. "Legal Requirement" means applicable common law and any constitution, statute, ordinance, code or other law, rule, regulation, technical or other standard, requirement or procedure enacted, adopted, promulgated, applied or followed by any Governmental Authority, including Judgments. "License" means any franchise, authorization, permit, license, consent or regulatory approval issued by any Governmental Authority. "Lien" means any lien, mortgage, pledge, encumbrance, indenture, charge, adverse interest or other security interest, other than liens for taxes not yet due and payable. "Litigation" means any claim, action, suit, proceeding, arbitration, investigation, hearing or other activity or procedure that could result in a Judgment, and any notice of any of the foregoing. "Material Adverse Effect" when used in connection with GlobalTel or any of its Subsidiaries, or CSI, as the case may be, means any change of effect that, individually or when taken together with all other such changes or effects that have occurred prior to the date of determination of the occurrence of the Material Adverse Effect, is or is reasonably likely to have a material adverse effect on the business, assets (including intangible assets), liabilities, financial condition, results of operations or prospects of GlobalTel and its Subsidiaries, taken as a whole, or CSI, as the case may be, or on the ability of the Surviving Corporation following the Merger to continue the business of GlobalTel and its Subsidiaries and CSI substantially as currently conducted (without loss of any material rights). 4 "Merger" has the meaning set forth in Section 2.1(a). -------------- "Merger Consideration" has the meaning set forth in Section 2.8(c). -------------- "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). "Parties" has the meaning set forth in the preface above. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Registration Statement" means that registration statement No. 333-47045 filed with the SEC. "Requisite CSI Shareholder Approval" means the affirmative vote of the holders of not less than a majority of CSI Shares in favor of this Agreement and the Merger. "Requisite GlobalTel Shareholder Approval" means the affirmative vote of the holders of not less than two-thirds of GlobalTel Shares as a whole, as well as the affirmative vote of the holders of two-thirds of the holders of each of GlobalTel Common Stock and GlobalTel Preferred Stock, voting as separate classes, in favor of this Agreement and the Merger. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Securities Exchange Act" means the Securities Exchange Act of 1934, as amended. "Subsidiary" means any corporation with respect to which GlobalTel (or a Subsidiary of GlobalTel) owns a majority of the common stock or has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Superior Proposal" has the meaning set forth in Section 5.3 (a). --------------- "Surviving Corporation" has the meaning set forth in Section 2.1(a). -------------- "Taxes" means all levies and assessments of any kind or nature imposed by any Governmen tal Authority, including all income, sales, use, ad valorem, value added, franchise, severance, net or gross proceeds, withholding, payroll, employment, excise or property taxes, together with any interest thereon and any penalties, additions to tax or additional amounts applicable thereto. 5 "Total Post-Merger Outstanding Common Stock" means the Total Pre-Merger Outstanding CSI Common Stock divided by 60%. "Total Pre-Merger Outstanding CSI Common Stock" means the aggregate number of shares of CSI Common Stock outstanding immediately prior to the Effective Time. For purposes of this definition, all shares of CSI Common Stock issuable upon exercise of options or upon conversion, exchange or exercise of other securities or other rights outstanding immediately prior to the Effective Time (regardless of whether then exercisable, convertible or exchangeable) shall be deemed to be outstanding; provided, however that the CSI Common Stock to be issued in connection with the purchase of International Telephone Company ("ITC") or CSI's public offering pursuant to the Registration Statement (including any shares issuable pursuant to underwriters' warrants) shall not be included as part of Total Pre-Merger Outstanding CSI Common Stock. "Total Pre-Merger Outstanding GlobalTel Common Stock" means the aggregate number of shares of GlobalTel Common Stock outstanding immediately prior to the Effective Time. For purposes of this definition, all shares of GlobalTel Common Stock issuable upon exercise of options or upon conversion, exchange or exercise of other securities or other rights outstanding immediately prior to the Effective Time (regardless of whether then exercisable, convertible or exchangeable), shall be deemed to be outstanding. "Washington Business Corporation Act" means the Washington Business Corporation Act, as amended. ARTICLE II Basic Transaction ----------------- SECTION 2.1 The Merger. ---------- (a) Merger; Surviving Corporation. On and subject to the terms and ----------------------------- conditions of this Agreement, at the Effective Time, GlobalTel will merge with and into CSI (the "Merger") in accordance with the Colorado Business Corporation Act and the Washington Business Corporation Act, whereupon the separate existence of GlobalTel shall cease, and CSI shall be the surviving corporation (the "Surviving Corporation"). (b) Effective Time. As soon as practicable after satisfaction or, to -------------- the extent permitted hereunder, waiver of all conditions to the Merger set forth in Article VIII, CSI and GlobalTel will file articles of merger with the ------------ Secretaries of State of the State of Colorado and the State of Washington, respectively, and make all other filings or recordings required by the Colorado Business Corporation Act or the Washington Business Corporation Act in connection with the Merger. The Merger shall become effective at such time as the articles of merger are duly filed with the Secretaries of State of the State of Colorado and the State of Washington or at such later time as is specified in the articles of merger (the "Effective Time"). Based on the certificates to be delivered pursuant to Article VIII, CSI and GlobalTel shall calculate the ------------ numerical value of the 6 Common Stock Conversion Ratio specified in Section 2.4 and such numerical value ----------- shall be included in the articles of merger. The articles of merger, as filed, absent manifest error, shall be conclusive of such Common Stock Conversion Ratio. (c) Effect of the Merger. From and after the Effective Time, the -------------------- Surviving Corporation shall possess all the rights, privileges, powers and franchises and be subject to all of the restrictions, disabilities and duties of CSI and GlobalTel, all as provided under the Colorado Business Corporation Act and the Washington Business Corporation Act. SECTION 2.2 Articles of Incorporation; Bylaws. --------------------------------- (a) Articles of Incorporation of the Surviving Corporation. The ------------------------------------------------------ articles of incorporation of CSI as in effect at the Effective Time shall be the articles of incorporation of the Surviving Corporation until amended in accordance with applicable law, except that Article I of the articles of incorporation shall be amended to read in their entirety as follows: ARTICLE I --------- NAME ---- The name and style of said corporation shall be CS GLOBALTEL, INC. (b) Bylaws of the Surviving Corporation. The bylaws of CSI as in ----------------------------------- effect at the Effective Time shall be the bylaws of the Surviving Corporation until amended in accordance with applicable law, except that the second sentence of Article III, Section 1 of the bylaws and all of Article IV of the bylaws shall be amended to read in their entirety as set forth in Exhibit 1 attached --------- hereto and incorporated herein by this reference. SECTION 2.3 Directors and Officers. ---------------------- (a) Directors of the Surviving Corporation. At the Effective Time, -------------------------------------- all directors of CSI shall be deemed to have resigned as directors, except for Robert A. Spade and Patrick R. Scanlon who shall be directors of the Surviving Corporation until the next annual meeting of shareholders of the Surviving Corporation and until their respective successors are elected and qualified. At the Effective Time, Messrs. Spade and Scanlon shall fill the vacancies on the board of directors of the Surviving Corporation by electing those persons named on Exhibit 2 to hold office until the next annual meeting of shareholders of the --------- Surviving Corporation and until their respective successors are elected and qualified. (b) Officers of the Surviving Corporation. At the Effective Time, all ------------------------------------- officers of CSI shall continue as officers of the Surviving Corporation until their respective successors are elected and qualified, except that, at the Effective Time, Robert A. Spade shall resign as Chairman of the Board and the directors of the Surviving Corporation shall elect Ronald P. 7 Erickson to serve as Chairman of the Board and Robert A. Spade to serve as Chief Executive Officer and Vice Chairman of the Board, each to hold office until his respective successor is elected and qualified. SECTION 2.4 Conversion of Shares. -------------------- (a) GlobalTel Common Stock. At the Effective Time by virtue of the ---------------------- Merger, each issued and outstanding share of GlobalTel Common Stock outstanding immediately prior to the Effective Time (other than shares held as treasury stock of GlobalTel, CSI-owned Shares and GlobalTel Dissenting Shares) shall be converted, subject to Section 2.6, into the number of CSI Shares equal to the ----------- product of (x) the Total Post-Merger Outstanding Common Stock times (y) 40% divided by (z) the Total Pre-Merger Outstanding GlobalTel Common Stock (such number is referred to herein as the "Common Stock Conversion Ratio"). (b) GlobalTel Preferred Stock. At the Effective Time by virtue of the ------------------------- Merger, each issued and outstanding share of GlobalTel Preferred Stock shall be liquidated in accordance with its terms. Shares of GlobalTel Preferred Stock shall not have the right to be converted in the Merger into any CSI Shares. (c) Treasury Stock and CSI-owned Shares. At the Effective Time by ----------------------------------- virtue of the Merger, each share of GlobalTel Common Stock held as treasury stock of GlobalTel, each share of GlobalTel Preferred Stock held as treasury stock of GlobalTel and each CSI-owned Share immediately prior to the Effective Time shall be canceled and retired and cease to exist, and no exchange or payment shall be made with respect thereof. SECTION 2.5 Intentionally omitted. SECTION 2.6 No Fractional Shares. No fractional CSI Shares, and no -------------------- certificates representing such fractional shares, shall be issued upon the surrender for exchange of certificates representing GlobalTel Shares. In lieu of any fractional share, the Surviving Corporation shall pay to each holder of GlobalTel Shares who otherwise would be entitled to receive a fractional CSI Share (after aggregating all fractional CSI Shares to be received by such holder) an amount of cash (rounded to the nearest whole cent), without interest, equal to the product of (a) the average of the last sale price per CSI Share for the most recent thirty consecutive trading days preceding the Effective Time as reported on the OTC Bulletin Board, multiplied by (b) the fractional share interest to which such holder would otherwise be entitled. SECTION 2.7 Capital Stock of CSI. -------------------- (a) CSI Shares. On and after the Effective Time, each CSI Share ---------- issued and outstanding immediately prior to the Effective Time shall remain an issued and outstanding CSI Share and shall not be effected by the Merger. 8 (b) Reservation of CSI Shares. On and after the Effective Time, CSI ------------------------- shall reserve a sufficient number of authorized but unissued CSI Shares for issuance in connection with the conversion of GlobalTel Shares into CSI Shares as provided herein. SECTION 2.8 Procedure for Exchange of Stock Certificates. -------------------------------------------- (a) Certificates for CSI Shares. Prior to the Effective Time, the --------------------------- Surviving Corporation shall supply, or shall cause to be supplied, to or for the account of an exchange agent designated by the Surviving Corporation and reasonably acceptable to GlobalTel (the "Exchange Agent") certificates evidencing the CSI Shares issuable pursuant to Section 2.4. ----------- (b) Letter of Transmittal and Instructions. As soon as reasonably -------------------------------------- practicable after the Effective Time, the Surviving Corporation will cause the Exchange Agent to mail to each holder of record of one or more GlobalTel Shares immediately prior to the Effective Time (other than treasury shares of GlobalTel, CSI-owned Shares and GlobalTel Dissenting Shares) (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the certificate or certificates which evidenced such GlobalTel Share or GlobalTel Shares (the "Certificates") shall pass, only upon proper delivery of the Certificates to the Exchange Agent and shall be in such form and have such other provisions as the Surviving Corporation reasonably may specify and (ii) instructions to effect the surrender of the Certificates in exchange for certificates representing the CSI Shares and, in lieu of any fractional share thereof, cash. The Exchange Agent shall be provided with the GlobalTel Shares Schedule referred to in Section 3.4(c) in order to determine, for its purposes, the number of GlobalTel Shares now evidenced by each surrendered Certificate, in order to verify the number of CSI Shares that the holder of such GlobalTel Shares is entitled to receive on account of his or her compliance with the procedures in the letter of transmittal. (c) Delivery of Merger Consideration. Upon surrender of a Certificate -------------------------------- for cancellation to the Exchange Agent together with the letter of transmittal described above, duly completed and executed, the holder of such Certificate shall be entitled to receive in exchange therefor (i) certificates evidencing that number of CSI Shares which such holder has the right to receive in accordance with the Common Stock Conversion Ratio in respect of the GlobalTel Shares formerly evidenced by such Certificate, (ii) any dividends or other distributions to which such holder is entitled pursuant to Section 2.8(d), and -------------- (iii) cash in lieu of fractional CSI Shares to which such holder is entitled pursuant to Section 2.6 (the CSI Shares, dividends, distributions and cash ----------- described in this Section 2.8(c) being, collectively, the "Merger -------------- Consideration"), and the Certificate so surrendered shall forthwith be canceled. (d) Dividends and Distributions. Until Certificates are surrendered --------------------------- as provided in this Section 2.8, no dividend or distribution payable to holders ----------- of record of CSI Shares shall be paid to any holder of such Certificates, but upon surrender of such Certificates by such holder there shall be paid to such holder the amount of any dividends or distributions (without interest) theretofore paid with respect to such whole CSI Shares, but not paid to such holder, and which dividends or distributions had a record date occurring on or subsequent to the Effective Time. 9 (e) Transfers of GlobalTel Shares. In the event of a transfer of ----------------------------- ownership of GlobalTel Shares which is not registered in the transfer records of GlobalTel as of the Effective Time, CSI Shares and cash may be issued and paid in accordance with this Section 2.8 to a transferee if the Certificate ----------- evidencing such GlobalTel Shares is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid. (f) Certificates. Until surrendered as provided in this Section 2.8, ------------ ----------- each outstanding Certificate that, immediately prior to the Effective Time, represented GlobalTel Shares (other than treasury shares of GlobalTel, CSI-owned Shares and GlobalTel Dissenting Shares) will be deemed from and after the Effective Time, for all corporate purposes other than the payment of dividends and the making of distributions, to evidence the ownership of the number of whole CSI Shares into which such GlobalTel Shares shall have been converted (pursuant to Section 2.4) and the right to receive an amount in cash in lieu of ----------- the issuance of any fractional shares (pursuant to Section 2.6). ----------- (g) No Liability. Neither CSI nor GlobalTel shall be liable to any ------------ holder of GlobalTel Shares for any Merger Consideration (or dividends or distributions with respect thereto) delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (h) Withholding Rights. The Surviving Corporation and the Exchange ------------------ Agent shall be entitled to deduct and withhold from the Merger Consideration otherwise payable pursuant to this Agreement to any holder of GlobalTel Shares such amounts as the Surviving Corporation or the Exchange Agent is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local, provincial or foreign tax law. To the extent that amounts are so withheld, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the CSI Shares in respect of which such deduction and withholding was made. (i) Lost Certificates. In the event any Certificate shall have been ----------------- lost, stolen or destroyed, the Exchange Agent shall issue and pay in exchange for such lost, stolen or destroyed Certificate, upon the making of an affidavit of that fact by the holder of record thereof, such CSI Shares and cash for fractional shares, if any, as may be required pursuant to this Agreement; provided, however, that CSI may, in its discretion and as a condition precedent to the issuance and payment thereof, require the owner of such lost, stolen or destroyed Certificate to deliver a bond in such sum as it may reasonably require as indemnity against any claim that may be made against CSI, GlobalTel, the Exchange Agent or any other party with respect to the Certificate alleged to have been lost, stolen or destroyed. (j) Limitations on Resale. The CSI Shares to be issued in the Merger --------------------- have not been registered for sale under state or federal securities laws and will be "restricted securities." The issuance of such CSI Shares is intended to be exempt from registration under the 10 Securities Act by virtue of Section 4(2) of the Securities Act and the provisions of Rule 506 of Regulation D promulgated thereunder. CSI Shares issued in the Merger are subject to restrictions on transferability and resale and may not be sold or otherwise transferred without registration under the Securities Act and applicable state securities laws or without an exemption therefrom. CSI has no obligation to register such CSI Shares except as set forth in Section 8.1(e). Any certificate representing such CSI Shares may bear -------------- a legend restricting the transfer thereof consistent with the foregoing. SECTION 2.9 Stock Transfer Books. At the Effective Time, the stock -------------------- transfer books of GlobalTel shall be closed, and there shall be no further registration of transfers of GlobalTel Shares thereafter on the records of GlobalTel. SECTION 2.10 Dissenting Shares. ----------------- (a) GlobalTel Dissenting Shares. The holders of GlobalTel Shares are --------------------------- entitled to dissenters' rights under the Washington Business Corporation Act. Notwithstanding any provision of this Agreement to the contrary, any GlobalTel Dissenting Shares shall not be converted into CSI Shares as otherwise provided in Section 2.4 unless and until the holder of such GlobalTel Dissenting Shares ----------- shall have effectively withdrawn or otherwise lost such holder's dissenter's rights under the Washington Business Corporation Act, at which time such GlobalTel Shares shall be converted into CSI Shares as provided in Section 2.4. ------------ Following approval of the Merger by the shareholders of GlobalTel, GlobalTel or the Surviving Corporation shall deliver notice to the holders of GlobalTel Dissenting Shares as required by Section 23B.13.220 of the Washington Business ------------------ Corporation Act. Promptly following the Effective Time (or the later due receipt of demand for payment and deposit of certificates representing GlobalTel Dissenting Shares), the Surviving Corporation shall remit to the holders of GlobalTel Dissenting Shares payment of the fair value of such shares, as determined by the Surviving Corporation. (b) CSI Dissenting Shares. The holders of CSI Shares on the record --------------------- date fixed to determine the shareholders of CSI entitled to receive notice of the CSI Shareholders' Meeting are entitled to dissenters' rights under the Colorado Business Corporation Act. Following approval of the Merger by the shareholders of CSI, CSI or the Surviving Corporation shall deliver notice to the holders of CSI Dissenting Shares as required by Section 7-113-203 of the ----------------- Colorado Business Corporation Act. Promptly following the Effective Time (or the later due receipt of demand for payment and deposit of certificates representing CSI Dissenting Shares), the Surviving Corporation shall remit to the holders of CSI Dissenting Shares payment of the fair value of such shares, as determined by the Surviving Corporation. SECTION 2.11 Closing. Unless this Agreement shall have been terminated ------- pursuant to the provisions of Article IX, and subject to the provisions of ---------- Article VIII, the closing of the Merger (the "Closing") shall take place at - ------------ 10:00 a.m. (local time) on a date (the"Closing Date") to be mutually agreed upon by the Parties, which date shall be no later than the third Business Day after all of the conditions set forth in Article VIII shall have been satisfied (or ------------ waived in accordance with the 11 provisions of this Agreement), unless another date is agreed to in writing by the Parties. The closing shall take place at the offices of Parcel, Mauro & Spaanstra, P.C. in Denver, Colorado, unless another place is agreed to in writing by the Parties. SECTION 2.12 Taking of Necessary Action. Prior to the Effective Time, -------------------------- the Parties shall take, or cause to be taken (as the case may be), all such reasonable actions as may be necessary or appropriate in order to effectuate, as expeditiously as reasonably practicable, the Merger. SECTION 2.13 Piggyback Registration Rights. CSI grants to the holders of ----------------------------- CSI Shares issued in the Merger by conversion of GlobalTel Shares those piggyback registration rights described (and for the period prescribed) in Exhibit 3 attached hereto and by this reference incorporated herein. - --------- ARTICLE III Representations and Warranties of GlobalTel ------------------------------------------- Except as specifically set forth in and qualified by the disclosure schedule furnished by GlobalTel to CSI prior to the date hereof (the "GlobalTel Disclosure Schedule"), which GlobalTel Disclosure Schedule shall refer specifically to each Section or subsection of this Agreement that is so qualified by a disclosure set forth therein, GlobalTel represents and warrants to CSI that: SECTION 3.1 Organization and Qualification. Except as set forth in ------------------------------ Section 3.1 of the GlobalTel Disclosure Schedule, each of GlobalTel and its - ----------- Subsidiaries is a corporation duly organized and validly existing, under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority, and is in possession of all franchises, grants, Licenses, easements, certificates, approvals and orders necessary, to own, lease and operate the properties it purports to own, lease and operate and to carry on its business as now conducted. Each of GlobalTel and its Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes such qualification necessary except where the lack of such qualification would not have a Material Adverse Effect. SECTION 3.2 Subsidiaries. A true and complete list of all of ------------ GlobalTel's Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary and the percentage of each Subsidiary's outstanding capital stock owned by GlobalTel or another Subsidiary, is set forth in Section 3.2 of ----------- the GlobalTel Disclosure Schedule, except as noted therein. Except as set forth in Section 3.2 of the GlobalTel Disclosure Schedule, GlobalTel does not directly ----------- or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for, any equity or similar interest in, any Person. SECTION 3.3 Articles of Incorporation and Bylaws. GlobalTel has ------------------------------------ heretofore furnished to CSI a complete and correct copy of its articles of incorporation and bylaws, each as amended to the date of this Agreement, and, except as set forth in Section 3.3 of the GlobalTel Disclosure Schedule, ----------- equivalent organizational documents of each of its Subsidiaries, each as amended to the date of this 12 Agreement. Such articles of incorporation and bylaws and equivalent organizational documents are in full force and effect. Neither GlobalTel nor any of its Subsidiaries is in violation of any of the provisions of its respective articles of incorporation or bylaws or equivalent organizational documents. SECTION 3.4 Capitalization. -------------- (a) GlobalTel. The entire authorized capital stock of GlobalTel --------- consists of 50,000,000 shares of common stock, $0.05 par value per share and 5,000,000 shares of preferred stock, $0.01 par value per share, one series of which has been designated. As of March 31, 1998: (a) 1,747,976 shares of GlobalTel Common Stock were issued and outstanding, (b) 275,000 shares of GlobalTel Preferred Stock were issued and outstanding, (c) no GlobalTel Shares were held in the treasury of GlobalTel, (d) 640,108 shares of GlobalTel Common Stock were reserved for future issuance upon exercise of outstanding warrants and (e) 700,000 shares of GlobalTel Common Stock were reserved for future issuance pursuant to option grants under its 1996 Stock Option Plan. All of the issued and outstanding GlobalTel Shares have been duly authorized and are validly issued, fully paid, and nonassessable and have not been issued in violation of any preemptive right of shareholders. Except as set forth in Section 3.4 of the GlobalTel Disclosure Schedule, there are no outstanding or - ----------- authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other Contracts that could require GlobalTel or any of its Subsidiaries to issue, sell or otherwise cause to become outstanding any of its respective capital stock. Except as set forth in Section 3.4 of the ----------- GlobalTel Disclosure Schedule, there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to GlobalTel or any of its Subsidiaries. There are no outstanding obligations of GlobalTel or any of it Subsidiaries to repurchase, redeem or otherwise acquire any of their respective securities. (b) Subsidiaries. Section 3.4(b) of the GlobalTel Disclosure Schedule ------------ -------------- sets forth as of the date of this Agreement: (i) the authorized capital of each Subsidiary; (ii) the issued and outstanding shares of each Subsidiary; (iii) the owners of the issued and outstanding shares of each Subsidiary and the number of shares held by them in each Subsidiary; (iv) the number of shares held in the treasury of each Subsidiary; and (v) the number of shares of each Subsidiary reserved for future issuance. (c) Certificates for GlobalTel Shares. Earlier in 1998, GlobalTel ---------------------------------- completed a 1-for-5 reverse stock split of all issued and outstanding shares of GlobalTel Common Stock, pursuant to which the number of GlobalTel Shares held by each holder of GlobalTel Common Stock was reduced and any fractional share thereby created was converted to a right to receive cash. The number of GlobalTel Shares now evidenced by each stock certificate heretofore issued by GlobalTel (the "Certificates") is set forth in the schedule (the "GlobalTel Shares Schedule") described in Section 3.4(c) of the GlobalTel Disclosure -------------- Schedule, in the column entitled "POST-SPLIT Shares." (The GlobalTel Shares Schedule also identifies the number of GlobalTel Shares that existed and were evidenced by the Certificate prior to the reverse stock split and, where applicable, the fractional share created by the reverse stock split and now subject to monetary satisfaction.) 13 Each Certificate states a number of PRE-SPLIT Shares, and GlobalTel has not required its shareholders to surrender those Certificates or issued replacement certificates to evidence, for each holder, the POST-SPLIT number of GlobalTel Shares now held. SECTION 3.5 Authorization of Transaction. GlobalTel has all necessary ---------------------------- corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that GlobalTel cannot consummate the Merger unless and until it receives the Requisite GlobalTel Shareholder Approval. The execution and delivery of this Agreement by GlobalTel and the consummation by GlobalTel of the transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action other than the Requisite GlobalTel Shareholder Approval. This Agreement has been duly and validly executed and delivered by GlobalTel. This Agreement constitutes the valid and legally binding obligation of GlobalTel, enforceable in accordance with its terms and conditions, subject to (i) bankruptcy, insolvency, reorganization, arrangement, moratorium, and other laws of general application affecting the rights and remedies of creditors, and (ii) general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. SECTION 3.6 No Conflict; Required Filings and Consents. ------------------------------------------ (a) Except as set forth in Section 3.6 of the GlobalTel Disclosure ----------- Schedule, the execution and the delivery of this Agreement by GlobalTel and the consummation by GlobalTel of the Merger will not (i) violate or conflict with any provision of the articles of incorporation or bylaws or equivalent organizational documents of GlobalTel or any of its Subsidiaries, (ii) violate or conflict with any Legal Requirement applicable to GlobalTel or any of its Subsidiaries or by which any of their respective properties is bound or affected or (iii) conflict with, result in a breach of, constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or result in the creation of any Lien under, any Contract or License to which any of GlobalTel or any of its Subsidiaries is a party or by which it is bound or to which any of its assets is subject. (b) The execution and delivery of this Agreement by GlobalTel does not, and the performance of this Agreement by GlobalTel will not, require any consent, approval, authorization or permit of, or filing with or notification to any Governmental Authority or other Person, except (i) for applicable requirements, if any, of the Securities Act, the Securities Exchange Act and state securities laws, (ii) the filing of articles of merger under the Colorado Business Corporation Act and the Washington Business Corporation Act, and (iii) as set forth in Section 3.6(b) of the GlobalTel Disclosure Schedule. -------------- SECTION 3.7 GlobalTel Financial Statements. GlobalTel has delivered to ------------------------------ CSI: (a) an audited consolidated balance sheet of GlobalTel and its Subsidiaries as of December 31 in each of the years 1995, 1996 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flow for each of the fiscal years then ended, together with the report 14 of Arthur Andersen LLP, independent certified public accountants, (b) a consolidated balance sheet of GlobalTel and its Subsidiaries as of December 31, 1997 (including the notes thereto, the "GlobalTel Balance Sheet"), and the related consolidated statements of income, changes in stockholders' equity, and cash flow for the fiscal year then ended, together with the report of Arthur Andersen LLP, independent certified public accountants, and (c) an unaudited consolidated balance sheet of GlobalTel and its Subsidiaries as of March 31, 1998 (the "GlobalTel Interim Balance Sheet") and the related unaudited consolidated statements of income, changes in stockholders' equity, and cash flow for the three months then ended, including in each case the notes thereto (the financial statements referred to in clauses (a) through (c), together with the notes thereto, being hereinafter referred to collectively as the "GlobalTel Financial Statements"). The GlobalTel Financial Statements and notes fairly present the financial condition and the results of operation, changes in stockholders' equity, and cash flow of GlobalTel and its Subsidiaries as of the respective dates of and for the periods referred to in such Financial Statements, all in accordance with GAAP consistently applied throughout the periods involved (except as disclosed in the notes thereto), subject, in the case of interim GlobalTel Financial Statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (that, if presented, would not differ materially from those included in the GlobalTel Balance Sheet). SECTION 3.8 Absence of Certain Changes or Events. Except as set forth ------------------------------------ in Section 3.8 of the GlobalTel Disclosure Schedule, since December 31, 1997, ----------- each of GlobalTel and its Subsidiaries has conducted its respective business in the Ordinary Course of Business and there has not occurred: (a) any amendment or change in the articles of incorporation or bylaws or other equivalent organizational documents of GlobalTel or any of its Subsidiaries; (b) any damage to, destruction or loss of any assets of GlobalTel or any of its Subsidiaries (whether or not covered by insurance) that had a Material Adverse Effect; (c) any change by GlobalTel or any Subsidiary in its accounting methods, principles or practices; (d) any revaluation by GlobalTel or any of its Subsidiaries of any of their respective assets, including writing off notes or accounts receivable other than in the Ordinary Course of Business; (e) any event, occurrence or development of a state of circumstances or facts which has, had or reasonably could be expected to have, a Material Adverse Effect; (f) any declaration, setting aside or payment of any dividend or other distribution with respect to any GlobalTel Share, or any repurchase or redemption or other acquisition by GlobalTel of any outstanding GlobalTel Shares or other securities of, or other ownership interest in, GlobalTel. SECTION 3.9 No Undisclosed Liabilities. Except as disclosed in Section -------------------------- ------- 3.9 of the GlobalTel Disclosure Schedule, neither GlobalTel nor any of its - --- Subsidiaries has any liabilities (absolute, accrued, contingent or otherwise) which are, in the aggregate, material to the business, operations or financial condition of GlobalTel and its Subsidiaries taken as a whole, except liabilities (a) adequately provided for in the GlobalTel Balance Sheet, (b) incurred in the Ordinary Course of Business and not required under GAAP to be reflected on the GlobalTel Balance Sheet, (c) incurred since December 31, 1997 in the Ordinary Course of Business and consistent with past practice, and (d) incurred in connection with this Agreement. 15 SECTION 3.10 Absence of Litigation. Except as disclosed in Section 3.10 --------------------- ------------ of the GlobalTel Disclosure Schedule: (a) there is no Litigation pending or, to the Knowledge of GlobalTel, threatened against GlobalTel or any of its Subsidiaries, or any properties or rights of GlobalTel or any of its Subsidiaries, by or before any Governmental Authority or private arbitrational tribunal, domestic or foreign, that could have a Material Adverse Effect, and (b) there is not in existence any Judgment naming and requiring GlobalTel or any Subsidiary to take any action of any kind with respect to its assets or its business or to which GlobalTel or any Subsidiary, or its respective assets or business, is subject or by which they are bound or affected. SECTION 3.11 Employee Benefit Plans; Employment Agreements. --------------------------------------------- (a) Employee Plans. Section 3.11(a) of the GlobalTel Disclosure -------------- --------------- Schedule lists all employee benefit plans (as defined in Section 3(3) of ERISA), ------------ regardless of whether ERISA is applicable thereto, all other bonus stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance or termination pay, medical or life insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plans, agreements or arrangements and other similar fringe or employee benefit plans, programs or arrangements, and any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of GlobalTel or any of its Subsidiaries or any ERISA Affiliate of GlobalTel or any of its Subsidiaries, to which GlobalTel, any Subsidiary or any ERISA Affiliate of GlobalTel or any Subsidiary is a party, with respect to which GlobalTel, any Subsidiary or any ERISA Affiliate of GlobalTel or any Subsidiary has or could have any obligation, as well as each plan with respect to which GlobalTel, any Subsidiary or an ERISA Affiliate of GlobalTel or any Subsidiary has or could incur liability if such plan has been or were terminated (collectively, the "GlobalTel Employee Plans"), and GlobalTel has furnished to CSI a complete and correct copy of each such written GlobalTel Employee Plan. (b) Compliance. Except as set forth in Section 3.11(b) of the ---------- --------------- GlobalTel Disclosure Schedule, (i) none of the GlobalTel Employee Plans promises or provides retiree medical or other retiree welfare benefits to any Person and none of the GlobalTel Employee Plans is a "multi-employer plan" as such term is defined in Section 3(37) of ERISA; (ii) there has been no transaction or failure ------------- to act with respect to any GlobalTel Employee Plan, which could result in any material liability of GlobalTel or any Subsidiary; (iii) all GlobalTel Employee Plans are in compliance in all material respects with the requirements prescribed by any and all Legal Requirements currently in effect with respect thereto, and GlobalTel and each of its Subsidiaries have performed all material obligations required to be performed by them under, are not in any material respect in default under or violation of, and have no Knowledge of any default or violation by any other Person to, any of the GlobalTel Employee Plans, except as to which such non-compliance, non-performance or default would not have a Material Adverse Effect; (iv) each GlobalTel Employee Plan intended to qualify under Section 401(a) of the Code is the subject of a favorable determination -------------- letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions required to be made to any GlobalTel Employee Plan, or pursuant to the terms of any GlobalTel Employee Plan or any collective bargaining agreement, have been made on or before their 16 due dates and a reasonable amount has been accrued for contribution to each GlobalTel Employee Plan for the current plan years; (vi) with respect to each GlobalTel Employee Plan, no "reportable event" within the meaning of Section ------- 4043 of ERISA (excluding any such event for which the thirty day notice - ---- requirement has been waived under the regulations to Section 4043 of ERISA) nor ------------ any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and ------------------ ---- (vii) neither GlobalTel nor any Subsidiary nor any ERISA Affiliate of GlobalTel or any Subsidiary has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability for premium payments to the -------- Pension Benefit Guaranty Corporation arising in the Ordinary Course of Business). (c) Qualification. Each GlobalTel Employee Plan that is required or ------------- intended to be qualified under any applicable Legal Requirement or registered or approved by a Governmental Authority has been so qualified, registered or approved by the appropriate Governmental Authority, and nothing has occurred since the date of the last qualification, registration or approval to adversely affect, or cause the appropriate Governmental Authority to revoke, such qualification, registration or approval. (d) Contributions. All contributions (including premiums) required by ------------- any Legal Requirement or Contract to have been made or approved by GlobalTel or any Subsidiary under or with respect to GlobalTel Employee Plans have been paid or accrued by GlobalTel and its Subsidiaries. Without limiting the foregoing, except as disclosed in Section 3.11(d) of the GlobalTel Disclosure Schedule, --------------- there are no material unfunded liabilities under any GlobalTel Employee Plan. (e) No Litigation. There is no pending or, to the Knowledge of ------------- GlobalTel and its Subsidiaries, threatened Litigation against GlobalTel or any Subsidiary with respect to any of the GlobalTel Employee Plans. (f) No Employee Claims. Except as set forth in Section 3.11(f) of the ------------------ --------------- GlobalTel Disclosure Schedule, there is no Litigation pending or, to the Knowledge of GlobalTel and its Subsidiaries, threatened by former or present employees of GlobalTel or any Subsidiary (or their beneficiaries) with respect to GlobalTel Employee Plans or the assets or fiduciaries thereof (other than routine claims for benefits). (g) No Material Liability. No condition or event has occurred with --------------------- respect to the GlobalTel Employee Plans which has or could reasonably be expected to result in a material liability to GlobalTel or any Subsidiary. (h) Stock Options. Section 3.11(h) of the GlobalTel Disclosure ------------- -------- Schedule sets forth a true and complete list of each current or former employee, officer or director of GlobalTel or any Subsidiary who, as of the date of this Agreement, holds any option to purchase any GlobalTel Shares or any capital stock of any Subsidiary, together with the number of GlobalTel Shares or shares of capital stock of such Subsidiary subject to such option, the date of grant of such option, the extent to which such option is vested, the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock 17 option within the meaning of Section 422(b) of the Code and the expiration date -------------- of such option. Section 3.11(h) of the GlobalTel Disclosure Schedule also sets --------------- forth the total number of such incentive stock options and non-qualified options. (i) Employment and Other Contracts. GlobalTel has furnished to CSI ------------------------------ (i) complete and correct copies of all employment Contracts with officers of GlobalTel or any Subsidiary; (ii) complete and correct copies of all Contracts with consultants obligating GlobalTel or any Subsidiary to make annual cash payments in an amount exceeding $10,000; (iii) a schedule listing all officers of GlobalTel or any Subsidiary who have executed a non-competition Contract with GlobalTel or a Subsidiary; (iv) complete and correct copies of all plans, programs, Contracts and other arrangements of GlobalTel or any Subsidiary with or relating to its respective employees which contain change in control provisions; (v) the form of standard employment Contract, if any, of GlobalTel or any Subsidiary for its respective non-executive employees; (vi) the standard form agency, distributor or similar Contract, if any, of GlobalTel or any Subsidiary for its respective sales agents; and (vii) complete and correct copies of all confidentiality agreements or similar nondisclosure Contracts to which GlobalTel or any Subsidiary is a party or by which any of them is bound or affected. SECTION 3.12 Labor Matters. There are no controversies pending or, to ------------- the Knowledge of GlobalTel and its Subsidiaries, threatened, between GlobalTel or any of its Subsidiaries and any of their respective employees, which controversies have or may have a Material Adverse Effect. Neither GlobalTel nor any of its Subsidiaries is a party to any collective bargaining agreement or other labor union Contract applicable to persons employed by GlobalTel or any of its Subsidiaries. Neither GlobalTel nor any of its Subsidiaries knows of any activities or proceedings of any labor union to organize any such employees. Neither GlobalTel nor any of its Subsidiaries has any Knowledge of any strikes, slowdowns, work stoppages, lockouts or threats thereof by or with respect to any employees of GlobalTel or any of its Subsidiaries. SECTION 3.13 Proxy Statement. None of the information supplied or to be --------------- supplied by GlobalTel in writing for inclusion or incorporation by reference in (a) the proxy statement relating to the meeting of GlobalTel shareholders (the "GlobalTel Shareholders' Meeting") to be held in connection with the Merger (the "GlobalTel Proxy Statement"), (b) the proxy statement relating to the meeting of CSI shareholders (the "CSI Shareholders' Meeting") to be held in connection with the Merger (the "CSI Proxy Statement") or (c) the Registration Statement will, in the case of the Registration Statement, at the time it is filed with the SEC and at the time it becomes effective under the Securities Act, and, in the case of the GlobalTel Proxy Statement and the CSI Proxy Statement, at the date it or any amendments or supplements thereto are mailed to GlobalTel Shareholders and/or the shareholders of CSI, at the time of the GlobalTel Shareholders' Meeting, at the time of the CSI Shareholders' Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The GlobalTel Proxy Statement will comply as to form in all material respects with the applicable provisions of the Washington Business Corporation Act and any other applicable Legal 18 Requirements. If at any time prior to the Effective Time any event relating to GlobalTel or any Subsidiary or any of their respective Affiliates, officers or directors should be discovered by GlobalTel which should be set forth in an amendment to the Registration Statement or a supplement to the GlobalTel Proxy Statement or the CSI Proxy Statement, GlobalTel shall promptly inform CSI. Notwithstanding the foregoing, GlobalTel makes no representation or warranty with respect to any information supplied by CSI which is contained in any of the foregoing documents. SECTION 3.14 Restrictions on Business Activities. Except as set forth in ----------------------------------- Section 3.14 of the GlobalTel Disclosure Schedule and except for this Agreement, - ------------ there is no material Contract or Judgment binding upon GlobalTel or any Subsidiary which has or could reasonably be expected to have the effect of prohibiting or impairing any material business practice of GlobalTel or any of its Subsidiaries, acquisition of property by GlobalTel or any of its Subsidiaries or the conduct of business by GlobalTel or any of its Subsidiaries as currently conducted or as proposed to be conducted by GlobalTel. SECTION 3.15 Title to Assets. Except for personal property sold or --------------- otherwise disposed of in the Ordinary Course of Business since December 31, 1997, GlobalTel and its Subsidiaries have good and marketable title to all assets reflected on the GlobalTel Balance Sheet, free and clear of all Liens except (a) Liens reflected in the GlobalTel Balance Sheet and (b) Liens set forth in Section 3.15 of the GlobalTel Disclosure Schedule. The tangible assets ------------ reflected on the GlobalTel Balance Sheet are in good condition and repair, ordinary wear and tear excepted. The assets reflected on the GlobalTel Balance Sheet constitute all property and rights, real and personal, tangible and intangible, necessary or required, to operate the business of GlobalTel and its Subsidiaries as currently conducted. SECTION 3.16 Contracts and Licenses. ---------------------- (a) Identification. Section 3.16(a) of the GlobalTel Disclosure -------------- Schedule sets forth a correct and complete list of: (i) all Licenses possessed by or issued to GlobalTel or any of its Subsidiaries; and (ii) all Contracts to which GlobalTel or any of its Subsidiaries is a party or by which any of them or any of their respective properties is bound or affected in any of the following categories: carrier contracts, sales agent contracts, marketing contracts, product and service development contracts, director indemnity contracts and Contracts generally described in subsection 3.16(c). GlobalTel has delivered to CSI correct and complete copies of each of the Contracts and Licenses listed in Section 3.16(a) of the GlobalTel Disclosure Schedule, including any amendments - --------------- thereto (or, in the case of oral Contracts or Licenses, correct and complete written summaries thereof). (b) Validity. Except as set forth in Section 3.16(b) of the GlobalTel -------- --------------- Disclosure Schedule: (i) each of the Contracts and Licenses listed in Section ------- 3.16(a) thereof is valid, in full force and effect and enforceable in accordance - ------- with its terms against the parties thereto, and GlobalTel and its Subsidiaries have fulfilled when due, or have taken all action necessary to enable them to fulfill when due, all of their respective obligations thereunder; (ii) there has not occurred any 19 default (without regard to lapse of time, the giving of notice, the election of any Person other than GlobalTel or any Subsidiary or any combination thereof) by GlobalTel or any Subsidiary nor, to the Knowledge of GlobalTel and its Subsidiaries, by any other Person under any of such Contracts or Licenses, which default remains uncured; and (iii) neither GlobalTel nor any Subsidiary nor, to the Knowledge of GlobalTel and its Subsidiaries, any other Person is in arrears in the performance or satisfaction of its respective obligations under any of such Contracts or Licenses, and no waiver or indulgence has been granted by any of the parties thereto. (c) No Other Contracts and Licenses. Except for the Contracts and ------------------------------- Licenses listed in Section 3.16(a) of the GlobalTel Disclosure Schedule, neither --------------- GlobalTel nor any of its Subsidiaries is bound or affected by: (i) any lease of real or personal property (whether as lessor or lessee); (ii) any Contract granting any Person a Lien on or against any of the assets of GlobalTel or any of its Subsidiaries; (iii) any franchise or similar authorization; (iv) any license or permit authorized or issued by any Governmental Authority or any other Person; (v) any Contract of employment or Contract with any consultant or independent contractor; or (v) any Contract which contemplates payments by or to GlobalTel or any Subsidiary in any twelve-month period exceeding $25,000 individually or $50,000 in the aggregate. SECTION 3.17 Tax Matters. Except as set forth in Section 3.17 of the ----------- ------------ GlobalTel Disclosure Schedule, GlobalTel and each of the Subsidiaries have filed in true and correct form all federal, state, local and foreign Tax returns and other reports required to be filed and have timely paid all Taxes which have become due and payable, whether or not shown on any such return or report. Neither GlobalTel nor any Subsidiary has received any notice of, and neither GlobalTel nor any Subsidiary has any Knowledge of any notice of, deficiency or assessment or proposed deficiency or assessment from any Taxing Governmental Authority. There are no audits pending with respect to GlobalTel or any Subsidiary and there are no outstanding agreements or waivers by or with respect to GlobalTel or any Subsidiary that extend the statutory period of limitations applicable to any federal, state, local or foreign Tax returns or Taxes for any period. There are no determined Tax deficiencies or proposed assessments against GlobalTel or any Subsidiary. As of the date of the GlobalTel Balance Sheet the unpaid Taxes of GlobalTel and its Subsidiaries did not exceed the liability for Taxes set forth on the face of the GlobalTel Balance Sheet. SECTION 3.18 Intellectual Property Matters. ----------------------------- (a) GlobalTel Intellectual Property. Section 3.18(a) of the GlobalTel ------------------------------- --------------- Disclosure Schedule sets forth a correct and complete list of all domestic (federal, state or local) and foreign (i) patents and patent applications, (ii) trademark and service mark registrations, (iii) copyright registrations and applications, (iv) trade names and unregistered trademarks and service mark and (v) software (collectively, the "Intellectual Property") that are licensed to or owned or used by GlobalTel or any Subsidiary, and all applications for, or licenses or other rights to use any of the same (collectively, the "GlobalTel Intellectual Property"). Except as disclosed in Section 3.18(a) of the --------------- GlobalTel Disclosure Schedule: (i) the activities of GlobalTel and its Subsidiaries as currently conducted do not infringe, misappropriate or otherwise misuse any rights to Intellectual Property of 20 other Persons; (ii) the validity of GlobalTel Intellectual Property, and the title or other rights thereto of GlobalTel, have not been questioned in any Litigation to which GlobalTel or any Subsidiary is a party, nor to the Knowledge of GlobalTel and its Subsidiaries is any such Litigation threatened; and (iii) to the Knowledge of GlobalTel and its Subsidiaries, there is no unauthorized use, infringement, misappropriation or other misuse by other Persons of any GlobalTel Intellectual Property. (b) Validity. Except as set forth in Section 3.18 (b) of the -------- ---------------- GlobalTel Disclosure Schedule: (i) all patents, patent applications and rights to inventions or other intellectual property heretofore owned or held by any employee or officer of GlobalTel or any Subsidiary, where required by any Legal Requirement or Contract to be transferred to GlobalTel or any Subsidiary, have been duly and effectively transferred to GlobalTel or a Subsidiary with no restrictions on the subsequent transfer thereof by GlobalTel or any Subsidiary; (ii) there has been no act or omission by GlobalTel or any Subsidiary or any of their respective employees, duly authorized attorneys or agents, as the case may be, or any other fact, which makes or will make invalid or unenforceable any of the GlobalTel Intellectual Property (by assignment or otherwise), or which negates or will negate the right to the issuance of any the GlobalTel Intellectual Property; and (iii) all of the patents and trademark and service mark registrations included in the GlobalTel Intellectual Property have been duly issued by the United States Patent and Trademark office or the corresponding office of another country, as indicated in Section 3.18(b) of the --------------- GlobalTel Disclosure Schedule, and all copyright registrations included in the GlobalTel Intellectual Property have been duly issued by the United States Register of Copyrights or the corresponding office of another country, as indicated in Section 3.18(b) of the GlobalTel Disclosure Schedule. --------------- SECTION 3.19 Customers and Agents. Section 3.19 of the GlobalTel -------------------- ------------ Disclosure Schedule sets forth, as of December 31, 1997 the total number of sales agents engaged by GlobalTel and its Subsidiaries and the revenue of the top ten agents for the 12 months ended December 31, 1997. There has been no material loss of agents since December 31, 1997. SECTION 3.20 Compliance with Laws. Except as set forth in Section 3.20 -------------------- ------------ of the GlobalTel Disclosure Schedule, GlobalTel and each of its Subsidiaries (a) is not in violation of, and has not violated, any applicable provision of any Legal Requirement and (b) has not received any notice from any Governmental Authority or other Person that it is in violation of, or has violated, any applicable provision of any Legal Requirement, except in the case of both clauses (a) and (b) for violations, individually or in the aggregate, which have not had and could not reasonably be expected to have a Material Adverse Effect. Except as set forth in Section 3.20 of the GlobalTel Disclosure Schedule, ------------ GlobalTel and its Subsidiaries have all Licenses from Governmental Authorities required to conduct their respective businesses as now being conducted, except for such Licenses the absence of which would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 3.21 Brokers' Fees. Except as set forth in Section 3.21 of the ------------- ------------ GlobalTel Disclosure Schedule, none of GlobalTel and its Subsidiaries has any liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the Merger, except for a merger 21 completion fee payable to Cruttenden pursuant to written contract, a true and correct copy of which GlobalTel has furnished to CSI. SECTION 3.22 Continuity of Business Enterprise. GlobalTel operates at --------------------------------- least one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treas. Reg. (S)1.368-1(d). SECTION 3.23 Board Approval. The Board of Directors of GlobalTel has (a) -------------- approved this Agreement and the Merger and the transactions contemplated hereby and thereby, (b) determined that this Agreement and the Merger are in the best interests of the GlobalTel shareholders and are on terms that are fair to such shareholders and (c) recommended that the GlobalTel shareholders approve this Agreement and the Merger. SECTION 3.24 Vote Required. The affirmative vote of (a) the holders of ------------- not less than two-thirds of the outstanding GlobalTel Common Stock and the outstanding GlobalTel Preferred Stock, voting together, (b) the holders of not less than two-thirds of the outstanding GlobalTel Common Stock, voting as a voting group and (c) the holders of not less than two-thirds of the outstanding GlobalTel Preferred Stock, voting as a voting group, is required to approve this Agreement and the Merger. SECTION 3.25 Nature of GlobalTel Shareholders. At the date of this -------------------------------- Agreement, at the date the GlobalTel Proxy Statement or any amendments or supplements thereto are mailed to GlobalTel Shareholders, at the time of the GlobalTel Shareholders' Meeting, and at the Effective Time, each Person entitled to receive CSI Shares in the Merger either (a) shall be an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated by the SEC or (b) shall alone or with such Person's "purchase representative" (as such term is defined in Rule 501(d) of said Regulation D) have such knowledge and experience in financial and business matters that such Person is capable of evaluating the merits and risks of the Merger and the investment in CSI Shares. SECTION 3.26 Determination of Preferred Stock Liquidation Preference. ------------------------------------------------------- The Chief Executive Officer of GlobalTel has determined, pursuant to Article III, Section (C)(3) of GlobalTel's amended and restated articles of incorporation, that the liquidation preference per share of GlobalTel Preferred Stock shall be $4.00 plus any unpaid dividend accrued thereon. ARTICLE IV Representations and Warranties of CSI ------------------------------------- Except as specifically set forth in and qualified by the disclosure schedule furnished by CSI to GlobalTel prior to the date hereof (the "CSI Disclosure Schedule"), which CSI Disclosure Schedule shall refer specifically to each Section or subsection of this Agreement that is so qualified by a disclosure set forth therein, CSI represents and warrants to GlobalTel that: 22 SECTION 4.1 Organization and Qualification. Except as set forth in ------------------------------ Section 4.1 of the CSI Disclosure Schedule, CSI is a corporation duly organized, - ----------- validly existing, and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority, and is in possession of all grants, Licenses, easements, certificates, approvals and orders necessary, to own, lease and operate the properties it purports to own, lease and operate and to carry on its business as now conducted. Except in Florida, where CSI is in the process of qualifying as a foreign corporation, CSI is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction where the character of the property owned, leased or operated by it or the nature of its activities makes such qualification necessary except where the lack of such qualification would not have a Material Adverse Effect. SECTION 4.2 Articles of Incorporation and Bylaws. CSI has heretofore ------------------------------------ furnished to GlobalTel a complete and correct copy of CSI's articles of incorporation and bylaws, each as amended to the date of this Agreement. Such articles of incorporation and bylaws are in full force and effect. CSI is not in violation of any of the provisions of its articles of incorporation or bylaws. SECTION 4.3 Capitalization. The entire authorized capital stock of CSI -------------- consists of 25,00,000 shares of common stock, no par value per share and 5,000,000 shares of preferred stock, no par value per share. As of March 31, 1998: (a) 10,505,657 shares of CSI Common Stock were issued and outstanding, (b) no shares of CSI Preferred Stock were issued and outstanding, (c) 241,126 CSI Shares were held in the treasury of CSI, (d) 601,150 shares of CSI Common Stock were reserved for future issuance upon exercise of outstanding warrants and (e) 3,000,000 shares of CSI Common Stock were reserved for future issuance pursuant to option grants under its 1998 Stock Option Plan. All of the issued and outstanding CSI Shares have been duly authorized and are validly issued, fully paid, and nonassessable (except for 60,000 CSI Shares that were purchased with a promissory note) and have not been issued in violation of any preemptive right of shareholders. Except as set forth in Section 4.3 of the CSI Disclosure ----------- Schedule, there are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights, exchange rights, or other Contracts that could require CSI or any of its Subsidiaries to issue, sell, or otherwise cause to become outstanding any of its respective capital stock. Except as set forth in Section 4.3 of the CSI Disclosure Schedule, there are no ----------- outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to CSI or any of its Subsidiaries. There are no outstanding obligations of CSI or any of it Subsidiaries to repurchase, redeem or otherwise acquire any of their respective securities. SECTION 4.4 Authorization of Transaction. CSI has all necessary ---------------------------- corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder; provided, however, that CSI cannot consummate the Merger unless and until it receives the Requisite CSI Shareholder Approval. The execution and delivery of this Agreement by CSI and the consummation by CSI of the transactions contemplated by this Agreement have been duly and validly authorized by all necessary corporate action other than the Requisite CSI Shareholder Approval. This Agreement has been duly and validly executed and delivered by CSI. This Agreement constitutes the valid and legally binding obligation of CSI, enforceable in accordance with its terms and 23 conditions, subject to (i) bankruptcy, insolvency, reorganization, arrangement, moratorium, and other laws of general application affecting the rights and remedies of creditors, and (ii) general principles of equity, regardless of whether such enforcement is considered in a proceeding in equity or at law. SECTION 4.5 No Conflict; Required Filings and Consents. ------------------------------------------ (a) Except as set forth in Section 4.5 of the CSI Disclosure Schedule, ----------- the execution and the delivery of this Agreement by CSI and the consummation by CSI of the Merger will not (i) violate or conflict with any provision of the articles of incorporation or bylaws of CSI, (ii) violate or conflict with any Legal Requirement applicable to CSI or by which any of its properties is bound or affected or (iii) conflict with, result in a breach of, constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or result in the creation of any Lien under, any Contract or License to which CSI is a party or by which it is bound or to which any of its assets is subject. (b) The execution and delivery of this Agreement by CSI does not, and the performance of this Agreement by CSI will not, require any consent, approval, authorization or permit of, or filing with or notification to any Governmental Authority or other Person, except (i) for applicable requirements, if any, of the Securities Act, the Securities Exchange Act, and state securities laws, (ii) the filing of articles of merger under the Colorado Business Corporation Act and the Washington Business Corporation Act, and (iii) as set forth in Section 4.5(b) of the CSI Disclosure Schedule. -------------- SECTION 4.6 CSI Financial Statements. CSI has delivered to GlobalTel: ------------------------ (a) an audited balance sheet of CSI as of April 30, 1997, and the related statements of operations, changes in stockholders' equity, and cash flow for the fiscal years then ended, together with the report of Stockman Kast Ryan & Scruggs, P.C., independent certified public accountants, (b) an unaudited balance sheet of CSI as of December 31, 1997 (including the notes thereto, the "CSI Balance Sheet"), and the related unaudited statements of operations, changes in stockholders' equity, and cash flow for the fiscal year then ended, and (c) an unaudited balance sheet of CSI as of March 31, 1998 (the "CSI Interim Balance Sheet") and the related unaudited statements of operations, changes in stockholders' equity, and cash flow for the nine months then ended, including in each case the notes thereto (the financial statements referred to in clauses (a) through (c), together with the notes thereto, being hereinafter referred to collectively as the "CSI Financial Statements"). The CSI Financial Statements fairly present the financial condition and the results of operation, changes in stockholders' equity, and cash flow of CSI as of the respective dates of and for the periods referred to in such Financial Statements, all in accordance with GAAP consistently applied throughout the periods involved (except as disclosed in the notes thereto), subject, in the case of interim CSI Financial Statements, to normal recurring year-end adjustments (the effect of which will not, individually or in the aggregate, be materially adverse) and the absence of notes (that, if presented, would not differ materially from those included in the CSI Balance Sheet). 24 SECTION 4.7 Absence of Certain Changes or Events. Except as set forth ------------------------------------ in Section 4.7 of the CSI Disclosure Schedule, since April 30, 1997, CSI has ----------- conducted its business in the Ordinary Course of Business and there has not occurred: (a) any amendment or change in the articles of incorporation or bylaws of CSI; (b) any damage to, destruction or loss of any assets of CSI (whether or not covered by insurance) that had a Material Adverse Effect; (c) any change by CSI in its accounting methods, principles or practices; (d) any revaluation by CSI of any of its assets, including writing off notes or accounts receivable other than in the Ordinary Course of Business; (e) any event, occurrence or development of a state of circumstances or facts which has, had or reasonably could be expected to have, a Material Adverse Effect; or (f) any declaration, setting aside or payment of any dividend or other distribution with respect to any CSI Common Stock or CSI Preferred Stock, or any repurchase or redemption or other acquisition by CSI of any outstanding shares of capital stock or other securities of, or other ownership or interest in, CSI. SECTION 4.8 No Undisclosed Liabilities. Except as disclosed in Section -------------------------- ------- 4.8 of the CSI Disclosure Schedule, CSI does not have any liabilities (absolute, - --- accrued, contingent or otherwise) which are, in the aggregate, material to the business, operations or financial condition of CSI , except liabilities (a) adequately provided for in the CSI Balance Sheet, (b) incurred in the Ordinary Course of Business and not required under GAAP to be reflected on the CSI Balance Sheet, (c) incurred since April 30, 1997 in the Ordinary Course of Business and consistent with past practice, and (d) incurred in connection with this Agreement. SECTION 4.9 Absence of Litigation. Except as disclosed in Section 4.9 --------------------- ----------- of the CSI Disclosure Schedule, there is no Litigation pending or, to the Knowledge of CSI, threatened against CSI or any properties or rights of CSI before any Governmental Authority or private arbitrational tribunal, domestic or foreign, that could have a Material Adverse Effect and (b) there is not in existence any Judgment naming and requiring CSI to take any action of any kind with respect to its assets or its business or to which CSI, or is assets or business, is subject or by which they are bound or affected. SECTION 4.10 Employee Benefit Plans; Employment Agreements. --------------------------------------------- (a) Employee Plans. Section 4.10(a) of the CSI Disclosure Schedule -------------- --------------- lists all employee benefit plans (as defined in Section 3(3) of ERISA), ------------ regardless of whether ERISA is applicable thereto, all other bonus stock option, stock purchase, incentive, deferred compensation, supplemental retirement, severance or termination pay, medical or life insurance, supplemental unemployment benefits, profit-sharing, pension or retirement plans, agreements or arrangements and other similar fringe or employee benefit plans, programs or arrangements, and any current or former employment or executive compensation or severance agreements, written or otherwise, for the benefit of, or relating to, any employee of CSI any ERISA Affiliate of CSI, to which CSI or any ERISA Affiliate of CSI is a party, with respect to which CSI or any ERISA Affiliate of CSI has or could have any obligation, as well as each plan with respect to which CSI or an ERISA Affiliate of CSI has or could incur liability if such plan has been or were terminated (collectively, the "CSI 25 Employee Plans"), and CSI has furnished to GlobalTel a complete and correct copy of each such written Employee Plan. (b) Compliance. Except as set forth in Section 4.10(b) of the CSI ---------- --------------- Disclosure Schedule, (i) none of the CSI Employee Plans promises or provides retiree medical or other retiree welfare benefits to any Person and none of the CSI Employee Plans is a "multi-employer plan" as such term is defined in Section ------- 3(37) of ERISA; (ii) there has been no transaction or failure to act with - ----- respect to any CSI Employee Plan, which could result in any material liability of CSI; (iii) all CSI Employee Plans are in compliance in all material respects with the requirements prescribed by any and all Legal Requirements currently in effect with respect thereto, and CSI has performed all material obligations required to be performed by it under, is not in any material respect in default under or violation of, and has no Knowledge of any default or violation by any other Person to, any of the CSI Employee Plans, except as to which such non- compliance, non-performance or default would not have a Material Adverse Effect; (iv) each CSI Employee Plan intended to qualify under Section 401(a) of the Code -------------- is the subject of a favorable determination letter from the IRS, and nothing has occurred which may reasonably be expected to impair such determination; (v) all contributions required to be made to any CSI Employee Plan, or pursuant to the terms of any CSI Employee Plan or any collective bargaining agreement, have been made on or before their due dates and a reasonable amount has been accrued for contribution to each CSI Employee Plan for the current plan years; (vi) with respect to each CSI Employee Plan, no "reportable event" within the meaning of Section 4043 of ERISA (excluding any such event for which the thirty day notice - ------------ requirement has been waived under the regulations to Section 4043 of ERISA) nor ------------ any event described in Section 4062, 4063 or 4041 of ERISA has occurred; and ------------------ ---- (vii) neither CSI nor any ERISA Affiliate of CSI has incurred, nor reasonably expects to incur, any liability under Title IV of ERISA (other than liability -------- for premium payments to the Pension Benefit Guaranty Corporation arising in the Ordinary Course of Business). (c) Qualification. Each CSI Employee Plan that is required or ------------- intended to be qualified under any applicable Legal Requirement or registered or approved by a Governmental Authority has been so qualified, registered or approved by the appropriate Governmental Authority, and nothing has occurred since the date of the last qualification, registration or approval to adversely affect, or cause the appropriate Governmental Authority to revoke, such qualification, registration or approval. (d) Contributions. All contributions (including premiums) required by ------------- any Legal Requirement or Contract to have been made or approved by CSI under or with respect to CSI Employee Plans have been paid or accrued by CSI. Without limiting the foregoing, except as disclosed in Section 4.10(d) of the CSI --------------- Disclosure Schedule, there are no material unfunded liabilities under any CSI Employee Plan. (e) No Litigation. There is no pending or, to the Knowledge of CSI, ------------- threatened Litigation against CSI with respect to any of the CSI Employee Plans. 26 (f) No Employee Claims. Except as set forth in Section 4.10(f) of the ------------------ --------------- CSI Disclosure Schedule, there is no Litigation pending or, to the Knowledge of CSI, threatened by former or present employees of CSI (or their beneficiaries) with respect to CSI Employee Plans or the assets or fiduciaries thereof (other than routine claims for benefits). (g) No Material Liability. No condition or event has occurred with --------------------- respect to the CSI Employee Plans which has or could reasonably be expected to result in a material liability to CSI. (h) Stock Options. Section 4.10(h) of the CSI Disclosure Schedule ------------- -------- sets forth a true and complete list of each current or former employee, officer or director of CSI who, as of the date of this Agreement, holds any option to purchase and CSI Shares, together with the number of CSI subject to such option, the date of grant of such option, the extent to which such option is vested, the option price of such option (to the extent determined as of the date hereof), whether such option is intended to qualify as an incentive stock option within the meaning of Section 422(b) of the Code and the expiration date of such -------------- option. Section 4.10(h) of the CSI Disclosure Schedule also sets forth the --------------- total number of such incentive stock options and non-qualified options. (i) Employment and Other Contracts. CSI has furnished to GlobalTel ------------------------------ (i) complete and correct copies of all employment Contracts with officers of CSI; (ii) complete and correct copies of all Contracts with consultants obligating CSI to make annual cash payments in an amount exceeding $10,000; (iii) a schedule listing all officers of CSI who have executed a non-competition Contract with CSI; (iv) complete and correct copies of all plans, programs, Contracts and other arrangements of CSI with or relating to its respective employees which contain change in control provisions; (v) the form of standard employment Contract, if any, of CSI for its respective non-executive employees; (vi) the standard form agency, distributor or similar Contract, if any, of CSI for its sales agents; and (vii) complete and correct copies of all confidentiality agreements or similar nondisclosure Contracts to which CSI is a party or by which it is bound or affected. SECTION 4.11 Labor Matters. There are no controversies pending or, to ------------- the Knowledge of CSI, threatened, between CSI and any of its employees, which controversies have or may have a Material Adverse Effect. CSI is a not party to any collective bargaining agreement or other labor union Contract applicable to persons employed by CSI. CSI does not know of any activities or proceedings of any labor union to organize any such employees. CSI has no Knowledge of any strikes, slowdowns, work stoppages, lockouts or threats thereof by or with respect to any employees of CSI. SECTION 4.12 Proxy Statement. None of the information supplied or to be --------------- supplied by CSI in writing for inclusion or incorporation by reference in the GlobalTel Proxy Statement, the CSI Proxy Statement or the Registration Statement will, in the case of the Registration Statement, at the time it is filed with the SEC and at the time it becomes effective under the Securities Act, and, in the case of the GlobalTel Proxy Statement and the CSI Proxy Statement, at the date it or any amendments or supplements thereto are mailed to GlobalTel Shareholders and/or the shareholders 27 of CSI, at the time of the GlobalTel Shareholders' Meeting, at the time of the CSI Shareholders' Meeting and at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The CSI Proxy Statement will comply as to form in all material respects with the applicable provisions of the Colorado Business Corporation Act and any other applicable Legal Requirements. If at any time prior to the Effective Time any event relating to CSI or any of its Affiliates, officers or directors should be discovered by CSI which should be set forth in an amendment to the Registration Statement or a supplement to GlobalTel Proxy Statement or the CSI Proxy Statement, CSI shall promptly inform GlobalTel. Notwithstanding the foregoing, CSI makes no representation or warranty with respect to any information supplied by GlobalTel which is contained in any of the foregoing documents. SECTION 4.13 Restrictions on Business Activities. Except as set forth in ----------------------------------- Section 4.13 of the CSI Disclosure Schedule and except for this Agreement, there - ------------ is no material Contract or Judgment binding upon CSI which has or could reasonably be expected to have the effect of prohibiting or impairing any material business practice of CSI, acquisition of property by CSI or the conduct of business by CSI as currently conducted or as proposed to be conducted by CSI. SECTION 4.14 Title to Assets. Except for personal property sold or --------------- otherwise disposed of in the Ordinary Course of Business since April 30, 1997, CSI has good and marketable title to all assets reflected on the CSI Balance Sheet, free and clear of all Liens except (a) Liens reflected in the CSI Balance Sheet and (b) Liens set forth in Section 4.14 of the CSI Disclosure Schedule. ------------ The tangible assets reflected on the CSI Balance Sheet are in good condition and repair, ordinary wear and tear excepted. The assets reflected on the CSI Balance Sheet constitute all property and rights, real and personal, tangible and intangible, necessary or required, to operate the business of CSI as currently conducted. SECTION 4.15 Contracts and Licenses. ---------------------- (a) Identification. Section 4.15(a) of the CSI Disclosure Schedule -------------- --------------- sets forth a correct and complete list of: (i) all Licenses possessed by or issued to CSI; and (ii) all Contracts to which CSI is a party or by which it or any of its properties is bound or affected in any of the following categories: carrier contracts, sales agent contracts, marketing contracts, product and service development contracts, director indemnity contracts and Contracts generally described in subsection 4.15(c). CSI has delivered to GlobalTel correct and complete copies of each of the Contracts and Licenses listed in Section 4.15(a) of the CSI Disclosure Schedule, including any amendments thereto - --------------- (or, in the case of oral Contracts or Licenses, correct and complete written summaries thereof). (b) Validity. Except as set forth in Section 4.15(b) of the CSI -------- --------------- Disclosure Schedule: (i) each of the Contracts and Licenses listed in Section ------- 4.15(a) thereof is valid, in full force and effect and enforceable in accordance - ------- with its terms against the parties thereto, and CSI has fulfilled when due, or has taken all action necessary to enable it to fulfill when due, all of its 28 respective obligations thereunder; (ii) there has not occurred any default (without regard to lapse of time, the giving of notice, the election of any Person other than CSI or any combination thereof) by CSI nor, to the Knowledge of CSI, by any other Person under any of such Contracts or Licenses, which default remains uncured; and (iii) neither CSI nor, to the Knowledge of CSI, any other Person is in arrears in the performance or satisfaction of its respective obligations under any of such Contracts or Licenses, and no waiver or indulgence has been granted by any of the parties thereto. (c) No Other Contracts and Licenses. Except for the Contracts and ------------------------------- Licenses listed in Section 4.15(a) of the CSI Disclosure Schedule and except as --------------- set forth in Section 4.15(c) of the CSI Disclosure Schedule, CSI is not bound or --------------- affected by: (i) any lease of real or personal property (whether as lessor or lessee); (ii) any Contract granting any Person a Lien on or against any of the assets of CSI; (iii) any franchise or similar authorization; (iv) any license or permit authorized or issued by any Governmental Authority or any other Person; (v) any Contract of employment or Contract with any consultant or independent contractor; or (v) any Contract which contemplates payments by or to CSI in any twelve-month period exceeding $25,000 individually or $50,000 in the aggregate. SECTION 4.16 Tax Matters. Except as set forth in Section 4.16 of the CSI ----------- ------------ Disclosure Schedule, CSI has filed in true and correct form all federal, state, local and foreign Tax returns and other reports required to be filed and have timely paid all Taxes which have become due and payable, whether or not shown on any such return or report. CSI has not received any notice of, and CSI has no Knowledge of any notice of, deficiency or assessment or proposed deficiency or assessment from any Taxing Governmental Authority. There are no audits pending with respect to CSI and there are no outstanding agreements or waivers by or with respect to CSI that extend the statutory period of limitations applicable to any federal, state, local or foreign Tax returns or Taxes for any period. There are no determined Tax deficiencies or proposed assessments against CSI. As of the date of the CSI Balance Sheet the unpaid Taxes of CSI did not exceed the liability for Taxes set forth on the face of the CSI Balance Sheet. SECTION 4.17 Intellectual Property Matters. ----------------------------- (a) CSI Intellectual Property. Section 4.17(a) of the CSI Disclosure ------------------------- --------------- Schedule sets forth a correct and complete list of all domestic (federal, state or local) and foreign Intellectual Property that is licensed to or owned or used by CSI, and all applications for, or licenses or other rights to use any of the same (collectively, the "CSI Intellectual Property"). Except as disclosed in Section 4.17(a) of the CSI Disclosure Schedule: (i) the activities of CSI as - --------------- currently conducted do not infringe, misappropriate or otherwise misuse any rights to Intellectual Property of other Persons; (ii) the validity of CSI Intellectual Property, and the title or other rights thereto of CSI, have not been questioned in any Litigation to which CSI is a party, nor to the Knowledge of CSI is any such Litigation threatened; and (iii) to the Knowledge of CSI, there is no unauthorized use, infringement, misappropriation or other misuse by other Persons of any CSI Intellectual Property. 29 (b) Validity. Except as set forth in Section 4.17 (b) of the CSI -------- ---------------- Disclosure Schedule: (i) all patents, patent applications and rights to inventions or other intellectual property heretofore owned or held by any employee or officer of CSI, where required by any Legal Requirement or Contract to be transferred to CSI, have been duly and effectively transferred to CSI with no restrictions on the subsequent transfer thereof by CSI; (ii) there has been no act or omission by CSI or any of its employees, duly authorized attorneys or agents, as the case may be, or any other fact, which makes or will make invalid or unenforceable any of the CSI Intellectual Property (by assignment or otherwise), or which negates or will negate the right to the issuance of any the CSI Intellectual Property; and (iii) all of the patents and trademark and service mark registrations included in the CSI Intellectual Property have been duly issued by the United States Patent and Trademark office or the corresponding office of another country, as indicated in Section 4.17(b) of the --------------- CSI Disclosure Schedule, and all copyright registrations included in the CSI Intellectual Property have been duly issued by the United States Register of Copyrights or the corresponding office of another country, as indicated in Section 4.17(b) of the CSI Disclosure Schedule. - --------------- SECTION 4.18 Customers and Agents. Section 4.18 of the CSI Disclosure -------------------- ------------ Schedule sets forth, as of December 31, 1997, the total number of sales agents engaged by CSI and the revenue for the top ten agents for the 12 months ended December 31, 1997. There has been no material loss of agents since December 31, 1997. SECTION 4.19 Compliance with Laws. Except as set forth in Section 4.19 -------------------- ------------ of the CSI Disclosure Schedule, CSI (a) is not in violation of, and has not violated, any applicable provision of any Legal Requirement and (b) has not received any notice from any Governmental Authority or other Person that it is in violation of, or has violated, any applicable provision of any Legal Requirement, except in the case of both clauses (a) and (b) for violations, individually or in the aggregate, which have not had and could not reasonably be expected to have a Material Adverse Effect. Except as set forth in Section 4.19 ------------ of the CSI Disclosure Schedule, CSI has all Licenses from Governmental Authorities required to conduct its business as now being conducted, except for such Licenses the absence of which would not, individually or in the aggregate, have a Material Adverse Effect. SECTION 4.20 Brokers' Fees. CSI has no liability or obligation to pay ------------- any fees or commissions to any broker, finder, or agent with respect to the Merger. SECTION 4.21 Continuity of Business Enterprise. CSI operates at least --------------------------------- one significant historic business line, or owns at least a significant portion of its historic business assets, in each case within the meaning of Treas. Reg. (S)1.368-1(d). SECTION 4.22 Board Approval. The Board of Directors of CSI has (a) -------------- approved this Agreement and the Merger and the transactions contemplated hereby and thereby, (b) determined that this Agreement and the Merger are in the best interests of the shareholders of CSI and are on terms that are fair to such shareholders and (c) recommended that the shareholders of CSI approve this Agreement and the Merger. 30 SECTION 4.23 Vote Required. The affirmative vote of the holders of not ------------- less than a majority of the outstanding CSI Common Stock is required to approve this Agreement and the Merger. ARTICLE V Covenants of GlobalTel ---------------------- SECTION 5.1 Certain Affirmative Covenants of GlobalTel. During the ------------------------------------------ period from the date of this Agreement and continuing until the earlier of the date of termination of this Agreement or the Effective Time, GlobalTel covenants and agrees that, unless CSI shall otherwise agree in writing, GlobalTel shall, and GlobalTel shall cause each of its Subsidiaries to: (a) conduct its business only in the Ordinary Course of Business; (b) use reasonable commercial efforts to preserve substantially intact the business organization of GlobalTel and the Subsidiaries; (c) keep available the services of the present officers, employees and consultants of GlobalTel and its Subsidiaries; (d) take all reasonable action in the Ordinary Course of Business necessary to prevent the loss, cancellation, abandonment, or forfeiture of any of the business of GlobalTel and its Subsidiaries; (e) continue normal marketing, advertising and promotional expenditures with respect to the business of GlobalTel and its Subsidiaries; (f) preserve the current relationships of GlobalTel and its Subsidiaries with customers, suppliers, sales agents and other persons with which GlobalTel or any of its Subsidiaries has business relations; (g) maintain (i) its respective assets in good condition and repair, ordinary wear and tear excepted, and (ii) in full force and effect policies of insurance with respect to its respective assets and the operation of its business, with such insurers of recognized responsibility, in such amounts and with respect to such risks and losses as are adequate for such business in accordance with customary industry practice; (h) (i) duly comply with all applicable Legal Requirements; (ii) perform without default all of its respective obligations under all Contracts and Licenses to which it is a party or by which it or any of its respective properties is bound or affected; (i) (i) give to CSI, and its counsel, accountants and other representatives, full access during normal business hours to the premises of GlobalTel and its Subsidiaries, all of 31 their respective properties and assets, books and records and their respective personnel; (ii) furnish to CSI and such representatives all such additional documents (certified by an officer of GlobalTel or a Subsidiary, if requested), financial information and other information as CSI may from time to time reasonably request; and (iii) cause GlobalTel's accountants to permit CSI and its accountants to examine the records and working papers pertaining to such accountants' audits and other reviews of the GlobalTel Financial Statements; provided that no investigation by CSI or its representatives shall affect or limit the scope of any of the representations and warranties of GlobalTel herein or limit the liability of GlobalTel for breach of such representations and warranties; and, provided further, that notwithstanding the foregoing, GlobalTel and its Subsidiaries shall not be required to disclosure the contents of books, records and other documents to the extent prohibited by employment record confidentiality laws for the benefit of employees and to the extent necessary to preserve attorney-client and similar evidentiary privileges for the benefit of GlobalTel or a Subsidiary; (j) use its best efforts to obtain in writing as promptly as possible all approvals, authorizations and consents required to be obtained by GlobalTel or any Subsidiary in order to consummate the Merger and deliver to CSI copies, satisfactory in form and substance to CSI, of such approvals, authorizations and consents; provided, however, that GlobalTel and its Subsidiaries shall not accept or agree or accede to any modification or amendment to, or any condition to the transfer of, any Contract or License to which it is a party or by which it or any of its respective properties is bound or affected, which modification, amendment or condition is not acceptable to CSI; (k) promptly deliver to CSI true and complete copies of all monthly and quarterly financial statements and operating reports of GlobalTel and its Subsidiaries and any reports with respect to their respective businesses prepared by or for GlobalTel or any Subsidiary at any time after the date of this Agreement, and any other similar material which CSI reasonably may request; (l) promptly notify CSI of any circumstance, event or action by GlobalTel, any Subsidiary or otherwise (i) which, if known at the date of this Agreement, would have been required to be disclosed in or pursuant to this Agreement or (ii) the existence, occurrence or taking of which would result in any of the representations or warranties of GlobalTel contained in this Agreement not being true and correct when made or at Closing, and, with respect to clause (ii), use its best efforts to remedy the same; and (m) cause the GlobalTel Preferred Stock to be converted into GlobalTel Common Stock prior to the Effective Time. SECTION 5.2 Certain Negative Covenants of GlobalTel. Except as --------------------------------------- contemplated by this Agreement or as described in Section 5.2 of the GlobalTel ----------- Disclosure Schedule, GlobalTel covenants that neither it nor any of its Subsidiaries shall, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of CSI: 32 (a) amend of otherwise change the articles of incorporation or bylaws of GlobalTel or the equivalent organizational documents of any Subsidiary; (b) issue, sell, pledge, dispose of or encumber, or authorize the issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including any phantom interest) of GlobalTel or any of its Subsidiaries (except for the issuance of GlobalTel Shares issuable upon the exercise of any warrants or options or the conversion of other securities outstanding on the date of this Agreement); (c) sell, pledge, dispose of or encumber any assets of GlobalTel or any of its Subsidiaries (except for (i) sales of assets in the Ordinary Course of Business and (ii) dispositions of obsolete or worthless assets); (d) amend or change the period (or permit any acceleration, amendment or change) of exercisability of options granted under the GlobalTel Employee Plans or authorize cash payments in exchange for any options granted under any of such plans; (e) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) amend the terms of, repurchase, redeem or otherwise acquire, or permit any Subsidiary to repurchase, redeem or otherwise acquire, any of its securities or any securities of its Subsidiaries, or propose to do any of the foregoing. (f) sell, transfer, license, sublicense or otherwise dispose of any GlobalTel Intellectual Property, or amend or modify any existing Contracts with respect to GlobalTel Intellectual Property; (g) other than in the Ordinary Course of Business, modify, terminate, renew, suspend or abrogate any Contract or License to which it is a party or by which it or any of its respective properties is bound or affected; (h) (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the Ordinary Course of Business; (iii) enter into or amend any Contract other than in the Ordinary Course of Business; (iv) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $50,000 for GlobalTel and its Subsidiaries, 33 taken as a whole; or (v) enter into or amend any Contract, commitment or arrangement to effect any of the matters prohibited by this Section 5.1(h); --------------- (i) increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of employees of GlobalTel or its Subsidiaries who are not officers of GlobalTel or its Subsidiaries in accordance with past practices, or grant any severance or termination pay to, or enter into any employment or severance agreement with any director, officer (except for officers who are terminated on an involuntary basis) or other employee of GlobalTel or any Subsidiary, or establish, adopt, enter into or amend any GlobalTel Employee Plan; (j) take any action, other than as required by GAAP, to change accounting policies or procedures; (k) make any material Tax election inconsistent with past practices or settle or compromise any material federal, state, local or foreign Tax liability or agree to an extension of a statute of limitations for any assessment of any Tax, except to the extent the amount of any such settlement has been reserved for on the GlobalTel Interim Balance Sheet; (l) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the Ordinary Course of Business of liabilities, reflected or reserved against in the GlobalTel Financial Statements or incurred in the Ordinary Course of Business; (m) except as may be required by any Legal Requirement, take any action to terminate or amend any of the GlobalTel Employee Plans other than in connection with the Merger; or (n) take, or agree in writing or otherwise to take, any of the actions described in this Section 5.2, or any action which would make any of the ----------- representations or warranties of GlobalTel contained in this Agreement untrue or incorrect or prevent GlobalTel from performing or cause GlobalTel not to perform its covenants hereunder or result in any of the conditions to the Merger set forth herein not being satisfied. SECTION 5.3 No Solicitation. --------------- (a) Restriction. GlobalTel shall not, directly or indirectly, through ----------- any officer, director, employee, representative or agent of GlobalTel or any Subsidiary, solicit or encourage (including by way of furnishing information) the initiation of any inquiries or proposals regarding any merger, amalgamation, take-over bid, sale of substantial assets, sale of shares of capital stock (including by way of a tender offer) or similar transaction involving GlobalTel or any Subsidiary (any of the foregoing inquiries or proposals being referred to herein as an "Acquisition Proposal"); provided, however, that nothing contained in this Agreement shall prevent the Board of 34 Directors of GlobalTel from referring any third party to this Section 5.3(a). -------------- Nothing contained in this Section 5.3(a) or any other provision of this -------------- Agreement shall prevent the Board of Directors of GlobalTel from considering, negotiating, approving and recommending to the GlobalTel Shareholders an unsolicited bona fide written Acquisition Proposal which the Board of Directors of GlobalTel determines in good faith (after consultation with its financial advisors, and after receiving a written opinion of outside counsel or the advise of such counsel that is reflected in the minutes of a meeting of the Board of Directors of GlobalTel, to the effect that the Board of Directors is required to do so in order to discharge properly its fiduciary duties) would result in a transaction more favorable to GlobalTel Shareholders than the Merger (any such Acquisition Proposal being referred to herein as a "Superior Proposal"). (b) Notification. GlobalTel shall immediately notify CSI after ------------ receipt of any Acquisition Proposal or any request for non-public information relating to GlobalTel or any of its Subsidiaries in connection with an Acquisition Proposal of for access to the properties, books or records of GlobalTel or any Subsidiary by any Person that informs the Board of Directors of GlobalTel of such Subsidiary that it is considering making, or has made, an Acquisition Proposal. Such notice to CSI shall be made orally and in writing and shall indicate in reasonable detail the identity of the offeror and the terms and conditions of such proposal, inquiry or contact. (c) Provision of Information. If the Board of Directors of GlobalTel ------------------------ receives a request for material non-public information by a party who make a bona fide Acquisition Proposal and the Board of Directors of GlobalTel determines that such proposal, if consummated pursuant to its terms, would be a Superior Proposal, then, and only in such case, GlobalTel may, subject to the execution of a confidentiality and standstill agreement substantially similar to that then in effect between GlobalTel and CSI, provide such party with access to information regarding GlobalTel and its Subsidiaries. (d) Existing Discussions. GlobalTel shall immediately cease and cause -------------------- to be terminated any existing discussions or negotiations with any parties, other than CSI, conducted heretofore with respect to any of the foregoing. GlobalTel shall not release any third party from any confidentiality or standstill agreement to which GlobalTel is a party. (e) Liability. GlobalTel shall ensure that the officers, directors --------- and employees of GlobalTel and its Subsidiaries and any investment banker or other advisor or representative retained by GlobalTel are aware of the restrictions described in this Section and shall be responsible for any breach of this Section 5.3 by such bankers, advisors and representatives. ----------- ARTICLE VI Covenants of CSI ---------------- SECTION 6.1 Certain Affirmative Covenants of CSI. During the period ------------------------------------ from the date of this Agreement and continuing until the earlier of the date of termination of this Agreement or the 35 Effective Time, CSI covenants and agrees that, unless GlobalTel shall otherwise agree in writing, CSI shall: (a) conduct its business only in the Ordinary Course of Business; (b) use reasonable commercial efforts to preserve substantially intact the business organization of CSI; (c) keep available the services of the present officers, employees and consultants of CSI; (d) take all reasonable action in the Ordinary Course of Business necessary to prevent the loss, cancellation, abandonment, or forfeiture of any of the business of CSI; (e) continue normal marketing, advertising and promotional expenditures with respect to the business of CSI; (f) preserve the current relationships of CSI with customers, suppliers, sales agents and other persons with which CSI has business relations; (g) maintain (i) its assets in good condition and repair, ordinary wear and tear excepted, and (ii) in full force and effect policies of insurance with respect to its assets and the operation of its business, with such insurers of recognized responsibility, in such amounts and with respect to such risks and losses as are adequate for such business in accordance with customary industry practice; (h) (i) duly comply with all applicable Legal Requirements; (ii) perform without default all of its obligations under all Contracts and Licenses to which it is a party or by which it or any of its properties is bound or affected; (i) (i) give to GlobalTel, and its counsel, accountants and other representatives, full access during normal business hours to the premises of CSI, all of its properties and assets, books and records and its personnel; (ii) furnish to GlobalTel and such representatives all such additional documents (certified by an officer of CSI, if requested), financial information and other information as GlobalTel may from time to time reasonably request; and (iii) cause CSI's accountants to permit GlobalTel and its accountants to examine the records and working papers pertaining to such accountants' audits and other reviews of the CSI Financial Statements; provided that no investigation by GlobalTel or its representatives shall affect or limit the scope of any of the representations and warranties of CSI herein or limit the liability of CSI for breach of such representations and warranties; and, provided further, that notwithstanding the foregoing, CSI and its Subsidiaries shall not be required to disclosure the contents of books, records and other documents to the extent prohibited by employment record confidentiality laws for the benefit of 36 employees and to the extent necessary to preserve attorney-client and similar evidentiary privileges for the benefit of CSI; (j) use its best efforts to obtain in writing as promptly as possible all approvals, authorizations and consents required to be obtained by CSI in order to consummate the Merger and deliver to GlobalTel copies, satisfactory in form and substance to GlobalTel, of such approvals, authorizations and consents; provided, however, that CSI shall not accept or agree or accede to any modification or amendment to, or any condition to the transfer of, any Contract or License to which it is a party or by which it or any of its properties is bound or affected, which modification, amendment or condition is not acceptable to GlobalTel; (k) promptly deliver to GlobalTel true and complete copies of all monthly and quarterly financial statements and operating reports of CSI and any reports with respect to its business prepared by or for CSI at any time after the date of this Agreement, and any other similar material which GlobalTel reasonably may request; and (l) promptly notify GlobalTel of any circumstance, event or action by CSI or otherwise (i) which, if known at the date of this Agreement, would have been required to be disclosed in or pursuant to this Agreement or (ii) the existence, occurrence or taking of which would result in any of the representations or warranties of CSI contained in this Agreement not being true and correct when made or at Closing, and, with respect to clause (ii), use its best efforts to remedy the same. SECTION 6.2 Certain Negative Covenants of CSI. Except as contemplated --------------------------------- by this Agreement or the Registration Statement or as described in Section 6.2 ----------- of the CSI Disclosure Schedule, CSI covenants that it shall not, during the period from the date of this Agreement and continuing until the earlier of the termination of this Agreement or the Effective Time, directly or indirectly do, or propose to do, any of the following without the prior written consent of GlobalTel: (a) amend of otherwise change the articles of incorporation or bylaws of CSI; (b) issue, sell, pledge, dispose of or encumber, or authorize this issuance, sale, pledge, disposition or encumbrance of, any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including any phantom interest) of CSI (except for the issuance of CSI Shares issuable upon the exercise of any warrants or options or the conversion of other securities outstanding on the date of this Agreement); (c) sell, pledge, dispose of or encumber any assets of CSI (except for (i) sales of assets in the Ordinary Course of Business and (ii) dispositions of obsolete or worthless assets); 37 (d) amend or change the period (or permit any acceleration, amendment or change) of exercisability of options granted under the CSI Employee Plans or authorize cash payments in exchange for any options granted under any of such plans; (e) (i) declare, set aside, make or pay any dividend or other distribution (whether in cash, stock or property or any combination thereof) in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) amend the terms of, repurchase, redeem or otherwise acquire any of its securities, or propose to do any of the foregoing; (f) sell, transfer, license, sublicense or otherwise dispose of any CSI Intellectual Property, or amend or modify any existing Contracts with respect to CSI Intellectual Property; (g) other than in the Ordinary Course of Business, modify, terminate, renew, suspend or abrogate any Contract or License to which it is a party or by which it or any of its properties is bound or affected; (h) (i) acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse or otherwise as an accommodation become responsible for, the obligations of any Person, or make any loans or advances, except in the Ordinary Course of Business; (iii) enter into or amend any Contract other than in the Ordinary Course of Business; (iv) authorize any capital expenditures or purchase of fixed assets which are, in the aggregate, in excess of $50,000 for CSI; or (v) enter into or amend any Contract, commitment or arrangement to effect any of the matters prohibited by this Section 6.1(h); --------------- (i) increase the compensation payable or to become payable to its officers or employees, except for increases in salary or wages of employees of CSI who are not officers of CSI in accordance with past practices, or grant any severance or termination pay to, or enter into any employment or severance agreement with any director, officer (except for officers who are terminated on an involuntary basis) or other employee of CSI, or establish, adopt, enter into or amend any CSI Employee Plan; (j) take any action, other than as required by GAAP, to change accounting policies or procedures; (k) make any material Tax election inconsistent with past practices or settle or compromise any material federal, state, local or foreign Tax liability or agree to an extension of a statute of limitations for any assessment of any Tax, except to the extent the amount of any such settlement has been reserved for on the CSI Interim Balance Sheet; 38 (l) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, contingent or otherwise), other than the payment, discharge or satisfaction in the Ordinary Course of Business of liabilities, reflected or reserved against in the CSI Financial Statements or incurred in the Ordinary Course of Business; (m) except as may be required by any Legal Requirement, take any action to terminate or amend any of the CSI Employee Plans other than in connection with the Merger; or (n) take, or agree in writing or otherwise to take, any of the actions described in this Section 6.2, or any action which would make any of the ----------- representations or warranties of CSI contained in this Agreement untrue or incorrect or prevent CSI from performing or cause CSI not to perform its covenants hereunder or result in any of the conditions to the Merger set forth herein not being satisfied. ARTICLE VII Additional Agreements --------------------- SECTION 7.1 GlobalTel Shareholders' Meeting. GlobalTel shall, in ------------------------------- accordance with the Washington Business Corporation Act and its articles of incorporation and bylaws, call and hold the GlobalTel Shareholders' Meeting as promptly as practicable for the purpose of voting upon the approval of this Agreement and the Merger. GlobalTel shall use its reasonable best efforts to solicit from its shareholders proxies in favor of the approval of this Agreement and the Merger and shall take all other action necessary or advisable to secure the Requisite GlobalTel Shareholder Approval. The GlobalTel Proxy Statement shall include the recommendation of the Board of Directors of GlobalTel in favor of the Merger, subject to the second sentence of Section 5.3(a). -------------- SECTION 7.2 CSI Shareholders' Meeting. CSI shall, in accordance with ------------------------- the Colorado Business Corporation Act and its articles of incorporation and bylaws, call and hold the CSI Shareholders' Meeting as promptly as practicable for the purpose of voting upon the approval of this Agreement and the Merger. CSI shall use its reasonable best efforts to hold the CSI Shareholders' Meeting as soon as practicable after the date of which the Registration Statement becomes effective. CSI shall use its reasonable best efforts to solicit from its shareholders proxies in favor of the approval of this Agreement and the Merger and shall take all other action necessary or advisable to secure the Requisite CSI Shareholder Approval. The CSI Proxy Statement shall include the recommendation of the Board of Directors of CSI in favor of the Merger. SECTION 7.3 Confidentiality. --------------- (a) By GlobalTel. Any non-public information that GlobalTel or any ------------ Subsidiary may obtain from CSI in connection with this Agreement and the transactions contemplated hereby shall be deemed confidential and, unless and until Closing shall occur, GlobalTel shall not, and GlobalTel shall cause each of the Subsidiaries not to, disclose any such information to any third party (other than its directors, officers and employees, and representatives of its advisors and lenders whose knowledge thereof is necessary in order to facilitate the consummation of the transactions contemplated hereby) or use such 39 information to the detriment of CSI; provided that (i) GlobalTel may use and disclose any such information once it has been publicly disclosed (other than by GlobalTel or any Subsidiary in breach of its obligations under this Section) or which rightfully has come into the possession of GlobalTel or any of its Subsidiaries (other than from CSI), and (ii) to the extent that GlobalTel or any Subsidiary may become compelled by Legal Requirements to disclose any of such information, GlobalTel or such Subsidiary may disclose such information if it shall have used all reasonable efforts, and shall have afforded CSI the opportunity, to obtain an appropriate protective order, or other satisfactory assurance of confidential treatment, for the information compelled to be disclosed. In the event of termination of this Agreement, GlobalTel shall, and GlobalTel shall cause its Subsidiaries and advisors to, use all reasonable efforts to cause to be delivered to CSI, and retain no copies of, any documents, work papers and other materials obtained by GlobalTel or on its behalf from CSI, whether so obtained before or after the date of this Agreement. (b) By CSI. Any non-public information that CSI may obtain from ------ GlobalTel in connection with this Agreement and the transactions contemplated hereby shall be deemed confidential and, unless and until Closing shall occur, CSI shall not disclose any such information to any third party (other than its directors, officers and employees, and representatives of its advisors and lenders whose knowledge thereof is necessary in order to facilitate the consummation of the transactions contemplated hereby) or use such information to the detriment of GlobalTel; provided that (i) CSI may use and disclose any such information once it has been publicly disclosed (other than by CSI in breach of its obligations under this Section) or which rightfully has come into the possession of CSI (other than from GlobalTel or any Subsidiary), and (ii) to the extent that CSI may become compelled by Legal Requirements to disclose any of such information, CSI may disclose such information if it shall have used all reasonable efforts, and shall have afforded GlobalTel the opportunity, to obtain an appropriate protective order, or other satisfactory assurance of confidential treatment, for the information compelled to be disclosed. In the event of termination of this Agreement, CSI shall, and CSI shall cause its advisors to, use all reasonable efforts to cause to be delivered to GlobalTel, and retain no copies of, any documents, work papers and other materials obtained by CSI or on its behalf from GlobalTel, whether so obtained before or after the date of this Agreement. SECTION 7.4 Stock Options and Warrants. -------------------------- (a) Assumption. At the Effective Time, GlobalTel's obligations with ---------- respect to each outstanding option or warrant to purchase GlobalTel Shares (each, a "GlobalTel Option"), whether vested or unvested, will be assumed by the Surviving Corporation. Each GlobalTel Option so assumed by the Surviving Corporation under this Agreement shall continue to have, and be subject to, the same terms and conditions pursuant to which the GlobalTel Option was issued as in effect immediately prior to the Effective Time, except that (i) such GlobalTel Option shall be exercisable for that number of CSI Shares equal to the product of the number of GlobalTel 40 Shares that were purchasable under such GlobalTel Option immediately prior to the Effective Time multiplied by the Common Stock Conversion Ratio rounded up to the nearest whole number of CSI Shares, and (ii) the per share exercise price for the CSI Shares issuable upon exercise of such assumed GlobalTel Option will be equal to the quotient determined by dividing the exercise price per GlobalTel Share at which such GlobalTel Option was exercisable immediately prior to the Effective Time by the Common Stock Conversion Ratio and rounding the resulting exercise price up to the nearest whole cent. (b) Incentive Stock Options. It is the intention of the Parties that ----------------------- the Company Options assumed by the Surviving Corporation qualify, following the Effective Time, as incentive stock options as defined in the Code to the extent the Company Options qualified as incentive stock options immediately prior to the Effective Time. (c) Documentation. After the Effective Time, the Surviving ------------- Corporation will issue to each holder of an outstanding Company Option a document evidencing the foregoing assumption by the Surviving Corporation. SECTION 7.5 Public Announcements. Neither CSI, on the one hand, nor -------------------- GlobalTel nor any of its Subsidiaries, on the other hand, shall issue any press release or make any public statement with respect to the Merger or this Agreement without the prior consent of the other Party, which consent shall not be unreasonably withheld; provided, however, that if a Party has used all reasonable efforts to consult with the other Party, a Party may, without the prior consent of the other Party, issue such press release or make such public announcement as may upon the advice of legal counsel be required by any Legal Requirement, the National Association of Securities Dealers or the Nasdaq Stock Market. SECTION 7.6 Listing of CSI Shares. CSI shall file an application for --------------------- listing of the CSI Shares, including the CSI Shares issuable in the Merger, in accordance with the rules of the Nasdaq SmallCap Market in order to have the CSI Shares to be issued in connection with the Merger to be approved for listing on the Nasdaq SmallCap Market and shall use its reasonable best efforts to have such application approved by the Nasdaq SmallCap Market prior to the Effective Time. SECTION 7.7 Accountants' Letters. Upon reasonable notice from one Party -------------------- to the other Party, the other Party shall use its best efforts to cause its independent certified public accountants to deliver to the requesting Party a letter covering such matters as are requested by the requesting Party and as are customarily addressed in accountant's "comfort" letters. SECTION 7.8 Further Assurances. At and after the Effective Time, the ------------------ officers and directors of the Surviving Corporation shall be authorized to execute and deliver, in the name of and on behalf of GlobalTel, any deeds, bills of sale, assignments, assurances or other documents and to take and do, in the name and on behalf of GlobalTel, any other actions and things to vest, perfect or confirm of record or otherwise in the Surviving Corporation any and all right, title and interest in, to and 41 under any of the rights, properties or assets of GlobalTel acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger. SECTION 7.9 Notice of Developments. Each Party will give prompt written ---------------------- notice to the other of any material adverse development causing a breach of any of its own representations and warranties in Article III and Article IV above. ----------- ---------- No disclosure by any Party pursuant to this Section 7.9, however, shall be ----------- deemed to amend or supplement such Party's Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. SECTION 7.10 Indemnification. CSI, as the Surviving Corporation in the --------------- Merger, will observe any indemnification provisions now existing in the articles of incorporation or bylaws of GlobalTel and in the indemnity agreements described in Section 3.16(a) of the GlobalTel Disclosure Schedule for the --------------- benefit of any individual who served as a director or officer of GlobalTel or any Subsidiary at any time prior to the Effective Time. All such persons are express third-party beneficiaries of this section of the Agreement. ARTICLE VII Conditions to the Merger ------------------------ SECTION 8.1 Conditions to Obligations of Each Party to Effect the ----------------------------------------------------- Merger. The respective obligations of each Party to consummate the Merger are subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) Shareholder Approval. This Agreement and the Merger shall have -------------------- been approved and adopted by the Requisite GlobalTel Shareholders Vote and the Requisite CSI Shareholders Vote. (b) No Injunctions or Restraints. No Judgment issued by any ---------------------------- Governmental Authority of competent jurisdiction preventing the consummation of the Merger shall be in effect, nor shall any proceeding brought by any Governmental Authority seeking any such Judgment be pending. There shall not be any action taken, or any Legal Requirement applicable to the Merger, which makes consummation of the Merger illegal. (c) Tax Opinion. CSI and GlobalTel shall have received the written ----------- opinion of Parcel, Mauro & Spaanstra, P.C. in form and substance reasonably satisfactory to them to the effect that the Merger will constitute a reorganization within the meaning of Section 368 of the Code, and such opinion ----------- shall not have been withdrawn. In rendering such opinion, counsel shall be entitled to rely upon representations of CSI and GlobalTel and certain Affiliates and shareholders of GlobalTel. (d) Nasdaq Stock Market. The CSI Shares to be issued in the Merger ------------------- shall have been approved for listing, subject to notice of issuance, on the Nasdaq Stock Market. 42 (e) CSI Public Offering. The Registration Statement shall have become ------------------- effective and the public sale of CSI Shares described in the Registration Statement shall have been completed, realizing not less than $20 million in net proceeds to CSI and based on a valuation of the combined companies (including ITC) of not less than $50 million. SECTION 8.2 Conditions to Obligations of CSI. The obligations of CSI -------------------------------- to consummate the Merger are subject also to the satisfaction at or prior to the Effective Time of the following conditions: (a) Dissenting Shares. Immediately prior to the Effective Time, ----------------- neither (i) shall the number of GlobalTel Dissenting Shares representing shares of GlobalTel Common Stock exceed two percent of the number of outstanding shares of GlobalTel Common Stock nor (ii) shall the number of GlobalTel Dissenting Shares representing shares of GlobalTel Preferred Stock exceed two percent of the number of outstanding shares of GlobalTel Preferred Stock nor (iii) shall the number of CSI Dissenting Shares exceed two percent of the number of outstanding CSI Shares. (b) Representations and Warranties. Except as contemplated by this ------------------------------ Agreement, the representations and warranties of GlobalTel set forth in this Agreement shall be true and correct in all material respects (except for such representations and warranties which are qualified by a reference to materiality, which representations and warranties as so qualified shall be true in all respects) on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that a representation or warranty made as of a particular date need only be true and correct as of such date, and CSI shall have received a certificate to such effect signed on behalf of the corporation by the chief executive officer and the chief financial officer of GlobalTel. (c) Agreements and Covenants. GlobalTel shall have performed or ------------------------ complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and CSI shall have received a certificate to such effect signed on behalf of the corporation by the chief executive officer and the chief financial officer of GlobalTel. (d) Consents. All consents, waivers, approvals, authorizations or -------- orders required to be obtained (including those shown in Section 3.6(b) of the -------------- GlobalTel Disclosure Schedule), and all filings required to be made, by GlobalTel for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by GlobalTel in form and substance reasonably satisfactory to CSI. (e) Material Adverse Change. Since the date of the GlobalTel Interim ----------------------- Balance Sheet, there shall have been no change, occurrence or circumstance in the business, results of operations or financial condition of GlobalTel or any Subsidiary having or reasonably likely to have a Material Adverse Effect. 43 (f) Affiliate Agreements. CSI shall have received an Affiliate -------------------- Agreement from each person who is identified in the Affiliate Letter as an Affiliate of GlobalTel, and each such Affiliate Agreement shall be in full force and effect. (g) Opinion of Counsel. CSI shall have received opinions of counsel ------------------ from Squires, Sanders and Dempsey (as to regulatory and Blue Stone International Ltd. matters), Early, Lennon, Peters & Crocker (as to foreign corporation qualifications) and Heller Ehrman White & McAuliffe (as to other matters) addressed to CSI and dated as of the Closing Date. The opinions, each of which shall be subject to the limitations, qualifications and assumptions mutually agreed upon by the parties and customary for opinions delivered on such subjects, shall in the aggregate be substantially to the effect that: (1) GlobalTel has been duly incorporated and is validly existing under the laws of the State of Washington. GlobalTel is duly qualified to do business and is in good standing in each other jurisdiction in the United States where the character of the property owned, leased or operated by it or the nature of its activities make such qualification necessary except where the lack of such qualification would not have a Material Adverse Effect. (2) The authorized capital of GlobalTel is as stated in this Agreement. (3) All of the outstanding GlobalTel Shares have been duly authorized and validly issued and are fully paid, non-assessable, and are free and clear of any preemptive rights arising pursuant to GlobalTel's articles of incorporation, bylaws and the laws of the State of Washington. To the actual knowledge of attorneys who are currently involved in legal representation of GlobalTel in connection with this Agreement (the "attorneys' knowledge"), except as set forth in the GlobalTel Disclosure Schedule: (A) GlobalTel has not granted or issued any options, warrants, convertible or exchangeable securities or other rights to any person for the purchase or acquisition from GlobalTel of any shares of capital stock of GlobalTel; (B) there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to GlobalTel; and (C) GlobalTel is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in subpart (A). (4) GlobalTel has all requisite corporate power and corporate authority to enter into and perform the Agreement, to own its properties and to carry on its business as, to the attorneys' knowledge, it is now conducted. The Agreement has been duly authorized by all necessary corporate action on the part of GlobalTel and has been duly executed and delivered on behalf of GlobalTel. The Agreement is a valid and binding obligation of GlobalTel, enforceable against GlobalTel in accordance with its terms, subject, as to enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws of general applicability affecting creditors' rights and remedies and (ii) to general principles of equity, whether such enforcement is considered in a proceeding in equity or at law. 44 (5) Neither the execution and delivery of the Agreement on behalf of GlobalTel nor the consummation by GlobalTel of the Merger as provided in the Agreement (i) conflicts with any provision of the articles of incorporation or bylaws of GlobalTel or any of its Subsidiaries, (ii) violates any law applicable to GlobalTel or any of its Subsidiaries, or (iii) results in a breach or violation of , or constitutes a default under, any judgment of which the attorneys have knowledge and to which GlobalTel or any of its Subsidiaries is a party or by which any of them or any of their respective properties is bound. (6) Each Subsidiary (other than with respect to Ratsten International Telecommunications, Inc.) has been duly incorporated and is validly existing under the laws of the respective jurisdiction of its incorporation set forth in the GlobalTel Disclosure Schedule. Each Subsidiary (other than with respect to Ratsten International Telecommunications, Inc.) is duly qualified to do business and is in good standing in the jurisdictions listed in Section 3.1 of the GlobalTel Disclosure Schedule. Ratsten International Telecommunications, Inc. has been duly incorporated and is validly existing under the laws of the State of California, but is no longer in good standing in that state. (7) The authorized capital of each Subsidiary is as stated in the GlobalTel Disclosure Schedule. The stock register of each Subsidiary indicates that all of the issued and outstanding shares of capital stock of that Subsidiary are registered in the name identified and set forth in Section 3.4(b) of the GlobalTel Disclosure Schedule as the owner of those shares. (8) All outstanding shares of capital stock of each Subsidiary are duly and validly authorized and issued, fully paid and non-assessable and are free and clear of any preemptive rights arising pursuant to the Subsidiary's articles of incorporation, bylaws and the laws of the state of organization. To the attorneys' knowledge: (A) there are no outstanding or authorized options, warrants, purchase rights, subscription rights, conversion rights or other contracts or commitments that could require any Subsidiary to issue, sell or otherwise cause to become outstanding any of its capital stock; (B) there are not outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to any Subsidiary; and (C) there are no outstanding obligations of any Subsidiary to repurchase, redeem or otherwise acquire any of its securities. (9) To the attorneys' knowledge, there is no action, suit or proceeding against GlobalTel or any Subsidiary by any Governmental Authority which seeks to restrain, prohibit or invalidate the transactions contemplated by this Agreement that is either pending or has been threatened in writing. (10) No governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Agreement on behalf of GlobalTel or any of its Subsidiaries and consummation by GlobalTel or any of its Subsidiaries of the Merger as provided in the Agreement except such as have been obtained or made. 45 (h) Shareholder Affidavits. CSI shall have received from each Person ---------------------- entitled to receive CSI Shares in the Merger a duly executed affidavit, in form and substance reasonably satisfactory to CSI, to the effect that such Person either (i) is an "accredited investor" as such term is defined in Rule 501(a) of Regulation D promulgated by the SEC or (ii) alone or with such Person's "purchaser representative" (as such term is defined in Rule 501(d) of said Regulation D) has such knowledge and experience in financial and business matters that such Person is capable of evaluating the merits and risks of the Merger and the investment in CSI Shares. All but 35 or fewer of the Persons entitled to receive CSI Shares in the Merger shall be accredited investors. (i) Outstanding GlobalTel Common Stock. CSI shall have received a ---------------------------------- certificate signed by the chief executive officer and the principal financial officer of GlobalTel certifying as to the Total Pre-Merger Outstanding GlobalTel Common Stock. Such certificate shall include a summary of such outstanding stock as CSI shall reasonably require. (j) Other. All actions taken by GlobalTel in connection with ----- consummation of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to CSI. CSI may waive any condition specified in this Section 8.2 if it executes a writing so stating at or prior to the Closing. SECTION 8.3 Conditions to Obligations of GlobalTel. The obligations of -------------------------------------- GlobalTel to consummate the Merger are subject also to the satisfaction at or prior to the Effective Time of the following conditions: (a) Representations and Warranties. Except as contemplated by this ------------------------------ Agreement, the representations and warranties of CSI set forth in this Agreement shall be true and correct in all material respects (except for such representations and warranties which are qualified by a reference to materiality, which representations and warranties as so qualified shall be true in all respects) on and as of the Closing Date, with the same force and effect as though made on and as of the Closing Date, except that a representation or warranty made as of a particular date need only be true and correct as of such date, and GlobalTel shall have received a certificate to such effect signed by the chief executive officer and the chief financial officer of CSI. (b) Agreements and Covenants. CSI shall have performed or complied in ------------------------ all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and GlobalTel shall have received a certificate to such effect signed by the chief executive officer and the chief financial officer of CSI. 46 (c) Consents. All consents, waivers, approvals, authorizations or -------- orders required to be obtained (including those shown in Section 4.5(b) of the -------------- CSI Disclosure Schedule), and all filings required to be made, by CSI for the authorization, execution and delivery of this Agreement and the consummation by it of the transactions contemplated hereby shall have been obtained and made by CSI in form and substance reasonably satisfactory to GlobalTel. (d) Material Adverse Change. Since the date of the CSI Interim ----------------------- Balance Sheet, there shall have been no change, occurrence or circumstance in the business, results of operations or financial condition of CSI having or reasonably likely to have a Material Adverse Effect. (e) Opinion of Counsel. GlobalTel shall have received an opinion of ------------------ counsel from Parcel, Mauro & Spaanstra, P.C. addressed to GlobalTel and dated as of the Closing Date, substantially to the effect that: (1) CSI has been duly incorporated and is validly existing under the laws of the State of Colorado. Except in Florida, where CSI is in the process of qualifying as a foreign corporation, CSI is duly qualified to do business and is in good standing in each other jurisdiction in the United States where the character of the property owned, leased or operated by it or the nature of its activities make such qualification necessary except where the lack of such qualification would not have a Material Adverse Effect. (2) The authorized capital of CSI is as stated in this Agreement. (3) All of the outstanding CSI Shares have been duly authorized and validly issued and are fully paid, non-assessable (except with respect to 60,000 CSI Shares that were purchased with a promissory note), and are free and clear of any preemptive rights arising pursuant to CSI's articles of incorporation, bylaws and the laws of the State of Colorado. To the actual knowledge of attorneys who are currently involved in legal representation of CSI in connection with this Agreement or the Registration Statement (the "attorneys' knowledge"), except as set forth in the CSI Disclosure Schedule: (A) CSI has not granted or issued any options, warrants, convertible or exchangeable securities or other rights to any person for the purchase or acquisition from CSI of any shares of capital stock of CSI; (B) there are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to CSI; and (C) CSI is not subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in subpart (A). (4) The CSI Shares, when issued as provided in the Agreement, will be duly and validly authorized, fully paid and nonassessable shares of the capital stock of CSI. (5) CSI has all requisite corporate power and corporate authority to enter into and perform the Agreement, to own its properties and to carry on its business as, to the attorneys' knowledge, it is now conducted. The Agreement has been duly authorized by all 47 necessary corporate action on the part of CSI and has been duly executed and delivered on behalf of CSI. The Agreement is a valid and binding obligation of CSI, enforceable against CSI in accordance with its terms, subject, as to enforcement, (i) to bankruptcy, insolvency, reorganization, arrangement, moratorium and other laws of general applicability affecting creditors' rights and remedies and (ii) to general principles of equity, whether such enforcement is considered in a proceeding in equity or at law. (6) Neither the execution and delivery of the Agreement on behalf of CSI nor the consummation by CSI of the Merger as provided in the Agreement (i) conflicts with any provision of the articles of incorporation or bylaws of CSI, (ii) violates any law applicable to CSI, or (iii) results in a breach or violation of , or constitutes a default under, any judgment of which the attorneys have knowledge and to which CSI is a party or by which it or any of its properties is bound. (7) To the attorneys' knowledge, there is no action, suit or proceeding against CSI by any Governmental Authority which seeks to restrain, prohibit or invalidate the transactions contemplated by this Agreement that is either pending or has been threatened in writing. (8) No governmental consents, approvals, authorizations, registrations, declarations or filings are required for the execution and delivery of the Agreement on behalf of CSI and consummation by CSI of the Merger as provided in the Agreement except such as have been obtained or made. (f) Outstanding CSI Common Stock. GlobalTel shall have received a ---------------------------- certificate signed by the chief executive officer and the principal financial officer of CSI certifying as to the Total Pre-Merger Outstanding CSI Common Stock. Such certificate shall include a summary of such outstanding stock as GlobalTel shall reasonably require. (g) Other. All actions taken by CSI in connection with consummation ----- of the transactions contemplated hereby and all certificates, opinions, instruments and other documents required to effect the transactions contemplated hereby shall be reasonably satisfactory in form and substance to GlobalTel. GlobalTel may waive any condition specified in this Section 8.3 if it ----------- executes a writing so stating at or prior to the Closing. ARTICLE IX Termination ----------- SECTION 9.1 Termination of Agreement. This Agreement may be terminated ------------------------ at any time prior to the Effective Time, notwithstanding approval thereof by the shareholders of GlobalTel and the shareholders of CSI: 48 (a) by mutual written consent duly authorized by the respective Boards of Directors of the Parties; or (b) by either Party if the Merger shall not have been consummated by September 30, 1998 (provided, however, that the right to terminate under this Section 9.1(b) shall not be available to any Party whose failure to fulfill any - -------------- obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date); or (c) by either Party if a Governmental Authority of competent jurisdiction shall have issued a non-appealable final Judgment or taken any other action, in each case having the effect of permanently restraining, enjoining or otherwise prohibiting the Merger; or (d) by either Party if at the GlobalTel Shareholders' Meeting the Requisite GlobalTel Shareholders' Vote shall not have been obtained or if at the CSI Shareholders' Meeting the Requisite CSI Shareholders' Vote shall not have been obtained; or (e) by either Party upon a breach of any representation, warranty, covenant or agreement on the part of the other Party set forth in this Agreement or if any representation or warranty of such other Party shall have become untrue, in either case such that the conditions set forth in Section 8.2(b) or -------------- 8.2(c) or Section 8.3(a) or 8.3(b) would not be satisfied; or - ------ -------------- ------ (f) by either Party if the Board of Directors of GlobalTel shall have resolved to accept, or accepted, a Superior Proposal. SECTION 9.2 Effect of Termination. In the event of the termination of --------------------- this Agreement pursuant to Section 9.1, this Agreement shall forthwith become ----------- void and there shall be no liability on the part of any Party hereto or any of its Affiliates, directors, officers or shareholders except (i) as set forth in Section 9.3 and Section 10.1 hereof and (ii) nothing herein shall relieve any - ----------- ------------ party form liability for any willful breach hereof (provided that any fee paid pursuant to Section 9.3(b) shall be credited towards any such liability of -------------- GlobalTel). SECTION 9.3 Fees and Expenses. ----------------- (a) Generally. Except as set forth in this Section 9.3, all fees and --------- ----------- expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expenses, whether or not the Merger is consummated. (b) GlobalTel Fee. GlobalTel shall pay CSI a fee of $400,000 upon the ------------- termination of this Agreement by CSI or GlobalTel pursuant to Section 9.1(f). -------------- Any fee payable pursuant to this Section 9.3(b) shall be paid within one -------------- Business Day after the date of termination of this Agreement. 49 ARTICLE X Miscellaneous ------------- SECTION 10.1 Effectiveness of Representations, Warranties and Agreements. ----------------------------------------------------------- Except as otherwise provided in this Section 10.1, the representations, ------------ warranties and agreements of each Party hereto shall remain operative and in full force and effect regardless of any investigation made by or on behalf of the other Party hereto, whether prior to or after the execution of this Agreement. Any disclosure made with reference to one or more sections of the GlobalTel Disclosure Schedule or the CSI Disclosure Schedule shall be deemed disclosed with respect to each other section therein as to which such disclosure is relevant provided such relevance is reasonably apparent. The representa tions, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section ------- 9.1, as the case may be, except that the agreement set forth in Article II shall - --- ---------- survive the Effective Time if the Merger is consummated and those set forth in Sections 7.3 and 9.3 shall survive termination of this Agreement. - ------------ --- SECTION 10.2 Notices. All notices and other communications given or made ------- pursuant hereto shall be in writing and shall be deemed to have been duly given or made as of the date delivered if delivered personally, three days after being sent by registered or certified mail (postage prepaid, return receipt requested), one Business Day after dispatch by recognized overnight courier (provided delivery is confirmed by the carrier) and upon transmission by telecopy, confirmed received, to the Parties at the following addresses (or at such other address for a Party as shall be specified by notice given in accordance with this Section): (a) If to CSI: Communications Systems International, Inc. 8 South Nevada Avenue Colorado Springs, Colorado 80903 Attention: Robert A. Spade Telecopy: (719) 577-4470 with a copy to: Parcel, Mauro & Spaanstra, P.C. 1801 California Street, Suite 3600 Denver, Colorado 80202 Attention: Douglas R. Wright, Esq. Telecopy: (303) 295-3040 50 (b) If to GlobalTel: GlobalTel Resources Inc. 1520 Eastlake Avenue East Seattle, Washington 98102 Attention: Ronald P. Erickson Telecopy: (206) 720-7251 with a copy to: Heller Ehrman White & McAuliffe 6100 Columbia Center 701 Fifth Avenue Seattle, WA 98104-7098 Attention: John W. Hanley, Jr., Esq. Telecopy: (206) 447-0849 SECTION 10.3 Amendment. This Agreement may be amended by the Parties by --------- action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the shareholders of GlobalTel or the shareholders of CSI, no amendment may be made which by law requires further approval by such shareholders without such further approval. SECTION 10.4 Waiver. At any time prior to the Effective Time, either ------ Party may (a) extend the time for performance of any of the obligations or other acts of the other Party, waive any inaccuracies in the representations and warranties of the other Party contained herein or in any document delivered pursuant hereto and (c) waive compliance by the other Party with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the Party to be bound thereby. No failure or delay by any Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law or at equity. SECTION 10.5 Headings. The headings contained in this Agreement are for -------- reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 10.6 Severability. The Parties intend that the provisions of ------------ this Agreement be enforced to the fullest extent permissible under the Legal Requirements and public policy applied in each jurisdiction in which enforcement is sought. Accordingly, in the event that any provision of this Agreement should be held in any jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, 51 as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7 Entire Agreement. This Agreement, together with the ---------------- GlobalTel Disclosure Schedule and the CSI Disclosure Schedule, constitutes the entire agreement, and supersedes all prior agreements and understandings, both written and oral, between the Parties with respect to the subject matter hereof and, except as otherwise expressly provided herein, is not intended to confer upon any other Person any rights or remedies hereunder. SECTION 10.8 Successors and Assigns. The provisions of this Agreement ---------------------- shall be binding upon and inure to the benefit of the Parties and their respective successors and assign, provided that no Party may assign, delegate or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the other Party. SECTION 10.9 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND ------------- CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF COLORADO, WITHOUT GIVING EFFECT TO THE PRINCIPLES OF CONFLICT OF LAWS THEREOF. SECTION 10.10 Construction. The Parties have participated jointly in the ------------ negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. SECTION 10.11 Incorporation of Exhibits and Disclosure Schedules. The -------------------------------------------------- Exhibits and Disclosure Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. SECTION 10.12 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be an original, with the same effect as if the signature thereto and hereto were upon the same instrument. This Agreement shall become effective when each Party shall have received a counterpart signed by the other Party. IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. 52 COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. By:________________________________ Name:___________________________ Title:__________________________ GLOBALTEL RESOURCES, INC. By:________________________________ Name:___________________________ Title:__________________________ 53 EXHIBIT 1 TO AGREEMENT AND PLAN OF MERGER BETWEEN COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. AND GLOBALTEL RESOURCES, INC. AMENDMENT TO BYLAWS OF SURVIVING CORPORATION -------------------------------------------- 1. The second sentence of Article III, Section 1 of the bylaws of the Surviving Corporation shall be amended to read in its entirety as follows: Management of the affairs, property, and business of the Corporation shall be vested in the Board of Directors, which shall consist of nine members. 2. Article IV of the bylaws of the Surviving Corporation shall be amended to read in its entirety as follows: ARTICLE IV OFFICERS SECTION 1. TITLES: - ------------------- The officers of the Corporation shall consist of a Chairman of the Board, Vice Chairman of the Board, Chief Executive Officer, President, one or more Vice Presidents, a Secretary, and a Treasurer, who shall each be elected for one (1) year by the directors at their first meeting following the annual meeting of stockholders. Such officers shall hold office until their successors are elected and qualify. The Board of Directors may appoint from time to time such other officers as it deems desirable who shall serve during such terms as may be fixed by the Board at a duly held meeting. The Board, by resolution, shall specify the titles, duties and responsibilities of such officers. SECTION 2. CHAIRMAN OF THE BOARD: - --------------------------------- The Chairman of the Board shall, when present, preside at all meetings of shareholders and of the Board of Directors, and in general shall perform all duties incident to the office of Chairman of the Board and such other duties as from time to time may be assigned to the Chairman by the Board of Directors, or as prescribed herein. 1-1 SECTION 3. VICE CHAIRMAN OF THE BOARD: - -------------------------------------- The Vice Chairman of the Board shall perform such duties and possess such powers as from time to time may be assigned to the Vice Chairman by the Board of Directors or the Chairman. In the absence of the Chairman or in the event of the Chairman's inability or refusal to act, the Vice Chairman shall perform the duties of the Chairman and when so performing shall have all the powers of and be subject to all the restrictions upon the Chairman. SECTION 4. CHIEF EXECUTIVE OFFICER: - ----------------------------------- The Chief Executive Officer shall have general charge, supervision and authority over the property, affairs and business of the Corporation, and over its several offices, subject, however, to the control of the Board of Directors. The Chief Executive Officer shall have authority to cause the employment or appointment of such employees and agents of the Corporation (other than officers or agents elected or appointed by the Board) as the conduct of the business of the Corporation may require, and to fix their compensation, and to remove or suspend any employee or agent who shall not have been appointed by the Board. SECTION 5. PRESIDENT: - ---------------------- The President shall be the chief operating officer of the Corporation. The President shall make reports to the Board of Directors, Chief Executive Officer and stockholders and shall perform such other duties and services as may be required from time to time by the Board of Directors or the Chief Executive Officer. The President shall see that all orders and resolutions of the Board of Directors are carried into effect. The President shall countersign all certificates, contracts, and other instruments of the Corporation as authorized by the Board of Directors or required by law. In the absence of the Chief Executive Officer or in the event of such officer's inability or refusal to act, the President shall perform the duties of the Chief Executive Officer and when so performing shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. SECTION 6. VICE PRESIDENT: - -------------------------- The Vice President shall perform all the duties of the President if the President is absent or for any other reason is unable to perform such officer's duties and shall have such other duties as the Board of Directors shall authorize or direct. SECTION 7. SECRETARY: - --------------------- The Secretary shall issue notices of all meetings of stockholders and directors, shall keep minutes of all such meetings, and shall record all proceedings. The Secretary shall have custody and control of the corporate records and shall make such reports and perform such other duties as may be consistent with such office or as may be required of such officer from time to time by the Board of Directors. 1-2 SECTION 8. TREASURER: - --------------------- The Treasurer shall have custody of all moneys and securities of the Corporation and shall have supervision over the regular books of account. The Treasurer shall deposit all moneys, securities, and other valuable effects of the Corporation in such banks and depositories as the Board of Directors may designate and shall disburse the funds of the Corporation in payment of just debts and demands against the Corporation, or as they may be ordered by the Board of Directors, shall render such account of such officer's transactions as may be required of such officer by the President or the Board of Directors from time to time and shall otherwise perform such duties as may be required of such officer by the Board of Directors. The Board of Directors may require the Treasurer to give a bond indemnifying the Corporation against larceny, theft, embezzlement, forgery, misappropriation, or any other act of fraud or dishonesty resulting from such officer's duties as Treasurer of the Corporation, which bond shall be in such amount as appropriate resolution or resolutions of the Board of Directors may require. SECTION 9. VACANCIES OR ABSENCES: - --------------------------------- If a vacancy in any office arises in any manner, the directors then in office may choose, by a majority vote, a successor to hold office for the unexpired term of the officer. If any officer shall be absent or unable for any reason to perform such officer's duties, the Board of Directors, to the extent not otherwise inconsistent with these Bylaws, may direct that the duties of such officer during such absence or inability shall be performed by such other officer or subordinate officer as seems advisable to the Board. SECTION 10. COMPENSATION: - ------------------------- No officer shall receive any salary or compensation for such officer's services unless and until the Board of Directors authorizes and fixes the amount and terms of such salary or compensation. 1-3 EXHIBIT 2 TO AGREEMENT AND PLAN OF MERGER BETWEEN COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. AND GLOBALTEL RESOURCES, INC. ADDITIONAL DIRECTORS OF SURVIVING CORPORATION --------------------------------------------- Messrs. Spade and Scanlon will elect the following persons to fill the vacancies on the board of directors of the Surviving Corporation to hold office until the next annual meeting of shareholders of the Surviving Corporation and until their respective successors are elected: Ronald P. Erickson, Bruce L. Crockett, Lyman C. Hamilton, Jr., Michael S. Brownfield, Dean H. Cary, Richard F. Nipert and Charles A. Shields. 2-1 EXHIBIT 3 TO AGREEMENT AND PLAN OF MERGER BETWEEN COMMUNICATIONS SYSTEMS INTERNATIONAL, INC. AND GLOBALTEL RESOURCES, INC. 1. PIGGYBACK REGISTRATION RIGHTS. ----------------------------- (a) Certain Definitions. As used in this Section, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any ---------- other federal agency at the time administering the Securities Act. "Holder" shall mean any person who owns any Registrable Securities and ------ assignees thereof in accordance with Section (f) below. "Registrable Securities" shall mean (i) CSI Shares issued by CSI ---------------------- pursuant to that Agreement and Plan of Merger dated May 29, 1998, in conversion of GlobalTel Shares (as defined therein) and (ii) any securities issued in respect of such CSI Shares upon any stock split, stock dividend, recapitalization, or similar event; provided, however, that shares of CSI common -------- ------- ---- or preferred stock shall no longer be treated as Registrable Securities after they have become eligible to be sold to or through a broker or dealer or underwriter in a public distribution or a public offering, whether in a registered offering, Rule 144 transaction or otherwise. "Registration Expenses" shall mean all expenses, except as otherwise --------------------- stated below, incurred by CSI in complying with subsection 1(b) hereof, including, without limitation, all registration, qualification and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for CSI, blue sky fees and expenses, the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of CSI which shall be paid in any event by CSI) and the reasonable fees and disbursements of one counsel for all Holders. "Securities Act" shall mean the Securities Act of 1933, as amended. -------------- "Selling Expenses" shall mean all underwriting discounts, selling ---------------- commissions and stock transfer taxes applicable to the securities registered by the Holders and, except as set forth in the definition of Registration Expenses, all fees and disbursements of counsel for any Holder. (b) Piggyback Registration Rights. ----------------------------- 3-1 (i) If at any time or from time to time during the period beginning one year after the effective date of CSI's registration statement no. 333-47045 relating to its underwritten public offering of common stock being managed by Cruttenden Roth Incorporated and ending on the second anniversary of such date CSI shall determine to register any of its securities, either for its own account or the account of a security holder or holders, other than (i) a registration relating solely to employee benefit plans, or (ii) a registration relating solely to a Commission Rule 145 transaction, CSI will: (A) promptly give to each Holder written notice thereof; and (B) include in such registration (and any related qualification under Blue Sky laws or other compliance), and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within 20 days after receipt of such written notice from CSI. (ii) If the registration of which CSI gives notice is for a registered public offering involving an underwriting, CSI shall so advise the Holders as a part of the written notice given pursuant to subsection 1(c)(i)(A). In such event the right of any Holder to registration pursuant to subsection 1(b) shall be conditioned upon such Holder's participation in such underwriting and the inclusion of the Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with CSI and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the managing underwriter selected for such underwriting by CSI. Notwithstanding any other provision of this subsection 1(b), if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten in CSI's registered public offering, the managing underwriter may limit on a pro rata basis the Registrable Securities to be included in such registration, to an amount not less than one-fourth (1/4) of the aggregate number of securities included in such registration. CSI shall advise all Holders and all other persons distributing their securities through such underwriting of any limitation described above; and the number of shares of Registrable Securities that may be included in the registration and underwriting shall be allocated among all participating Holders and such other persons having a contractual right to include shares of CSI Common Stock in such registration in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such participating Holders and such other participating holders at the time of filing the registration statement. If any officers, directors, employees, Holders or Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to CSI and the managing underwriter. (iii) If a Holder decides not to include all of its Registrable Securities in any registration statement filed by CSI, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by CSI with respect to offerings of its securities, all upon the terms and conditions set forth herein. 3-2 (iv) CSI shall have the right to terminate or withdraw any registration initiated by it under this subsection 1(b) prior to the effectiveness of such registration, whether or not any Holder has elected to include securities in such registration. (c) Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with all registrations pursuant to subsection l(b) shall be borne by CSI. Unless otherwise stated, all Selling Expenses relating to securities registered on behalf of a Holder shall be borne by such Holder. (d) Registration Procedures. In the case of each registration, ----------------------- qualification or compliance effected by CSI pursuant to Section l(b), CSI will keep each Holder advised in writing as to the initiation of each registration, qualification and compliance and as to the completion thereof. At its expense CSI will with all deliberate speed: (i) Prepare and file with the Commission a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for a period up to two hundred seventy (270) days; (ii) Furnish to the Holders participating in such registration and to the underwriters (if any) of the securities being registered such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such underwriters may reasonably request in order to facilitate the public offering of such securities; (iii) Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statements as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement; (iv) Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that CSI shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; and (v) In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. (vi) Notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or 3-3 necessary to make the statements therein not misleading in the light of the circumstances then existing. (vii) At the request of the managing underwriter of any underwritten offering, furnish on the date that such Registrable Securities are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement (i) an opinion, dated such date, of the counsel representing CSI for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated such date, from the independent certified public accountants of CSI, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. (viii) For as long as CSI has any registration obligations hereunder, timely file all such reports, forms or other documents as may be required from time to time under the Securities Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder and cause such reports, forms or other documents to comply as to form and substance with such acts and such rules and regulations. (e) Indemnification. --------------- (i) CSI will indemnify each Holder, each of its officers and directors and partners, and each person controlling such Holder within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section, and each underwriter, if any, and each person who controls any underwriter within the meaning of Section 15 of the Securities Act, against all expenses, claims, losses, damages or liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any registration statement, prospectus, offering circular or other document, or any amendment or supplement thereto, or incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they were made, not misleading, or any violation by CSI of the Securities Act or any rule or regulation promulgated under the Securities Act applicable to CSI in connection with any such registration, qualification or compliance, and CSI will reimburse promptly upon request each such Holder, each of its officers and directors, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal or any other expenses reasonably incurred in connection with investigating, preparing or defending any such claim, loss, damage, liability or action, provided that CSI will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission or alleged untrue statement or omissions, made in reliance upon and in conformity with written information furnished to CSI by an instrument duly executed by such Holder, controlling person or underwriter and stated to be specifically for use therein. Each Holder 3-4 will, if Registrable Securities held by such Holder are included in the securities as to which such registration, qualification or compliance is being effected, indemnify CSI, each of its directors and officers, each underwriter, if any, of CSI's securities covered by such a registration statement, each person who controls CSI or such underwriter within the meaning of Section 15 of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder within the meaning of Section 15 of the Securities Act, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to CSI by an instrument duly executed by such Holder and stated to be specifically for use therein. (ii) Each party entitled to indemnification under this subsection (e) (the "Indemnified Party") shall give notice to the party required to provide ----------------- indemnification (the "Indemnifying Party") promptly after such Indemnified Party ------------------ has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provide further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this subsection (e) unless the failure to give such notice is materially prejudicial to an Indemnifying Party's ability to defend such action and provided further, that an Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by the Indemnifying Party, if, in the opinion of counsel for the Indemnifying Party, representation of such Indemnified Party by the counsel retained by the Indemnifying Party would be inappropriate due to actual or potential differing interests between such Indemnified Party and any other party represented by such counsel in such proceeding. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. No Indemnifying Party shall be liable for indemnification hereunder with respect to any settlement or consent to judgment, in connection with any claim or litigation to which these indemnification provisions apply, that has been entered into without the prior consent of the Indemnifying Party (which consent will not be unreasonably withheld). (f) Assignment of Registration Rights. The rights to cause CSI to --------------------------------- register Registrable Securities pursuant to this Agreement may be assigned by a Holder to a transferee or assignee of such securities who shall, upon such transfer or assignment, be deemed a "Holder" under 3-5 this Agreement if and only if CSI is, within a reasonable period of time after such transfer, not to exceed sixty (60) days, furnished with written notice of the name and address of such transferee or assignee and the Registrable Securities with respect to which such registration rights are being assigned. (g) Limitations on Subsequent Registration Rights. From and after the --------------------------------------------- date of this Agreement, CSI shall not, without the prior written consent of a majority in interest of the Holders, enter into any agreement with any holder or prospective holder of any securities of CSI which would grant registration rights to such holder or prospective holder which are prior or superior to the rights of the Holders hereunder. 3-6 EX-23.2 4 CONSENT OF STOCKMAN KAST RYAN & SCRUGGS, PC Exhibit 23.2 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333- 47045 of Communications Systems International, Inc. of our report dated May 28, 1998 appearing in the Prospectus, which is a part of such Registration Statement, and to the reference to us under the heading "Experts" in such Prospectus. STOCKMAN KAST RYAN & SCRUGGS, P.C. Colorado Springs, Colorado June 19, 1998 EX-23.3 5 CONSENT OF RICHARD A. EISNER & COMPANY, LLP Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to inclusion of our report dated December 12, 1997 on our audits of the balance sheets of International Telephone Company as of October 31, 1997 and December 31, 1996 and the related statements of operations, changes in shareholders' equity (capital deficiency) and cash flows for the ten month period ended October 31, 1997 and the years ended December 31, 1996 and 1995 in this Registration Statement on Amendment No. 2 to Form SB-2 on Form S-1 and related Prospectus. We also consent to the reference to our firm under the caption "Experts" in the Prospectus. Richard A. Eisner & Company, LLP New York, New York June 17, 1998 EX-23.4 6 CONSENT OF ARTHUR ANDERSEN, LLP EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made a part of this registration statement. /s/ ARTHUR ANDERSEN LLP Seattle, Washington June 19, 1998 EX-27 7 FINANCIAL DATA SCHEDULE
5 8-MOS DEC-31-1997 MAY-01-1997 DEC-31-1997 429,373 0 1,369,493 342,276 0 1,475,960 767,791 284,156 2,975,305 4,087,498 0 0 0 2,750,285 (3,862,478) 2,975,305 8,114,737 8,114,737 4,878,478 4,878,478 4,278,078 0 113,529 (417,348) 0 (1,164,348) 0 747,000 0 (417,348) 0 0
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