<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 1997
REGISTRATION NO. 333-17681
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GROUP LONG DISTANCE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 4813 65-0213198
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------
1451 WEST CYPRESS CREEK ROAD, SUITE 200
FORT LAUDERDALE, FLORIDA 33309
(954) 771-9696
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
GERALD M. DUNNE, JR., PRESIDENT
GROUP LONG DISTANCE, INC.
1451 WEST CYPRESS CREEK ROAD, SUITE 200
FORT LAUDERDALE, FLORIDA 33309
(954) 771-9696
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Please send a copy of all communications to:
LAWRENCE B. FISHER, ESQ. ROBERT J. MITTMAN, ESQ.
ORRICK, HERRINGTON & SUTCLIFFE LLP TENZER GREENBLATT LLP
666 FIFTH AVENUE 405 LEXINGTON AVENUE
NEW YORK, NEW YORK 10103 NEW YORK, NEW YORK 10174
(212) 506-5000 (212) 885-5000
(212) 506-5151 (FAX) (212) 885-5001 (FAX)
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. /x/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM
PER SHARE OF AGGREGATE
AMOUNT COMMON STOCK AND OFFERING
TITLE OF EACH CLASS TO BE REDEEMABLE COMMON STOCK PRICE PER AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PURCHASE WARRANT(1) UNIT(1) REGISTRATION FEE
------------------------------ ---------- ---------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Common Stock, no par value(2)...... 1,437,500 $ 4.50 $6,468,750 $ 1,960.23
Redeemable Common Stock Purchase
Warrants(3)...................... 1,437,500 .10 143,750 43.56
Common Stock, no par value(4)(5)... 1,437,500 5.40 7,762,500 2,352.27
Common Stock, no par value(5)(6)... 300,000 5.75 1,725,000 522.73
Common Stock, no par value(5)(6)... 50,000 5.00 250,000 75.76
Representative's Warrants.......... -- .0001 -- --
Common Stock, par value(7)......... 125,000 4.95 618,750 187.50
Redeemable Common Stock Purchase
Warrants(7)...................... 125,000 .11 13,750 4.17
Common Stock, no par value(5)(8)... 125,000 5.94 742,500 225.00
Total.............................. $ 5,371.22
Amount Previously Paid............. $ 3,281.34
Amount Owed........................ $ 2,089.88
</TABLE>
(1) Pursuant to Rule 457(c) under the Securities Act, the maximum offering price
of the Common Stock has been calculated on the basis of the maximum offering
price per share.
(2) Includes shares of Common Stock included in the underwriters' over-allotment
option.
(3) Includes Redeemable Common Stock Purchase Warrants included in the
underwriters' over-allotment option.
(4) Issuable upon exercise of the Redeemable Common Stock Purchase Warrants,
including the Redeemable Common Stock Purchase Warrants included in the
underwriters' over-allotment option.
(5) Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares of Common Stock as may become issuable as a
result of anti-dilution provisions in the Warrants.
(6) Issuable upon exercise of Warrants issued to a certain lender that provided
financing to the Company.
(7) Reserved for issuance upon exercise of the Representative's Warrants.
(8) Issuable upon exercise of Redeemable Common Stock Purchase Warrants included
in the Representative's Warrants.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
GROUP LONG DISTANCE, INC.
CROSS-REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
Item and Caption in Form SB-2 Location in Prospectus
------------------------------ ----------------------
<S> <C>
1. Front of Registration Statement and Outside Front
Cover Page of Prospectus........................... Forepart of the Registration Statement; Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back Cover Pages of
Prospectus
3. Summary Information and Risk Factors................. Prospectus Summary; Risk Factors; Selected Financial
Data
4. Use of Proceeds...................................... Use of Proceeds; Capitalization
5. Determination of Offering Price...................... Risk Factors; Underwriting
6. Dilution............................................. Dilution
7. Selling Security Holders............................. Concurrent Offering
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Legal Proceedings.................................... Business
10. Directors, Executive Officers, Promoters and Control
Persons............................................ Management; Principal Stockholders
11. Security Ownership of Certain Beneficial Owners and
Management......................................... Principal Stockholders
12. Description of Securities............................ Description of Securities
13. Interests of Named Experts and Counsel............... Legal Matters; Experts
14. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Management
15. Organization Within Last Five Years.................. The Company; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Certain Transactions
16. Description of Business.............................. Prospectus Summary; Risk Factors; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business
17. Management's Discussion and Analysis or Plan of
Operation.......................................... Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property.............................. Business
19. Certain Relationships and Related Transactions....... Certain Transactions; Principal Stockholders
20. Market for Common Equity and Related Stockholder
Matters............................................ Outside Front Cover Page of Prospectus; Prospectus
Summary; Price Range of Common Stock; Dividend
Policy; Dilution; Description of Securities; Shares
Eligible for Future Sale
21. Executive Compensation............................... Management
22. Consolidated Financial Statements.................... Financial Statements
23. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ Not Applicable
</TABLE>
i
<PAGE>
EXPLANATORY NOTE
This registration statement (the 'Registration Statement') contains two
prospectuses: one related to the offering of 1,250,000 shares of Common Stock
(the 'Common Stock') and 1,250,000 redeemable common stock purchase warrants
(the 'Redeemable Warrants') (together, the 'Securities') by Group Long Distance,
Inc. (the 'Company') (the 'Prospectus'); and one relating to the offering of
350,000 shares of Common Stock issuable upon the exercise of warrants (the
'Selling Shareholder Prospectus'). Following the Prospectus are certain
substitute pages of the Selling Shareholder Prospectus, including alternate
front outside and back outside cover pages, an alternate 'The Offering' section
of the 'Prospectus Summary' and sections entitled 'Concurrent Offering' and
'Plan of Distribution.' Each of the alternate pages for the Selling Shareholder
Prospectus included herein is labeled 'Alternate Page for Selling Shareholder
Prospectus' or 'Additional Page for Selling Shareholder Prospectus.' All other
sections of the Prospectus, other than 'Underwriting' and 'Concurrent Offering,'
are to be used in the Selling Shareholder Prospectus. In addition,
cross-references in the Prospectus will be adjusted in the Selling Shareholder
Prospectus to refer to the appropriate sections.
ii
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such state.
PRELIMINARY PROSPECTUS DATED MARCH 3, 1997
SUBJECT TO COMPLETION
[LOGO] GROUP LONG DISTANCE, INC.
1,250,000 SHARES OF COMMON STOCK
AND
1,250,000 REDEEMABLE WARRANTS
------------------------
The Company is offering hereby 1,250,000 shares of Common Stock (the 'Common
Stock') and redeemable warrants to purchase 1,250,000 shares of Common Stock
(the 'Redeemable Warrants'). The shares of Common Stock and Redeemable Warrants
(sometimes hereinafter collectively referred to as the 'Securities') may be
purchased separately and will be separately transferable immediately upon
issuance. Each Redeemable Warrant entitles the registered holder thereof to
purchase one share of Common Stock at a price of $5.40, subject to adjustment in
certain circumstances, at any time commencing , 1998 through and
including , 2000. The Redeemable Warrants are redeemable by the
Company, upon the consent of LT Lawrence & Co., Inc. (the 'Representative') at
any time commencing , 1998, upon notice of not less than 30 days, at
a price of $.10 per Warrant, provided that the closing bid quotation of the
Common Stock equals or exceeds 125% of the then effective exercise price of the
Redeemable Warrants for any twenty trading days within a period of thirty
consecutive trading days ending on the fifth trading day immediately prior to
the notice of redemption. The Redeemable Warrants will be exercisable until the
close of business on the date fixed for redemption. See 'Description of
Securities.'
Prior to this offering, there has been a limited trading market for the
Common Stock and no public market for the Redeemable Warrants, and there can be
no assurance that any regular market will develop. The Common Stock is traded on
the OTC Bulletin Board under the symbol 'GLDT.' Application had been made to
quote the Common Stock and the Redeemable Warrants on the Nasdaq SmallCap Market
('Nasdaq') under the symbols 'GLDI' and 'GLDIW,' respectively. The last reported
sale price for the Common Stock on February 21, 1997 was $4.50. The offering
prices of the Common Stock and the Redeemable Warrants have been determined
pursuant to negotiations between the Company and the Representative and do not
necessarily relate to the Company's book value or any other established criteria
of value. See 'Price Range of Common Stock' and 'Underwriting.'
Concurrently with this offering, 350,000 shares of Common Stock issuable
upon exercise of warrants (the 'Tel-Save Warrants') are being registered at the
Company's expense for sale by Tel-Save Holdings, Inc. (the 'Selling
Shareholder'), an affiliate of Tel-Save, Inc., pursuant to a separate
prospectus. The shares offered by the Selling Shareholder are not part of the
underwritten offering and may not be offered or sold prior to twelve months from
the date of this Prospectus without the prior written consent of the
Representative. See 'Concurrent Offering.'
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 7 AND 'DILUTION.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
-------- ---------------------- ------------
<S> <C> <C> <C>
Per Share................................... $4.50 $.45 $4.05
Per Redeemable Warrant...................... $.10 $.01 $.09
Total(3).................................... $5,750,000 $575,000 $5,175,000
</TABLE>
(1) In addition, the Company has agreed to pay to the Representative a 3%
nonaccountable expense allowance and to sell to the Representative warrants
(the 'Representative's Warrants') to purchase 125,000 shares of Common Stock
and/or 125,000 Redeemable Warrants. The Company has also agreed to indemnify
the Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933. See 'Underwriting.'
(2) Before deducting expenses, including the nonaccountable expense allowance in
the amount of $172,500 ($198,375, if the Underwriters' over-allotment option
is exercised in full), estimated at $657,500, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an aggregate of
187,500 additional shares of Common Stock and/or 187,500 additional
Redeemable Warrants on the same terms as set forth above, solely for the
purpose of covering over-allotments, if any. If the Underwriters'
over-allotment option is exercised in full, the total price to the public,
underwriting discounts and commissions and proceeds to the Company will be
$6,612,500, $661,250 and $5,951,250, respectively. See 'Underwriting.'
------------------------
The shares of Common Stock and Redeemable Warrants are being offered subject
to prior sale, when, as and if delivered to and accepted by the several
Underwriters and subject to approval of legal matters by counsel and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify this offering and to reject any order in whole or in part. It is expected
that delivery of certificates representing the shares of Common Stock and
Redeemable Warrants offered hereby will be made against payment therefor at the
offices of the Representative, 3 New York Plaza, New York, New York 10004, on or
about , 1997.
------------------------
LT LAWRENCE & CO., INC.
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AND/OR REDEEMABLE WARRANTS OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Unless otherwise indicated, all
information in this Prospectus (i) assumes no exercise of the Redeemable
Warrants, the Underwriters' over-allotment option or the Representative's
Warrants and (ii) gives effect to the increase in the Company's authorized
capital stock. See 'Description of Securities' and 'Underwriting.'
THE COMPANY
Group Long Distance, Inc. (the 'Company') provides long distance telephone
and other telecommunications services and products to approximately 34,000
customers as of December 31, 1996. The Company's customers are primarily small
and medium-sized businesses located principally in the Southeastern United
States. In addition to its basic '1 plus' and '800' long distance services, the
Company offers local, Internet, international call-back, e-mail and data
services and prepaid long distance calling cards. The Company markets its
services and products primarily through independent distributors, agents and
telemarketers. The Company's sales increased by 30% to $12.4 million for the
fiscal year ended April 30, 1996 from the prior fiscal year and increased by 84%
to $15 million for the eight months ended December 31, 1996 from the
corresponding prior period.
The Company has entered into agreements with long distance carriers and
other service providers, including Tel-Save, Inc. ('Tel-Save'), WorldCom/LDDS
Inc. ('WorldCom'), Intermedia Communications Inc. ('ICI') and UUNET
Technologies, Inc. ('UUNET'), to provide its customers with service rates which
the Company believes are generally less than those that can be obtained by its
customers directly from carriers. For the eight months ended December 31, 1996,
approximately 71% of the Company's sales were generated by calls and services
carried on the AT&T network through Tel-Save utilizing AT&T's operator and
billing services. The Company has commenced placing new customers on Tel-Save's
newly acquired network of state-of-the-art AT&T 5 ESS 2000 digital switches.
In July 1996, the Company acquired Adventures-in-Telecom, Inc. ('AIT') with
a customer base of approximately 30,000 small businesses in consideration of
$5,271,230 in cash and the issuance of 155,000 shares of Common Stock (the 'AIT
Acquisition'). In December 1996, the Company accelerated the amortization of the
acquisition costs of the AIT customer base due to significant customer
attrition, resulting in $1,484,700 of additional amortization expense and a net
loss of $1,749,050 for the eight months ended December 31, 1996. Customer
attrition was primarily attributable to the Company's inability to implement
customer service and retention programs, including delays in provisioning
(activation of new customers), as well as increased competition. In connection
with the AIT Acquisition, the Company entered into an agreement with Tel-Save
pursuant to which the Company borrowed $5,521,230 from Tel-Save primarily to
finance the purchase price of the acquisition (the 'Acquisition Loan').
The domestic long distance market in the United States has experienced an
annual revenue growth rate of approximately 7.4% since 1984. The Company
believes that this growth is a result of increased usage resulting from
declining per minute costs, increased data transmission needs of customers and
businesses and the popularization of products such as facsimile machines, '800'
services and Internet access. The Company expects these factors to continue to
result in increased usage of long distance services in the future. In addition,
the Company believes that the Southeastern United States is continuing to
experience a high level of economic and population growth which the Company
anticipates will result in an overall increase in demand for long distance and
telecommunications services in this area.
The Company intends to actively pursue a strategy of continued growth and
will seek to expand the distribution of its services and products and maximize
penetration of new and existing geographic markets. Key elements of the
Company's growth strategy include:
o Expand Distribution Channels. The Company intends to expand its
marketing activities by increasing the number of direct sales
personnel and in-house telemarketers as well as independent agents,
distributors and telemarketers. By expanding these distribution
channels, the Company will seek to maximize exposure of its services
and products.
3
<PAGE>
o Emphasize Product and Service 'Bundling.' The Company has
increasingly emphasized bundling of its basic long distance services
with other services and products, such as local telecommunications
access, Internet access and fax broadcast services. The Company
believes that if it is successful in bundling its services, it may
increase revenue per customer and decrease customer attrition. The
Company also believes that service bundling will be attractive to
small businesses seeking to obtain a variety of services from one
provider.
o Develop Strategic Marketing Relationships. The Company intends to
continue to develop strategic marketing relationships with entities
such as Scrip Plus Inc. ('Scrip'), a large fundraising and
educational consulting company, and with retail outlets to expand
distribution of its basic '1 plus' and '800' services as well as its
prepaid calling cards.
o Improve Operating and Network Efficiencies. The Company has agreed
to place new customers' domestic switched, '1 plus' and '800'
services on Tel-Save's One Better Network ('OBN'), which will
utilize the new AT&T 5 ESS 2000 digital switches. The Company
believes that, upon successful transition of its customer base, the
increased efficiency of these switches may ultimately shorten the
Company's provisioning, billing and collection cycles.
o Expand Through Acquisitions. The Company operates in a highly
fragmented segment of the telecommunications industry and regularly
evaluates possible acquisition opportunities. The Company may seek
to acquire smaller resellers and customer bases in order to expand
the distribution of its products and services and maximize
penetration in new and existing geographic markets. The Company
believes its existing infrastructure, including customer service,
collections, provisioning and carrier agreements, may position the
Company to acquire customer bases with little corresponding increase
in overhead costs.
Although the Company has identified potential areas for expansion, there
can be no assurance that the Company will be able to successfully expand its
operations.
The Company was incorporated under the laws of Florida in September 1995 by
ITC Integrated Systems, Inc. ('ITC'), an unaffiliated third party, under the
name Second ITC Corporation ('Second ITC') as the successor to the business of
Group Long Distance, Inc. ('GLD'), which was incorporated under the laws of
Florida in July 1990. In November 1995, GLD was merged into Second ITC and
Second ITC simultaneously changed its name to Group Long Distance, Inc. The
address of the Company's principal office is 1451 West Cypress Creek Road, Suite
200, Fort Lauderdale, Florida 33309. The Company's telephone number is (954)
771-9696. Unless otherwise indicated, all references in this Prospectus to the
Company include GLD, the Company's predecessor, and the Company's wholly-owned
subsidiaries.
RECENT DEVELOPMENTS
In January 1997, the Company purchased from Great Lakes Telecommunications
Corp. ('Great Lakes'), a debtor-in-possession under Chapter 11 of the U.S.
Bankruptcy Code (i) a customer base consisting of approximately 7,000 customers
that were subject to an agreement between Great Lakes and Tel-Save and (ii) a
warrant to purchase 200,000 shares of Common Stock of Tel-Save in consideration
of $1,200,000 in cash. In connection with such acquisition, the Company borrowed
$1,200,000 from Tel-Save. In January 1997, Tel-Save repurchased the warrants
from the Company in consideration of $1,800,000 and credited the Company with
such amount ($1,200,000 to repay the loan made in January 1997 and $600,000 to
reduce the outstanding principal balance under the Acquisition Loan (the 'Loan
Reduction')). See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and 'Certain Transactions.'
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities offered................................ 1,250,000 shares of Common Stock and 1,250,000 Redeemable
Warrants.
Common Stock outstanding after the offering....... 3,462,353 shares(1)
Redeemable Warrants:
Number to be outstanding after the offering..... 1,250,000 Redeemable Warrants.
Exercise terms.................................. Exercisable commencing , 1998, each to
purchase one share of Common Stock at a price of $5.40 per
share, subject to adjustment in certain circumstances. See
'Description of Securities--Redeemable Warrants.'
Expiration date................................. , 2000.
Redemption...................................... Redeemable by the Company, upon the consent of the
Representative, at any time commencing , 1998,
upon notice of not less than 30 days, at a price of $.10 per
Warrant, provided that the closing bid quotation of the Common
Stock equals or exceeds 125% of the then effective exercise
price of the Redeemable Warrants for any twenty trading days
within a period of thirty consecutive trading days ending on
the fifth trading day immediately prior to the notice of
redemption. The Redeemable Warrants will be exercisable until
the close of business on the date fixed for redemption. See
'Description of Securities--Redeemable Warrants.'
Use of Proceeds................................... The Company intends to use the net proceeds of this offering
for marketing and sales and the balance for working capital
and general corporate purposes, including potential
acquisitions of resellers and customer bases. See 'Use of
Proceeds.'
Risk Factors...................................... The Securities offered hereby are speculative and involve 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 Symbols(2):
Common Stock.................................... GLDI
Redeemable Warrants............................. GLDIW
</TABLE>
- ------------------
(1) Does not include: (i) 350,000 shares of Common Stock issuable upon exercise
of the Tel-Save Warrants at a weighted average exercise price of $5.64 per
share; (ii) 76,216 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.23 per share;
(iii) 526,500 shares of Common Stock issuable upon exercise of options
granted under the Company's stock option plan (the 'Stock Option Plan') at
an exercise price of $5.0625 per share; and (iv) 73,500 shares reserved for
the exercise of options available for future grant under the Stock Option
Plan. See 'Management--Stock Option Plan.'
(2) The Common Stock is traded on the OTC Bulletin Board under the symbol
'GLDT.' In connection with this offering, application has been made to list
the Common Stock and the Redeemable Warrants on Nasdaq. See 'Price Range of
Common Stock.'
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEAR ENDED APRIL 30, EIGHT MONTHS ENDED DECEMBER 31,
------------------------------------------------------ ----------------------------------------
1996 1996
-------------------------- --------------------------
PRO PRO
1994 1995 ACTUAL FORMA(2) 1995 ACTUAL(1) FORMA(2)
---------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Sales............... $7,784,112 $9,538,095 $12,364,643 $36,867,160 $8,195,632 $15,069,300 $16,619,188
Cost of sales....... 5,086,764 6,992,817 9,009,131 26,615,705 6,002,319 10,848,880 11,969,325
---------- ---------- ----------- ----------- ---------- ----------- -----------
Gross profit........ 2,697,348 2,545,278 3,355,512 10,251,455 2,193,313 4,220,420 4,649,863
Selling, general and
administrative.... 2,336,048 2,074,127 2,835,316 4,893,881 1,779,033 3,014,315 3,150,059
Depreciation and
amortization...... 4,611 16,070 133,281 4,375,281 40,530 2,690,738 3,044,238
Interest expense,
net............... 20,441 22,177 19,050 361,050 10,832 264,417 292,656
Earnings (losses)
before income
taxes............. 336,248 432,904 367,865 621,243 362,918 (1,749,050) (1,837,090)
Income taxes........ 136,653 151,000 169,900 718,565 137,250 -- --
Income (loss) before
extraordinary
item.............. 199,595 281,904 197,965 (97,322) 225,668 (1,749,050) (1,837,090)
Extraordinary item
(3)............... 517,653 -- -- -- -- -- --
Net income (loss)... $ 717,248 $ 281,904 $ 197,965 $ (97,322) $ 225,668 $(1,749,050) $(1,837,090)
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
Net income (loss)
per share
Before
extraordinary
item............ $ .12 $ .15 $ .10 $ (.04) $ .11 $ (.79) $ (.81)
Extraordinary
item............ .30 -- -- -- -- -- --
Total per share... $ .42 $ .15 $ .10 $ (.04) $ .11 $ (.79) $ (.81)
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
Weighted average
shares outstanding
(4)............... 1,693,995 1,840,250 2,018,474 2,173,474 2,059,025 2,222,917 2,261,822
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
OTHER OPERATING
DATA:
Number of customers
at period end..... 4,700 9,000 12,000 42,000 15,000 34,000 34,000
EBITDA (5).......... $ 361,300 $ 471,151 $ 520,196 $ 5,357,574 $ 414,280 $ 1,206,105 $ 1,499,804
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
APRIL 30, --------------------------
-------------------------------------- AS
1994 1995 1996 ACTUAL(1) ADJUSTED(6)
---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................................. $ (8,779) $ 7,772 $ (851,072) $(1,614,844) $3,861,827
Total assets............................................... 1,400,570 1,849,880 2,740,411 8,748,839 13,266,339
Short-term debt............................................ 606,867 553,633 664,187 2,491,116 1,891,116
Long-term debt............................................. 375,417 160,000 98,727 3,513,125 3,513,125
Stockholders' equity (deficit)............................. $ (375,892) $ (13,988) $ 188,641 $ (475,409) $4,624,091
</TABLE>
- ------------------
(1) Includes the operations of AIT since June 1996.
(2) The unaudited pro forma consolidated financial statements have been prepared
to give effect to the AIT Acquisition as if it had occurred at the beginning
of each of the periods presented. The pro forma adjustments are based upon
preliminary estimates, available information and certain assumptions that
management deems appropriate. The unaudited pro forma consolidated financial
data presented herein should not be viewed as indicative of the results the
Company would have obtained had such events occurred at the beginning of the
period, as assumed, or of the future results of the Company. Does not give
effect to the Great Lakes acquisition consummated in January 1997. See 'Pro
Forma Financial Statements.'
(3) This extraordinary item relates to settlement agreements with AT&T, which
resulted in a reduction in carrier trade payables and a corresponding gain
after taxes of $517,653. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
(4) See Note B to Notes to Financial Statements.
(5) As used herein, 'EBITDA' is defined as net income or loss plus depreciation
expense, amortization expense, 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.
(6) As adjusted to give effect to (i) the $600,000 Loan Reduction and (ii) the
sale of the shares of Common Stock and Redeemable Warrants offered hereby
(after deducting estimated offering expenses and underwriting discounts and
commissions), and the initial application of the estimated net proceeds
therefrom. See 'Use of Proceeds' and 'Capitalization.'
6
<PAGE>
RISK FACTORS
The Securities offered hereby are speculative and involve a high degree of
risk. Each prospective investor should carefully consider the following risk
factors before making an investment decision.
Limited Historical Profitability; Recent Loss; Anticipated Future
Losses. The Company operates on a low-margin basis and has achieved limited
historical profitability. For the eight months ended December 31, 1996, the
Company incurred a net loss of $1,749,050, primarily as a result of an
accelerated amortization charge of $2,474,601 relating to higher than
anticipated attrition of the AIT customer base. Losses are continuing through
the date of this Prospectus. Inasmuch as the Company will continue to have a
high level of operating expenses following the consummation of this offering and
will incur additional amortization expenses of $1,765,000 relating to the AIT
customer base through June 1, 1997, the Company anticipates it will, in all
likelihood, incur a significant loss for the year ended April 30, 1997.
Increased competition, customer attrition and service delays have had and could
continue to have a material adverse effect on the Company's operating results.
There can be no assurance that the Company will not continue to incur
significant losses or that the Company will be able to achieve profitable
operations. See 'Management's Discussion and Analysis of Financial Condition and
Results of Operations' and Financial Statements.
Significant Capital Requirements; Dependence on Offering Proceeds; Working
Capital and Stockholders' Deficits; Possible Need For Additional Financing. The
Company's capital requirements have been and will continue to be significant.
The Company is dependent on the proceeds of this offering or other financing to
fund its cash requirements necessary to finance its anticipated growth in
accounts receivable and reduce its working capital deficit. At December 31,
1996, the Company had a working capital deficit of $1,614,844 and a
stockholders' deficit of $475,409. Based on the Company's currently proposed
plans and assumptions relating to its operations, the Company believes that the
proceeds of this offering, together with projected cash flow from operations,
will be sufficient to satisfy its contemplated cash requirements for at least
twelve months following the consummation of this offering. In the event that the
Company's plans change, its assumptions change or prove to be inaccurate or if
the proceeds of this offering or projected cash flow prove to be insufficient to
fund operations (due to unanticipated expenses, operating difficulties or
otherwise), the Company could be required to seek additional financing or
curtail its operations. While the Company has relied on advances from Tel-Save
in the past, the Company has no current arrangements with respect to, or sources
of, additional financing and Tel-Save has not committed to provide any portion
of the Company's future financing requirements. There can be no assurance that
any such additional financing will be available to the Company on commercially
reasonable terms, or at all. In light of the Company's limited resources, its
anticipated expenses and the competitive environment in which it operates, any
inability to obtain additional financing, if required, would have a material
adverse effect on the Company. See 'Use of Proceeds' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
Significant Outstanding Indebtedness; Loan Covenants and Security
Interests; Payment Defaults. The Company has incurred substantial indebtedness
in relation to its equity capital. In connection with the AIT Acquisition in
July 1996, the Company entered into an agreement with Tel-Save pursuant to which
it borrowed an aggregate amount of $5,521,230 primarily to finance the purchase
price of the acquisition. At January 31, 1997, approximately $3 million was
outstanding under the Acquisition Loan. The Company's loan agreement with
Tel-Save was amended in February 1997 to provide for the repayment of the
balance of the Acquisition Loan in equal monthly installments of $125,000
together with interest, commencing after September 1997, provided that this
offering is consummated by April 15, 1997. In the event that this offering is
not consummated by such date, the entire principal amount of and accrued
interest on the Acquisition Loan becomes due and payable. There can be no
assurance that the Company will have the financial resources to satisfy such
obligation. All of the Company's assets (including the capital stock of AIT) are
pledged to Tel-Save as collateral and the Company is prohibited from creating
liens or security interests on the Company's assets, which could limit the
Company's ability to secure future financing. In the event of a default by the
Company on its obligations to Tel-Save, Tel-Save could elect to require the
Company and its directors to cause Tel-Save's designees to be appointed to and
constitute a majority of the Board of Directors of the Company and/or declare
the Company's indebtedness to be immediately due and payable and foreclose on
the Company's assets, which would result in a change of control of the Company.
The Company was not in compliance with respect to its payment obligations and
certain provisions of its partition agreement with Tel-Save as of December 31,
1996. Tel-Save has waived
7
<PAGE>
such non-compliance and, as of the date of this Prospectus, the Company is in
compliance with its obligations or has otherwise obtained the necessary waivers
or consents from Tel-Save. The Company also is indebted to WorldCom in the
amount of approximately $1,254,000 at December 31, 1996, which is secured by the
Company's assets (including receivables) relating to the provision of long
distance services by WorldCom to the Company's customers. The Company is
currently in default under its payment obligations to AT&T in an amount of
approximately $548,000. The Company has not allocated any portion of the
proceeds of this offering to repay any such indebtedness. To the extent the
Company is required to use a significant portion of such proceeds to repay such
indebtedness, the Company will have less resources available to it for other
purposes. See 'Use of Proceeds' and 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
Dependence on Tel-Save and Third-Party Carriers; Possible Service
Interruptions and Equipment Failures. The Company does not own or operate any
transmission facilities and is dependent on a limited number of long distance
carriers and numerous regional and local telephone companies to provide access
to long distance telephone and Internet service on a cost-effective basis. The
Company has entered into agreements with long distance carriers to provide
access to telephone lines and transmission facilities necessary to transmit
customer calls. For the year ended April 30, 1996, long distance calls carried
by Tel-Save (through AT&T) and WorldCom accounted for approximately 61% and 31%,
respectively, of the Company's revenues. For the eight months ended December 31,
1996, long distance calls carried by Tel-Save (through AT&T), WorldCom and ICI
accounted for approximately 71%, 22% and 4%, respectively, of the Company's
revenues. The Company's agreement with Tel-Save requires the Company, subject to
certain exceptions, to provide domestic switched, '1 plus' and '800' services to
all of the Company's new customers through Tel-Save's newly acquired AT&T
digital switching equipment, and grants Tel-Save the right to reprovision
certain of the Company's existing customers on its new network. Such
arrangements will significantly increase the Company's dependence on Tel-Save
for the transmission of customer calls. Tel-Save's newly acquired digital
switching equipment has only recently become operational, which has resulted in
material delays in provisioning the Company's new customers. There can be no
assurance that the transition of the Company's customer base to Tel-Save's
network will be successful or that the Company will not continue to be subject
to material delays or other difficulties in connection with provisioning new
customers. Poor performance by Tel-Save or a decline in Tel-Save's economic
prospects could have an adverse affect on the Company's future operating
results. Although the Company believes that it currently has sufficient access
to transmission facilities and long distance networks on favorable terms and
believes that its relationships with its carriers are satisfactory, any increase
in the rates charged by carriers would materially adversely affect the Company's
operating margins. Failure to obtain continuing access to such facilities and
networks would also have a material adverse effect on the Company, including
possibly requiring the Company to significantly curtail its operations.
In addition, the Company's operations require that its carrier switching
facilities and long distance networks operate on a continuous basis. There can
be no assurance that third-party switching facilities and long distance networks
will not from time to time experience service interruptions or equipment
failures or that Tel-Save's new switching equipment, which employs new
technologies that have not been used extensively, will prove to be reliable in
widespread commercial use. Service interruptions and equipment failures
resulting in material delays would adversely affect consumer confidence as well
as the Company's business operations and reputation. See 'Business--Long
Distance Service Providers.'
Dependence On Timely and Accurate Call Data Records; Billing and Payment
Disputes. The Company is dependent upon the timely receipt and accuracy of call
data records provided to it by its carriers. There can be no assurance that
accurate information will consistently be provided by carriers or that such
information will be provided on a timely basis. Failure by carriers to provide
timely and accurate call detail would increase the length of the Company's
billing and collection cycles and adversely affect its operating results. Due
principally to numerous billing rates and discounts which must be applied by
carriers to the calls completed by the Company's customers and the timing of
customer addition and termination, the Company has had disagreements with its
carriers concerning the amounts invoiced for its customers' traffic. The Company
pays its long distance carriers according to the Company's calculation of the
charges applicable to the calls attributed to the Company based on computer tape
records of all such calls provided by carriers which may not always reflect
current rates. Accordingly, a carrier may consider the Company to be in arrears
in its payments until the amount in dispute is resolved. In particular, the
Company has had disputes with AT&T which resulted in a settlement pursuant to
which the Company's indebtedness to such carrier was reduced and committed to a
payment schedule. The
8
<PAGE>
Company is in default under its payment obligations to AT&T and, as of December
31, 1996, owed AT&T approximately $548,000. The Company unsuccessfully attempted
to negotiate a new payment schedule or settlement with AT&T and there can be no
assurance that AT&T will not seek to enforce its rights against the Company. In
June and December 1996, the Company converted certain accounts payable to
WorldCom into a promissory note in the aggregate principal amount of $1,253,798.
There can be no assurance that future disputes with carriers will not arise or
that such disputes will be resolved in a manner favorable to the Company. In
addition, the Company is required to maintain sophisticated billing and
reporting systems to service the large volume of calls placed over the WorldCom,
ICI and other long distance networks. There can be no assurance that the
Company's billing and management systems will be sufficient to provide the
Company with accurate and efficient billing and order processing capabilities.
See 'Management's Discussion and Analysis of Financial Condition and Results of
Operations,' 'Business--Long Distance Service Providers' and '--Operations and
Customer Billing Service.'
Outstanding Accounts Receivable; Collection and Credit Risks. The
Company's accounts receivable, less allowance for doubtful accounts, were
$2,544,080 at December 31, 1996 as compared to $1,201,710 at April 30, 1996. Of
the Company's accounts receivable at December 31, 1996, approximately $1,000,000
were more than 90 days outstanding. Accounts receivable averaged 45 days of
sales for the year ended April 30, 1996, as compared to 64 days through December
31, 1996. Increased accounts receivable days outstanding has required the
Company to use substantial working capital to finance receivables, which has
materially adversely affected its liquidity and working capital position. At
December 31, 1996, the Company's allowance for doubtful accounts was $994,000,
as compared to $358,000 at April 30, 1996, which the Company believes is
currently adequate for the size and nature of its receivables. Nevertheless,
delays in collection or uncollectibility of accounts receivable could continue
to have a material adverse effect on the Company's liquidity and working capital
position and could require the Company to continually increase its allowance for
doubtful accounts. Furthermore, as the Company seeks to expand its customer base
through internal growth and potential acquisitions, the Company will be required
to continually evaluate and assess the creditworthiness of new customers. Any
inability to properly assess potential credit risks could also have a material
adverse effect on the Company. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
Minimum Volume Commitments. The Company has entered into multiple-year
service agreements with Tel-Save, WorldCom and ICI and short-term agreements
with other suppliers of long distance telecommunication services. To obtain
favorable forward pricing from its underlying carriers, the Company has
committed to purchase certain minimum volumes of long distance services during
stated periods. For the year ended April 30, 1996 and the eight months ended
December 31, 1996, these commitments aggregated approximately $3,200,000 and
$4,885,000, respectively. The Company's agreement with Tel-Save currently
requires the Company to commit to a minimum volume of $100,000 per month or pay
the amount billed plus a surcharge of $5,000 for such month. Such minimum
purchase commitment will increase to $3,000,000 per month commencing November 1,
1997. Such commitment, coupled with the Company's agreement to provide domestic
switched, '1 plus' and '800 services' to new customers through Tel-Save, could
adversely affect the Company's ability to satisfy minimum volume purchase
commitments to other carriers in the future. The Company's agreement with
WorldCom requires the Company to pay the greater of the actual amount billed or
a minimum of $500,000 per month, increasing to $750,000 per month in April 1997
and $1,000,000 per month in August 1997. The Company's agreement with ICI
requires the Company to purchase a minimum volume of $250,000 per month. The
Company has in the past obtained relief from its carriers for shortfalls in
meeting its volume commitments. There can be no assurance that the Company will
continue to satisfy minimum volume commitments in the future or that its
carriers will provide relief with respect to any shortfalls. Failure to satisfy
such commitments could have a material adverse effect on the Company's operating
margins and results of operations. In addition, because the Company has
commitments to purchase fixed volumes of use at predetermined rates, if carriers
were to lower the rates made available to the Company's target market without a
corresponding reduction in the Company's rates, the Company could be materially
adversely affected. See 'Business--Long Distance Service Providers.'
Customer Attrition. The Company's operating results are significantly
affected by customer attrition rates. Customers are not obligated to purchase
any minimum usage and may discontinue service without penalty at any time. There
can be no assurance that customers will continue to purchase long distance or
other services through the Company in the future or that the Company will not be
subject to increased customer attrition rates. The Company believes that a high
level of customer attrition in the industry is primarily a result of national
9
<PAGE>
advertising campaigns, telemarketing programs and customer incentives provided
by major competitors, as well as the termination of service for non-payment. The
Company typically experiences higher customer attrition rates during the first
year following the acquisition of a customer base from other resellers. The
Company believes that this is due to increased customer exposure to competitors
during the transition to the Company's services. The Company recently acquired
the AIT customer base and originally recorded an asset of approximately $6.6
million at July 31, 1996, of which approximately $5.6 million (net of
receivables, marketing advances to agents, and an adjustment in the number of
shares issued) was to be amortized at the rate of 30%, 25%, 20%, 15% and 10%,
respectively, over a five-year period. The Company experienced an attrition rate
in excess of 50% during the seven-month period ended December 31, 1996 relating
to this customer base. As a result, in December 1996, the Company accelerated
the amortization of the acquisition costs of such customer base to the rate of
75% for the first year ($4,242,000), which had a material adverse effect on the
Company's operating results for the eight months ended December 31, 1996. The
Company expects to amortize the balance of customer acquisition costs of
$1,414,000 at the end of the first year, at a rate of 15% and 10%, respectively,
over the second and third years. There can be no assurance that the assumed
attrition rates underlying the Company's amortization schedule will prove to be
accurate or that customer attrition rates will not increase in the future. Any
significant increase in customer attrition rates resulting in increased
amortization expense will continue to have a material adverse effect on the
Company's operating results. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
Competition; Evolving Industry Standards, Technological Trends and Changing
Regulation. The Company faces intense competition in the marketing and sale of
its services and products. The Company's long distance, prepaid long distance
calling cards, Internet and other services and products compete for consumer
recognition with other long distance, calling card, Internet and other services
and products which have achieved significant international, national and
regional consumer loyalty. Many of these services and products are marketed by
companies which are well-established, have reputations for success in the
development and sale of services and products and have significantly greater
financial, marketing, distribution, personnel and other resources than the
Company. These resources permit such companies to implement extensive
advertising and promotional campaigns, both generally and in response to efforts
by additional competitors to enter into new markets and introduce new services
and products. Certain of these competitors, including AT&T, MCI
Telecommunications Corporation ('MCI') and Sprint Corporation ('Sprint'),
dominate the industry and have the financial resources to enable them to
withstand substantial price competition which has continued to increase. These
and other large telephone companies have also entered or have announced their
intention to enter into the prepaid phone card and Internet segments of the
telecommunications industry. Because the reseller segment of the
telecommunications industry has no substantial barriers to entry, competition
from smaller resellers in the Company's target markets is also expected to
continue to increase significantly. The markets for telecommunications services
and products are also characterized by rapidly changing technology and evolving
industry standards, often resulting in product obsolescence or short product
life cycles. The proliferation of new telecommunications technologies, including
personal communication services, cellular telephone services and products and
prepaid phone cards employing alternative 'smart' card technologies, may reduce
demand for traditional land-line long distance telephone services generally and
the Company's services in particular. The Company's success will depend on the
Company's ability to anticipate and respond to these and other factors affecting
the industry, including changes in customer preferences, business and
demographic trends, unfavorable general economic conditions and discount pricing
strategies by competitors.
Recent regulatory changes may also result in significantly increased
competition. In October 1995, the FCC terminated AT&T's designation as a
dominant carrier, which will make it easier for AT&T to compete directly with
the Company for low volume commercial long distance customers. Also, the
recently adopted 1996 Telecommunications Act is designed to introduce increased
competition in domestic telecommunications markets by facilitating the entry of
any entity (including cable television companies and utilities) into both the
long distance and local telecommunications markets. Consequently, such act
increases the potential for increased competition by permitting long distance
and regional carriers to compete in local markets and well-established and
well-capitalized Regional Bell Operating Companies and local exchange carriers
to compete directly against the Company in long distance markets. There can be
no assurance that the Company will be able to continue to compete successfully,
particularly as it seeks to enter into new markets and market new services and
products. See 'Business--Competition' and '--Government Regulation.'
10
<PAGE>
Regulatory Factors. Long distance telecommunications services are subject
to regulation by the Federal Communications Commission (the 'FCC') and by state
regulatory authorities. Among other things, these regulatory authorities impose
regulations governing the rates, terms and conditions for interstate,
international and intrastate telecommunications services and require the Company
to obtain FCC approval and to file tariffs for international service with the
FCC and obtain approval for intrastate service provided in most of the states in
which it markets its services. Changes in existing laws and regulations,
particularly regulations resulting in increased price competition, may have a
significant impact on the Company's business activities and on the Company's
future operating results. The Company provides interstate and international long
distance service in all or some portions of 50 states for which the Company has
filed a tariff with FCC. The Company is authorized, pursuant to state
regulations, certifications, tariffs or notifications or on an unregulated
basis, to provide intrastate service in 42 states and is in the process of
obtaining authorization in 4 additional states. There can be no assurance that
the Company will be able to obtain the required licenses or approvals in the
future or that the FCC or state regulatory authorities will not require the
Company to comply with more stringent regulatory requirements. The Company is
also subject to FCC and Federal Trade Commission regulation and other federal
and state laws relating to the promotion, advertising, telemarketing and direct
marketing of its services and products. Certain marketing practices, including
the means to convert a customer's long distance telephone service from one
carrier to another, have recently been subject to increased federal and state
regulatory review. Increased scrutiny could adversely affect proposed
telemarketing activities, the transitioning of customers and the acquisition of
new customer bases. Furthermore, amendments to existing statutes and regulations
or adoption of new statutes and regulations could require the Company to alter
methods of operation or obtain additional approvals. There can be no assurance
that the Company will be able to comply with applicable laws, regulations and
licensing requirements. Failure to comply with applicable laws, regulations and
licensing requirements could result in civil penalties, including substantial
fines, and certificates of authority may be conditioned, modified, cancelled,
terminated or revoked, any of which could have a material adverse effect on the
Company.
The tariffs of non-dominant carriers, such as the Company, are presumed
lawful and are seldom contested, although those tariffs and the rates and
charges they specify are subject to FCC review. Prior to a January 1995 court
decision, domestic non-dominant carriers were allowed by the FCC to file tariffs
with a 'reasonable range of rates' instead of the detailed schedules of
individual charges required of dominant carriers. After such court decision,
which required detailed rate schedules for domestic offerings in their tariffs,
the Company and most of its competitors relied on the FCC's past practice of
allowing relaxed tariff filing requirements for non-dominant carriers and did
not maintain the required detailed rate schedules. Until the two-year statute of
limitations expires, the Company could be held liable for damages for its
failure to do so, although it believes that such an outcome is highly unlikely
and would not have an adverse effect on it. In order to recover damages, a
competing telecommunications provider would need to demonstrate that the
Company's failure to file detailed rate schedules caused that other service
provider to lose customers and that the Company should be held liable for the
damages. The possible extent of such damages, if any, cannot be determined by
the Company. Furthermore, the FCC recently adopted an order which requires
nondominant, interstate, interexchange carriers, such as the Company, to
withdraw their tariffs, insofar as such tariffs apply to interstate services.
International services continue to require a tariff filing. See
'Business--Government Regulation.'
Risks Associated with Rapid Expansion and Acquisitions. The Company's
recent expansion has placed and is expected to continue to place a strain on its
management, administrative, operational, financial and other resources. The
Company's continued expansion will be largely dependent upon its ability to
maintain its operating margins, obtain competitive telecommunications network
services on a timely basis and on commercially reasonable terms, hire and retain
skilled management, marketing and other personnel and successfully manage growth
(including monitoring operations, controlling costs and maintaining effective
management and credit controls). The Company has limited experience in
effectuating rapid expansion and in managing a broader range of new services and
operations which are geographically dispersed. There can be no assurance that
the Company will be able to successfully expand its operations or manage growth.
To date, the Company's customer base has been concentrated in the Southeastern
United States. The Company's growth prospects will be significantly affected by
its ability to achieve greater penetration in new and existing geographic areas
and to acquire additional resellers and customer bases. The Company's prospects
could be adversely affected by a decline in the telecommunications industry
generally or in particular geographic markets or related market segments, which
could result in reduction or deferral of expenditures by prospective customers.
11
<PAGE>
While the Company regularly evaluates possible acquisition opportunities and has
identified a reseller as a potential acquisition candidate, as of the date of
this Prospectus, the Company has no plans, agreements, commitments,
understandings or arrangements with respect to any such acquisition. There can
be no assurance that the Company will ultimately effect any acquisition or that
the Company will be able to successfully integrate into its operations any
business or customer base which it may acquire, including its recently acquired
AIT and Great Lakes customer bases. Any inability to do so, particularly in
instances in which the Company has made significant capital investments, would
have a material adverse effect on the Company.
The Company may determine, depending upon the opportunities available to
it, to seek additional debt or equity financing to fund the cost of continuing
expansion. To the extent that the Company finances an acquisition with a
combination of cash and equity securities, any such issuance of equity
securities would result in dilution to the interests of the Company's
shareholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities in connection with any acquisition, the Company will
be subject to risks associated with incurring additional indebtedness and there
can be no assurance that cash flow will be sufficient to repay any such
indebtedness. See 'Use of Proceeds' and 'Business--Strategy.'
Single Market; Uncertainty of Market Penetration; Limited Marketing
Capabilities. The Company is dependent on sales of long distance services to
commercial customers generally characterized by telecommunications usage of
under $5,000 per month. As a result, the Company's growth prospects will be
largely dependent upon the Company achieving greater penetration of the low
volume commercial long distance market. Achieving greater penetration in this
market will require substantial marketing efforts and expenditure of significant
funds to increase customer awareness of the cost and other advantages of the
Company's services. The Company currently has limited financial, personnel and
other resources to independently undertake extensive marketing activities and
has been dependent upon distributors, agents and telemarketers for a portion of
its revenues. For the year ended April 30, 1996 and the eight months ended
December 31, 1996, distributors and agents in the aggregate accounted for
approximately 20% and 6%, respectively, of the Company's revenues. The Company
recently reduced the number of its direct sales personnel and, accordingly, the
Company will become increasingly dependent upon independent distributors, agents
and telemarketers to market its services. The Company's agreements with
distributors and agents do not prevent them from selling competitive services
and products. Such distributors and agents often represent and deal in various
product lines generally and cannot be expected to increase their sales efforts
for the Company in the absence of increased incentives or demand. The Company's
ability to expand its customer base may be limited by the number of
distributors, agents and telemarketers it engages and will be dependent upon
their efforts. See 'Business--Marketing and Sales.'
Personal Pledges. Gerald M. Dunne, Jr., President and Chief Executive
Officer of the Company, has personally pledged all of the Common Stock of the
Company owned by him to secure repayment of the Company's indebtedness to
Tel-Save and has personally guaranteed the repayment of $69,417 owed to Gateway
American Bank of Florida at December 31, 1996. Neither Mr. Dunne nor any other
person has any obligation to make personal pledges or guarantees available to
the Company in the future, and there can be no assurance that the absence of
personal pledges will not adversely affect the Company's ability to obtain
future financing. See 'Use of Proceeds,' 'Management's Discussion and Analysis
of Financial Condition and Results of Operations' and 'Certain Transactions.'
Dependence on Key Personnel. The success of the Company will be largely
dependent on the personal efforts of Gerald M. Dunne, Jr., its President and
Chief Executive Officer, and other key personnel. Although the Company has
entered into a two-year employment agreement with Mr. Dunne, the loss of the
services of such individual could have a material adverse effect on the
Company's business and prospects. The Company maintains 'key-man' insurance on
the life of Mr. Dunne in the amount of $1,000,000. The success of the Company is
dependent upon its ability to hire and retain additional qualified sales and
marketing, financial and other personnel. Competition for qualified personnel in
the telecommunications industry is intense and there can be no assurance that
the Company will be able to hire or retain additional qualified personnel. See
'Management.'
Potential Conflicts of Interest. The Company has entered into certain
transactions or arrangements with related parties which could result in
potential conflicts of interest. In July 1996, Global Telecom Network ('GTN'), a
company controlled by Gerald Dunne, Sr., a principal shareholder of the Company
and the father of Gerald M. Dunne, Jr., converted accounts payable to the
Company for long distance services provided by the
12
<PAGE>
Company into a promissory note in the principal amount of $182,050. The Company
has also agreed to pay Gerald Dunne, Sr. certain royalty payments based on the
Company's net revenues. The Company has also entered into various transactions
with Tel-Save, including in connection with the Acquisition Loan and the Great
Lakes acquisition. There can be no assurance that conflicts of interest will not
arise with respect to future transactions or arrangements with related parties
or that any such conflicts will be resolved in a manner favorable to the
Company. See 'Certain Transactions.'
Authorization of Preferred Stock. The Company's Articles of Incorporation
authorize the issuance of up to 2,000,000 shares of preferred stock. In the
event of issuance, the preferred stock could be utilized, under certain
circumstances, as a method of discouraging, delaying, or preventing a change in
control of the Company. Although the Company has no present intention to issue
any shares of its authorized preferred stock, there can be no assurance that the
Company will not do so in the future. See 'Description of Securities.'
Immediate and Substantial Dilution. This offering involves an immediate
and substantial dilution of $4.41 per share (or 98%) between the pro forma net
tangible book value per share after the offering and the assumed public offering
price. See 'Dilution.'
Limited Underwriting Experience. The Representative has engaged in limited
underwriting activities and has acted as a principal underwriter in four public
offerings. There can be no assurance that the Representative's lack of public
offering experience will not affect the proposed public offering or subsequent
development and maintenance of a trading market, if any, for the Securities. See
'Underwriting.'
No Assurance of Public Market; Possible Volatility of Market Price of
Common Stock and Redeemable Warrants; Representative's Potential Influence on
the Market. Prior to this offering, there has been a limited public trading
market for the Common Stock and no public market for the Redeemable Warrants.
The Common Stock has traded sporadically in limited volumes in the
over-the-counter market. There can be no assurance that a regular trading market
for the Securities will develop after this offering or that, if developed, it
will be sustained. The market price for the Company's securities following this
offering may be highly volatile as has been the case with the securities of
other small capitalization companies. Factors such as the Company's financial
results and introduction of new services by the Company or its competitors, and
various factors affecting the telecommunications industry generally, may have a
significant impact on the market price of the Company's securities.
Additionally, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies,
particularly of small capitalization companies, the common stock of which trade
in the over-the-counter market, have experienced wide price fluctuations which
have not necessarily been related to the operating performance of such
companies. Although it has no obligation to do so, the Representative intends to
make a market in the Securities and may otherwise effect transactions in the
Securities. If the Representative makes a market in the Securities, such
activities may exert a dominating influence on the market and such activity may
be discontinued at any time. The price and liquidity of the Securities may be
significantly affected to the extent, if any, that the Representative
participates in such market. See 'Price Range of Common Stock' and
'Underwriting.'
No Dividends. The Company has not paid any cash dividends to date. The
Company intends to retain earnings, if any, to finance the operation and
expansion of its business and does not expect to pay cash dividends in the
foreseeable future. See 'Dividend Policy.'
Shares Eligible for Future Sale. Upon consummation of this offering, the
Company will have 3,462,353 shares of Common Stock outstanding (assuming no
exercise of outstanding options or warrants), of which the 1,250,000 shares of
Common Stock offered hereby, and 308,000 shares registered in a prior
registration statement will be freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the 'Securities
Act'). Subject to certain contractual restrictions as described below, an
additional 350,000 shares issuable upon exercise of the Tel-Save Warrants will
be freely tradeable without restriction or further registration under the
Securities Act. Tel-Save has agreed not to sell such securities for a period of
twelve months from the date of this Prospectus without the prior written consent
of the Representative. All of the remaining 1,904,353 shares of Common Stock
outstanding are 'restricted securities,' as that term is defined under Rule 144
promulgated under the Securities Act and may be sold without registration
pursuant to such rule, at various times commencing April 1997. The Company's
officers, directors and security holders beneficially owning 3% or more of the
Company's outstanding Common Stock have agreed not to sell any securities of the
Company for a period of twelve months from the date of this Prospectus without
the Representative's prior
13
<PAGE>
written consent. No prediction can be made as to the effect, if any, that sales
of shares of Common Stock or even the availability of such shares for sale will
have on the market prices prevailing from time to time. The possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect the prevailing market price for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See 'Concurrent Offering,' 'Principal Stockholders' and 'Shares
Eligible for Future Sale.'
Potential Adverse Effect of Warrant Redemption. The Warrants are subject
to redemption by the Company, upon the consent of the Representative, at any
time commencing on , 1998, upon notice of not less than 30 days,
at a price of $.10 per Warrant, provided that the closing bid quotation of the
Common Stock equals or exceeds 125% of the then effective exercise price of the
Warrants for any twenty trading days within a period of thirty consecutive
trading days ending on the fifth day immediately prior to the notice of
redemption. Redemption of the Warrants could force the holders to exercise the
Warrants and pay the exercise price at a time when it may be disadvantageous for
the holders to do so, to sell the Warrants at the then current market price when
they might otherwise wish to hold the Warrants, or to accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See 'Description of Securities--Redeemable
Warrants.'
Possible Inability to Exercise Redeemable Warrants. The Company intends to
qualify the sale of the Common Stock and the Warants in a limited number of
states. Altough certain exemptions in the securities laws of certain states
might permit the Warrants to be transferred to purchasers in states other than
those in which the Warrants were initially qualified, the Company will be
prevented from issuing Common Stock in such states upon the exercise of the
Warrants unless an exemption from qualification is available or unless the
issuance of Common Stock upon exercise of the Warrants is qualified. The Company
may decide not to seek or may not be able to obtain qualification of the
issuance of such Common Stock in all of the states in which the ultimate
purchasers of the Warrants reside. In such a case, the Warrants held by
purchasers will expire and have no value if such Warrants cannot be sold.
Accordingly, the market for the Warrants may be limited because of these
restrictions. Further, a current prospectus covering the Common Stock issuable
upon exercise of the Warrants must be in effect before the Company may accept
Warrant exercises. There can be no assurance the Company will be able to have a
prospectus in effect when this Prospectus is no longer current, notwithstanding
the Company's commitment to use its best efforts to do so. See 'Description of
Securities--Redeemable Warrants.'
Nasdaq Maintenance Requirements; Possible Delisting of Securities from
Nasdaq System; Risks Relating to Low-Priced Stocks. It is currently anticipated
that the Securities will be eligible for listing on Nasdaq upon the completion
of this offering. In order to continue to be listed on Nasdaq, however, the
Company must maintain $2,000,000 in total assets, a $200,000 market value of the
public float and $1,000,000 in total capital and surplus. In addition, continued
inclusion requires two market-makers and a minimum bid price of $1.00 per share;
provided, however, that if the Company falls below such minimum bid price, it
will remain eligible for continued inclusion on Nasdaq if the market value of
the public float is at least $1,000,000 and the Company has $2,000,000 in
capital and surplus. Nasdaq has recently proposed new maintenance criteria
which, if implemented, would eliminate the exception to the $1.00 per share
minimum bid price and require, among other things, $2,000,000 in net tangible
assets, $1,000,000 market value of the public float and adherence to certain
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Securities from Nasdaq, and
trading, if any, in the Securities would thereafter be conducted in the non-
Nasdaq over-the-counter market. As a result of such delisting, an investor could
find it more difficult to dispose of, or to obtain accurate quotations as to the
market value of, the Securities. In addition, if the Securities were to become
delisted from trading on Nasdaq and the trading price of the Securities were to
fall below $5.00 per share, trading in the Securities would also be subject to
the requirements of certain rules promulgated under the Exchange Act, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a penny stock (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage broker-dealers from effecting transactions in
the Securities, which could severely
14
<PAGE>
limit the market liquidity of the Securities and the ability of purchasers in
this offering to sell the Securities in the secondary market. See 'Price Range
of Common Stock.'
Legal Proceedings. The Company is currently a defendant in a lawsuit in
which two former distributors of the Company's services are alleging breach of
contract and are seeking damages of $89,664 in unpaid commissions. The Company
is currently engaged in a dispute with a shareholder with respect to the
ownership of 100,000 shares of Common Stock pledged by the Company to secure an
obligation to such shareholder. In January 1997, the Company filed an action
seeking a declaratory judgment and a judicial determination as to the amount in
dispute. There can be no assurance that these matters will be resolved or
settled in a manner favorable to the Company. The Company was incorporated under
the laws of Florida in September 1995 by ITC, an unaffiliated third party, under
the name Second ITC, as the successor to the business of GLD. In November 1995,
the Board of Directors and shareholders of GLD approved a Plan and Agreement of
Merger which stated that the shareholders of GLD would own 94% of the
outstanding shares of Common Stock of Second ITC and the shareholders of Second
ITC would own the remaining 6% of the outstanding shares. Pursuant to the
merger, the shareholders of GLD received 87.5% of the shares of Second ITC and
the shareholders of Second ITC received 12.5% of the outstanding shares of
Second ITC, which included an aggregate of 130,000 shares (6.5%) issued to
Gerald M. Dunne, Jr., President and Chief Executive Officer of the Company,
Andrea Morey, Vice President-Administration of the Company, Michael Mueller,
Vice President-Marketing of the Company, Jeffrey Ullman, Vice President-Sales of
the Company, and three other employees of the Company (collectively, the
'founders'). While the merger and the issuance of the shares to the founders
have been subsequently ratified by a majority of the shareholders of the Company
that were shareholders of GLD at the time of the merger, there can be no
assurance that shareholders will not seek legal action against the Company and
the founders for failing to disclose the issuance of such shares and the
resulting dilution to the shareholders or that any such action would not have a
material adverse effect on the Company. Pursuant to an indemnification agreement
(i) the Company and each of the founders, jointly and severally, have agreed to
indemnify the Underwriters, and each of the founders has agreed to indemnify the
Company, for any and all losses, claims, damages, expenses or liabilities
(including reasonable legal fees and expenses) as a result of any claim arising
out of or based upon the failure to disclose the issuance of the shares to the
founders and (ii) in the event that as a result of any such claim, the Company
is required to issue additional shares of Common Stock, the founders have agreed
to deliver an equal number of shares of Common Stock to the Company for
cancellation. The Company is from time to time the subject of complaints or
litigation in the ordinary course of its business. The Company believes that the
lawsuits, claims and other legal matters to which it has become subject are not
material to the Company's financial condition or results of operations, but an
existing or future lawsuit or claim resulting in an adverse decision against the
Company could have a material adverse effect on the Company's financial
condition and results of operations. See 'Business--Legal Proceedings.'
CONCURRENT OFFERING
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of 350,000 shares of Common
Stock issuable upon the exercise of the Tel-Save Warrants held by Tel-Save
Holdings, Inc., an affiliate of Tel-Save (the 'Selling Shareholder'), all of
which may be sold in the open market, in privately negotiated transactions or
otherwise, directly by the Selling Shareholder. The Selling Shareholder has
agreed with the Representative not to sell any of such securities for twelve
months from the date of this Prospectus without the prior written consent of the
Representative. The Company will not receive any proceeds from the sale of such
securities by the Selling Shareholder, although it will receive proceeds from
the exercise of the Tel-Save Warrants, if any. Expenses of the concurrent
offering, other than fees and expenses of counsel to the Selling Shareholder and
selling commissions, will be paid by the Company. Sales of such securities by
the holders thereof or the potential for such sales may have an adverse effect
on the market price of the Securities offered hereby.
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby are estimated to be approximately $4,517,500 ($5,267,875 if the
Underwriters' over-allotment option is exercised in full) after deducting
underwriter discounts and commissions and estimated offering expenses payable by
the Company. The Company expects to use the net proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF PROCEEDS DOLLAR AMOUNT PERCENTAGE
- -------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
Marketing and sales(1).................................................... $ 3,000,000 66.4%
Working capital and general corporate purposes............................ 1,517,500 33.6
------------- -----------
$ 4,517,500 100.0%
------------- -----------
------------- -----------
</TABLE>
- ------------------
(1) Represents anticipated costs associated with marketing and sales, including
salaries for additional direct sales personnel and additional in-house
telemarketers, as well as the payment of sales incentives to independent
distributors and agents. See 'Business--Marketing and Sales.'
If the Underwriters exercise the over-allotment option in full, the Company
will realize additional net proceeds of $750,375 which will be added to working
capital.
The Company may use a portion of the proceeds of this offering allocated to
working capital to expand its operations by acquiring resellers and/or customer
bases. Any decision to make an acquisition will be based upon the purchase price
and other financial terms of the transaction, the business prospects and
competitive position of and services and products provided by the acquisition
candidate. While the Company regularly evaluates possible acquisition
opportunities and has identified a reseller as a potential acquisition
candidate, as of the date of this Prospectus, the Company has no plans,
agreements, commitments, understandings or arrangements with respect to any
acquisition. The Company may determine, depending upon the opportunities
available to it, to seek additional debt or equity financing to fund the cost of
continuing expansion. To the extent that the Company finances an acquisition
with a combination of cash and equity securities, any such issuance of equity
securities would result in dilution to the interests of the Company's
shareholders. Additionally, to the extent that the Company incurs indebtedness
or issues debt securities in connection with any acquisition, the Company will
be subject to risks associated with incurring additional indebtedness and there
can be no assurance that cash flow will be sufficient to repay any such
indebtedness. There can be no assurance that the Company will ultimately effect
any acquisition, that the Company will be able to successfully integrate into
its operations any business or customer base which it may acquire or that the
Company will be able to obtain financing in such amounts and on such terms as
will be necessary to consummate any acquisition.
Based on currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this offering, together
with projected cash flow from operations, will be sufficient to satisfy its
contemplated cash requirements for at least twelve months following the
consummation of this offering. In the event that the Company's plans change (due
to changes in market conditions, competitive factors or new or different
business opportunities that may become available in the future), its assumptions
change or prove to be inaccurate or if the proceeds of this offering or cash
flow prove to be insufficient to fund operations (due to unanticipated expenses,
operating difficulties or otherwise), the Company may find it necessary or
desirable to reallocate a portion of the proceeds within the above-described
categories, use proceeds for other purposes, seek additional financing or
curtail its operations. There can be no assurance that additional financing, if
required, will be available to the Company on commercially reasonable terms, or
at all.
The Company has not allocated any portion of the proceeds to repay
outstanding indebtedness to Tel-Save, AT&T and WorldCom. To the extent that cash
flow from operations is insufficient to pay outstanding indebtedness, the
Company may use a portion of the proceeds to repay outstanding indebtedness, and
as a result will have less resources available to it for other purposes.
Proceeds not immediately required for the purposes described above will be
invested principally in United States government securities, short-term
certificates of deposit, money market funds or other short-term interest-bearing
investments.
16
<PAGE>
PRICE RANGE OF COMMON STOCK
Since April 1, 1996, the Common Stock has traded on a limited basis on the
OTC Bulletin Board, under the symbol 'GLDT.' The following table sets forth, for
the periods indicated, high and low bid information for the Common Stock. Such
high and low bid information reflects inter-dealer quotations, without retail,
mark-up, mark down or commissions and may not represent actual transactions. In
connection with this offering, application has been made to quote the Common
Stock and the Redeemable Warrants on Nasdaq under the symbols 'GLDI' and
'GLDIW,' respectively.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
Fiscal Year Ended April 30, 1996
Fourth Quarter (commencing April 1, 1996)........................................ $5.0625 $4.875
Fiscal Year Ended April 30, 1997
First Quarter.................................................................... $7.50 $3.25
Second Quarter................................................................... $6.50 $5.375
Third Quarter.................................................................... $5.50 $3.50
Fourth Quarter (through February 21, 1997)....................................... $5.50 $4.00
</TABLE>
On February 21, 1997, the last reported sale price for the Common Stock was
$4.50. As of December 31, 1996, the Company had approximately 130 stockholders
of record.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996 and as adjusted to reflect (i) the $600,000 Loan Reduction and
(ii) the sale of the Securities offered hereby and the initial application of
the estimated net proceeds therefrom after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company. The
information set forth below should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt and current portion of long-term debt..................... $ 2,491,116 $ 1,891,116
----------- -----------
----------- -----------
Long-term debt, net of current portion.................................... $ 3,513,125 $ 3,513,125
Stockholders' equity(1):
Preferred Stock--no par value; 2,000,000 shares authorized; no shares
issued and outstanding............................................... -- --
Common Stock--no par value; 12,000,000 shares authorized; 2,212,353
shares issued and outstanding actual; 3,462,353 shares issued and
outstanding as adjusted.............................................. -- --
Additional paid-in capital.............................................. 1,353,364 6,470,864
Accumulated deficit..................................................... (1,828,773) (1,828,773)
----------- -----------
Total stockholders' equity (deficit)................................. (475,409) 4,642,091
----------- -----------
Total capitalization.................................................... $ 5,528,832 $10,046,332
----------- -----------
----------- -----------
</TABLE>
- ------------------
(1) Does not include: (i) 350,000 shares of Common Stock issuable upon exercise
of the Tel-Save Warrants at a weighted average exercise price of $5.64 per
share; (ii) 76,216 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.23; (iii)
526,500 shares of Common Stock issuable upon exercise of options granted,
under the Stock Option Plan; and (iv) 73,500 shares reserved for the
exercise of options available for future grant under the Stock Option Plan.
See 'Management--Stock Option Plan.'
18
<PAGE>
DILUTION
At December 31, 1996, the Company had a negative net tangible book value of
$(4,438,019), or approximately $(2.01) per share. Net tangible book value per
share represents the total amount of tangible assets less total liabilities
divided by the number of shares of Common Stock issued and outstanding. After
giving effect to (i) the $600,000 Loan Reduction and (ii) the sale of the
1,250,000 shares of Common Stock and the 1,250,000 Redeemable Warrants offered
hereby after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the pro forma net tangible book value
of the Company at December 31, 1996 would have been $329,902, or approximately
$.09 per share. This represents an immediate increase in net tangible book value
of $2.10 per share to existing stockholders and an immediate dilution in net
tangible book value of $4.41 per share to new investors. The following table
illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Public offering price per share..................................................... $ 4.50
Net tangible book value (deficiency) before offering................. $ (2.01)
Increase per share attributable to new investors..................... 2.10
-------
Pro forma net tangible book value after offering.................................... .09
------
Dilution to new investors........................................................... $ 4.41
------
------
</TABLE>
The following table sets forth, as of December 31, 1996, with respect to
the Company's existing shareholders and new investors, a comparison of the
number of shares of Common Stock acquired from the Company, the percentage
ownership of such shares, the total consideration paid, the percentage of total
consideration and the average price per share.
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
-------------------- --------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ---------- ------- -------
<S> <C> <C> <C> <C> <C>
Existing Stockholders..................................... 2,212,353 63.9% $1,673,521 22.9% $ .76
New Investors............................................. 1,250,000 36.1 5,625,000 77.1 4.50
--------- ------- ---------- -------
Total................................................ 3,462,353 100.0% $7,298,521 100.0%
--------- ------- ---------- -------
--------- ------- ---------- -------
</TABLE>
The above table assumes no exercise of the Underwriters' over-allotment
option. If the Underwriters' over-allotment is exercised in full, new investors
will have paid $6,468,750 for 1,437,500 shares of Common Stock, representing
79.4% of the total consideration for 39.3% of the total number of shares of
Common Stock outstanding. The foregoing also assumes no exercise of outstanding
warrants or options. See 'Management--Stock Option Plan' and 'Underwriting.'
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial information
for the Company for the fiscal years ended April 30, 1994, 1995 and 1996, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus and pro forma
information reflecting the AIT Acquisition. The financial information set forth
below for the eight months ended December 31, 1995 has been derived from
unaudited financial statements of the Company and for the eight months ended
December 31, 1996 has been derived from unaudited consolidated financial
statements of the Company. In the opinion of management, the unaudited financial
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, which consist only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the eight months
ended December 31, 1996 are not necessarily indicative of the results that may
be expected for the full year. The following financial information should be
read in conjunction with 'Pro Forma Statement of Operations' and 'Management's
Discussion and Analysis of Financial Condition and Results of Operations.'
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
FISCAL YEAR ENDED APRIL 30, DECEMBER 31,
--------------------------------------------------- --------------------------------------
1996 1996
------------------------- -------------------------
PRO PRO
1994 1995 ACTUAL FORMA(2) 1995 ACTUAL(1) FORMA(2)
---------- ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales............................ $7,784,112 $9,538,095 $12,364,643 $36,867,160 $8,195,632 $15,069,300 $16,619,188
Cost of sales.................... 5,086,764 6,992,817 9,009,131 26,615,705 6,002,319 10,848,880 11,969,325
---------- ---------- ----------- ----------- ---------- ----------- -----------
Gross profit..................... 2,697,348 2,545,278 3,355,512 10,251,455 2,193,313 4,220,420 4,649,863
Selling, general and
administrative................. 2,336,048 2,074,127 2,835,316 4,893,881 1,779,033 3,014,315 3,150,059
Depreciation and amortization.... 4,611 16,070 133,281 4,375,281 40,530 2,690,738 3,044,238
Interest expense, net............ 20,441 22,177 19,050 361,050 10,832 264,417 292,656
Earnings (losses) before income
taxes.......................... 336,248 432,904 367,865 621,243 362,918 (1,749,050) (1,837,090)
Income taxes..................... 136,653 151,000 169,900 718,565 137,250 -- --
Income (loss) before
extraordinary item............. 199,595 281,904 197,965 (97,322) 225,668 (1,749,050) (1,837,090)
Extraordinary item(3)............ 517,653 -- -- -- -- -- --
Net income (loss)................ $ 717,248 $ 281,904 $ 197,965 $ (97,322) $ 225,668 $(1,749,050) $(1,837,090)
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
Net income per share
Before extraordinary item...... $ .12 $ .15 $ .10 $ (.04) $ .11 $ (.79) $ (.81)
Extraordinary item............. .30 -- -- -- -- -- --
Total per share................ $ .42 $ .15 $ .10 $ (.04) $ .11 $ (.79) $ (.81)
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
Weighted average shares
outstanding(4)................. 1,693,995 1,840,250 2,018,474 2,218,474 2,059,025 2,222,917 2,261,822
---------- ---------- ----------- ----------- ---------- ----------- -----------
---------- ---------- ----------- ----------- ---------- ----------- -----------
OTHER OPERATING DATA:
Number of customers at period
end............................ 4,700 9,000 12,000 42,000 15,000 34,000 34,000
EBITDA(5)........................ $ 361,300 $ 471,151 $ 520,196 5,357,574 $ 414,280 $ 1,206,105 $ 1,499,804
</TABLE>
<TABLE>
<CAPTION>
APRIL 30,
--------------------------------------- DECEMBER
1994 1995 1996 31, 1996(1)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................................... $ (8,779) $ 7,772 $ (851,072) $(1,614,844)
Total assets...................................................... 1,400,570 1,849,880 2,740,411 8,748,839
Short-term debt................................................... 606,867 553,633 664,187 2,491,116
Long-term debt.................................................... 375,417 160,000 98,727 3,513,125
Stockholders' equity (deficit).................................... $ (375,892) $ (13,988) $ 188,641 $ (475,409)
</TABLE>
- ------------------
(1) Includes operations of AIT since June 1996.
(2) The unaudited pro forma consolidated financial statements have been prepared
to give effect to the AIT Acquisition as if it had occurred at the beginning
of each of the periods presented. The pro forma adjustments are based upon
preliminary estimates, available information and certain assumptions that
management deems appropriate. The unaudited pro forma consolidated financial
data presented herein should not be viewed as indicative of the results the
Company would have obtained had such events occurred at the beginning of the
period, as assumed, or of the future results of the Company. See 'Pro Forma
Financial Statements.'
(3) This extraordinary item relates to settlement agreements with AT&T, which
resulted in a reduction in carrier trade payables and a corresponding gain
after taxation of $517,653. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations.'
(4) See Note B to Notes to Financial Statements.
(5) As used herein, 'EBITDA' is defined as net income or loss plus depreciation
expense, amortization expense, 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 perpared
in accordance with generally accepted accounting principles.
20
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements have
been prepared to give effect to the AIT Acquisition. The unaudited pro forma
consolidated statement of operations of the Company for the year ended April 30,
1996 and the eight months ended December 31, 1996 give effect to the AIT
Acquisition as if it occurred on May 1, 1995 and May 1, 1996, respectively. No
pro forma balance sheet has been presented since the AIT Acquisition occurred
prior to December 31, 1996. The unaudited pro forma consolidated financial
statements are based upon available information and certain assumptions that the
Company believes are reasonable under the circumstances. The following unaudited
pro forma consolidated financial statements do not give effect to the Great
Lakes acquisition consummated in January 1997.
Pro forma adjustments are based upon preliminary estimates, available
information and certain assumptions that management deems appropriate. The
unaudited pro forma consolidated financial statements presented herein should
not be viewed as indicative of the results the Company would have obtained had
such events occurred at the beginning of the periods, as assumed, or of the
future results of the Company. The pro forma consolidated financial statements
should be read in conjunction with the financial statements and notes thereto
included elsewhere in this Prospectus.
21
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP LONG ADVENTURES IN PRO FORMA TOTAL
DISTANCE INC. TELECOM INC. ADJUSTMENTS PRO FORMA
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues........................................... $ 12,364,643 $ 24,502,517 $ -- $36,867,160
Cost of sales...................................... 9,009,131 17,606,574 -- 26,615,705
------------- ------------- ----------- -----------
Gross profit..................................... 3,355,512 6,895,943 -- 10,251,455
------------- ------------- ----------- -----------
Selling, general and administrative expenses....... 2,968,597 -- 600,000(1) 9,269,162
735,076(2)
153,141(3)
205,348(4)
365,000(5)
4,242,000(6)
Interest expense, net.............................. 19,050 -- 342,000(7) 361,050
------------- ------------- ----------- -----------
Earnings (loss) before income taxes.............. 367,865 6,895,943 (6,642,565) 621,243
Income tax expense................................. 169,900 -- 548,665(8) 718,565
------------- ------------- ----------- -----------
Net earnings (loss).............................. $ 197,965 $ 6,895,943 $(7,191,230) $ (97,322)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Earnings (loss) per common and common equivalent
share............................................ $ .10 $ (.04)
------------- -----------
------------- -----------
Weighted average number of shares outstanding...... 2,018,474 155,000 2,173,474
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
- ------------------
(1) To record commission expense payable to agents on '800' and '1 plus'
revenues.
(2) To record provision for bad debt on additional revenues. This provision is
based on the Company's historical experience of 3% of revenues.
(3) In connection with the AIT Acquisition, the Company entered into a
management contract with Telscape International, Inc. ('Telscape'),
pursuant to which the Company paid a fee of 1.5% of gross monthly billing
to Telscape for management services, including handling of inbound customer
service calls, processing of customer adjustments, calculation of
commissions and coordination of agent accounts. The management contract was
terminated in September 1996. The pro forma presentation has been adjusted
to record a management fee expense equal to 1.5% of revenues in accordance
with the management contract. See 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business--Recent
Acquisitions.'
(4) To record payroll expense for new customer service, accounting and
management employees to be hired after the expiration of the management
contract (see 3 above).
(5) To record miscellaneous selling, general and administrative expenses. This
amount includes estimates for telephone system upgrades and related
charges, computer system upgrades, advertising, professional fees and other
items.
(6) To record amortization expense of the AIT customer base acquisition cost.
(7) To record interest on the Acquisition Loan.
(8) To record taxes on additional pre-tax income.
22
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
STATEMENT ADVENTURES
OF IN TELECOM, PRO FORMA TOTAL
OPERATIONS INC. ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................ $15,069,300 $ 1,549,888 $ -- $16,619,188
Cost of sales....................................... 10,848,880 1,120,445 -- 11,969,325
----------- ----------- ----------- -----------
Gross profit................................... 4,220,420 429,443 -- 4,649,863
----------- ----------- ----------- -----------
Selling, general and administrative expenses........ 5,705,053 -- 35,579(1) 6,194,297
46,497(2)
23,248(3)
30,420(4)
353,500(5)
Interest expense, net............................... 264,417 -- 28,239(6) 292,565
----------- ----------- ----------- -----------
Earnings before income taxes................... (1,749,050) 429,443 (517,483) (1,837,090)
Income tax expense.................................. -- -- -- --
----------- ----------- ----------- -----------
Net earnings (loss)............................ $(1,749,050) $ 429,443 $(517,483) $(1,837,090)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common and
common equivalent share........................... $ (.79) $ (.81)
----------- -----------
----------- -----------
Weighted average number
of shares outstanding............................. 2,222,917 38,905 2,261,822
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------
(1) To record commission expense payable to agents on '800' and '1 plus'
revenues.
(2) To record provision for bad debt on additional revenues. This provision is
based on the Company's historical experience of 3% of revenues.
(3) In connection with the AIT Acquisition, the Company entered into a
management contract with Telscape, pursuant to which the Company paid a fee
of 1.5% of gross monthly billing to Telscape for management services. The
management contract was terminated in September 1996. The pro forma
presentation has been adjusted to record a management fee expense equal to
1.5% of revenues in accordance with the management contract. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations' and 'Business--Recent Acquisitions.'
(4) To record miscellaneous selling, general and administrative expenses. This
amount includes estimates for telephone system upgrades and related
charges, computer system upgrades, advertising, professional fees and other
items.
(5) To record amortization expense of the AIT customer base acquisition cost.
(6) To record interest on the Acquisition Loan.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and results
of operations should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto and the other financial information appearing
elsewhere in this Prospectus. Except for historical information, this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this Prospectus contain forward-looking
information which involves risks and uncertainties. The Company's actual results
could differ materially from those anticipated by such forward-looking
information. Factors that may cause such differences include, but are not
limited to, those discussed under 'Risk Factors' and elsewhere in this
Prospectus.
OVERVIEW
The Company provides long distance telephone and other telecommunications
services to commercial customers. The Company does not own or operate any
transmission facilities and is dependent on a limited number of long distance
carriers and numerous regional and local telephone companies to provide long
distance telephone and Internet service on a cost-effective basis. The Company
has entered into agreements with Tel-Save, WorldCom, ICI and other long distance
carriers which provide access to phone lines and transmission facilities
necessary to transmit customer calls. For the year ended April 30, 1996 and the
eight months ended December 31, 1996, basic '1 plus' and '800' long distance
services accounted for approximately 97% and 94%, respectively, of the Company's
revenues.
The Company, through Tel-Save, offers billing services provided by AT&T and
AT&T's College and University Systems ('ACUS'), a wholly-owned subsidiary of
AT&T. ACUS processes call details and bills the Company's customers directly.
Customers remit payment to a lock-box designated by Tel-Save. The Company also
offers direct billing services to customers serviced by WorldCom and ICI. The
Company receives monthly records from its carriers which detail the calls made
by its customers. The Company then rates the calls and bills its customers
directly. The Company is dependent upon the timely receipt and accuracy of call
data records provided by its carriers.
The Company has historically experienced delays in provisioning (activating
new customers) by its carriers. The Company has agreed to provide domestic
switched, '1 plus' and '800' services to the Company's new customers through
Tel-Save's newly acquired network of AT&T digital switching equipment.
Tel-Save's OBN has only recently become operational, which has resulted in
material delays in provisioning the Company's new customers. There can be no
assurance that the transition of the Company's customer base to Tel-Save's
network will be successful or that the Company will not continue to be subject
to material delays or other difficulties in connection with provisioning new
customers.
To obtain favorable rates from its carriers, the Company has committed to
purchase certain minimum volumes of long distance services during stated
periods, whether or not such volumes are used. For the year ended April 30, 1996
and the eight months ended December 31, 1996, these commitments aggregated
approximately $3,200,000 and $4,885,000, respectively. Pursuant to its current
agreements with Tel-Save and other carriers, the Company's volume commitments
are expected to increase substantially during the next two years. Failure to
satisfy volume purchase commitments or price increases by carriers could
adversely affect the Company's future operating results.
The Company's operating results are significantly affected by customer
attrition rates. The Company believes that a high level of customer attrition in
the industry is primarily a result of national advertising campaigns,
telemarketing programs and customer incentives provided by major competitors, as
well as the termination of service for non-payment. The Company acquired a
customer base from AIT and recorded an asset of approximately $6.6 million at
July 31, 1996, of which $5.6 million (net of receivables and marketing advances)
was to be amortized at the rate of 30%, 25%, 20%, 15% and 10%, respectively,
over a five-year period. The Company experienced an attrition rate in excess of
50% during the seven-month period ended December 31, 1996 relating to the AIT
customer base. As a result, in December 1996, the Company accelerated the
amortization of the acquisition costs of such customer base to the rate of 75%
for the first year ($4,242,000), which had a material adverse effect on the
Company's operating results for the eight months ended December 31, 1996. The
Company expects to amortize the remaining balance of customer acquisition costs
of $1,414,000 at the
24
<PAGE>
end of the first year, at a rate of 15% and 10%, respectively, over the second
and third years. There can be no assurance that assumed attrition rates
underlying the Company's amortization schedule will prove to be accurate or that
customer attrition rates will not increase in the future. Any significant
increase in customer attrition rates resulting in increased amortization expense
will continue to have a material adverse effect on the Company's operating
results. In the event that attrition rates increase as a result of increased
competition, the purchase of poorly performing customer bases or the inability
to manage the existing customer base due to transitional difficulties onto
Tel-Save's OBN network, the Company may continue to incur charges that result in
losses. See Note B to Notes to Financial Statements.
The Company is dependent on independent distributors and agents for a
portion of its revenues. For the year ended April 30, 1996 and the eight months
ended December 31, 1996, distributors and agents in the aggregate accounted for
approximately 20% and 6%, respectively, of the Company's revenues. The Company's
ability to expand its operations is dependent upon the Company's ability to
continue to maintain satisfactory relationships with existing distributors and
agents and establish relationships with additional distributors and agents. The
Company intends to use a portion of the proceeds of this offering to expand its
sales and marketing activities, including by hiring additional direct sales
personnel and in-house telemarketers as well as engaging additional independent
telemarketers, and by paying sales incentives to independent distributors and
agents.
RECENT ACQUISITIONS
In January 1997, the Company purchased from Great Lakes (i) a customer base
consisting of approximately 7,000 customers that were subject to an agreement
between Great Lakes and Tel-Save and (ii) a warrant to purchase 200,000 shares
of Common Stock of Tel-Save in consideration of $1,200,000 in cash. In
connection with such acquisition, the Company borrowed $1,200,000 from Tel-Save.
In January 1997, Tel-Save repurchased the warrants from the Company in
consideration of $1,800,000 and credited the Company with such amount
($1,200,000 to repay the loan made in January 1997 and $600,000 to reduce the
outstanding principal balance under the AIT Acquisition Loan). The $600,000
reduction of debt by Tel-Save has been accounted for as a contribution to
paid-in capital by Tel-Save. In connection with the acquisition, no value was
assigned to the customer base acquired. See Note O to Notes to Financial
Statements.
In July 1996, the Company consummated the AIT Acquisition in consideration
of $5,271,230 in cash and the issuance of 200,000 shares of Common Stock, of
which 50,000 were subject to certain holdback provisions. The acquired assets
consisted of a customer base of approximately 30,000 small businesses. In
connection with the AIT Acquisition, the Company entered into a management
contract with Telscape, pursuant to which the Company paid a fee of 1.5% of
gross monthly billing to Telscape for management services. The management
contract was terminated in September 1996. In December 1996, the Company
accelerated the amortization of the acquisition costs of the AIT customer base
due to significant customer attrition, resulting in $1,484,700 of additional
amortization expense and a net loss of $1,749,050 for the eight months ended
December 31, 1996. Higher than expected customer attrition was primarily
attributable to the Company's inability to implement customer service and
retention program, including delays in provisioning customers, as well as
increased competition with respect to such customer base. In December 1996, the
Company agreed with the former shareholders of AIT to cancel 45,000 of the
50,000 shares that were subject to the holdback provisions, in settlement of
certain claims by the Company against the AIT shareholders. See
'Business--Acquisitions.'
In May 1996, the Company acquired all of the issued and outstanding capital
stock of Gulf Communications, Inc. ('Gulf') in consideration of $25,000 in cash
and the assumption of a promissory note in the principal amount of $182,000 (the
'Gulf Acquisition'). Such note is payable in equal monthly installments of
$10,000 until February 1, 1998. Gulf operates switching equipment in Fort
Lauderdale, Florida, which allows it to act as an international call back and
call through provider, and offers prepaid long distance calling cards. See
'Business--Acquisitions.'
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of
total sales represented by certain items reflected in the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED EIGHT MONTHS ENDED
APRIL 30, DECEMBER 31,
-------------------------------------- ------------------------------------
1995 1996 1995 1996
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Sales.............................. 100% 100% 100% 100%
Cost of sales...................... 73 73 73 72
Gross profit....................... 27 27 27 28
Selling, general and administrative
expenses......................... 22 23 22 20
Depreciation and amortization
expense.......................... * * * 18
Interest expense, net.............. * * * 2
Earnings (losses) before income
taxes............................ 5 3 4 *
Income taxes....................... 2 1 2 *
Net income (loss).................. 3 2 3 *
</TABLE>
- ------------------
* Less than one percent
Comparison of Eight Months Ended December 31, 1996 to Eight Months Ended
December 31, 1995.
Sales. The Company's sales were $15,069,300 for the eight months ended
December 31, 1996 (the '1996 Interim Period') compared to $8,195,632 for the
eight months ended December 31, 1995 (the '1995 Interim Period'), an increase of
$6,873,668 or 84%. The increased sales are a result of the AIT Acquisition
consummated in June 1996.
Cost of Sales. Cost of sales was $10,848,880 for the 1996 Interim Period
compared to $6,002,319 for the 1995 Interim Period, an increase of $4,846,561,
or 81%. As a percentage of sales, cost of sales decreased to 72% for the 1996
Interim Period compared to 73% for the 1995 Interim Period, primarily as a
result of increased operating efficiencies from a larger customer base. Gross
margin was $4,220,420 for the 1996 Interim Period compared to $2,193,313 for the
1995 Interim Period, an increase of $2,027,107, or 92%. As a percentage of
sales, gross margin increased to 28% for the 1996 Interim Period from 27% for
the 1995 Interim Period.
Selling, General and Administrative Expense. Selling, general and
administrative expenses ('SG&A') were $3,014,315 for the 1996 Interim Period
compared to $1,779,033 for the 1995 Interim Period, an increase of $1,235,282,
or 69%. This increase in SG&A was due primarily to increases in commissions paid
to agents and distributors in connection with the AIT customer base and payroll
costs resulting from the employment of additional customer service, collections
and provisioning staff to handle the increased business. As a percentage of
sales, SG&A decreased to 20% in the 1996 Interim Period from 22% in the 1995
Interim Period.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $2,690,738 for the 1996 Interim Period compared to $40,530 for the
1995 Interim Period, an increase of $2,650,208. As a percentage of total sales,
depreciation and amortization was 18% for the 1996 Interim Period compared to
less than 1% for the 1995 Interim Period. The increase in depreciation and
amortization expense, and the increase as a percentage of sales, was
attributable to the Company's change in the estimated rate of amortization of
the AIT customer base due to significant customer attrition.
Interest Expense, Net. Interest expense (net) for the 1996 Interim Period
was $264,417 compared to $10,832 for the 1995 Interim Period, an increase of
$253,585. This increase in interest expense was primarily a result of the
Acquisition Loan from Tel-Save of $5,571,230 which was primarily used to
complete the AIT Acquisition.
Income Taxes. No income tax was provided for in the 1996 Interim Period
compared to $137,250 for the 1995 Interim Period. No provision for income tax
was made due to the change in the estimated rate of amortization of the AIT
customer base, which resulted in a loss before taxes for the 1996 Interim
Period.
Net Loss. The Company incurred a net loss of $1,749,050, or a loss of $.79
per share, for the 1996 Interim Period, as compared to net earnings of $225,668,
or $.11 per share, for the 1995 Interim Period. The net loss is
26
<PAGE>
largely attributable to the increase in depreciation and amortization expense,
primarily a result of the significant attrition associated with the AIT customer
base.
Comparison of Year Ended April 30, 1996 to Year Ended April 30, 1995.
Sales. The Company's sales were $12,364,643 for the fiscal year ended
April 30, 1996 ('Fiscal 1996') compared to $9,538,095 for the fiscal year ended
April 30, 1995 ('Fiscal 1995'), an increase of $2,826,548, or 30%. This increase
in sales was primarily attributable to increased sales and marketing efforts
during the year. The Company also began marketing additional services such as
Internet access service and international call back service in the second half
of 1995, although such services's impact on revenues were nominal through April
1996.
Cost of Sales. Cost of sales was $9,009,131 for Fiscal 1996 compared to
$6,992,817 for Fiscal 1995, an increase of $2,016,314, or 29%. The increase in
cost of sales is attributable to the increase in sales. Cost of sales, as a
percentage of sales, was 73% for Fiscal 1996 and Fiscal 1995. There were no
significant price changes during Fiscal 1996.
Selling, General and Administrative Expense. SG&A was $2,835,316 in Fiscal
1996 compared to $2,074,127 in Fiscal 1995, an increase of $761,189, or 37%.
This increase was due primarily to increases in payroll costs resulting from the
employment of additional sales and customer service staff, increased commissions
paid to agents and distributors and an increase in bad debt expense, which is
related to the Company's corresponding increase in revenues. SG&A, as a
percentage of total sales, was 23% in Fiscal 1996 and 22% in Fiscal 1995.
Depreciation and Amortization Expense. Depreciation and amortization
expense was $133,281 for Fiscal 1996 compared to $16,070 for Fiscal 1995, an
increase of $117,211. As a percentage of total sales, depreciation and
amortization was 1.1% for Fiscal 1996 compared to .2% for Fiscal 1995. The
increase was due to the acquisition of the TouchTone customer base during the
year.
Interest Expense, Net. Interest expense, as a percentage of total sales,
for Fiscal 1996 and Fiscal 1995 remained at less than 1%.
Income Taxes. Income taxes on operations, as a percentage of total sales,
was 1.4% for Fiscal 1996 and 1.6% for Fiscal 1995.
Net Earnings. Net earnings were $197,965 for Fiscal 1996 compared to
$281,904 in Fiscal 1995, a decrease of $83,939, or 30%. This resulted in
earnings per share of $.10 in Fiscal 1996 compared to $.15 in Fiscal 1995,
representing a decrease of approximately 33%. This decrease is largely
attributable to the increase in SG&A during Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements have been to fund the acquisition
of customer bases and increased levels of accounts receivable, which have
required substantial working capital. The Company has historically satisfied its
working capital requirements principally through cash flow from operations and
borrowings.
At December 31, 1996, the Company had a working capital deficit of
$1,614,844, as compared to working capital deficit of $851,072 at April 30,
1996. The increase in the working capital deficit was primarily attributable to
the AIT Acquisition.
Net cash used in operating activities was $374,723 for the 1996 Interim
Period as compared to cash provided by operating activities of $492,145 for the
1995 Interim Period.The increase in cash used in operations is primarily the
result of an increase in accounts receivable through the purchase of the AIT
customer base. Net cash used in investing activities was $5,731,864 for the 1996
Interim Period, as compared to $564,458 for the 1995 Interim Period. The
increase in cash used in investing activities was attributable to the AIT
Acquisition. Net cash provided by financing activities was $6,027,820 for the
1996 Interim Period as compared to net cash used in financing activities for the
1995 Interim Period of $54,157. The increase in cash provided by financing
activities
27
<PAGE>
is primarily attributable to the proceeds of the Acquisition Loan. At December
31, 1996, the Company did not maintain any bank balances.
Net cash provided by operating activities was $950,158 for the year ended
April 30, 1996, as compared to net cash provided by operating activities of
$381,217 for the year ended April 30, 1995. The increase in cash provided by
operating activities is primarily attributable to a decrease in accounts
receivable, an increase in amortization of customer acquisition costs and an
increase in accounts payable. Net cash used in investing activities was $952,398
for the year ended April 30, 1996, as compared to $146,006 for the year ended
April 30, 1995. The increase is attributable to the acquisition of customer
bases and the purchase of property and equipment. Net cash used in financing
activities was $42,046 for the year ended April 30, 1996, as compared to
$188,651 for the year ended April 30, 1995. The decrease in cash used in
financing activities is primarily attributable to the proceeds from the exercise
of options and a $100,000 loan from one of the Company's directors and an
unaffiliated third party, less repayment of debt of $132,822.
In June 1993, the Company entered into a Release and Settlement Agreement
with AT&T pursuant to which AT&T agreed to accept $1,200,000 from the Company
(which was further reduced to $1,042,500) in full satisfaction of the Company's
then outstanding accounts payable to AT&T of $1,548,642. The agreement obligated
the Company to pay AT&T in varying monthly installments until April 3, 1995. The
Company paid AT&T $165,000 during Fiscal 1995 and $10,000 during Fiscal 1996.
The Company is in default under its payment obligations to AT&T and, at December
31, 1996, the Company owed AT&T approximately $548,000.
In connection with the AIT Acquisition in July 1996, the Company entered
into an agreement with Tel-Save pursuant to which it borrowed an aggregate of
$5,521,230 primarily to finance the purchase price of the acquisition. At
January 31, 1997, approximately $3 million was outstanding under the Acquisition
Loan. The Acquisition Loan originally required the Company to repay such loan in
equal monthly installments of $500,000 through July 1997, with the entire
principal amount and interest due and payable upon the consummation of a public
offering of the Company's securities. In February 1997, the loan agreement was
amended to provide for the Company to repay the balance of the Acquisition Loan
in equal monthly installments of $125,000 together with interest at the rate of
6.5% per annum, commencing after September 1997. In the event that this offering
is not consummated by April 15, 1997, the loan agreement would revert to its
original terms and obligate the Company to repay the remaining balance of such
loan. There can be no assurance that the Company will have the financial
resources to satisfy such obligation. The amended loan agreement also amended
the Company's services agreement with Tel-Save to provide for an increase in the
minimum volume commitment to $3,000,000 per month beginning November 1, 1997,
and to require the Company and Tel-Save to enter into a new services agreement
by April 15, 1997, which shall incorporate the terms of and supersede the
existing services agreement. Failure to enter into such services agreement by
April 15, 1997 constitutes an event of default under the Acquisition Loan.
All of the Company's assets (including the capital stock of AIT) are
pledged to Tel-Save as collateral for the Acquisition Loan and the Company is
prohibited from creating liens or security interests in the Company's assets,
which could limit the Company's ability to secure future financing. Gerald M.
Dunne, Jr., President and Chief Executive Officer of the Company, has personally
pledged all of the Common Stock of the Company owned by him to secure the
repayment of the Company's Acquisition Loan. In connection with the Acquisition
Loan and the December 1996 amendment to the Company's loan agreement with
Tel-Save, the Company issued the Tel-Save Warrants, which include five-year
warrants to purchase 300,000 shares of Common Stock at an exercise price of
$5.75 per share and five-year warrants to purchase 50,000 shares of Common Stock
at an exercise price of $5.00 per share. See 'Principal Shareholders' and
'Certain Transactions.'
In connection with the Great Lakes acquisition, the Company borrowed
$1,200,000 from Tel-Save. In January 1997, Tel-Save repurchased warrants from
the Company in consideration of $1,800,000 and credited the Company with such
amount ($1,200,000 to repay the loan made in January 1997 and $600,000 to repay
a portion of the Acquisition Loan). See 'Certain Transactions.'
Tel-Save has made monthly advances to the Company for marketing expenses.
At December 31, 1996, approximately $1,100,000 included in accounts payable
represented advances made by Tel-Save to the Company. See 'Certain
Transactions.'
28
<PAGE>
In May 1996, the Company entered into an agreement with Gateway American
Bank of Florida ('Gateway') pursuant to which it borrowed $50,000, of which
$35,417 was outstanding at December 31, 1996. The loan bears interest at the
prime rate plus 2% and matures on May 2, 1997. In August 1996, the Company
entered into an agreement with Gateway which provides for a line of credit of up
to $50,000, of which $34,000 was outstanding at December 31, 1996. The line of
credit bears interest at the prime rate plus 1% and matures on August 1, 1997.
Repayment of the loan and the line of credit is secured by all of the Company's
equipment, machinery, furniture and general intangibles and is personally
guaranteed by Gerald M. Dunne, Jr., President and Chief Executive Officer of the
Company. See 'Certain Transactions.'
In September 1995, the Company issued a promissory note to John L.
Tomlinson, a director of the Company, and Phillip C. Cezeaux, an unaffiliated
third-party, in the aggregate principal amount of $100,000. The interest rate on
the promissory note adjusts semi-annually based on the prime rate plus 2% and
principal and interest are payable in equal monthly installments of $2,600 until
September 1997. At December 31, 1996, approximately $72,000 was outstanding
under such note. As an inducement for the loan, the Company issued options to
Messrs. Tomlinson and Cezeaux to purchase 47,635 shares of Common Stock at a
price of $3.15 per share. These options expire on September 30, 1997. See
'Certain Transactions.'
In June 1996, the Company converted certain accounts payable to WorldCom
into a promissory note in the principal amount of $566,917 bearing interest a
rate of 15% per annum. In December 1996, the Company cancelled the prior note
and converted additional accounts payable to WorldCom into a single promissory
note in principal amount of $1,253,798 bearing interest at the rate of 16% per
annum. The promissory note provides for the Company to make equal monthly
payments of $113,758 to WorldCom until December 20, 1997. In connection with the
issuance of the notes, the Company entered into an agreement with WorldCom which
grants WorldCom a security interest in certain assets of Company, including
accounts receivable, customer lists, contractual rights and records relating to
a services agreement entered into by the Company and WorldCom in February 1994.
In July 1996, GTN a company controlled by Gerald M. Dunne, Sr., the father
of Gerald M. Dunne, Jr., President and Chief Executive Officer of the Company,
converted accounts payable to the Company for long distance services provided by
the Company into a promissory note in the principal amount of $182,050 bearing
interest at a rate of 15% per annum. The outstanding principal amount of and
accrued interest on the note is payable monthly and matures on June 15, 1997.
Gerald M. Dunne, Sr. has pledged 50,000 shares of the Company's Common Stock
owned by him to secure repayment of such promissory note. See 'Certain
Transactions.'
At December 31, 1996, the Company owed an aggregate of approximately
$57,800 to stockholders of the Company. See Financial Statements.
The Company's accounts receivable, less allowance for doubtful accounts, at
December 31, 1996 were $2,544,080, as compared to $1,201,710 at April 30, 1996.
Of the Company's accounts receivable at December 31, 1996, approximately
$1,000,000 were more than 90 days outstanding. Accounts receivable averaged 45
days of sales for the year ended April 30, 1996, as compared to 64 days through
December 31, 1996. Increased accounts receivable days outstanding has required
the Company to use substantial working capital to finance receivables which has
materially adversely affected its liquidity and working capital position.
At December 31, 1996, the Company's allowance for doubtful accounts was
$994,000, as compared to $358,000 at April 30, 1996, which the Company believes
is currently adequate for the size and nature of its receivables. Nevertheless,
delays in collection or uncollectibility of accounts receivable could continue
to have a material adverse effect on the Company's liquidity and working capital
position and could require the Company to continually increase its allowance for
doubtful accounts. Bad debt expense accounted for 3.3% of the Company's revenues
for the year ended April 30, 1996 and 4.6% for the eight months ended December
31, 1996.
The Company's capital requirements have been and will continue to be
significant. The Company is dependent on the proceeds of this offering or other
financing to fund its cash requirements necessary to finance its anticipated
growth in accounts receivable and reduce its working capital deficit. Based on
the Company's currently proposed plans and assumptions relating to its
operations, the Company believes that the proceeds of this offering, together
with projected cash flow from operations, will be sufficient to satisfy its
contemplated cash
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requirements for at least twelve months following the consummation of this
offering. In the event that the Company's plans change, its assumptions change
or prove to be inaccurate or if the proceeds of this offering or projected cash
flow prove to be insufficient to fund operations (due to unanticipated expenses,
operating difficulties or otherwise), the Company would be required to seek
additional financing sooner than anticipated or curtail its operations. There
can be no assurance that any such additional financing will be available to the
Company on commercially reasonable terms, or at all.
EFFECTS OF INFLATION
The Company does not believe that inflation has had a significant impact on
its operations.
ACCOUNTING PRONOUNCEMENTS
In November 1995, the Financial Accounting Standards Board issued FASB No.
123 'Accounting for Stock-Based Compensation.' This standard encourages, but
does not require, recognition of compensation expense based on the fair value of
equity instruments granted to employees. The Company does not plan to adopt the
recognition provisions of this standard. The disclosures required by this
standard will be included in a note to the Company's financial statements for
the year ending April 30, 1997.
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BUSINESS
GENERAL
The Company provides long distance telephone and other telecommunications
services and products to approximately 34,000 customers as of December 31, 1996.
The Company's customers are primarily small and medium-sized businesses located
principally in the Southeastern United States. In addition to its basic '1 plus'
and '800' long distance services, the Company offers local, Internet,
international call-back, e-mail and data services and prepaid long distance
calling cards. The Company markets its services and products primarily through
independent distributors, agents and telemarketers. The Company's sales
increased by 30% to $12.4 million for the fiscal year ended April 30, 1996 from
the prior fiscal year and increased by 84% to $15 million for the eight months
ended December 31, 1996 from the corresponding prior period.
The Company was incorporated under the laws of Florida in September 1995 by
ITC Integrated Systems, Inc. ('ITC'), an unaffiliated third party, under the
name Second ITC Corporation ('Second ITC') as the successor to the business of
Group Long Distance, Inc. ('GLD'), which was incorporated under the laws of
Florida in July 1990. In November 1995, GLD was merged into Second ITC and
Second ITC simultaneously changed its name to Group Long Distance, Inc.
INDUSTRY BACKGROUND
The U.S. long distance industry is dominated by the nation's three largest
long distance carriers, AT&T, MCI and Sprint, which together accounted for 83%
of the $67 billion in aggregate revenues generated by all U.S. long distance
carriers in 1994 according to a December 1995 FCC report. Other long distance
carriers, some with national transmission capabilities, accounted for the
remainder of the market.
The telecommunications industry's structure has until recently been formed
by a 1984 court decree (the 'Consent Decree') between AT&T and the United States
Department of Justice which required the divestiture by AT&T of its Bell
operating companies and divided the country into 201 Local Areas and Transport
Areas ('LATAs'). The 22 Bell operating companies, which were combined into seven
Regional Bell Operating Companies ('RBOCs'), were allowed to provide local
telephone service, local access service to long distance carriers and service
within LATAs ('intraLATA service'). However, the right to provide service
between LATAs ('interLATA service') was restricted to AT&T and other long
distance carriers.
To encourage competition in the long distance market, the Consent Decree
and certain FCC regulations require most RBOCs and other local exchange carriers
('LECs') to provide access to local exchange services that is 'equal in type,
quality and price' to that provided to AT&T and with the opportunity to be
selected by customers as their preferred long distance carrier. These 'equal
access' provisions are intended to prevent preferential treatment of AT&T by
LECs and, with other regulatory, judicial and technological factors, have helped
smaller companies to become competitive alternatives to AT&T, MCI and Sprint for
long distance services. A December 1995 FCC report stated that as of December
31, 1994 there were 465 long distance carriers purchasing equal access services
from LECs in the United States. Included in these carriers are the 'first tier'
of AT&T, MCI and Sprint, a 'second tier' of somewhat smaller carriers, such as
WorldCom, Allnet Communications Services, Inc., Cable & Wireless Communications
and LCI International, and a 'third tier' of the remaining companies.
Major long distance carriers have historically charged higher rates to
small and medium-sized business customers than to large business customers.
Large business customers are often able to commit to large volumes of traffic
and so are able to negotiate low rates under individualized contracts, unlike
smaller businesses. The combination of FCC policy and economics has given rise
to 'resellers,' such as the Company, who negotiate low rates from carriers in
return for large volume commitments, and then either resell those services to
small and medium-sized businesses at a lower rate than these customers would
have otherwise paid, or resell the services to another reseller who then sells
them to the end-user.
Companies in the long distance industry are further differentiated by their
technological capabilities. Facilities-based carriers maintain switching
equipment, which is necessary to direct calls or data over the appropriate
transmission line. Some smaller non-facilities-based providers, known as
'switchless resellers,' gain
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the use of switches as part of their contracts with facilities-based carriers.
Other non-facilities-based providers, known as 'switch-based resellers,' install
their own switches in those areas where they have sufficient volume to justify
the capital expense and maintenance costs.
The long distance industry may be significantly altered in the future by
two recent regulatory enactments. First, in October 1995 the FCC terminated
AT&T's previous price cap regulations regarding service to residences and small
businesses and now allows AT&T to file effective rate schedules on one day's
notice, thereby limiting competitors' previous ability to protest such tariffs.
These changes give AT&T increased flexibility that may permit it to compete more
effectively with smaller long distance service providers, such as the Company,
particularly in regard to the small business customers who compose the vast
majority of the Company's customer base. Second, on February 8, 1996, the
President signed the Telecommunications Act, designed to introduce more
competition into U.S. telecommunications markets. The Act increases the
potential for competition in both the long distance services market, by removing
the prohibitions against RBOCs providing long distance services, and in the
local services market by requiring LECs to permit interconnection to their
networks, thus allowing long distance and regional carriers to compete in local
markets. Due to these changes, the Company may be forced to compete with both
RBOCs and long distance carriers to a greater degree than in the past. See
'--Government Regulation' and '--Competition.'
The Company believes that the rapid evolution of the resale industry
presents an opportunity for consolidation of third-tier companies in general,
and resellers, in particular. Many of these companies are, in the Company's
opinion, undercapitalized and may have difficulty providing their services
profitably. The Company believes that many of the carriers that provide resale
products, particularly first-tier carriers, would welcome a consolidation of
resellers that would decrease the number of companies with whom they contract,
leaving only quality, well capitalized resellers with whom to deal.
Consolidation with other resellers could, in the Company's opinion, achieve
additional economies in both pricing with underlying carriers and in operating
costs such as customer service. Such economies are not certain and cannot be
adequately predicted. The Company does not have any current understanding
arrangement or agreement to consolidate with other resellers.
STRATEGY
The Company intends to actively pursue a strategy of continued growth and
will seek to expand the distribution of its services and products and maximize
penetration of new and existing geographic markets. Key elements of the
Company's growth strategy include:
Expand Distribution Channels. The Company intends to expand its marketing
activities by increasing the number of direct sales personnel and in-house
telemarketers as well as independent distributors, agents, and telemarketers. By
expanding these distribution channels, the Company will seek to maximize
exposure of its services and products.
Emphasize Product and Service 'Bundling.' The Company has increasingly
emphasized bundling of its basic long distance services with other services and
products, such as local telecommunications access, Internet access and fax
broadcast services. The Company believes that, if it is successful in bundling
its services, it may increase revenue per customer and decrease customer
attrition. The Company also believes that such bundling will be attractive to
small businesses seeking to obtain a variety of services from one provider.
Develop Strategic Marketing Relationships. The Company intends to continue
to develop strategic marketing relationships with entities such as Scrip, a
large fundraising and educational consulting company, and with retail outlets to
expand distribution of its basic '1 plus' and '800' services as well as prepaid
calling cards and other products.
Improve Operating and Network Efficiencies. The Company has agreed to
place new customers' domestic switched, '1 plus' and '800' services on
Tel-Save's One Better Network, which will utilize the new AT&T 5 ESS 2000
digital switches. The Company believes that, upon successful transition of its
customer base, the increased efficiency of these switches may ultimately shorten
the Company's provisioning and billing and collection cycles.
Expand Through Acquisitions. The Company operates in a highly fragmented
segment of the telecommunications industry and regularly evaluates possible
acquisition opportunities. The Company may seek
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to acquire smaller resellers and customer bases in order to expand the
distribution of its services and products and maximize penetration in new and
existing geographic markets. The Company believes its existing infrastructure,
including customer service, collections, provisioning and carrier agreements,
may position the Company to acquire customer bases with little corresponding
increase in overhead costs.
SERVICES AND PRODUCTS
Basic '1 plus' and '800' long distance services have historically accounted
for substantially all of the Company's revenues. For the year ended April 30,
1996 and the eight months ended December 31, 1996, such services accounted for
approximately 97% and 94%, respectively, of the Company's revenues. The Company
has increasingly emphasized its other services and products which the Company
believes may generate higher margins than basic long distance service, and may
increase customer loyalty.
The Company currently offers the following services and products, which in
the aggregate accounted for 3% and 6%, respectively, of the Company's revenues
for the year ended April 30, 1996 and the eight months ended December 31, 1996:
Prepaid Long Distance Calling Cards. The Company sells its 'EZ Call'
prepaid long distance calling cards directly to its customers. The Company's
calling card is paid for in advance and may also have additional time added to
it by using a major credit card. EZ Call limits a customer's liability for
stolen, lost, or cards abused by employees, since the minutes are pre-programmed
and added to each card in limited quantities at the direction of the customer.
The Company has also acted as a procuring agent for GTN in connection with
GTN's provision of prepaid calling cards to Target Stores ('Target'), a division
of Dayton Hudson Corporation ('Dayton'), a chain of retail department stores, to
be sold in their stores. In February 1996, GTN agreed to pay to the Company 50%
of all profits derived from sales to Target and Dayton. This agreement generated
approximately $176,000 and $80,000 of the Company's revenues for the year ended
April 30, 1996 and the eight months ended December 31, 1996, respectively.
In August 1996, the Company entered into an Independent Marketing
Distributor Agreement with Scrip Plus, Inc. ('Scrip'), a fundraising and
educational consulting company. The agreement grants Scrip the right to market
the Company's services and products, primarily the Company's prepaid calling
cards, to end users. The agreement provides for the Company to pay commissions
based on the services sold by Scrip. Beginning in August 1998, Scrip must sell a
minimum of $3,000,000 per month of the Company's services in order to receive
maximum commissions from the Company. Beginning in February 1998, if Scrip sells
less than $200,000 per month, it will be charged an administrative fee. The term
of the agreement is seven years and is automatically renewable for additional
one year terms unless either party notifies the other 45 days prior to the
expiration of the initial or any renewal term.
The Company also believes that a number of significant opportunities exist
for additional sales of prepaid calling cards though various distribution
channels, including retail outlets and large organizations, such as rental car
companies, airline travel organizations and restaurant chains. The Company will
seek to market the cards to end users through these organizations as well as
affinity groups such as the AFL/CIO and large service organizations such as
National Rental Car, which distribute the cards in connection with promotional
activities.
IntraLATA Toll Service. IntraLATA calls are non-local toll calls made
within a state. IntraLATA toll service allows IntraLATA calls to be billed by
the Company rather than the local telephone companies. Recent regulatory changes
permit customers to choose one company to provide both IntraLATA and long
distance service, meaning that the Company is able to add IntraLATA service for
existing long distance customers, enabling them to initiate their IntraLATA toll
calls in the same manner that a normal long distance call is initiated. By
offering this service, the Company believes it may be able to generate
additional revenues from current customers.
Internet Access. The Company has packaged a service which includes
Internet domain registration and services (e.g., design, placement and
advertising), Web sites, monthly access to the Internet for dial-up and
dedicated usage, and a discounted '800' service to respond and/or reply to the
customers' eventual order flow. The bundling of these services represents a
'one-stop-shopping' arrangement for the small and medium-sized
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business users that do not employ computer/software specialists to serve their
systems needs, or that are managed by individuals who may not be skilled in the
use of the Internet. This package also includes e-mail, Web browser, Internet
dialer and search engines. The Company also offers facsimile-related services
that allow a user to send a facsimile to many destinations simultaneously (Fax
Broadcast) and to store and retrieve facsimiles in a manner similar to
electronic mail (Fax Mailbox).
International Service. The Company recently acquired switching facilities
in connection with the Gulf Acquisition that enable it to originate and transmit
international traffic worldwide. The Company's international services consist of
call through and call back services. Call through service utilizes programming
that allows an international caller to be connected via a U.S. based operator to
a U.S. based line at a lower rate than would be available in the country of
origin. Call back service is an alternate way of allowing international callers
to pay lower rates than would be available in their country of origin. The
caller places a call from outside the United States to the Company's switching
facilities. The switching program instantly disconnects the call, then recalls
the customer at a pre-designated number and switches the call to the ultimate
intended receiver, utilizing a lower United States rate. Currently, the
Company's primary marketing efforts are in the Caribbean basin, certain Latin
American countries, and Europe. The Company will seek to broaden its scope of
operations to include offering international switching services to
facilities-based resellers.
ACQUISITIONS
The Company has historically expanded its operations through the
acquisitions of customer bases. In June 1994 the Company acquired a customer
base of approximately 200 small businesses from ACTI, Inc. in consideration of
$80,000. In February 1995, the Company acquired a customer base of approximately
350 small businesses from Rockwell Communications, Inc. in consideration of
$37,045. In October 1995, the Company acquired a customer base of approximately
1,000 small businesses from Touchtone Network, Inc. in consideration of
$553,223.
In May 1996, the Company acquired all of the issued and outstanding capital
stock of Gulf in consideration of $25,000 in cash and the assumption of a
promissory note in the principal amount of $182,000. Such note is payable in
equal monthly installments of $10,000 and is due February 1, 1998. Gulf operates
switching equipment which allows it to act as an international call back and
call through provider. In addition, Gulf offers prepaid long distance calling
cards, Internet access, voice mail and facsimile broadcast services. Gulf's
assets included approximately 200 commercial customers.
In July 1996, the Company acquired all of the issued and outstanding
capital stock of AIT, including certain assets of DNS Communications, Inc.
('DNS'), a division of MATRIX Telecom, Inc. ('MATRIX'). Prior to the
acquisition, MATRIX had entered into long distance service agreements with
Tel-Save through DNS. On June 28, 1996, MATRIX assigned to AIT all of its
rights, duties and obligations to those DNS service agreements, including DNS's
customer base, in consideration of $5,271,230. Shortly thereafter, the Company
purchased all of the issued and outstanding stock of AIT, as well as the DNS
customer base, in consideration of $5,271,230 in cash and the issuance of
200,000 shares of the Company's Common Stock (of which 50,000 were subject to
certain holdback provisions). This AIT/DNS customer base consisted of
approximately 30,000 small businesses at the time of the acquisition.
In December 1996, the Company accelerated the amortization of the
acquisition costs of the AIT customer base due to significant customer
attrition, resulting in $1,484,700 of additional amortization expense and a net
loss of $1,749,050 for the eight months ended December 31, 1996. Higher than
expected customer attrition was primarily attributable to the Company's
inability to implement customer service and retention, including delays in
provisioning new customers on Tel-Save's digital switches, as well as increased
competition with respect to such customer base. In January 1997, the Company
agreed with the former shareholders of AIT to cancel 45,000 of the 50,000 shares
that were subject to the holdback provisions, in settlement of certain claims by
the Company against the AIT shareholders.
In January 1997, the Company purchased from Great Lakes (i) a customer base
consisting of approximately 7,000 customers that were subject to an agreement
between Great Lakes and Tel-Save and (ii) a warrant to purchase 200,000 shares
of Common Stock of Tel-Save in consideration of $1,200,000 in cash. In
connection with such acquisition, the Company borrowed $1,200,000 from Tel-Save.
In January 1997, Tel-Save repurchased the warrants
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from the Company in consideration of $1,800,000 and credited the Company with
such amount ($1,200,000 to repay the loan made in January 1997 and $600,000 to
reduce the outstanding principal balance under the Acquisition Loan). See
'Certain Transactions.'
LONG DISTANCE SERVICE PROVIDERS
The Company has entered into multiple-year service agreements with
Tel-Save, WorldCom and ICI and short-term agreements with other suppliers of
long distance telecommunication services. To obtain favorable forward pricing
from its underlying carriers, the Company has committed to purchase certain
minimum volumes of long distance services during stated periods. For the year
ended April 30, 1996 and the eight months ended December 31, 1996, these
commitments aggregated approximately $3,200,000 and $4,885,000, respectively.
Pursuant to the Company's current agreements with Tel-Save and other carriers,
the Company's minimum volume commitments are expected to increase substantially
during the next two years.
For the year ended April 30, 1996 long distance calls carried by Tel-Save
(through AT&T) and WorldCom accounted for approximately 61% and 31%,
respectively, of the Company's revenues. For the eight months ended December 31,
1996, long distance calls carried by Tel-Save (through AT&T), WorldCom and ICI
accounted for approximately 71%, 22% and 4%, respectively, of the Company's
revenues. The Company has entered into the following services agreements or
arrangements with long distance carriers which provide access to phone lines and
transmission facilities necessary to transmit customer calls.
Tel-Save Agreement. In February 1993, the Company entered into a Partition
Agreement with Tel-Save, which was amended in July and November 1996. Pursuant
to such agreement, Tel-Save has agreed to provide long distance service to the
Company's customers through its AT&T partitions until the later of August 31,
1999 or the date that all of the Company's obligations to Tel-Save have been
satisfied. The Company's agreement with Tel-Save requires the Company, subject
to certain exceptions, to provide domestic switched, '1 plus' and '800' services
to all of the Company's new customers through Tel-Save's newly acquired AT&T
digital switching equipment. The agreement also provides that Tel-Save may
reprovision certain of the Company's existing customers onto Tel-Save's network.
Under the agreement, the Company is currently required to commit to a
minimum volume of $100,000 per month or pay the actual amount billed plus a
surcharge of $5,000 for such month. This minimum increases to $3,000,000 per
month commencing November 1, 1997. The agreement prohibits the Company from
incurring indebtedness for borrowed money (unless the Company has given Tel-Save
notice and the opportunity to provide any such financing), creating any liens or
security interests on its assets or properties or, subject to certain
exceptions, merging with another corporation or selling all or substantially all
of its assets. The agreement also prohibits the Company's directors, principals,
shareholders, agents and employees from engaging in certain competitive
activities during the term of the agreement and for a period of two years
thereafter. Tel-Save may terminate the agreement upon the happening of certain
events, including failure by the Company to pay amounts billed or demanded by
Tel-Save or any other debt when due or a judgment in excess of $20,000 is
entered against the Company.
WorldCom Agreement. In February 1996, the Company entered into a Rebiller
Service Agreement with WorldCom, pursuant to which WorldCom has agreed to
provide 'WorldOne' long distance services to the Company's customers pursuant to
applicable FCC and state tariffs through July 31, 2000, unless otherwise
terminated by either party upon thirty days' prior written notice. The Company's
agreement with WorldCom requires the Company to pay the actual amount billed or
a minimum of $500,000 per month, increasing to $750,000 per month in April 1997
and $1,000,000 per month in August 1997. In the event it fails to satisfy such
minimum commitment, the Company is required to pay a deficiency charge equal to
the difference between actual charges and the minimum commitment. WorldCom may,
upon 90 days' prior written notice, increase the rates charged to the Company to
offset an increase in the costs of providing service as a result in a change in
applicable regulations.
ICI Agreement. In April 1996, the Company entered into a Switched Reseller
Services Agreement with Phone One, Inc., a wholly owned subsidiary of ICI. The
agreement provides that ICI will supply long distance service to the Company and
its customers pursuant to applicable FCC and state tariffs. The agreement
requires that the Company purchase a minimum commitment of service from ICI of
$250,000 per month. If the Company fails to meet such minimum commitment for any
period of three consecutive months, the Company must pay a deficiency charge
equal to the difference between actual charges and the minimum commitment.
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UUNET Agreement. In February 1996, the Company entered into a Network
Services Agreement with UUNET pursuant to which UUNET agreed to provide
telecommunications services to interconnect the Company's customers to the
Internet. The term of the agreement is one year and is automatically renewable
for additional one year terms, unless terminated by either party upon not less
than 60 days notice prior to the end of any current term. The Company has agreed
to commit to purchase a minimum of $7,500 per month of service and is entitled
to receive certain discounted rates commensurate with higher commitment levels.
The Company's carriers rely on numerous regional and local telephone
companies to provide call origination and termination services to the Company's
customers.
MARKETING AND SALES
The Company markets its services and products through three distinct
channels: direct sales personnel; independent agents, distributors and
telemarketers; and on a wholesale basis, smaller resellers. The Company targets
commercial customers with telecommunications usage of under $5,000 per month.
The Company believes that AT&T, MCI and Sprint historically have chosen not to
concentrate their direct selling effort on this segment of the market. The
Company's target customers generally do not qualify for the major carriers'
volume discounts or for the level of support services made available to higher
volume users.
Direct Sales. The Company relies on its direct sales and field service
personnel for a substantial portion of its revenues. The Company's direct sales
personnel receive an initial commission for securing a sale and a residual
commission so long as that customer and the direct sales personnel remain with
the Company. The Company's field service personnel follow up with existing
customers by offering them new value-added services, for which the personnel
also receive a commission. The Company recently reduced the number of its direct
sales personnel. The Company intends, however, to use a portion of the proceeds
from this offering to hire additional experienced direct sales personnel and
in-house telemarketers. Sales of long distance and other services by the
Company's direct sales personnel and from acquisitions accounted for
approximately 73% and 93%, respectively, of the Company's revenues for the year
ended April 30, 1996 and the eight months ended December 31, 1996.
Distributors and Agents. The Company supplements its direct sales efforts
by marketing through a nationwide network of approximately 57 independent
distributors and agents, which generally include distributors of office
equipment and supplies. These distributors and agents enter into agreements
providing for commissions on business generated for the Company. The Company
typically grants a nonexclusive right to solicit customers and requires its
distributors to maintain a minimum quota. Some of the Company's new distributors
have substantial telemarketing programs, and the Company believes that sales
through this channel may increase the number of small volume customers. Although
there are higher costs associated with sales to smaller customers, sales to such
customers generally have higher margins. Sales of long distance and other
services through distributors and agents in the aggregate accounted for
approximately 20% and 6%, respectively, of the Company's revenues for the year
ended April 30, 1996 and the eight months ended December 31, 1996. The Company
anticipates that it will become increasingly dependent upon independent
distributors, agents and telemarketers to market its services.
Resellers. In April 1995, the Company commenced offering
telecommunications services on a wholesale basis to small resellers of long
distance services. Although gross margins on sales to resellers are generally
lower than the Company's average, sales through this channel enable the Company
to enter markets with minimal cost or risk where small resellers have already
built strong direct relationships with their customers. The Company believes
that reseller customers also provide opportunities for growth as candidates for
acquisitions. Sales of long distance and other services through resellers
accounted for approximately 7% and less than 1%, respectively, of the Company's
revenues for the year ended April 30, 1996 and the eight months ended December
31, 1996.
COMPETITION
The Company faces intense competition in the marketing and sale of its
services and products. The Company's long distance, prepaid long distance
calling cards, Internet and other services and products compete for consumer
recognition with other long distance, calling card, Internet and other services
and products which have achieved significant international, national and
regional consumer loyalty. Many of these services and products are marketed by
companies which are well-established, have reputations for success in the
development and sale of services and products and have significantly greater
financial, marketing, distribution, personnel and other resources than the
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Company. These resources permit such companies to implement extensive
advertising and promotional campaigns, both generally and in response to efforts
by additional competitors to enter into new markets and introduce new services
and products. Certain of these competitors, including AT&T, MCI
Telecommunications Corporation ('MCI') and Sprint Corporation ('Sprint'),
dominate the industry and have the financial resources to enable them to
withstand substantial price competition which has continued to increase. These
and other large telephone companies have also entered or have announced their
intention to enter into the prepaid phone card and Internet segments of the
telecommunications industry. Because the reseller segment of the
telecommunications industry has no substantial barriers to entry, competition
from smaller resellers in the Company's target markets is also expected to
continue to increase significantly. The markets for telecommunications services
and products are also characterized by rapidly changing technology and evolving
industry standards, often resulting in product obsolescence or short product
life cycles. The proliferation of new telecommunications technologies, including
personal communication services, cellular telephone services and products and
prepaid phone cards employing alternative 'smart' card technologies, may reduce
demand for traditional land-line long distance telephone services generally and
the Company's services in particular. The Company's success will depend on the
Company's ability to anticipate and respond to these and other factors affecting
the industry, including changes in customer preferences, business and
demographic trends, unfavorable general economic conditions and discount pricing
strategies by competitors.
Recent regulatory changes may also result in significantly increased
competition. In October 1995, the FCC terminated AT&T's designation as a
dominant carrier, which will make it easier for AT&T to compete directly with
the Company for low volume commercial long distance customers. Also, the
recently adopted 1996 Telecommunications Act is designed to introduce increased
competition in domestic telecommunications markets by facilitating the entry of
any entity (including cable television companies and utilities) into both the
long distance and local telecommunications markets. Consequently, such act
increases the potential for increased competition by permitting long distance
and regional carriers to compete in local markets and well-established and
well-capitalized Regional Bell Operating Companies and local exchange carriers
to compete directly against the Company in long distance markets. There can be
no assurance that the Company will be able to continue to compete successfully,
particularly as it seeks to enter into new markets and market new services and
products.
GOVERNMENT REGULATION
The Company's provision of telecommunications services is subject to
government regulation. Federal law regulates domestic interstate and
international telecommunications, and state law regulates telecommunications
that originate and terminate within the same state. Furthermore, in February
1996 the President signed the 1996 Telecommunications Act, which affects both
local and long distance telecommunications.
The 1996 Telecommunications Act. The President signed the 1996
Telecommunications Act into law in February 1996. The legislation is designed to
increase competition in both the local and long distance telecommunications
markets. The legislation opens the local markets by requiring LECs to permit
interconnection to their networks by long distance and regional services
providers and through creating LEC obligations regarding unbundled access,
dialing parity, access to rights-of-way, resale, number portability, mutual
compensation and other matters. Additionally, the legislation codifies the LECs'
equal access and nondiscrimination obligations and preempts inconsistent state
law. Through these requirements, the legislation allows long distance and
regional services providers to enter the local services markets.
The legislation also removes the prohibitions against RBOCs providing
InterLATA long distance services. The new provisions allow a RBOC to provide
these services 'out-of-region' (where it is not the LEC) immediately after
obtaining any state and/or federal regulatory approvals necessary to the
provision of long distance service. A RBOC may also provide long distance
service 'in-region' after it obtains FCC approval by showing that
facilities-based competition is present in its market and that it has entered
into interconnection agreements which satisfy a 14-point checklist of
competitive requirements. The legislation defines in-region service to include
every state, in its entirety, in which the RBOC provides local exchange service,
even if the RBOC is not the incumbent local exchange provider in all parts of
that state.
The Company will face new competition from the RBOCs that are able to
obtain the required state or FCC approvals to provide in-region or out-of-region
InterLATA long distance services. However, the legislation does establish
certain safeguards to prevent anticompetitive abuse by RBOCs. The legislation
restricts the ability of
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RBOCs to market jointly InterLATA long distance services together with local
services. RBOCs may engage in such efforts only through separate subsidiaries
with separate books and records, management, financing and employees. RBOCs also
may not package local and long distance services unless they permit competitors
to offer similar packages. Moreover, RBOCs must obtain in-region long distance
authority before they may market local and long distance services jointly in a
state. The adequacy of these safeguards against anticompetitive abuse by RBOCs
and any effect of such conduct on the Company cannot be determined.
Federal Regulation. International non-dominant carriers must maintain
tariffs on file with the FCC. The tariffs of non-dominant carriers, such as the
Company, are presumed lawful and are seldom contested, although those tariffs
and the rates and charges they specify are subject to FCC review. Prior to a
1995 court decision, domestic non-dominant carriers were allowed by the FCC to
file tariffs with a 'reasonable range of rates' instead of the detailed
schedules of individual charges required of dominant carriers. After such court
decision, which required detailed rate schedules for domestic offerings in their
tariffs, the Company and most of its competitors relied on the FCC's past
practice of allowing relaxed tariff filing requirements for non-dominant
carriers and did not maintain the required detailed rate schedules. Until the
two-year statute of limitations expires, the Company could be held liable for
damages for its failure to do so, although it believes that such an outcome is
highly unlikely and would not have an adverse effect on it. In order to recover
damages, a competing telecommunications provider would need to demonstrate that
the Company's failure to file detailed rate schedules caused that other service
provider to lose customers and that the Company should be held liable for the
damages. The possible extent of such damages, if any, cannot be determined by
the Company.
The FCC recently eliminated the requirement that nondominant interstate
carriers such as the Company file tariffs with the FCC for domestic interstate
services and such carriers, including the Company, must withdraw tariffs filed
with the FCC to the extent such tariffs apply to interstate services. The FCC
also requested public comment on whether any other regulations presently imposed
on nondominant carriers be eliminated. It is not known when the FCC will act on
this proposal.
AT&T was previously classified as a dominant carrier, but the FCC in
October 1995 granted AT&T nondominant status in the domestic market. As a
result, past price cap restrictions on AT&T's service to residences and small
business have been terminated, which could result in greater price competition
for the Company. Moreover, the FCC also now allows AT&T to file effective
tariffs on one day's notice, thereby limiting competitors' previous ability to
protest such tariffs.
Among domestic local carriers, only the current LECs are presently
classified by the FCC as dominant carriers for the provision of interstate
access services. This means that the FCC regulates many of the LECs' rates,
charges and services to a larger degree than the Company's. The FCC's regulation
of LECs is expected to decrease over time, especially given the 1996
Telecommunications Act. The FCC has proposed that RBOCs that provide
out-of-region long distance services be regulated as nondominant carriers.
State Regulation. The intrastate long distance operations of the Company
are also subject to various state laws and regulations, including prior
certification, notification and registration requirements. The vast majority of
states require the Company to apply for certification to provide intrastate
telecommunications services, or at least to register or be found exempt from
regulation, before commencing intrastate services. Most states also require the
Company to file and maintain detailed tariffs listing their rates for intrastate
service. Many states also impose various reporting requirements and/or require
prior approval for transfers of control of certified carriers, assignment of
carrier assets, including customer bases, carrier stock offerings and incurrence
by carriers of significant debt obligations. Certificates of authority can
generally be conditioned, modified, cancelled, terminated or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations and policies of the state regulatory authorities. Fines and other
penalties may also be imposed for such violations.
The Company provides interstate and international long distance service in
all or some portions of 50 states for which the Company has filed a tariff with
FCC. The Company is authorized, pursuant to state regulations, certifications,
tariffs or notifications or on an unregulated basis, to provide intrastate
service in 42 states and is in the process of obtaining approvals in 4
additional states. The Company expects to obtain authority to operate in each
jurisdiction where authority is required, but there can be no assurance that one
or more of these jurisdictions will not deny the Company's request for operating
authority.
38
<PAGE>
OPERATIONS AND CUSTOMER BILLING SERVICE
Total Order Processing System ('TOPS') is the Company's customer operations
and information management system. The system provides efficient processing of
new customer orders from the Company's sales personnel and independent
telemarketers, distributors and agents to the Company's long distance services
carriers.
The processing of new customer orders begins with the sale of the Company's
services to the customer by the Company's direct sales personnel or independent
distributors, agents or telemarketers. The orders are sent to the TOPS system,
which processes the orders for entry into the Company's database. The Company
executes a credit check on orders based on certain criteria and rejects those
that fail to meet the Company's qualifications. The TOPS system formats and
electronically forwards each order to the appropriate long distance carrier.
Upon successful activation of the new customers' accounts by the carriers
and LECs, customers can utilize the Company's services. The Company, through
Tel-Save, offers billing services provided by AT&T and AT&T's ACUS, a
wholly-owned subsidiary of AT&T. ACUS processes call details and bills the
Company's customers directly. Customers remit payment to a lock-box designated
by Tel-Save. The Company also offers direct billing services to customers
serviced by WorldCom and ICI. The Company receives monthly records from its
carriers which detail the calls made by its customers, and checks the carriers'
records against its own records for accuracy. The Company initiates collection
calls to resolve nonpayment by customers, and engages third party collection
agencies if such efforts are unsuccessful.
The Company strives to reduce initial attrition rates and develop long-term
customer relationships through continuous communication with its customer base.
Customers solicited by the Company's telemarketers are contacted to verify their
orders, and the Company's customer service personnel conduct periodic audits of
new customers to evaluate their satisfaction with the Company's services.
Customer service personnel also field customer-initiated calls regarding billing
questions and problems to provide immediate resolution of issues and inquiries.
EMPLOYEES
As of December 31, 1996, the Company employed 31 persons on a full-time
basis, with 5 in sales and marketing, 14 in customer service, collection and
provisioning, 8 in administration and 4 in senior management. None of the
Company's employees are represented by a union. The Company considers relations
with its employees to be satisfactory.
FACILITIES
The Company's executive offices are located at 1451 West Cypress Creek
Road, Suite 200, Fort Lauderdale, Florida 33309. The Company has entered into a
four-year lease which expires in March 2000, for 7,950 square feet. The Company
pays approximately $8,000 per month, and the rent is subject to a 4% adjustment
on an annual basis. The Company also has a sales office in Orlando located at
1555 Howel Branch Road, Suite C208, Winter Park, Florida 32789. The Company has
entered into a three-year lease, expiring on December 31, 1998 for 925 square
feet. The Company pays $1,020 per month, and the rent is subject to a 4%
adjustment on an annual basis.
LEGAL PROCEEDINGS
Nortel, Inc. ('Nortel') and Accutel Communications, Inc. ('Accutel') have
filed combined suits against the Company alleging causes of action for
anticipatory breach of contract and breach of contract arising from the
termination by the Company of service under a service contract and independent
marketing distributor agreement with each party. The Company terminated the
telephone services of Nortel and terminated the distributor relationship with
Accutel for breaches of contract, including the failure to comply with the
payment terms of their contracts. Nortel and Accutel claim that the Company
anticipatorily and wrongfully terminated their contracts, and Accutel claims
that the Company owes it $89,664 in unpaid commissions. Nortel sued for an
injunction against the Company's termination of telephone services and was
awarded an ex-parte temporary injunction, but at a hearing for dissolution of
the order the Court immediately ordered the dissolution of the prior injunction
and ordered all parties to attend mediation. The Company believes it was
justified in terminating service in accordance with the contracts and intends to
vigorously defend its position. However, there can be no assurance as to the
possible outcome of this action.
39
<PAGE>
Between October 1991 and June 1991, the Company borrowed an aggregate of
approximately $125,000 from Mr. Harold L. Sutton, a stockholder of the Company.
As of April 30, 1996, the Company owed Mr. Sutton approximately $17,069. In
connection with such borrowings the Company at various times pledged securities
to secure its obligations. The Company and Mr. Sutton currently are in dispute
with respect to the ownership of 100,000 shares of Common Stock originally
pledged to secure the Company's borrowings from Mr. Sutton. In January 1997, the
Company filed an action seeking a declaratory judgment and a judicial
determination as to the amount in dispute.
Pursuant to the Plan and Agreement of Merger dated November 14, 1995 (the
'Plan'), Group Long Distance, Inc., a Florida corporation ('GLD'), was merged
(the 'Merger') into Second ITC Corporation, a Florida corporation ('Second ITC')
and Second ITC changed its name to Group Long Distance, Inc. Second ITC was
founded by ITC Integrated Systems, Inc. ('ITC Integrated') which owned 1,870,000
shares of Second ITC and by 7 existing shareholders of GLD, who owned in the
aggregate the remaining 130,000 shares (the 'Founders Shares') of Second ITC
(the 'Individual Founders'), respectively. The Individual Founders were Gerald
M. Dunne, Jr., Rafael Alvarez, Jr., Jeffrey Granick, Andrea Morey, Michael
Mueller, Vincent Tumminello and Jeffrey Ullman. The Plan stated that the
shareholders of GLD would own 94% of the outstanding shares of Second ITC and
the existing shareholders of Second ITC would own the remaining 6% of the shares
outstanding. The shareholders of GLD received 1,750,000 shares of Second ITC
owned by ITC Integrated which resulted in (i) the shareholders of GLD receiving
87.5% of the outstanding shares of Second ITC and the existing shareholders of
Second ITC, namely the Individual Founders and ITC Integrated retaining 130,000
and 120,000 shares of Second ITC, respectively, or an aggregate of 12.5% of the
outstanding shares of Second ITC, and (ii) in a partial dilution of the
interests received by the shareholders of GLD in the Merger from 94% to 87.5%
(the 'Dilution'). In December 1996 and January 1997, the Board of Directors of
the Company, a majority of the shareholders of the Company that were
shareholders of GLD (the predecessor) at the time of the Merger and a majority
of the current shareholders of the Company, each ratified and approved the
Merger and the resulting Dilution. Shareholders affected by the Dilution may
have a cause of action against the Company and the Individual Founders for the
failure to disclose the issuance of the Founders Shares to the Individual
Founders. Although the Dilution was subsequently ratified by a majority of the
shareholders of the Company, there can be no assurance that a shareholder may
not seek legal remedy against the Company or the Individual Founders. Any such
action could have a material adverse effect on the Company.
The Company is from time to time the subject of complaints or litigation in
the ordinary course of its business. The Company believes that the lawsuits,
claims and other legal matters to which it has become subject are not material
to the Company's financial condition or results of operations, but an existing
or future lawsuit or claim resulting in an adverse decision against the Company
could have a material adverse effect on the Company's financial condition and
results of operations.
40
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- ------------------------------------------------ --- ------------------------------------------------
<S> <C> <C>
Gerald M. Dunne, Jr............................. 34 President, Chief Executive Officer and Director
Peter J. Russo.................................. 40 Chief Financial Officer
Andrea A. Morey................................. 39 Vice President--Administration and Secretary
Michael A. Mueller.............................. 39 Vice President--Marketing
Jeffrey A. Ullman............................... 36 Vice President--Sales
Sam D. Hitner................................... 39 Controller
Edward Harwood.................................. 70 Director
C. Shelton James................................ 57 Director
Glenn S. Koach.................................. 41 Director
John L. Tomlinson............................... 48 Director
</TABLE>
Gerald M. Dunne, Jr. has been President, Chief Executive Officer and a
director of the Company since February 1992. From May 1989 to February 1992, Mr.
Dunne was Senior Vice President and Vice President of Sales of the Company. From
January 1986 to September 1988, Mr. Dunne was in the Accounting Department at
the Battery Products Division of Union Carbide. Mr. Dunne is a member of the
Telecommunications Resellers Association.
Peter J. Russo has been Chief Financial Officer of the Company since
December 1996. From February 1992 to June 1996, Mr. Russo was Executive Vice
President, USA, and from May 1988 to January 1992, Mr. Russo was Senior Vice
President and Chief Financial Officer for the United States operations of the
State Bank of South Australia. From April 1979 to April 1988, Mr. Russo held
various senior management positions in New York, including First Vice President
and Chief Financial Officer for the U.S. operations of the Australia and New
Zealand Banking Group Ltd. Mr. Russo received his Bachelor of Business
Administration degree in Public Accounting from Pace University, New York.
Andrea A. Morey has been Vice President--Administration of the Company
since November 1994 and Secretary since April 1991. Ms. Morey joined the Company
in 1989 as an account representative and became Director of Operations in 1991.
From 1986 to 1989, Ms. Morey was Director of Administration of the South Florida
law firm of Tew, Jorden & Schulte.
Michael A. Mueller has been Vice President of Marketing of the Company
since February 1992. From August 1991 to February 1992, Mr. Mueller was the
Company's Director of National Sales. From December 1990 to June 1991, Mr.
Mueller was the General Manager of the Traditional Products Division of MODCOMP,
an industrial automation company. From December 1984 to September 1987, Mr.
Mueller was a Product Marketing Manager at Gould Electronics Corporation
('Gould'), a computer manufacturing company.
Jeffrey A. Ullman has been Vice President of Sales of the Company since
October 1994. From May 1993 to October 1994, Mr. Ullman was the Company's
Regional Sales Manager and, from April 1992 to May 1993, Mr. Ullman was the
Company's Sales Manager in the Orlando office. From May 1991 to May 1992, Mr.
Ullman owned and managed Phymed Services, Inc., a medical supply company.
Sam D. Hitner has been the Controller of the Company since August 1995.
From November 1994 to August 1995, Mr. Hitner was employed with John L.
Tomlinson C.P.A., P.A. as a tax consultant. From September 1992 to July 1994,
Mr. Hitner was Controller of the sales and marketing division of South African
Druggists, a publicly held pharmaceutical manufacturer and distributor. From
October 1989 to September 1992, Mr. Hitner
41
<PAGE>
was Controller of the sales and marketing division of Protea Electronics, a
division of Protea Technology, a publicly held corporation, which division was
involved in the sale and repair of sophisticated electronic equipment. Mr.
Hitner is qualified as a Chartered Accountant (S.A.) in South Africa.
Edward Harwood has been a director of the Company since September 1995. Mr.
Harwood retired in 1989. For the 19 years prior thereto, Mr. Harwood held
various executive positions with Gould.
C. Shelton James has been a director of the Company since September 1995.
Mr. James has been Chairman and Chief Executive Officer of Elcotel, a publicly
traded corporation and manufacturer of telecommunications equipment, since May
1991. Mr. James also serves as a director of the following public corporations:
NAI Technologies, a manufacturer of computers, SK Technologies, a point of sale
software company, Cyberguard Corporation, an Interest Security company,
Concurrent Computer Systems, a real time computer company and CSPI a
manufacturer of high performance computers. Mr. James also has been the
President and Director of Fundamental Management, an investment management
company, since 1990. From 1980 to 1989, Mr. James served as Executive Vice
President of Gould and as President of its computer systems division.
Glenn S. Koach has been a director of the Company since September 1995.
Since 1984, Mr. Koach has been a Principal and Investment Manager of Riverside
Capital Advisors, an investment company based in South Florida. Mr. Koach also
has served as Chairman of the Board of Metro Airlines since 1994.
John L. Tomlinson has been a director of the Company since November 1995.
Mr. Tomlinson is a Certified Public Accountant and has been in private practice
since 1990. Prior to 1990, Mr. Tomlinson was the Vice President of Finance for
All Metals Service and Warehousing, Inc. Mr. Tomlinson also serves as a director
of Gateway American Bank of Florida.
The Company has a classified Board of Directors currently consisting of
five members. The directors are divided into three classes. The term of office
of the directors expires following the date of this Prospectus as follows: Class
1, at the first annual meeting of stockholders, Class 2, at the second annual
meeting of shareholders; and Class 3, at the third annual meeting of
stockholders. Thereafter, the term of office of each director will expire at the
third annual meeting of stockholders following his or her election. Mr. John
Tomlinson is a Class 1 director. Messrs. Edward Harwood and C. Shelton James are
Class 2 directors and Messrs. Glenn S. Koach and Gerald M. Dunne, Jr. are Class
3 directors. Having a classified Board of Directors may be viewed as inhibiting
a change of control of the Company and having a possible anti-takeover effect
because it would take at least two annual meetings to change control of the
Board of Directors by stockholder vote.
The Company has also agreed, for a period of three years following
consummation of this offering, if so requested by the Representative, to
nominate and use its best efforts to elect a designee of the Representative as a
director of the Company, or, at the Representative's option, as a non-voting
adviser to the Company's Board of Directors subject to execution of a
confidentiality agreement with such non-voting adviser. The Company's officers,
directors and principal stockholders have agreed to vote their shares in favor
of such designee. The Representative has not yet exercised its right to
designate such a person. The Representative's designee elected will be a Class 1
director.
The Company maintains a life insurance policy in the amount of $1,000,000
on Gerald M. Dunne, Jr., its Chief Executive Officer. The proceeds of the policy
are payable to the Company.
COMMITTEES OF THE BOARD
Audit Committee. The Audit Committee is composed of Glenn Koach, C.
Shelton James and John Tomlinson. Mr. Tomlinson is the Chairman. The Audit
Committee is responsible for recommending to the Board of Directors the
engagement of independent auditors of the Company and reviewing with the
independent auditors the scope and results of the audits, the internal
accounting controls of the Company, audit practices and the professional
services furnished by the independent auditors.
Compensation Committee. The Compensation Committee is composed of C.
Shelton James and Edward Harwood. Mr. James is the Chairman. The Compensation
Committee is responsible for reviewing and approving all compensation
arrangements for officers and executive management of the Company.
42
<PAGE>
EMPLOYMENT AGREEMENT
In February 1997, the Company and Gerald M. Dunne, Jr. entered into a
two-year employment agreement providing for his employment as the Company's
President and Chief Executive Officer with an annual base salary of $130,000 for
the first year, increasing to $150,000 for the second year. The agreement
provides for a bonus based on certain earnings criteria. The agreement provides
that in the event of termination: (i) without cause or by Mr. Dunne for cause,
or by either party in connection with a change in control of the Company, Mr.
Dunne will receive a lump sum severance pay equal to his then annual base salary
and disability, accident and health insurance benefits substantially similar to
those insurance benefits Mr. Dunne is receiving immediately before the
termination for cause; (ii) as a result of the incapacity of Mr. Dunne, Mr.
Dunne shall be entitled to continue to receive 60% of his salary for a two-year
period from the date of termination; and (iii) as a result of the death of Mr.
Dunne, Mr. Dunne (or his estate) shall be entitled to any benefits accrued under
the Company's death, disability or other benefit plan and shall be entitled to
receive a lump sum payment equal to his then annual base salary. The agreement
also includes a one-year noncompete covenant commencing on the date of
termination.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and
long-term compensation for services in all capacities paid to the Company's
Chief Executive Officer during the fiscal year ended April 30, 1996. No other
executive officer received a total salary, bonus and other compensation in
excess of $100,000 during such year.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-------------------------
ANNUAL COMPENSATION SECURITIES
--------------------------------- UNDERLYING
FISCAL OTHER ANNUAL OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION (#) COMPENSATION
- -------------------------------------------- ------ ------- ------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gerald M. Dunne, Jr.
President, Chief Executive Officer
and Director.............................. 1996 $93,000 $41,808(1) $38,126(2) -- --
All Directors as a group (3)................ 1996 0.00 0.00 0.00 -- --
</TABLE>
- ------------------
(1) Comprised of subjective and profitability bonuses. The subjective bonus was
composed of qualitative performance objectives set by the Board of
Directors. The profitability bonus was earned by the attainment of
prescribed revenue and profit levels.
(2) Comprised of commission and royalty income of $30,926 earned from sales
generated and reimbursements of automobile expenses of $7,200. No other
employee received automobile reimbursements to this extent although other
employees were reimbursed for some automobile related expenses.
(3) Through April 30, 1996, no Board member received compensation for his role
on the Board. John L. Tomlinson, C.P.A., P.A., an accounting firm owned by
and managed by Mr. John L. Tomlinson, a director of the Company, received
$14,060 in connection with accounting services rendered by such firm to the
Company during the 1996 fiscal year.
43
<PAGE>
The following table sets forth certain information for the executive
officers with respect to the exercise of options to purchase Common Stock during
the fiscal year ended April 30, 1996 and the number and value of securities
underlying unexercised options held by the executive officers as of April 30,
1996.
AGGREGATED OPTION/SAR EXERCISES IN THE YEAR ENDED
APRIL 30, 1996 AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS
SHARES AT APRIL 30, 1996(#) AT APRIL 30, 1996($)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald M. Dunne, Jr................ 47,635 $ 0.00 0 0 0 0
</TABLE>
STOCK OPTION PLAN
In October 1996, the Company's board of directors approved and in February
1997 the shareholders approved a Stock Option Plan (the 'Plan'). The Plan
permits the granting of stock options to eligible participants. The Plan permits
the granting of both incentive stock options (which are entitled to certain
favorable treatment under the Internal Revenue Code of 1986) and nonqualified
stock options (i.e., options which are not intended to be incentive stock
options). A total of 600,000 shares of Common Stock will be available for
issuance. Employees and consultants of the Company and its subsidiaries are
eligible to be selected to receive options. The Plan also provides for the grant
of stock options to nonemployee members of the Company's Board of Directors
although the Board of Directors has not yet determined the number and terms of
such options. Nonemployee director options will be granted pursuant to the
discretion of the Board of Directors.
The Plan is administered by a committee of nonemployee members of the Board
of Directors (the 'Committee'). Subject to the terms of the Plan, the Committee
has the sole discretion to determine the employees and consultants to whom
options will be granted and the terms and conditions of such options. The
exercise price of stock options granted under the Plan cannot be less than 100%
of the fair market value (on the date of grant) of the shares covered by the
option (110% of fair market value in the case of certain incentive stock options
granted to a 10% shareholder).
OUTSTANDING OPTIONS AND WARRANTS
To date, the Company has granted options to purchase 514,216 shares of
Common Stock. Of such options, options to purchase 526,500 shares of Common
Stock were issued at an exercise price of $5.0625 per share under the Plan.
These options are exercisable for a period of five years. Options to purchase an
aggregate of 340,000 shares of Common Stock were granted to Mr. Dunne, Jr.,
other directors and a former director and vest 50% immediately upon grant and
50% one year later. As to the remaining options issued to employees and
consultants of the Company to purchase 186,500 shares of Common Stock, such
options vest incrementally on a quarterly basis over a three year period. In
addition, options to purchase an aggregate 76,216 shares of Common Stock, which
were issued to directors, employees and other shareholders, are exercisable at a
weighted average exercise price of $2.23 per share. These options which were
issued outside the Plan expire at various times through September 30, 1997. The
Company has issued the Tel-Save Warrants at a weighted average exercise price of
$5.64.
INDEMNIFICATION
The Company's by-laws provide for indemnification rights of officers,
directors, and others and limited the personal liability of directors for
monetary damages to the extent permitted by Florida law. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted for directors, officers and controlling persons of the Company, the
Company 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.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Common Stock as of December 31, 1996 and as adjusted to reflect
the sale of Common Stock offered hereby by (i) all shareholders who beneficially
own, to the knowledge of the Company, 5% or more of the Common Stock, (ii) each
executive officer of the Company, (iii) each director of the Company, and (iv)
all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OWNERSHIP
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) OFFERING OFFERING
- ----------------------------------------------------------------------- ------------ -------- --------
<S> <C> <C> <C>
Mr. Gerald M. Dunne, Jr................................................ 322,754(3) 14.0% 9.1%
Tel-Save Holdings, Inc.
c/o Tel-Save, Inc.
6805 Route 202
New Hope, Pennsylvania 18938......................................... 350,000(4) 13.7 9.2
Gerald M. Dunne, Sr. Trust
2502 S.W. Racquet Club Dr.
Palm City, Florida 34990............................................. 303,013(5) 13.7 8.5
Mr. C. Shelton James
4101 N. Ocean Blvd.
Apt. 405D
Boca Raton, Florida 33431............................................ 106,698(6) 4.8 3.1
Mr. Edward Harwood
4100 Galt Ocean Drive
Apt. 614
Ft. Lauderdale, Florida 33308........................................ 79,451(6) 3.6 2.3
Mr. John L. Tomlinson
500 West Cypress Creek Rd.
Suite 455
Fort Lauderdale, Florida 33309....................................... 62,779(6)(7) 2.8 1.8
Mr. Glenn S. Koach
2320 N.E. 9th Street
Suite 300
Ft. Lauderdale, Florida 33304........................................ 50,966(6) 2.3 1.5
Ms. Andrea Morey....................................................... 31,149(8) 1.4 *
Mr. Michael A. Mueller................................................. 22,574(8) 1.0 *
Mr. Jeffrey A. Ullman.................................................. 9,500(8) * *
Mr. Peter J. Russo..................................................... 6,000(9) * *
Mr. Sam D. Hitner...................................................... 2,500(10) * *
All directors and executive officers as a group (10 persons)........... 694,371(11) 28.7% 18.9%
</TABLE>
- ------------------
* Represents beneficial ownership of less than 1%.
(1) The address of each person listed, unless otherwise indicated, is c/o Group
Long Distance, Inc., 1451 West Cypress Creek Road, Suite 200, Fort
Lauderdale, Florida 33309.
(2) As used in this table 'beneficial ownership' means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to have 'beneficial ownership' of any security
that such person has a right to acquire within 60 days of the date of this
Prospectus. Any security that any person named above has the right to
acquire within 60 days is deemed to be outstanding
(Footnotes continued on next page)
45
<PAGE>
(Footnotes continued from previous page)
for purposes of calculating the ownership percentage of such person but is
not deemed to be outstanding for purposes of calculating the ownership
percentage of any other person. Unless otherwise noted, each person listed
has the sole power to vote, or direct the voting of, and power to dispose,
or direct the disposition of, all of such shares.
(3) Includes 100,000 shares of Common Stock issuable upon exercise of presently
exercisable options at an exercise price of $5.0625 per share and having an
expiration date in 2001.
(4) Represents 300,000 shares of Common Stock issuable upon exercise of a
warrant (presently held by TS Investment, Inc.) to purchase common stock at
an exercise price of $5.75 per share, and 50,000 shares of Common Stock
issuable upon exercise of a warrant to purchase common stock at an exercise
price of $5.00 per share, until October 31, 2001.
(5) The Trustors and beneficiaries of the Trust are Mr. Gerald M. Dunne, Sr.
and Ms. Paulette Dunne. Ms. Dunne also owns 5,716 shares of Common Stock
individually. Mr. Dunne, Sr. and Ms. Dunne are the parents of Gerald M.
Dunne, Jr., the Chief Executive Officer and President of the Company. Mr.
Dunne, Jr. is neither a Trustor, nor a beneficiary, nor a Trustee of the
Trust. Four Voting Trustees--Mr. C. Shelton James, a director and
shareholder of the Company, Mr. Ronald Assaf, a shareholder of the Company,
Mr. Murdock MacGregor, a shareholder of the Company, and Mr. Patrick
Rickard, a shareholder of the Company--together retain sole voting rights
on all matters on which stockholders of the Company may vote. Mr. James,
Mr. Assaf and Mr. MacGregor have each executed Powers of Attorney
appointing Mr. Rickard as their attorney and granting Mr. Rickard full
authority to execute stock option agreements with regard to the Trust.
(6) Includes 10,000 shares of Common Stock issuable upon exercise of presently
exercisable options issued to each of the non-employee directors. The
options expire in 1998 and are exercisable at an exercise price of $5.0625
per share.
(7) Includes 47,635 shares of Common Stock underlying an option previously
granted to Mr. Tomlinson and an unaffiliated third party exercisable at
$3.15 per share through September 30, 1997.
(8) Includes 5,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days from the date hereof at an exercise price of
$5.0625 per share and having an expiration date in 2001.
(9) Includes 6,000 shares of Common Stock issuable upon exercise of options
exercisable within 60 days from the date hereof at an exercise price of
$5.0625 per share having an expiration date of 2001.
(10) Includes 2,500 shares of Common Stock issuable upon exercise of options
exercisable within 60 days from the date hereof at an exercise price of
$5.0625 per share and having an expiration date in 2001.
(11) Includes an aggregate of 163,500 shares of Common Stock issuable upon
exercise of presently exercisable options or options exercisable within 60
days from the date hereof at an exercise price of $5.0625 per share and
47,635 shares of Common Stock issuable upon exercise of presently
exercisable options at an exercise price of $3.15 per share.
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CERTAIN TRANSACTIONS
In 1991, the Company entered into a royalty agreement with Gerald M. Dunne,
Sr., a principal shareholder of the Company and the father of Gerald M. Dunne,
Jr., the Company's President and Chief Executive Officer. In consideration for
certain sales and marketing activities to be conducted by Gerald M. Dunne, Sr.
on behalf of the Company, the agreement provides for monthly royalty payments to
be paid by the Company to him based on a percentage (1% to .4%) of the Company's
monthly net revenues. Royalties paid for the years ended April 30, 1995 and 1996
and the eight months ended December 31, 1996 were approximately $91,300,
$111,810 and $50,271, respectively. Such agreement terminates on the
consummation of this offering.
In January 1992, in connection with such royalty agreement, Gerald M.
Dunne, Sr. entered into Assignment of Royalty Agreements with Glenn Koach and
Edward Harwood, a director of the Company, and two unaffiliated third-parties,
pursuant to which Mr. Dunne, Sr. assigned to each of those individuals all of
his right, title and interest to 1.8% of the royalties in excess of $10,000 per
month payable to Mr. Dunne, Sr. by the Company. No monies were paid to the
assignees for the years ended April 30, 1995 and 1996 or the eight months ended
December 31, 1996.
In September 1995, the Company issued a promissory note to John L.
Tomlinson, a director of the Company, and Phillip C. Cezeaux, an unaffiliated
third-party, in the aggregate principal amount of $100,000. The interest rate on
the promissory note adjusts semi-annually based on the prime rate plus 2% and
principal and interest is payable in equal monthly installments of $2,600 until
September 1997. At December 31, 1996, approximately $72,000 was outstanding
under such note. As an inducement for the loan, the Company issued options to
Messrs. Tomlinson and Cezeaux to purchase 47,635 shares of Common Stock at a
price of $3.15 per share. These options expire on September 30, 1997.
In February 1996, GTN agreed to pay the Company 50% of all profits derived
from sales of prepaid long distance calling cards by GTN to Target. GTN is
controlled by Gerald M. Dunne, Sr., who is a principal shareholder of the
Company and the father of Gerald M. Dunne, Jr., the President and Chief
Executive Officer of the Company.
In July 1996, in connection with the Acquisition Loan, Gerald M. Dunne,
Jr., President and Chief Executive Officer of the Company, personally pledged
all of the Common Stock owned by him to secure repayment of the Company's
indebtedness to Tel-Save. Upon repayment of the Acquisition Loan from the
proceeds of this offering, Mr. Dunne's personal pledge will be released.
In July 1996, in connection with the Acquisition Loan, the Company issued a
five-year warrant to TS Investment, Inc., an affiliate of Tel-Save, to purchase
300,000 shares of Common Stock at an exercise price of $5.75 per share which was
subsequently assigned to Tel-Save Holdings, Inc., another affiliate of Tel-Save.
In December 1996, in connection with an amendment of the AIT Acquisition Loan
and of the Company's services agreement with Tel-Save, the Company issued a
five-year warrant to Tel-Save Holdings, Inc. to purchase 50,000 shares of Common
Stock at an exercise price of $5.00.
In July 1996, in connection with the AIT Acquisition Loan, Mr. Gerald M.
Dunne, Jr., Mr. C. Shelton James, Mr. Edward Harwood, Mr. Glenn Koach, Mr. John
Tomlinson and Ms. Andrea Morey (the 'Stockholders') and the Company entered into
an agreement with Tel-Save pursuant to which, as amended, the Stockholders and
the Company agreed that for so long as Tel-Save or an affiliate of Tel-Save
holds the Tel-Save Warrants or any other warrant issued by the Company to
Tel-Save (or an affiliate of Tel-Save) or any shares of Common Stock issued
pursuant thereto, no Stockholder shall sell or transfer any shares of Common
Stock owned by him or her to any person, with certain exceptions, unless: (i)
Tel-Save is given notice of the proposed sale and the purchaser purchases from
Tel-Save the lesser of the number of shares it purchases from the selling
stockholder or the number of shares that bears the same relation to the
aggregate number owned by Tel-Save as the shares being sold by the Stockholder
to the aggregate owned by the Stockholder; and (ii) the purchaser acknowledges
that it is a 'Stockholder' under the agreement and its shares shall be bound by
the terms of this agreement. These covenants do not apply when (i) all amounts
due and owing Tel-Save under the Acquisition Loan have been satisfied and (ii)
there is an effective registration statement covering the resale by Tel-Save of
the shares underlying the Tel-Save Warrants. The Stockholders also agreed that
so long as any amount is outstanding and payable under the Acquisition Loan,
each of the Stockholders will use his or her best efforts to cause
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Tel-Save's designees to constitute a majority of the Company's Board of
Directors upon the occurrence of an event of default under the Acquisition Loan.
In January 1997, the Company purchased from Great Lakes, a
debtor-in-possession under Chapter 11 of the U.S. Bankruptcy Code (i) a customer
base consisting of approximately 7,000 customers that were subject to an
agreement between Great Lakes and Tel-Save and (ii) a warrant to purchase
200,000 shares of Common Stock of Tel-Save in consideration of $1,200,000 in
cash. In connection with such acquisition, the Company borrowed $1,200,000 from
Tel-Save. In January 1997, Tel-Save repurchased the warrants from the Company in
consideration of $1,800,000 and credited the Company with such amount
($1,200,000 toward the loan made in January 1997 and $600,000 to reduce the
outstanding principal balance under the Acquisition Loan).
In July 1996, GTN, a company controlled by Gerald M. Dunne, Sr., the father
of Gerald M. Dunne, Jr., President and Chief Executive Officer of the Company,
converted accounts payable to the Company for long distance services into a
promissory note in the principal amount of $182,050 bearing interest at a rate
of 15% per annum. The outstanding principal amount of and accrued interest on
the note is payable monthly and matures on June 15, 1997. Gerald M. Dunne, Sr.
has pledged 50,000 shares of the Company's Common Stock owned by him to secure
repayment of such promissory note.
In May 1996, the Company entered into an agreement with Gateway pursuant to
which it borrowed $50,000. In August 1996, the Company entered into an agreement
with Gateway, which provides for a line of credit of up to $50,000. Repayment of
the loan and the line of credit is secured by all of the Company's equipment,
machinery, furniture and general intangibles and is personally guaranteed by
Gerald M. Dunne, Jr., President and Chief Executive Officer of the Company. Mr.
John L. Tomlinson, a director of the Company, is also a director of Gateway.
Future transactions between the Company and its officers, directors and
securityholders and their respective affiliates will be on terms no less
favorable than could have been obtained from unaffiliated third parties and will
be approved by a majority of the independent and disinterested members of the
Board of Directors.
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<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 12,000,000 shares
of Common Stock, no par value and 2,000,000 shares of 'blank check' Preferred
Stock, no par value. As of the date of this Prospectus, 2,221,353 shares of
Common Stock are outstanding and no shares of Preferred Stock have been issued.
After giving effect to the sale of the shares of Common Stock offered hereby,
there will be 3,462,353 shares of Common Stock outstanding (3,649,853 shares if
the Underwriters' over-allotment option is exercised in full).
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record on all matters to be voted on by shareholders. The holders of
Common Stock do not have preemptive rights to purchase additional shares of
Common Stock or other subscription rights and have no cumulative voting rights
with respect to the election of directors. Under the Florida Business
Corporations Act, all shares of Common Stock are entitled to share equally in
dividends from sources legally available therefor when, as and if declared by
the Board of Directors and, upon liquidation or dissolution of the Company,
whether voluntary or involuntary, to share equally in the assets of the Company
available for distribution to Common Stock holders. The rights of the
shareholders of Common Stock to participate in dividends and in assets upon
liquidation or dissolution may be subordinate to the rights of the shareholders
of the Company's Preferred Stock. All of the outstanding shares of Common Stock
are, and all shares of Common Stock offered hereby, will be duly authorized,
validly issued, fully paid and nonassessable. The Board of Directors is
authorized to issue additional shares of Common Stock, not to exceed the amount
authorized by the Company's Certificate of Incorporation, and to issue options
and warrants for the purchase of such Common Stock, on such terms and conditions
and for such consideration as the Board of Directors may deem appropriate
without further stockholder action. See 'Business--Legal Proceedings.'
PREFERRED STOCK
The Board of Directors has the authority in the Company's Restated Articles
of Incorporation without further action by the shareholders, to issue up to
2,000,000 shares of preferred stock in one or more series and to fix the number
of shares in each series, the designation thereof and the relative rights,
preferences and limitations of each series, and specifically the Board of
Directors is authorized to fix with respect to each series (a) the dividend
rate; (b) redeemable features, if any; (c) rights upon liquidation; (d) whether
or not the shares of such series shall be subject to a purchase, retirement or
sinking fund provision; (e) whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class and, if so, the
rate of conversion or exchange; (f) restrictions, if any, upon the payment of
dividends on the Common Stock; (g) restrictions, if any, upon the creation of
indebtedness; (h) voting powers, if any, of the shares of each series; and (i)
such other rights, preferences and limitations as shall not be inconsistent with
the laws of the State of Florida. The Board of Directors, without, shareholder
approval, can issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the Common Stock.
Preferred stock could thus be issued quickly with terms calculated to delay or
prevent a change in control of the Company or make removal of management more
difficult. Additionally, the issuance of preferred stock may have the effect of
decreasing the market price of the Common Stock, and may adversely affect the
voting and other rights of the holders of Common Stock. At present, there are no
shares of preferred stock outstanding and the Company has no plans to issue any
of the preferred stock.
REDEEMABLE WARRANTS
Each Redeemable Warrant entitles the registered holder thereof to purchase
one share of Common Stock at a price of $5.40 per share, subject to adjustment,
commencing 1998. The Redeemable Warrants expire on ,
2000. The Redeemable Warrants will be subject to redemption, subject to the
prior written consent of the Representative, which consent must be received
prior to the giving of any notice of redemption, at a price of $.10 per
Redeemable Warrant on 30 days' written notice, provided the closing bid
quotation of the Common Stock as reported by Nasdaq (or the last sale price if
listed on a national securities exchange), equals or exceeds 125% of the then
effective exercise price of the Redeemable Warrants for any 20 trading days
within a period of 30 consecutive trading days ending on the fifth trading day
prior to the date of the notice of redemption. The holder of a Redeemable
Warrant will lose his right to purchase if such right is not exercised prior to
redemption by the Company on the date for redemption specified in the Company's
notice of redemption or any later date specified in a subsequent notice. Notice
of redemption by the Company shall be
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<PAGE>
given by first class mail to the holders of the Redeemable Warrants at their
addresses set forth in the Company's records.
The exercise price of the Redeemable Warrants and the number and kind of
shares of Common Stock or other securities and property to be obtained upon
exercise of the Redeemable Warrants are subject to adjustment in certain
circumstances including a stock split of, or stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock. Additionally,
an adjustment would be made upon the sale of all or substantially all of the
assets of the Company so as to enable Redeemable Warrant holders to purchase the
kind and number of shares of stock or other securities or property (including
cash) receivable in such event by a holder of the number of shares of Common
Stock that might otherwise have been purchased upon exercise of such Redeemable
Warrant. No adjustment for previously paid cash dividends, if any, will be made
upon exercise of the Redeemable Warrants.
The Redeemable Warrants do not confer upon the holder any voting or any
other rights of a stockholder of the Company. Upon notice to the Redeemable
Warrant holders, the Company has the right to reduce the exercise price or
extend the expiration date of the Redeemable Warrants.
The Redeemable Warrants may be exercised upon surrender of the Redeemable
Warrants certificate on or prior to the respective expiration date (or earlier
redemption date) of such Redeemable Warrants at the office of Continental Stock
Transfer & Trust Company (the 'Redeemable Warrant Agent'), with the form of
'Election to Purchase' on the reverse side of the Redeemable Warrant certificate
completed and executed as indicated, accompanied by payment of the full exercise
price (certified check payable to the order of the Redeemable Warrant Agent) for
the number of Redeemable Warrants being exercised.
DIVIDEND POLICY
The Company has never paid cash dividends on its capital stock and does not
anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and such other factors as the Board of
Directors deems relevant.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock and Warrant Agent for
the Redeemable Warrants is Continental Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,462,353 shares of
Common Stock outstanding (3,649,853 if the Underwriters' over-allotment option
is exercised in full). Of these shares, the 1,250,000 shares (1,437,500 shares
if the Underwriters' over-allotment option is exercised in full) sold in this
offering and an additional 308,000 shares and, subject to certain contractual
restrictions described below, will be freely tradeable without restriction or
registration under the Securities Act by persons other than 'affiliates' of the
Company, as defined under the Securities Act. An additional 350,000 shares
issuable upon exercise of the Tel-Save Warrants will be freely tradeable without
restriction of further registration under the Securities Act by persons other
than 'affiliates' of the Company, as defined under the Securities Act. The
remaining 1,904,353 shares of Common Stock outstanding upon completion of this
offering will be 'restricted shares' as that term is defined by Rule 144 as
promulgated under the Securities Act. The Company has also issued options to
purchase 602,716 shares of Common Stock.
In general, under new provisions of Rule 144 effective April 1997, a person
(or persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, including persons who may be deemed
'affiliates' of the Company, would be entitled to sell within any three-month
period a number of shares that does not exceed the greater of one percent of the
number of shares of Common Stock then outstanding or the average weekly trading
volume of the Common Stock during the four calendar weeks preceding the filing
of a Form 144 with respect to such sale. Sales under Rule 144 are also subject
to certain manner of sale provisions and notice requirements, and to the
availability of current public information about the Company. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above.
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Under Rule 144 (and subject to the conditions thereof), 1,949,353 shares
will be eligible for sale commencing in April 1997. All officers, directors and
securityholders beneficially owning 3% or more of the Common Stock of the
Company have agreed that they will not, directly or indirectly, offer, sell,
offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose of any shares of Common Stock or other capital stock
of the Company, or any securities convertible into, or exercisable or
exchangeable for, any shares of Common Stock or other capital stock of the
Company without the prior written consent of the Representative, for a period of
12 months after the date of this Prospectus, provided, however, that (i) any
such person may make private sales or bona fide gifts of securities of the
Company during such period if the proposed transferee agrees to be bound by the
above restrictions and (ii) such restrictions shall not apply with respect to
the laws of descent and distribution.
Tel-Save has agreed not to sell its shares of Common Stock received upon
exercise of any warrant issued to it by the Company for a period of no more than
twelve months from the date of this Prospectus without the prior written consent
of the Representative.
No prediction can be made as to the effect, if any, that the sales of
Common Stock and of Common Stock underlying outstanding options and warrants or
the availability of such shares for sale in the public market will have on the
market price for the Common Stock prevailing from time to time. Nevertheless,
sales of substantial amounts of Common Stock in the public market and/or upon
the exercise of outstanding options and warrants after the restrictions
described above lapse could adversely affect prevailing market prices for the
Common Stock and impair the ability of the Company to raise capital through an
offering of its equity securities in the future.
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UNDERWRITING
The Underwriters named below, for which LT Lawrence & Co., Inc. is acting
as Representative, have agreed, severally, not jointly, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase 1,250,000 shares
of Common Stock from the Company and 1,250,000 Warrants. The number of shares of
Common Stock and Warrants that each Underwriter has agreed to purchase is set
forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER NUMBER OF
UNDERWRITER OF SHARES WARRANTS
- -------------------------------------------------------------------- --------- ----------
<S> <C> <C>
LT Lawrence & Co., Inc..............................................
--------- ----------
1,250,000 1,250,000
--------- ----------
--------- ----------
</TABLE>
The Underwriters are committed to purchase and pay for all of the shares of
Common Stock and Warrants offered hereby if any of such securities are
purchased. The shares of Common Stock and Warrants are being offered by the
Underwriters subject to prior sale, when, as and if delivered to and accepted by
the Underwriters and subject to approval of certain legal matters by counsel and
to certain other conditions.
Through the Representative, the Underwriters have advised the Company that
the Underwriters propose to offer the shares of Common Stock and Warrants to the
public at the public offering prices set forth on the cover page of this
Prospectus. The Underwriters may allow certain dealers who are members of the
NASD concessions not in excess of $. per share of Common Stock and $. per
Warrant, of which is not in excess of $. per share of Common Stock and $. per
Warrant may be reallowed to other dealers who are members of the NASD.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period from the date of this Prospectus, to purchase up to 187,500
additional shares of Common Stock and/or an additional 187,500 Warrants at the
public offering price set forth on the cover page of this Prospectus, less
underwriting discounts and commissions. The Underwriters may exercise this
option in whole, or from time to time, in part, solely for the purpose of
covering over-allotments, if any, made in connection with the sale of the shares
of Common Stock and Warrants offered hereby.
The Company has agreed to pay the Representative, individually and not as
the representative of the several Underwriters, a non-accountable expense
allowance of 3% of the gross proceeds of this offering of which $50,000 has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock and Warrants
offered hereby for sale under the laws of such states as the Representative may
designate, including expenses of counsel retained for such purpose by the
Representative.
The Company has agreed to sell to the Representative and its designees, for
an aggregate of $125, warrants (the 'Representative Warrants') to purchase up to
125,000 shares of Common Stock at an exercise price equal to 110% of the public
offering price per share and/or up to 125,000 Warrants at an exercise price
equal to 110% of the public offering price per Warrant. The Representative's
Warrants may not be sold, transferred, assigned or hypothecated for one year
from the date of this Prospectus, except to officers and partners of the
Representative, the several Underwriters, and members of the selling group, and
are exercisable during the five-year period commencing on the date of this
Prospectus (the 'Warrant Exercise Term'). During the Warrant Exercise Term, the
holders of the Representative's Warrants are given, at nominal cost, the
opportunity to profit from a rise in the market price of the Company's Common
Stock. To the extent that the Representative's Warrants are exercised, dilution
of the interests of the Company's stockholders will occur. Further, the terms on
which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of the Representative's Warrants can be
expected to exercise them at any time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Representative's Warrants. Any profit realized by the
Representative on the sale of the Representative's Warrants or the underlying
shares of Common Stock or Warrants may be deemed additional underwriting
compensation. Subject to certain limitations and exclusions, the Company has
agreed, at the request of the holders of a majority of the Representative's
Warrants, at the Company's expense, to register the Representative's Warrants
and the securities issuable upon exercise of the Representative's Warrants under
the Securities Act on one occasion
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during the Warrant Exercise Term and to include the Representative's Warrants
and such underlying securities in any appropriate registration statement which
is filed by the Company during the seven years following the date of this
Prospectus.
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Representative for bona fide services provided a fee of 4% of the
exercise price for each Warrant exercised; provided, however, that the
Underwriter will not be entitled to receive such compensation in Warrant
exercise transactions in which (i) the market price of shares at the time of
exercise is lower than the exercise price of the Warrants; (ii) the Warrants are
held in any discretionary account; (iii) disclosure of compensation arrangements
is not made, in addition to the disclosure provided in this Prospectus, in
documents provided to holders of the Warrants at that time of exercise; (iv) the
holder of the Warrants has not confirmed in writing that the Representative
solicitated such exercise; or (v) the solicitation of exercise of the Warrants
was in violation of Rule 10b-6 promulgated under the Exchange Act. In addition
to soliciting, either orally or in writing, the exercise of the Warrants, such
bona fide services may also include disseminating information, either orally or
in writing, to the holders of the Warrants about the Company or the market for
the Company's securities, and assisting in the processing of the exercise of
Warrants.
The Company has also agreed, for a period of three years following
consummation of this offering, if so requested by the Representative, to
nominate and use its best efforts to elect a designee of the Representative as a
director of the Company, or, at the Representative's option, as a non-voting
adviser to the Company's Board of Directors subject to execution of a
confidentiality agreement with such non-voting adviser. The Company's officers,
directors and principal stockholders have agreed to vote their shares in favor
of such designee. The Representative has not yet exercised its right to
designate such a person.
The Company's officers, directors and securityholders beneficially owning
3% percent or more of the Company's outstanding Common Stock have agreed not to
sell or otherwise dispose of any securities of the Company for a period of
twelve months from the date of this Prospectus without the prior written consent
of the Representative.
The Representative has informed the Company that it does not expect to make
sales of the shares offered hereby to discretionary accounts.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Representative was organized in February 1992 and was registered as a
broker-dealer in 1993. Prior to this offering, the Representative has acted as a
principal underwriter in four public offerings.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kipnis Tescher
Lippman Valinsky & Kain, Fort Lauderdale, Florida. Orrick, Herrington &
Sutcliffe LLP, New York, New York has acted as counsel to the Company in
connection with this offering. Tenzer Greenblatt LLP, New York, New York has
acted as counsel to the Underwriters in connection with this offering.
EXPERTS
The consolidated financial statements of the Company as of April 30, 1996,
and for the fiscal year then ended, appearing in this Prospectus and
Registration Statement have been audited by Grant Thornton LLP, Independent
Certified Public Accountants, as set forth in their report thereon appearing
herein and in the Registration Statement and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of the Company as of April 30, 1994 and 1995, and
for the fiscal years then ended, appearing in this Prospectus and Registration
Statement have been audited by Timothy M. Hohl Company P.A., Certified Public
Accountants, independent auditors, as set forth in their report thereon
appearing herein and in the Registration Statement and are included in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
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On June 5, 1996, the Company dismissed Timothy M. Hohl Company P.A.
('Hohl'). The dismissal of Hohl was approved by the Board of Directors. The
Company believes, and has been advised by Hohl that it concurs in such belief,
that during the fiscal years ended April 30, 1994 and 1995, the Company and Hohl
did not have any disagreement on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of Hohl, would have caused it
to make reference in connection with its reports on the Company's financial
statements to the subject matter of the disagreement. No report of Hohl on the
Company's financial statements contained an adverse opinion or a disclaimer of
opinion, or was modified as to uncertainty, audit scope or accounting
principles. On June 5, 1996, the Company engaged Grant Thornton LLP to audit its
financial statements for the fiscal year ended April 30, 1996.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission'), Washington, D.C. 20549, a registration statement on Form SB-2
(together with all amendments and exhibits thereto, the 'Registration
Statement') under the Securities Act of 1933, as amended (the 'Securities Act').
This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted from this Prospectus
in accordance with the Commission's rules and regulations. For further
information, reference should be made to the Registration Statement and to the
exhibits filed thereto. For further information with respect to the Company and
the Common Stock, reference is made to the Registration Statement and the
exhibits and schedules thereto which may be inspected without charge or copied
at the public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can be obtained from the Commission's
Public Reference Section at prescribed rates. Registration statements
transmitted through the Commission's Electronic Data Gathering, Analysis and
Retrieval System are also publicly available through the Commission's Internet
site on the World Wide Web (http://www.sec.gov). Descriptions contained in this
Prospectus as to the contents of any contract or other documents filed as an
exhibit to the Registration Statement are not necessarily complete and each such
description is qualified by reference to such contract or document. In addition,
it is anticipated that the Common Stock and the Redeemable Warrants will be
quoted on the Nasdaq Small Cap Market under the symbols 'GLDI' and 'GLDIW,'
respectively. Reports and other information concerning the Company may be
inspected at the offices of The Nasdaq Stock Market, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent public accounting firm
and such other reports as the Company may determine to be appropriate or as may
be required by law. The Company's fiscal year ends on April 30.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets............................................................................................. F-3
Statements of Operations................................................................................... F-4
Statement of Stockholders' Equity (Deficit)................................................................ F-5
Statements of Cash Flows................................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
Report of Independent Certified Public Accountants......................................................... F-18
Historical Statements of Income and Direct Operating Expenses Exclusive of Items
Not Comparable to the Proposed Future Operations of the Customer Base.................................... F-19
Pro Forma Financial Statements............................................................................. F-20
Pro Forma Statement of Operations For the Year Ended April 30, 1996........................................ F-21
Pro Forma Statement of Operations For the Eight Months Ended December 31, 1996............................. F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Group Long Distance, Inc.
We have audited the accompanying balance sheet of Group Long Distance, Inc. (the
'Company') as of April 30, 1996, and the related statements of earnings,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Group Long Distance, Inc. as of
April 30, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Fort Lauderdale, Florida GRANT THORNTON LLP
July 26, 1996
F-2
<PAGE>
GROUP LONG DISTANCE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 30, APRIL 30, DECEMBER 31,
1995 1996 1996
---------- ---------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash................................................................ $ 123,051 $ 78,767 $ --
Accounts receivable less allowance for doubtful accounts of
$568,000, $358,000 and $994,000 at April 30, 1995, 1996 and July
31, 1996, respectively........................................... 1,368,345 1,201,710 2,544,080
Note receivable--related party...................................... -- 96,956 150,476
Deferred tax assets................................................. 214,000 147,900 337,221
Prepaid expenses and other current assets........................... 6,244 76,638 1,064,502
---------- ---------- ------------
1,711,640 1,601,971 4,096,279
---------- ---------- ------------
Note receivable--related party, net of current portion................ -- 85,094
Property and equipment net of accumulated depreciation of $20,582,
$29,647 and $88,070 at April 30, 1995, 1996, and December 31, 1996,
respectively........................................................ 31,581 77,276 359,289
Customer acquisition costs, net of accumulated amortization of
$10,386, $134,602 and $2,770,187 at April 30, 1995, 1996 and
December 31, 1996................................................... 106,659 886,917 3,866,218
Deferred offering costs............................................... -- 73,478 359,171
Other assets.......................................................... -- 15,675 67,882
---------- ---------- ------------
Total assets..................................................... $1,849,880 $2,740,411 $ 8,748,839
---------- ---------- ------------
---------- ---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Line of credit...................................................... $ -- $ 47,920 $ 71,417
Accounts payable.................................................... 1,059,356 1,543,718 2,742,525
Accrued expenses and other liabilities.............................. 90,879 245,138 477,482
Current portion of long-term debt................................... 486,550 609,811 2,394,830
Current portion of long-term debt--related party.................... 67,083 -- --
Current portion of capital lease obligations........................ -- 6,456 24,869
---------- ---------- ------------
1,703,868 2,453,043 5,711,123
Long-term debt, net of current portion................................ 160,000 83,159 3,470,944
Capital lease obligations, net of current portion..................... -- 15,568 42,181
---------- ---------- ------------
Total liabilities................................................ $1,863,868 $2,551,770 $ 9,224,248
---------- ---------- ------------
---------- ---------- ------------
Commitments and contingencies......................................... $ -- $ -- $ --
Stockholders' equity (deficit)
Preferred stock, no par value, 2,000,000 shares authorized;
no shares issued and outstanding................................. -- -- --
Common stock, no par value, 12,000,000 shares authorized; 1,761,000,
2,057,353 and 2,212,353 shares issued and outstanding, as of
April 30, 1995, 1996 and December 31, 1996, respectively......... -- -- --
Additional paid-in capital.......................................... 263,700 268,364 1,353,364
Accumulated deficit................................................. (277,688) (79,723) (1,828,773)
---------- ---------- ------------
Total stockholders' equity (deficit)............................. (13,988) 188,641 (475,409)
---------- ---------- ------------
Total liabilities and stockholders' equity....................... $1,849,880 $2,740,411 $ 8,748,839
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
GROUP LONG DISTANCE, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED APRIL 30, DECEMBER 31,
------------------------ ------------------------
1995 1996 1995 1996
---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Sales........................................................ $9,538,095 $12,364,643 $8,195,632 $15,069,300
Cost of sales................................................ 6,992,817 9,009,131 6,002,319 10,848,880
---------- ----------- ---------- -----------
Gross profit............................................... 2,545,278 3,355,512 2,193,313 4,220,420
Selling, general and administrative expenses................. 2,074,127 2,835,316 1,779,033 3,014,315
Depreciation and amortization................................ 16,070 133,281 40,530 2,690,738
Interest expense, net........................................ 22,177 19,050 10,832 264,417
---------- ----------- ---------- -----------
Earnings (loss) before income taxes........................ 432,904 367,865 362,918 (1,749,050)
Income tax expense........................................... 151,000 169,900 137,250 --
---------- ----------- ---------- -----------
Net earnings (loss)........................................ $ 281,904 $ 197,965 $ 225,668 $(1,749,050)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
Earnings (loss) per common and common equivalent share....... $ .15 $ .10 $ .11 $ (.79)
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GROUP LONG DISTANCE, INC.
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
TWO YEARS ENDED APRIL 30, 1996 AND EIGHT MONTHS ENDED
DECEMBER 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
TOTAL
SHARES OF ADDITIONAL STOCKHOLDERS'
COMMON COMMON PAID-IN ACCUMULATED EQUITY
STOCK STOCK CAPITAL DEFICIT (DEFICIT)
---------- ------ ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Balance, May 1, 1994......................... 1,755,500 $-- $ 183,700 $ (559,592) $ (375,892)
Issuance of common stock..................... 32,000 -- 17,500 -- 17,500
Issuance of common stock for exercise of
stock options.............................. 179,500 -- 94,500 -- 94,500
Common stock reacquired and retired.......... (42,000) -- (32,000) -- (32,000)
Net earnings................................. -- -- -- 281,904 281,904
Balance, April 30, 1995...................... 1,925,000 -- 263,700 (277,688) (13,988)
Exercise of options.......................... 132,353 -- 110,000 -- 110,000
Costs of registering shares.................. -- -- (105,336) -- (105,336)
Net earnings................................. -- -- -- 197,965 197,965
Balance, April 30, 1996...................... 2,057,353 -- 268,364 (79,723) 188,641
Issuance of common stock..................... 200,000 -- 1,400,000 -- 1,400,000
Common Stock reacquired...................... (45,000) -- (315,000) -- (315,000)
Net loss for the period (unaudited).......... -- -- -- (1,749,050) (1,749,050)
---------- ------ ---------- ----------- --------------
Balance, December 31, 1996 (unaudited)....... $2,212,353 $-- $1,353,364 $(1,828,773) $ (475,409)
---------- ------ ---------- ----------- --------------
---------- ------ ---------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
GROUP LONG DISTANCE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEAR ENDED APRIL 30, DECEMBER 31,
-------------------- --------------------------
1995 1996 1995 1996
-------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net earnings............................................... $281,904 $197,965 $ 225,668 $(1,749,050)
Adjustments to reconcile net earnings to net cash provided
by operating activities
Depreciation and amortization........................... 16,070 133,281 40,530 2,690,738
Provision for bad debts................................. 301,203 404,480 233,073 693,148
Changes in assets and liabilities
Increase in accounts receivable....................... (723,413) (237,845) (225,060) (1,735,518)
(Increase) decrease in notes receivable............... -- (182,050) -- 31,574
(Increase) decrease in deferred tax asset............. 146,000 66,100 (46,800) (189,321)
(Increase) decrease in prepaid expenses and other
current assets..................................... 3,396 (70,394) (68,550) (587,864)
Increase in accounts payable.......................... 358,155 484,362 84,022 239,226
Increase (decrease) in accrued expenses and other
liabilities........................................ (2,098) 154,259 249,262 232,344
-------- -------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... 381,217 950,158 492,145 (374,723)
-------- -------- ----------- -----------
Cash flows from investing activities
Acquisitions of property and equipment..................... (28,961) (32,249) (17,874) (162,166)
Acquisitions of customer bases............................. (117,045) (904,474) (341,400) (5,517,491)
Increase in other assets................................... -- (15,675) (205,184) (52,207)
-------- -------- ----------- -----------
Net cash used in investing activities.............. (146,006) (952,398) (564,458) (5,731,864)
-------- -------- ----------- -----------
Cash flows from financing activities
Net borrowings under line of credit agreement.............. -- 47,920 -- 50,000
Proceeds from loan originations............................ 17,210 112,159 105,285 6,607,064
Principal repayments of long-term debt..................... (309,861) (132,822) (90,799) (330,842)
Principal repayments of capital lease obligations.......... -- (487) -- (12,709)
Proceeds from the sale of common stock..................... 112,000 110,000 55,000 --
Offering costs incurred.................................... -- (178,814) (123,643) (285,693)
Common stock repurchased and retired....................... (8,000) -- -- --
-------- -------- ----------- -----------
Net cash (used in) provided by financing
activities....................................... (188,651) (42,046) (54,157) 6,027,820
Net increase (decrease) in cash.............................. $ 46,560 $(44,284) $(126,470) $ (78,767)
Cash at beginning of year.................................... 76,491 123,051 123,051 78,767
-------- -------- ----------- -----------
Cash at end of year.......................................... $123,051 $ 78,767 $ (3,419) $ --
-------- -------- ----------- -----------
-------- -------- ----------- -----------
Noncash investing and financing activity:
The Company acquired a customer base partially with common
stock with a value of $1,085,000 during the eight month
period ended December 31, 1996.
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE A--FORMATION AND OPERATIONS OF THE COMPANY
In November 1995, Group Long Distance, Inc. (the 'Company') (which was
originally incorporated in July 1990) merged into Second ITC Corporation, the
surviving corporation, whose name was changed to Group Long Distance, Inc. The
existing stockholders of Group Long Distance retained 94% of the issued and
outstanding stock of the merged company. For accounting purposes, the
acquisition has been treated as a recapitalization of Group Long Distance with
Group Long Distance as the acquired (reverse acquisition), and the financial
statements of Group Long Distance are considered to be the financial statements
of the Company. Historical stockholders' equity of Group Long Distance prior to
the merger has been retroactively restated.
The Company is a nonfacilities based reseller of long distance
telecommunication services. The Company utilizes services contracts to provide
its customers with switched, dedicated and private line services to various long
distance telecommunications networks such as AT&T Tel-Save, Worldcom and ICI.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows.
Principles of Consolidation
The financial statements at December 31, 1996 and for the eight months
period ended December 31, 1996 represents the consolidated results of the
Company and its wholly-owned subsidiaries Gulf Communication Services, Inc., and
Adventures-in-Telecom, Inc., which were acquired in May and July 1996,
respectively (see Note O). All intercompany balances have been eliminated in
consolidation. The financial statements as of April 30, 1995 and 1996 and for
the years then ended only included the operations of the Company without any
subsidiaries.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of
three months or less, when purchased, to be cash equivalents.
Property and Equipment
Additions and major renewals to property and equipment are recorded at
cost. Maintenance and repairs are charged to expense when incurred. The cost and
accumulated depreciation of assets sold or retired are removed from the
respective accounts and any resulting gain or loss is reflected in income. The
Company provides for depreciation using the straight-line method over an
estimated useful life of five years for office equipment, furniture and fixtures
and leasehold improvements.
Customer Acquisition Costs
Customer acquisition costs represent the cost of purchased customer
accounts which are amortized over five years utilizing an accelerated method.
The Company's amortization method and life are based on estimated attrition
rates and attempt to match these costs with the corresponding revenues.
F-7
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In December 1996, as a result of higher than expected customer attrition,
the Company accelerated the amortization of the acquisition costs of the AIT
customer base. This change in estimate resulted in $1,484,700 of additional
amortization expense in the eight months ended December 31, 1996 based upon the
new first year amortization rate of 75% compared to the estimated rate of 30%
which the Company was previously using. The Company will amortize the remaining
balance using 15% in year 2 and 10% in year 3. The higher than expected
attrition resulted from delays in implementing the Company's service and
retention program which relies, in part, on Tel-Save's installation of its new
AT&T digital switching equipment. Additionally, increasingly competitive
conditions in the industry have affected the attrition rate.
Income Taxes
Deferred income taxes have been provided for elements of income and expense
which are recognized for financial reporting purposes in periods different than
such items are recognized for income tax purposes. The Company accounts for
deferred taxes utilizing the liability method, which applies the enacted
statutory rates in effect at the balance sheet date to differences between the
book and tax basis of assets and liabilities. The resulting deferred tax
liabilities and assets are adjusted to reflect changes in tax laws.
Earnings Per Share
Earnings per share are based upon the weighted average number of common and
common equivalent shares outstanding during each year. The total number of such
weighted average shares was 1,840,250 and 2,018,474 for the years ended April
30, 1995 and 1996, respectively, and 2,059,025 and 2,222,917 for the eight
months ended December 31, 1995 and 1996, respectively. Stock options and
warrants are considered common stock equivalents unless their inclusion would be
antidilutive.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, 'Disclosures About
Fair Value of Financial Instruments,' requires disclosure of estimated fair
values of financial instruments. These estimated fair values are to be disclosed
whether or not they are recognized in the balance sheet, provided it is
practical to estimate such values. The Company estimates that the fair value of
its financial instruments approximates the carrying value of its financial
instruments at April 30, 1996.
Accounting For Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, 'Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,'
requires that long-lived assets and certain intangibles
F-8
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. This statement had no impact on the Company's results of operations
or financial position upon adoption in May 1996.
Stock Options
Options granted under the Company's Stock Option Plan are accounted for
under APB 25, 'Accounting for Stock Issued to Employees,' and related
interpretations. In October 1995, the Financial Accounting Standards Board
issued Statement 123, 'Accounting for Stock-Based Compensation,' which will
require additional proforma disclosures for companies that will continue to
account for employee stock options under the intrinsic value method specified in
APB 25. The Company plans to continue to apply APB 25 and the only effect of
adopting Statement 123 in May 1996 will be the new disclosure requirement.
Interim Financial Information
The financial statements at December 31, 1996 and for the eight month
periods ended December 31, 1995 and 1996 are unaudited and prepared on the same
basis as the audited consolidated financial statements included herein.
In the opinion of management, such interim financial statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the results for such periods. The results of operations for the eight
months ended December 31, 1996 are not necessarily indicative of the results to
be expected for the full year or any other interim period.
Reclassifications
Certain reclassifications have been made to the prior year's financial
statements to conform with the current year presentation.
NOTE C--CONCENTRATIONS OF RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of accounts and notes receivable which are
due from businesses primarily located in the Southeastern United States. The
Company continually evaluates the creditworthiness of its customers; however, it
generally does not require collateral.
The majority of the Company's revenues are derived from calls placed
through AT&T's reseller, Tel-Save, Inc. ('Tel-Save'). Such revenues represented
61% and 67% of total revenues in fiscal 1996 and 1995, respectively.
NOTE D--LINE OF CREDIT
On December 11, 1995, the Company entered into a $50,000 line of credit
agreement with a financial institution. The line of credit was renewed in August
1996, matures on August 1997 and bears interest at prime plus 2%. The line of
credit is collateralized by all the Company's equipment, machinery, furniture
and intangibles and is personally guaranteed by the Company's president.
F-9
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE E--LONG-TERM DEBT
Long-term debt is comprised of the following at April 30, 1995 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996 1996
-------- -------- ------------
UNAUDITED
<S> <C> <C> <C>
Secured Tel-Save interest bearing Note at 6.5%................... $ -- $ -- $3,788,135
Secured WorldCom interest bearing Note at 16.5%.................. -- -- 1,294,017
Unsecured promissary note payable to a Corporation in connection
with an acquisition. The Note is payable in equal monthly
installments of $10,000 until
February 1, 1998............................................... -- -- 117,886
Unsecured non-interest bearing settlement payable to AT&T. The
Company has been and continues to be in default under this
obligation. See also Note L.................................... 557,500 547,500 547,500
Unsecured promissory note payable to a director of the Company
and an unaffiliated third party. The note, which matures on
September 25, 1997, is due in 24 equal monthly payments $2,600
and bears interest at prime plus 2%. See also Note J........... -- 91,428 72,317
Unsecured non-interest bearing note payable to an individual. The
note, which matures on April 1, 1997, is due in equal monthly
principal payments of $1,000................................... 24,000 11,000 5,000
Unsecured 11% interest bearing note which is payable in monthly
installments of $1,000 and matures in fiscal 1998.............. 32,093 25,973 21,691
18% interest bearing note payable to an individual. The note is
collateralized by 100,000 shares of the Company's common
stock.......................................................... 32,957 17,069 19,228
11% interest bearing notes payable to stockholders. The notes
were repaid on December 31, 1995............................... 67,083 -- --
-------- -------- ------------
713,633 692,970 5,865,774
Less current portion of long-term debt........................... 553,633 609,811 2,394,830
-------- -------- ------------
$160,000 $ 83,159 $3,470,944
-------- -------- ------------
-------- -------- ------------
</TABLE>
F-10
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE E--LONG-TERM DEBT--(CONTINUED)
Principal maturities of long-term debt at April 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
APRIL 30
- ---------------------
<S> <C>
1997................. $609,811
1998................. 38,876
1999................. 44,283
2000 and thereafter.. --
--------
$692,970
--------
--------
</TABLE>
NOTE F--INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, 'Accounting for Income Taxes' which
requires the use of the 'liability method' of accounting for income taxes.
Accordingly, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using statutory federal income tax rates in effect for the year.
The Company, at April 30, 1996, has an alternative minimum tax credit
carryforward for federal income tax purposes of approximately $13,000, which is
available to offset future income liabilities.
The provision for income taxes consists of the following at April 30,:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current... $ 5,000 $103,800
Deferred.. 146,000 66,100
-------- --------
$151,000 $169,900
-------- --------
-------- --------
</TABLE>
The provision for income taxes differs from the amount of income tax
determined by applying the applicable statutory federal income tax rates to
pretax income as a result of the following differences at April 30, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Provision for income taxes, at 34%......... $147,100 $125,800
Increase (decrease) in tax resulting from:
Amortization............................. -- 33,400
Nondeductible items...................... 6,000 7,700
Alternative minimum tax credits.......... (5,000) (13,000)
Effect of graduated tax rates............ (14,100) (1,800)
State taxes, net of federal tax benefit.. 17,000 13,700
Other.................................... -- 4,100
-------- --------
$151,000 $169,900
-------- --------
-------- --------
</TABLE>
F-11
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE F--INCOME TAXES--(CONTINUED)
Deferred tax assets are comprised of the following at April 30, 1995 and
1996.
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Allowance for doubtful accounts... $210,405 $134,700
Customer acquisition costs........ -- 37,000
Accrued bonus..................... -- 13,200
Alternative minimum tax credits... 3,595 --
-------- --------
214,000 184,900
Less valuation allowance.......... -- 37,000
-------- --------
$214,000 $147,900
-------- --------
-------- --------
</TABLE>
NOTE G--LEASES
The Company leases various office facilities under noncancellable operating
leases which expire at various dates through March 2000. The leases contain
renewal options and provide for rental increases by either index or
renegotiation. Further, some of the leases require payment of common area
maintenance and utilities. Rent expense for the years ended April 30, 1996 and
1995 totaled approximately $74,800 and $73,500.
Approximate future minimum lease payments applicable to noncancellable
operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
APRIL 30
- ---------------------
<S> <C>
1997................. $ 88,728
1998................. 91,118
1999................. 89,096
2000 and thereafter.. 73,266
--------
$342,208
--------
--------
</TABLE>
The Company leases certain equipment under capital lease agreements. The
economic substance of these agreements is that the Company is financing the
acquisition of assets. The net book value of the equipment leased is $22,511.
The following is a schedule of the future minimum annual lease payments due
under the leases:
<TABLE>
<CAPTION>
YEAR ENDING
APRIL 30
- ---------------------
<S> <C>
1997............................................. $ 9,265
1998............................................. 9,265
1999 and thereafter.............................. 8,494
--------
Total minimum future lease payments.............. 27,024
Less amounts representing interest............... 5,000
--------
Present value of future minimum lease payments... 22,024
Less current portion............................. 6,456
--------
$ 15,568
--------
--------
</TABLE>
F-12
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE H--COMMITMENTS AND CONTINGENCIES
Certain of the Company's network service agreements contain provisions for
guaranteed monthly volume and network usage which is the basis for determining
volume discounts and other special billing features. If the Company is unable to
achieve the guaranteed monthly volume, the agreements provide for various
surcharges.
In February 1997 (see Note O), the Company and the Company's President and
Chief Executive Officer entered into a two-year employment agreement providing a
base salary of $130,000 and a bonus based on certain earnings criteria. In
addition, Mr. Dunne will be granted options to purchase 250,000 shares of Common
Stock at an exercise price equal to the fair market value of the Common Stock on
the date of grant.
Nortel, Inc. ('Nortel') and Accutel Communications, Inc. ('Accutel') have
filed combined suits against the Company alleging causes of action for
anticipatory breach of contract and breach of contract arising from the
termination by the Company of service under a service contract and independent
marketing distributor agreement with each party. The Company terminated the
telephone services of Nortel and terminated the distributor relationship with
Accutel for breaches of contract, including the failure to comply with the
payment terms of their contracts. Nortel and Accutel claim that the Company
anticipatorily and wrongfully terminated their contracts, and Accutel claims
that the Company owes it $89,664 in unpaid commissions. Nortel sued for an
injunction against the Company's termination of telephone services and was
awarded an ex-parte temporary injunction, but at a hearing for dissolution of
the order the Court immediately ordered the dissolution of the prior injunction
and ordered all parties to attend mediation. The Company believes it was
justified in terminating service in accordance with the contracts and intends to
vigorously defend its position. However, there can be no assurance as to the
possible outcome of this action.
Between October 1991 and June 1991, the Company borrowed an aggregate of
approximately $125,000 from Mr. Harold L. Sutton, a stockholder of the Company.
As of April 30, 1996 the Company owed Mr. Sutton $17,069. In connection with
such borrowings the Company at various times pledged securities to secure its
obligations. The Company and Mr. Sutton currently are in dispute with respect to
the ownership of 100,000 shares of Common Stock originally pledged to secure the
Company's borrowings. Between October 1991 and June 1991, the Company borrowed
an aggregate of approximately $125,000 from Mr. Harold L. Sutton, a stockholder
of the Company. As of April 30, 1996, the Company owed Mr. Sutton approximately
$17,069. In connection with such borrowings the Company at various times pledged
securities to secure its obligations. The Company and Mr. Sutton currently are
in dispute with respect to the ownership of 100,000 shares of Common Stock
originally pledged to secure the Company's borrowings from Mr. Sutton. In
January 1997, the Company filed an action seeking a declaratory judgment and a
judicial determination.
In November 1995, the Board of Directors and shareholders of a predecessor
corporation ('GLD') approved a Plan and Agreement of Merger which stated that
the shareholders of GLD would own 94% of the outstanding shares of Common Stock
of Second ITC and the shareholders of Second ITC would own the remaining 6% of
the outstanding shares. Pursuant to the merger, the shareholders of GLD received
87.5% of the shares of Second ITC and the shareholders of Second ITC received
12.5% of the outstanding shares of Second ITC, which included an aggregate of
130,000 shares (6.5%) issued to employees of the Company (collectively, the
'founders'). While the merger and the issuance of the shares to the founders
have been subsequently ratified by a majority of the shareholders of the Company
that were shareholders of GLD at the time of the merger, there can be no
assurance that shareholders will not seek legal action against the Company and
the founders for failing to disclose the issuance of such shares and the
resulting dilution to the shareholders or that any such action would not have a
material adverse effect on the Company. Pursuant to an indemnification agreement
(i) the Company and each of the founders, jointly and severally, have agreed to
indemnify the Underwriters, and each of the
F-13
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE H--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
founders has agreed to indemnify the Company, for any and all losses, claims,
damages, expenses or liabilities (including reasonable legal fees and expenses)
as a result of any claim arising out of or based upon the failure to disclose
the issuance of the shares to the founders and (ii) in the event that as a
result of any such claim, the Company is required to issue additional shares of
Common Stock, the founders have agreed to deliver an equal number of shares of
Common Stock to the Company for cancellation.
The Company is from time to time the subject of complaints or litigation in
the ordinary course of its business. The Company believes that the lawsuits,
claims and other legal matters to which it has become subject are not material
to the Company's financial condition or results of operations, but an existing
or future lawsuit or claim resulting in an adverse decision against the Company
could have a material adverse effect on the Company's financial condition and
results of operations.
NOTE I--RELATED PARTY TRANSACTIONS
The Company has entered into an agreement with a related party which
provides for monthly royalty payments based upon a sliding scale percentage of
the Company's monthly net revenues. Royalties paid for the years ended April 30,
1996 and 1995 totaled approximately $111,800 and $91,300. This agreement
terminates at the earliest of the following occurrences: (a) the closing of an
initial public offering of the Company's common stock in excess of $4,000,000,
(b) the sale of substantially all of the Company's assets or common stock to
third party, or certain other conditions.
NOTE J--STOCK OPTIONS
The following option information has been adjusted to reflect the change
required by the merger of Second ITC Corporation in November 1995. In November
1993, as an inducement to loan the Company $190,000, the Company issued stock
options to purchase 90,505 shares of the Company's common stock for $1.05 per
share. Options to purchase 80,978 shares of the Company's common stock have been
exercised as of April 30 ,1996. The remaining options expire in November 1997.
In February 1994, the Company issued stock options to purchase 19,054
shares of common stock for $.53 per share to employees of the Company. None of
these options were exercised during the year ended April 30, 1996.
In February 1994, the Company issued stock options to purchase 47,635
shares of common stock for $.50 per share to an officer of the Company. These
options were exercised during the year ended April 30, 1996.
In September 1995, as an inducement to loan the Company $100,000, the
Company issued stock options to a director and an unaffiliated third party to
purchase 47,635 shares of the Company's common stock at $3.15 per share. These
options expire on September 30, 1997. None of these options were exercised at
April 30, 1996. See also Note E.
F-14
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE J--STOCK OPTIONS--(CONTINUED)
At April 30, 1996, there were unexercised options to purchase 76,216 shares
of the Company's common stock outstanding (all of which were exercisable) as
follows:
<TABLE>
<CAPTION>
OPTIONS EXERCISE
DATE OPTIONS GRANTED OUTSTANDING PRICE
- -------------------- ----------- --------
<S> <C> <C>
November, 1993...... 9,527 $ 1.05
February, 1994...... 19,054 $ .53
September, 1995..... 47,635 $ 3.15
-----------
76,216
-----------
-----------
</TABLE>
NOTE K--SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Cash paid during the year for interest.............................. $ 37,612 $ 21,687
-------- ----------
-------- ----------
Cash paid during the year for taxes................................. $ 8,312 $ 5,000
-------- ----------
-------- ----------
Noncash financing activities:
Purchase of stock................................................. $ 32,000 $ --
Less: Debt incurred............................................... 24,000 --
-------- ----------
Cash payments for the purchase of stock........................ $ 8,000 $ --
-------- ----------
-------- ----------
Property and equipment acquired under capital lease obligations... $ -- $ 25,511
-------- ----------
-------- ----------
Issuance of 200,000 shares in connection with acquisition of AIT
(see Note O)...................................................... $ -- $1,400,000
-------- ----------
-------- ----------
</TABLE>
NOTE L--SETTLEMENT AGREEMENTS
In June 1993, the Company settled certain billing disputes with AT&T and
executed a settlement agreement which resulted in a gain of approximately
$500,000. The Company then paid down the agreed upon balance in fiscal 1994 and
1995 to the present balance of approximately $548,000. The Company is currently
in default under its payment obligations to AT&T.
NOTE M--EQUITY
The Company is authorized to issue 1,000,000 shares of preferred stock,
none of which has been issued. The preferred stock, if and when issued, is
entitled to receive a noncumulative dividend of $1.00 per share, and no
dividends may be paid on the common stock during any fiscal year until such
$1.00 per share dividend has been declared to preferred stockholders.
On December 3, 1996, the Board of Directors approved an increase in
authorized stock, subject to stockholder approval, to 14 million shares. Common
stock will be increased from 5,000,000 to 12,000,000 shares and preferred stock
will increase from 1,000,000 to 2,000,000 shares.
F-15
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE N--RISKS AND UNCERTAINTIES
The Company's operations are based upon agreements with a limited number of
long-distance carriers who provide access to phone lines and transmission
facilities. The carriers also provide call data records, and in the case of
Tel-Save, the carrier also bills the Company's customers on the Company's
behalf. The Company is dependent upon such carriers for such services, and there
is a reasonable possibility that there could be equipment failures or other
service interruptions that could materially affect the Company. Such delays
could result in postponed or possibly lost sales, which could adversely affect
operating results.
The Company's amortization method for customer acquisition costs is based
on management's best estimate of the period of time and amounts of revenue to be
derived from each applicable customer base. The Company cannot predict customer
attrition rates with absolute certainty so it is reasonably possible that such
amortization may need to be increased in the future.
NOTE O--SUBSEQUENT EVENTS
Stock Option Plan
In October 1996, the Company's board of directors approved a Stock Option
Plan (the 'Plan'). The Plan was approved by the shareholders of the Company in
February 1997. The Plan permits the granting of stock options to eligible
participants. The Plan permits the granting of both incentive stock options
(which are entitled to certain favorable treatment under the Internal Revenue
Code of 1986) and nonqualified stock options (i.e., options which are not
intended to be incentive stock options). A total of 600,000 shares of Common
Stock will be available for issuance. Employees and consultants of the Company
and its subsidiaries are eligible to be selected to receive options. The Plan
also provides for the automatic grant of stock options to nonemployee members of
the Company's Board of Directors. Nonemployee director options will be granted
pursuant to an automatic, nondiscretionary formula. Options to purchase an
aggregate of 526,500 shares of Common Stock have been issued under the Plan.
Acquisitions
In May 1996, the Company purchased, for $207,000, the stock and assets,
including the customer base, of Gulf Communications Service, Inc. ('Gulf') in
consideration of $25,000 in cash and the assumption of a promissory note in the
principal amount of $182,000. Gulf has switching equipment which allows it to
act as an international call back and call through provider. The promissory note
of $182,000 is payable monthly installments of $10,000 through February 1, 1998.
In July 1996, the Company entered into a Purchase Agreement and Plan of
Exchange with Adventures-in-Telecom, Inc. ('AIT') whereby the Company purchased
100% of the common stock of AIT. AIT is a non-facilities based reseller of long
distance communication services. The purchase price was comprised of $5,271,230
in cash and 200,000 restricted shares of common stock of the Company. In
December 1996, the Company agreed with the former shareholders of AIT to cancel
45,000 of the 50,000 shares that were subject to the holdback provisions, in
settlement of certain claims by the Company against the AIT shareholders.
Acquisition Financing
The Company, to finance the AIT acquisition, issued a note payable to
Tel-Save in July 1996 for $5,521,230. This note bears interest at 6.5% per annum
and matures in July 1997. Included in the face of the note are amounts due to
the lending corporation at April 30, 1996 that aggregate $250,000. These amounts
are reflected in accounts payable--carrier at April 30, 1996. To induce Tel-Save
to provide the financing needed to
F-16
<PAGE>
GROUP LONG DISTANCE, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
TWO YEARS ENDED APRIL 30, 1996 AND FOR THE EIGHT
MONTHS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION RELATING TO THE EIGHT MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
NOTE O--SUBSEQUENT EVENTS--(CONTINUED)
purchase AIT, the Company issued a warrant to purchase 300,000 shares of common
stock of the Company at $5.75 per share and a warrant to purchase 50,000 shares
of common stock of the Company at $5.00 per share. Both warrants are exercisable
through July 2001 and subject to certain registration rights.
The Company's loan agreement with Tel-Save was amended in February 1997 to
provide for the repayment of the Acquisition Loan in monthly payments of
$125,000 plus interest, beginning after September 1997, provided that this
offering is consummated by April 15, 1997. In the event that this offering is
not consummated by such date, the loan agreement would revert to the original
terms and obligate the Company to pay the difference between the aggregate
amount of payments made and the aggregate amount it would have paid had it made
monthly payments of $500,000 since July 1996 and to continue to make monthly
payments of $500,000 through July 1997.
In January 1997, the Company purchased from Great Lakes (i) a customer base
consisting of approximately 7,000 customers that were subject to an agreement
between Great Lakes and Tel-Save and (ii) a warrant to purchase 200,000 shares
of Common Stock of Tel-Save in consideration of $1,200,000 in cash. In
connection with such acquisition, the Company borrowed $1,200,000 from Tel-Save.
In January 1997, Tel-Save repurchased the Tel-Save Warrants from the Company in
consideration of $1,800,000 and credited the Company with such amount
($1,200,000 toward the Great Lakes acquisition and $600,000 toward the Company's
outstanding principal balance under the Acquisition Loan). The $600,000
reduction of debt has been accounted for as a contribution to paid-in-capital by
Tel-Save. No value has been assigned to the customer base acquired from Great
Lakes.
Accounts Payable Conversion
In June 1996, the Company converted certain accounts payable to WorldCom
into a promissory note in the principal amount of $566,917 bearing interest at a
rate of 15% per annum. In December 1996, the Company cancelled the prior note
and converted additional accounts payable to WorldCom into a single promissory
note in principal amount of $1,253,798 bearing interest at the rate of 16% per
annum. The promissory note provides for the Company to make equal monthly
payments of $113,758 to WorldCom until December 20, 1997.
Public Offering
The Board has authorized the filing of a registration statement relating to
a public offering of 1,250,000 shares of Common Stock and 1,250,000 redeemable
common stock purchase warrants ('Redeemable Warrants'). In addition to the
issuance and sale of 1,250,000 shares of Common Stock, up to 187,500 additional
shares and/or 187,500 Redeemable Warrants may be sold by the underwriters
pursuant to an over-allotment option.
Note Payable
In May 1996, the Company entered into an agreement with a financial
institution to borrow $50,000. The loan bears interest at the prime rate plus 2%
and matures on May 2, 1997. The loan is collateralized by all the Company's
equipment, machinery, furniture and intangibles and is personally guaranteed by
the Company's president.
F-17
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Group Long Distance, Inc.
We have audited the accompanying Historical Statements of Income and Direct
Operating Expenses exclusive of items not comparable to the proposed future
operations of the customer base of Adventures in Telecom, Inc. for each of the
two years in the period ended April 30, 1996. These statements are the
responsibility of the management of Group Long Distance, Inc. Our responsibility
is to express an opinion on these 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 statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in the registration statement on Form SB-2 of Group Long Distance, Inc.) as
described in Note A and are not intended to be a complete presentation of
Adventures in Telecom, Inc.'s revenues and expenses.
In our opinion, the statements referred to above present fairly, in all material
respects, the operating income and direct operating expenses described in Note A
of Adventures in Telecom, Inc. for each of the two years in the period ended
April 30, 1996 in conformity with generally accepted accounting principles.
Fort Lauderdale, Florida GRANT THORNTON LLP
October 4, 1996
F-18
<PAGE>
ADVENTURES IN TELECOM, INC.
HISTORICAL STATEMENTS OF INCOME AND DIRECT OPERATING
EXPENSES EXCLUSIVE OF ITEMS NOT COMPARABLE TO THE
PROPOSED FUTURE OPERATIONS OF THE CUSTOMER BASE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED APRIL
30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Revenues........................................................................... $24,502,517 $11,256,362
Direct operating expenses
Telephone expense................................................................ 17,606,574 8,295,237
----------- -----------
Operating income exclusive of items not comparable to the proposed future
operations of the property.................................................... $ 6,895,943 $ 2,961,125
----------- -----------
----------- -----------
</TABLE>
NOTE A--ORGANIZATION AND BASIS OF PRESENTATION
Adventures-in-Telecom, Inc. ('AIT') is a corporation formed to hold a
customer base (which is broken down by groups called 'partitions') that was
acquired from a division of another telecommunications company. These operations
are not divisible from the larger entity, and complete financial information is
not readily available for AIT's operations nor is it comparable to the proposed
future operations of this customer base. Accordingly, it is impracticable to
prepare the full financial statements required by Regulation S-X. The audited
statements include only the direct income and direct operating expense of
servicing this customer base. Amounts of selling general, and administrative
expenses expected after the acquisition are reflected in the pro forma
statements of operations.
NOTE B--REVENUES
In 1995, the servicing of certain customer partitions began at different
times throughout the year. However, during 1996 the majority of these customer
partitions were serviced for the entire year. As a result, revenues increased
significantly in 1996 as compared to 1995.
F-19
<PAGE>
GROUP LONG DISTANCE, INC.
PRO FORMA FINANCIAL STATEMENTS
In July 1996, Group Long Distance, Inc. ('GLD') acquired
Adventures-in-Telecom, Inc., ('AIT') whose assets consisted of a customer base
of approximately 30,000 customers and related accounts receivable.
The following unaudited pro forma statement of operations for the year
ended April 30, 1996, and the eight months ended December 31, 1996 are presented
as if Group Long Distance had acquired AIT on May 1, 1995. Selling, general, and
administrative expenses have been adjusted to reflect the incremental costs to
operate this customer base within GLD's organizational structure. No pro forma
balance sheet has been presented since the acquisition occurred prior to
December 31, 1996.
Pro forma information is not necessarily indicative of what the Company's
results of operations actually would have been if these transactions had in fact
occurred on the dates indicated.
F-20
<PAGE>
GROUP LONG DISTANCE, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED APRIL 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
GROUP LONG ADVENTURES
DISTANCE IN TELECOM PRO FORMA TOTAL
INC. INC. ADJUSTMENTS PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues......................................... $12,364,643 $24,502,517 $ -- $36,867,160
Cost of sales.................................... 9,009,131 17,606,574 -- 26,615,705
----------- ----------- ----------- -----------
Gross profit................................... 3,355,512 6,895,943 -- 10,251,455
----------- ----------- ----------- -----------
Selling, general and administrative expenses..... 2,968,597 -- 600,000(1) 9,269,162
735,076(2)
153,141(3)
205,348(4)
365,000(5)
4,242,000(6)
Interest expense (net)........................... 19,050 -- 342,000(7) 361,050
----------- ----------- ----------- -----------
Earnings before income taxes................... 367,865 6,895,943 (6,642,565) 621,243
Income tax expense............................... 169,900 -- 548,665(8) 718,565
----------- ----------- ----------- -----------
Net earnings (loss)............................ $ 197,965 $ 6,895,943 $(7,191,230) $ (97,322)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings (loss) per common and common equivalent
share.......................................... $ .10 $ (.04)
----------- -----------
----------- -----------
Weighted average number of shares outstanding.... 2,018,474 155,000 2,173,474
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------
1) To record commission expense payable to agents on '800' and '1
plus' revenues.
2) To record provision for bad debt on additional revenues. This provision is
based on the Company's historical experience of 3% of revenues.
3) In connection with the AIT Acquisition, the Company entered into a
management contract with Telscape International, Inc. ('Telscape'), pursuant
to which the Company paid a fee of 1.5% of gross monthly billing to Telscape
for management services, including handling of inbound customer service
calls, processing of customer adjustments, calculation of commissions and
coordination of agent accounts. The management contract was terminated in
September 1996. The pro forma presentation has been adjusted to record a
management fee expense equal to 1.5% of revenues in accordance with the
management contract.
4) To record payroll expense for new customer service, accounting and
management employees to be hired after the expiration of the management
contract (see 3 above).
5) To record miscellaneous selling, general and administrative expenses. This
amount includes estimates for telephone system upgrades and related charges,
computer system upgrades, advertising, professional fees and other items.
6) To record amortization expense of the AIT customer base acquisition cost.
7) To record interest on the Acquisition Loan.
8) To record taxes on additional pre-tax income.
F-21
<PAGE>
GROUP LONG DISTANCE, INC.
PRO FORMA STATEMENT OF OPERATIONS
FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
STATEMENT ADVENTURES IN PRO FORMA TOTAL
OF OPERATIONS TELECOM, INC. ADJUSTMENTS PRO FORMA
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues............................................ $ 15,069,300 $ 1,549,888 $ -- $16,619,188
Cost of sales....................................... 10,848,880 1,120,445 -- 11,969,325
------------- ------------- ----------- -----------
Gross profit...................................... 4,220,420 429,443 -- 4,649,863
------------- ------------- ----------- -----------
Selling, general and administrative expenses........ 5,705,053 -- 35,579(1) 6,194,297
46,497(2)
23,248(3)
30,420(4)
353,500(5)
Interest expense, net............................... 264,417 -- 28,239(6) 292,656
------------- ------------- ----------- -----------
Earnings before income taxes...................... (1,749,050) 429,443 (517,483) (1,837,090)
Income tax expense.................................. -- -- -- --
------------- ------------- ----------- -----------
Net earnings...................................... $ (1,749,050) $ 429,443 $ (517,483) $(1,837,090)
------------- ------------- ----------- -----------
------------- ------------- ----------- -----------
Earnings per common and common equivalent share..... $ (.79) $ (.81)
------------- -----------
------------- -----------
Weighted average number of shares outstanding....... 2,222,917 38,905 2,261,822
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
- ------------------
1) To record commission expense payable to agents on '800' and '1 plus'
revenues.
2) To record provision for bad debt on additional revenues. This provision is
based on the Company's historical experience of 3% of revenues.
3) In connection with the AIT Acquisition, the Company entered into a
management contract with Telscape, pursuant to which the Company paid a fee
of 1.5% of gross monthly billing to Telscape for management services. The
management contract was terminated in September 1996. The pro forma
presentation has been adjusted to record a management fee expense equal to
1.5% of revenues in accordance with the management contract.
4) To record miscellaneous selling, general and administrative expenses. This
amount includes estimates for telephone system upgrades and related charges,
computer system upgrades, advertising, professional fees and other items.
5) To record amortization expense of the AIT customer base acquisition cost.
6) To record interest on the AIT Acquisition Loan.
F-22
<PAGE>
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Concurrent Offering............................ 15
Use of Proceeds................................ 16
Price Range of Common Stock.................... 17
Capitalization................................. 18
Dilution....................................... 19
Selected Financial Data........................ 20
Pro Forma Financial Statements................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 31
Management..................................... 41
Principal Stockholders......................... 45
Certain Transactions........................... 47
Description of Securities...................... 49
Shares Eligible for Future Sale................ 50
Underwriting................................... 52
Legal Matters.................................. 53
Experts........................................ 53
Additional Information......................... 54
Index to Financial Statements.................. F-1
</TABLE>
------------------------
[LOGO] GROUP LONG DISTANCE, INC.
1,250,000 SHARES OF COMMON STOCK
AND
1,250,000 REDEEMABLE WARRANTS
------------------------
PROSPECTUS
------------------------
LT LAWRENCE & CO., INC.
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such state.
[(ALTERNATE PAGES FOR SELLING SHAREHOLDER PROSPECTUS)]
SUBJECT TO COMPLETION DATED MARCH 3, 1997
PROSPECTUS
[LOGO] GROUP LONG DISTANCE, INC.
350,000 SHARES OF COMMON STOCK
------------------------
All of the 350,000 shares of Common Stock (the 'Common Stock') of Group
Long Distance, Inc. (the 'Company') offered hereby are being sold by a Selling
Shareholder named herein. The Company will not receive any of the proceeds from
the sale of the shares offered hereby.
There has been a limited trading market for the Common Stock, and there can
be no assurance that any regular market will develop. The Common Stock is traded
on the OTC Bulletin Board under the symbol 'GLDT.' Application has been made to
quote the Common Stock on the Nasdaq SmallCap Market ('Nasdaq') under the symbol
'GLDI'. The last reported sale price for the Common Stock on February 26, 1997,
was $4.50. See 'Price Range of Common Stock.'
The distribution of shares of Common Stock, offered hereby by the Selling
Shareholder may be effected in one or more transactions that may take place on
the over-the-counter market, including ordinary broker's transactions, privately
negotiated transactions or through sales to one or more dealers for sale of such
securities as principals, at market prices prevailing at the time of sale, at
prices relating to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Shareholder.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION. SEE 'RISK FACTORS' BEGINNING ON
PAGE 7 AND 'DILUTION.'
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Selling Shareholder 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 commissions received may be deemed underwriting
compensation.
The Company will not receive any of the proceeds from the sale of the
shares of the Common Stock, by the Selling Shareholder, although it will receive
proceeds from the exercise of the Warrants. Expenses of this offering, other
than fees and expenses of counsel to the Selling Shareholder and selling
commissions, will be paid by the Company. See 'Plan of Distribution.'
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 1,250,000 shares of Common Stock
and 1,250,000 Redeemable Common Stock Purchase Warrants and up to an additional
187,500 shares of Common Stock and/or 187,500 Redeemable Common Stock Purchase
Warrants 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 $4,517,500 from the sale of the shares of Common
Stock included in the underwritten public offering, and will receive
approximately $750,375 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. See 'Concurrent
Offering.'
<PAGE>
[ALTERNATE]
THE OFFERING
<TABLE>
<S> <C>
Securities offered................................ 350,000 shares of Common Stock.
Common Stock outstanding.......................... 3,462,353 shares(1)
Use of Proceeds................................... The Company intends to use the proceeds from the exercise of
the Warrants for working capital and general corporate
purposes.
Risk Factors...................................... The Common Stock offered hereby involve a high degree of risk
and immediate and substantial dilution. See 'Risk Factors' and
'Dilution.'
Proposed Nasdaq Symbol(2)
Common Stock.................................... GLDI
</TABLE>
- ------------------
(1) Assumes the issuance of 1,250,000 shares of Common Stock to be issued in
connection with an underwritten public offering by the Company. Does not
include: (i) 76,216 shares of Common Stock issuable upon exercise of
outstanding options at a weighted average exercise price of $2.23 per
share;(ii) 526,500 shares of Common Stock issuable upon exercise of options
to be granted under the Company's stock option plan (the 'Stock Option
Plan') at an exercise price of $5.0625 per share; and (iii) 73,500 shares
reserved for the exercise of options available for future grant under the
Stock Option Plan. See 'Management--Stock Option Plan.'
(2) The Common Stock is traded on the OTC Bulletin Board under the symbol
'GLDT.' In connection with this offering, application has been made to list
the Common Stock on Nasdaq. See 'Price Range of Common Stock.'
5
<PAGE>
[ALTERNATE]
CONCURRENT OFFERING
On the date of this Prospectus, a registration statement including a
prospectus of even date filed under the Securities Act with respect to an
underwritten public offering by the Company of 1,250,000 shares of Common Stock
and 1,250,000 Redeemable Common Stock Purchase Warrants and up to an additional
187,500 shares of Common Stock and/or 187,500 Redeemable Common Stock Purchase
Warrants 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 $4,517,500 from the sale of the shares of Common
Stock included in the underwritten public offering, and will receive
approximately $750,375 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.
15
<PAGE>
[ALTERNATE]
PLAN OF DISTRIBUTION
The Selling Shareholder has advised the Company that it may from time to
time sell all or a portion of the Shares offered hereby in one or more
transactions in the over-the-counter market, on the NASDAQ SmallCap Market, on
any exchange on which the Common Stock may then be listed, in negotiated
transactions or otherwise, or a combination of such methods of sale, at market,
prices prevailing at the time of sale or prices related to such prevailing
market prices or at negotiated prices. The Selling Shareholder may effect such
transactions by selling the Shares to or through broker-dealers, and such
broker-dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Selling Shareholder and/or purchasers of the
Shares for whom they may act as agent (which compensation may be in excess of
customary commissions). In connection with such sales, the Selling Shareholder
and any broker-dealers or agents participating in such sales may be deemed to be
underwriters as that term is defined under the Securities Act. Neither the
Company nor the Selling Shareholder can presently estimate the amount of
commissions or discounts, if any, that will be paid by the Selling Shareholders
on account of their sales of the Shares from time to time. The Shares are
subject to an agreement between the holders thereof and the Representative
restricting the sale thereof within the six months from the date of this
Prospectus without the prior written consent of the Representative.
Under the securities laws of certain states, the Shares may be sold in such
states only through registered or licensed broker-dealers or pursuant to
available exemptions from such requirements. In addition, in certain states the
Shares may not be sold therein unless the Shares have been registered or
qualified for sale in such state or an exemption from such requirement is
available and satisfied.
The Company will pay certain expenses in connection with this offering,
estimated to be approximately $ , but will not pay for any underwriting
commissions and discounts, if any, or counsel fees or expenses of the Selling
Shareholder. The Company has agreed to indemnify the Selling Shareholder, its
directors, officers, agents and representatives, and any underwriters, against
certain liabilities, including certain liabilities under the Securities Act.
The Selling Shareholder has also agreed to indemnify the Company, its
directors, officers, agents and representatives against certain liabilities,
including liabilities under the Securities Act. The Selling Shareholder and
other persons participating in the distribution of the Shares offered hereby are
subject to the applicable requirements of Rule 10b-6 promulgated under the
Exchange Act in connection with sales of the Shares.
16
<PAGE>
[ALTERNATE]
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE SELLING SHAREHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 7
Concurrent Offering............................ 15
Plan of Distribution........................... 16
Price Range of Common Stock.................... 17
Capitalization................................. 18
Dilution....................................... 19
Selected Financial Data........................ 20
Pro Forma Financial Statements................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 24
Business....................................... 31
Management..................................... 41
Principal Stockholders......................... 45
Certain Transactions........................... 47
Description of Securities...................... 49
Shares Eligible for Future Sale................ 50
Underwriting................................... 51
Legal Matters.................................. 52
Experts........................................ 52
Additional Information......................... 53
Index to Financial Statements.................. F-1
</TABLE>
------------------------
[LOGO] GROUP LONG DISTANCE, INC.
350,000 SHARES OF COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1997
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
for in such statute. The Registrant's Articles of Incorporation provide that the
Registrant shall indemnify and may insure its officers and directors to the
fullest extent not prohibited by law. The Registrant has also entered into an
agreement (the form of which is filed as Exhibit 10.25 hereto) with each of its
directors and executive officers wherein it has agreed to indemnify each of them
to the fullest extent permitted by law. In general, Florida law permits a
Florida corporation to indemnify its directors, officers, employees and agents,
and persons serving at the corporation's request in such capacities for another
enterprise, against liabilities arising from conduct that such persons
reasonably believed to be in, or not opposed to, the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
Pursuant to the Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement, the Underwriter has agreed to indemnify the directors,
officers and controlling persons of the Registrant against certain civil
liabilities that may be incurred in connection with the offering, including
certain liabilities under the Securities Act of 1933, as amended.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the securities being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration Fee....................................... $ 5,371.22
NASD Filing Fee............................................ 2,272.50
Nasdaq Listing Fee......................................... 10,000.00
Printing Costs............................................. 60,000.00
Legal Fees and Expenses.................................... 250,000.00
Accounting Fees and Expenses............................... 80,000.00
Blue Sky Fees and Expenses................................. 40,000.00
Transfer Agent and Registrar Fees.......................... 5,000.00
Miscellaneous.............................................. $ 32,356.28
-----------
Total................................................. $485,000.00
-----------
-----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In July 1996, the Company acquired all of the common stock of
Adventures-in-Telecom, Inc. ('AIT'). The Company paid $5,271,230 and issued
155,000 shares of the Company's Common Stock. In connection with the acquisition
of AIT, the Company obtained a loan from Tel-Save, Inc. In connection with the
loan, the Company issued a warrant to Tel-Save Holdings, Inc., an affiliate of
Tel-Save, to purchase 300,000 shares of Common Stock at an exercise price of
$5.75 per share, exercisable until July 2001. In November 1996, in connection
with an amendment of the loan and of the Company's services agreement with
Tel-Save, the Company issued a five-year warrant to Tel-Save Holdings, Inc. to
purchase 50,000 shares of Common Stock at an exercise price of $5.00 per share.
In September 1995, as an inducement to loan the Company $100,000, the
Company issued stock options to a director and an unaffiliated third party to
purchase 47,635 shares of the Company's Common Stock at $3.15 per share. These
options expire on September 30, 1997.
In September of 1995 through January of 1996, the Company issued an
aggregate of 80,798 unregistered shares of Common Stock to shareholders pursuant
to the exercise of options granted in November of 1991 for aggregate gross
proceeds of $85,000.
II-1
<PAGE>
In September of 1995 through January of 1996, the Company issued an
aggregate of 19,054 unregistered shares of Common Stock to shareholders pursuant
to the exercise of options granted in July 15, 1991 for aggregate gross proceeds
of $10,000.
In October of 1995, the Company issued 47,635 unregistered shares of Common
Stock to Gerald M. Dunne, Jr., the Company's President and Chief Executive
Officer, in consideration of services rendered.
In February of 1995, the Company issued 9,527 unregistered shares of Common
Stock to a director of the Company pursuant to the exercise of options granted
in July of 1993 for gross proceeds of $10,000.
In January of 1995, the Company issued 953 unregistered shares of Common
Stock to a director of the Company pursuant to the exercise of options granted
in January 1992 for gross proceeds of $1,000.
In January through February of 1995, the Company issued an aggregate of
39,060 unregistered shares of Common Stock to shareholders pursuant to the
exercise of options granted in January of 1992 for aggregate gross proceeds of
$21,000.
In December of 1994, the Company issued 11,432 unregistered shares of
Common Stock to a shareholder for gross proceeds of $15,000.
In June through October of 1994, the Company issued an aggregate of 4,287
unregistered shares of Common Stock to shareholders pursuant to the exercise of
options granted in November of 1991, for aggregate gross proceeds of $4,500.
In April through December of 1994, the Company issued an aggregate of
114,323 unregistered shares of Common Stock to shareholders pursuant to options
granted in June of 1991 for aggregate gross proceeds of $60,000.
The issuances described above were deemed exempt from registration under
the Securities Act in reliance on Section 4(2) of the Securities Act as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the
Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------------
<S> <C>
++++1.1 -- Form of Underwriting Agreement.
*2.1 -- Plan and Agreement of Merger of Group Long Distance, Inc. into Registrant.
*2.2 -- Articles of Merger of Group Long Distance, Inc. into the Company.
+++2.3 -- Amended and Restated Articles of Merger of Group Long Distance, Inc. into the Company.
*3.1 -- Articles of Incorporation of the Company.
++++3.2 -- Amended and Restated Articles of Incorporation of the Company.
*3.3 -- By-laws of the Company.
++++3.4 -- Amended and Restated By-laws of the Company.
++++4.1 -- Form of Representative's Warrant Agreement including Form of Warrant Certificates.
++++4.2 -- Form of Redeemable Warrant Agreement including form of Warrant Certificate.
++5.1 -- Opinion of Kipnis Tescher Lippman Valinsky & Kain with respect to the legality of the Common
Stock.
***10.1 -- Partition Agreement between Registrant and Tel-Save, Inc. dated February 3, 1993 (including
Security and Assignment Agreement and Lock Box Agreement).
+++10.2 -- Purchase and Sale Agreement between Registrant and Rockwell Communications, Inc. dated February
24, 1994.
+++10.3 -- Purchase Agreement between Registrant and ACTI, Inc. dated June 1994.
****10.4 -- Reseller Agreement between Registrant and Touchtone Network, Inc. dated March 30, 1995.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ----------- ------------------------------------------------------------------------------------------------------
<S> <C>
**10.5 -- Reseller agreement between Registrant and ARN Communications Corporation dated April 13, 1995.
**10.6 -- Loan Agreement between Registrant and Gateway American Bank of Florida dated June 7, 1995.
**10.7 -- Promissory Note payable to John L. Tomlinson and Philip C. Cezeaux, dated September 25, 1995.
+++10.8 -- Purchase Agreement between Registrant and Touchtone Network, Inc. dated October 11, 1995.
+++10.9 -- Addendum to the Purchase Agreement between Registrant and Touchtone Network, Inc. dated November
21 and 22, 1995.
+++10.10 -- Lease Agreement between Registrant and Chantilly Management Corporation regarding 1555 Howell
Branch Road, Winter Park, Florida dated December 31, 1995.
**10.11 -- Commission Agreement between Registrant and Global Telecom Network, Inc. regarding Target
Stores, a division of Dayton Hudson Corporation, dated February 1, 1996.
+++10.12 -- Second Amendment and Renewal of Lease between Registrant and Gateway Investments Corporation
regarding 1451 West Cypress Creek Road, Fort Lauderdale, Florida dated February 5, 1996.
***10.13 -- Network Services Agreement between Registrant and UUNET Technologies, Inc. dated February 9,
1996.
+++10.14 -- Rebiller Services Agreement between Registrant and WorldCom, Inc. dated February 22, 1996.
+++10.15 -- Acknowledgement, Agreement and Release between Registrant and Touchtone Network, Inc. dated
March 1996.
+++10.16 -- Switched Reseller Services Agreement between Registrant and Phone One, Inc. (Intermedia
Communications Inc.) dated April 10, 1996.
+++10.17 -- Purchase Agreement between Registrant and Mr. Larry C. Cornwell regarding Gulf Communications
Services, Inc. dated May 1, 1996.
+++10.18 -- Loan Agreement between Registrant and Gateway American Bank of Florida dated May 2, 1996.
+++10.19 -- Promissory Note payable by Registrant to WorldCom, Inc. dated June 6, 1996.
****10.20 -- Purchase Agreement and Plan of Exchange between Registrant and Adventures-in-TeleCom, Inc. dated
July 3, 1996.
****10.21 -- Loan Agreement between Registrant and Tel-Save Inc. dated July 11, 1996.
+++10.22 -- Consent and Amendment between Tel-Save, Inc., and Registrant dated December 2, 1996.
+++10.23 -- Common Stock Purchase Warrant to purchase 50,000 Shares of Common Stock granted to Tel-Save
Holdings, Inc., by Registrant, dated December 2, 1996.
+++10.24 -- Line of Credit Agreement between Registrant and Gateway American Bank of Florida dated August 1,
1996.
++10.25 -- Employment agreement of Gerald M. Dunne, Jr. with Registrant.
++++10.26 -- 1996 Stock Option Plan.
++10.27 -- Form of Indemnification Agreement between Registrant and each of its directors and executive
officers.
++++10.28 -- Amended Promissory Note payable by Registrant to WorldCom, Inc. dated December 20, 1996.
+++11.1 -- Statement re: computation of per share earnings.
+16.1 -- Letter on change in certifying accountant.
+++21.1 -- Subsidiaries of Registrant.
+++23.1 -- Consent of Grant Thornton LLP, certified public accountants.
+++23.2 -- Consent of Timothy Hohl Company P.A., certified public accountants.
+++23.3 -- Consent of Orrick, Herrington & Sutcliffe LLP.
++23.4 -- Consent of Kipnis Tescher Lippman Valinsky & Kain (included in Exhibit Number 5.1).
+++27.1 -- Financial Data Schedule.
++++27.2 -- Financial Data Schedule.
</TABLE>
(Footnotes on next page)
II-3
<PAGE>
(Footnotes from previous page)
- ------------------
* Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(No. 33-99998) and incorporated by reference herein.
** Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 33-99998) and incorporated by reference
herein.
+++ Filed as an Exhibit to Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (No. 33-99998) and incorporated by reference
herein.
**** Filed as an Exhibit to the Company's report on Form 10-KSB dated August
12, 1996.
+ Filed as an Exhibit to the Company's report on Form 8-K dated June 10,
1996.
++ To be filed by amendment.
(b) Financial Statement Schedules
+++ Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(No. 333-17681) filed December 12, 1996 and incorporated by reference
herein.
++++ Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, as amended (the 'Act'), 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
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the 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 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant hereby 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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 3rd day of March, 1997.
GROUP LONG DISTANCE, INC.
By: /s/ GERALD M. DUNNE, JR.
----------------------------------
Gerald M. Dunne, Jr.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that the persons whose signatures appear
below each severally constitutes and appoints Gerald M. Dunne, Jr., as true and
lawful attorney-in-fact and agent, with full powers of substitution and
resubstitution, for them in their name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this Registration Statement, any registration
statement relating to the same offering as this Registration Statement that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as they might or could do in
person, hereby ratifying and confirming all which said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do, or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the registration statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------ ------------------------------------ ------------------------
<S> <C> <C>
/s/ GERALD M. DUNNE, JR. Chief Executive Officer March 3, 1997
------------------------------ (Principal Executive Officer)
Gerald M. Dunne, Jr.
* Chief Financial Officer March 3, 1997
------------------------------ (Principal Financial Officer)
Peter J. Russo
* Vice President and Secretary March 3, 1997
------------------------------
Andrea A. Morey
* Director March 3, 1997
------------------------------
Edward Harwood
* Director March 3, 1997
------------------------------
C. Shelton James
* Director March 3, 1997
------------------------------
Glenn S. Koach
* Director March 3, 1997
------------------------------
John L. Tomlinson
* By /s/ Gerald M. Dunne, Jr.
---------------------------
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- --------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
++++1.1 -- Form of Underwriting Agreement.
*2.1 -- Plan and Agreement of Merger of Group Long Distance, Inc. into Registrant.
*2.2 -- Articles of Merger of Group Long Distance, Inc. into the Company.
+++2.3 -- Amended and Restated Articles of Merger of Group Long Distance, Inc. into the Company.
*3.1 -- Articles of Incorporation of the Company.
++++3.2 -- Amended and Restated Articles of Incorporation of the Company.
*3.3 -- By-laws of the Company.
++++3.4 -- Amended and Restated By-laws of the Company.
++++4.1 -- Form of Representative's Warrant Agreement including Form of Warrant Certificates.
++++4.2 -- Form of Redeemable Warrant Agreement including form of Warrant Certificate.
++5.1 -- Opinion of Kipnis Tescher Lippman Valinsky & Kain with respect to the legality of the
Common Stock.
***10.1 -- Partition Agreement between Registrant and Tel-Save, Inc. dated February 3, 1993
(including Security and Assignment Agreement and Lock Box Agreement).
+++10.2 -- Purchase and Sale Agreement between Registrant and Rockwell Communications, Inc. dated
February 24, 1994.
+++10.3 -- Purchase Agreement between Registrant and ACTI, Inc. dated June 1994.
****10.4 -- Reseller Agreement between Registrant and Touchtone Network, Inc. dated March 30,
1995.
**10.5 -- Reseller Agreement between Registrant and ARN Communications Corporation dated April
13, 1995.
**10.6 -- Loan Agreement between Registrant and Gateway American Bank of Florida dated June 7,
1995.
**10.7 -- Promissory Note payable to John L. Tomlinson and Philip C. Cezeaux, dated September
25, 1995.
+++10.8 -- Purchase Agreement between Registrant and Touchtone Network, Inc. dated October 11,
1995.
+++10.9 -- Addendum to the Purchase Agreement between Registrant and Touchtone Network, Inc.
dated November 21 and 22, 1995.
+++10.10 -- Lease Agreement between Registrant and Chantilly Management Corporation regarding 1555
Howell Branch Road, Winter Park, Florida dated December 31, 1995.
**10.11 -- Commission Agreement between Registrant and Global Telecom Network, Inc. regarding
Target Stores, a division of Dayton Hudson Corporation, dated February 1, 1996.
+++10.12 -- Second Amendment and Renewal of Lease between Registrant and Gateway Investments
Corporation regarding 1451 West Cypress Creek Road, Fort Lauderdale, Florida dated
February 5, 1996.
***10.13 -- Network Services Agreement between Registrant and UUNET Technologies, Inc. dated
February 9, 1996.
+++10.14 -- Rebiller Services Agreement between Registrant and WorldCom, Inc. dated February 22,
1996.
+++10.15 -- Acknowledgement, Agreement and Release between Registrant and Touchtone Network, Inc.
dated March 1996.
+++10.16 -- Switched Reseller Services Agreement between Registrant and Phone One, Inc.
(Intermedia Communications Inc.) dated April 10, 1996.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION OF EXHIBITS PAGE NO.
- --------- -------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
+++10.17 -- Purchase Agreement between Registrant and Mr. Larry C. Cornwell regarding Gulf
Communications Services, Inc. dated May 1, 1996.
+++10.18 -- Loan Agreement between Registrant and Gateway American Bank of Florida dated May 2,
1996.
+++10.19 -- Promissory Note payable by Registrant to WorldCom, Inc. dated June 6, 1996.
****10.20 -- Purchase Agreement and Plan of Exchange between Registrant and Adventures-in-TeleCom,
Inc. dated July 3, 1996.
****10.21 -- Loan Agreement between Registrant and Tel-Save Inc. dated July 11, 1996.
+++10.22 -- Consent and Amendment between Tel-Save, Inc., and Registrant dated December 2, 1996.
+++10.23 -- Common Stock Purchase Warrant to purchase 50,000 Shares of Common Stock granted to
Tel-Save Holdings, Inc. by Registrant, dated December 2, 1996.
+++10.24 -- Line of Credit Agreement between Registrant and Gateway American Bank of Florida dated
August 1, 1996.
++10.25 -- Employment agreement of Gerald M. Dunne, Jr. with Registrant.
++++10.26 -- 1996 Stock Option Plan.
++10.27 -- Form of Indemnification Agreement between Registrant and each of its directors and
executive officers.
++++10.28 -- Amended Promissory Note payable by Registrant to WorldCom, Inc. dated December 20,
1996.
+++11.1 -- Statement re: computation of per share earnings.
+16.1 -- Letter on change in certifying accountant.
+++21.1 -- Subsidiaries of Registrant.
+++23.1 -- Consent of Grant Thornton LLP, certified public accountants.
+++23.2 -- Consent of Timothy Hohl Company P.A., certified public accountants.
+++23.3 -- Consent of Orrick, Herrington & Sutcliffe LLP.
++23.4 -- Consent of Kipnis Tescher Lippman Valinsky & Kain (included in Exhibit Number 5.1).
+++27.1 -- Financial Data Schedule.
++++27.2 -- Financial Data Schedule.
</TABLE>
- ------------------
* Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(No. 33-99998) and incorporated by reference herein.
** Filed as an Exhibit to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 33-99998) and incorporated by reference herein.
*** Filed as an Exhibit to Amendment No. 2 to the Company's Registration
Statement on Form SB-2 (No. 33-99998) and incorporated by reference herein.
**** Filed as an Exhibit to the Company's report on Form 10-KSB dated August 12,
1996.
+ Filed as an Exhibit to the Company's report on Form 8-K dated June 10,
1996.
++ To be filed by amendment.
+++ Filed as an Exhibit to the Company's Registration Statement on Form SB-2
(No. 333-17681) filed December 12, 1996 and incorporated by reference
herein.
++++ Filed herewith.
<PAGE>
GROUP LONG DISTANCE, INC.
1,250,000 Shares of Common Stock
(No Par Value)
and
Warrants to Purchase 1,250,000 Shares of Common Stock
UNDERWRITING AGREEMENT
LT Lawrence & Co., Inc. _______________, 1997
As Representative of the
Several Underwriters
3 New York Plaza
New York, New York 10004
Ladies and Gentlemen:
Group Long Distance, Inc., a Florida corporation (the
"Company"), proposes to issue and sell to the underwriters (the "Underwriters")
named in Schedule A, for which LT Lawrence & Co., Inc. is acting as
representative (the "Representative"), an aggregate of 1,250,000 shares of
common stock of the Company, no par value (the "Offered Shares"), which Offered
Shares are presently authorized but unissued shares of the common stock, no par
value (individually, a "Common Share" and collectively the "Common Shares"), of
the Company, and 1,250,000 Common Share purchase warrants (the "Offered
Warrants"), entitling the holder of each Offered Warrant to purchase, during the
two (2) year period commencing one year from the Effective Date (as hereinafter
defined), one (1) Common Share, at an exercise price of Five Dollars and Forty
Cents ($5.40) (subject to adjustment in certain circumstances). The Company
shall have the right, upon the consent of the Representative, to call each
Offered Warrant for redemption upon not less than thirty (30) days' written
notice at any time commencing one year from the Effective Date (as hereinafter
defined) at a redemption price of Ten Cents ($.10) per Offered Warrant;
provided, that the closing bid quotation of the Common Stock has been at least
125% (subject to adjustment) of the then effective exercise price of the
Warrants on all thirty (30) of the trading days ending on the third day prior to
the day on which the Company gives notice. In addition, the Underwriters, in
order to cover over-allotments in the sale of the Offered Shares and/or Offered
Warrants, may purchase up to
<PAGE>
an aggregate of 187,500 Common Shares (the "Optional Shares") and/or 187,500
Common Share purchase warrants (the "Optional Warrants") entitling the holder of
each Optional Warrant to purchase one (1) Common Share on the same terms as the
Offered Warrants. The Offered Shares and the Optional Shares are hereinafter
sometimes collectively referred to as the "Shares"; and the Offered Warrants and
the Optional Warrants are hereinafter sometimes collectively referred to as the
"Warrants." The Warrants will be issued pursuant to a Warrant Agreement (the
"Warrant Agreement") to be dated as of the Closing Date (as hereinafter defined)
by and among the Company, the Representative and Continental Stock Transfer &
Trust Company, as warrant agent (the "Warrant Agent").
The Company also proposes to issue and sell to the
Representative, for its own account and the accounts of its designees, warrants
(the "Representative's Warrants") to purchase up to an aggregate of 125,000
Common Shares (collectively, the "Underlying Shares") and/or 125,000 warrants
similar but not identical to the Warrants (collectively, the "Underlying
Warrants"), which sale will be consummated in accordance with the terms and
conditions of the form of Representative's Warrant Agreement filed as an exhibit
to the Registration Statement (as hereinafter defined). The Underlying Shares,
the Common Shares issuable upon exercise of the Warrants and the Common Shares
issuable upon exercise of the Underlying Warrants are hereinafter sometimes
referred to as the "Warrant Shares". The Shares, the Warrants, the Underwriter's
Warrants, the Underlying Warrants and the Warrant Shares (collectively, the
"Securities") are more fully described in the Registration Statement and the
Prospectus, as defined below.
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares and Offered Warrants.
On the basis of the representations and warranties herein contained, but subject
to the terms and conditions herein set forth, the Company hereby agrees to sell
the Offered Shares and Offered Warrants to the Underwriters, and the
Underwriters agree, severally and not jointly, to purchase the Offered Shares
and Offered Warrants from the Company, at a purchase price of $ per Offered
Share and $.___ per Offered Warrant. The Underwriters plan to offer the Offered
Shares and Offered Warrants to the public at a public offering price of $____
per Offered Share and $.___ per Offered Warrant.
-2-
<PAGE>
2. Payment and Delivery.
(a) Payment for the Offered Shares and Offered
Warrants will be made to the Company by wire transfer or certified or official
bank check or checks payable to its order in New York Clearing House funds, at
the offices of the Representative, 3 New York Plaza, New York, New York, against
delivery of the Offered Shares and Offered Warrants to the Underwriters. Such
payment and delivery will be made at 10:00 A.M., New York City time, on the
third business day following the Effective Date (the fourth business day
following the Effective Date in the event that trading of the Offered Shares and
Offered Warrants commences on the day following the Effective Date), the date
and time of such payment and delivery being herein called the "Closing Date."
The certificates representing the Offered Shares and Offered Warrants to be
delivered will be in such denominations and registered in such names as the
Representative may request not less than two full business days prior to the
Closing Date, and will be made available to the Representative for inspection,
checking and packaging at the office of the Company's transfer agent or
correspondent in New York City, Two Broadway, New York, New York not less than
one full business day prior to the Closing Date.
(b) On the Closing Date, the Company will sell the
Representative's Warrants to the Representative or to the Representative's
designees, limited to officers, directors and partners of the Representative
and/or the Underwriters, members of the selling group and/or their officers,
directors or partners (collectively, the "Representative's Designees"). The
Representative's Warrants will be in the form of, and in accordance with, the
provisions of the Representative's Warrant Agreement attached as an exhibit to
the Registration Statement. The aggregate purchase price for the
Representative's Warrants is ($137.50). The Representative's Warrants will be
restricted from sale, transfer, assignment or hypothecation for a period of one
(1) year from the Effective Date, except to the Representative's Designees.
Payment for the Representative's Warrants will be made to the Company by check
or checks payable to its order on the Closing Date against delivery of the
certificates representing the Representative's Warrants. The certificates
representing the Representative's Warrants will be in such denominations and
such names as the Representative may request prior to the Closing Date.
3. Option to Purchase Optional Shares and/or Optional
Warrants.
(a) For the purposes of covering any over- allotments
in connection with the distribution and sale of the
-3-
<PAGE>
Offered Shares and Offered Warrants as contemplated by the Prospectus, the
Underwriters are hereby granted an option to purchase all or any part of the
Optional Shares and/or Optional Warrants from the Company (which may be
exercised, at its option, by the Representative, individually). The purchase
price to be paid for the Optional Shares and Optional Warrants will be the same
price per Optional Share and Optional Warrant as the price per Offered Share or
Offered Warrant, as the case may be, set forth in Section 1 hereof. The option
granted hereby may be exercised by the Underwriters as to all or any part of the
Optional Shares and/or the Optional Warrants at any time within 45 days after
the Effective Date. The Underwriters will not be under any obligation to
purchase any Optional Shares or Optional Warrants prior to the exercise of such
option.
(b) The option granted hereby may be exercised by the
Representative by giving oral notice to the Company, which must be confirmed by
a letter, telex or telegraph setting forth the number of Optional Shares and
Optional Warrants to be purchased, the date and time for delivery of and payment
for the Optional Shares and Optional Warrants to be purchased and stating that
the Optional Shares and Optional Warrants referred to therein are to be used for
the purpose of covering over-allotments in connection with the distribution and
sale of the Offered Shares and Offered Warrants. If such notice is given prior
to the Closing Date, the date set forth therein for such delivery and payment
will not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two full business days thereafter. In either event, the date so set
forth will not be more than 15 full business days after the date of such notice.
The date and time set forth in such notice is herein called the "Option Closing
Date." Upon exercise of such option, the Company will become obligated to convey
to the Underwriters, and, subject to the terms and conditions set forth in
Section 3(d) hereof, the Underwriters will become obligated to purchase, the
number of Optional Shares and Optional Warrants specified in such notice.
(c) Payment for any Optional Shares and Optional
Warrants purchased will be made to the Company by wire transfer or certified or
official bank check or checks payable to its order in New York Clearing House
funds, at the office of the Representative, against delivery of the Optional
Shares and Optional Warrants purchased to the Underwriters. The certificates
representing the Optional Shares and Optional Warrants to be delivered will be
in such denominations and registered in such names as the Representative
requests not less than two full business days prior to the Option Closing Date,
and will be made
-4-
<PAGE>
available to the Representative for inspection, checking and packaging at the
aforesaid office of the Company's transfer agent or correspondent not less than
one full business day prior to the Option Closing Date.
(d) The obligation of the Underwriters to purchase
and pay for any of the Optional Shares or Optional Warrants is subject to the
accuracy and completeness (as of the date hereof and as of the Option Closing
Date) of and compliance in all material respects with the representations and
warranties of the Company herein, to the accuracy and completeness of the
statements of the Company or its officers made in any certificate or other
document to be delivered by the Company pursuant to this Agreement, to the
performance in all material respects by the Company of its obligations
hereunder, to the satisfaction by the Company of the conditions, as of the date
hereof and as of the Option Closing Date, set forth in Section 3(b) hereof, and
to the delivery to the Underwriter of opinions, certificates and letters dated
the Option Closing Date substantially similar in scope to those specified in
Section 5, 6(b), (c), (d), (e) and (f) hereof, but with each reference to
"Offered Shares," "Offered Warrants" and "Closing Date" to be, respectively, to
the Optional Shares, Optional Warrants and the Option Closing Date.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Florida,
with full power and authority, corporate and other, to own or lease, as the case
may be, and operate its properties, whether tangible or intangible, and to
conduct its business as described in the Registration Statement and to execute,
deliver and perform this Agreement, the Warrant Agreement and the
Representative's Warrant Agreement and to consummate the transactions
contemplated hereby and thereby. The Company is duly qualified to do business as
a foreign corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company. Other than Adventures-in- Telecom, Inc. and Gulf
Communications, Inc. (the "Subsidiaries"), the Company has no subsidiaries.
(b) Each Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority, corporate or other, to own or
lease and operate its properties and to conduct its business as described in the
-5-
<PAGE>
Registration Statement. Each Subsidiary is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
property of such Subsidiary or the Company. The Company owns all of the issued
and outstanding shares of capital stock of each Subsidiary and, except as
described in the Registration Statement and Prospectus, such shares are free and
clear of any security interests, liens, encumbrances, claims and charges, and
all of such shares have been duly authorized and validly issued and are fully
paid and nonassessable. There are no options or warrants for the purchase of, or
other rights to purchase, or outstanding securities convertible into or
exchangeable for, any capital stock or other securities of any Subsidiary.
(c) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, and each of the Warrant Agreement and the Representative's Warrant
Agreement, when executed and delivered by the Company on the Closing Date, will
be the valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms. The execution, delivery and
performance of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated and the compliance by the Company
with the terms of this Agreement, the Warrant Agreement and the Representative's
Warrant Agreement have been duly authorized by all necessary corporate action
and do not and will not, with or without the giving of notice or the lapse of
time, or both, (i) result in any violation of the Articles of Incorporation or
ByLaws, each as amended, of the Company; (ii) result in a breach of or conflict
with any of the terms or provisions of, or constitute a default under, or result
in the modification or termination of, or result in the creation or imposition
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company or any Subsidiary pursuant to any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary or any of
their respective properties or assets is or may be bound or affected; (iii)
violate any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any Subsidiary or any of their respective properties or
business; or (iv) have any effect on any permit, certification, registration,
approval, consent, order, license, franchise or other authorization
(collectively, "Permits") necessary for the Company or any Subsidiary to own or
lease and operate their respective
-6-
<PAGE>
properties and to conduct their respective businesses or the ability of the
Company to make use thereof.
(d) No Permits of any court or governmental agency or
body, other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, are required for (i) the valid authorization, issuance, sale and delivery
of the Shares and Warrants to the Underwriters, or (ii) the consummation by the
Company of the transactions contemplated by this Agreement, the Warrant
Agreement or the Representative's Warrant Agreement.
(e) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to Form SB-2 have
been satisfied with respect to the Company, the transactions contemplated herein
and in the Registration Statement. The Company has prepared in conformity with
the requirements of the Act and the rules and regulations (the "Regulations") of
the Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333-17681) on Form SB-2 and has
filed one or more amendments thereto, covering the registration of the
Securities under the Act, including the related preliminary prospectus or
preliminary prospectuses (each thereof being herein called a "Preliminary
Prospectus") and a proposed final prospectus. Each Preliminary Prospectus was
endorsed with the legend required by Item 501(a)(5) of Regulation S-B of the
Regulations and, if applicable, Rule 430A of the Regulations. Such registration
statement including any documents incorporated by reference therein and all
financial schedules and exhibits thereto, as amended at the time it becomes
effective, and the final prospectus included therein are herein, respectively,
called the "Registration Statement" and the "Prospectus," except that, (i) if
the prospectus filed by the Company pursuant to Rule 424(b) of the Regulations
differs from the Prospectus, the term "Prospectus" will also include the
prospectus filed pursuant to Rule 424(b), and (ii) if the Registration Statement
is amended or such Prospectus is supplemented after the date the Registration
Statement is declared effective by the Commission (the "Effective Date") and
prior to the Option Closing Date, the terms "Registration Statement" and
"Prospectus" shall include the Registration Statement as amended or
supplemented.
(f) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
-7-
<PAGE>
(g) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it is
filed with the Commission pursuant to Rule 424(b), and both documents as of the
Closing Date and the Option Closing Date, referred to below, will contain all
statements which 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 neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, on such
dates, will 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, except that this representation and warranty does not apply to
statements or omissions made in reliance upon and in conformity with information
furnished in writing to the Company in connection with the Registration
Statement or Prospectus or any amendment or supplement thereto by the
Representative expressly for use therein.
(h) The Company had at the date or dates indicated in
the Prospectus a duly authorized and outstanding capitalization as set forth in
the Registration Statement and the Prospectus. Based on the assumptions stated
in the Registration Statement and the Prospectus, the Company will have on the
Closing Date the adjusted stock capitalization set forth therein. Except as set
forth in the Registration Statement or the Prospectus, on the Effective Date and
on the Closing Date, there will be no options to purchase, warrants or other
rights to subscribe for, or any securities or obligations convertible into, or
any contracts or commitments to issue or sell shares of the Company's capital
stock or any such warrants, convertible securities or obligations. Except as set
forth in the Prospectus, no holders of any of the Company's securities has any
rights, "demand," "piggyback" or otherwise, to have such securities registered
under the Act.
(i) The descriptions in the Registration Statement
and the Prospectus of contracts and other documents are accurate and present
fairly the information required to be disclosed, and there are no contracts or
other documents required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement under the
Act or the Regulations which have not been so described or filed as required.
(j) Grant Thornton LLP and Timothy M. Hohl Company
P.A., the accountants who have certified the consolidated financial statements
filed and to be filed with the Commission as part of the Registration Statement
and the Prospectus, are
-8-
<PAGE>
independent public accountants within the meaning of the Act and Regulations.
The consolidated financial statements and schedules and the notes thereto filed
as part of the Registration Statement and included in the Prospectus are
complete, correct and present fairly the financial position of the Company as of
the dates thereof, and the results of operations and changes in financial
position of the Company for the periods indicated therein, all in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved except as otherwise stated in the Registration
Statement and the Prospectus. The unaudited pro forma and selected financial
data set forth in the Registration Statement and the Prospectus present fairly
the information shown therein and have been compiled on a basis consistent with
that of the audited and unaudited financial statements included in the
Registration Statement and the Prospectus.
(k) The Company and each Subsidiary has filed with
the appropriate federal, state and local governmental agencies, and all
appropriate foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be filed or has
duly obtained extensions of time for the filing thereof and has paid all taxes
shown on such returns and all assessments received by it to the extent that the
same have become due; and the provisions for income taxes payable, if any, shown
on the consolidated financial statements filed with or as part of the
Registration Statement are sufficient for all accrued and unpaid foreign and
domestic taxes, whether or not disputed, and for all periods to and including
the dates of such consolidated financial statements. Except as disclosed in
writing to the Representative, neither the Company nor any Subsidiary has
executed or filed with any taxing authority, foreign or domestic, any agreement
extending the period for assessment or collection of any income taxes and is not
a party to any pending action or proceeding by any foreign or domestic
governmental agency for assessment or collection of taxes; and no claims for
assessment or collection of taxes have been asserted against the Company or any
Subsidiary.
(l) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
The outstanding options and warrants to purchase Common Shares constitute the
valid and binding obligations of the Company, enforceable in accordance with
their terms. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of the preemptive rights of
any shareholder of the Company. None of the holders of the outstanding Common
Shares is subject to personal liability solely by reason of being such a
-9-
<PAGE>
holder. The offers and sales of the outstanding Common Shares and outstanding
options and warrants to purchase Common Shares were at all relevant times either
registered under the Act and the applicable state securities or Blue Sky laws or
exempt from such registration requirements. The authorized Common Shares and
outstanding options and warrants to purchase Common Shares conform to the
descriptions thereof contained in the Registration Statement and Prospectus.
Except as set forth in the Registration Statement and the Prospectus, on the
Effective Date and the Closing Date, there will be no outstanding options or
warrants for the purchase of, or other outstanding rights to purchase, Common
Shares or securities convertible into Common Shares.
(m) No securities of the Company have been sold by
the Company or by or on behalf of, or for the benefit of, any person or persons
controlling, controlled by, or under common control with the Company within the
three years prior to the date hereof, except as disclosed in the Registration
Statement. The Company has not taken, directly or indirectly, any action
designed to cause or result in, or which has constituted, the stabilization or
manipulation of the price of the Common Shares to facilitate the sale or resale
of the Common Shares.
(n) The issuance and sale of the Shares and the
Warrant Shares have been duly authorized and, when the Shares and the Warrant
Shares have been issued and duly delivered against payment therefor as
contemplated by this Agreement, the Representative's Warrant Agreement or the
Warrant Agreement, as the case may be, the Shares and the Warrant Shares will be
validly issued, fully paid and nonassessable. The holders of the Securities will
not be subject to personal liability solely by reason of being such holders and
none of the Securities will be subject to preemptive rights of any shareholder
of the Company.
(o) The issuance and sale of the Warrants, the
Representative's Warrants and the Underlying Warrants have been duly authorized
and, when issued, paid for and delivered pursuant to the terms of this
Agreement, the Representative's Warrant Agreement or the Warrant Agreement, as
the case may be, the Warrants, the Representative's Warrants and the Underlying
Warrants will constitute valid and binding obligations of the Company,
enforceable as to the Company in accordance with their terms. The Warrant Shares
have been duly reserved for issuance upon exercise of the Warrants, the
Representative's Warrants and the Underlying Warrants in accordance with the
provisions of the Warrant Agreement and the Representative's Warrant Agreement.
The Warrants, Representative's Warrants and Underlying Warrants will conform to
the descriptions thereof contained in the Registration Statement and the
Prospectus.
-10-
<PAGE>
(p) Neither the Company nor any Subsidiary is in
violation of, or in default under, (i) any term or provision of its Articles of
Incorporation or By-Laws, each as amended; (ii) any material term or provision
or any financial covenants of any indenture, mortgage, contract, commitment or
other agreement or instrument to which it is a party or by which it or any of
its property or business is or may be bound or affected; or (iii) any existing
applicable law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any Subsidiary or any of the Company's or any Subsidiary's properties or
business. The Company and each Subsidiary owns, possesses or has obtained all
governmental and other (including those obtainable from third parties) Permits
necessary to own or lease, as the case may be, and to operate its properties,
whether tangible or intangible, and to conduct any of the business or operations
of the Company as presently conducted, and all such Permits are outstanding and
in good standing, and there are no proceedings pending or, to the best of the
Company's knowledge, threatened (nor, to the best of the Company's knowledge, is
there any basis therefor), which seeking to cancel, terminate or limit such
Permits.
(q) Except as set forth in the Prospectus, there are
no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, domestic or
foreign, or before any private arbitration tribunal, pending, or, to the best of
the Company's knowledge, threatened against the Company or any Subsidiary or
involving the Company's or any Subsidiary's properties or business which, if
determined adversely to the Company or any Subsidiary, would, individually or in
the aggregate, result in any material adverse change in the financial position,
shareholders' equity, results of operations, properties, business, management or
affairs or business prospects of the Company or any Subsidiary or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement; nor, to the best of the Company's knowledge, is there any basis
for any such claim, action, suit, proceeding, arbitration, investigation or
inquiry. There are no outstanding orders, judgments or decrees of any court,
governmental agency or other tribunal naming the Company or any Subsidiary and
enjoining the Company or any Subsidiary from taking, or requiring the Company or
any Subsidiary to take, any action, or to which the Company or any Subsidiary,
or the Company's or any Subsidiary's properties or businesses, is bound or
subject.
(r) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
-11-
<PAGE>
(s) The Company and each of the Subsidiaries owns or
possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus (collectively
the "Intangibles"); to the best of the Company's knowledge, neither the Company
nor any Subsidiary has infringed and is not infringing upon the rights of others
with respect to the Intangibles; and neither the Company nor any Subsidiary has
received any notice of conflict with the asserted rights of others with respect
to the Intangibles which could, singly or in the aggregate, materially adversely
affect its business as presently conducted or the prospects, financial condition
or results of operations of the Company or any Subsidiary, and the Company knows
of no basis therefor; and, to the best of the Company's knowledge, no others
have infringed upon the Intangibles of the Company or any Subsidiary.
(t) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest consolidated financial statements, neither the Company nor any
Subsidiary has incurred any material liability or obligation, direct or
contingent, or entered into any material transaction, whether or not incurred in
the ordinary course of business, and has not sustained any material loss or
interference with its business from fire, storm, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
there have not been, and prior to the Closing Date referred to below there will
not be, any changes in the capital stock or any material increases in the
long-term debt of the Company or any material adverse change in or affecting the
general affairs, management, financial condition, shareholders' equity, results
of operations or prospects of the Company or any Subsidiary, otherwise than as
set forth or contemplated in the Prospectus.
(u) The Company and each Subsidiary has good and
marketable title in fee simple to all real property and good title to all
personal property (tangible and intangible) owned by it, free and clear of all
security interests, charges, mortgages, liens, encumbrances and defects, except
such as are described in the Registration Statement and Prospectus or such as do
not materially affect the value or transferability of such property and do not
interfere with the use of such property made, or proposed to be made, by the
Company or any Subsidiary. The leases, licenses or other contracts or
instruments under which
-12-
<PAGE>
the Company and each Subsidiary leases, holds or is entitled to use any
property, real or personal, are valid, subsisting and enforceable only with such
exceptions as are not material and do not interfere with the use of such
property made, or proposed to be made, by the Company or any Subsidiary, and all
rentals, royalties or other payments accruing thereunder which became due prior
to the date of this Agreement have been duly paid, and neither the Company nor
any Subsidiary, nor, to the best of the Company's knowledge, any other party is
in default thereunder and, to the best of the Company's knowledge, no event has
occurred which, with the passage of time or the giving of notice, or both, would
constitute a default thereunder. Neither the Company nor any Subsidiary has
received notice of any violation of any applicable law, ordinance, regulation,
order or requirement relating to its owned or leased properties. The Company and
each Subsidiary has adequately insured its properties against loss or damage by
fire or other casualty and maintains, in adequate amounts, such other insurance
as is usually maintained by companies engaged in the same or similar businesses
located in its geographic area.
(v) Each contract or other instrument (however
characterized or described) to which the Company or any Subsidiary is a party or
by which their properties or businesses is or may be bound or affected and to
which reference is made in the Prospectus has been duly and validly executed, is
in full force and effect in all material respects and is enforceable against the
parties thereto in accordance with its terms, and none of such contracts or
instruments has been assigned by the Company or any Subsidiary, and neither the
Company nor any Subsidiary, nor, to the best of the Company's knowledge, any
other party, is in default thereunder and, to the best of the Company's
knowledge, no event has occurred which, with the lapse of time or the giving of
notice, or both, would constitute a default thereunder.
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company or any Subsidiary or any of their respective assets or businesses,
including, without limitation, those relating to the provision of long distance
telecommunications services and internet access services.
(w) The employment, consulting, confidentiality and
non-competition agreements between the Company and between each Subsidiary and
its officers, employees and consultants, described in the Registration
Statement, are binding and enforceable obligations upon the respective parties
thereto in accordance with their respective terms, except as such
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enforceability may be limited by applicable bankruptcy, insolvency, moratorium
or other similar laws or arrangements affecting creditors' rights generally and
subject to principles of equity.
(x) Except as set forth in the Prospectus, the
Company has no employee benefit plans (including, without limitation, profit
sharing and welfare benefit plans) or deferred compensation arrangements that
are subject to the provisions of the Employee Retirement Income Security Act of
1974.
(y) To the best of the Company's knowledge, no labor
problem exists with any of the Company's or any Subsidi- ary's employees or is
imminent which could adversely affect the Company or any Subsidiary.
(z) The Company has not, directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(aa) The Shares and Warrants have been approved for
listing on the Nasdaq SmallCap Market of the National Association of Securities
Dealers, Inc. ("NASDAQ").
(ab) The Company has provided Tenzer Greenblatt LLP,
counsel to the Underwriters ("Underwriters' Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated ___________, 1996.
Any certificate signed by an officer of the Company
or of any Subsidiary and delivered to the Underwriters or to Underwriters'
Counsel shall be deemed to be a representation and warranty by the Company to
the Underwriters as to the matters covered thereby.
5. Certain Covenants of the Company. The Company covenants
with the Underwriters as follows:
(a) The Company will not at any time, whether before
the Effective Date or thereafter during such period as the Prospectus is
required by law to be delivered in connection with the sales of the Shares and
Warrants by the Underwriters or a
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dealer, file or publish any amendment or supplement to the Registration
Statement or Prospectus of which the Representative has not been previously
advised and furnished a copy, or to which the Representative shall object in
writing.
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the
Representative immediately, and, if requested by the Representative, confirm
such advice in writing, (i) when the Registration Statement, or any
post-effective amendment to the Registration Statement or any supplemented
Prospectus is filed with the Commission; (ii) of the receipt of any comments
from the Commission; (iii) of any request of the Commission for amendment or
supplementation of the Registration Statement or Prospectus or for additional
information; and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Shares and/or the Warrants for offering
or sale in any jurisdiction, or of the initiation of any proceedings for any of
such purposes. The Company will use its best efforts to prevent the issuance of
any such stop order or of any order preventing or suspending such use and to
obtain as soon as possible the lifting thereof, if any such order is issued.
(c) The Company will deliver to the Underwriters,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as the Underwriters may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriters, without charge, as soon as
the Registration Statement becomes effective, and thereafter from time to time
as requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriters may
reasonably request. The Company has furnished or will furnish to the
Representative two signed copies of the Registration Statement as originally
filed and of all amendments thereto, whether filed before or after the
Registration Statement becomes effective, two copies of all exhibits filed
therewith and two signed copies of all consents and certificates of experts.
(d) The Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder so as to permit the continuance
of sales of and dealings in the Offered Shares and Offered Warrants, in any
Optional Shares and Optional Warrants which may be issued and sold, and in the
Warrant Shares underlying such Warrants. If, at any time when a prospectus
relating to any of the Securities is required to be delivered
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under the Act, any event occurs as a result of which the Registration Statement
and Prospectus as then amended or supplemented would include an untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or if it shall be necessary to amend or supplement the
Registration Statement and Prospectus to comply with the Act or the regulations
thereunder, the Company will promptly file with the Commission, subject to
Section 5(a) hereof, an amendment or supplement which will correct such
statement or omission or which will effect such compliance.
(e) The Company will furnish such proper informa-
tion as may be required and otherwise cooperate in qualifying the Securities for
offering and sale under the securities or Blue Sky laws relating to the offering
in such jurisdictions as the Representative may reasonably designate, provided
that no such qualification will be required in any jurisdiction where, solely as
a result thereof, the Company would be subject to service of general process or
to taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) The Company will make generally available to its
security holders, in the manner specified in Rule 158(b) under the Act, and
deliver to the Underwriters and Underwriters' Counsel as soon as practicable and
in any event not later than 45 days after the end of its fiscal quarter in which
the first anniversary date of the effective date of the Registration Statement
occurs, an earnings statement meeting the requirements of Rule 158(a) under the
Act covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement.
(g) For a period of five years from the Effective
Date, the Company will deliver to the Representative and to Underwriters'
Counsel on a timely basis (i) a copy of each report or document, including,
without limitation, reports on Forms 8-K, 10-K (or 10-KSB), 10-Q (or 10-QSB) and
10-C and exhibits thereto, filed or furnished to the Commission, any securities
exchange or the National Association of Securities Dealers, Inc. (the "NASD")
on the date each such report or document is so filed or furnished; (ii) as soon
as practicable, copies of any reports or communications (financial or other) of
the Company mailed to its security holders; (iii) as soon as practicable, a copy
of any Schedule 13D, 13G, 14D-1 or 13E-3 received or prepared by the Company
from time to time; (iv) monthly statements setting forth such information
regarding the Company's results of operations and financial position (including
balance sheet, profit and loss statements and data regarding outstanding
purchase orders) as is regularly prepared by management of the Company; and (v)
such
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additional information concerning the business and financial condition of the
Company as the Representative may from time to time reasonably request and which
can be prepared or obtained by the Company without unreasonable effort or
expense. The Company will furnish to its shareholders annual reports containing
audited financial statements and such other periodic reports as it may determine
to be appropriate or as may be required by law.
(h) Neither the Company nor any person that con-
trols, is controlled by or is under common control with the Company will take
any action designed to or which might be reasonably expected to cause or result
in the stabilization or manipulation of the price of the Common Shares or
Warrants.
(i) If the transactions contemplated by this
Agreement are consummated, the Representative shall retain the $50,000
previously paid to it, and the Company will pay or cause to be paid the
following: all costs and expenses incident to the performance of the obligations
of the Company under this Agreement, including, but not limited to, the fees and
expenses of accountants and counsel for the Company; the preparation, printing,
mailing and filing of the Registration Statement (including financial statements
and exhibits), Preliminary Prospectuses and the Prospectus, and any amendments
or supplements thereto; the printing and mailing of the Underwriting Agreement,
Agreement Among Underwriters, Underwriters kit (including Power of Attorney) and
Selected Dealer Agreement; the issuance and delivery of the Shares and Warrants
to the Underwriters; all taxes, if any, on the issuance of the Shares and
Warrants; the fees, expenses and other costs of qualifying the Shares and
Warrants for sale under the Blue Sky or securities laws of those states in which
the Shares and Warrants are to be offered or sold, including the fees and
disbursements of Underwriter's Counsel in connection therewith, and including
those of such local counsel as may have been retained for such purpose; the cost
of printing and mailing the "Blue Sky Survey;" and the filing fees incident to
securing any required review by the NASD and either the Boston Stock Exchange or
Pacific Stock Exchange; the cost of furnishing to the Underwriters copies of the
Registration Statement, Preliminary Prospectuses and the Prospectus as herein
provided; the costs of placing "tombstone advertisements" in any publications
which may be selected by the Representative; and all other costs and expenses
incident to the performance of the Company's obligations hereunder which are not
otherwise specifically provided for in this Section 5(i).
In addition, at the Closing Date or the Option
Closing Date, as the case may be, the Representative will deduct from the
payment for the Offered Shares and Offered Warrants or any Optional Shares
and/or Optional Warrants purchased three
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percent (3%) of the gross proceeds of the offering (less the sum of $50,000
previously paid to the Representative), as payment for the Representative's
nonaccountable expense allowance relating to the transactions contemplated
hereby, which amount will include the fees and expenses of Underwriters' Counsel
(other than the fees and expenses of Underwriters' Counsel relating to Blue Sky
qualifications and registrations, which, as provided for above, shall be in
addition to the three percent (3%) nonaccountable expense allowance and shall be
payable directly by the Company to Underwriters' Counsel on or prior to the
Closing Date).
(j) If the transactions contemplated by this
Agreement or related hereto are not consummated because the Company decides not
to proceed with the offering for any reason or because the Representative
decides not to proceed with the offering as a result of a breach by the Company
of its representations, warranties or covenants in the Agreement or as a result
of adverse changes in the affairs of the Company, then the Company will be
obligated to reimburse the Representative for its accountable out-of-pocket
expenses up to the sum of $50,000, inclusive of $50,000 previously paid to the
Representative by the Company. In all cases other than those set forth in the
preceding sentence, if the Company or the Representative decide not to proceed
with the offering, the Company will only be obligated to reimburse the
Representative for its accountable out-of-pocket expenses up to $25,000, and
inclusive of amounts previously paid to the Representative by the Company. In no
event, however, will the Representative, in the event the offering is
terminated, be entitled to retain or receive more than an amount equal to its
actual accountable out-of-pocket expenses.
(k) The Company will apply the net proceeds from the
sale of the Shares and Warrants for the purposes set forth in the Prospectus.
Except as set forth in the Registration Statement and Prospectus, no portion of
the net proceeds from the sale of the Shares and Warrants will be used to repay
any indebtedness. The Company will file with the Commission all required reports
on Form S-R in accordance with the provisions of Rule 463 promulgated under the
Act and will provide a copy of each such report to the Representative and its
counsel.
(l) During the period of twelve (12) months from the
date hereof, none of the Company's officers, directors or persons who
beneficially own or hold 3% or more of the outstanding Common Shares (calculated
in accordance with Rule 13d-3(d)(l) under the Exchange Act) (the "Principal
Shareholders"), will offer for sale or sell or otherwise dispose of, directly or
indirectly, any securities of the Company, in any manner whatsoever, whether
pursuant to Rule 144 of the
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Regulations or otherwise, and no holder of registration rights relating to any
securities of the Company will exercise any such registration rights, in either
case, without the prior written consent of the Representative. The Company
agrees to deliver to the Representative prior to the Effective Date, the
agreement of each of the Company's officers, directors and Principal
Stockholder's to comply with the provisions of this Section 5(1).
(m) The Company will not file any registration
statement relating to the offer or sale of any of the Company's securities,
including any registration statement on Form S-8, during the twelve (12) months
from the Effective Date, without the Representative's prior written consent.
(n) The Company maintains and will continue to
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(o) The Company will use its best efforts to maintain
the listing of the Shares and Warrants on NASDAQ.
(p) The Company will, concurrently with the Effective
Date, register the class of equity securities of which the Shares are a part
under Section 12(g) of the Exchange Act and the Company will maintain such
registration for a minimum of five (5) years from the Effective Date.
(q) Subject to the sale of the Offered Shares and
Offered Warrants, the Representative and its successors will have the right to
designate a nominee for election, at its or their option, either as a member of
or a non-voting advisor to the Board of Directors of the Company, and the
Company will use its best efforts to cause such nominee to be elected and
continued in office as a director of the Company or as such advisor until the
expiration of five (5) years from the Effective Date. The Company agrees to
deliver to the Representative prior to the Effective Date, the agreement of each
of the Company's current officers, directors and Principal Shareholders to vote
all of the Common Shares owned by such person or entity so as to elect and
continue in office such nominee of the Representative. Following the election of
such nominee as a director or advisor, such
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person shall receive no more or less compensation than is paid to other
non-officer directors of the Company for attendance at meetings of the Board of
Directors of the Company and shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings including, but not limited
to, food, lodging and transportation. The Company agrees to indemnify and hold
such director or advisor harmless, to the maximum extent permitted by law,
against any and all claims, actions, awards and judgments arising out of his
service as a director or advisor and, in the event the Company maintains a
liability insurance policy affording coverage for the acts of its officers and
directors, to include such director or advisor as an insured under such policy.
The rights and benefits of such indemnification and the benefits of such
insurance shall, to the extent possible, extend to the Representative insofar as
it may be or may be alleged to be responsible for such director or advisor.
If the Representative does not exercise its
option to designate a member of or advisor to the Company's Board of Directors,
the Representative shall nonetheless have the right to send a representative
(who need not be the same individual from meeting to meeting) to observe each
meeting of the Board of Directors. The Company agrees to give the Representative
notice of each such meeting and to provide the Representative with an agenda and
minutes of the meeting no later than it gives such notice and provides such
items to the directors.
(r) Subject to the provisions of applicable law, the
Representative shall be entitled to receive a warrant solicitation fee of five
percent (5%) of the aggregate exercise price of the Warrants for each Warrant
exercised during the period commencing one year after the Effective Date;
provided, however, that the Representative will not be entitled to receive such
compensation in Warrant exercise transactions in which (i) the market price of
the Common Shares at the time of exercise is lower than the exercise price of
the Warrants; (ii) the Warrants are held in any discretionary account; (iii)
disclosure of compensation arrangements is not made in the Registration
Statement and in documents provided to holders of Warrants at the time of
exercise; (iv) the holder thereof has not confirmed in writing that the
Representative solicited the exercise of the Warrants; or (v) the solicitation
or exercise of the Warrants was in violation of Rule 10b-6 promulgated under the
Exchange Act.
(s) The Company shall retain a transfer agent for the
Common Shares and Warrants, reasonably acceptable to the Representative, for a
period of five (5) years from the Effective Date. In addition, for a period of
five (5) years from the Effective Date, the Company, at its own expense, shall
cause such
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transfer agent to provide the Representative with copies of the Company's daily
transfer sheets, and, when requested by the Underwriter, a current list of the
Company's securityholders, including a list of the beneficial owners of
securities held by a depository trust company and other nominees.
(t) The Company hereby agrees, at its sole cost and
expense, to supply and deliver to the Representative and Underwriters' Counsel,
within a reasonable period from the date hereof, four bound volumes, including
the Registration Statement, as amended or supplemented, all exhibits to the
Registration Statement, the Prospectus and all other underwriting documents.
(u) The Company shall, as of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service (including
annual report information) or Moody's Industrial Manual (Moody's OTC Industrial
Manual not being sufficient for these purposes) and shall use its best efforts
to have the Company listed in such manual and shall maintain such listing for a
period of five (5) years from the Effective Date.
(v) For a period of five (5) years from the Effective
Date, the Company shall provide the Representative, on a not less than annual
basis, with internal forecasts setting forth projected results of operations for
each quarterly and annual period in the two (2) fiscal years following the
respective dates of such forecasts. Such forecasts shall be provided to the
Representative more frequently than annually if prepared more frequently by
management, and revised forecasts shall be prepared and provided to the
Representative when required to reflect more current information, revised
assumptions or actual results that differ materially from those set forth in the
forecasts.
(w) For a period of five (5) years from the Effective
Date, or until such earlier time as the Common Shares and Warrants are listed on
the New York Stock Exchange or the American Stock Exchange, the Company shall
cause its legal counsel to provide the Representative with a list, to be updated
at least annually, of those states in which the Common Shares and Warrants may
be traded in non-issuer transactions under the Blue Sky laws of the 50 states.
(x) For a period of five (5) years from the Effective
Date, the Company shall continue to retain Grant Thornton LLP (or such other
nationally recognized accounting firm as is acceptable to the Representative) as
the Company's independent public accountants.
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(y) For a period of five (5) years from the Effective
Date, the Company, at its expense, shall cause its then independent certified
public accountants, as described in Section 5(x) above, to review (but not
audit) the Company's financial statements for each of the first three fiscal
quarters prior to the announcement of quarterly financial information, the
filing of the Company's 10-Q (or 10-QSB) quarterly report (or other equivalent
report) and the mailing of quarterly financial information to shareholders.
(z) So long as any Warrants are outstanding, the
Company shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act as shall
be necessary to enable the sale of the Common Shares underlying the Warrants and
cause a copy of each Prospectus, as then amended, to be delivered to each holder
of record of a Warrant as they request and as otherwise required by law and, to
furnish to the Representative, Underwriters and dealers as many copies of each
such Prospectus as the Representative, Underwriters or dealers may reasonably
request. In addition, for so long as any Warrant is outstanding, the Company
will promptly notify the Representative of any material change in the financial
condition, business, results of operations or properties of the Company.
(aa) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any other
publicity without the Representative's prior written consent, other than normal
and customary releases issued in the ordinary course of the Company's business
or those releases required by law.
(ab) For a period of three (3) years following the
Effective Date, the Company will not increase or authorize an increase in the
cash compensation of its President greater than those increases provided for in
the employment agreement with the Company and agreed to by the Company and the
Representative prior to the Effective Date and as described in the Registration
Statement, without the Representative's prior written consent.
(ac) For a period of five (5) years from the
Effective Date, the Company will promptly submit to the Representative copies of
accountant's management reports and similar correspondence between the Company's
accountants and the Company.
(ad) For a period of three (3) years from the
Effective Date, the Company will not offer or sell any of its securities
pursuant to Regulation S promulgated under the Act without the prior written
consent of the Representative.
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(ae) For a period of five (5) years from the
Effective Date, the Company will provide to the Representative ten day's written
notice prior to any issuance by the Company or its subsidiaries of any equity
securities or securities exchangeable for or convertible into equity securities
of the Company, except for (i) shares of Common Stock issuable upon exercise of
currently outstanding options and warrants or conversion of currently
outstanding convertible securities and (ii) options available for future grant
pursuant to any stock option plan in effect on the Effective Date and the
issuance of shares of Common Stock upon the exercise of such options.
(af) Prior to the Effective Date and for a period of
five (5) years thereafter, the Company will retain a financial public relations
firm reasonably acceptable to the Representative.
(ag) For a period of three (3) years from the
Effective Date, the Company will cause its Board of Directors to meet, either in
person or telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per annum.
6. Conditions of the Underwriters' Obligation to Purchase the
Offered Shares and Offered Warrants from the Company. The obligation of the
Underwriters to purchase and pay for the Offered Shares and Offered Warrants
which they have agreed to purchase from the Company is subject (as of the date
hereof and the Closing Date) to the accuracy of and compliance in all material
respects with the representations and warranties of the Company herein, to the
accuracy of the statements of the Company or its officers made pursuant hereto,
to the performance in all material respects by the Company of its obligations
hereunder, and to the following additional conditions:
(a) The Registration Statement will have become
effective not later than _______ .M., New York City time, on the day following
the date of this Agreement, or at such later time or on such later date as the
Representative may agree to in writing; prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement will have been issued
and no proceedings for that purpose will have been initiated or will be pending
or, to the best of the Representative's or the Company's knowledge, will be
contemplated by the Commission; and any request on the part of the Commission
for additional \information will have been complied with to the satisfaction of
Underwriters' Counsel.
(b) At the time that this Agreement is executed and
at the Closing Date, there will have been delivered to the
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Underwriters a signed opinion of Orrick, Herrington & Sutcliffe, counsel for the
Company ("Company Counsel"), dated as of the date hereof or the Closing Date, as
the case may be (and any other opinions of counsel referred to in such opinion
of Company Counsel or relied upon by Company Counsel in rendering their
opinion), reasonably satisfactory to Underwriters' Counsel, in substantially the
form and substance attached hereto as Exhibit A.
(c) At the time this Agreement is executed and at the
Closing Date there will have been delivered to the Underwriters a signed opinion
of special regulatory counsel to the Company ("Regulatory Counsel"), dated as of
the date hereof or the Closing Date, as the case may be, reasonably satisfactory
to Underwriter's counsel, in substantially the from and in substantially the
form and substance attached hereto as Exhibit B.
(d) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriters' Counsel, dated as
of the Closing Date, to the effect that the opinions delivered pursuant to
Section 6(b) hereof appear on their face to be appropriately responsive to the
requirements of this Agreement, except to the extent waived by the Underwriters,
specifying the same, and with respect to such related matters as the
Underwriters may require.
(e) At the Closing Date (i) the Registration
Statement and the Prospectus and any amendments or supplements thereto will
contain all material statements which are required to be stated therein in
accordance with the Act and the Regulations and will conform in all material
respects to the requirements of the Act and the Regulations, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto will 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; (ii) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there will not have been any
material adverse change in the financial condition, results of operations or
general affairs of the Company from that set forth or contemplated in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and the Prospectus indicate might occur after the Effective Date;
(iii) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no material
transaction, contract or agreement entered into by the Company, other than in
the ordinary course of business, which would be
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required to be set forth in the Registration Statement and the Prospectus, other
than as set forth therein; and (iv) no action, suit or proceeding at law or in
equity will be pending or, to the best of the Company's knowledge, threatened
against the Company which is required to be set forth in the Registration
Statement and the Prospectus, other than as set forth therein, and no
proceedings will be pending or, to the best of the Company's knowledge,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding would materially adversely affect the business, property,
financial condition or results of operations of the Company, other than as set
forth in the Registration Statement and the Prospectus. At the Closing Date,
there will be delivered to the Representative a certificate signed by the
Chairman of the Board or the President or a Vice President of the Company, dated
the Closing Date, evidencing compliance with the provisions of this Section 6(e)
and stating that the representations and warranties of the Company set forth in
Section 4 hereof were accurate and complete in all material respects when made
on the date hereof and are accurate and complete in all material respects on the
Closing Date as if then made; that the Company has performed all covenants and
complied with all conditions required by this Agreement to be performed or
complied with by the Company prior to or as of the Closing Date; and that, as of
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or, to the best of his knowledge, are contemplated or threatened. In
addition, the Representative will have received such other and further
certificates of officers of the Company as the Representative or Underwriters'
Counsel may reasonably request.
(f) At the time that this Agreement is executed and
at the Closing Date, the Representative will have received a signed letter from
Grant Thornton LLP, dated the date such letter is to be received by the
Representative and addressed to it, confirming that it is a firm of independent
public accountants within the meaning of the Act and Regulations and stating
that: (i) insofar as reported on by them, in their opinion, the financial
statements of the Company included in the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable Regulations; (ii) on the basis of procedures and inquiries (not
constituting an examination in accordance with generally accepted auditing
standards) consisting of a reading of the unaudited interim financial statements
of the Company, if any, appearing in the Registration Statement and the
Prospectus and the latest available unaudited interim financial statements of
the Company, if more recent than that appearing in the Registration Statement
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and Prospectus, inquiries of officers of the Company responsible for financial
and accounting matters as to the transactions and events subsequent to the date
of the latest audited financial statements of the Company, and a reading of the
minutes of meetings of the shareholders, the Board of Directors of the Company
and any committees of the Board of Directors, as set forth in the minute books
of the Company, nothing has come to their attention which, in their judgment,
would indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and Prospectus
to a specified date not more than three business days prior to the date of such
letter, there have been any decreases in net current assets or net assets as
compared with amounts shown in such financial statements or decreases in net
sales or decreases in total or per share net income compared with the
corresponding period in the preceding year or any change in the capitalization
or long-term debt of the Company, except in all cases as set forth in or
contemplated by the Registration Statement and the Prospectus, and (B) the
unaudited interim financial statements of the Company, if any, appearing in the
Registration Statement and the Prospectus, do not comply as to form in all
material respects with the applicable accounting requirements of the Act and the
Regulations or are not fairly presented in conformity with generally accepted
accounting principles and practices on a basis substantially consistent with the
audited financial statements included in the Registration Statement or the
Prospectus; and (iii) they have compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(g) There shall have been duly tendered to the
Underwriters certificates representing the Offered Shares and the Offered
Warrants to be sold on the Closing Date.
(h) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the Shares
and Warrants by the Underwriters.
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<PAGE>
(i) No action shall have been taken by the Commission
or the NASD the effect of which would make it improper, at any time prior to the
Closing Date or the Option Closing Date, as the case may be, for any member firm
of the NASD to execute transactions (as principal or as agent) in the Shares or
Warrants, and no proceedings for the purpose of taking such action shall have
been instituted or shall be pending, or, to the best of the Representative's or
the Company's knowledge, shall be contemplated by the Commission or the NASD.
The Company represents at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD.
(j) The Company meets the current and any existing
and proposed criteria for inclusion of the Shares and Warrants in Nasdaq.
(k) All proceedings taken at or prior to the Closing
Date or the Option Closing Date, as the case may be, in connection with the
authorization, issuance and sale of the Shares or Warrants shall be reasonably
satisfactory in form and substance to the Representative and to Underwriters'
Counsel, and such counsel shall have been furnished with all such documents,
certificates and opinions as they may request for the purpose of enabling them
to pass upon the matters referred to in Section 6(c) hereof and in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements of the Company, the performance of any covenants of the Company,
or the compliance by the Company with any of the conditions herein contained.
(l) As of the date hereof, the Company will have
delivered to the Representative the written undertakings of its officers,
directors and Principal Shareholders and/or registration rights holders, as the
case may be, to the effect of the matters set forth in Sections 5(l) and (q).
If any of the conditions specified in this Section 6
have not been fulfilled, this Agreement may be terminated by the Representative
on notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless
each Underwriter (including specifically each person that may be substituted for
an Underwriter as provided in Section 10 hereof), each officer, director,
partner, employee and agent of any Underwriter, and each person, if any, who
controls any Underwriter within the meaning of Section 15 of the Act or
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Section 20(a) of the Exchange Act, from and against any and all losses, claims,
damages, expenses or liabilities, joint or several (and actions in respect
thereof), to which they or any of them may become subject under the Act or under
any other statute or at common law or otherwise, and, except as hereinafter
provided, will reimburse each Underwriter and each such person, if any, for any
legal or other expenses reasonably incurred by them or any of them in connection
with investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application or other document 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 Shares and Warrants under the securities laws thereof
(hereinafter "application"), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein not misleading, in light of
the circumstances under which they were made, unless such untrue statement or
omission was made in such Registration Statement, Preliminary Prospectus,
Prospectus or application in reliance upon and in conformity with information
furnished in writing to the Company in connection therewith by the
Representative or any such person through the Representative expressly for use
therein; provided, however, that the indemnity agreement contained in this
Section 7(a) with respect to any Preliminary Prospectus will not inure to the
benefit of any Underwriter (or to the benefit of any other person that may be
indemnified pursuant to this Section 7(a)) if (A) the person asserting any such
losses, claims, damages, expenses or liabilities purchased the Shares and/or
Warrants which are the subject thereof from such Underwriter or other
indemnified person; (B) such Underwriter or other indemnified person failed to
send or give a copy of the Prospectus to such person at or prior to the written
confirmation of the sale of such Shares and/or Warrants to such person; and (C)
the Prospectus did not contain any untrue statement or alleged untrue statement
or omission or alleged omission giving rise to such cause, claim, damage,
expense or liability.
(b) Each Underwriter (including specifically each
person that may be substituted for an Underwriter as provided in Section 10
hereof) agrees to indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act
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or Section 20(a) of the Exchange Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several (and actions in
respect thereof), to which they or any of them may become subject under the Act
or under any other statute or at common law or otherwise, and, except as
hereinafter provided, will reimburse the Company and each such director, officer
or controlling person for any legal or other expenses reasonably incurred by
them or any of them in connection with investigating or defending any actions,
whether or not resulting in any liability, insofar as such losses, claims,
damages, expenses, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained (i) in
the Registration Statement, in any Preliminary Prospectus or in the Prospectus
(or the Registration Statement or Prospectus as from time to time amended or
supplemented) or (ii) in any application (including any application for
registration of the Shares and Warrants under state securities or Blue Sky
laws), or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, in light of the
circumstances under which they were made, but only insofar as any such statement
or omission was made in reliance upon and in conformity with information
furnished in writing to the Company in connection therewith by such Underwriter
expressly for use therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory to
the indemnified party and the payment of expenses) insofar as such action
relates to an alleged liability in respect of which indemnity may be sought
against the indemnifying party. After notice from the indemnifying party of its
election to assume the defense of such claim or action, the indemnifying party
shall no longer be liable to the indemnified party under this Section 7 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of the
indemnified party or parties, it is advisable for the indemnified party or
parties to be represented by separate counsel, the indemnified party or parties
shall have the right to employ a single counsel to represent the indemnified
parties who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the indemnified parties thereof against the
indemnifying party, in which event the fees and expenses of such separate
counsel shall be borne by the indemnifying party. Any party against whom
indemnification may be sought under this Section 7 shall not be liable to
indemnify any person that might
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<PAGE>
otherwise be indemnified pursuant hereto for any settlement of any action
effected without such indemnifying party's consent, which consent shall not be
unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for indemnification may not be enforced, even though
this Agreement expressly provides for indemnification in such case; or (ii) any
indemnified or indemnifying party seeks contribution under the Act, the Exchange
Act, or otherwise, then the Company (including, for this purpose, any
contribution made by or on behalf of any director of the Company, any officer of
the Company who signed the Registration Statement and any controlling person of
the Company) as one entity and the Underwriters (including, for this purpose,
any contribution by or on behalf of each person, if any, who controls any
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act and each officer, director, partner, employee and agent of any
Underwriter) as a second entity, shall contribute to the losses, liabilities,
claims, damages and expenses whatsoever to which any of them may be subject, so
that the Underwriters are, in the aggregate, responsible for the proportion
thereof equal to the percentage which the underwriting discount per Share and
per Warrant set forth on the cover page of the Prospectus represents of the
initial public offering price per Share and per Warrant set forth on the cover
page of the Prospectus and the Company is responsible for the remaining portion;
provided, however, that if applicable law does not permit such allocation, then,
if applicable law permits, other relevant equitable considerations such as the
relative fault of the Company and the Underwriters in connection with the facts
which resulted in such losses, liabilities, claims, damages and expenses shall
also be considered. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission or
alleged omission relates to information supplied by the Company or by any
Underwriter, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement, alleged statement,
omission or alleged omission. The Company and the Underwriters agree that it
would be unjust and inequitable if the respective obligations of the Company and
the Underwriters for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages and expenses or
by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8 and that the contribution of each
contributing Underwriter shall not be in excess of its proportionate share
(based on the ratio of the number of Shares and Warrants purchased by such
Underwriter to the number of Shares and Warrants purchased by all
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<PAGE>
contributing Underwriters) of such losses, liabilities, claims, damages and
expenses. No person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) will be entitled to contribution from any person
who is not guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and each officer,
director, partner, employee and agent of the Underwriter will have the same
rights to contribution as Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who has signed the Registration
Statement and each director of the Company will have the same rights to
contribution as the Company, subject in each case to the provisions of this
Section 8. Anything in this Section 8 to the contrary notwithstanding, no party
will be liable for contribution with respect to the settlement of any claim or
action effected without its written consent. This Section 8 is intended to
supersede, to the extent permitted by law, any right to contribution under the
Act or the Exchange Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriters contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Representative, Underwriters, the Company or any of its directors and officers,
or any controlling person referred to in said Sections, and shall survive the
delivery of, and payment for, the Shares and the Warrants.
10. Substitution of Underwriters.
(a) If one or more Underwriters should default in its
or their obligation to purchase and pay for any Offered Shares hereunder and if
the aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase does not exceed 10% of the total number of the Offered
shares, the non-defaulting Underwriters will be obligated severally to purchase
and pay for (in addition to the number of Offered Shares set forth opposite
their names in Schedule A attached hereto) the full number of Offered Shares
agreed to be purchased by all defaulting Underwriters, and not so purchased, in
proportion to their respective commitments hereunder. In such event the
Representative, for the accounts of the several nondefaulting Underwriters, may
take up and pay for all or any part of such additional Offered Shares to be
purchased by each such Underwriter under this Section 10(a), and may postpone
the Closing Date to a time not exceeding three full business days
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<PAGE>
after the Closing Date determined as provided in Section 2 hereof.
(b) If one or more Underwriters should default in its
or their obligation to purchase and pay for any Offered Shares hereunder and if
the aggregate number of such Offered Shares which all Underwriters so defaulting
have agreed to purchase exceeds 10% of the total number of Offered Shares, or if
one or more Underwriters for any reason permitted hereunder should cancel its or
their obligation to purchase and pay for Offered Shares hereunder, the
non-cancelling and non-defaulting Underwriters (hereinafter called the
"remaining Underwriters") will have the right to purchase such Offered Shares in
such proportion as may be agreed among them at the Closing Date determined as
provided in Section 2 hereof. If the remaining Underwriters do not purchase and
pay for such Offered Shares at such Closing Date, the Closing Date will be
postponed for 24 hours and the remaining Underwriters will have the right to
purchase such Offered Shares, or to substitute another person or persons to
purchase the same, or both, at such postponed Closing Date. If purchasers have
not been found for such Offered Shares by such postponed Closing Date, the
Closing Date will be postponed for a further 24 hours, and the Company will have
the right to substitute another person or persons, reasonably satisfactory to
the Representative, to purchase such Offered Shares at such second postponed
Closing Date. If the Company has not found such purchasers for such Offered
Shares by such second postponed Closing Date, then this Agreement will
automatically terminate, and neither the Company nor the remaining Underwriters
will be under any obligation under this Agreement (except that the Company and
the Underwriters will remain liable to the extent provided in Sections 7 and 8
hereof and the Company will also remain liable to the extent provided in Section
5(j) hereof). As used in this Agreement, the term "Underwriter" includes any
person substituted for an Underwriter under this Section 10(b). Nothing in
Section 10 hereof will relieve a defaulting Underwriter from the liability for
its default and nothing in this Section 10(b) will obligate any Underwriter to
purchase or find purchasers for any Offered Shares in excess of those agreed to
be purchased by such Underwriter under the terms of Section 2 hereof.
11. Termination of Agreement.
(a) The Company, by written or telegraphic notice to
the Representative, or the Representative, by written or telegraphic notice to
the Company, may terminate this Agreement prior to the earlier of (i) 11:00
A.M., New York City time, on the first full business day after the Effective
Date; or (ii) the time when the Representative, after the Registration Statement
becomes effective, releases the Offered Shares and Offered Warrants for public
offering. The time when the Representative "releases the Offered Shares and
Offered Warrants for public
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<PAGE>
offering" for the purposes of this Section 10 means the time when the
Representative releases for publication the first newspaper advertisement, which
is subsequently published, relating to the Offered Shares and Offered Warrants,
or the time when the Representative releases for delivery to members of an
underwriting syndicate or a selling group copies of the Prospectus and an
offering letter or an offering telegram relating to the Offered Shares and
Offered Warrants, whichever will first occur.
(b) This Agreement, including without limitation, the
obligation to purchase the Offered Shares and the Offered Warrants and the
obligation to purchase the Optional Shares and/or Optional Warrants after
exercise of the option referred to in Section 3 hereof, are subject to
termination in the absolute discretion of the Representative, by notice given to
the Company prior to delivery of and payment for all the Offered Shares and
Offered Warrants or such Optional Shares and Optional Warrants, as the case may
be, if, prior to such time, any of the following shall have occurred: (i) the
Company withdraws the Registration Statement from the Commission or the Company
does not or cannot expeditiously proceed with the public offering; (ii) the
representations and warranties in Section 4 hereof are not materially correct or
cannot be complied with; (iii) trading in securities generally on the New York
Stock Exchange or the American Stock Exchange will have been suspended; (iv)
limited or minimum prices will have been established on either such Exchange;
(v) a banking moratorium will have been declared either by federal or New York
State authorities; (vi) any other restrictions on transactions in securities
materially affecting the free market for securities or the payment for such
securities, including the Offered Shares and Offered Warrants or the Optional
Shares and Optional Warrants, will be established by either of such Exchanges,
by the Commission, by any other federal or state agency, by action of the
Congress or by Executive Order; (vii) trading in any securities of the Company
shall have been suspended or halted by any national securities exchange, the
NASD or the Commission; (viii) there has been a materially adverse change in the
condition (financial or otherwise), prospects or obligations of the Company;
(ix) the Company will have sustained a material loss, whether or not insured, by
reason of fire, flood, accident or other calamity; (x) any action has been taken
by the government of the United States or any department or agency thereof
which, in the judgment of the Representative, has had a material adverse effect
upon the market or potential market for securities in general; or (xi) the
market for securities in general or political, financial or economic conditions
will have so materially adversely changed that, in the judgment of the
Representative, it will be impracticable to offer for sale, or to enforce
contracts made by the Underwriter for the resale of, the Offered Shares and
Offered Warrants or the Optional Shares and Offered Warrants, as the case may
be.
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<PAGE>
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein are
not consummated because any condition of the Underwriters' obligations hereunder
is not satisfied or because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company shall be unable to or does
not perform all of its obligations under this Agreement, the Company will not be
liable to the Underwriters for damages on account of loss of anticipated profits
arising out of the transactions covered by this Agreement, but the Company will
remain liable to the extent provided in Sections 5(j), 7, 8 and 9 of this
Agreement.
12. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Representative to the Company for
use in the Prospectus are the statements set forth in the last sentence of the
last paragraph on the cover page, the statement appearing in the last paragraph
on page 2 with respect to stabilizing the market price of Shares and Warrants,
the information in the __ paragraph on page __ with respect to concessions and
reallowances, and the information in the ___ paragraph on page ___ with respect
to the determination of the public offering price, as such information appears
in any Preliminary Prospectus and in the Prospectus.
13. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Representative, to LT Lawrence & Co., Inc., 3 New
York Plaza, New York, New York 10004, Attention: ___________, with a copy to
Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405 Lexington Avenue,
New York, New York 10174; if to the Company, addressed to it at 1451 West
Cypress Creek Road, Suite 200, Fort Lauderdale, Florida 33309, Attention: Gerald
M. Dunne, with a copy to Orrick, Herrington & Sutcliffe LLP, 666 Fifth Avenue,
New York, New York 10103, Attention: Lawrence B. Fisher, Esq.
This Agreement shall be deemed to have been made and delivered
in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York. The Company (1) agrees that any legal suit, action or proceeding
arising out of or relating to this Agreement shall be instituted exclusively in
New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (2) waives any objection
which the Company may have now or hereafter to the venue of any such suit,
action or proceeding, and (3) irrevocably consents to the jurisdiction of
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the New York State Supreme Court, County of New York, and the United States
District Court for the Southern District of New York in any such suit, action or
proceeding. The Company further agrees to accept and acknowledge service of any
and all process which may be served in any such suit, action or proceeding in
the New York State Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York and agrees that service of
process upon the Company mailed by certified mail to the Company's address shall
be deemed in every respect effective service of process upon the Company, in any
such suit, action or proceeding.
14. Parties in Interest. This Agreement is made solely for the
benefit of the Representative, the Underwriters, the Company and, to the extent
expressed, any person controlling the Representative, the Company or the
Underwriters, each officer, director, partner, employee and agent of the
Representative, the Underwriters, the directors of the Company, its officers who
have signed the Registration Statement, and their respective executors,
administrators, successors and assigns, and, no other person will acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" will not include any purchaser of the Shares or Warrants from the
Underwriters, as such purchaser.
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<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
GROUP LONG DISTANCE, INC.
By: /s/ Gerald M. Dunne, Jr.
-----------------------------
Name: Gerald M. Dunne, Jr.
Title: President
Confirmed and accepted in New York, N.Y., as of the date first above written:
LT LAWRENCE & CO., LTD.
By:
-------------------------------
Name:
Title:
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<PAGE>
Schedule A
To the Underwriting Agreement
Number of Shares
Underwriter and Warrants
- ----------- ----------------
LT Lawrence & Co., Inc.
----------
Total $1,250,000
==========
<PAGE>
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
GROUP LONG DISTANCE, INC.
The undersigned, Gerald M. Dunne, Jr., President of Group Long
Distance, Inc., a Florida corporation (the "Corporation"), hereby certifies
that:
In accordance with Sections 607.1003 and 607.1007 of the Florida
Business Corporation Act (the "Act") the Board of Directors of the Corporation
("Board of Directors") has recommended by unanimous written consent dated as of
January 14, 1997, that the shareholders of the Corporation approve, and
shareholders having the voting power prescribed in Section 607.1003(5) of the
Act have approved by written consent as of January 15, 1997, the amendment and
restatement of the Corporation's Articles of Incorporation to read in their
entirety as follows:
ARTICLE I - NAME
The name of the Corporation is Group Long Distance, Inc.
ARTICLE II - ADDRESS
The mailing address for the Corporation is 1451 West Cypress Creek
Road, Suite 200, Ft. Lauderdale, Florida 33309.
ARTICLE III - DURATION
The duration of the Corporation shall be perpetual.
ARTICLE IV - PURPOSE
The Corporation is organized to engage in any activity or business
permitted under the laws of the United States and the State of Florida.
ARTICLE V - INCORPORATOR
The name and addresses of the incorporator of this Corporation was Gary
M. Appelblatt, Esquire, 1451 West Cypress Creek Road, Suite 208b, Ft.
Lauderdale, Florida 33309 and 3610 American River Drive, Suite 112, Sacramento,
California 95864.
<PAGE>
ARTICLE VI - REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation is 1201 Hays
Street, Tallahassee, Florida, 32301 and the name of the registered agent of the
Corporation at such address is Corporation Services Company.
ARTICLE VII - CAPITAL STOCK
The total number of shares of all classes of capital stock of the
Corporation which the Corporation shall have the authority to issue is
14,000,000, of which 12,000,000 shares having no par value shall be designated
as Common Stock and 2,000,000 shares having no par value shall be designated as
Preferred Stock.
Shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares in
each series, the designation thereof and the relative rights, preferences and
limitations of each series, and specifically the Board of Directors is
authorized to fix with respect to each series (a) the dividend rate; (b)
redeemable features, if any; (c) rights upon liquidation; (d) whether or not the
shares of such series shall be subject to a purchase, retirement or sinking fund
provision; (e) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class and, if so, the rate of
conversion or exchange; (f) restrictions, if any, upon the payment of dividends
on common stock; (g) restrictions, if any, upon the creation of indebtedness;
(h) voting powers, if any, of the shares of each series; and (i) such other
rights, preferences and limitations as shall not be inconsistent with the laws
of the State of Florida.
ARTICLE VIII - BYLAWS
The power to adopt, alter, amend, or repeal bylaws shall be vested in
the board of directors and the shareholders, except that the board of directors
may not amend or repeal any bylaw adopted by the shareholders if the
shareholders specifically provide that the bylaw is not subject to amendment or
repeal by the directors.
ARTICLE IX - INDEMNIFICATION
The Corporation shall indemnify and may advance expenses to its
officers and directors and employees and agents to the fullest extent permitted
by law in existence either now or hereafter.
2
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation this 30th day of January, 1997
By:
--------------------------------
Name: Gerald M. Dunne, Jr.
Title: President
3
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
GROUP LONG DISTANCE, INC.
ARTICLE I. MEETINGS OF SHAREHOLDERS
Section 1. Annual Meeting. The annual meeting of the shareholders of
the Corporation for the election of directors and the transaction of other
business shall be held during the month of October each year and on the date and
at the time and place that the board of directors determines, or at such other
time and place as the board of directors shall determine. If any annual meeting
is not held, by oversight or otherwise, a special meeting shall be held as soon
as practical, and any business transacted or election held at that meeting shall
be as valid as if transacted or held at the annual meeting.
Section 2. Special Meetings. Special meetings of the shareholders for
any purpose shall be held when called by the president or the board of
directors, or when demanded in writing by the holders of not less than thirty
percent (30%) of all the shares entitled to vote at the meeting. Such demand
must be delivered to the Corporation's secretary. A meeting demanded by
shareholders shall be called for a date not less than ten nor more than sixty
days after the request is made, unless the shareholders requesting the meeting
designate a later date. The secretary shall issue the call for the meeting,
unless the president, the board of directors, or shareholders requesting the
meeting designate another person to do so. The shareholders at a special meeting
may transact only business that is related to the purposes stated in the notice
of the special meeting.
Section 3. Place. Annual or special meetings of shareholders may be
held either within or outside the State of Florida.
Section 4. Notice. A written notice of each meeting of shareholders,
stating the place, day, and time of the meeting and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be
delivered to each shareholder of record entitled to vote at the meeting, not
less than ten nor more than sixty days before the date set for the meeting,
either personally or by first-class mail, by or at the direction of the
president, the secretary, or the officer or other persons calling the meeting.
If mailed, the notice shall be considered delivered when it is deposited in the
United States mail, postage prepaid, addressed to the shareholder at such
shareholder's address as it appears on the records of the Corporation.
Section 5. Waivers of Notice. Whenever any notice is required to be
given to any shareholder of the Corporation under these bylaws, the articles of
incorporation, or the Florida Business Corporation Act, a written waiver of
notice, signed anytime by the
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person entitled to notice shall be equivalent to giving notice. Attendance by a
shareholder entitled to vote at a meeting, in person or by proxy, shall
constitute a waiver of (a) notice of the meeting, except when the shareholder
attends a meeting solely for the purpose, expressed at the beginning of the
meeting, of objecting to the transaction of any business because the meeting is
not lawfully called or convened, and (b) an objection to consideration of a
particular matter at the meeting that is not within the purpose of the meeting
unless the shareholders object to considering the matter when it is presented.
Section 6. Record Date. In order that the Corporation may determine
the shareholders entitled to notice of or to vote at any meeting of shareholders
or any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
for determining shareholders entitled to notice of or to vote at a meeting of
shareholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the shareholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the shareholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty (60) days prior to
such action. If no record date is fixed, the record date for determining
shareholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
Section 7. Shareholder's List for Meeting. The Secretary shall
prepare and make, at least ten (10) days before every meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any shareholder who is present.
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Section 8. Quorum. At each meeting of shareholders, except where
otherwise provided by law or the Articles of Incorporation or these Bylaws, the
holders of a majority of the outstanding shares of stock entitled to vote on a
matter at the meeting, present in person or represented by proxy, shall
constitute a quorum. For purposes of the foregoing, where a separate vote by
class or classes is required for any matter, the holders of a majority of the
outstanding shares of such class or classes, present in person or represented by
proxy, shall constitute a quorum to take action with respect to that vote on
that matter. Two or more classes or series of stock shall be considered a single
class if the holders thereof are entitled to vote together as a single class at
the meeting. In the absence of a quorum of the holders of any class of stock
entitled to vote on a matter, the holders of such class so present or
represented may, by majority vote, adjourn the meeting of such class from time
to time in the manner provided by Section 12 of these Bylaws until a quorum of
such class shall be so present or represented. Shares of its own capital stock
belonging on the record date for the meeting to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
Directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including but not limited to its own stock, held by
it in a fiduciary capacity.
Section 9. Voting; Proxies. Unless otherwise provided in the
Articles of Incorporation, each shareholder entitled to vote at any meeting of
shareholders shall be entitled to one vote for each share of stock held by such
shareholder which has voting power upon the matter in question. If the Articles
of Incorporation provides for more or less than one vote for any share on any
matter, every reference in these Bylaws to a majority or other proportion of
stock shall refer to such majority or other proportion of the votes of such
stock. Each shareholder entitled to vote at a meeting of shareholders may
authorize another person or persons to act for such shareholder by proxy, but no
such proxy shall be voted or acted upon after eleven months from its date,
unless the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power,
regardless of whether the interest with which it is coupled is an interest in
the stock itself or an interest in the Corporation generally. A shareholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or another duly
executed proxy bearing a later date with the Secretary of the Corporation.
Voting at meetings of shareholders need not be by written ballot unless the
holders of a majority of the outstanding shares of all classes of stock entitled
to vote thereon present in person or represented by proxy at such meeting shall
so determine. Directors shall be elected by a plurality of the votes of the
shares present in person or represented by proxy at the meeting and entitled to
vote on the election of Directors. In all other matters, unless otherwise
provided by law or by the Articles of Incorporation or these Bylaws, the
affirmative vote of the holders of a majority of the shares present in person or
represented by proxy at the meeting and entitled to vote on the subject matter
shall be the act of the shareholders. Where a separate vote by class or classes
is required, the affirmative vote of the holders of a majority of the shares of
such class or classes present in person or
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represented by proxy at the meeting shall be the act of such class or classes,
except as otherwise provided by law or by the Articles of Incorporation or these
Bylaws.
Section 10. Inspectors. Prior to any meeting of shareholders, the Board
of Directors or the President shall appoint one or more inspectors to act at
such meeting and make a written report thereof and may designate one or more
persons as alternate inspectors to replace any inspector who fails to act. If no
inspector or alternate is able to act at the meeting of shareholders, the person
presiding at the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. The inspectors may appoint or retain other persons to assist them in
the performance of their duties. The time of the opening and closing of the
polls for each matter upon which the shareholders will vote at a meeting shall
be announced at the meeting. No ballot, proxy or vote, nor any revocation
thereof or change thereto, shall be accepted by the inspectors after the closing
of the polls. In determining the validity and counting of proxies and ballots,
the inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a shareholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the shareholder, ballots and the
regular books and records of the corporation, and they may also consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by the
record owner to cast or more votes than the shareholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 11. Advance Notice of Shareholder Proposals. At any annual or
special meeting of shareholders, proposals by shareholders and persons nominated
for election as Directors by shareholders shall be considered only if advance
notice thereof has been timely given as provided herein and such proposals or
nominations are otherwise proper for consideration under applicable law and the
Articles of Incorporation and Bylaws of the Corporation. Notice of any proposal
to be presented by any shareholder or of the name of any person to be nominated
by any shareholder for election as a Director of the Corporation at any meeting
of shareholders shall be delivered to the Secretary of the Corporation at its
principal executive office not less than sixty (60) nor more than ninety (90)
days prior to the date of the meeting; provided, however, that if the date of
the meeting is first publicly
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announced or disclosed (in a public filing or otherwise) less than seventy (70)
days prior to the date of the meeting, such advance notice shall be given not
more than ten (10) days after such date is first so announced or disclosed.
Public notice shall be deemed to have been given more than seventy (70) days in
advance of the annual meeting if the Corporation shall have previously
disclosed, in these Bylaws or otherwise, that the annual meeting in each year is
to be held on a determinable date, unless and until the Board of Directors
determines to hold the meeting on a different date. Any shareholder who gives
notice of any such proposal shall deliver therewith the text of the proposal to
be presented and a brief written statement of the reasons why such shareholder
favors the proposal and setting forth such shareholder's name and address, the
number and class of all shares of each class of stock of the Corporation
beneficially owned by such shareholder and any material interest of such
shareholder in the proposal (other than as a shareholder). Any shareholder
desiring to nominate any person for election as a Director of the Corporation
shall deliver with such notice a statement in writing setting forth the name of
the person to be nominated, the number and class of all shares of each class of
stock of the Corporation beneficially owned by such person, the information
regarding such person required by paragraphs (a), (e) and (f) of Item 401 of
Regulation S-K adopted by the Securities and Exchange Commission (or the
corresponding provisions of any regulation subsequently adopted by the
Securities and Exchange Commission applicable to the Corporation), such person's
signed consent to serve as a Director of the Corporation if elected, such
shareholder's name and address and the number and class of all shares of each
class of stock of the Corporation beneficially owned by such shareholder. As
used herein, shares "beneficially owned" shall mean all shares as to which such
person, together with such person's affiliates and associates (as defined in
Rule 12b-2 under the Securities Exchange Act of 1934), may be deemed to be
beneficially own pursuant to Rules 13d-3 and 13d-5 under the Securities Exchange
Act of 1934, as well as all shares as to which such person, together with such
person's affiliates and associates, has the right to become the beneficial owner
pursuant to any agreement or understanding, or upon the exercise of warrants,
options or rights to convert or exchange (whether such rights are exercisable
immediately or only after the passage of time or the occurrence of conditions).
The person presiding at the meeting, in addition to making any other
determinations that may be appropriate to the conduct of the meeting, shall
determine whether such notice has been duly given and shall direct that
proposals and nominees not be considered if such notice has not been given.
Section 12. Adjournments. Any meeting of shareholders, annual or
special, may be adjourned from time to time, to reconvene at the same or some
other place, and notice need not be given of any such adjourned meeting if the
time and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each shareholder of record entitled to vote at the meeting.
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ARTICLE II. DIRECTORS
Section 1. Function. The business of this Corporation shall be
managed and its corporate powers exercised by the board of directors.
Section 2. Number. The Corporation shall have not less than three (3)
directors, the number thereof to be determined from time to time by the Board
of Directors. The number of directors may be increased or diminished from time
to time by action of the board of directors or shareholders, but no decrease
shall have the effect of shortening the term of any incumbent director, unless
the shareholders remove the director.
Section 3. Qualification. Each member of the board of directors must
be a natural person who is eighteen years of age or older. A director need not
be a resident of Florida or a shareholder of the Corporation.
Section 4. Election and Term of Office. The Directors of the
Corporation shall be divided into three classes, as nearly equal in number as
reasonably possible, as determined by the Board of Directors, with the initial
term of office of the first class of such Directors to expire at the first
annual meeting of shareholders thereafter, the initial term of office of the
second class of such Directors to expire at the second annual meeting of
shareholders thereafter and the initial term of office of the third class of
such Directors to expire at the third annual meeting thereafter, with each class
of Directors to hold office until their successors have been duly elected and
qualified. At each annual meeting of shareholders following such initial
classification and election, Directors elected to succeed the Directors whose
terms expire at such annual meeting shall be elected to hold office for a term
expiring at the annual meeting of shareholders in the third year following the
year of their election and until their successors have been duly elected and
qualified. If the number of Directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain or attain a number of
Directors in each class as nearly equal as reasonably possible, but no decrease
in the number of Directors may shorten the term of any incumbent Director.
Section 5. Compensation. The board of directors has authority to fix
the compensation of the directors, as directors and as officers.
Section 6. Duties of Directors. A director shall perform his duties
as a director, including his duties as a member of any committee of the board
upon which he serves, in good faith, in a manner he reasonably believes to be
in the best interests of the Corporation.
Section 7. Presumption of Assent. A director of the Corporation who
is present at a meeting of the board of directors or a committee of the board of
directors when corporate action is taken is presumed to have assented to the
action unless he votes against it
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or expressly abstains from voting on the action taken, or, he objects at the
beginning of the meeting to the holding of the meeting or transacting specific
business at the meeting.
Section 8. Vacancies. Unless filled by the shareholders, any vacancy
occurring in the board of directors, including any vacancy created because of an
increase in the number of directors, may be filled by the affirmative vote of a
majority of the remaining directors, even if the number of remaining directors
does not constitute a quorum of the board of directors. A director elected to
fill a vacancy shall hold office only until the next election of directors by
the shareholders.
Section 9. Removal or Resignation of Directors. At a meeting of
shareholders called for that purpose, the shareholders, by a vote of the holders
of sixty percent (60%) of the shares entitled to vote at an election of
directors, may remove any director, or the entire board of directors, with or
without cause, and fill any vacancy or vacancies created by the removal.
A director may resign at any time by delivering written notice to the
board of directors or its chairman or the corporation. A resignation is
effective when the notice is delivered unless the notice specifies later
effective date. If a resignation is made effective at a later date, the board of
directors may fill the pending vacancy before the effective date if the board of
directors provided that the successor does not take office until the effective
date.
Section 10. Quorum and Voting. A majority of the board of directors
constitutes a quorum for the transaction of business. The act of the majority of
the directors at a meeting at which a quorum is present is the act of the board
of directors.
Section 11. Place of Meetings. Regular and special meetings by the
board of directors may be held within or outside the State of Florida.
Section 12. Regular Meetings. A regular meeting of the board of
directors shall be held without notice, other than this bylaw, immediately after
and at the same place as the annual meeting of shareholders. The board of
directors may provide, by resolution, the time and place for the holding of
additional regular meetings without notice other than the resolution.
Section 13. Special Meetings. Special meetings of the board of
directors may be called by or at the request of the president or any director.
Section 14. Notice of Meetings. Written notice of the time and place
of special meetings of the board of directors shall be given to each director by
either personal delivery or by first class United States mail, telegram,
cablegram or facsimile with confirmation of transmission, at least two days
before the meeting. Notice of a meeting of the board of directors need not be
given to any director who signs a waiver of notice either before or after the
meeting. Attendance of a director at a meeting constitutes a waiver of notice of
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the meeting and all objections to the time and place of the meeting, or the
manner in which it has been called or convened, except when the director states,
at the beginning of the meeting, or promptly upon arrival at the meeting, any
objection to the transaction of business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, nor the purpose
of, any regular or special meeting of the board of directors need be specified
in the notice or waiver of notice of the meeting.
A majority of the directors present, whether or not a quorum exists,
may adjourn any meeting of the board of directors to another time and place.
Notice of any adjourned meeting shall be given to the directors who were
not present at the time of the adjournment and, unless the time and place of the
adjourned meeting are announced at the time of the adjournment, to the other
directors.
Section 15. Participation in Meetings by Conference Telephone
Permitted. Unless otherwise restricted by the Articles of Incorporation or these
Bylaws, members of the Board of Directors, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or of
such committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
By-law shall constitute presence in person at such meeting.
Section 16. Action by Directors Without a Meeting. Unless otherwise
restricted by the Articles of Incorporation or these Bylaws, any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board of
Directors or of such committee, as the case may be, consent thereto in writing,
and the writing or writings are filed with the minutes of proceedings of the
Board of Directors or committee.
Section 17. Committees. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, designate one or more
committees, each committee to consist of one or more of the Directors of the
Corporation. The Board of Directors may designate one or more Directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in these Bylaws, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
Corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Articles of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors,
fix the
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designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the Corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation, recommending to the
shareholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the shareholders a
dissolution of the Corporation or a revocation of a dissolution or amending
these Bylaws; and, unless the resolution, these Bylaws or the Articles of
Incorporation expressly so provides, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, to adopt a
certificate of ownership and merger or to remove or indemnify Directors.
ARTICLE III. OFFICERS
Section 1. Officers; Election. As soon as practicable after the
annual meeting of shareholders in each year, the Board of Directors shall elect
a President, a Secretary, and a Treasurer and it may, if it so determines, elect
from among its members a Chairman of the Board of Directors and a Vice Chairman
of the Board of Directors. The Board of Directors may also elect one or more
Vice Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and such other
officers as the Board of Directors may deem desirable or appropri- ate and may
give any of them such further designations or alternate titles as it considers
desirable. Any number of offices may be held by the same person unless the
Articles of Incorporation or these Bylaws otherwise provide.
Section 2. Term of Office; Resignation; Removal; Vacancies. Unless
otherwise provided in the resolution of the Board of Directors electing any
officer, each officer shall hold office until his or her successor is elected
and qualified or until his or her earlier resignation or removal. Any officer
may resign at any time upon written notice to the Board of Directors or to the
President or the Secretary of the Corporation. Such resignation shall take
effect at the time specified therein, and unless otherwise specified therein no
acceptance of such resignation shall be necessary to make it effective. The
Board of Directors may remove any officer with or without cause at any time. Any
such removal shall be without prejudice to the contractual rights of such
officer, if any, with the Corpora- tion, but the election of an officer shall
not of itself create contractual rights. Any vacancy occurring in any office of
the Corporation by death, resignation, removal or otherwise may be filled by the
Board of Directors at any regular or special meeting or by unanimous written
consent of the Board of Directors.
Section 3. Powers and Duties. The officers of the Corporation shall
have such powers and duties in the management of the Corporation as shall be
stated in these Bylaws or in a resolution of the Board of Directors which is not
inconsistent with these
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Bylaws and, to the extent not so stated, as generally pertain to their
respective offices, subject to the control of the Board of Directors. The
Secretary shall have the duty to record the proceedings of the meetings of the
shareholders, the Board of Directors and any committees in a book to be kept for
that purpose. The Board of Directors may require any officer, agent or employee
to give security for the faithful performance of his or her duties.
Section 4. Salaries. The board of directors from time to time shall
fix the salaries of the officers, and no officer shall be prevented from
receiving his salary merely because he is also a director of the Corporation.
ARTICLE IV. INDEMNIFICATION
The Corporation shall indemnify and may advance expenses to
its officers and directors and employees and agents to the fullest extent
permitted by law in existence either now or hereinafter.
ARTICLE V. STOCK CERTIFICATES
Section 1. Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by the Chairman or Vice Chairman of the Board of Directors, if
any, or the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary, of the Corporation,
representing the number of shares of stock in the Corporation owned by such
holder. If such certificate is manually signed by one officer or manually
countersigned by a transfer agent or by a registrar, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer, transfer agent or registrar at the date of
issue.
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications or restrictions of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided by law, in lieu of
the foregoing requirements, there may be set forth on the face or back of the
certificate which the Corporation shall issue to represent such class or series
of stock a statement that the Corporation will furnish without charge to each
shareholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
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Section 2. Lost, Stolen or Destroyed Stock Certificates: Issuance of
New Certificates. The Corporation may issue a new certificate of stock in the
place of any certificate theretofore issued by it, alleged to have been lost,
stolen or destroyed, and the Corporation may require the owner of the lost,
stolen or destroyed certificate, or such owner's legal representative, to give
the Corporation a bond sufficient to indemnify it against any claim that may be
made against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
ARTICLE VI. DIVIDENDS
The board of directors from time to time may declare, and the
Corporation may pay, dividends on its outstanding shares in the manner and upon
the terms and conditions provided by law.
ARTICLE VII. SEAL
The Corporation may have a corporate seal which shall have the name
of the Corporation, and may be a facsimile, engraved, printed, or an impression
seal.
ARTICLE VIII. AMENDMENT
These bylaws may be repealed or amended, and additional bylaws may be
adopted, by either a vote of a majority of the full board of directors or by
vote of the holders of a majority of the issued and outstanding shares
entitled to vote, but the board of directors may not amend or repeal any bylaw
adopted by the shareholders if the shareholders specifically provide that the
bylaw is not subject to amendment or repeal by the directors. In order to be
effective, any amendment approved hereby must be in writing and attached to
these Bylaws.
ARTICLE IX. MISCELLANEOUS
Section 1. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board of Directors.
Section 2. Interested Directors; Quorum. No contract or transaction
between the Corporation and one or more of its Directors or officers, or
between the Corporation and any other corporation, partnership, association or
other organization in which one or more of its Directors or officers are
Directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the Director or
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officer is present at or participates in the meeting of the Board of Directors
or committee thereof which authorizes the contract or transaction, or solely
because his or her or their votes are counted for such purpose, if: (1) the
material facts as to his or her relationship or interest and as to the contract
or transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested Directors, even though the disinterested Directors be less than a
quorum; or (2) the material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or (3) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof or the
shareholders. Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
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WARRANT AGREEMENT dated as of __________, 1997 between Group
Long Distance, Inc., a Florida corporation (the "Company"), and LT Lawrence &
Co., Inc. (hereinafter referred to as the "Representative").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Representative
warrants (the "Warrants") to purchase up to 125,000 (as such number may be
adjusted from time to time pursuant to Article 8 of this Warrant Agreement)
shares (the "Shares") of Common Stock, no par value (the "Common Stock"), of the
Company, and up to 125,000 (as such number may be adjusted from time to time
pursuant to Article 8 of this Warrant Agreement) Common Stock purchase warrants
(the "Underlying Warrants"); and
WHEREAS, the Representative has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated _____________, 1997
between the Representative and the Company, to act as an underwriter in
connection with the Company's proposed public offering (the "Public Offering")
of 1,250,000 shares of Common Stock (the "Public Shares") at an initial public
offering price of $______ per Public Share and 1,250,000 warrants (the "Public
Warrants") at an initial public offering price of $______ per Public Warrant;
and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Representative or to its
<PAGE>
designees who are directors, officers and partners of the Representative or to
members of the underwriting syndicate or selling group participating in the
distribution of the Public Shares and Public Warrants to the public in the
Public Offering and/or their respective directors, officers or partners
(collectively, the "Designees"), in consideration for, and as part of the
Representative's compensation in connection with, the Representative acting as
an underwriter pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment
by the Representative or its designees to the Company of $137.50, the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. The Representative and/or the Designees are
hereby granted the right to purchase, at any time from _____________, 1997 until
5:00 P.M., New York time, on _________, 2002 (the "Warrant Exercise Term"), up
to 125,000 fully-paid and non-assessable Shares at an initial exercise price
(subject to adjustment as provided in Article 6 hereof) of $4.95 per Share and
up to 125,000 Underlying Warrants at an initial exercise price (subject to
adjustment as provided in Article 6 hereof) of $.11 per Underlying Warrant. The
Underlying Warrants are each exercisable to purchase one fully-paid and
non-assessable share of Common Stock at a price of $5.94 per share (the
"Underlying
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<PAGE>
Warrant Shares"). The Underlying Warrants are exercisable at any time from
________, 1998 until 5:00 P.M., New York City time on ________, 2000. The Holder
may purchase, upon exercise of this Warrant, either the Shares or the Underlying
Warrants or both. Except as provided in Article 13 hereof, the Shares and the
Underlying Warrants are in all respects identical to the Public Shares and
Public Warrants being sold to the public pursuant to the terms and provisions of
the Underwriting Agreement.
2. Warrant Certificates. The warrant certificates
delivered and to be delivered pursuant to this Agreement (the "Warrant
Certificates") shall be, for the Warrants exercisable for the purchase of
Underlying Shares, in the form set forth in Exhibit A attached hereto and made a
part hereof, and, for the Warrants exercisable for the purchase of Underlying
Warrants, in the form of Exhibit B attached hereto and made a part hereof, each
with such appropriate insertions, omissions, substitutions and other variations
as required or permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $4.95 per Share purchased and $.11 per Underlying
Warrant purchased, payable in cash or by check to the order of the Company, or
any combination thereof, subject to adjustment as provided in Article 8 hereof.
Upon surrender of the Warrant Certificate(s) with the annexed Form of Election
to Purchase duly executed, together with payment of the Exercise
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<PAGE>
Price (as hereinafter defined) for the Shares and Underlying Warrants purchased,
at the Company's principal offices in Florida (currently located at 1451 West
Cypress Creek Road, Fort Lauderdale, Florida 33309) the registered holder of a
Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a
certificate or certificates for the Shares so purchased and/or a certificate or
certificates for the Underlying Warrants so purchased. The purchase rights
represented by each Warrant Certificate are exercisable at the option of the
Holder hereof, in whole or in part (but not as to fractional Shares or
fractional Underlying Warrants). In the case of the purchase of less than all
Shares or Underlying Warrants purchasable under any Warrant Certificate, the
Company shall cancel said Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate of like tenor for the
balance of the Shares or Underlying Warrants purchasable thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at the Holder's option, exchange, in
whole or in part, the Warrants represented by such Holder's Warrant Certificate
which are exercisable for the purchase of Shares (a "Warrant Exchange"), into
the number of Shares and Underlying Warrants determined in accordance with this
Section 3.2, by surrendering such Warrant Certificate at the principal office of
the Company or at the office of its transfer agent, accompanied by a notice
stating such Holder's intent to
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<PAGE>
effect such exchange, the number of Warrants to be so exchanged and the date on
which the Holder requests that such Warrant Exchange occur (the "Notice of
Exchange"). The Warrant Exchange shall take place on the date specified in the
Notice of Exchange or, if later, the date the Notice of Exchange is received by
the Company (the "Exchange Date"). Certificates for the Shares issuable upon
such Warrant Exchange and, if applicable, a new Warrant Certificate of like
tenor representing the Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) days following the
Exchange Date. In connection with any Warrant Exchange, the Holder shall be
entitled to subscribe for and acquire (i) the number of Shares (rounded to the
next highest integer) which would, but for such Warrant Exchange, than be
issuable pursuant to the provisions of Section 3.1 above upon the exercise of
the Warrants specified by the Holder in its Notice of Exchange (the "Total Share
Number") less (ii) the number of Shares equal to the quotient obtained by
dividing (a) the product of the Total Share Number and the existing Exercise
Price per Share (as hereinafter defined) by (b) the Market Price (as hereinafter
defined) of a Public Share on the day preceding the Warrant Exchange. "Market
Price" at any date shall be deemed to be the last reported sale price, or, in
case no such reported sales takes place on such day, the average of the last
reported
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<PAGE>
sale prices for the last three (3) trading days, in either case as officially
reported by the principal securities exchange on which the Common Stock is
listed or admitted to trading or as reported in the NASDAQ National Market
System, or, if the Common Stock is not listed or admitted to trading on any
national securities exchange or quoted on the NASDAQ National Market System, the
closing bid price as furnished by (i) the National Association of Securities
Dealers, Inc. through NASDAQ or (ii) a similar organization if NASDAQ is no
longer reporting such information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased and certificates for the Underlying
Warrants purchased, and upon the exercise of the Underlying Warrants, the
issuance of certificates for the Underlying Warrant Shares purchased, shall be
made forthwith (and in any event within three (3) business days thereafter)
without charge to the Holder thereof including, without limitation, any tax
which may be payable in respect of the issuance thereof, and such certificates
shall (subject to the provisions of Article 5 hereof) be issued in the name of,
or in such names as may be directed by, the Holder thereof; provided, however,
that the Company shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any such
certificates in a name other than that of the Holder
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<PAGE>
and the Company shall not be required to issue or deliver such certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
The Warrant Certificates and the certificates representing the
Shares and the Underlying Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the present or any future Chairman or Vice
Chairman of the Board of Directors or Chief Executive Officer, President or Vice
President of the Company under its corporate seal reproduced thereon, attested
to by the manual or facsimile signature of the present or any future Secretary
or Assistant Secretary of the Company. Warrant Certificates and certificates
representing the Underlying Warrants shall be dated the date of execution by the
Company upon initial issuance, division, exchange, substitution or transfer.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares and the Underlying Warrants purchased, and
upon exercise, in whole or in part, of the Underlying Warrants, certificates
representing the Underlying Warrant Shares purchased (collectively, the "Warrant
Securities"), shall bear a legend substantially similar to the following:
"The securities represented by this
certificate and the other securities issuable
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<PAGE>
upon exercise thereof have not been registered for purposes of
public distribution under the Securities Act of 1933, as
amended (the "Act"), and may not be offered or sold except (i)
pursuant to an effective registration statement under the Act,
(ii) to the extent applicable, pursuant to Rule 144 under the
Act (or any similar rule under such Act relating to the
disposition of securities), or (iii) upon the delivery by the
holder to the Company of an opinion of counsel, reasonably
satisfactory to counsel to the Company, stating that an
exemption from registration under such Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants may not be sold, transferred, assigned, hypothecated or otherwise
disposed of, in whole or in part, for a period of one (1) year from the date
hereof, except to the Designees.
6. Price.
6.1. Initial and Adjusted Exercise Price. The
initial exercise price of each Warrant shall be $4.95 per Share and $.11 per
Underlying Warrant. The adjusted exercise price per Share and the adjusted
exercise price per Underlying Warrant shall be the prices which shall result
from time to time from any and all adjustments of the initial exercise price per
Share or per Underlying Warrant, as the case may be, in accordance with the
provisions of Article 8 hereof.
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<PAGE>
6.2. Exercise Price. The term "Exercise Price"
herein shall mean the initial exercise price or the adjusted exercise price,
depending upon the context.
7. Registration Rights.
7.1. Registration Under the Securities Act of 1933.
None of the Warrants, the Shares, the Underlying Warrants, or the Underlying
Warrant Shares have been registered for purposes of public distribution under
the Securities Act of 1933, as amended (the "Act").
7.2. Registrable Securities. As used herein the term
"Registrable Security" means each of the Warrants, the Shares, the Underlying
Warrants, the Underlying Warrant Shares and any shares of Common Stock issued
upon any stock split or stock dividend in respect of such Shares or Underlying
Warrant Shares; provided, however, that with respect to any particular
Registrable Security, such security shall cease to be a Registrable Security
when, as of the date of determination, (i) it has been effectively registered
under the Act and disposed of pursuant thereto, (ii) registration under the Act
is no longer required for subsequent public distribution of such security, or
(iii) it has ceased to be outstanding. The term "Registrable Securities" means
any and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
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<PAGE>
the Common Stock, such adjustment shall be made in the definition of
"Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during
the seven years following the effective date of the Public Offering, the Company
proposes to prepare and file one or more post-effective amendments to the
registration statement filed in connection with the Public Offering or any new
registration statement or post-effective amendments thereto covering equity or
debt securities of the Company, or any such securities of the Company held by
its shareholders (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form) (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least thirty
(30) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities. Upon the written request of such a
holder (a "Requesting Holder"), made within twenty (20) business days after
receipt of the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register
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<PAGE>
("Piggyback Registration"), at the Company's sole cost and expense and at no
cost or expense to the Requesting Holders (except as provided in Section 7.5(b)
hereof).
Notwithstanding the provisions of this Section 7.3,
the Company shall have the right at any time after it shall have given written
notice pursuant to this Section 7.3 (irrespective of whether any written request
for inclusion of Registrable Securities shall have already been made) to elect
not to file any such proposed Registration Statement, or to withdraw the same
after the filing but prior to the effective date thereof.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4(d) below) of
the Registrable Securities shall have the right (which right is in addition to
the piggyback registration rights provided for under Section 7.3 hereof),
exercisable by written notice to the Company (the "Demand Registration
Request"), to have the Company prepare and file with the Securities and Exchange
Commission (the "Commission") on one occasion, at the sole expense of the
Company (except as provided in Section 7.5(b) hereof), a Registration Statement
and such other documents, including a prospectus, as may be necessary (in the
opinion of both counsel for the Company and counsel for such Majority Holder) in
order to comply with the provisions of the Act, so as to permit a public
offering and sale of the Registrable
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<PAGE>
Securities by the holders thereof. The Company shall use its best efforts to
cause the Registration Statement to become effective under the Act, so as to
permit a public offering and sale of the Registrable Securities by the holders
thereof. Once effective, the Company will use its best efforts to maintain the
effectiveness of the Registration Statement until the earlier of (i) the date
that all of the Registrable Securities have been sold or (ii) the date the
holders thereof receive an opinion of counsel to the Company that all of the
Registrable Securities may be freely traded without registration under the Act,
under Rule 144(k) promulgated under the Act or otherwise.
(b) The Company covenants and agrees to
give written notice of any Demand Registration Request to all holders of the
Registrable Securities within ten (10) business days from the date of the
Company's receipt of any such Demand Registration Request. After receiving
notice from the Company as provided in this Section 7.4(b), holders of
Registrable Securities may request the Company to include their Registrable
Securities in the Registration Statement to be filed pursuant to Section 7.4(a)
hereof by notifying the Company of their decision to have such securities
included within ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights
provided for under Section 7.3 hereof and subsection (a) of this Section 7.4, at
any time during the Warrant Exercise Term, any
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<PAGE>
Majority Holder (as defined below in Section 7.4(d)) of Registrable Securities
shall have the right, exercisable by written request to the Company, to have the
Company prepare and file with the Commission, on one occasion in respect of all
holders of Registrable Securities, a Registration Statement so as to permit a
public offering and sale of such Registrable Securities for nine (9) consecutive
months, provided, however, that all costs incident thereto shall be at the
expense of the holders of the Registrable Securities included in such
Registration Statement. If a Majority Holder shall give notice to the Company at
any time of its or their desire to exercise the registration right granted
pursuant to this Section 7.4(c), then within ten (10) days after the Company's
receipt of such notice, the Company shall give notice to the other holders of
Registrable Securities advising them that the Company is proceeding with such
registration and offering to include therein the Registrable Securities of such
holders, provided they furnish the Company with such appropriate information in
connection therewith as the Company shall reasonably request in writing.
(d) The term "Majority Holder" as used in
Section 7.4 hereof shall mean any holder or any combination of holders of
Registrable Securities, if included in such holders' Registrable Securities are
that aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying
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<PAGE>
Warrant Shares already issued and Underlying Warrant Shares issuable pursuant to
the exercise of outstanding Underlying Warrants) as would constitute a majority
of the aggregate number of shares of Common Stock (including Shares already
issued, Shares issuable pursuant to the exercise of outstanding Warrants,
Underlying Warrant Shares already issued and Underlying Warrant Shares issuable
pursuant to the exercise of outstanding Underlying Warrants) included in all the
Registrable Securities.
7.5. Covenants of the Company With Respect to
Registration. The Company covenants and agrees as follows:
(a) In connection with any registration
under Section 7.4 hereof, the Company shall file the Registration Statement as
expeditiously as possible, but in any event no later than twenty (20) days
following receipt of any demand therefor, shall use its best efforts to have any
such Registration Statement declared effective at the earliest possible time,
and shall furnish each holder of Registrable Securities such number of
prospectuses as shall reasonably be requested.
(b) The Company shall pay all costs, fees
and expenses (other than underwriting fees, discounts and nonaccountable expense
allowance applicable to the Registrable Securities and fees and expenses of
counsel retained by the holders of Registrable Securities) in connection with
all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and
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<PAGE>
accounting fees, printing expenses, and blue sky fees and expenses.
(c) The Company will take all necessary
action which may be required in qualifying or registering the Registrable
Securities included in the Registration Statement, for offering and sale under
the securities or blue sky laws of such states as are reasonably requested by
the holders of such securities; provided that the Company shall not be obligated
to execute or file any general consent to service of process or to qualify as a
foreign corporation to do business under the laws of any such jurisdiction.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all
loss, claim, damage, expense or liability (including all expenses reasonably
incurred in investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange Act or
otherwise, arising from such registration statement to the same extent and with
the same effect as the provisions pursuant to which the Company has agreed
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<PAGE>
to indemnify the Representative as set forth in Section 7 of the Underwriting
Agreement and to provide for just and equitable contribution as set forth in
Section 8 of the Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement, and such Holder's successors and
assigns, shall severally, and not jointly, indemnify, the Company, its officers
and directors and each person, if any, who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
all loss, claim, damage or expense or liability (including all expenses
reasonably incurred in investigating, preparing or defending against any claim
whatsoever) to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such holder, or
such Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Representative has agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any holder to exercise the Warrants or the
Underlying Warrants held by such Holder prior to
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<PAGE>
the initial filing of any registration statement or the effectiveness thereof.
(g) If the Company shall fail to comply
with the provisions of this Article 7, the Company shall, in addition to any
other equitable or other relief available to the holders of Registrable
Securities, be liable for any or all incidental, special and consequential
damages sustained by the holders of Registrable Securities, requesting
registration of their Registrable Securities.
(h) The Company shall not permit the
inclusion of any securities other than the Registrable Securities to be included
in any Registration Statement filed pursuant to Section 7.4 hereof, without the
prior written consent of the Majority Holders, which consent shall not be
unreasonably withheld.
(i) The Company shall promptly deliver
copies of all correspondence between the Commission and the Company, its counsel
or auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are being
registered and
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<PAGE>
shall permit each holder of Registrable Securities and such underwriter to do
such reasonable investigation, upon reasonable advance notice, with respect to
information contained in or omitted from the Registration Statement as it deems
reasonably necessary to comply with applicable securities laws or rules of the
National Association of Securities Dealers, Inc. Such investigation shall
include access to books, records and properties and opportunities to discuss the
business of the Company with its officers and independent auditors, all to such
reasonable extent and at such reasonable times and as often as any such holder
of Registrable Securities or underwriter shall reasonably request.
8. Adjustments of Exercise Price and Number of
Securities. The following adjustments apply to the Exercise Price of the
Warrants with respect to the Shares and the number of Shares purchasable upon
exercise of the Warrants. In the event the Exercise Price per Share and/or the
number of Shares so purchasable is adjusted, then the Exercise Price of the
Warrants relating to the Underlying Warrants and the number of underlying
Warrants purchasable hereunder shall be adjusted in the same proportion.
8.1. Computation of Adjusted Price. In case the
Company shall at any time after the date hereof pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock, then upon such
dividend or distribution the Exercise Price
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<PAGE>
in effect immediately prior to such dividend or distribution shall forthwith be
reduced to a price determined by dividing:
(a) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(b) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 8.1, the Common Stock
issuable by way of dividend or other distribution on any stock of the Company
shall be deemed to have been issued immediately after the opening of business on
the date following the date fixed for the determination of stockholders entitled
to receive such dividend or other distribution.
8.2. Subdivision and Combination. In case the
Company shall at any time subdivide or combine the outstanding shares of Common
Stock, the Exercise Price shall forthwith be proportionately decreased in the
case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Securities. Upon
each adjustment of the Exercise Price pursuant to the provisions of this Article
8, the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest full number by multiplying a number equal to the
Exercise Price in
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<PAGE>
effect immediately prior to such adjustment by the number of Shares issuable
upon exercise of the Warrants immediately prior to such adjustment and dividing
the product so obtained by the adjusted Exercise Price, provided, however, that
if an event occurs that results in an adjustment of the number and/or price of
the shares of Common Stock issuable upon exercise of the Public Warrants
pursuant to Section 9 of the Warrant Agreement by and among the Company, the
Representative and Continental Stock Transfer & Trust Company dated as of
___________, 1997 ("Public Warrant Agreement"), resulting in automatic
adjustment in the number and/or price of the Underlying Warrant Shares issuable
upon exercise of the Underlying Warrants pursuant to Section 8.5 hereof, then
the adjustment provided for in this Section 8.3 shall not, in such instance,
result in any further adjustment in the aggregate number of shares of Common
Stock ultimately issuable upon exercise of the Underlying Warrants.
8.4. Reclassification, Consolidation, Merger,
etc. In case of any reclassification or change of the outstanding shares of
Common Stock (other than a change in par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in the
case of any consolidation of the Company with, or merger of the Company into,
another corporation (other than a consolidation or merger in which the Company
is the surviving corporation and which does not result in any reclassification
or change of the outstanding shares of
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<PAGE>
Common Stock, except a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or in the case of a sale or
conveyance to another corporation of the property of the Company as an entirety,
the Holders shall thereafter have the right to purchase the kind and number of
shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance as if the
Holders were the owners of both the Shares and the Underlying Warrant Shares
immediately prior to any such events, at a price equal to the product of (x) the
number of shares of Common Stock issuable upon exercise of the Holders' Warrants
and the Underlying Warrants and (y) the exercise prices for the Warrants and the
Underlying Warrants in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance as if such
Holders had exercised the Warrants and the Underlying Warrants.
8.5. Determination of Outstanding Common Shares.
The number of Common Shares at any one time outstanding shall include the
aggregate number of shares issued and the aggregate number of shares issuable
upon the exercise of options, rights, warrants and upon the conversion or
exchange of convertible or exchangeable securities.
8.6. Adjustment of Underlying Warrants' Exercise
Price and Securities Issuable Upon Exercise of Underlying Warrants. With respect
to any of the Underlying Warrants,
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whether or not the Warrants have been exercised and whether or not the Warrants
are issued and outstanding, the exercise price for, and the number of,
Underlying Warrant Shares issuable upon exercise of the Underlying Warrants
shall be automatically adjusted in accordance with Section 9 of the Public
Warrant Agreement, upon the occurrence of any of the events described therein.
Thereafter, until the next such adjustment or until otherwise adjusted in
accordance with this Section 8, the Underlying Warrants shall be exercisable at
such adjusted exercise price and for such adjusted number of Underlying Warrant
Shares.
8.7. Dividends and Other Distributions with
Respect to Outstanding Securities. In the event that the Company shall at any
time prior to the exercise of all Warrants make any distribution of its assets
to holders of its Common Stock as a liquidating or a partial liquidating
dividend, then the holder of Warrants who exercises its Warrants after the
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Warrant Price per Warrant, in addition to
each share of Common Stock, the amount of such distribution (or, at the option
of the Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith) which would have been payable to such holder had he been
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the holder of record of the Common Stock receivable upon exercise of his Warrant
on the record date for the determination of those entitled to such distribution.
___ At the time of any such dividend or distribution, the Company shall make
appropriate reserves to ensure the timely performance of the provisions of this
Subsection 8.7.
8.8. Subscription Rights for Shares of Common
Stock or Other Securities. In the case that the Company or an affiliate of the
Company shall at any time after the date hereof and prior to the exercise of all
the Warrants issue any rights, warrants or options to subscribe for shares of
Common Stock or any other securities of the Company or of such affiliate to all
the shareholders of the Company, the Holders of unexercised Warrants on the
record date set by the Company or such affiliate in connection with such
issuance of rights, warrants or options shall be entitled, in addition to the
shares of Common Stock or other securities receivable upon the exercise of the
Warrants, to receive such rights, warrants or options shall be entitled, in
addition to the shares of Common Stock or other securities receivable upon the
exercise of the Warrants, to receive such rights at the time such rights,
warrants or options that such Holders would have been entitled to receive had
they been, on such record date, the holders of record of the number of whole
shares of Common Stock then issuable upon exercise of their outstanding Warrants
(assuming for purposes of this Section 8.8),
-23-
<PAGE>
that the exercise of the Warrants is permissible immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense, upon
the surrender thereof by the registered Holder at the principal executive office
of the Company, for a new Warrant Certificate of like tenor and date
representing in the aggregate the right to purchase the same number of
securities in such denominations as shall be designated by the Holder thereof at
the time of such surrender.
Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
Certificate, and, in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and reimbursement to the Company of all
reasonable expenses incidental thereto, and upon surrender and cancellation of
the Warrant Certificate, if mutilated, the Company will make and deliver a new
Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests.
The Company shall not be required to issue certificates
representing fractions of Shares or fractions of Underlying Warrants upon the
exercise of the Warrants, nor shall it be required to issue scrip or pay cash in
lieu of fractional
-24-
<PAGE>
interests, it being the intent of the parties that all fractional interests
shall be eliminated by rounding any fraction up to the nearest whole number of
Shares and Underlying Warrants.
11. Reservation and Listing of Securities.
The Company shall at all times reserve and keep available out
of its authorized shares of Common Stock, solely for the purpose of issuance
upon the exercise of the Warrants and the Underlying Warrants, such number of
shares of Common Stock as shall be issuable upon the exercise thereof. The
Company covenants and agrees that, upon exercise of the Warrants and payment of
the Exercise Price therefor, all Shares issuable upon such exercise shall be
duly and validly issued, fully paid, non-assessable and not subject to the
preemptive rights of any shareholder. The Company further covenants and agrees
that upon exercise of the Underlying Warrants and payment of the respective
Underlying Warrant exercise price therefor, all Underlying Warrant Shares
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder. As
long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock issuable upon the exercise of the
Warrants and the Underlying Warrants and all Underlying Warrants to be listed on
or quoted by NASDAQ or listed on such national securities exchange, in the event
the Common Stock is listed on a national securities exchange.
-25-
<PAGE>
12. Notices to Warrant Holders.
Nothing contained in this Agreement shall be construed as
conferring upon the Holder or Holders the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter, or as having any rights
whatsoever as a shareholder of the Company. If, however, at any time prior to
the expiration of the Warrants and their exercise, any of the following events
shall occur:
(a) the Company shall take a record of the holders
of its shares of Common Stock for the purpose of entitling
them to receive a dividend or distribution payable otherwise
than in cash, or a cash dividend or distribution payable
otherwise than out of current or retained earnings, as
indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
(b) the Company shall offer to all the holders of
its Common Stock any additional shares of capital stock of the
Company or securities convertible into or exchangeable for
shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of
the Company (other than in connection with a consoli-
-26-
<PAGE>
dation or merger) or a sale of all or substantially all
of its property, assets and business as an entirety
shall be proposed; or
(d) _____ reclassification or change of the
outstanding shares of Common Stock (other than a change in par
value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), consolidation of
the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result
in any reclassification or change of the outstanding shares of
Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of
the property of the Company as an entirety is proposed; or
(e) _____ The Company or an affiliate of the
Company shall propose to issue any rights to subscribe for
shares of Common Stock or any other securities of the Company
or of such affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders of such event at least fifteen (15) days prior to the
date fixed as a record date or the
-27-
<PAGE>
date of closing the transfer books for the determination of the shareholders
entitled to such dividend, distribution, convertible or exchangeable securities
or subscription rights, options or warrants, or entitled to vote on such
proposed dissolution, liquidation, winding up or sale. Such notice shall specify
such record date or the date of closing the transfer books, as the case may be.
Failure to give such notice or any defect therein shall not affect the validity
of any action taken in connection with the declaration or payment of any such
dividend or distribution, or the issuance of any convertible or exchangeable
securities or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
13. Underlying Warrants.
The form of the certificates representing the Underlying
Warrants (and the form of election to purchase shares of Common Stock upon the
exercise of the Underlying Warrants and the form of assignment printed on the
reverse thereof) shall be substantially as set forth in Exhibit "A" to the
Public Warrant Agreement; provided, however, (i) each Underlying Warrant
issuable upon exercise of the Warrants shall evidence the right to initially
purchase one fully paid and non-assessable share of Common Stock in respect of
the Underlying Warrant at an initial purchase price of $_____ per share until
__________, 1999 and (ii) the Target Redemption Price (as defined in the Public
Warrant Agreement) of the Underlying Warrants is 110% of the then
-28-
<PAGE>
effective exercise price of the Underlying Warrants. As set forth in Section 8.5
of this Agreement, the exercise price of the Underlying Warrants and the number
of shares of Common Stock issuable upon the exercise of the Underlying Warrants
are subject to adjustment, whether or not the Warrants have been exercised and
the Underlying Warrants have been issued, in the manner and upon the occurrence
of the events set forth in Section 9 of the Public Warrant Agreement, which is
hereby incorporated herein by reference and made a part hereof as if set forth
in its entirety herein. Subject to the provisions of this Agreement and upon
issuance of the Underlying Warrants, each registered holder of such Underlying
Warrants shall have the right to purchase from the Company (and the Company
shall issue to such registered holders) up to the number of fully paid and
non-assessable Underlying Warrant Shares (subject to adjustment as provided
herein and in the Public Warrant Agreement), free and clear of all preemptive
rights of shareholders, provided that such registered holder complies, in
connection with the exercise of such holders' Underlying Warrants, with the
terms governing exercise of the Public Warrants set forth in the Public Warrant
Agreement, and pays the applicable exercise price, determined in accordance with
the terms of the Public Warrant Agreement. Upon exercise of the Underlying
Warrants, the Company shall forthwith issue to the registered holder of any such
Underlying Warrants, in such holder's name or in such name as may be directed by
such
-29-
<PAGE>
holder, certificates for the number of Underlying Warrant Shares so purchased.
The Underlying Warrants shall be transferable in the manner provided in the
Public Warrant Agreement, and upon any such transfer, a new Underlying Warrant
shall be issued promptly to the transferee. The Company covenants to, and agrees
with, each Holder that without the prior written consent of all the Holders, the
Public Warrant Agreement will not be modified, amended, cancelled, altered or
superseded, and that the Company will send to each Holder, irrespective of
whether or not the Warrants have been exercised, any and all notices required by
the Public Warrant Agreement to be sent to holders of the Public Warrants.
14. Notices.
All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt requested:
(a) If to a registered Holder of the Warrants,
to the address of such Holder as shown on the books of
the Company; or
(b) If to the Company, to the address set forth in
Section 3 of this Agreement or to such other address as the
Company may designate by notice to the Holders.
15. Supplements and Amendments.
-30-
<PAGE>
The Company and the Representative may from time to time
supplement or amend this Agreement without the approval of any Holders of the
Warrants and/or Warrant Securities in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or inconsistent
with any provisions herein, or to make any other provisions in regard to matters
or questions arising hereunder which the Company and the Representative may deem
necessary or desirable and which the Company and the Representative deem not to
adversely affect the interests of the Holders of Warrant Certificates.
16. Successors.
All the covenants and provisions of this Agreement by or for
the benefit of the Company and the Holders inure to the benefit of their
respective successors and assigns hereunder.
17. Termination.
This Agreement shall terminate at the close of business on
_________, 2005. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date when all Warrants and Underlying Warrants have been exercised
and all Warrant Securities have been resold to the public; provided, however,
that the provisions of Section 7 shall survive any termination pursuant to this
Section 17 until the close of business on __________, 2008.
18. Governing Law.
-31-
<PAGE>
This Agreement and each Warrant Certificate issued hereunder
shall be deemed to be a contract made under the laws of the State of New York
and for all purposes shall be construed in accordance with the laws of said
State.
19. Benefits of This Agreement.
Nothing in this Agreement shall be construed to give to any
person or corporation other than the Company and the Representative and any
other registered holder or holders of the Warrant Certificates or Warrant
Securities any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Company
and the Representative and any other holder or holders of the Warrant
Certificates or Warrant Securities.
20. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes be deemed to be an
original, and such counterparts shall together constitute but one and the same
instrument.
-32-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
[SEAL] GROUP LONG DISTANCE, INC.
By: /s/ Gerald M. Dunne, Jr.
-------------------------------------
Gerald M. Dunne, Jr.
President
Attest:
- -----------------------
LT LAWRENCE & CO., INC.
By:
-------------------------------------
Name:
Title:
-33-
<PAGE>
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______, 2002
No. W-1 125,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that LT Lawrence & Co.,
Inc. or registered assigns, is the registered holder of 125,000 Warrants to
purchase, at any time from _______, 1997 until 5:00 P.M. New York City time on
_______, 2002 ("Expiration Date"), up to 125,000 fully-paid and non-assessable
shares (the "Shares") of the common stock, no par value (the "Common Stock"), of
Group Long Distance, Inc., a Florida corporation (the "Company"), at an initial
exercise price, subject to adjustment in certain events (the "Exercise Price"),
of $4.95 per Share, upon surrender of this Warrant Certificate and payment of
the Exercise Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the warrant agreement dated as of _______,
1997 between the Company and LT Lawrence & Co., Inc. (the "Warrant Agreement").
Payment of the Exercise Price may be made in cash, or by certified or official
bank check in New York Clearing House funds payable to the order of the Company,
or any combination thereof.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
<PAGE>
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair, the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax, or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue to the holder hereof a
new Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997 GROUP LONG DISTANCE, INC.
[SEAL] By: /s/ Gerald M. Dunne, Jr.
-------------------------
Gerald M. Dunne, Jr.
President
Attest:
- ----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Shares of
Common Stock and herewith tenders in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of ____________________________ in the amount of $ ___________ , all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of , whose address is
___________________ , and that such Certificate be delivered to
___________________ , whose address is __________________________.
Dated: Signature:
----------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED
-------------------------------------------
hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
--------------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
- -------------------------------
- -------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, _______, 2002
No. W-1 125,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that LT Lawrence & Co.,
Inc., or registered assigns, is the registered holder of 125,000 Warrants to
purchase, at any time from _______, 1997 until 5:00 P.M. New York City time on
_______, 2002 ("Expiration Date"), an aggregate of up to 125,000 common stock
purchase warrants, each common stock purchase warrant entitling the holder
thereof to purchase one share of common stock, no par value (collectively, the
"Underlying Warrants"), of Group Long Distance, Inc., a Florida corporation (the
"Company"), at an initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $.11 per Underlying Warrant, upon surrender of
this Warrant Certificate and payment of the Exercise Price at an office or
agency of the Company, but subject to the conditions set forth herein and in the
warrant agreement dated as of _______, 1997 between the Company and LT Lawrence
& Co., Inc. (the "Warrant Agreement"). Payment of the Exercise Price may be made
in cash, or by certified or official bank check in New York Clearing House funds
payable to the order of the Company, or any combination thereof.
The Underlying Warrants issuable upon exercise of the Warrants
will be exercisable at any time from _______, 1998 until 5:00 P.M. Eastern Time
_______, 2000 each Underlying Warrant entitling the holder thereof to purchase
one fully-paid
<PAGE>
and non-assessable share of common stock of the Company, at an initial exercise
price, subject to adjustment in certain events, of $5.94 per share. The
Underlying Warrants are issuable pursuant to the terms and provisions of a
certain agreement dated as of _______, 1997 by and among the Company, LT
Lawrence & Co., Inc. and Continental Stock Transfer & Trust Company (the "Public
Warrant Agreement"). The Public Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to
(except as otherwise provided in the Warrant Agreement) for a description of the
rights, limitations of rights, manner of exercise, anti-dilution provisions and
other provisions with respect to the Underlying Warrants.
No Warrant may be exercised after 5:00 P.M., New York City
time, on the Expiration Date, at which time all Warrants evidenced hereby,
unless exercised prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants issued pursuant to the Warrant Agreement,
which Warrant Agreement is hereby incorporated by reference in and made a part
of this instrument and is hereby referred to in a description of the rights,
limitation of rights, obligations, duties and immunities thereunder of the
Company and the holders (the words "holders" or "holder" meaning the registered
holders or registered holder) of the Warrants.
The Warrant Agreement provides that, upon the occurrence of
certain events, the Exercise Price and the type and/or number of the Company's
securities issuable thereupon may, subject to certain conditions, be adjusted.
In such event, the Company will, at the request of the holder, issue a new
Warrant Certificate evidencing the adjustment in the Exercise Price and the
number and/or type of securities issuable upon the exercise of the Warrants;
provided, however, that the failure of the Company to issue such new Warrant
Certificates shall not in any way change, alter, or otherwise impair the rights
of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this
Warrant Certificate at an office or agency of the Company, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced
by this Certificate, the Company shall forthwith issue
<PAGE>
to the holder hereof a new Warrant Certificate representing such number of
unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof
as the absolute owner(s) of this Warrant Certificate (notwithstanding any
notation of ownership or other writing hereon made by anyone), for the purpose
of any exercise hereof, and of any distribution to the holder(s) hereof, and for
all other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined
in the Warrant Agreement shall have the meanings assigned to them in the Warrant
Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant
Certificate to be duly executed under its corporate seal.
Dated: _______, 1997 GROUP LONG DISTANCE, INC.
[SEAL] By: /s/ Gerald M. Dunne, Jr.
-----------------------
Gerald M. Dunne, Jr.
President
Attest:
- ----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ Underlying
Warrants and herewith tenders, in payment for such securities, cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of _______________________ in the amount of $ ___________ , all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of
___________________________, whose address is _____________________________, and
that such Certificate be delivered to __________________, whose address is
_________________________________.
Dated: Signature:
------------------------
(Signature must conform in
all respects to name of
holder as specified on the
face of the Warrant
Certificate.)
--------------------------------
--------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such
holder desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED _________________________________________
hereby sells, assigns and transfers unto
________________________________________________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________, Attorney, to
transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: Signature:
----------------------------
(Signature must conform in all
respects to name of holder as
specified on the face of the
Warrant Certificate)
- --------------------------------
- --------------------------------
(Insert Social Security or Other
Identifying Number of Assignee)
<PAGE>
Group Long Distance, Inc.
a Florida corporation
and
Continental Stock Transfer & Trust Company
Warrant Agent
and
LT Lawrence & Co., Inc.
Representative
WARRANT AGREEMENT
<PAGE>
Table of Contents
Section Page
1 Appointment of Warrant Agent ................... 1
2 Form of Warrant ............................... 2
3 Countersignature and Registration .............. 3
4 Transfers and Exchanges ........................ 3
5 Exercise of Warrants; Payment of Warrant
Solicitation Fee ............................ 4
6 Payment of Taxes ............................... 8
7 Mutilated or Missing Warrants .................. 9
8 Reservation of Common Stock .................... 9
9 Warrant Price; Adjustments ..................... 11
10 Fractional Interest ............................ 18
11 Notices to Warrantholders ...................... 18
12 Disposition of Proceeds on Exercise of
Warrants ....................................... 20
13 Redemption of Warrants ......................... 21
14 Merger or Consolidation or Change of Name
of Warrant Agent ............................... 21
15 Duties of Warrant Agent ........................ 22
16 Change of Warrant Agent ........................ 26
17 Identity of Transfer Agent ..................... 27
18 Notices ........................................ 27
19 Supplements and Amendments ..................... 29
20 New York Contract .............................. 29
21 Benefits of this Agreement ..................... 30
22 Successors ..................................... 30
Exhibit A - Form of Warrant ....................
<PAGE>
WARRANT AGENT AGREEMENT dated as of ___________ , 1997, by and
among Group Long Distance, Inc., a Florida corporation (the "Company"), LT
Lawrence & Co., Inc. (the "Representative") and Continental Stock Transfer &
Trust Company, as warrant agent (hereinafter called the "Warrant Agent").
WHEREAS, the Company proposes to issue and sell to the public
up to 1,437,500 shares of the common stock of the Company, no par value
(hereinafter, together with the stock of any other class to which such shares
may hereafter have been changed, called "Common Stock"), and up to 1,437,500
Common Stock Purchase Warrants (the "Warrants") (such numbers include Shares and
Warrants purchasable by the Underwriter pursuant to the over-allotment option
granted by the Company);
WHEREAS, each Warrant will entitle the holder to purchase one
share of Common Stock;
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer, exchange and exercise of the
Warrants;
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as Warrant Agent for the Company in accordance
with the instructions hereinafter set forth
<PAGE>
in this Agreement, and the Warrant Agent hereby accepts such appointment.
Section 2. Form of Warrant. The text of the Warrants and of
the form of election to purchase Common Stock to be printed on the reverse
thereof shall be substantially as set forth in Exhibit A attached hereto. Each
Warrant shall entitle the registered holder thereof to purchase one share of
Common Stock at a purchase price of $5.40, at any time from ___________, 1998
until 5:00 p.m. Eastern time, on __________, 2000 (the "Warrant Exercise
Period"). The warrant price and the number of shares of Common Stock issuable
upon exercise of the Warrants are subject to adjustment upon the occurrence of
certain events, all as hereinafter provided. The Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or any
future Chief Executive Officer, President or Vice President of the Company,
attested to by the manual or facsimile signature of the present or any future
Secretary or Assistant Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant
Agent either upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants
fall on a Saturday or Sunday, or on a legal holiday on which the New York Stock
Exchange is closed, then the Warrants
-2-
<PAGE>
shall expire at 5:00 p.m. Eastern time on the next succeeding business day.
Section 3. Countersignature and Registration. The Warrant
Agent shall maintain books for the transfer and registration of the Warrants.
Upon the initial issuance of the Warrants, the Warrant Agent shall issue and
register the Warrants in the names of the respective holders thereof. The
Warrants shall be countersigned manually or by facsimile by the Warrant Agent
(or by any successor to the Warrant Agent then acting as warrant agent under
this Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may, however, be so countersigned by the Warrant Agent (or by its
successor as Warrant Agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall
transfer, from time to time, any outstanding Warrants upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender thereof for
transfer properly endorsed or accompanied by appropriate instructions for
transfer. Upon any such transfer, a new Warrant shall be issued to the
transferee and the surrendered Warrant shall be cancelled by the Warrant Agent.
Warrants so cancelled shall be delivered by the Warrant
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Agent to the Company from time to time upon request. Warrants may be exchanged
at the option of the holder thereof, when surrendered at the office of the
Warrant Agent, for another Warrant, or other Warrants of different denominations
of like tenor and representing in the aggregate the right to purchase a like
number of shares of Common Stock.
Section 5. Exercise of Warrants; Payment of Warrant
Solicitation Fee.
(a) Subject to the provisions of this Agreement, each
registered holder of Warrants shall have the right, which may be exercised
commencing at the opening of business on the first day of the Warrant Exercise
Period, to purchase from the Company (and the Company shall issue and sell to
such registered holder of Warrants) the number of fully paid and non-assessable
shares of Common Stock specified in such Warrants upon surrender of such
Warrants to the Company at the office of the Warrant Agent, with the form of
election to purchase on the reverse thereof duly filled in and signed, and upon
payment to the Company of the warrant price, determined in accordance with the
provisions of Sections 9 and 10 of this Agreement, for the number of shares of
Common Stock in respect of which such Warrants are then exercised. Payment of
such warrant price shall be made in cash or by certified check or bank draft to
the order of the Company. Subject to Section 6, upon such surrender of Warrants
and payment of the warrant price, the
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<PAGE>
Company shall issue and cause to be delivered with all reasonable dispatch to or
upon the written order of the registered holder of such Warrants and in such
name or names as such registered holder may designate, a certificate or
certificates for the number of full shares of Common Stock so purchased upon the
exercise of such Warrants. Such certificate or certificates shall be deemed to
have been issued, and any person so designated to be named therein shall be
deemed to have become a holder of record of such shares of Common Stock, as of
the date of the surrender of such Warrants and payment of the warrant price as
aforesaid. The rights of purchase represented by the Warrants shall be
exercisable, at the election of the registered holders thereof, either as an
entirety or from time to time for a portion of the shares specified therein and,
in the event that any Warrant is exercised in respect of less than all of the
shares of Common Stock specified therein at any time prior to the date of
expiration of the Warrants, a new Warrant or Warrants will be issued to the
registered holder for the remaining number of shares of Common Stock specified
in the Warrant so surrendered, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrants pursuant to
the provisions of this Section and of Section 3 of this Agreement and the
Company, whenever requested by the Warrant Agent, will supply the Warrant Agent
with Warrants duly executed on behalf of the Company for such purpose. Anything
in the foregoing to the
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contrary notwithstanding, no Warrant will be exercisable unless at the time of
exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as amended (the "Act"),
covering the shares of Common Stock issuable upon exercise of such Warrant and
such shares have been so registered under the Act and qualified or deemed to be
exempt under the securities laws of the state of residence of the holder of such
Warrant. The Company shall use its best efforts to have all shares so registered
or qualified on or before the date on which the Warrants become exercisable.
(b) If at the time of exercise of any Warrant after (i)
________, 1998 (i) the market price of the Company's Common Stock is equal to or
greater than the then purchase price of the Warrant, (ii) the exercise of the
Warrant is solicited by the Representative at such time while the Representative
is a member of the National Association of Securities Dealers, Inc. ("NASD"),
(iii) the Warrant is not held in a discretionary account, (iv) disclosure of the
compensation arrangement is made in documents provided to the holders of the
Warrants; and (v) the solicitation of the exercise of the Warrant is not in
violation of Rule 10b-6 (as such rule or any successor rule may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Representative shall be entitled to receive from the Company upon
exercise of each of the Warrant(s) so exercised a fee of five
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percent (5%) of the aggregate price of the Warrants so exercised (the "Exercise
Fee"). The procedures for payment of the warrant solicitation fee are set forth
in Section 5(c) below.
(c) (1) Within five (5) days of the last day of each month
commencing with _______, 1998, the Warrant Agent will notify the Representative
of each Warrant Certificate which has been properly completed for exercise by
holders of Warrants during the last month. The Company and Warrant Agent shall
determine, in their sole and absolute discretion, whether a Warrant Certificate
has been properly completed. The Warrant Agent will provide the Representative
with such information, in connection with the exercise of each Warrant, as the
Representative shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the Representative the Exercise Fee promptly after
receipt by the Warrant Agent from the Company of a check payable to the order of
the Representative in the amount of the Exercise Fee. The Warrant Agent shall
not issue the shares of Common Stock issuable upon exercise of the Warrants
until receipt and forwarding of such check to the Representative. In the event
that an Exercise Fee is paid to the Representative with respect to a Warrant
which the Company or the Warrant agent determines is not properly completed for
exercise or in respect of which the Representative is not entitled to an
Exercise Fee, the Representative will promptly return such
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Exercise Fee to the Warrant Agent which shall forthwith return such fee to the
Company.
The Representative and the Company may at any time, after
____________, 1998, and during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant certificates returned to
the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to
the contrary, the provisions of paragraphs 5(b) and 5(c) may not be modified,
amended or deleted without the prior written consent of the Representative.
Section 6. Payment of Taxes. The Company will pay any
documentary stamp taxes attributable to the initial issuance of Common Stock
issuable upon the exercise of Warrants; provided, however, that the Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issue or delivery of any certificates of shares of
Common Stock in a name other than that of the registered holder of Warrants in
respect of which such shares are issued, and in such case neither the Company
nor the Warrant Agent shall be required to issue or deliver any certificate for
shares of Common Stock or any Warrant until the person requesting the same has
paid to the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid.
Section 7. Mutilated or Missing Warrants. In case
any of the Warrants shall be mutilated, lost, stolen or de-
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<PAGE>
stroyed, the Company may, in its discretion, issue and the Warrant Agent shall
countersign and deliver in exchange and substitution for and upon cancellation
of the mutilated Warrant, or in lieu of and in substitution for the Warrant
lost, stolen or destroyed, a new Warrant of like tenor and representing an
equivalent right or interest, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction and, in
case of a lost, stolen or destroyed Warrant, indemnity, if requested, also
satisfactory to them. Applicants for such substitute Warrants shall also comply
with such other reasonable regulations and pay such reasonable charges as the
Company or the Warrant Agent may prescribe.
Section 8. Reservation of Common Stock. There have been
reserved, and the Company shall at all times keep reserved, out of the
authorized and unissued shares of Common Stock, a number of shares of Common
Stock sufficient to provide for the exercise of the rights of purchase
represented by the Warrants, and the transfer agent for the shares of Common
Stock and every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of any of the rights of purchase aforesaid are
irrevocably authorized and directed at all times to reserve such number of
authorized and unissued shares of Common Stock as shall be required for such
purpose. The Company agrees that all shares of Common Stock issued upon exercise
of the Warrants shall be, at the time of delivery of the certificates of
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such shares, validly issued and outstanding, fully paid and non-assessable and
listed on any national securities exchange upon which the other shares of Common
Stock are then listed. So long as any unexpired Warrants remain outstanding, the
Company will file such post-effective amendments to the registration statement
(Form SB-2, Registration No. 333-17681) (the "Registration Statement") filed
pursuant to the Act with respect to the Warrants (or other appropriate
registration statements or post-effective amendment or supplements) as may be
necessary to permit it to deliver to each person exercising a Warrant, a
prospectus meeting the requirements of Section 10(a)(3) of the Act and otherwise
complying therewith, and will deliver such a prospectus to each such person. To
the extent that during any period it is not reasonably likely that the Warrants
will be exercised, due to market price or otherwise, the Company need not file
such a post-effective amendment during such period. The Company will keep a copy
of this Agreement on file with the transfer agent for the shares of Common Stock
and with every subsequent transfer agent for any shares of the Company's Common
Stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is irrevocably authorized to requisition from time
to time from such transfer agent stock certificates required to honor
outstanding Warrants. The Company will supply such transfer agent with duly
executed stock certificates for that purpose. All Warrants surrendered in the
exercise of the rights
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<PAGE>
thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter
be delivered to the Company, and such cancelled Warrants shall constitute
sufficient evidence of the number of shares of Common Stock which have been
issued upon the exercise of such Warrants. Promptly after the date of expiration
of the Warrants, the Warrant Agent shall certify to the Company the total
aggregate amount of Warrants then outstanding, and thereafter no shares of
Common Stock shall be subject to reservation in respect of such Warrants which
shall have expired.
Section 9. Warrant Price; Adjustments.
(a) The warrant price at which Common Stock shall be
purchasable upon the exercise of the Warrants shall be $5.40 per share or after
adjustment, as provided in this Section, shall be such price as so adjusted (the
"Warrant Price").
(b) The Warrant Price shall be subject to adjust-
ment from time to time as follows:
(i) In case the Company shall at any time
after the date hereof pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock, then upon such dividend or distribution
the Warrant Price in effect immediately prior to such dividend or distribution
shall forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total
number of shares of Common Stock outstanding immediately prior to such
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<PAGE>
dividend or distribution multiplied by the Warrant Price in effect immediately
prior to such dividend or distribution, by
(B) the total number of shares of
Common Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be
made in accordance with the provisions of this Section 9(b)(i), the following
provisions shall be applicable: Common Stock issuable by way of dividend or
other distribution on any stock of the Company shall be deemed to have been
issued immediately after the opening of business on the date following the date
fixed for the determination of stockholders entitled to receive such dividend or
other distribution.
(ii) In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Warrant Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination to the nearest one cent. Any such adjustment shall
become effective at the time such subdivision or combination shall become
effective.
(iii) Within a reasonable time after the
close of each quarterly fiscal period of the Company during which the Warrant
Price has been adjusted as herein provided, the Company shall:
(A) file with the Warrant Agent a
cer- tificate signed by the Chief Executive Officer, President or Vice President
of the Company and by the Treasurer or Assistant
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Treasurer or the Secretary or an Assistant Secretary of the Company, showing in
detail the facts requiring all such adjustments occurring during such period and
the Warrant Price after each such adjustment; and
(B) the Warrant Agent shall have no
duty with respect to any such certificate filed with it except to keep the same
on file and available for inspection by holders of Warrants during reasonable
business hours, and the Warrant Agent may conclusively rely upon the latest
certificate furnished to it hereunder. The Warrant Agent shall not at any time
be under any duty or responsibility to any holder of a Warrant to determine
whether any facts exist which may require any adjustment of the Warrant Price,
or with respect to the nature or extent of any adjustment of the Warrant Price
when made, or with respect to the method employed in making any such adjustment,
or with respect to the nature or extent of the property or securities
deliverable hereunder. In the absence of a certificate having been furnished,
the Warrant Agent may conclusively rely upon the provisions of the Warrants with
respect to the Common Stock deliverable upon the exercise of the Warrants and
the applicable Warrant Price thereof.
(iv) Notwithstanding anything contained
herein to the contrary, no adjustment of the Warrant Price shall be made if the
amount of such adjustment shall be less than $.05, but in such case any
adjustment that would otherwise be required
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then to be made shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which, together with any adjustment
so carried forward, shall amount to not less than $.02.
(v) In the event that the number of
outstanding shares of Common Stock is increased by a stock dividend payable in
Common Stock or by a subdivision of the outstanding Common Stock, then, from and
after the time at which the adjusted Warrant Price becomes effective pursuant to
Subsection (b) of this Section by reason of such dividend or subdivision, the
number of shares of Common Stock issuable upon the exercise of each Warrant
shall be increased in proportion to such increase in outstanding shares. In the
event that the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to this Section 9(b)
by reason of such combination, the number of shares of Common Stock issuable
upon the exercise of each Warrant shall be decreased in proportion to such
decrease in the outstanding shares of Common Stock.
(vi) In case of any reorganization or
reclassifi- cation of the outstanding Common Stock (other than a change in par
value, or from par value to no par value, or as a result of a subdivision or
combination), or in case of any consolidation of the Company with, or merger of
the Company into, another corpora-
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<PAGE>
tion (other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any reclassification of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety, the holder of each Warrant then outstanding shall thereafter have the
right to purchase the kind and amount of shares of Common Stock and other
securities and property receivable upon such reorganization, reclassification,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock which the holder of such Warrant shall then be entitled to
purchase; such adjustments shall apply with respect to all such changes
occurring between the date of this Warrant Agreement and the date of exercise of
such Warrant.
(vii) Subject to the provisions of this
Section 9, in case the Company shall, at any time prior to the exercise of the
Warrants, make any distribution of its assets to holders of its Common Stock as
a liquidating or a partial liquidating dividend, then the holder of Warrants who
exercises its Warrants after the record date for the determination of those
holders of Common Stock entitled to such distribution of assets as a liquidating
or partial liquidating dividend shall be entitled to receive for the Warrant
Price per Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such
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<PAGE>
assets at the time of such distribution as determined by the Board of Directors
of the Company in good faith), which would have been payable to such holder had
he been the holder of record of the Common Stock receivable upon exercise of its
Warrant on the record date for the determination of those entitled to such
distribution.
(viii) In case of the dissolution,
liquidation or winding up of the Company, all rights under the Warrants shall
terminate on a date fixed by the Company, such date to be no earlier than ten
(10) days prior to the effectiveness of such dissolution, liquidation or winding
up and not later than five (5) days prior to such effectiveness. Notice of such
termination of purchase rights shall be given to the last registered holder of
the Warrants, as the same shall appear on the books of the Company maintained by
the Warrant Agent, by registered mail at least thirty (30) days prior to such
termination date.
(ix) In case the Company shall, at any time
prior to the expiration of the Warrants and prior to the exercise thereof, offer
to the holders of its Common Stock any rights to subscribe for additional shares
of any class of the Company, then the Company shall give written notice thereof
to the last registered holder thereof not less than thirty (30) days prior to
the date on which the books of the Company are closed or a record date is fixed
for the determination of the stockholders entitled to such subscription rights.
Such notice shall specify the date
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as to which the books shall be closed or record date fixed with respect to such
offer of subscription and the right of the holder thereof to participate in such
offer of subscription shall terminate if the Warrant shall not be exercised on
or before the date of such closing of the books or such record date.
(x) Any adjustment pursuant to the aforesaid
pro- visions of this Section 9 shall be made on the basis of the number of
shares of Common Stock which the holder thereof would have been entitled to
acquire by the exercise of the Warrant immediately prior to the event giving
rise to such adjustment.
(xi) Irrespective of any adjustments in the
Warrant Price or the number or kind of shares purchasable upon exercise of the
Warrants, Warrants previously or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the similar Warrants
initially issuable pursuant to this Warrant Agreement.
(xii) The Company may retain a firm of
independent public accountants (who may be any such firm regularly employed by
the Company) to make any computation required under this Section 9, and any
certificate setting forth such computation signed by such firm shall be
conclusive evidence of the correctness of any computation made under this
Section 9.
(xiii) If at any time, as a result of an
adjustment made pursuant to Section 9(b)(vi) above, the holders of a Warrant or
Warrants shall become entitled to purchase any
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securities other than shares of Common Stock, thereafter the number of such
securities so purchasable upon exercise of each Warrant and the Warrant Price
for such shares shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect to
the Common Stock contained in Sections 9(b)(ii) through (v).
Section 10. Fractional Interest. The Warrants may only be
exercised to purchase full shares of Common Stock and the Company shall not be
required to issue fractions of shares of Common Stock on the exercise of
Warrants. However, if a Warrant holder exercises all Warrants then owned of
record by it and such exercise would result in the issuance of a fractional
share, the Company will pay to such Warrant holder, in lieu of the issuance of
any fractional share otherwise issuable, an amount of cash based on the market
value of the Common Stock of the Company on the last trading day prior to the
exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and the
number of shares of Common Stock issuable upon exercise of a Warrant, then and
in each such case the Company shall give written notice thereof to the Warrant
Agent, which notice shall state the Warrant Price resulting from such adjustment
and the increase or decrease, if any, in the number of shares purchasable at
such price upon the exercise of a Warrant, setting forth in reasonable detail
the method of calculation and the facts upon which such
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calculation is based. The Company shall also mail such notice to the holders of
the Warrants at their addresses appearing in the Warrant register. Failure to
give or mail such notice, or any defect therein, shall not affect the validity
of the adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable
in stock upon its Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock; or
(ii) the Company shall offer for subscrip-
tion pro rata to the holders of its Common Stock any additional shares of stock
of any class or other rights; or
(iii) there shall be any capital reorgani-
zation or reclassification of the capital stock of the Company, or consolidation
or merger of the Company with, or sale or substantially all of its assets to,
another corporation; or
(iv) there shall be a voluntary or involun-
tary dissolution, liquidation or winding up of the Company; then in any one or
more of such cases, the Company shall give written notice in the manner set
forth in Section 11(a) of the date on which (A) a record shall be taken for such
dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common
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Stock of record shall participate in such dividend, distribution or subscription
rights, or shall be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up as the case
may be. Such notice shall be given at least thirty (30) days prior to the action
in question and not less than thirty (30) days prior to the record date in
respect thereof. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of any of the matters set forth in this Section
11(b).
(c) The Company shall cause copies of all financial
statements and reports, proxy statements and other documents that are sent to
its stockholders to be sent by first-class mail, postage prepaid, on the date of
mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of
Warrants.
(i) The Warrant Agent shall promptly forward to the
Company all monies received by the Warrant Agent for the purchase of shares of
Common Stock through the exercise of such Warrants.
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(ii) The Warrant Agent shall keep copies of this
Agreement available for inspection by holders of Warrants during normal business
hours.
Section 13. Redemption of Warrants. The Warrants are
redeemable by the Company upon the consent of the Representative, in whole or in
part, on not less than thirty (30) days' prior written notice at a redemption
price of $.10 per Warrant at any time commencing _________, 1998 ; provided that
(i) the closing sale price of the Common Stock on all thirty (30) trading days
ending on the third day prior to the day on which the Company gives notice of
redemption has been at least 125% of the then effective exercise price of the
Warrants (the "Target Redemption Price") and (ii) the Warrants are currently
exercisable. The redemption notice shall be mailed to the holders of the
Warrants at their addresses appearing in the Warrant register. Holders of the
Warrants will have exercise rights until the close of business on the date fixed
for redemption.
Section 14. Merger or Consolidation or Change of Name of
Warrant Agent. Any corporation or company which may succeed to the corporate
trust business of the Warrant Agent by any merger or consolidation or otherwise
shall be the successor to the Warrant Agent hereunder without the execution or
filing of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible to serve as a successor Warrant
Agent under the provisions of Section 16
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of this Agreement. In case at the time such successor to the Warrant Agent shall
succeed to the agency created by this Agreement, any of the Warrants shall have
been countersigned but not delivered, any such successor to the Warrant Agent
may adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrants shall have been countersigned but
not delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Warrants, by their acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained
herein and in the Warrants shall be taken as statements of the Company, and the
Warrant Agent assumes no responsibility for the correctness of any of the same
except such as describe the Warrant Agent or action taken or to be taken by it.
The Warrant Agent assumes no responsibility with respect to the distribution of
the Warrants except as herein expressly provided.
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(b) The Warrant Agent shall not be responsible for
any failure of the Company to comply with any of the covenants in this Agreement
or in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with
counsel satisfactory to it (who may be counsel for the Company) and the Warrant
Agent shall incur no liability or responsibility to the Company or to any holder
of any Warrant in respect of any action taken, suffered or omitted by it
hereunder in good faith and in accordance with the opinion or the advice of such
counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver, consent, order, certificate
or other instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent in the
execution of this Agreement, to reimburse the Warrant Agent for all expenses,
taxes and governmental charges and other charges incurred by the Warrant Agent
in the execution of this Agreement and to indemnify the Warrant Agent and save
it harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done
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or omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation
to institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as the
Warrant Agent may consider proper, whether with or without any such security or
indemnity. All rights of action under this Agreement or under any of the
Warrants may be enforced by the Warrant Agent without the possession of any of
the Warrants or the production thereof at any trial or other proceeding, and any
such action, suit or proceeding instituted by the Warrant Agent shall be brought
in its name as Warrant Agent, and any recovery of judgment shall be for the
ratable benefit of the registered holders of the Warrants, as their respective
rights and interests may appear.
(g) The Warrant Agent and any stockholder, director,
officer, partner or employee of the Warrant Agent may buy, sell or deal in any
of the Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be interested, or
contract with or lend
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money to or otherwise act as fully and freely as though it were not the Warrant
Agent under this Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent and its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of
the rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys, agents or employees, and the Warrant
Agent shall not be answerable or accountable for any such attorneys, agents or
employees or for any loss to the Company resulting from such neglect or
misconduct, provided reasonable care had been exercised in the selection and
continued employment thereof.
(j) Any request, direction, election, order or demand
of the Company shall be sufficiently evidenced by an instrument signed in the
name of the Company by its Chief Executive Officer, President or a Vice
President or its Secretary or an Assistant Secretary or its Treasurer or an
Assistant Treasurer (unless other evidence in respect thereof be herein
specifically prescribed); and any resolution of the Board of Directors may be
evidenced to the Warrant Agent by a copy thereof certified by the Secretary or
an Assistant Secretary of the Company.
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Section 16. Change of Warrant Agent. The Warrant Agent may
resign and be discharged from its duties under this Agreement by giving to the
Company notice in writing, and to the holders of the Warrants notice by mailing
such notice to the holders at their addresses appearing on the Warrant register,
of such resignation, specifying a date when such resignation shall take effect.
The Warrant Agent may be removed by like notice to the Warrant Agent from the
Company and the like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or shall otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company shall fail to make such appointment within a period of thirty (30) days
after such removal or after it has been notified in writing of such resignation
or incapacity by the resigning or incapacitated Warrant Agent or after the
Company has received such notice from a registered holder of a Warrant (who
shall, with such notice, submit his Warrant for inspection by the Company), then
the registered holder of any Warrant may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Any
successor Warrant Agent, whether appointed by the Company or by such a court,
shall be a bank or trust company, in good standing, incorporated under New York
or federal law. After appointment, the successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant
-26-
<PAGE>
Agent without further act or deed and the former Warrant Agent shall deliver and
transfer to the successor Warrant Agent all cancelled Warrants, records and
property at the time held by it hereunder, and execute and deliver any further
assurance or conveyance necessary for the purpose. Failure to file or mail any
notice provided for in this Section, however, or any defect therein, shall not
affect the validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Common Stock or of any
subsequent transfer agent for the shares of Common Stock or other shares of the
Company's Common Stock issuable upon the exercise of the rights of purchase
represented by the Warrants, the Company will file with the Warrant Agent a
statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to
be given by the Warrant Agent, or by the registered holder of any Warrant to the
Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
Group Long Distance, Inc.
1451 West Cypress Creek Road
Fort Lauderdale, Florida 33309
-27-
<PAGE>
Attention: Gerald M. Dunne, Jr.
and a copy thereof to:
Orrick, Herrington & Sutcliffe LLP
666 Fifth Avenue
New York, New York 10103
Attention: Lawrence B. Fisher, Esq.
Any notice pursuant to this Agreement to be given by the
Company or by the registered holder of any Warrant to the Warrant Agent shall be
sufficiently given if sent by first-class mail, postage prepaid, addressed
(until another address is filed in writing by the Warrant Agent with the
Company) as follows:
Continental Stock Transfer & Trust Company
2 Broadway
New York, New York 10004
Attention: Steven G. Nelson
Any notice pursuant to this Agreement to be given by the
Warrant Agent or by the Company to the Representative shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address if filed in writing with the Warrant agent) as follows:
LT Lawrence & Co., Inc.
3 New York Plaza
New York, New York 10004
Attention: Joel Gold
and a copy thereof to:
Tenzer Greenblatt LLP
405 Lexington Avenue
New York, New York 10174
Attention: Robert J. Mittman, Esq.
-28-
<PAGE>
Section 19. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement in order
to cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Warrant Agent may deem necessary or desirable and
which shall not be inconsistent with the provisions of the Warrants and which
shall not adversely affect the interest of the holders of Warrants.
Section 20. New York Contract. This Agreement and each Warrant
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Representative, the Warrant Agent and the registered holders of the
Warrants any legal or equitable right, remedy or claim under this Agreement; but
this Agreement shall be for the sole and exclusive benefit of the Company, the
Representative, the Warrant Agent and the registered holders of the Warrants.
Section 22. Successors. All the covenants and provi-
sions of this Agreement by or for the benefit of the Company, the
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<PAGE>
Warrant Agent or the Representative shall bind and inure to the benefit of their
respective successors and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
GROUP LONG DISTANCE, INC.
By: /s/ Gerald M. Dunne, Jr.
--------------------------------------
Gerald M. Dunne, Jr.
President
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY
By:
--------------------------------------
LT LAWRENCE & CO., INC.
By:
--------------------------------------
<PAGE>
GROUP LONG DISTANCE, INC.
1996 STOCK OPTION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date and Purpose.................................................................... 1
SECTION 2
DEFINITIONS
2.1 "1934 Act".................................................................................... 1
2.2 "Affiliate"................................................................................... 1
2.3 "Board"....................................................................................... 1
2.4 "Code"........................................................................................ 1
2.5 "Committee"................................................................................... 1
2.6 "Company"..................................................................................... 1
2.7 "Consultant".................................................................................. 2
2.8 "Director".................................................................................... 2
2.9 "Disability".................................................................................. 2
2.10 "Employee".................................................................................... 2
2.11 "Exercise Price".............................................................................. 2
2.12 "Fair Market Value"........................................................................... 2
2.13 "Fiscal Year"................................................................................. 2
2.14 "Grant Date".................................................................................. 2
2.15 "Incentive Stock Option"...................................................................... 2
2.16 "Nonqualified Stock Option"................................................................... 2
2.17 "Option"...................................................................................... 2
2.18 "Option Agreement"............................................................................ 2
2.19 "Participant"................................................................................. 2
2.20 "Plan"........................................................................................ 3
2.21 "Rule 16b-3".................................................................................. 3
2.22 "Section 16 Person"........................................................................... 3
2.23 "Shares"...................................................................................... 3
2.24 "Subsidiary".................................................................................. 3
2.25 "Termination of Service"...................................................................... 3
SECTION 3
ADMINISTRATION
3.1 The Committee................................................................................. 3
3.2 Authority of the Committee.................................................................... 3
3.3 Delegation by the Committee................................................................... 4
3.4 Decisions Binding............................................................................. 4
</TABLE>
i
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<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares.............................................................................. 4
4.2 Lapsed Options................................................................................ 4
4.3 Adjustments in Options and Authorized Shares.................................................. 4
SECTION 5
STOCK OPTIONS
5.1 Grant of Options.............................................................................. 4
5.2 Option Agreement.............................................................................. 4
5.3 Exercise Price................................................................................ 5
5.3.1 Nonqualified Stock Options.......................................................... 5
5.3.2 Incentive Stock Options............................................................. 5
5.3.3 Substitute Options.................................................................. 5
5.4 Expiration of Options......................................................................... 5
5.4.1 Expiration Dates.................................................................... 5
5.4.2 Death of Participant................................................................ 6
5.4.3 Committee Discretion................................................................ 6
5.5 Exercisability of Options..................................................................... 6
5.6 Payment....................................................................................... 6
5.7 Restrictions on Share Transferability......................................................... 6
5.8 Certain Additional Provisions for Incentive Stock Options..................................... 6
5.8.1 Exercisability...................................................................... 6
5.8.2 Termination of Service.............................................................. 7
5.8.3 Company and Subsidiaries Only....................................................... 7
5.8.4 Expiration.......................................................................... 7
5.9 Grant of Reload Options....................................................................... 7
5.10 Granting of Options to Nonemployee Directors.................................................. 7
5.10.1 New Nonemployee Directors........................................................... 7
5.10.2 Continuing Nonemployee Directors.................................................... 7
5.11 Terms of Options for Nonemployee Directors.................................................... 8
5.11.1 Option Agreement.................................................................... 8
5.11.2 Exercise Price...................................................................... 8
5.11.3 Exercisability...................................................................... 8
5.11.4 Expiration of Options............................................................... 8
5.11.5 Death of Director................................................................... 8
5.11.6 Special Rule for Retirement......................................................... 8
5.11.7 Not Incentive Stock Options......................................................... 8
5.11.8 Other Terms......................................................................... 9
</TABLE>
ii
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<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 6
MISCELLANEOUS
6.1 No Effect on Employment or Service............................................................ 9
6.2 Participation................................................................................. 9
6.3 Indemnification............................................................................... 9
6.4 Successors.................................................................................... 9
6.5 Beneficiary Designations...................................................................... 9
6.6 Nontransferability of Options................................................................. 10
6.7 No Rights as Shareholder...................................................................... 10
6.8 Withholding Requirements...................................................................... 10
6.9 Withholding Arrangements...................................................................... 10
SECTION 7
AMENDMENT, TERMINATION, AND DURATION
7.1 Amendment, Suspension, or Termination......................................................... 10
7.2 Duration of the Plan.......................................................................... 10
SECTION 8
LEGAL CONSTRUCTION
8.1 Gender and Number............................................................................. 11
8.2 Severability.................................................................................. 11
8.3 Requirements of Law........................................................................... 11
8.4 Compliance with Rule 16b-3.................................................................... 11
8.5 Governing Law................................................................................. 11
8.6 Captions...................................................................................... 11
</TABLE>
iii
<PAGE>
GROUP LONG DISTANCE, INC.
1996 STOCK OPTION PLAN
GROUP LONG DISTANCE, INC., hereby adopts Group Long Distance,
Inc. 1996 Stock Option Plan, as follows:
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Effective Date and Purpose. The Plan is effective as of
May 21, 1996. The Plan is intended to increase incentive and to encourage Share
ownership on the part of (1) employees of the Company and its Affiliates, and
(2) consultants who provide significant services to the Company and its
Affiliates. The Plan also is intended to further the growth and profitability of
the Company.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following
meanings unless a different meaning is plainly required by the context:
2.1 "1934 Act" means the Securities Exchange Act of 1934, as
amended. Reference to a specific section of the 1934 Act or regulation
thereunder shall include such section or regulation, any valid regulation
promulgated under such section, and any comparable provision of any future
legislation or regulation amending, supplementing or superseding such section or
regulation.
2.2 "Affiliate" means any corporation or any other entity
(including, but not limited to, partnerships and joint ventures) controlling,
controlled by, or under common control with the Company.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as
amended. Reference to a specific section of the Code or regulation thereunder
shall include such section or regulation, any valid regulation promulgated under
such section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.
2.5 "Committee" means the committee appointed by the Board
(pursuant to Section 3.1) to administer the Plan.
2.6 "Company" means Group Long Distance, Inc., a Florida
corporation, or any successor thereto.
<PAGE>
2.7 "Consultant" means any consultant, independent contractor,
or other person who provides significant services to the Company or its
Affiliates, but who is neither an Employee nor a Director.
2.8 "Director" means any individual who is a member of the
Board.
2.9 "Disability" means a permanent and total disability within
the meaning of Code section 22(e)(3), provided that in the case of Options other
than Incentive Stock Options, the Committee in its discretion may determine
whether a permanent and total disability exists in accordance with uniform and
non-discriminatory standards adopted by the Committee from time to time.
2.10 "Employee" means any employee of the Company or of an
Affiliate, whether such employee is so employed at the time the Plan is adopted
or becomes so employed subsequent to the adoption of the Plan.
2.11 "Exercise Price" means the price at which a Share may
be purchased by a Participant pursuant to the exercise of an Option.
2.12 "Fair Market Value" means the last quoted per share
selling price for Shares on the relevant date, or if there were no sales on such
date, the arithmetic mean of the highest and lowest quoted selling prices on the
nearest day before and the nearest day after the relevant date, as determined by
the Committee. Notwithstanding the preceding, with respect to Options granted on
the date of the initial public offering of Shares, fair market value means the
price at which each Share is sold in such offering, as determined by the
Committee.
2.13 "Fiscal Year" means the fiscal year of the Company.
2.14 "Grant Date" means, with respect to an Option, the date
that the Option was granted.
2.15 "Incentive Stock Option" means an Option to purchase
Shares which is designated as an Incentive Stock Option and is intended to meet
the requirements of section 422 of the Code.
2.16 "Nonqualified Stock Option" means an option to purchase
Shares which is not intended to be an Incentive Stock Option.
2.17 "Option" means an Incentive Stock Option or a
Nonqualified Stock Option.
2.18 "Option Agreement" means the written agreement setting
forth the terms and provisions applicable to each Option granted under the Plan.
2.19 "Participant" means an Employee, Consultant, or
Director who has an outstanding Option.
2
<PAGE>
2.20 "Plan" means Group Long Distance, Inc. 1996 Stock
Option Plan, as set forth in this instrument and as hereafter amended from
time to time.
2.21 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934
Act, as amended, and any future regulation amending, supplementing or
superseding such regulation.
2.22 "Section 16 Person" means a person who, with respect to
the Shares, is subject to section 16 of the 1934 Act.
2.23 "Shares" means the shares of the Company's common stock,
no par value.
2.24 "Subsidiary" means any corporation in an unbroken chain
of corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
2.25 "Termination of Service" means (a) in the case of an
Employee, a cessation of the employee-employer relationship between an Employee
and the Company or an Affiliate for any reason, including, but not by way of
limitation, a termination by resignation, discharge, death, Disability,
retirement, or the disaffiliation of an Affiliate, but excluding any such
termination where there is a simultaneous reemployment by the Company or an
Affiliate; (b) in the case of a Consultant, a cessation of the service
relationship between a Consultant and the Company or an Affiliate for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability, or the disaffiliation of an Affiliate, but
excluding any such termination where there is a simultaneous re-engagement of
the consultant by the Company or an Affiliate; and (c) in the case of a
Director, a cessation of the Director's service on the Board for any reason.
SECTION 3
ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the
Committee. The members of the Committee shall be appointed from time to time
by, and shall serve at the pleasure of, the Board.
3.2 Authority of the Committee. It shall be the duty of the
Committee to administer the Plan in accordance with the Plan's provisions. The
Committee shall have all powers and discretion necessary or appropriate to
administer the Plan and to control its operation, including, but not limited to,
the power to (a) determine which Employees, Consultants and Directors shall be
granted Options, (b) prescribe the terms and conditions of the Options, (c)
interpret the Plan and the Options, (d) adopt such procedures and subplans as
are necessary or appropriate to permit participation in the Plan by Employees,
Consultants and Directors who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret, amend or
revoke any such rules.
3
<PAGE>
3.3 Delegation by the Committee. The Committee, in its sole
discretion and on such terms and conditions as it may provide, may delegate all
or any part of its authority and powers under the Plan to one or more directors
or officers of the Company; provided, however, that unless otherwise determined
by the Board, the Committee may not delegate its authority and powers in any way
which would jeopardize the Plan's qualification under section 162(m) of the Code
or Rule 16b-3.
3.4 Decisions Binding. All determinations and decisions made
by the Committee, the Board, and any delegate of the Committee pursuant to the
provisions of the Plan shall be final, conclusive, and binding on all persons,
and shall be given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in
Section 4.3, the total number of Shares available for grant under the Plan shall
not exceed six hundred thousand (600,000) Shares granted under the Plan may be
either authorized but unissued Shares or treasury Shares.
4.2 Lapsed Options. If an Option terminates, expires, or
lapses for any reason, any Shares subject to such Option again shall be
available to be the subject of an Option.
4.3 Adjustments in Options and Authorized Shares. In the event
of any merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, Share combination, or other change in the
corporate structure of the Company affecting the Shares, the Committee shall
adjust the number and class of Shares which may be delivered under the Plan, the
number, class, and price of Shares subject to outstanding Options, and the
numerical limit of Section 5.1 in such manner as the Committee (in its sole
discretion) shall determine to be appropriate to prevent the dilution or
diminution of such Options. Notwithstanding the preceding, the number of Shares
subject to any Option always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 Grant of Options. Subject to the terms and provisions of
the Plan, Options may be granted to Employees, Consultants and Directors at any
time and from time to time as determined by the Committee in its sole
discretion. The Committee, in its sole discretion, shall determine the number of
Shares subject to each Option. The Committee may grant Incentive Stock Options,
Nonqualified Stock Options, or a combination thereof.
5.2 Option Agreement. Each Option shall be evidenced by an
Option Agreement that shall specify the Exercise Price, the expiration date of
the Option, the number
4
<PAGE>
of Shares to which the Option pertains, any conditions to exercise of the
Option, and such other terms and conditions as the Committee, in its discretion,
shall determine. The Option Agreement shall specify whether the Option is
intended to be an Incentive Stock Option or a Nonqualified Stock Option.
5.3 Exercise Price. Subject to the provisions of this
Section 5.3, the Exercise Price for each Option shall be determined by the
Committee in its sole discretion.
5.3.1 Nonqualified Stock Options. In the case of a
Nonqualified Stock Option, the Exercise Price shall be not less than one
hundred percent (100%) of the Fair Market Value of a Share on the Grant Date.
5.3.2 Incentive Stock Options. In the case of an
Incentive Stock Option, the Exercise Price shall be not less than one hundred
percent (100%) of the Fair Market Value of a Share on the Grant Date; provided,
however, that if on the Grant Date, the Employee (together with persons whose
stock ownership is attributed to the Employee pursuant to section 424(d) of
the Code) owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any of its Subsidiaries, the
Exercise Price shall be not less than one hundred and ten percent (110%) of
the Fair Market Value of a Share on the Grant Date.
5.3.3 Substitute Options. Notwithstanding the
provisions of Sections 5.3.1 and 5.3.2, in the event that the Company or an
Affiliate consummates a transaction described in section 424(a) of the Code
(e.g., the acquisition of property or stock from an unrelated corporation),
persons who become Employees or Consultants on account of such transaction may
be granted Options in substitution for options granted by their former
employer. If such substitute Options are granted, the Committee, in its sole
discretion and consistent with section 424(a) of the Code, shall determine the
exercise price of such substitute Options.
5.4 Expiration of Options.
5.4.1 Expiration Dates. Each Option shall
terminate no later than the first to occur of the following events:
(a) The date for termination of the Option set
forth in the written Option Agreement; or
(b) The expiration of ten (10) years from the
Grant Date; or
(c) The expiration of three (3) months from the date
of the Participant's Termination of Service for a reason other than the
Participant's death, Disability or Retirement; or
(d) The expiration of one (1) year from the date of
the Participant's Termination of Service by reason of Disability.
5
<PAGE>
5.4.2 Death of Participant. Notwithstanding Section
5.4.1, if a Participant dies prior to the expiration of his or her options,
the Committee, in its discretion, may provide that his or her options shall be
exercisable for up to one (1) year after the date of death.
5.4.3 Committee Discretion. The Committee, in its
sole discretion, (a) shall provide in each Option Agreement when each Option
expires and becomes unexercisable, and (b) may, after an Option is granted,
extend the maximum term of the Option (subject to Section 5.4.1(b) (regarding
the maximum term of Options) and Section 5.8.4 (regarding Incentive Stock
Options)).
5.5 Exercisability of Options. Options granted under the Plan
shall be exercisable at such times and be subject to such restrictions and
conditions as the Committee shall determine in its sole discretion. After an
Option is granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option.
5.6 Payment. Options shall be exercised by the Participant's
delivery of a written notice of exercise to the Secretary of the Company (or its
designee), setting forth the number of Shares with respect to which the Option
is to be exercised, accompanied by full payment for the Shares.
Upon the exercise of any Option, the Exercise Price shall be
payable to the Company in full in cash or its equivalent. The Committee, in its
sole discretion, also may permit exercise (a) by tendering previously acquired
Shares having an aggregate Fair Market Value at the time of exercise equal to
the total Exercise Price, or (b) by any other means which the Committee, in its
sole discretion, determines to both provide legal consideration for the Shares,
and to be consistent with the purposes of the Plan.
As soon as practicable after receipt of a written notification
of exercise and full payment for the Shares purchased, the Company shall deliver
to the Participant (or the Participant's designated broker), Share certificates
(which may be in book entry form) representing such Shares.
5.7 Restrictions on Share Transferability. The Committee may
impose such restrictions on any Shares acquired pursuant to the exercise of an
Option as it may deem advisable, including, but not limited to, restrictions
related to applicable Federal securities laws, the requirements of any national
securities exchange or system upon which Shares are then listed or traded, or
any blue sky or state securities laws.
5.8 Certain Additional Provisions for Incentive Stock
Options.
5.8.1 Exercisability. The aggregate Fair Market Value
(determined on the Grant Date(s)) of the Shares with respect to which
Incentive Stock Options are exercisable for the first time by any Employee
during any calendar year (under all plans of the Company and its Subsidiaries)
shall not exceed $100,000.
6
<PAGE>
5.8.2 Termination of Service. No Incentive Stock
Option may be exercised more than three (3) months after the Participant's
Termination of Service for any reason other than Disability or death, unless (a)
the Participant dies during such three-month period, and (b) the Option
Agreement or the Committee permits later exercise.
5.8.3 Company and Subsidiaries Only. Incentive Stock
Options may be granted only to persons who are employees of the Company or a
Subsidiary on the Grant Date.
5.8.4 Expiration. No Incentive Stock Option may be
exercised after the expiration of ten (10) years from the Grant Date; provided,
however, that if the Option is granted to an Employee who, together with
persons whose stock ownership is attributed to the Employee pursuant to section
424(d) of the Code, owns stock possessing more than 10% of the total combined
voting power of all classes of the stock of the Company or any of its
Subsidiaries, the Option may not be exercised after the expiration of five (5)
years from the Grant Date.
5.9 Grant of Reload Options. The Committee may provide in an
Option Agreement that a Participant who exercises all or part of an Option by
payment of the Exercise Price with already-owned Shares, shall be granted an
additional option (a "Reload Option") for a number of shares of stock equal to
the number of Shares tendered to exercise the previously granted Option plus, if
the Committee so determines, any Shares withheld or delivered in satisfaction of
any tax withholding requirements. As determined by the Committee, each Reload
Option shall: (a) have a Grant Date which is the date as of which the previously
granted Option is exercised, and (b) be exercisable on the same terms and
conditions as the previously granted Option, except that the Exercise Price
shall be determined as of the Grant Date.
5.10 Granting of Options to Nonemployee Directors.
5.10.1 New Nonemployee Directors. Each Nonemployee
Director who first becomes a Nonemployee Director on or after the effective date
of the Plan shall be granted an Option to purchase such number of Shares as
shall be determined by the Board or the Committee from time to time. Such Option
shall be granted on the first business day after the first Annual Meeting of
Shareholders at which the Nonemployee Director is such, but only if he or she
remains a Nonemployee Director on the Grant Date. Thereafter, for so long as the
Nonemployee Director remains such, he or she annually shall be granted an Option
for such number of additional Shares as shall be determined by the Board or the
Committee from time to time. Each such Option shall be granted on the first
business day after each Annual Meeting of Shareholders, but only if the
Nonemployee Director has continuously served as such through the Grant Date.
5.10.2 Continuing Nonemployee Directors. Each
Nonemployee Director who became a Nonemployee Director prior to the effective
date of the Plan annually shall be granted an Option to purchase such number
of Shares for as long as he or she remains a Nonemployee Director as shall be
determined by the Board or the Committee from time to time. Each such Option
shall be granted on the first business day after each Annual Meeting of
Shareholders, but only if the Nonemployee Director has continuously served as
such through the Grant Date.
7
<PAGE>
5.11 Terms of Options for Nonemployee Directors.
5.11.1 Option Agreement. Each Option granted pursuant
to Section 5.10 shall be evidenced by a written stock option agreement which
shall be executed by the Participant and the Company.
5.11.2 Exercise Price. The Exercise Price for the
Shares subject to each Option granted pursuant to Section 5.10 shall be 100%
of the Fair Market Value of such Shares on the Grant Date.
5.11.3 Exercisability. Each Option granted pursuant
to Section 5.10 shall become exercisable in full one year after the date the
Option is granted. If a Nonemployee Director incurs a Termination of Service for
a reason other than Retirement, death or Disability, his or her Options which
are not exercisable on the date of such Termination shall never become
exercisable. If the Termination of Service is on account of Retirement, death or
Disability, the Option shall become exercisable in full on the date of the
Termination of Service.
5.11.4 Expiration of Options. Each Option shall
terminate upon the first to occur of the following events:
(a) The expiration of ten (10) years from the
Grant Date; or
(b) The expiration of three (3) months from the
date of the Participant's Termination of Service for a reason other
than death, Disability or Retirement; or
(c) The expiration of one (1) year from the date
of the Participant's Termination of Service by reason of Disability or
Retirement.
5.11.5 Death of Director. Notwithstanding Section
5.11.4, if a Director dies prior to the expiration of his or her options in
accordance with Section 5.11.4, his or her options shall terminate one (1)
year after the date of his or her death.
5.11.6 Special Rule for Retirement. Notwithstanding
the provisions of Section 5.11.4, if the exercisability of an Option is
accelerated under Section 5.11.3 on account of the Participant's Retirement,
such Option shall terminate upon the first to occur of: (a) The expiration of
ten (10) years from the date the Option was granted; or (b) the expiration of
one year from the date of the Participant's death.
5.11.7 Not Incentive Stock Options. Options granted
pursuant to Section 5.10 shall not be designated as Incentive Stock Options.
5.11.8 Other Terms. All provisions of the Plan not
inconsistent with Section 5.10 and this Section 5.11 shall apply to Options
granted to Nonemployee Directors; provided, however, that Section 5.2 (relating
to the Committee's discretion to set the terms and conditions of Options) shall
be inapplicable with respect to Nonemployee Directors.
8
<PAGE>
SECTION 6
MISCELLANEOUS
6.1 No Effect on Employment or Service. Nothing in the Plan
shall interfere with or limit in any way the right of the Company to terminate
any Participant's employment or service at any time, with or without cause. For
purposes of the Plan, transfer of employment of a Participant between the
Company and any one of its Affiliates (or between Affiliates) shall not be
deemed a Termination of Service. Employment or service with the Company and its
Affiliates is on an at-will basis only.
6.2 Participation. No Employee, Consultant or Director shall
have the right to be selected to receive an Option under this Plan, or, having
been so selected, to be selected to receive a future Option.
6.3 Indemnification. Each person who is or shall have been a
member of the Committee, or of the Board, shall be indemnified and held harmless
by the Company against and from (a) any loss, cost, liability, or expense that
may be imposed upon or reasonably incurred by him or her in connection with or
resulting from any claim, action, suit, or proceeding to which he or she may be
a party or in which he or she may be involved by reason of any action taken or
failure to act under the Plan or any Option Agreement, and (b) from any and all
amounts paid by him or her in settlement thereof, with the Company's approval,
or paid by him or her in satisfaction of any judgment in any such claim, action,
suit, or proceeding against him or her, provided he or she shall give the
Company an opportunity, at its own expense, to handle and defend the same before
he or she undertakes to handle and defend it on his or her own behalf. The
foregoing right of indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the Company's
Certificate of Incorporation or Bylaws, by contract, as a matter of law, or
otherwise, or under any power that the Company may have to indemnify them or
hold them harmless.
6.4 Successors. All obligations of the Company under the
Plan, with respect to Options granted hereunder, shall be binding on any
successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation, or otherwise, of all or
substantially all of the business or assets of the Company.
6.5 Beneficiary Designations. If permitted by the Committee,
a Participant under the Plan may name a beneficiary or beneficiaries to whom any
vested but unpaid Option shall be paid in the event of the Participant's death.
Each such designation shall revoke all prior designations by the Participant and
shall be effective only if given in a form and manner acceptable to the
Committee. In the absence of any such designation, any vested benefits remaining
unpaid at the Participant's death shall be paid to the Participant's estate and,
subject to the terms of the Plan and of the applicable Option Agreement, any
unexercised vested Option may be exercised by the administrator or executor of
the Participant's estate.
6.6 Nontransferability of Options. No Option granted under
the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, by the laws of descent and distribution, or to
the limited extent provided in Section 6.5. All
9
<PAGE>
rights with respect to an Option granted to a Participant shall be available
during his or her lifetime only to the Participant.
6.7 No Rights as Shareholder. No Participant (nor any
beneficiary) shall have any of the rights or privileges of a shareholder of the
Company with respect to any Shares issuable pursuant to an Option, unless and
until certificates representing such Shares shall have been issued, recorded on
the records of the Company or its transfer agents or registrars, and delivered
to the Participant (or beneficiary).
6.8 Withholding Requirements. Prior to the delivery of any
Shares or cash pursuant to an Option, the Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy Federal, state, and local taxes (including the
Participant's FICA obligation) required to be withheld with respect to such
Option (or exercise thereof).
6.9 Withholding Arrangements. The Committee, in its sole
discretion and pursuant to such procedures as it may specify from time to time,
may permit or require a Participant to satisfy all or part of the tax
withholding obligations in connection with an Option by (a) having the Company
withhold otherwise deliverable Shares, or (b) delivering to the Company
already-owned Shares having a Fair Market Value equal to the amount required to
be withheld. The amount of the withholding requirement shall be deemed to
include any amount which the Committee determines, not to exceed the amount
determined by using the maximum federal, state or local marginal income tax
rates applicable to the Participant with respect to the Option on the date that
the amount of tax to be withheld is to be determined. The Fair Market Value of
the Shares to be withheld or delivered shall be determined as of the date that
the taxes are required to be withheld.
SECTION 7
AMENDMENT, TERMINATION, AND DURATION
7.1 Amendment, Suspension, or Termination. The Board, in its
sole discretion, may amend or terminate the Plan, or any part thereof, at any
time and for any reason. The amendment, suspension, or termination of the Plan
shall not, without the consent of the Participant, alter or impair any rights or
obligations under any Option theretofore granted to such Participant. No Option
may be granted during any period of suspension or after termination of the Plan.
7.2 Duration of the Plan. The Plan shall commence on the
date specified herein, and subject to Section 11.1 (regarding the Board's
right to amend or terminate the Plan), shall remain in effect thereafter.
However, without further shareholder approval, no Incentive Stock Option may
be granted under the Plan after May 21, 2006.
10
<PAGE>
SECTION 8
LEGAL CONSTRUCTION
8.1 Gender and Number. Except where otherwise indicated by the
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
8.2 Severability. In the event any provision of the Plan shall
be held illegal or invalid for any reason, the illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
8.3 Requirements of Law. The granting of Options and the
issuance of Shares under the Plan shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any governmental agencies or
national securities exchanges as may be required.
8.4 Compliance with Rule 16b-3. Transactions under this Plan
with respect to Section 16 Persons are intended to comply with all applicable
conditions of Rule 16b-3. To the extent any provision of the Plan, Option
Agreement or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.
8.5 Governing Law. The Plan and all Option Agreements
shall be construed in accordance with and governed by the laws of the State of
Florida.
8.6 Captions. Captions are provided herein for convenience
only, and shall not serve as a basis for interpretation or construction of the
Plan.
EXECUTION
IN WITNESS WHEREOF, Group Long Distance, Inc., by its duly
authorized officer, has executed the Plan on the date indicated below.
GROUP LONG DISTANCE, INC.
Dated as of: May 21, 1996 By _______________________________
Gerald M. Dunne, Jr.
President
11
<PAGE>
AMENDED PROMISSORY NOTE
$1,253,798.46 December 20, 1996
FOR VALUE RECEIVED, the undersigned, GROUP LONG DISTANCE, INC., (the
"Maker"), whose chief executive office and principal place of business is
located at 1451 West Cypress Creek Road, Suite 200, Ft. Lauderdale, FL 33309, a
Florida corporation, hereby promises to pay to the order of WORLDCOM, INC. fka
LDDS COMMUNICATIONS, INC., a Georgia corporation, (the "Holder"), at its offices
at One Williams Center, 28-18, Tulsa, Oklahoma 74172, Attention: Mr. Robert S.
Vetera, or at such other place as the Holder may from tiome to time designate,
the principal sum of One Million Two Hundred Fifty-Three Thousand Seven Hundred
Ninety-Eight Dollars and Forty-Six Cents ($1,253,798.46), together with interest
on such sum from the date hereof, payable as follows:
(i)Interest shall accrue on the unpaid principal balance hereof
from the due date of this Note until paid in full at a rate
equal to sixteen percent (16%) per annum. If the Maker fails
to pay to the Holder any amounts owing to the Holder under
this Note as of the date, interest ("Post-Default Interest")
on all the outstanding unpaid amounts under this Note shall
accrue at a rate equal to eighteen percent (18%) per annum
from the original due date of such amount until all such
amounts have been paid in full and shall be payable on demand.
(ii)Principal and interest (other than Post-Default Interest) shall
be payable in accordance with the Note amortization Schedule,
attached hereto and made a part hereof; provided, however, that
in the event WorldCom issues a credit to Group Long Distance,
Inc. as a result of a pending dispute still under
consideration by WorldCom at the time of the execution of this
Amended Promissory Note, those credits shall be applied to the
principal balance of the Note, and any interest charged from
the date of the execution of the Note to the date the credit is
issued shall be credited to the outstanding balance of the
Note. However, in no way shall any approved credits constitute
a monthly payment or take the place of a monthly payment, and
Group Long Distance Inc. hereby agrees to make monthly payments
pursuant to the Note Amortization Schedule.
If the Maker fails to pay to the Holder when due any amounts owing to
the Holder under this Note, or breaches any other terms of this Note or any
other agreement with Holder (an "Event of Default"), the Holder may declare, by
written notice, the entire principal amount then unpaid, together with all
accrued interest, immediately due and payable. If an Event of Default occurs
and this Note is placed in the hands of an attorney for collection, or suit is
filed hereon, or proceedings are had in bankruptcy, receivership,
reorganization, or other judicial proceedings for the
Page 1
<PAGE>
establishment or collection of any amount called for hereunder, or any amount
payable or to be payable hereunder is collected through any such proceedings,
the Maker agrees to pay attorneys' and collection fees to the Holder.
Except as otherwise provided herein, Maker hereby waives presentment,
demand, protest and notice of dishonor. Failure by the Holder to exercise any
of the rights or remedies set forth herein shall not constitute a waiver of the
right to exercise the same or any other right of remedy at any subsequent time
in repsect to the same or any other event. The acceptance by the Holdewr of any
payment hereunder that is less than payment in full of all amounts due and
payable at the time of such payment shall not constitute a waiver of the right
to exercise any of the foregoing rights or remedies at that time or at any
subsequent time, or nullify any prior exercise of any such right or remedy
without the express written consent of the Holder.
All amounts payable hereunder are payable in lawful money of the United
States of America.
It is expressly stipulated and agreed to be the intent of the Maker and
the Holder to at all times comply with the applicable law now or hereafter
governing the interest payable on this Note or the indebtedness evidenced
hereby. If the applicable law as it is now or as it may be revised, repealed or
judicially interpreted so as to render usurious any amount called for under this
Note, or contracted for, charged, taken, reserved or received with respect to
the indebtedness evidenced by this Note, or if the Holder's exercise of the
option herein contained to accelerate the maturity of this Note or if any
prepayment by the Maker results in the Maker having paid any interest in excess
of that permitted by applicable law, then it is the Maker's and the Holder's
express intent that all excess amounts theretofore collected by the Holder be
credited on the principal balance of this Note (or, if this Note has been paid
in full, refunded to the Maker), and the provisions of this Note shall
immediately be deemed reformed and the amounts thereafter collectible hereunder
reduced, without the necessity of the execution of any new document, so as to
comply with the then applicable law, but so as to permit the recovery of the
fullest amount otherwise called for hereunder.
All notices and other communications required or permitted to be made to
the Maker hereunder shall be made in writing and will be deemed delivered when
received by Maker by
Page 2
<PAGE>
messenger, telex, telecopier or mail at the following address or such other
address as Maker may notify Holder in writing from time to time:
Gerald M. Dunne, Jr., President and CEO
Group Long distance, Inc.
1451 Cypress Creek Road, Suite 200
Ft. Lauderdale, FL 33309
THIS NOTE SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH OKLAHOMA
LAW WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.
This Note shall amend that certain Promissory Note in the amount of
$566,916.66 dated June 6, 1996. The terms of this Note shall be binding upon
and inure to the benefit of the successors and assigns of the Maker and the
Holder.
EXECUTED as of the date and year first above written.
GROUP LONG DISTANCE, INC.
BY: /s/ Gerald M. Dunne, Jr.
_________________________________________
Gerald M. Dunne, Jr.
President and CEO
Page 3
<PAGE>
NOTE AMORTIZATION SCHEDULE
(360-Day Year)
DEBTOR: Group Long Distance, Inc.
CREDITOR: WorldCom Inc., F.K.A./LDDS Communications, Inc.
DATE: 20-Dec-96
PRINCIPAL: $1,253,798.46
INT RATE: 16.00%
MONTHS: 12
PAYMENT: 113,758.21 **
<TABLE>
<CAPTION>
Payment Payment Beginning Principal Total Ending
Number Due Date Balance Interest Reduction Payment Balance
------- -------- --------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1 20-Jan-97 $1,253,798.46 $16,717.31 $97,040.90 $113,758.21 $1,156,757.56
2 20-Feb-97 $1,156,757.56 $15,423.43 $98,334.78 $113,758.21 $1,058,422.78
3 20-Mar-97 $1,058,422.78 $14,112.30 $99,645.91 $113,758.21 $958,776.87
4 20-Apr-97 $958,776.87 $12,783.69 $100,974.52 $113,758.21 $857,802.35
5 20-May-97 $857,802.35 $11,437.36 $102,320.85 $113,758.21 $755,481.50
6 20-Jun-97 $755,481.50 $10,073.09 $103,685.12 $113,758.21 $651,796.38
7 20-Jul-97 $651,796.38 $8,690.62 $105,067.59 $113,758.21 $546,728.79
8 20-Aug-97 $546,728.79 $7,289.72 $106,468.49 $113,758.21 $440,260.30
9 20-Sep-97 $440,260.30 $5,870.14 $107,888.07 $113,758.21 $332,372.23
10 20-Oct-97 $332,372.23 $4,431.63 $109,326.58 $113,758.21 $223,045.65
11 20-Nov-97 $223,045.65 $2,973,94 $110,784.27 $113,758.21 $112,261.38
12 29-Dec-97 $112,261.38 $1,496.82 $112,261.38 $113,758.20 $0.00
-----------------------------------------------------
Totals $111,300.05 $1,253,798.46 $1,365,098.51
=====================================================
</TABLE>
**Note: Final Payment is $113,758.20
Group Long Distance, Inc.
By: /s/
-------------------------------------------------------------
By:
-------------------------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM GROUP LONG DISTANCE, INC. FINANCIAL
STATEMENTS ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN
IT'S ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 8-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 3,538,080
<ALLOWANCES> (994,000)
<INVENTORY> 0
<CURRENT-ASSETS> 4,096,279
<PP&E> 447,359
<DEPRECIATION> (88,070)
<TOTAL-ASSETS> 8,748,839
<CURRENT-LIABILITIES> 9,124,258
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> (475,409)
<TOTAL-LIABILITY-AND-EQUITY> 8,748,839
<SALES> 0
<TOTAL-REVENUES> 15,069,300
<CGS> 10,848,880
<TOTAL-COSTS> 10,848,880
<OTHER-EXPENSES> 5,011,905
<LOSS-PROVISION> 693,148
<INTEREST-EXPENSE> 264,417
<INCOME-PRETAX> (1,749,050)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,749,050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,749,050)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (0.79)
</TABLE>
