<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 1997.
REGISTRATION STATEMENT NO. 333-25065
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE AMENDMENT NO. 4 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
TELEGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
IOWA 4813 42-1344121
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
2098 NUTMEG AVENUE
FAIRFIELD, IOWA 52556
(515) 472-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DOUGLAS A. NEISH
CHIEF FINANCIAL OFFICER
TELEGROUP, INC.
2098 NUTMEG AVENUE
FAIRFIELD, IOWA 52556
(515) 472-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JOHN J. KLUSARITZ, ESQ. DENNIS J. FRIEDMAN, ESQ.
MORRIS F. DEFEO, JR., ESQ.
SWIDLER & BERLIN, CHARTERED CLAUDE S. SERFILIPPI
CHADBOURNE & PARKE LLP
3000 K STREET, N.W., SUITE 300 30 ROCKEFELLER PLAZA
WASHINGTON, D.C. 20007 NEW YORK, NY 10112
(202) 424-7500 (212) 408-5100
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
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: [_]
----------------
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 THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of Prospectus: (i) one to be
used in connection with an offering of the Registrant's Common Stock in the
United States and Canada (the "U.S. Prospectus") and (ii) the other to be used
in a concurrent offering of the Registrant's Common Stock outside the United
States and Canada (the "International Prospectus" and, together with the U.S.
Prospectus, the "Prospectuses"). The International Prospectus will be
identical to the U.S. Prospectus except that it will have a different front
cover page and back cover page. The U.S. Prospectus is included herein and is
followed by the alternate pages to be used in the International Prospectus.
Such alternate pages for the International Prospectus included herein are
labeled "Alternate Page for International Prospectus."
<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 +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 19, 1997
PROSPECTUS
7,200,000 SHARES
LOGO
COMMON STOCK
--------
Of the 7,200,000 shares of Common Stock, no par value (the "Common Stock"),
offered hereby, 5,760,000 shares are being offered in the United States and
Canada (the "U.S. Offering") by the U.S. Underwriters (as defined) and
1,440,000 shares are being offered in a concurrent international offering (the
"International Offering" and, together with the U.S. Offering, the "Offering")
outside the United States and Canada by the Managers (as defined). The initial
public offering price and the aggregate underwriting discount per share are
identical for both offerings. All of the shares offered hereby are being issued
and sold by Telegroup, Inc. (the "Company").
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price of the
Common Stock will be between $14.00 and $16.00 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. The shares of Common Stock have been approved for
quotation on The Nasdaq National Market under the symbol "TGRP," subject to
official notice of issuance.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
--------
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>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -----------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- -----------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and certain existing securityholders (the "Selling
Shareholders") have agreed to indemnify the U.S. Underwriters and the
Managers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000, all of which will be
paid by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters and the
Managers a 30-day option to purchase up to an additional 1,080,000 shares
of Common Stock on the same terms as set forth above solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public and Underwriting Discounts and
Commissions will be $ and $ , respectively, and the Proceeds to
Selling Shareholders will be $ . See "Underwriting." The Company will
not receive any of the proceeds from the sale of shares by the Selling
Shareholders pursuant to the over-allotment option.
--------
The shares of Common Stock are being offered by the several U.S. Underwriters
and the several Managers named herein, subject to prior sale, when, as and if
received and accepted by them and subject to certain conditions. It is expected
that certificates for shares of Common Stock will be available for delivery on
or about , 1997 at the offices of Smith Barney Inc., 333 W. 34th Street, New
York, New York 10001.
--------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
, 1997
<PAGE>
[LOGO OF TELEGROUP APPEARS HERE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including risk factors, the Company's consolidated financial
statements and other financial data, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information in this Prospectus (i) assumes an
estimated initial public offering price equal to $15.00 (the midpoint of the
range shown on the cover page of this Prospectus) and that the "over-allotment"
option is not exercised and (ii) has been adjusted to give effect to the
"Reclassification" and the approximately 5.51-for-1 "Stock Split," each as
defined and described in "Description of Capital Stock." References in this
Prospectus to the "Company" and "Telegroup" refer to Telegroup, Inc. and its
subsidiaries, except where the context otherwise requires. See "Glossary of
Terms" for definitions of certain technical and other terms used in this
Prospectus.
THE COMPANY
Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network (the "Telegroup Intelligent Global Network" or
"TIGN") to deliver its services in a reliable, flexible and cost-effective
manner to approximately 204,000 active customers worldwide. According to
Federal Communications Commission ("FCC") statistics, Telegroup was the sixth
largest U.S. carrier of outbound international traffic in 1995.
Telegroup provides an extensive range of telecommunications services on a
global basis under the Spectra, Global Access and other brand names. The
Company's services are typically priced competitively with other alternative
telecommunications providers and below the prices offered by the incumbent
telecommunications operators ("ITOs"), which are often government-owned or
protected telephone companies. While the Company offers a broad range of
telecommunications services, the services offered in a particular market vary
depending upon regulatory constraints and local market demands. Telegroup
historically has offered traditional call-reorigination service (also known as
"callback") to penetrate international markets having regulatory constraints.
As major markets continue to deregulate, the Company intends to migrate an
increasing portion of its customer base to "call-through" service, which
includes conventional international long distance service and a "transparent"
form of call-reorigination. The Company markets its call-through service under
the brand name Global Access Direct and its traditional call-reorigination
service under the brand name Global Access CallBack. Currently, the Company
offers both international and national long distance service, prepaid and
postpaid calling cards, toll-free service and enhanced services such as fax
store and forward, fax-mail, voice-mail and call conferencing. The Company
believes its broad array of basic and enhanced services enables the Company to
offer a comprehensive solution to its customers' telecommunications needs. The
Company also resells switched minutes on a wholesale basis to other
telecommunications providers and carriers. See "Business--Services."
Telegroup's extensive sales, marketing and customer service organization
consists of a worldwide network of independent agents and an internal sales
force who market Telegroup's services and provide customer service, typically
in local languages and in accordance with the cultural norms of the countries
and regions in which they operate. The Company's local sales, marketing and
customer service organization permits the Company to continually monitor
changes in each market and quickly modify service and sales strategies in
response to changes in particular markets. In addition, the Company believes
that it can leverage its global sales and marketing organization to quickly and
efficiently market new and innovative service offerings. As of April 30, 1997,
the Company had approximately 1,300 independent agents worldwide. Thirty
country coordinators ("Country Coordinators") are responsible for coordinating
Telegroup's operations, including sales, marketing,
3
<PAGE>
customer service and independent agent support, in 63 countries. In addition,
the Company has 30 internal sales personnel in the United States and one each
in France, Germany and the United Kingdom, and intends to establish additional
internal sales departments in selected core markets. The Company believes that
its comprehensive global sales, marketing and customer service organization
will enable the Company to increase its market share and position itself as the
leading alternative international long distance provider in each of its target
markets. The Company believes that it is the largest alternative international
long distance provider in three of the largest international telecommunications
markets in the world--France, the Netherlands and Switzerland. See "Business--
Sales, Marketing and Customer Service."
The Telegroup Intelligent Global Network includes a central Network
Operations Center ("Network Operations Center") in Iowa City, Iowa, as well as
switches, owned and leased transmission capacity and a proprietary distributed
intelligent network architecture. The TIGN is designed to allow customer-
specific information, such as credit limits, language selection, waiting voice-
mail and faxes, and speed dial numbers to be distributed efficiently over a
parallel data network wherever Telegroup has installed a TIGN switch. In
addition, the open, programmable architecture of the TIGN allows the Company to
rapidly deploy new features, improve service quality, and reduce costs through
least cost routing. As of April 30, 1997, the TIGN consisted of (i) the Network
Operations Center, (ii) 13 Excel, NorTel or Harris switches in Fairfield, Iowa,
New York City, London, Paris, Amsterdam, Hong Kong, Sydney and Tokyo, (iii) two
enhanced services platforms in New York and Hong Kong, (iv) two trans-oceanic
fiber-optic cable links connecting its New York switches to its switches in
London and Sydney, and (v) leased parallel data transmission capacity
connecting Telegroup's switches to each other and to the networks of other
international and national carriers. The Company intends to further develop the
TIGN by upgrading existing facilities and by adding switches and transmission
capacity principally in and between major markets where the Company has
established a substantial customer base. During the next 18 months, the Company
has scheduled the installation of additional switches in New Jersey, Los
Angeles, Chicago, Miami, Denmark, Germany, Switzerland, Italy and Brazil, and
additional nodes in Sweden, Norway, Belgium, Italy, New Zealand, Germany,
Switzerland and Japan. Telegroup also anticipates purchasing ownership in
additional fiber-optic cables and leasing additional dedicated transmission
capacity to reduce the Company's per minute transmission costs. See "Business--
Network and Operations."
MARKET OPPORTUNITY
The global market for international telecommunications services is undergoing
significant deregulation and reform. The industry is being shaped by the
following trends: (i) deregulation and privatization of telecommunications
markets worldwide; (ii) diversification of services through technological
innovation; and (iii) globalization of major carriers through market expansion,
consolidation and strategic alliances. As a result of these factors, it is
anticipated that the industry will experience considerable growth in the
foreseeable future, both in terms of traffic volume and revenue. According to
the International Telecommunications Union ("ITU"), a worldwide
telecommunications organization under the auspices of the United Nations, the
international telecommunications industry accounted for $52.8 billion in
revenues and 60.3 billion minutes of use in 1995, increasing from $21.7 billion
in revenues and 16.7 billion minutes of use in 1986, which represents compound
annual growth rates of 10% and 15%, respectively. The ITU projects that
international telecommunications revenues will approach $76.0 billion by the
year 2000 with the volume of traffic expanding to 107.0 billion minutes of use,
representing compound annual growth rates of 7% and 12%, respectively, from
1995. See "The International Telecommunications Industry."
BUSINESS STRATEGY
Telegroup's objective is to become the leading alternative provider of
telecommunications services to small- and medium-sized business and high-volume
residential customers in its existing core markets and in selected target
markets. Telegroup's strategy for achieving this objective is to deliver
additional services to customers in
4
<PAGE>
its markets through the continued deployment of the TIGN and to expand its
sales and marketing organization into new target markets. The Company's
business strategy includes the following key elements:
Expand the Telegroup Intelligent Global Network. Telegroup is currently
expanding the TIGN by installing switches, purchasing ownership in additional
fiber-optic cable and leasing additional dedicated transmission capacity in
strategically located areas of customer concentration in Western Europe and the
Pacific Rim. During the next 18 months, the Company has scheduled the
installation of additional switches in New Jersey, Los Angeles, Chicago, Miami,
Denmark, Germany, Switzerland, Italy and Brazil, and additional nodes in
Sweden, Norway, Belgium, Italy, New Zealand, Germany, Switzerland and Japan.
The Company believes that the expansion of the TIGN will enable Telegroup to
migrate customers from traditional call-reorigination services to Global Access
Direct. In order to maximize the Company's return on invested capital, the
Company employs a success-based approach to capital expenditures, locating new
switching facilities in markets where the Company has established a customer
base by marketing its call-reorigination services.
Maximize Operating Efficiencies. Telegroup intends to reduce its costs of
providing telecommunications services by strategically deploying switching
facilities, adding leased and owned fiber-optic capacity and entering into
additional alternative "transit/termination agreements." This expansion of the
TIGN will enable the Company to originate, transport and terminate a larger
portion of its traffic over its own network, thereby reducing its overall
telecommunications costs. The Company believes that through least cost routing
and its cost effective Excel LNX switches, Telegroup will be able to further
reduce the overall cost of its services.
Expand Global Sales, Marketing and Customer Service Organization. The Company
believes that its experience in establishing one of the most comprehensive
global sales, marketing and customer service organizations in the international
telecommunications industry provides it with a competitive advantage. The
Company intends to expand its global sales, marketing and customer service
organization in new and existing markets. In new target markets, the Company
relies primarily on independent agents to develop a customer base while
minimizing its capital investment and management requirements. As the customer
base in a particular market develops, the Company intends to selectively
acquire the operations of its Country Coordinator serving such market and
recruit and train additional internal sales personnel and independent agents.
The Company believes that a direct sales and marketing organization complements
its existing independent agents by enabling Telegroup to conduct test marketing
and quickly implement new marketing strategies. In addition to its sales
offices in France, Germany and the United Kingdom, the Company intends to open
or acquire additional offices in target markets in Europe and the Pacific Rim
during 1997.
Position Telegroup as a Local Provider of Global Telecommunications
Services. Telegroup is one of the only alternative telecommunications providers
that offers in-country and regional customer service offices in major markets
on a global basis. The Company has 30 Country Coordinators providing customer
service in 63 countries. Telegroup believes this local presence provides an
important competitive advantage, allowing the Company to tailor customer
service and marketing to meet the specific needs of its customers in a
particular market. Customer service representatives speak the local languages
and are aware of the cultural norms in the countries in which they operate. The
Company continually monitors changes in the local market and seeks to quickly
modify service and sales strategies in response to such changes. In many
instances, this type of dedicated customer service and marketing is not
available to the Company's target customer base from the ITOs.
Target Small- and Medium-Sized Business Customers. The Company believes that
small- and medium-sized business customers focus principally on obtaining
quality and breadth of service at low prices and have historically been
underserved by the ITOs and the major global telecommunications carriers.
Through the deployment of the TIGN, the Company expects to migrate existing
customers from traditional call-reorigination
5
<PAGE>
services to Global Access Direct, and to address the telecommunications needs
of a wider base of small- and medium-sized business customers. Telegroup
believes that, with its direct, face-to-face sales force and dedicated customer
service, it can more effectively attract and serve these business customers.
Broaden Market Penetration through Enhanced Service Offerings. The Company
believes that offering a broad array of enhanced services is essential to
retain existing customers and to attract new customers. The TIGN's enhanced
services platform and its distributed intelligent network architecture permit
the Company to provide a broad array of voice, data and enhanced services and
to efficiently distribute customer information, such as language selection,
waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The
Company offers a comprehensive solution to its customers' telecommunications
needs by providing enhanced services, including fax store and forward, fax-
mail, voice-mail and call conferencing and intends to introduce e-mail-to-
voice-mail translation and voice recognition services. Telegroup believes that
its provision of such enhanced services will enable it to increase its revenue
from existing customers and to attract a broader base of small- and medium-
sized business customers.
Expand and Upgrade Management Information Systems. Telegroup believes that
reliable, sophisticated and flexible management information systems are
essential to remain competitive in the global telecommunications services
market. Accordingly, the Company has invested substantial resources to develop
and implement sophisticated information systems, which it will continue to
refine, in order to increase the speed, accuracy, accessibility and efficiency
of its Company-wide provisioning, billing, accounting and collections
functions. The Company intends to use a portion of the net proceeds of the
Offering to expand and upgrade these information systems.
Pursue Acquisitions, Investments and Strategic Alliances. In addition to
selective acquisitions of its Country Coordinators' operations, the Company
intends to expand its current operations and service offerings through
selective acquisitions of, and investments in, businesses that complement the
Company's current operations and service offerings. The Company also intends to
enter into strategic alliances with selective business partners that can
complement the Company's service offerings. The Company is continuously
reviewing opportunities and believes that such acquisitions, investments and
strategic alliances are an important means of increasing network traffic volume
and achieving economies of scale. The Company believes that its management's
extensive entrepreneurial, operational, technical and financial expertise will
enable the Company to identify and rapidly take advantage of such
opportunities.
----------------
The Company was incorporated in Iowa in 1989. The address of the Company's
principal place of business is 2098 Nutmeg Avenue, Fairfield, Iowa 52556, and
its telephone number is (515) 472-5000.
6
<PAGE>
THE OFFERING
Total number of shares of Common Stock offered by the Company:
<TABLE>
<S> <C>
U.S. Offering................. 5,760,000 shares
International Offering........ 1,440,000 shares
----------------
Total........................ 7,200,000 shares
Common Stock to be outstanding
after the Offering.............. 33,548,809 shares*
Use of proceeds.................. Of the estimated $99.7 million in net
proceeds to the Company, approximately $58.5
million will be used to expand the Telegroup
Intelligent Global Network; approximately
$22.2 million will be used to prepay all of
the Company's outstanding 12% Senior
Subordinated Notes (the "Senior Subordinated
Notes"); approximately $15.0 million will be
used to develop and upgrade management
information systems; and the balance will be
used for working capital and for other
general corporate purposes, including
strategic alliances and acquisitions. See
"Use of Proceeds."
Dividend policy.................. The Company does not expect to pay dividends
on the Common Stock in the foreseeable
future. See "Dividend Policy."
Nasdaq National Market Symbol.... TGRP
</TABLE>
- --------
* Excludes (i) 1,971,189 shares of Common Stock issuable upon the exercise of
options granted under the Stock Option Plan (as defined); (ii) 2,028,811
shares of Common Stock issuable upon the exercise of options available for
grant under the Stock Option Plan; and (iii) 1,180,002 shares of Common
Stock issuable upon the exercise of the Warrants (as defined). See
"Management--Amended and Restated Stock Option Plan" and "Description of
Capital Stock--Warrants."
7
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth certain consolidated financial information for
the Company for (i) the years ended December 31, 1994, 1995 and 1996, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus, (ii) the year ended
December 31, 1993, which has been derived from audited consolidated financial
statements of the Company which are not included herein, and (iii) the year
ended December 31, 1992, which has been derived from unaudited consolidated
financial statements which are not included herein. The summary financial data
as of March 31, 1997 and for the three months ended March 31, 1996 and 1997 has
been derived from the unaudited consolidated financial statements for the
Company included elsewhere in this Prospectus. In the opinion of management,
the unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated 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. The following financial information should be read in
conjunction with "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ -----------------
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- -------- -------- ------- --------
(in thousands, except per share
and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Retail................ $23,846 $29,790 $68,714 $128,139 $179,147 $41,440 $ 56,909
Wholesale............. -- -- -- 980 34,061 1,911 17,187
------- ------- ------- -------- -------- ------- --------
Total revenues...... 23,846 29,790 68,714 129,119 213,208 43,351 74,096
Cost of revenues........ 18,411 22,727 49,513 83,101 150,537 27,742 53,283
------- ------- ------- -------- -------- ------- --------
Gross profit.......... 5,435 7,063 19,201 46,018 62,671 15,609 20,813
Operating expenses:
Selling, general and
administrative....... 3,935 7,341 19,914 39,222 59,652 13,161 19,455
Depreciation and amor-
tization............. 61 172 301 655 1,882 261 807
Stock option based
compensation......... -- -- -- -- 1,032 -- 85
------- ------- ------- -------- -------- ------- --------
Total operating ex-
penses............. 3,996 7,513 20,215 39,877 62,566 13,422 20,347
Operating income
(loss)............. 1,439 (450) (1,014) 6,141 105 2,187 466
Net earnings
(loss)............. 1,386 (707) (538) 3,821 (118) 1,388 (277)
Net earnings (loss) per
share (1).............. $ .05 $ (.02) $ (.02) $ .13 $ (.00) $ .05 $ (.01)
======= ======= ======= ======== ======== ======= ========
Weighted average number
of common and common
share equivalents
(in thousands)......... 29,008 29,008 29,008 29,008 29,008 29,008 29,008
OTHER FINANCIAL DATA:
EBITDA (2).............. $ 1,510 $ (278) $ (577) $ 6,994 $ 2,990 $ 2,372 $ 1,022
Net cash provided by op-
erating activities..... 820 924 1,364 5,561 4,904 3,825 6,194
Net cash (used in) in-
vesting activities (667) (765) (700) (2,818) (11,262) (2,473) (3,529)
Net cash (used in) pro-
vided by financing ac-
tivities............... 21 (10) 957 (115) 15,924 (1,112) (430)
Capital expenditures.... 291 449 1,056 2,652 9,068 1,891 3,285
Dividends declared per
common share........... -- -- -- .02 .02 .02 --
OTHER OPERATING DATA (AT
PERIOD END):
Retail customers (3):
Domestic (U.S.)....... 6,113 6,440 17,653 17,664 34,296 39,186
International......... 0 5,301 28,325 55,513 109,847 117,716
Wholesale customers
(4).................... 0 0 0 3 17 21
Number of employees..... 55 92 211 313 461 487
Number of switches...... 0 1 2 3 7 13
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------
(UNAUDITED)
ACTUAL AS ADJUSTED (5)
------- ---------------
(in thousands)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents........................................ $16,327 $ 93,837
Working capital............................... 6,054 84,364
Property & equipment,
net.......................................... 13,840 13,840
Total assets.................................. 74,570 150,680
Long term debt, less
current portion.............................. 11,098 76
Total shareholders'
equity....................................... 13,108 101,018
</TABLE>
- --------
(1) Net earnings (loss) per share for the years ended December 31, 1992, 1993,
1994 1995 and 1996 and for the three months ended March 31, 1996 and 1997
is based on the weighted average number of common shares outstanding. For
all periods presented, per share information was computed pursuant to the
rules of the Securities and Exchange Commission (the "Commission"), which
require that common shares issued by the Company during the twelve months
immediately preceding the Company's initial public offering plus the number
of common shares issuable pursuant to the grant of options and warrants
issued during the same period (which have an exercise price less than the
initial public offering price), be included in the calculation of the
shares outstanding using the treasury stock method from the beginning of
all periods presented.
(2) EBITDA represents net earnings (loss) plus net interest expense (income),
income taxes, depreciation and amortization and non-cash stock option based
compensation. While EBITDA is not a measurement of financial performance
under generally accepted accounting principles and should not be construed
as a substitute for net earnings (loss) as a measure of performance, or
cash flow as a measure of liquidity, it is included herein because it is a
measure commonly used in the telecommunications industry.
(3) Consists of retail customers who received invoices for the last month of
the period indicated. Does not include active international customers who
incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render
invoices in such instances.
(4) Consists of wholesale customers who received invoices for the last month of
the period indicated.
(5) As adjusted to give effect to the Offering and the repayment of the 12%
Senior Subordinated Notes due November 27, 2003. See "Use of Proceeds."
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RISK FACTORS
In addition to the other information in this Prospectus, including "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the Company's consolidated financial
statements and notes thereto included elsewhere herein, the following risk
factors should be considered carefully by prospective investors prior to
making an investment in the Common Stock.
EXPANSION AND OPERATION OF THE TIGN
Historically, a significant portion of the Company's revenue has been
derived from the provision of traditional call-reorigination services to
retail customers on a global basis. The Company believes that as deregulation
occurs and competition increases in various markets around the world, the
pricing advantage of traditional call-reorigination relative to conventional
international long distance service will diminish or disappear in those
markets. The Company believes that, in general, in order to maintain its
existing customer base and to attract new customers in such markets, it will
need to be able to offer call-through services at prices at or below the
current prices charged for traditional call-reorigination. The Company seeks
to achieve this objective by expanding the TIGN in core and selected target
markets, thereby enabling it to offer call-through international long distance
services in deregulated markets. The Company will seek to migrate its existing
call-reorigination customers and to attract new customers in core and selected
target markets to the Global Access Direct service. There can be no assurance
that the Company will be successful in its efforts to expand the TIGN or in
its attempt to migrate existing customers and attract new customers to Global
Access Direct service. Failure to accomplish this objective could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company has only recently begun operating the TIGN. The long-term
success of the Company is dependent upon its ability to operate, expand,
manage and maintain the TIGN, activities in which the Company has limited
experience. The continued expansion, operation and development of the TIGN
will depend on, among other factors, the Company's ability to accomplish the
following: (i) acquire switching hardware and peripheral equipment; (ii)
program the switches with proprietary TIGN software; (iii) transport the
hardware and peripherals to the switch installation sites; (iv) obtain a
switch co-location site in each country; (v) obtain access and egress circuit
capacity connecting the switches to the Public Switched Telephone Network
("PSTN") and/or other carriers; (vi) obtain necessary licenses permitting
termination and origination of traffic; (vii) load switches with customer
data; and (viii) obtain access to or ownership of transmission facilities
linking a switch to other TIGN switches. The failure to accomplish any of
these tasks could cause a significant delay in the deployment of a TIGN switch
or node in a particular country or countries.Moreover, there can be no
assurance that the Company has obtained all licenses or approvals necessary to
import equipment for use in its telecommunications network. Significant delays
in the deployment of switches or nodes, and/or the failure of the Company to
obtain necessary import licenses or approvals, could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The successful implementation of the Company's expansion strategy will be
subject to a variety of risks, including operating and technical problems,
regulatory uncertainties, possible delays in the full implementation of
liberalization initiatives, competition and the availability of capital. In
expanding the TIGN, the Company may encounter technical difficulties because
of the existence of multiple local technical standards. These difficulties
could involve a delay in programming new switches with proprietary TIGN
software or otherwise integrating such switches into the TIGN. In addition, in
expanding the TIGN, the Company may incur substantial capital expenditures and
additional fixed operating costs. There can be no assurance that the TIGN will
grow and develop as planned or, if developed, that such growth or development
will be completed on schedule, at a commercially reasonable cost or within the
Company's specifications.
In deploying the TIGN, the Company must obtain reasonably priced access to
transmission facilities and interconnection with one or more carriers that
provide access and egress into and from the PSTN. Although the Company has
been successful to date in this regard, there can be no assurance that this
will be the case in the
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future. See "--Dependence on Telecommunications Facilities Providers," "--
Intense International and National Competition" and "Business--Competition."
In addition, concurrently with its anticipated expansion, the Company may
from time to time experience general problems affecting the quality of the
voice and data transmission of some calls transmitted over the TIGN, which
could result in poor quality transmission and interruptions in service. To
provide redundancy in the event of technical difficulties with the TIGN and to
the extent the Company resells transit and termination capacity from other
carriers, the Company relies upon other carriers' networks. Whenever the
Company is required to route traffic over a non-primary choice carrier due to
technical difficulties or capacity shortages with the TIGN or the primary
choice carrier, these calls will be more costly to the Company. Any failure by
the Company to properly operate, expand, manage or maintain the TIGN could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" and "Business."
HISTORICAL AND ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
For the three months ended March 31, 1997, the Company had operating income
of $465,948 and a net loss of $277,012, compared to operating income and net
earnings of $2.2 million and $1.4 million, respectively, for the three months
ended March 31, 1996. For the year ended December 31, 1996, the Company had
operating income of $104,528 and a net loss of $118,322, compared to operating
income and net income of $6.1 million and $3.8 million for the year ended
December 31, 1995. The Company expects to incur lower gross margins, negative
EBITDA and significant operating losses and net losses for the near term as it
incurs additional costs associated with the development and expansion of the
TIGN, the expansion of its marketing and sales organization, and the
introduction of new telecommunications services. Furthermore, the Company
expects that operations in new target markets will sustain negative cash flows
until an adequate customer base and related revenue stream have been
established. There can be no assurance that the Company will achieve or, if
achieved, will sustain profitability or positive cash flow from operating
activities in the future. If the Company cannot achieve and sustain
profitability or positive cash flow, it is likely that it will not be able to
meet its working capital requirements without additional financing. See "--
Need for Additional Financing" and "--Potential Fluctuations in Quarterly
Operating Results."
In addition, the Company intends to expand its operations in or enter
markets where it has limited or no operating experience. Furthermore, in many
of the Company's target markets, the Company intends to offer new services or
services that have previously been provided only by the local ITOs.
Accordingly, there can be no assurance that such operations will generate
operating or net income, and the Company's prospects must therefore be
considered in light of the risks, expenses, problems and delays inherent in
establishing a new business in a rapidly changing industry.
DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
The Company believes that, based on its current business plan, its
management information systems will be sufficient for the next 12 to 18
months, but will require substantial enhancements, replacements and additional
investments to continue their effectiveness after such time as the Company
continues to expand the TIGN and process a higher volume of calls. The failure
to successfully implement such enhancements, replacements and investments in a
timely fashion could result in a material adverse effect on the Company's
business, financial condition and results of operations. Furthermore, even if
the Company is successful in implementing such enhancements, replacements and
investments in a timely fashion there can be no assurance that the Company's
management information systems will not require further enhancements,
replacements or investments.
Historically, the Company has experienced some difficulties in reconciling
certain carrier accounts or, in some cases, accurately estimating monthly
carrier costs on a timely basis. These difficulties have affected the
Company's ability to complete its financial statements on a timely basis. To
address these issues, the Company has substantially upgraded and continues to
improve its accounting and billing systems. In addition, the Company has
developed a call costing and reconciliation system, which the Company expects
will be fully implemented in June 1997. While there can be no assurance, the
Company believes that such improved and newly developed systems will enable
the Company to prepare its financial statements on a timely basis.
Notwithstanding such
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recent developments and upgrades, the Company anticipates that its Small
Business Technologies ("SBT") accounting, commissions, billing and possibly
other systems will be required to be upgraded or replaced in the next 12 to 18
months. The Company has allocated $15 million of the expected net proceeds
from the Offering to upgrade the Company's management information systems.
Failure to successfully operate existing systems, implement the call costing
and reconciliation system or upgrade or replace such SBT accounting,
commissions, billing and possibly other systems, all in a timely fashion,
could affect the Company's ability to meet required financial reporting
deadlines and management's ability to manage the Company efficiently and,
therefore, could result in a material adverse effect on the Company's
business, financial condition or results of operations. See "Business--Network
and Operations."
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
The Company's ability to continue to grow may be affected by various
factors, many of which are not within the Company's control, including
governmental regulation of the telecommunications industry in the United
States and in other countries, competition, and the transmission capacity.
Although the Company has experienced significant growth in a relatively short
period of time and intends to continue to grow rapidly, there can be no
assurance that the growth experienced by the Company will continue or that the
Company will be able to achieve the growth contemplated by its business
strategy. The Company has experienced significant revenue growth and has
expanded the number of its employees and the geographic scope of its
operations. These factors have resulted in increased responsibilities for
management personnel. The Company's ability to continue to manage its growth
successfully will require it to further expand its network and infrastructure,
enhance its management, financial and information systems and controls and to
effectively expand, train and manage its employee base. In addition, as the
Company increases its service offerings and expands its target markets, there
will be additional demands on its customer service support and sales,
marketing and administrative resources. There can be no assurance that the
Company will be able to successfully manage its expanding operations. If the
Company's management is unable to manage growth effectively, the Company's
business, financial condition and results of operations could be materially
and adversely affected. See "--Dependence on Effective Management Information
Systems" and "Business."
NEED FOR ADDITIONAL FINANCING
The development and expansion of the TIGN, the opening of new offices and
the introduction of new telecommunications services, as well as the funding of
anticipated losses and net cash outflows, will require substantial additional
capital. The Company expects that the net proceeds from the Offering, together
with internally generated funds and other financings, will provide sufficient
funds for the Company to expand its business as planned and to fund
anticipated operating losses for the next 18 to 24 months. However, the amount
of the Company's future capital requirements will depend upon many factors,
including the performance of the Company's business, the rate and manner in
which it expands the TIGN and opens new offices, staffing levels and customer
growth, as well as other factors that are not within the Company's control,
including competitive conditions and regulatory or other government actions.
In the event that the Company's plans or assumptions change or prove to be
inaccurate or the net proceeds of the Offering, together with internally
generated funds and funds from other financings, prove to be insufficient to
fund the Company's growth and operations, then some or all of the Company's
development and expansion plans could be delayed or abandoned, or the Company
may be required to seek additional funds earlier than currently anticipated.
Other future sources of capital for the Company could include public and
private debt and equity financings. Issuances of additional equity securities
would result in dilution to the purchasers of the Common Stock offered hereby.
There can be no assurance that any such sources of financing would be
available to the Company in the future or, if available, that they could be
obtained on terms acceptable to the Company. See "--Shares Eligible for Future
Sale."
SUBSTANTIAL GOVERNMENT REGULATION
General. The international telecommunications industry is subject to
international treaties and agreements, and to laws and regulations which vary
from country to country. Enforcement and interpretation of these treaties,
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agreements, laws and regulations can be unpredictable and are often subject to
informal views of government officials and ministries that regulate
telecommunications in each country. In certain countries, such government
officials and ministries are subject to influence by the local ITO.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes, upon consultation
with counsel, to be permissible under applicable laws and regulations. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear, the Company's aggressive strategy may
result in the Company (i) providing services or using transmission methods
that are found to violate local laws or regulations or (ii) failing to obtain
approvals or make filings subsequently found to be required under such laws or
regulations. Where the Company is found to be or otherwise discovers that it
is in violation of local laws and regulations and believes that it is subject
to enforcement actions by the FCC or the local authority, it typically seeks
to modify its operations or discontinue operations so as to comply with such
laws and regulations. There can be no assurance, however, that the Company
will not be subject to fines, penalties or other sanctions as a result of
violations regardless of whether such violations are corrected. If the
Company's interpretation of applicable laws and regulations proves incorrect,
it could lose, or be unable to obtain, regulatory approvals necessary to
provide certain of its services or to use certain of its transmission methods.
The Company also could have substantial monetary fines and penalties imposed
against it. Except as set forth in this "Substantial Government Regulation"
and in "Business--Government Regulation," the Company believes that it is
currently in compliance with all applicable material domestic and
international regulatory requirements. To the Company's knowledge, it is not
currently subject to any material regulatory inquiry or investigation.
In numerous countries where the Company operates or plans to operate, local
laws or regulations limit the ability of telecommunication companies to
provide basic international telecommunications service in competition with
state-owned or state-sanctioned monopoly carriers. There can be no assurance
that future regulatory, judicial, legislative or political changes will permit
the Company to offer to residents of such countries all or any of its
services, that regulators or third parties will not raise material issues
regarding the Company's compliance with applicable laws or regulations, or
that such regulatory, judicial, legislative or political decisions will not
have a material adverse effect on the Company. If the Company is unable to
provide the services which it presently provides or intends to provide or to
use its existing or contemplated transmission methods due to its inability to
obtain or retain the requisite governmental approvals for such services or
transmission methods, or for any other reason related to regulatory compliance
or lack thereof, such developments could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company provides a substantial portion of its customers with access to
its services through the use of call-reorigination. Revenues attributable to
call-reorigination represented 76.6% of the Company's revenues in fiscal year
1996 and 72.8% of the Company's revenues for the three months ended March 31,
1997, and are expected to continue to represent a significant but decreasing
portion of the Company's revenues. A substantial number of countries have
prohibited certain forms of call-reorigination as a mechanism to access
telecommunications services. This has caused the Company to cease providing
call-reorigination services in Bermuda, the Bahamas and the Cayman Islands,
and may require it to do so in other jurisdictions in the future. As of May 1,
1997, reports had been filed with the ITU and/or the FCC claiming that the
laws in 63 countries prohibit call-reorigination. While the Company provides
call-reorigination services in substantially all of these countries, no single
country within this group accounted for more than 2% of the total revenues of
the Company for the 12 months ended March 31, 1997. There can be no assurance
that other countries where the Company derives material revenue will not
prohibit call-reorigination in the future. To the extent that a country with
an express prohibition against call-reorigination is unable to enforce its
laws against a provider of such services, it can request that the FCC enforce
such laws in the United States, by, for example, requiring a provider of such
services to cease providing call-reorigination services to such country or by
revoking such provider's FCC authorizations. Twenty-eight countries have
formally notified the FCC that they expressly prohibit call-reorigination. See
"--United States--The FCC's Policies on Call-reorigination." There can be no
assurance that the Company's call-reorigination services will not continue to
be, or will not become, prohibited in certain jurisdictions, including
jurisdictions in which the Company currently provides call-reorigination
services, and, depending on the jurisdictions, services and transmission
methods affected, there could be a material adverse effect on the Company's
business, financial condition and results of operations.
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On February 15, 1997, the United States and more than 60 members of the
World Trade Organization ("WTO") agreed to open their respective
telecommunications markets to competition and foreign ownership and to adopt
regulatory measures to protect market entrants against anticompetitive
behavior by dominant telephone companies (the "WTO Agreement"). Although the
Company believes that the WTO Agreement could provide the Company with
significant opportunities to compete in markets that were not previously
accessible, reduce its costs and provide more reliable services, it could also
provide similar opportunities to the Company's competitors. There can be no
assurance that the pro-competitive effects of the WTO Agreement will not have
a material adverse effect on the Company's business, financial condition and
results of operations or that members of the WTO will implement the terms of
the WTO Agreement.
United States. In the United States, the provision of the Company's services
is subject to the provisions of the Communications Act of 1934, as amended
(the "Communications Act"), the 1996 Telecommunications Act (the "1996
Telecommunications Act") and the FCC regulations thereunder. While the recent
trend in federal regulation of nondominant telecommunication service
providers, such as the Company, has been in the direction of reduced
regulation, this trend has also given AT&T Corp. ("AT&T"), the largest long
distance carrier in the U.S., increased pricing flexibility that has permitted
it to compete more effectively with smaller long distance carriers such as
Telegroup. In addition, the 1996 Telecommunications Act has opened the U.S.
market to increased competition by allowing the Regional Bell Operating
Companies ("RBOCs") to provide interexchange service for the first time. There
can be no assurance that future regulatory, judicial and legislative changes
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
U.S. International Long Distance Services. The Company is subject to FCC
rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points, as well as to FCC rules which also regulate the manner in
which the Company's international services may be provided, including the
circumstances under which the Company may provide international switched
services by using private lines or route traffic through third countries. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. Failure to comply with the FCC's rules could result in fines,
penalties or forfeiture of the Company's FCC authorizations, each of which
could have a material adverse effect on the Company business, financial
condition and results of operations.
The FCC's Policies on Call-reorigination. The Company offers service by
means of call-reorigination pursuant to an FCC authorization ("Section 214
Switched Voice Authorization") under Section 214 of the Communications Act
and certain relevant FCC decisions. The FCC has determined that call-
reorigination service using uncompleted call signaling does not violate
United States or international law, but has held that United States
companies providing such services must comply with the laws of the
countries in which they operate as a condition of such companies' Section
214 Switched Voice Authorizations. The FCC reserves the right to condition,
modify or revoke any Section 214 Authorizations and impose fines for
violations of the Communications Act or the FCC's regulations, rules or
policies promulgated thereunder, or for violations of the clear and
explicit telecommunications laws of other countries that are unable to
enforce their laws against U.S. carriers. FCC policy provides that foreign
governments that satisfy certain conditions may request FCC assistance in
enforcing their laws against call-reorigination providers based in the
United States that are violating the laws of these jurisdictions. Twenty-
eight countries have formally notified the FCC that call-reorigination
services violate their laws. The Company provides call-reorigination in all
of these countries, which accounted for 7.3% of the Company's total
revenues for the 12 months ended March 31, 1997. Two of the 28 countries
have requested assistance from the FCC in enforcing their prohibitions on
call-reorigination within their respective jurisdictions. Neither of these
two countries accounted for more than 2% of the Company's total revenues
for the 12 months ended March 31, 1997. The FCC has held that it would
consider enforcement action against companies based in the United States
engaged in call-reorigination by means of uncompleted call signalling in
countries where this activity is expressly prohibited. While the FCC has
not
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initiated any action to date to limit the provision of call-reorigination
services, there can be no assurance that it will not take action in the
future. Enforcement action could include an order to cease providing call-
reorigination services in such country, the imposition of one or more
restrictions on the Company, monetary fines or, ultimately, the revocation
of the Company's Section 214 Switched Voice Authorization, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The FCC's Private Line Resale Policy. The FCC's private line resale
policy prohibits a carrier from reselling international private leased
circuits to provide switched services (known as "ISR") to or from a country
unless the FCC has found that the country affords U.S. carriers equivalent
opportunities to engage in similar activities in that country. Thus far,
the FCC has found that Canada, the United Kingdom, Sweden and New Zealand
afford such opportunities to U.S. carriers. In separate proceedings, the
FCC is considering equivalency determinations for Australia, Chile,
Denmark, Finland and Mexico. The Company has entered into an arrangement
with a wholly owned subsidiary in Australia that involves the transmission
over private lines of switched services to or from Australia. The FCC has
not yet made a determination as to whether resale opportunities in
Australia can be deemed equivalent pursuant to the FCC's rules and
policies. The Company is seeking a ruling by the FCC that this arrangement
serves the public interest and can be implemented. There can be no
assurance that the FCC, upon viewing such alternate carrier arrangement,
will find that such arrangement is consistent with its private line resale
policy. The Company has not initiated services pursuant to this agreement
and does not currently intend to commence the provisioning of such services
pursuant to such agreement unless the arrangement is approved by the FCC.
The FCC may consider modifying its policy since the WTO Agreement prohibits
the United States from denying market entry based on the national origin of
the carrier or the traffic. There can be no assurance, however, that the
FCC or any other country's regulatory authority will change their policies
in a way that would have a beneficial impact on the Company or that would
not have a material adverse effect on the Company's business, financial
condition and results of operations.
The FCC's Policies on Transit and Refile. The FCC is currently
considering a 1995 request ("1995 Request") to limit or prohibit the
practice whereby a carrier routes, through its facilities in a third
country, traffic originating from one country and destined for another
country. The FCC has permitted third country calling where all countries
involved consent to the routing arrangements (referred to as "transiting").
Under certain arrangements referred to as "refiling," the carrier in the
destination country does not consent to receiving traffic from the
originating country and does not realize the traffic it receives from the
third country is actually originating from a different country. While the
Company's revenues attributable to refiling arrangements are minimal,
refiling may constitute a larger portion of the Company's operations in the
future. The FCC to date has made no pronouncement as to whether refiling
arrangements are inconsistent with U.S. or ITU regulations, although it is
considering these issues in connection with the 1995 Request. It is
possible that the FCC will determine that refiling violates U.S. and/or
international law, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The FCC's International Settlements Policy. The Company is also required
to conduct its facilities-based international business in compliance with
the FCC's international settlements policy (the "ISP"). The ISP establishes
the permissible arrangements for U.S. based facilities-based carriers and
their foreign counterparts to settle the cost of terminating each other's
traffic over their respective networks. One of the Company's arrangements
with foreign carriers is subject to the ISP and it is possible that the FCC
could take the view that this arrangement does not comply with the existing
ISP rules. See "The International Telecommunications Industry--
International Switched Long Distance Services--Operating Agreements." If
the FCC, on its own motion or in response to a challenge filed by a third
party, determines that the Company's foreign carrier arrangements do not
comply with FCC rules, among other measures, it may issue a cease and
desist order, impose fines on the Company or revoke or suspend its FCC
authorizations. See "--Recent and Potential FCC Actions." Such action could
have a material adverse effect on the Company's business, financial
condition and results of operations.
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The FCC's Tariff Requirements for International Long Distance
Services. The Company is also required to file and has filed with the FCC a
tariff containing the rates, terms and conditions applicable to its
international telecommunications services. The Company is also required to
file with the FCC any agreements with customers containing rates, terms,
and conditions for international telecommunications services, if those
rates, terms, or conditions are different than those contained in the
Company's tariff. Notwithstanding the foregoing requirements, to date, the
Company has not filed with the FCC certain commercially sensitive carrier-
to-carrier customer contracts. If the Company charges rates other than
those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, or fails to file with the FCC carrier-to-
carrier agreements, the FCC or a third party could bring an action against
the Company, which could result in a fine, a judgment or other penalties
against the Company. Such action could have a material adverse effect on
the Company's business, financial condition and results of operations.
Recent and Potential FCC Actions. Regulatory action that has been and may
be taken in the future by the FCC may enhance the intense competition faced
by the Company. The FCC recently enacted certain changes in its rules
designed to permit alternative arrangements outside of its ISP as a means
of encouraging competition and achieving lower, cost-based accounting and
collection rates as more facilities-based competition is permitted in
foreign markets. Specifically, the FCC has decided to allow U.S. carriers,
subject to certain competitive safeguards, to propose methods to pay for
international call termination that deviate from traditional bilateral
accounting rates and the ISP. The FCC has also proposed to establish lower
ceilings ("benchmarks") for the rates that U.S. carriers will pay foreign
carriers for the termination of international services. Moreover, the FCC
is examining whether, and if so, how to change its rules to implement the
WTO Agreement. While these rule changes may provide the Company with more
flexibility to respond more rapidly to changes in the global
telecommunications market, it will also provide similar flexibility to the
Company's competitors. The resolution of these proceedings could have a
material adverse effect on the Company's business, financial condition and
results of operations.
U.S. Domestic Long Distance Services. The Company's ability to provide
domestic long distance service in the United States is subject to
regulation by the FCC and relevant state Public Service Commissions
("PSCs") which regulate interstate and intrastate rates, respectively,
ownership of transmission facilities, and the terms and conditions under
which the Company's domestic U.S. services are provided. In general,
neither the FCC nor the relevant state PSCs exercise direct oversight over
prices charged for the Company's services or the Company's profit levels,
but either or both may do so in the future. The Company, however, is
required by federal and state law and regulations to file tariffs listing
the rates, terms and conditions of services provided. The Company has filed
domestic long distance tariffs with the FCC. The FCC adopted an order on
October 29, 1996 (the "October 29, 1996 Order") eliminating the requirement
that non-dominant interstate carriers, such as the Company, maintain FCC
tariffs. However, on February 13, 1997, the United States Court of Appeals
for the DC Circuit stayed the October 29, 1996 Order, pending judicial
review of the Order. Elimination of tariffs will require that the Company
secure contractual agreements with its customers regarding many of the
terms of its existing tariffs or face possible claims over the respective
rights of the parties once these rights are no longer clearly defined in
tariffs. The Company generally is also required to obtain certification
from the relevant state PSC prior to the initiation of intrastate service.
Telegroup has the authorizations required to provide service in 47 states,
and has filed or is in the process of filing required tariffs in each such
state. The Company has complied, or is in the process of complying, with
reporting requirements imposed by state PSCs in each state in which it
conducts business. Any failure to maintain proper federal and state
tariffing or certification or file required reports, or any difficulties or
delays in obtaining required authorizations, could have a material adverse
effect on the Company's business, financial condition and results of
operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in
the customer's primary long distance carrier. If these requirements are not
met, the Company may be subject to fines and penalties.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from local exchange carriers ("LECs") or competitive local
exchange carriers ("CLECs"). Access charges represent a significant portion
of the Company's cost of U.S. domestic long distance services and,
generally, such access charges are regulated by the FCC for
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interstate services and by PSCs for intrastate services. The FCC has
undertaken a comprehensive review of its regulation of LEC access charges
to better account for increasing levels of local competition. Under
alternative access charge rate structures being considered by the FCC, LECs
would be permitted to allow volume discounts in the pricing of access
charges. While the outcome of these proceedings is uncertain, if these rate
structures are adopted, many long distance carriers, including the Company,
could be placed at a significant cost disadvantage to larger competitors.
In addition, the FCC has adopted certain measures to implement the 1996
Telecommunications Act that will impose new regulatory requirements,
including the requirement that the Company contribute some portion of its
telecommunications revenues to a "universal service fund" designated to
fund affordable telephone service for consumers, schools, libraries and
rural healthcare providers. On May 16, 1997, the FCC released an order
making significant changes in the access service rate structure. Some of
the changes may result in increased costs to the Company for the
"transport" component of access services, although other revisions of the
order likely will reduce other access costs. Some issues in the FCC
proceeding have not yet been resolved, including a proposal under which
LECs would be permitted to allow volume discounts in the pricing of access
charges.
In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to
the implementation of such tax software and against which it has no
corresponding customer compensation. While the Company believes that any such
liability will not be significant, there can be no assurance that such tax
liability, if any, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
In November 1996, the FCC adopted rules that would require that
interexchange companies offering toll-free access through payphones compensate
certain payphone operators for customers' use of the payphone. This decision
is currently on appeal to the United States Circuit Court for the District of
Columbia. Although the Company cannot predict the outcome of the appeal or the
effect of the FCC's decision on the Company's business, it is possible that
the decision could have a material adverse effect on the Company's business,
financial condition and results of operations.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control (without
public notice), and corporate reorganizations, and assignments of regulatory
authorizations. Such requirements may delay, prevent or deter a change in
control of the Company.
European Union. Historically, European countries have prohibited the direct
transport and switching of speech in real-time between switched network
termination points ("Voice Telephony") except by the ITO. Although the
regulation of the telecommunications industry is governed at a supra-national
level by the European Union ("EU"), the Company's provision of services in the
EU is subject to the laws and regulations of each EU member state in which it
provides services. The Full Competition Directive 96/19 (the "Full Competition
Directive") was adopted on March 13, 1996 and requires the liberalization of
Voice Telephony and the freedom to create alternative telecommunications
infrastructures within EU member states (Austria, Belgium, Denmark, Finland,
France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden, and the United Kingdom). While the Full Competition
Directive sets January 1, 1998 as the deadline for each EU member state to
enact its own laws to implement such directive, subject to extensions granted
to Spain (December 1998), Ireland (January 1, 2000), Greece (2003) and
Portugal (2000), there can be no assurance that each EU member state will
enact laws that implement the Full Competition Directive within the allotted
time frame or at all. To the extent the Full Competition Directive is not
implemented, or not properly or fully implemented, in a particular member
state, the Company will not be able to offer its full range of services or
utilize certain transmission or access methods in that country.
Each EU member state in which the Company currently conducts business has a
different national regulatory scheme and regulatory variations among the
member states are expected to continue for the foreseeable future. In the EU,
the Company currently owns and operates switching facilities in the United
Kingdom, the Netherlands and France and provides other telecommunications
services in certain other member countries. The requirements for the Company
to obtain necessary approvals to offer the full range of telecommunications
services, including Voice Telephony, vary considerably from country to
country. In the U.K., the Company provides Voice Telephony pursuant to a class
license and holds a license under Section 7 of the Telecommunications Act of
1984 to engage in ISR. Other than in the U.K., the Company has not obtained
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approvals necessary to provide Voice Telephony in any EU member country. There
can be no assurance that the Company has received all necessary approvals,
filed applications for such approvals, received comfort letters or obtained
all necessary licenses from the applicable regulatory authorities to offer
telecommunications services in the EU, or that it will do so in the future.
The Company's failure to obtain, or retain necessary approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Liberalization in EU member states is proceeding rapidly and the Company is
seeking to keep pace with competition even where ITOs retain a legally
mandated monopoly on Voice Telephony. In the Netherlands, the Company has
begun to provide a range of enhanced telecommunications services and switched
voice services to business users, including closed user groups ("CUGs"), by
routing traffic via the international switched network of a competitor to the
ITO. To date, the Dutch telecommunications authority has not taken regulatory
action to prevent the provision by the Company of certain of these services
which could be regarded as prohibited services under the Dutch
telecommunications laws, and the Company is not aware of any action taken by
the Dutch ITO and/or PTT Telecom B.V. (a wholly owned subsidiary of the Dutch
ITO) in such regard. While the Company believes that the Dutch regulatory
authority will not seek to prevent the Company or other carriers from
competing with the ITO before full liberalization, which is expected on or
about July 1, 1997, there can be no guarantee that this will continue to be
the case or that the Company's services will be found not to constitute
providing Voice Telephony in the Netherlands while the ITO's monopoly on such
services is still in effect. If the Dutch telecommunications authority were to
commence regulatory action to prevent such competition and/or if the Dutch ITO
and/or PTT Telecom B.V. were to claim damages, the Company's operations in the
Netherlands would be adversely and materially affected. It is also possible
that the Company can be fined, or its application to provide services in the
future rejected, if the Company were found to be providing Voice Telephony and
such actions would have a material adverse impact on the Company's business,
financial condition and results of operations.
In France, Germany and Switzerland, the Company is currently providing
traditional or transparent call-reorigination services, but anticipates that
it will migrate CUGs and other customers to forms of call-through other than
transparent call-reorigination prior to January 1, 1998, the date on which
full competition with the ITOs will be permitted. The Company anticipates
providing a range of enhanced telecommunications services and switched voice
services in France, Germany and Switzerland to business users, including to
CUGs, prior to January 1, 1998, by routing traffic via the international
switched networks of competitors to the French, German or Swiss ITOs,
respectively. While the Company believes that it will not be found to be
offering Voice Telephony in these countries prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the respective ITOs or from the respective regulating authorities that this
will be the case. It is possible that the Company could be fined, or that the
Company would not be allowed to provide specific services in these countries,
if the Company were found to be providing Voice Telephony before January 1,
1998, or after that date without obtaining a proper license. Such actions
could have a material adverse impact on the Company's business, financial
condition and results of operations.
Moreover, the Company may be incorrect in its assumption that (i) each EU
member state will abolish, on a timely basis, the respective ITO's monopoly to
provide Voice Telephony within and between member states and other countries,
as required by the Full Competition Directive, (ii) deregulation will continue
to occur and (iii) the Company will be allowed to continue to provide and to
expand its services in the EU member countries. There can be no assurance that
an EU member state will not adopt laws or regulatory requirements that will
adversely affect the Company. Additionally, there can be no assurance that
future EU regulatory, judicial or legislative changes will not have a material
adverse effect on the Company or that regulators or third parties will not
raise material issues with regard to the Company's compliance with applicable
laws or regulations. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof, such
events could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Government
Regulation."
The Pacific Rim. Regulation of the Company's activities varies in the
Pacific Rim depending upon the particular country involved. The Company's
ability to provide voice telephony services is restricted in all countries
where the Company provides services except Australia and New Zealand, although
service between Australia or New Zealand and other countries may be
constrained by restrictions in the other countries. In Australia and New
Zealand, regulation of the Company's provision of telecommunications services
is relatively
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permissive, although enrollment (in Australia) or registration (in New
Zealand) with the regulator is required for ISR. The Company's Australian
subsidiary is enrolled in Australia as a "Supplier of Eligible International
Services." Additionally, in Japan, the Company provides call-reorigination
services but may not provide basic switched voice services to the public. The
Company may, with a license, provide a broad array of value-added services, as
well as limited switched voice services to CUGs. The Japanese government has
indicated that it will permit carriers such as the Company to apply for ISR
authority some time in 1997. There can be no assurance that the Company will
be permitted to apply for ISR authority, or (if it is permitted to apply) that
ISR authority will be granted, and the failure to obtain such authority could
have an adverse effect on the Company's plans to expand its services in Japan.
Call-reorigination services have been expressly permitted by the regulator
in Hong Kong. In Hong Kong, the Company has been issued a Public Non-Exclusive
Telecommunications Services ("PNETS") license which permits the provision of
personal identification number validation and call routing service and
facsimile communication service, and which, in general, has been interpreted
to permit the provision of call-reorigination services. A range of
international telephone services, including the operation of an international
gateway for all incoming and outgoing international calls, is provided in Hong
Kong solely by Hong Kong Telecommunications International Limited ("HKTI"),
the Hong Kong ITO, pursuant to an exclusive license which will expire on
October 1, 2006. The regulator in Hong Kong has sought to encourage
competition in international services consistent with HKTI's exclusivities.
For example, the Company may, with a license, provide a broad array of value-
added services, as well as limited basic switched voice services to CUGs. In
addition, the Hong Kong government has entered into discussions with HKTI
concerning a possible early termination of its exclusive license. In
developing a competitive position in Hong Kong, the Company has sought to
provide international services to and from Hong Kong to the maximum extent
permitted under the current Hong Kong regulatory regime, through, for example,
agreements with providers within Hong Kong. There can be no guarantee that the
Hong Kong regulator will not change its regulations or policy or, where the
Company has interpreted laws and/or regulations that are unclear, not find
that the Company is in violation of existing laws or that such change or
finding will not require the Company to cease providing certain services to
and from Hong Kong.
There can be no assurance that, upon resuming sovereignty over Hong Kong,
the People's Republic of China ("China") will continue the existing licensing
regime with respect to the Hong Kong telecommunications industry. There is
also no assurance that China will continue to implement the existing policies
of the Hong Kong government with respect to promoting the liberalization of
the Hong Kong telecommunications industry in general, including the policy
allowing call-reorigination, which is currently prohibited in China. For the
three months ended March 31, 1997, one wholesale customer in Hong Kong, New
T&T Hong Kong Limited (the "Hong Kong Customer"), accounted for approximately
12% of the Company's total revenues. Substantially all of the services
provided by the Company to this customer consists of call-reorigination
services. The initial term of the Company's agreement with the Hong Kong
Customer expires in October 1998, automatically renews for one-year periods,
and may be terminated by the Hong Kong Customer if it determines in good faith
that the services provided pursuant to the agreement are no longer
commercially viable in Hong Kong. If the Company loses its rights under its
PNETS license and/or if it is unable to provide call-reorigination services in
Hong Kong on either a retail or wholesale basis, such action could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, a material reduction in the level of
services provided by the Company to the Hong Kong Customer or a termination of
the Company's agreement with the Hong Kong Customer could have a material
adverse effect on the Company's business, financial condition and results of
operations.
In all other Pacific Rim countries, the Company is strictly limited in its
provision of public voice and value added services. While some countries in
the Pacific Rim oppose call-reorigination, the Company generally has not faced
significant regulatory impediments. China has specifically informed the FCC
that call-reorigination is illegal in that country. Australia, New Zealand,
Japan and Hong Kong do not prohibit call-reorigination. If the Company is
unable to provide the services it is presently providing or intends to provide
or to use its existing or contemplated transmission methods due to its
inability to receive or retain formal or informal approvals for such services
or transmission methods, or for any other reason related to regulatory
compliance or the lack thereof, such events could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Government Regulation."
Other Non-U.S. Markets. To the extent that it seeks to provide
telecommunications services in other non-U.S. markets, the Company will be
subject to the developing laws and regulations governing the competitive
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provision of telecommunications services in those markets. The Company
currently plans to provide a limited range of services in South Africa and
certain Latin American countries, as permitted by regulatory conditions in
those markets, and to expand its operations as these markets implement
liberalization to permit competition in the full range of telecommunications
services. The nature, extent and timing of the opportunity for the Company to
compete in these markets will be determined, in part, by the actions taken by
the governments in these countries to implement competition and the response
of incumbent carriers to these efforts. There can be no assurance that any of
these countries will implement competition in the near future or at all, that
the Company will be able to take advantage of any such liberalization in a
timely manner, or that the Company's operations in any such country will be
successful. See "Business--Government Regulation."
DEPENDENCE ON INDEPENDENT AGENTS; CONCENTRATION OF MARKETING RESOURCES
The Company's success depends in significant part on its ability to recruit,
maintain and motivate a network of independent agents, including its Country
Coordinators. Telegroup's international market penetration has resulted
primarily from the sales activities of independent agents compensated on a
commission basis. As of March 31, 1997, Telegroup had approximately 1,300
agents located in over 97 countries. The Company is subject to competition in
the recruitment of independent agents from other organizations that use
independent agents to market their products and services, including those that
market telecommunications services. The motivation of the independent agents,
which can be affected by general economic conditions and a number of
intangible factors, may impact the effectiveness of the independent agents'
ability to recruit customers for the Company's services. Because of the number
of factors that affect the recruiting of independent agents, the Company
cannot predict when or to what extent such increases or decreases in the level
of independent agent activity will occur. There can be no assurance that the
Company will be able to continue to effectively recruit, maintain and motivate
independent agents and, to the extent the Company is not able to do so, the
Company's business, results of operations and financial condition could be
materially and adversely affected.
As of March 31, 1997, approximately one-third of the Company's retail
revenues were derived from customers enrolled by agents who are contractually
prohibited from offering telecommunications services of the Company's
competitors to their customers during the term of their contract and typically
for a period of two years thereafter. Contracts with independent agents
entered into by the Company after July 1996 typically provide for such
exclusivity. As earlier agreements expire, the Company has generally required
its independent agents to enter into such new agreements. In the past, certain
independent agents have elected to terminate their relationship with the
Company in lieu of entering into new independent agent agreements. In the
event that independent agents transfer a significant number of customers to
other service providers or that a significant number of agents decline to
renew their contracts under the new terms and move their customers to another
carrier, this would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Business
Strategy" and "Business--Sales, Marketing and Customer Service."
While the Company has an extensive marketing and sales organization
consisting of a worldwide network of independent agents and an internal sales
force, a significant portion of the Company's revenues are generated from a
limited number of these individuals. In fiscal year 1996, and for the three
months ended March 31, 1997, the Company's internal sales force was
responsible for approximately half of the Company's U.S. domestic long
distance retail service revenues, and approximately 9.5% of the Company's
total revenues. For the three months ended March 31, 1997, 10 independent
agents and/or Country Coordinators were responsible for generating 28.0% of
the Company's international long distance service billings and 50 independent
agents and/or Country Coordinators were responsible for generating 50.6% of
the Company's international long distance service billings. Any loss of the
Company's internal sales force or certain of the Company's more productive
independent agents or Country Coordinators could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In connection with the Company's efforts to market its Global Access Direct
service, the Company anticipates that commission rates paid to its independent
agents for customer usage of Global Access Direct service may in some cases be
lower than those paid for marketing call-reorigination services. While the
Company does not believe that a lower commission rate will have a material
adverse effect on the Company's ability to market its Global Access Direct
service or to retain its independent agents, there can be no assurance that
this will be the case. In the event that the Company is unable to effectively
market its Global Access Direct service
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or retain its independent agents, such events would have a material adverse
effect on the Company's business, financial condition and results of
operations.
INTENSE INTERNATIONAL AND NATIONAL COMPETITION
The international and national telecommunications industry is highly
competitive. The Company's success depends upon its ability to compete with a
variety of other telecommunications providers in each of its markets,
including the respective ITO in each country in which the Company operates and
global alliances among some of the world's largest telecommunications
carriers. Other potential competitors include cable television companies,
wireless telephone companies, Internet access providers, electric and other
utilities with rights of way, railways, microwave carriers and large end users
which have private networks. The intensity of such competition has recently
increased and the Company believes that such competition will continue to
intensify as the number of new entrants increases. If the Company's
competitors devote significant additional resources to the provision of
international or national long distance telecommunications services to the
Company's target customer base of high-volume residential consumers and small-
and medium-sized businesses, such action could have a material adverse effect
on the Company's business, financial condition and results of operations, and
there can be no assurance that the Company will be able to compete
successfully against such new or existing competitors.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and "brand" loyalty, long-
standing relationships with the Company's target customers, and economies of
scale which can result in a lower relative cost structure for transmission and
related costs. These competitors include, among others, AT&T, MCI
Telecommunications Corporation ("MCI"), Sprint Communications, Inc.
("Sprint"), WorldCom, Inc. ("WorldCom"), Cable & Wireless, Inc., Frontier
Corp. ("Frontier") and LCI International, Inc. ("LCI") and RBOCs outside their
exchange territories providing long distance services in the United States;
France Telecom in France, PTT Telecom B.V. in the Netherlands, Cable &
Wireless plc, British Telecommunications plc ("BT"), Mercury Communications
Ltd. ("Mercury"), AT&T, WorldCom, Sprint and ACC Corp. in the United Kingdom;
Deutsche Telecom AG ("Deutsche Telecom") in Germany; Swiss PTT in Switzerland;
Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra and Optus in
Australia; and Kokusan Denshin, Denwa ("KDD"), International Telecom Japan
("ITJ") and International Digital Communications ("IDC") in Japan. The Company
competes with numerous other long distance providers, some of which focus
their efforts on the same customers targeted by the Company. In addition to
these competitors, recent and pending deregulation in various countries may
encourage new entrants. For example, as a result of the recently enacted 1996
Telecommunication Act in the United States, once certain conditions are met,
RBOCs will be allowed to enter the domestic long distance market, AT&T, MCI
and other long distance carriers will be allowed to enter the local telephone
services market, and any entity (including cable television companies and
utilities) will be allowed to enter both the local service and long distance
telecommunications markets. Moreover, while the recently completed WTO
Agreement could create opportunities for the Company to enter new foreign
markets, implementation of the accord by the United States could result in new
competition from ITOs previously banned or limited from providing services in
the United States. Increased competition in the United States as a result of
the foregoing, and other competitive developments, including entry by Internet
service providers into the long-distance market, could have an adverse effect
on the Company's business, financial condition and results of operations. In
addition, many smaller carriers have emerged, most of which specialize in
offering international telephone services utilizing dial-up access methods,
some of which have begun to build networks similar to the TIGN. See "The
International Telecommunications Industry."
The Company believes that ITOs generally have certain competitive advantages
due to their control over local connectivity and close ties with national
regulatory authorities. The Company also believes that, in certain instances,
some regulators have shown a reluctance to adopt policies and grant regulatory
approvals that would result in increased competition for the local ITO. If an
ITO were to successfully pressure national regulators to prevent the Company
from providing its services, the Company could be denied regulatory approval
in certain
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jurisdictions in which its services would otherwise be permitted, thereby
requiring the Company to seek judicial or other legal enforcement of its right
to provide services. Any delay in obtaining approval, or failure to obtain
approval, could have a material adverse effect on the Company's business,
financial condition and results of operations. If the Company encounters anti-
competitive behavior in countries in which it operates or if the ITO in any
country in which the Company operates uses its competitive advantages to the
fullest extent, the Company's business, financial condition and results of
operations could be materially adversely affected. See "Business--Competition"
and "Business--Government Regulation."
The long distance telecommunications industry is intensely competitive and
is significantly influenced by the pricing and marketing decisions of the
larger industry participants. In the United States, the industry has
relatively limited barriers to entry with numerous entities competing for the
same customers. Customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. Generally, the Company's domestic customers can switch carriers
at any time. The Company believes that competition in all of its markets is
likely to increase and that competition in non-United States markets is likely
to become more similar to competition in the United States market over time as
such non-United States markets continue to experience deregulatory influences.
In each of the countries where the Company markets its services, the Company
competes primarily on the basis of price (particularly with respect to its
sales to other carriers), and also on the basis of customer service and its
ability to provide a variety of telecommunications products and services.
There can be no assurance that the Company will be able to compete
successfully in the future. The Company anticipates that deregulation and
increased competition will result in decreasing customer prices for
telecommunications services. The Company believes that the effects of such
decreases will be at least partially offset by increased telecommunications
usage and decreased costs as the percentage of its traffic transmitted over
the TIGN increases. There can be no assurance that this will be the case. To
the extent this is not the case, there could be an adverse effect on the
Company's margins and financial profits, and the Company's business, financial
condition and results of operations could be materially and adversely
effected.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems,
such as the proposed Iridium and GlobalStar systems, utilization of the
Internet for international voice and data communications and digital wireless
communication systems such as personal communications services ("PCS"). The
Company is unable to predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and
services.
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon its ability to deliver
high quality, uninterrupted telecommunication services and on its ability to
protect its software and hardware against damage from fire, earthquake, power
loss, telecommunications failure, natural disaster and similar events. Any
failure of the TIGN or other systems or hardware that causes interruptions in
the Company's operations could have a material adverse effect on the Company.
As the Company expands the TIGN and call traffic grows, there will be
increased stress on hardware, circuit capacity and traffic management systems.
There can be no assurance that the Company will not experience system
failures. The Company's operations are also dependent on its ability to
successfully expand the TIGN and integrate new and emerging technologies and
equipment into the TIGN, which could increase the risk of system failure and
result in further strains upon the TIGN. The Company attempts to minimize
customer inconvenience in the event of a system disruption by routing traffic
to other circuits and switches which may be owned by other carriers. However,
significant or prolonged system failures, or difficulties for customers in
accessing, and maintaining connection with, the TIGN could damage the
reputation of the Company and result in customer attrition and financial
losses. Additionally, any damage to the Company's Network Operations Center
could have a negative impact on the Company's ability to monitor the
operations of the TIGN and generate accurate call detail reports.
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DEPENDENCE ON TELECOMMUNICATIONS FACILITIES PROVIDERS
The Company's success will continue to depend, in part, on its ability to
obtain and utilize transmission capacity on a cost-effective basis. The
Company currently owns only a limited amount of telecommunications
transmission infrastructure. Telephone calls made by the Company's customers
may be transmitted via one or more of the following types of circuit capacity:
(i) capacity purchased from another carrier on a per minute basis under a
simple resale agreement; (ii) capacity leased from another carrier; or (iii)
capacity owned by Telegroup on an IRU basis. In addition, the Company requires
leased circuit capacity to provide access and egress between its switches and
the local PSTN in each country.
The Company obtains most of its transmission capacity under a variety of
volume-based resale arrangements with facilities-based and other carriers
including ITOs. The Company has entered into resale agreements with more than
20 carriers in the U.S., U.K., Canada, the Netherlands, Denmark, Australia,
Hong Kong and Switzerland. Under these arrangements, the Company is subject to
the risk of unanticipated price fluctuations and service restrictions or
cancellations. The Company generally has not experienced sudden or
unanticipated price fluctuations, service restrictions or cancellations
imposed by such facilities-based carriers but there can be no assurance that
this will be the case in the future. The Company has entered into a resale
agreement with Sprint which contains a net monthly usage commitment of
$1,500,000, with the Company liable for 25% of any shortfall below such
commitment level. The Sprint agreement terminates in December 1997 and is
cancelable by the Company or Sprint on 90 days' notice, subject to the payment
of an early termination fee. The failure of the Company to meet the net
monthly usage commitments contained in this agreement could have a material
adverse effect on the Company's business, financial condition and results of
operations. Although the Company believes that its arrangements and
relationships with such carriers generally are satisfactory, the deterioration
or termination of the Company's arrangements and relationships, or the
Company's inability to enter into new arrangements and relationships with one
or more of such carriers could have a material adverse effect upon the
Company's cost structure, service quality, network coverage, results of
operations and financial condition.
In addition, the Company leases circuit capacity at fixed terms ranging up
to 12 months under arrangements with facilities-based long distance carriers.
As a result, the Company depends upon facilities-based carriers such as the
ITOs in each of the countries in which the Company operates to supply the
Company with high capacity transmission links. Some of these carriers are or
may become competitors of the Company. The Company has periodically
experienced difficulties with the quality of the services provided by such
carriers. In addition, the Company has experienced delays in obtaining access
and egress transmission lines supplied by ITOs and other facilities-based
carriers. While the Company seeks to minimize the impact of such difficulties,
there can be no assurance that difficulties with circuit access and quality of
service will not arise in the future and constitute a material adverse effect.
See "--Intense International and National Competition," "Business--
Competition" and "Business--Regulation." Moreover, minimum volume contracts
may result in relatively high fixed costs to the extent that the Company does
not generate the requisite traffic volume over the particular route. See
"Business--Network and Operations."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its expansion in international
markets. In many international markets, the ITO controls access to the local
networks, enjoys better brand recognition and brand and customer loyalty, and
possesses significant operational economies, including a larger backbone
network and operating agreements with other ITOs. Moreover, an ITO may take
many months before allowing competitors, including the Company, to
interconnect to its switches within the target market. Pursuit of
international growth opportunities may require significant investments for
extended periods of time before returns, if any, on such investments are
realized. In addition, there can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it to operate,
obtain access to local transmission facilities or market, sell and deliver
competitive services in these markets.
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In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks in conducting business
internationally, which could have a material adverse effect on the Company's
international operations, including its strategy to open additional offices in
foreign countries and its ability to repatriate net income from foreign
markets. Such risks may include unexpected changes in regulatory requirements,
VAT, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, problems in collecting accounts
receivable, political risks, fluctuations in currency exchange rates, foreign
exchange controls which restrict or prohibit repatriation of funds, technology
export and import restrictions or prohibitions, delays from customs brokers or
government agencies, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world, and potentially
adverse tax consequences resulting from operating in multiple jurisdictions
with different tax laws. In addition, the Company's business could be
adversely affected by a reversal in the current trend toward deregulation of
telecommunications carriers. In certain countries into which the Company may
choose to expand in the future, the Company may need to enter into a joint
venture or other strategic relationship with one or more third parties in
order to successfully conduct its operations (possibly with an ITO or other
dominant carrier). There can be no assurance that such factors will not have a
material adverse effect on the Company's future operations and, consequently,
on the Company's business, results of operations and financial condition, or
that the Company will not have to modify its current business practices. In
addition, there can be no assurance that laws or administrative practices
relating to taxation, foreign exchange or other matters of countries within
which the Company operates will not change. Any such change could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Foreign Corrupt Practices Act. As a result of the Offering, the Company will
become subject to the Foreign Corrupt Practices Act ("FCPA"), which generally
prohibits U.S. companies and their intermediaries from bribing foreign
officials for the purpose of obtaining or keeping business. The Company may be
exposed to liability under the FCPA as a result of past or future actions
taken without the Company's knowledge by agents, strategic partners and other
intermediaries. Such liability could have a material adverse effect on the
Company's business, financial condition and results of operations.
FOREIGN EXCHANGE RATE RISKS; REPATRIATION RISKS
Although the Company and its subsidiaries attempt to match costs and
revenues in terms of local currencies, the Company anticipates that as it
continues its expansion of the TIGN on a global basis, there will be many
instances in which costs and revenues will not be matched with respect to
currency denomination. As a result, the Company anticipates that increasing
portions of its revenues, costs, assets and liabilities will be subject to
fluctuations in foreign currency valuations, and that such changes in exchange
rates may have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company may utilize foreign
currency forward contracts or other currency hedging mechanisms to minimize
exposure to currency fluctuation, there can be no assurance that such hedges
will be implemented, or if implemented, will achieve the desired effect. The
Company may experience economic loss and a negative impact on earnings solely
as a result of foreign currency exchange rate fluctuations. The markets in
which the Company's subsidiaries now conduct business, except for South
Africa, generally do not restrict the removal or conversion of the local or
foreign currency; however, there can be no assurance that this situation will
continue. The Company has formed a subsidiary in South Africa which is
authorized to handle such repatriation functions on the Company's behalf in
accordance with applicable laws. See "--Risks Associated with International
Operations."
FAILURE TO COLLECT RECEIVABLES (BAD DEBT RISK)
Many of the countries in which the Company operates do not have established
credit bureaus, thereby making it more difficult for the Company to ascertain
the creditworthiness of potential customers. In addition, the Company expends
considerable resources to collect receivables from customers who fail to make
payment in a timely manner. While the Company continually seeks to minimize
bad debt, the Company's experience indicates that a certain portion of past
due receivables will never be collected and that such bad debt is a necessary
cost of conducting business in the telecommunications industry. Expenses
attributable to the write-off
24
<PAGE>
of bad debt, including an estimate of accounts receivable expected to be
written off, represented approximately 1.5%, 3.1% and 2.4% of revenues for the
years ended December 31, 1994, 1995 and 1996, respectively, and 3.3% for the
three months ended March 31, 1997. There can be no assurance, however, that,
with regard to any particular time period or periods or a particular
geographic location or locations, bad debt expense will not rise significantly
above historical or anticipated levels. Any significant increase in bad debt
levels could have a material adverse effect on the Company's business,
financial condition and results of operations.
The telecommunications industry has historically been a victim of fraud.
Although the Company has implemented anti-fraud measures to minimize losses
relating to fraudulent practices, there can be no assurance that the Company
can effectively control fraud when operating in the international or national
telecommunications arena. The Company's failure to effectively control fraud
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH IMPOSITION OF VAT ON COMPANY'S SERVICES
The EU imposes value-added taxes ("VAT") upon the sale of goods and services
within the EU. The rate of VAT varies among EU members, but ranges from 15% to
25% of the sales price of goods and services. Under VAT rules, businesses are
required to collect VAT from their customers upon the sale to such customers
of goods and services and remit such amounts to the VAT authorities.
In the case of services, VAT is imposed only where services are deemed to
have been provided within an EU member state. Pursuant to the Sixth VAT
Directive adopted in 1977 (the "Sixth Directive"), telecommunications services
were deemed to be provided where the supplier of such services is located.
Under the Sixth Directive, therefore, telecommunications services provided by
U.S. telecommunications companies in the United States were deemed to be
performed outside the EU and were exempt from VAT. Because telecommunications
providers based in the EU must charge VAT on telecommunications services they
provided, U.S.-based and other non-EU based telecommunications providers
historically enjoyed a competitive advantage over their EU counterparts under
the Sixth Directive.
Derogation to the Sixth Directive. In March 1997, the EU issued a derogation
to the Sixth Directive (the "Derogation") that, as of January 1, 1997,
authorized individual EU states to amend their laws so as to change the locus
of telecommunications services provided by non-EU based firms, treating such
services as being provided where the customer is located rather than where the
telecommunications provider is established. In the case of sales by non-EU
based telecommunications companies to non-VAT-registered (usually residential)
customers in an EU member state, the Derogation provides that the non-EU based
companies will be required to collect and remit VAT. In the case of sales by
non-EU based telecommunications companies to VAT-registered (usually business)
customers in an EU member state, however, the Derogation provides that the
VAT-registered business will be required to collect and remit VAT. It is
expected that non-EU based telecommunications providers will be required to
appoint a VAT agent and register for VAT in every EU member state in which it
has individual customers.
Germany and France have adopted rules that, as of January 1, 1997, deem
telecommunications services provided by non-EU based firms to be provided
where the customer is located, thereby subjecting telecommunications services
provided to customers in the EU by non-EU based companies to VAT. The German
and French rules impose VAT on both individual and business customers of non-
EU based telecommunications companies. In the case of sales to non-VAT-
registered customers, German and French rules require that the non-EU based
telecommunications carriers collect and remit the VAT. In the case of sales by
such providers to German VAT-registered customers, the German rules generally
require that such customers collect and remit the VAT. Under the so-called
"Nullregelung" doctrine, however, certain business customers that are required
to charge VAT on goods and services provided to their customers (generally,
companies other than banks and insurance companies) are entitled to an
exemption from VAT on telecommunications services either by receiving an
invoice without VAT ("Nullregelung" zero-rule) or by recovering the invoiced
VAT. In the case of sales by such providers to French VAT-registered
customers, the French rules require that such business customers collect and
remit the VAT.
25
<PAGE>
Effective April 1, 1997, Austria and Italy also began to impose VAT on
telecommunications services provided by non-EU based companies. The other
members of the EU are expected to implement similar legislation effective July
1, 1997. The rules adopted by Italy and Austria are generally similar to those
adopted by France and Germany in that they impose VAT on both individuals and
businesses, with non-EU based telecommunications providers required to collect
and remit the VAT in the case of sales to non-VAT-registered customers and the
customer required to collect and remit VAT in the case of sales to VAT-
registered customers.
Proposed Amendment to the Sixth Directive. The EU has adopted a proposed
amendment to the Sixth Directive that, if adopted in present form, would
require all EU members to adopt legislation to impose VAT on non-EU based
telecommunications services provided to customers in the EU by non-EU based
companies, beginning as early as December 31, 1998. Under the proposed
amendment, non-EU based telecommunications companies would be required to
collect and remit VAT on telecommunications services provided to EU businesses
as well as to individuals.
To the extent that the Company's services are, and in the future become,
subject to VAT, the Company's competitive price advantage with respect to
those EU businesses and other customers required to pay VAT will be reduced.
Such reduction could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company historically has
collected, and will continue to collect, VAT on Global Access Direct services
where it is offered in a VAT country. The Company believes that whatever
negative impact the Derogation and the Amendment will have on its operations
as a result of the imposition of VAT on traditional call-reorigination, such
impact will be partially mitigated by the customer migration towards and the
higher gross margins associated with call-through services.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future due to various factors, including
the timing of investments made to expand the TIGN and the opening of new
offices, general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demand, capital expenditures and other costs relating
to the expansion of operations, the introduction of new services by the
Company or its competitors, the mix of services sold and the mix of channels
through which those services are sold, pricing changes and new service
introductions by the Company and its competitors and prices charged by the
Company's facilities-based transmission line suppliers. Many of these factors
are outside of the Company's control, and any combination of such factors, or
any one of such factors, may in the future cause fluctuations in quarterly
operating results. In such event, the price of the Company's Common Stock
would likely be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team, as well as its technical, marketing and
sales personnel. While certain of the Company's employees have entered into
employment agreements with the Company, the Company's employees may
voluntarily terminate their employment with the Company at any time. The
Company has obtained a $5 million key man life insurance policy covering Mr.
Cliff Rees, the Company's Chief Executive Officer and President, but there can
be no assurance that the coverage provided by such policy will be sufficient
to compensate the Company for the loss of Mr. Rees' services. The Company's
success also will depend on its ability to continue to attract and retain
qualified management, marketing, technical and sales personnel. The process of
locating such personnel with the combination of skills and attributes required
to carry out the Company's strategies is often lengthy. Competition for
qualified employees and personnel in the telecommunications industry is
intense. There can be no assurance that the Company will be successful in
attracting and retaining such executives and personnel. The loss of the
services of key personnel, including Mr. Rees, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management."
26
<PAGE>
PROTECTION OF PROPRIETARY TECHNOLOGY AND INFORMATION
The Company relies on trade secrets, know-how and continuing technological
advancements to maintain its competitive position. The Company also relies on
unpatented proprietary technology and there can be no assurance that third
parties may not independently develop the same or similar technology or
otherwise obtain access to the Company's unpatented technology, trade-secrets
and know-how. Although the Company has entered into confidentiality and
invention agreements with certain of its employees and consultants, no
assurance can be given that such agreements will be honored or that the
Company will be able to protect effectively its rights to its unpatented
technology, trade secrets and know-how. Moreover, no assurance can be given
that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets and know-how. If the Company is unable to maintain the
proprietary nature of its technologies, the Company could be materially
adversely affected.
Competitors in both the United States and foreign countries, many of which
have substantially greater resources and have made substantial investments in
competing technologies, may have applied for or obtained, or may in the future
apply for and obtain, patents that will prevent, limit or otherwise interfere
with the Company's ability to sell its services. The Company has not conducted
an independent review of patents issued to third parties. Although the Company
believes that its products do not infringe on the patents or other proprietary
rights of third parties, there can be no assurance that other parties will not
assert infringement claims against the Company or that such claims will not be
successful. An adverse outcome in the defense of a patent suit could subject
the Company to significant liabilities to third parties, require disputed
rights to be licensed from third parties or require the Company to cease
selling its services.
CONTROL OF COMPANY BY PRINCIPAL SHAREHOLDERS
After completion of the Offering, Fred Gratzon, the Chairman of the Board,
and Clifford Rees, the Chief Executive Officer, will collectively beneficially
own in the aggregate approximately 70.5% of the then outstanding Common Stock
(approximately 69.8% if the over-allotment option is exercised). Accordingly,
if they choose to do so, Messrs. Gratzon and Rees acting together, or with
management as a group, will have the power to amend the Company's Second
Restated Articles of Incorporation, elect all of the directors, effect
fundamental corporate transactions such as mergers, asset sales and the sale
of the Company and otherwise direct the Company's business and affairs,
without the approval of any other shareholder. See "Management" and "Principal
and Selling Shareholders."
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
In furtherance of its business strategy, the Company may enter into
strategic alliances with, acquire assets or businesses from, or make
investments in, companies that are complementary to its current operations.
While the Company is currently engaged in negotiations to acquire the
operations and customer base of its Country Coordinators in Australia, the
Netherlands and New Zealand, the Company has no present agreements with
respect to any such strategic alliance, investment or acquisition. Any such
future strategic alliances, investments or acquisitions would be accompanied
by the risks commonly encountered in such transactions. Such risks include,
among other things, the difficulty of assimilating the operations and
personnel of the companies, the potential disruption of the Company's ongoing
business, costs associated with the development and integration of such
operations, the inability of management to maximize the financial and
strategic position of the Company by the successful incorporation of licensed
or acquired technology into the Company's service offerings, the maintenance
of uniform standards, controls, procedures and policies, the impairment of
relationships with employees and customers as a result of changes in
management, and higher customer attrition with respect to customers obtained
through acquisitions.
27
<PAGE>
ANTITAKEOVER CONSIDERATIONS
The Company's Second Restated Articles of Incorporation and its Amended and
Restated Bylaws include certain provisions which may have the effect of
delaying, deterring or preventing a future takeover or change in control of
the Company without the approval of the Company's Board of Directors. Such
provisions may also render the removal of directors and management more
difficult. Among other things, the Company's Second Articles of Incorporation,
its Amended and Restated Bylaws, and/or the Iowa Business Corporation Act: (i)
provide for a classified Board of Directors serving staggered three-year
terms, (ii) impose restrictions on who may call a special meeting of
shareholders, (iii) include a requirement that shareholder action be taken
only at shareholder meetings or with the written consent of the holders of at
least 90% of the outstanding shares of Common Stock and (iv) specify certain
advance notice requirements for shareholder nominations of candidates for
election to the Board of Directors and certain other shareholder proposals. In
addition, the Board of Directors, without further action by the shareholders,
may cause the Company to issue 10,000,000 shares of Preferred Stock on such
terms and with such rights, preferences and designations as the Board of
Directors may determine. Issuance of such Preferred Stock, depending upon the
rights, preferences and designations thereof, may have the effect of delaying,
deterring or preventing a change in control of the Company. Further, the Iowa
Business Corporation Act and certain provisions of the Second Restated
Articles of Incorporation impose restrictions on the ability of a third party
to effect a change in control of the Company and may be considered
disadvantageous by a shareholder. See "Description of Capital Stock--Preferred
Stock" and "Description of Capital Stock--Certain Provisions of the Company's
Articles and Bylaws," and "Description of Capital Stock--Iowa Business
Corporation Act; Antitakeover Effects." Certain federal and state laws and
regulations concerning telecommunications providers require prior approval of
transfers of control and may also have the effect of delaying, deterring or
preventing a change in control of the Company. See "--Substantial Government
Regulation--United States" and "Business--Government Regulation."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
Although the Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance, there can be no
assurance that an active trading market will develop or be maintained after
the Offering. The initial public offering price of the Common Stock offered
hereby will be determined by negotiations among the Company and the
representatives of the Underwriters and may not be indicative of the market
price of the Common Stock after the Offering. For a description of the factors
considered in determining the initial public offering price, see
"Underwriting." The market price of the Common Stock may be highly volatile.
Factors such as fluctuation in the Company's operating results, announcements
of technological innovations or new products or services by the Company or its
competitors, changes in the regulatory framework or in the cost of long
distance service or other operating costs and changes in general market
conditions may have a significant effect on the market price of the Common
Stock.
NO DIVIDENDS
While the Company has in the past paid dividends on its capital stock, it
does not anticipate paying any dividends to its shareholders in the
foreseeable future. The declaration and payment of any dividends in the future
will be determined by the Board of Directors, in its discretion, and will
depend upon the Company's earnings, capital requirements, financial condition
and other relevant factors. The Company's $7.5 million revolving credit
facility with American National Bank and Trust Company of Chicago (the "Credit
Facility") restricts the Company's ability to declare any dividends on its
capital stock. In addition, any future bank or other financing may restrict
the Company's ability to declare and pay dividends. See "--Need for Additional
Financing" and "Dividend Policy."
DILUTION TO PURCHASERS OF COMMON STOCK
Investors purchasing shares of Common Stock in the Offering will experience
an immediate dilution in net tangible book value of their shares of Common
Stock. See "Dilution."
28
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial numbers of shares of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of the Common Stock and make it more difficult for the
Company to raise funds through equity offerings in the future. Several of the
Company's principal shareholders hold a significant portion of the Company's
outstanding Common Stock and a decision by one or more of these shareholders
to sell their shares pursuant to the exercise of registration rights, pursuant
to Rule 144 under the Securities Act of 1933 (the "Securities Act") or
otherwise, could materially adversely affect the market price of the Common
Stock. In addition, certain of such shareholders, as well as holders of
outstanding Warrants, have registration rights with respect to shares of
Common Stock. See "Principal and Selling Shareholders" and "Description of
Capital Stock--Registration Rights."
Upon completion of the Offering, the Company will have 36,700,000 shares of
Common Stock outstanding, assuming the exercise of options to acquire
1,971,189 shares and warrants to acquire 1,180,002 shares. Of the Common Stock
outstanding upon completion of the Offering, the 7,200,000 shares of Common
Stock sold in the Offering will be freely tradeable without restriction or
further registration under the Securities Act, except for any shares held by
"affiliates" of the Company or persons who have been affiliates within the
preceding three months. In addition, approximately 26,085,321 outstanding
shares of Common Stock are currently eligible for sale under Rule 144, subject
to restrictions on the timing, manner and volume of sales of such shares.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that, subject to certain exceptions, for a period
of 180 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., directly or indirectly, sell, offer to
sell, contract to sell, hypothecate, pledge or otherwise dispose of, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to purchase any
shares of Common Stock of the Company.
Promptly following the Offering, the Company intends to register on Form S-8
under the Securities Act 4,000,000 shares of Common Stock issuable under
options granted or to be granted under the Company's Stock Option Plan. See
"Shares Eligible for Future Sale."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward- looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company or the global long distance telecommunications
industry to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; prospects for the global long distance telecommunications
industry; competition; changes in business strategy or development plans; the
loss of key personnel; the availability of capital; regulatory developments
and other factors referenced in this Prospectus, including, without
limitation, under the captions "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
29
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $99.7 million. The Company expects that approximately $58.5
million of such net proceeds will be used to expand the Telegroup Intelligent
Global Network, approximately $22.2 million will be used to prepay all of the
outstanding 12% Senior Subordinated Notes due November 27, 2003 (including a
prepayment fee equal to $1.4 million) and accrued interest, approximately
$15.0 million will be used to develop and upgrade management information
systems, and the balance will be used for working capital and for other
general corporate purposes, including strategic alliances with, investments
in, or acquisitions of companies. The net proceeds of the issuance of Senior
Subordinated Notes were used to fund costs associated with the deployment of
the TIGN and to repay outstanding bank indebtedness. The Company may use a
portion of the net proceeds of the Offering to further its business strategy
through strategic alliances with, investments in, or acquisitions of companies
that are complementary to the Company's operations. While the Company
continuously reviews such strategic alliances, investments and acquisition
opportunities in its existing and other markets, other than as set forth
herein, the Company has not entered into any agreement or understanding with
respect to any such strategic alliance, investment or acquisition. See
"Business--Business Strategy." Pending application, such net proceeds may be
invested in short-term, marketable securities. The Company will not receive
any of the proceeds from the sale of shares by the Selling Shareholders. For a
discussion of the Company's future capital requirements and the sources of
funds therefor over the next three years, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company declared a $525,000 cash dividend in December 1995 and a
$425,000 cash dividend in March 1996, both of which were paid in November 1996
to the Company's shareholders. The Company currently intends to retain all
future earnings for use in the operation of its business and, therefore, does
not anticipate paying any cash dividends in the foreseeable future. The
declaration and payment in the future of any cash dividends will be at the
discretion of the Company's Board of Directors and will depend upon, among
other things, the earnings, capital requirements and financial position of the
Company, existing and/or future loan covenants and general economic
conditions. Under the terms of the Credit Facility, the Company is restricted
from declaring, making or paying any distributions unless certain financial
covenants are met. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
30
<PAGE>
DILUTION
The Company's pro forma net tangible book value as of March 31, 1997 was
$8,665,570, or $0.30 per share. "Pro forma net tangible book value" per share
represents the total amount of tangible assets of the Company, less the total
amount of liabilities of the Company, divided by the number of shares of
Common Stock outstanding on a fully diluted basis, as adjusted to give effect
to the Recapitalization. After giving effect to the sale by the Company of the
7,200,000 shares of Common Stock offered hereby (at an assumed public offering
price of $15.00 per share), less estimated underwriting discounts and
commissions and the other estimated expenses of the Offering payable by the
Company, the Company's pro forma net tangible book value as of March 31, 1997
would have been $108.4 million, or $2.99 per share. This represents an
immediate increase in net tangible book value of $2.69 per share to existing
shareholders and an immediate dilution in net tangible book value of $12.01
per share to new investors purchasing shares of Common Stock in the Offering.
The following table illustrates this dilution on a per share basis to the new
investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $15.00
Pro forma net tangible book value per share at March
31, 1997................................................... 0.30
Increase in net tangible book value per share attributable
to new investors........................................... 2.69
----
Pro forma net tangible book value per share after giving
effect to the Offering..................................... 2.99
------
Dilution per share to new investors......................... $12.01
======
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the weighted average price per share
paid by existing shareholders and by new investors before deducting the
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company:
<TABLE>
<CAPTION>
TOTAL WEIGHTED
SHARES PURCHASED CONSIDERATION(1) AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders......... 26,348,809 78.5% $ -- 0.0% $ 0.00
New investors................. 7,200,000 21.5% 108,000,000 100.0% 15.00
---------- ----- ------------ ----- ------
Total....................... 33,548,809 100.0% $108,000,000 100.0% $ 3.22
========== ===== ============ ===== ======
</TABLE>
- --------
(1) The Common Stock held by existing stockholders has been issued over time
for various consideration and, for purposes of this comparison is assumed
to have been issued for nominal consideration.
The information in the table above excludes the effect of options to
purchase 1,635,438 shares of Common Stock outstanding at March 31, 1997, at an
exercise price of $1.31 per share, or warrants to purchase 1,166,181 shares of
Common Stock outstanding at March 31, 1997 at a conversion price of $.002 per
share. The exercise of any of these outstanding options or warrants would
result in additional dilution to new investors. See "Management--Executive
Compensation," "Management--Amended and Restated Stock Option Plan" and
"Principal and Selling Shareholders."
31
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company, as adjusted to give effect to the
Recapitalization (i) as of March 31, 1997, and (ii) as adjusted to give effect
to the issuance and sale by the Company of 7,200,000 shares of Common Stock in
the Offering (at an assumed public offering price of $15.00 per share) and the
application of the estimated net proceeds therefrom. See "Use of Proceeds,"
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
ACTUAL AS ADJUSTED(2)
------- --------------
<S> <C> <C>
Cash and cash equivalents............................... $16,327 $ 93,837
======= ========
Current portion of long term debt and capital lease
obligations............................................ 228 228
======= ========
Long-term debt, net of current portion:
Senior subordinated notes and other long term debt.... 11,098 76
Capital lease obligations............................. 261 261
------- --------
Total long-term debt................................ 11,359 337
Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares
authorized; no shares issued or outstanding.......... -- --
Common stock, no par value; 150,000,000 shares
authorized; 26,348,809 shares issued and outstanding;
33,548,809 issued and outstanding as adjusted (1).... -- --
Additional paid-in capital.............................. 10,851 110,561
Retained earnings....................................... 2,257 (9,543)
------- --------
Total shareholders' equity.............................. 13,108 101,018
------- --------
Total capitalization................................ $24,467 $101,355
======= ========
</TABLE>
- --------
(1) Excludes (i) 1,635,438 shares of Common Stock issuable upon the exercise
of options granted under the Stock Option Plan as of March 31, 1997; (ii)
2,364,562 shares of Common Stock issuable upon the exercise of options
available for grant under the Stock Option Plan as of March 31, 1997; and
(iii) 1,166,181 shares of Common Stock issuable upon the exercise of the
Warrants as of March 31, 1997. See "Management--Amended and Restated Stock
Option Plan" and "Description of Capital Stock--Warrants."
(2) Reflects the payment of the Senior Subordinated Notes for $20.0 million,
including a prepayment penalty of $1.4 million, loss on the retirement of
the Senior Subordinated Notes of $9.0 million, the write-off of debt
issuance costs of $1.4 million, and accrued but unpaid interest of $.8
million as of March 31, 1997.
32
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial information
for the Company for the years ended December 31, 1994, 1995 and 1996, which
have been derived from the Company's audited consolidated financial statements
and notes thereto included elsewhere in this Prospectus, for the year ended
December 31, 1993, which has been derived from audited consolidated financial
statements of the Company which are not included herein, and for the period
ended December 31, 1992, which has been derived from unaudited consolidated
financial statements which are not included herein. The selected financial
data as of March 31, 1997 and for the three months ended March 31, 1996 and
1997 has been derived from the unaudited consolidated financial statements for
the Company included elsewhere in this Prospectus. In the opinion of
management, the unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated 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. The following financial information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's consolidated financial
statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ----------------
(UNAUDITED)
(UNAUDITED)
1992 1993 1994 1995 1996 1996 1997
----------- ------- ------- -------- -------- ------- ------------
(in thousands, except per share and other operating data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Retail................. $23,846 $29,790 $68,714 $128,139 $179,147 $41,440 $56,909
Wholesale.............. -- -- -- 980 34,061 1,911 17,187
------- ------- ------- -------- -------- ------- -------
Total revenues....... 23,846 29,790 68,714 129,119 213,208 43,351 74,096
Cost of revenues........ 18,411 22,727 49,513 83,101 150,537 27,742 53,283
------- ------- ------- -------- -------- ------- -------
Gross profit........... 5,435 7,063 19,201 46,018 62,671 15,609 20,813
Operating expenses:
Selling, general and
administrative......... 3,935 7,341 19,914 39,222 59,652 13,161 19,455
Depreciation and
amortization........... 61 172 301 655 1,882 261 807
Stock option based
compensation........... -- -- -- -- 1,032 -- 85
------- ------- ------- -------- -------- ------- -------
Total operating
expenses........... 3,996 7,513 20,215 39,877 62,566 13,422 20,347
Operating income
(loss).............. 1,439 (450) (1,014) 6,141 105 2,187 466
Net earnings (loss).. 1,386 (707) (538) 3,821 (118) 1,388 (277)
Net earnings (loss) per
share (1).............. $ .05 $ (.02) $ (.02) $ .13 $ (.00) $ .05 $ (.01)
======= ======= ======= ======== ======== ======= =======
Weighted average number
of common and common
share equivalents (in
thousands) 29,008 29,008 29,008 29,008 29,008 29,008 29,008
OTHER FINANCIAL DATA:
EBITDA (2).............. $ 1,510 $ (278) $ (577) $ 6,994 $ 2,990 $ 2,372 $1,022
Net cash provided by
operating activities... 820 924 1,364 5,561 4,904 3,825 6,194
Net cash (used in)
investing activities... (667) (765) (700) (2,818) (11,262) (2,473) (3,529)
Net cash (used in)
provided by financing
activities............. 21 (10) 957 (115) 15,924 (1,112) (430)
Capital expenditures.... 291 449 1,056 2,652 9,068 1,891 3,285
Dividends declared per
common share........... -- -- -- .02 .02 .02 --
OTHER OPERATING DATA:
Retail customers (3):
Domestic (U.S.)....... 6,113 6,440 17,653 17,664 34,296 39,186
International......... 0 5,301 28,325 55,513 109,847 117,716
Wholesale customers
(4).................... 0 0 0 3 17 21
Number of employees..... 55 92 211 313 461 487
Number of switches...... 0 1 2 3 7 13
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, AS OF MARCH 31, 1997
---------------------------------------------- -----------------------
(UNAUDITED) (UNAUDITED)
1992 1993 1994 1995 1996 ACTUAL AS ADJUSTED (5)
----------- ------ ------- ------- -------- ------- ---------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Cash and cash
equivalents.................. $ 194 $ 342 $ 1,963 $ 4,591 $ 14,155 $16,327 $93,837
Working capital............... 59 (629) (2,171) (478) 9,659 6,054 84,364
Property &
equipment, net............... 546 948 2,165 3,979 11,256 13,840 13,840
Total assets.................. 5,760 7,677 17,537 33,576 65,956 74,570 150,680
Long term debt,
less current
portion...................... -- -- -- -- 11,217 11,098 76
Total
shareholders'
equity
(deficit).................... 1,097 389 (149) 3,147 13,363 13,108 101,018
</TABLE>
- --------
(1) Net earnings (loss) per common share for the years ended December 31,
1992, 1993, 1994 1995 and 1996 and for the three months ended March 31,
1996 and 1997 is based on the weighted average number of common shares
outstanding. For all periods presented, per share information was computed
pursuant to the rules of the Commission, which require that common shares
issued by the Company during the twelve months immediately preceding the
Company's initial public offering plus the number of common shares
issuable pursuant to the grant of options and warrants issued during the
same period (which have an exercise price less than the initial public
offering price), be included in the calculation of the shares outstanding
using the treasury stock method from the beginning of all periods
presented.
(2) EBITDA represents net earnings (loss) plus net interest expense (income),
income taxes, depreciation and amortization and non-cash stock option
based compensation. While EBITDA is not a measurement of financial
performance under generally accepted accounting principles and should not
be construed as a substitute for net earnings (loss) as a measure of
performance, or cash flow as a measure of liquidity, it is included herein
because it is a measure commonly used in the telecommunications industry.
(3) Consists of retail customers who received invoices for the last month of
the period indicated. Does not include active international customers who
incurred charges in such month but who had outstanding balances as of the
last day of such month of less than $50, as the Company does not render
invoices in such instances.
(4) Consists of wholesale customers who received invoices for the last month
of the applicable period indicated.
(5) As adjusted to give effect to the Offering and the repayment of the 12%
Senior Subordinated Notes due November 27, 2003. See "Use of Proceeds."
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion of the financial condition and performance of the
Company should be read in conjunction with the consolidated financial
statements and related notes and other detailed information regarding the
Company included elsewhere in this Prospectus. Certain information contained
below and elsewhere in this Prospectus, including information with respect to
the Company's plans and strategy for its business, are forward-looking
statements. See "Risk Factors" for a discussion of important factors which
could cause actual results to differ materially from the forward-looking
statements contained herein.
OVERVIEW
Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network, the Telegroup Intelligent Global Network or the
TIGN, to deliver its services in a reliable, flexible and cost-effective
manner to approximately 204,000 active customers worldwide (those that
incurred charges during March 1997). According to FCC statistics, Telegroup
was the sixth largest U.S. carrier of outbound international traffic in 1995.
Telegroup's revenues have increased from $29.8 million in 1993 to $213.2
million in 1996. In 1993, the Company had an operating loss of $450,000 and a
net loss of $707,000, compared to operating income of $105,000 and a net loss
of $118,000 in 1996.
Incorporated in 1989, Telegroup was one of the first resellers of AT&T's
Software Defined Network and Distributed Network Service long distance
services. The Company derived its initial growth by aggregating long distance
services to individuals and small businesses in the U.S. in order to fulfill
large volume commitments to AT&T. In early 1993, Telegroup initiated call
reorigination service in certain countries in Western Europe and the Pacific
Rim. By 1994, more than one half of Telegroup's retail customers were located
outside the United States. At March 31, 1997, the Company had approximately
45,000 active retail customers within the United States and approximately
159,000 active retail customers outside the United States. The Company's
network currently includes switches located in Australia, France, Hong Kong,
Japan, the Netherlands, the U.K. and the U.S. and leased and owned
transmission facilities, and enables the Company to offer a variety of
enhanced telecommunications services.
The Company has attained positive EBITDA (as defined in "Selected Financial
Data") and net earnings in only two of the last five years--1992 and 1995. The
Company expects to incur lower gross margins, negative EBITDA and significant
operating losses and net losses for the near term as it incurs additional
costs associated with the development and expansion of the TIGN, the expansion
of its marketing and sales organization, and the introduction of new
telecommunications services. As the development and expansion of the TIGN
continues and the Company's customers migrate from Global Access CallBack to
Global Access Direct service, the Company expects that its gross margins,
EBITDA, and operating and net income will improve. However there can be no
assurance that this will be the case. See "Risk Factors--Historical and
Anticipated Losses; Uncertainty of Future Profitability."
Telegroup's revenues are derived from the sale of telecommunications
services to retail customers, typically residential users and small- to
medium-sized businesses in over 170 countries worldwide and to wholesale
customers, typically other U.S. and non-U.S. telecommunications carriers. The
Company's revenues from retail and wholesale customers represented 84% and
16%, respectively, of the Company's total revenues for the year ended December
31, 1996 and 77% and 23%, respectively, for the three months ended March 31,
1997. The Company's retail customer base is diversified both geographically
and by customer type. No single retail customer accounted for more than 1% of
the Company's total revenues for the year ended December 31, 1996 and for the
three months ended March 31, 1997. Revenues from the Company's wholesale
customers have grown from $1.0 million in 1995, the first year in which the
Company derived revenues from wholesale
35
<PAGE>
customers, to $34.1 million for the year ended December 31, 1996. For the
three months ended March 31, 1997, one wholesale customer in Hong Kong, New
T&T Hong Kong Limited, accounted for approximately 12% of the Company's total
revenues. See "Business--Customers." The Company expects that wholesale
revenues will continue to grow as a percentage of total telecommunications
revenue in the near term.
The following chart sets forth the Company's combined retail and wholesale
revenues for the year ended December 31, 1996 for each of the Company's eight
largest markets, determined by customers' billing addresses:
<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY 1996 REVENUES TOTAL REVENUES
------- ------------- --------------
(MILLIONS)
<S> <C> <C>
United States................................ $60.4 28.3%
Netherlands.................................. 23.0 10.8
Hong Kong.................................... 15.6 7.3
France....................................... 15.4 7.2
Switzerland.................................. 13.5 6.3
Australia.................................... 8.7 4.1
Japan........................................ 8.0 3.8
Germany...................................... 7.8 3.7
</TABLE>
During fiscal year 1996, the geographic origin of the Company's revenues was
as follows: United States--28.3%; Europe--38.1%; Pacific Rim--19.8%; Other--
13.8%. During fiscal year 1995, revenues were derived as follows: U.S.--27.2%;
Europe--31.9%; Pacific Rim--17.5%; Other--23.4%. The most significant shift in
composition of revenue was the increase in revenue derived from Europe and the
decrease from the "other" countries category, primarily in Latin America,
Africa and the Middle East. The Company has developed its wholesale carrier
business, which accounted for 16% of revenues in 1996 compared to 0.8% in
1995, primarily by serving wholesale customers in the U.S. and the Pacific
Rim. In addition, the Company has expanded its Country Coordinator offices and
retail marketing activities primarily in its core markets, six of which are
located in Western Europe, and three in the Pacific Rim. The Company believes
that, because its core markets comprise approximately 64% of the total global
long distance telecommunications market, according to TeleGeography, the U.S.,
Europe, and Pacific Rim regions will continue to comprise the bulk of the
Company's revenues.
The Company believes its retail services are typically competitively priced
below those of the ITO in each country in which the Company offers its
services. Prices for telecommunications services in many of the Company's core
markets have declined in recent years as a result of deregulation and
increased competition. The Company believes that worldwide deregulation and
increased competition are likely to continue to reduce the Company's retail
revenues per billable minute. The Company believes, however, that any decrease
in retail revenues per minute will be at least partially offset by an increase
in billable minutes by the Company's customers, and by a decreased cost per
billable minute as a result of the expansion of the TIGN and the Company's
ability to use least cost routing in additional markets. See "Risk Factors--
Expansion and Operation of the TIGN."
For the year ended December 31, 1996 and the three months ended March 31,
1997, 83.8% and 80.0%, respectively, of the Company's retail revenues were
derived from Telegroup's Global Access CallBack services. As the Company's
Global Access Direct service is provided to customers currently using
traditional call-reorigination services, the Company anticipates that revenue
derived from Global Access Direct will increase as a percentage of retail
revenues. However, the Company expects to continue to aggressively market its
Global Access CallBack service in markets not served by the TIGN and to use
transparent call-reorigination as a possible routing methodology for its
Global Access Direct customers where appropriate. Accordingly, the Company
believes that call-reorigination will continue to be a significant source of
revenue.
Historically, the Company has not been required to collect VAT (typically
15% to 25% of the sales price) on call-reorigination services provided to
customers in the EU because prior laws deemed such services to be provided
from the U.S. However, Germany and France have adopted rules whereby, as of
January 1, 1997,
36
<PAGE>
telecommunications services provided by non-EU based firms are deemed to be
provided where the customer is located. Austria and Italy adopted similar
rules effective April 1, 1997, and the other members of the EU are expected to
adopt similar legislation effective July 1, 1997. The Company is currently
analyzing the effect of this legislation on its service offerings. The Company
may have no alternative but to reduce prices of particular services offered to
certain customer segments in order to remain competitive in light of the
imposition of VAT on its services in certain EU member states. Such price
reduction could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company believes that
whatever negative impact the imposition of VAT will have on its operations,
such impact will be partially mitigated by the migration of customers towards
and the higher gross margins associated with call-through services. See "Risk
Factors--Risks Associated With Imposition of VAT on Company's Services."
Cost of retail and wholesale revenues is comprised of (i) variable costs
associated with the origination, transmission and termination of voice and
data telecommunications services by other carriers, and (ii) costs associated
with owning or leasing and maintaining switching facilities and circuits. The
Company also includes as a cost of revenues payments resulting from traffic
imbalances under its operating agreement with AT&T Canada. Currently, a
significant portion of the Company's cost of revenues is variable, based on
the number of minutes of use transmitted and terminated over other carriers'
facilities. The Company's gross profitability is driven mainly by the
difference between revenues and the cost of transmission and termination
capacity.
The Company seeks to lower the variable portion of its cost of services by
originating, transporting and terminating a higher portion of its traffic over
the TIGN. However, in the near term, the Company expects that its cost of
revenues as a percentage of revenues will increase as the Company continues
the development and expansion of the TIGN and introduces new
telecommunications services. Subsequently, as the Company increases the volume
and percentage of traffic transmitted over the TIGN, cost of revenues will
increasingly consist of fixed costs associated with leased and owned lines and
the ownership and maintenance of the TIGN, and the Company expects that the
cost of revenues as a percentage of revenues will decline. The Company seeks
to lower its cost of revenues by: (i) expanding and upgrading the TIGN by
acquiring owned and leased facilities and increasing volume on these
facilities, thereby replacing a variable cost with a fixed cost and spreading
fixed costs over a larger number of minutes; (ii) negotiating lower cost of
transmission over the facilities owned by other national and international
carriers; and (iii) expanding the Company's least cost routing choices and
capabilities.
The Company generally realizes higher gross margins from its retail services
than from its wholesale services. Wholesale services, however, provide a
source of additional revenue and add significant minutes originating and
terminating on the TIGN, thus enhancing the Company's purchasing power for
leased lines and switched minutes and enabling it to take advantage of volume
discounts. The Company also generally realizes higher gross margins from
direct access services than from call-reorigination. The Company expects its
gross margins to continue to decline in the near term as a result of increased
wholesale revenues as a percentage of total revenues. In addition, the Company
intends to reduce prices in advance of corresponding reductions in
transmission costs in order to maintain market share while migrating customers
from traditional call-reorigination to Global Access Direct. The Company then
expects gross margins to improve as the volume and percentage of traffic
originated, transmitted and terminated on the TIGN increases and cost of
revenues is reduced. The Company's overall gross margins may fluctuate in the
future based on its mix of wholesale and retail long distance services and the
percentage of calls using direct access as compared to call-reorigination, any
significant long distance rate reductions imposed by ITOs to counter external
competition, and any risks associated with the Company agreeing to minimum
volume contracts and not achieving the volume necessary to meet the
commitments.
Operating expenses include: (i) selling, general and administrative; (ii)
depreciation and amortization; and (iii) stock option based compensation.
Selling, general and administrative expenses include: (i) selling expenses;
(ii) general and administrative expenses; and (iii) bad debt expense. Selling
expenses are primarily sales commissions paid to internal salespersons and
independent agents, the primary cost associated with the acquisition of
customers by the
37
<PAGE>
Company. The Company's decision to use independent agents to date has been
primarily driven by the low initial fixed costs associated with this
distribution channel, and the agents' familiarity with local business and
marketing practices. The Company strives to reduce its customer acquisition
costs where possible by acquiring successful independent agents and by
developing its internal sales and customer service operations in countries
where there is sufficient market penetration. Sales commissions have increased
over the past three years as the Company's business has expanded. The Company
anticipates that, as revenues from the Company's Global Access Direct,
Spectra, and wholesale carrier services increase relative to its existing
services, selling expense will decline as a percentage of revenue, because of
the generally lower commission structure associated with these services. See
"Risk Factors--Dependence on Independent Agents; Concentration of Marketing
Resources."
The general and administrative expense component includes salaries and
benefits, other corporate overhead costs and costs associated with the
operation and maintenance of the TIGN. These costs have increased due to the
development and expansion of the TIGN and corporate infrastructure. The
Company expects that general and administrative expenses may increase as a
percentage of revenues in the near term as the Company incurs additional costs
associated with the development and expansion of the TIGN, the expansion of
its marketing and sales organization, and the introduction of new
telecommunications services.
The Company spends considerable resources to collect receivables from
customers who fail to make payment in a timely manner. While the Company
continually seeks to minimize bad debt, the Company's experience indicates
that a certain portion of past due receivables will never be collected, and
that such bad debt is a necessary cost of conducting business in the
telecommunications industry. Expenses attributable to the write-off of bad
debt represented approximately 1.5%, 3.1% and 2.4% of revenues for the years
ended December 31, 1994, 1995 and 1996, respectively, and 3.3% for the three
months ended March 31, 1997. See "Risk Factors--Failure to Collect Receivables
(Bad Debt Risk)." In addition to uncollectible receivables, the
telecommunications industry has historically been exposed to a variety of
forms of customer fraud. The TIGN and the Company's billing systems are
designed to detect and minimize fraud, where practicable, and the Company
continuously seeks to enhance and upgrade its systems in an effort to minimize
losses as it expands into new markets. See "Risk Factors--Dependence on
Effective Management Information Systems."
As the Company begins to integrate its distribution network in selected
strategic locations by acquiring Country Coordinators and independent agents
or by establishing internal sales organizations, it may incur added selling,
general and administrative expenses associated with the transition which may
result, initially, in an increase in selling, general and administrative
expenses as a percentage of revenues. The Company anticipates, however, that
as sales networks become fully integrated, new service offerings are
implemented, and economies of scale are realized, selling, general and
administrative expenses will decline as a percentage of revenue. See
"Business--Market Opportunity" and "--Business Strategy."
Depreciation and amortization expense primarily consists of expenses
associated with the depreciation of assets, amortization of goodwill derived
from business combinations and the amortization of debt issuance costs
associated with the private placement of the Company's Senior Subordinated
Notes in November 1996.
Stock option based compensation expense results from the granting of certain
unqualified and performance based options to employees at exercise prices
below that of fair market value at the date of grant or when specified
performance criteria have been met. As a result of certain non-qualified stock
option grants during 1996, the Company will incur stock option based
compensation expense of $342,000 in 1997 and 1998, and $283,000 in 1999.
38
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain financial
data as a percentage of revenues.
PERCENTAGE OF REVENUES
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............. 72.0 64.4 70.6 64.0 71.9
Gross profit.................. 28.0 35.6 29.4 36.0 28.1
Operating expenses:
Selling, general and
administrative.............. 29.0 30.4 28.0 30.4 26.3
Depreciation and
amortization................ 0.5 0.5 0.8 0.6 1.1
Stock option based
compensation................ -- -- 0.5 -- 0.1
Total operating expenses...... 29.5 30.9 29.3 31.0 27.5
Operating income (loss)....... (1.5) 4.7 0.1 5.0 0.6
Earnings (loss) before income
taxes........................ (1.3) 5.0 (0.1) 4.9 (0.6)
Income tax benefit (expense).. 0.5 (2.0) 0.0 (1.7) 0.2
Net earnings (loss)........... (0.8) 3.0 (0.1) 3.2 (0.4)
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
Revenues. Revenues increased 70.7%, or $30.7 million, from $43.4 million in
the three months ended March 31, 1996 to $74.1 in the three months ended March
31, 1997. This increase was primarily due to growth in international and
domestic retail sales and international wholesale revenues. Wholesale revenues
increased from $1.9 million, or 4.4% of total revenues in the three months
ended March 31, 1996, to $17.2 million or 23.2% of revenues for the three
months ended March 31, 1997.
Cost of Revenues. Cost of revenues increased 92.4%, or $25.6 million, from
approximately $27.7 million to approximately $53.3 million. As a percentage of
revenues, cost of revenues increased from 64.0% to 71.9%, primarily as a
result of a larger percentage of lower margin wholesale revenues.
Gross Profits. Gross profit increased 33.3%, or $5.2 million, from $15.6
million in the three months ended March 31, 1996, to $20.8 million in the
three months ended March 31, 1997. As a percentage of revenues, gross profit
decreased from 36.0% to 28.1%, due to the increase in the relative cost of
revenues as a percentage of overall revenues.
Operating Expenses. Operating expenses increased 51.5%, or $6.9 million,
from $13.4 million in the three months ended 1996 to $20.3 million in the
three months ended March 31, 1997, primarily as a result of increased sales
commissions related to revenue growth, as well as an increase in the number of
employees necessary to provide customer service, billing and collection and
accounting support. As a percentage of revenues, operating expenses decreased
3.5% from 31.0% in the three months ended March 31, 1996 to 27.5% in the three
months ended March 31, 1997. The number of full and part-time employees grew
from 338 in the three months ended March 31, 1996 to 487 in the three months
ended March 31, 1997, representing a 44.1% increase.
Bad debt expense increased from $1.2 million, or 2.8% of revenues in the
three months ended March 31, 1996 to $2.5 million, or 3.3% of revenues, in the
three months ended March 31, 1997. The increase in bad debt expense as a
percentage of revenues in the three months ended March 31, 1997 was due
primarily to the write-off of accounts receivable for services rendered to a
single domestic customer during such period. Services to such customer have
been discontinued.
Depreciation and amortization increased from $261,000 in the three months
ended March 31, 1996 to $806,500 in the three months ended March 31, 1997,
primarily due to increased capital expenditures incurred in connection with
the development and expansion of the TIGN.
39
<PAGE>
Operating Income. Operating income decreased by $1.7 million, from $2.2
million in the three months ended March 31, 1996, to $0.5 million in the three
months ended March 31, 1997, as a result of increases in sales commissions and
general administration expenses which were greater than increases in gross
profit.
Net Earnings (Loss). Net earnings (loss) decreased approximately $1.7
million, from $1.4 million in the three months ended March 31, 1996, to $(0.3)
million in the three months ended March 31, 1997, as a result of lower
operating income, a $0.7 million increase in interest expense and a $0.2
million increase in foreign currency transaction losses. The foreign currency
transaction losses were attributable primarily to a strengthening of the U.S.
Dollar in such period versus foreign currencies in which the company had
unhedged positions.
EBITDA. EBITDA decreased from $2.4 million in the three months ended March
31, 1996, to $1.0 million in the three months ended March 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. Revenues increased 65.1%, or $84.1 million, from $129.1 million in
1995 to $213.2 million in 1996. The increase in revenues was due primarily to
an increase in billed customer minutes from the domestic and international
call-reorigination distribution channels and the first full year of wholesale
carrier operations. Revenues from international and domestic retail call
service usage increased by 39.8%, or $51.0 million, from $128.1 million in
1995 to $179.1 million in 1996. Revenues from wholesale carrier service usage
increased by $33.1 million, from $1.0 million in 1995 to $34.1 million in
1996. The wholesale revenue growth is largely the result of a significant
increase in traffic utilization from one international carrier, using bulk
call-reorigination to service its market more competitively.
Cost of Revenues. Cost of revenues increased 81.1%, or $67.4 million, from
$83.1 million in 1995, to $150.5 million in 1996. The increase in cost of
revenues was attributable primarily to increased traffic being handled by the
Company and increased costs associated with the expansion of the TIGN. The
increase in cost of revenues as a percent of revenues was attributable
primarily to the greater increase in the wholesale business as a percentage of
revenues. Other factors contributing to the increase in cost of revenues as a
percent of revenues included volume discounts to one large wholesale customer
in the fourth quarter of 1996, traffic rerouting penalties associated with
certain wholesale carrier traffic that exceeded the capacity of the Company's
network in the first two months of the fourth quarter; certain rate reductions
to customers in the U.S., Japan and France ahead of corresponding carrier cost
declines and the addition of fixed access costs associated with the expansion
of the TIGN.
The cost of revenues as a percentage of total revenues increased from 64.4%
in 1995 to 70.6% in 1996. Of the contributing factors identified above,
increases in wholesale business accounted for 3.0%, volume discounts being
offered accounted for 1.0% and rate reductions to customers in advance of
corresponding rate decreases from carriers and other factors accounted for the
additional 2.2% of the difference.
Gross Profit. Gross profit increased 36.3%, or $16.7 million, from $46.0
million in 1995 to $62.7 million in 1996. As a percentage of revenues, gross
profit decreased from 35.6% in 1995 to 29.4% in 1996.
Operating Expenses. Operating expenses increased 56.9%, or $22.7 million,
from $39.9 million in 1995 to $62.6 million in 1996. This increase was
primarily due to greater employee and contract employee costs, professional
fees for network and operating systems developers and legal, financial and
accounting costs associated with the development of the TIGN and the
supporting information and financial systems. From 1995 to 1996, the Company's
staff levels grew from 313 full and part time positions to 461 full and part
time positions, representing a 47.3% increase in the number of employees.
Growth was mainly in the professional category, with the hiring of additional
telecommunications technicians and programmers, and finance and accounting
professionals.
Bad debt expense increased $1.1 million, from $4.0 million in 1995, to $5.1
million in 1996. As a percentage of revenues, bad debt expense decreased from
3.1% in 1995 to 2.4% in 1996, primarily as a result of improvements in the
Company's collections systems and procedures.
40
<PAGE>
Depreciation and amortization increased $1.2 million, from $0.7 million in
1995, to $1.9 million in 1996. The increase in depreciation and amortization
is primarily attributable to increased capital expenditures incurred in
connection with the development and expansion of the TIGN and amortization of
goodwill associated with: (i) the acquisition of the operations of the
Company's Country Coordinator in France in August 1996; and (ii) expenses
incurred by the Company in connection with the private placement of its Senior
Subordinated Notes in November 1996.
The Company also incurred a non-cash stock option based compensation expense
of $1.0 million in the fourth quarter of 1996, resulting from the grant of
non-qualified and performance base stock options to certain employees.
As a percentage of revenues, operating expenses decreased from 30.9% in 1995
to 29.3% in 1996, as the additional costs and expenses were more than offset
by increased revenues during the period.
Operating Income. Operating income decreased by $6.0 million, from $6.1
million in 1995 to $0.1 million in 1996. As a percentage of revenues,
operating income decreased from 4.7% in 1995 to 0.1% in 1996, for the reasons
discussed above.
Interest Expense. Interest expense increased from $0.1 million for 1995 to
$0.6 million for 1996, an increase of $0.5 million. The increase is directly
attributable to the increase in long-term indebtedness during 1996.
Net Earnings (Loss). Net earnings decreased $3.9 million from $3.8 million
in 1995 to $(0.1) million in 1996.
EBITDA. EBITDA decreased from $7.0 million in 1995, to $3.0 million in 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues increased 87.9%, or $60.4 million, from $68.7 million in
1994 to $129.1 million in 1995. This increase was due primarily to an increase
in billed customer minutes of use from call-reorigination customers in Western
Europe, especially in France and the Netherlands.
Cost of Revenues. Cost of revenues increased 67.9%, or $33.6 million, from
approximately $49.5 million in 1994 to approximately $83.1 million in 1995. As
a percentage of revenues, cost of revenues declined from 72.0% to 64.4%,
primarily as a result of volume discounts under fixed-price lease agreements
and a reduction in rates charged by the Company's carrier suppliers.
Gross Profits. Gross profit increased 139.6%, or $26.8 million, from $19.2
million in 1994 to $46.0 million in 1995. As a percentage of revenues, gross
profit increased from 28.0% in 1994 to 35.6% in 1995, due to the decline in
the relative cost of revenues as a percentage of overall revenues.
Operating Expenses. Operating expenses increased 97.5%, or $19.7 million,
from $20.2 million in 1994 to $39.9 million in 1995, primarily as a result of
increases in commissions to independent agents and Country Coordinators
directly relating to the Company's increased revenues and to growth in sales,
customer service, billing, collections and accounting staff required to
support this growth. As a percentage of revenues, operating expenses increased
1.4% from 29.5% in 1994 to 30.9% in 1995, primarily due to the growth in staff
needed to accommodate the Company's growth in business volume and complexity.
Staff levels grew from 211 full and part time employees in 1994 to 313 in
1995, representing a 48.3% increase in the staff compliment.
Bad debt expense increased from $1.1 million, or 1.5% of revenues in 1994,
to $4.0 million, or 3.1% of revenues, in 1995, due to a rapid increase in
international sales, which outpaced the Company's collection abilities.
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Depreciation and amortization increased from $0.3 million in 1994, to $0.7
million in 1995, primarily due to increased capital expenditures incurred in
connection with the development and expansion of the Company's network.
Operating Income. Operating income increased by $7.1 million, from $(1.0)
million in 1994 to $6.1 million in 1995, as a result of increased sales and
gross profit with commensurate costs and expenses.
Net Earnings (Loss). Net earnings increased $4.3 million from $(0.5) million
in 1994 to $3.8 million in 1995, as a result of improved operating income.
EBITDA. EBITDA increased from $(0.6) million in 1994, to $7.0 million in
1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital investments consist of capital expenditures in
connection with the acquisition and maintenance of switching capacity and
funding of accounts receivable and other working capital requirements.
Historically, the Company's capital requirements have been funded primarily by
funds provided by operations, term loans and revolving credit facilities from
commercial banks, and by capital leases. While the Company does not expect
that it will require significant additional working capital, it expects to
require additional capital to develop and expand the TIGN, open new offices,
introduce new telecommunications services and fund its anticipated operating
losses and net cash outflows in the near term.
The net proceeds to the Company from the Offering are estimated to be
approximately $99.7 million. The Company expects that approximately $58.5
million of such net proceeds will be used to expand the Telegroup Intelligent
Global Network, approximately $22.2 million will be used to prepay all of the
outstanding Senior Subordinated Notes (including a prepayment fee equal to
$1.4 million and accrued interest); approximately $15.0 million will be used
to develop and upgrade management information systems; and the remaining
balance will be used for working capital and for other general corporate
purposes including strategic alliances, investments and acquisitions.
Net cash provided by operating activities was $3.8 million in the three
months ended March 31, 1996 and $6.2 million in the three months ended March
31, 1997. The net cash provided by operating activities in the three months
ended March 31, 1996 was primarily due to net earnings and a greater increase
in accounts payable to carriers relative to the increase in accounts
receivable from customers. The net cash provided by operating activities in
the three months ended March 31, 1997 was primarily due to a greater increase
in accounts payable to carriers relative to the increase in accounts
receivable from customers and an increase in the provision for credit losses
on accounts receivable. The $(0.7) million decreases in deposits and other
assets in the three months ended March 31, 1997 was due primarily to a deposit
to one vendor for card platform switch equipment.
Net cash provided by operating activities was $1.4 million in 1994, $5.6
million in 1995 and $4.9 million in 1996. The net cash provided by operating
activities in 1996 and 1995 was mainly a result of a greater increase in
accounts payable to carriers relative to the increase in accounts receivable
from customers. In 1995, net cash provided by operating activities was mainly
due to net earnings, changes in operating activities and off-setting increases
in current assets and liabilities for the year.
Net cash used in investing activities was $(2.5) million in the three months
ended March 31, 1996 and $(3.5) million in the three months ended March 31,
1997. The net cash used in the three month ended March 31, 1996 and March 31,
1997 were primarily due to increases in equipment purchases.
Net cash used in investing activities was $0.7 million in 1994, $2.8 million
in 1995 and $11.3 million in 1996. The net cash used in investing activities
in 1996, 1995 and 1994 was mainly due to an increase in equipment purchases,
and in 1996, the expenditure of $1.8 million in capitalized software
development costs.
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Net cash used in financing activities was $(1.1) million in the three months
ended March 31, 1996 and $(0.4) million in the three months ended March 31,
1997. The net cash used in the three months ended March 31, 1996 was primarily
due to the paydown of a revolving operating line of credit. The net cash used
in the three months ended March 31, 1997 was primarily due to payments of long
term borrowings.
Net cash provided by (used in) financing activities was $1.0 million in 1994,
$(0.1 million) in 1995 and $15.9 million in 1996. In November 1996, the Company
completed a private placement of its Senior Subordinated Notes for net proceeds
of $18.5 million.
In March, 1997, the Company entered into its $7.5 million Credit Facility.
The Credit Facility expires on June 30, 1998, is unsecured and contains certain
covenants relating to the tangible net worth, cash flow coverage, total
indebtedness and the current ratio of the Company. The interest rate under the
Credit Facility is LIBOR plus 1.25%. As of March 31, 1997 no indebtedness was
outstanding under the Credit Facility.
The development and expansion of the TIGN, the opening of new offices and the
introduction of new telecommunications services, as well as the funding of
anticipated losses and net cash outflows, will require substantial additional
capital. At March 31, 1997, the Company had $7.3 million in commitments for
capital expenditures. The Company has identified an additional $51.2 million of
capital expenditures which the Company intends to undertake in 1997 and
approximately $50.0 million of additional capital expenditures during
42-- 1
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the period from 1998 through 2001. The $58.5 million of capital expenditures
which the Company intends to undertake over the next 18 months include the
purchase of additional switches in New Jersey, Los Angeles, Chicago, Miami,
Denmark, Germany, Switzerland, Italy and Brazil and additional nodes in
Sweden, Norway, Belgium, Italy, New Zealand, Germany, Switzerland and Japan.
The Company expects that the net proceeds from the Offering, together with
internally generated funds and other financings, will provide sufficient funds
for the Company to expand its business as planned and to fund anticipated
operating losses for the next 18 to 24 months. However, the amount of the
Company's future capital requirements will depend upon many factors, including
the performance of the Company's business, the rate and manner in which it
expands the TIGN and opens new offices, staffing levels and customer growth,
as well as other factors that are not within the Company's control, including
competitive conditions and regulatory or other government actions. In the
event that the Company's plans or assumptions change or prove to be inaccurate
or the net proceeds of the Offering and other financings, together with
internally generated funds, prove to be insufficient to fund the Company's
growth and operations, then some or all of the Company's development and
expansion plans could be delayed or abandoned, or the Company may be required
to seek additional funds earlier than currently anticipated. Other future
sources of capital for the Company could include public and private debt and
equity financings. There can be no assurance that any such sources of
financing would be available to the Company in the future or, if available,
that they could be obtained on terms acceptable to the Company.
The Company continuously reviews opportunities to further its strategy
through strategic alliances with, investments in, or acquisitions of companies
that are complementary to the Company's operations. The Company may finance
such a venture with a portion of the net proceeds from this Offering, cash
flow from operations, or the Company may raise financing through additional
bank debt or one or more public offerings or private placements of securities.
The Company, however, has no present understanding, commitment or agreement
with respect to any such venture, and there can be no assurance that any such
venture will occur, or that the funds to finance such venture will be
available on reasonable terms, or at all.
FOREIGN CURRENCY
Although the Company's functional currency is the U.S. Dollar, the Company
derives a substantial percentage of its telecommunications revenues from
international sales. In countries where the local currency is freely
exchangeable and the Company is able to hedge its exposure, the Company bills
for its services in the local currency. In cases where the Company bills in a
local currency, the Company is exposed to the risk that the local currency
will depreciate between the date of billing and the date payment is received.
In certain countries in Europe, the Company purchases foreign exchange
contracts through its fiscal agent to hedge against this foreign exchange
risk. For the twelve months ended December 31, 1996, approximately $54.0
million (U.S. Dollar equivalent) or 25.3% of the Company's billings for
telecommunications services were billed in local currencies.
The Company's financial position and results of operations for the year
ended December 31, 1996, were not significantly affected by foreign currency
exchange rate fluctuation. As the Company continues to expand the TIGN and
increase its customer base in its targeted markets, an increasing proportion
of costs associated with operating and maintaining the TIGN, as well as local
selling expenses, will be billed in foreign currencies. Although the Company
and its subsidiaries attempt to match costs and revenues and borrowings and
repayments in terms of local currencies, there will be many instances in which
costs and revenues and borrowings and repayments will not be matched with
respect to currency denominations. The Company may choose to limit any
additional exposure to foreign exchange rate fluctuations by the purchase of
foreign forward exchange contracts or similar hedging strategies. There can be
no assurance that any currency hedging strategy would be successful in
avoiding exchange-related losses. See "Risk Factors--Foreign Exchange Rate
Risks; Repatriation Risks."
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" which revises the calculation and presentation
provisions of Accounting Principles Board Opinion 15
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and related interpretations. Statement No. 128 is effective for the Company's
fiscal year ending December 31, 1997. Retroactive application will be
required. The Company believes the adoption of Statement No. 128 will not have
a significant effect on its reported earnings per share.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business and has
not had a significant effect on the Company's operations to date.
SEASONAL FLUCTUATIONS
The Company has historically experienced, and expects to continue to
experience, reduced growth rates in revenues in the months of August and
December due to extended vacation time typically taken by Americans and
Europeans during these months.
44
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THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
OVERVIEW
The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade that have resulted in
significant growth in the use of services and in enhancements to technology.
The industry is expecting similar growth in revenue and traffic volume in the
foreseeable future. According to the ITU, the international telecommunications
industry accounted for $52.8 billion in revenues and 60.3 billion minutes of
use in 1995, increasing from $21.7 billion in revenues and 16.7 billion
minutes of use in 1986, which represents compound annual growth rates of 10%
and 15%, respectively. The ITU projects that revenues will approach $76
billion by the year 2000 with the volume of traffic expanding to 107 billion
minutes of use, representing compound annual growth rates of 7% and 12%,
respectively, from 1995. The market for telecommunications services is highly
concentrated, with Europe and the United States accounting for approximately
43% and 25%, respectively, of the industry's worldwide minutes of use in 1995.
AT&T, Deutsche Telecom, MCI, France Telecom and BT originated approximately
40% of the aggregate international long distance traffic minutes in 1995. The
Company's core markets accounted for approximately 60% of all international
long distance traffic minutes in 1995, with each market contributing as
follows: U.S. (25.9%), Germany (8.7%), the United Kingdom (6.7%), France
(4.7%), Switzerland (2.9%), Hong Kong (2.8%), Japan (2.7%), the Netherlands
(2.4%), Australia (1.7%), and Sweden (1.5%),
Growth and change in the international telecommunications industry have been
fueled by a number of factors, including greater consumer demand,
globalization of the industry, increases in international business travel,
privatization of ITOs, and growth of computerized transmission of voice and
data information. These trends have sharply increased the use of, and reliance
upon, telecommunications services throughout the world. The Company believes
that despite these trends, a high percentage of the world's businesses and
residential consumers continue to be subject to high prices with poor quality
of service which have been characteristic of many ITOs. Demand for improved
service and lower prices has created opportunities for private industry to
compete in the international telecommunications market. Increased competition,
in turn, has spurred a broadening of products and services, and new
technologies have contributed to improved quality and increased transmission
capacity and speed.
Consumer demand and competitive initiatives have also acted as catalysts for
government deregulation, especially in developed countries. Deregulation
accelerated in the United States in 1984 with the divestiture by AT&T of the
RBOCs. Today, there are over 500 U.S. long distance companies, most of which
are small- or medium-sized companies. In order to be successful, these small-
and medium-sized companies have to offer their customers a full range of
services, including international long distance. However, most of these
carriers do not have the critical mass of customers to receive volume
discounts on international traffic from the larger facilities-based carriers
such as AT&T, MCI and Sprint. In addition, these small- and medium-sized
companies have only a limited ability to invest in international facilities.
Alternative international carriers such as the Company have capitalized on
this demand for less expensive international transmission facilities. These
emerging international carriers are able to take advantage of larger traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or invest in facilities when volume on particular routes justify such
investments. As these emerging international carriers have become established,
they have also begun to carry overflow traffic from the larger long distance
providers that own overseas transmission facilities.
Deregulation in the United Kingdom began in 1981 when Mercury, a subsidiary
of Cable & Wireless plc, was granted a license to operate a facilities-based
network and compete with BT. Deregulation and privatization have also allowed
new long distance providers to emerge in other foreign markets. Deregulation
spread to Europe with the adoption of the "Directive on Competition in the
Markets for Telecommunication Services" in 1990. A series of subsequent EU
Directives, reports and actions are expected to result in substantial
deregulation of the telecommunications industries in most EU member states by
1998. A similar movement toward deregulation has already taken place in
Australia and New Zealand and is taking place in Japan, Mexico, Hong Kong and
other
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markets. Other governments have begun to allow competition for value-added and
other selected telecommunications services and features, including data and
facsimile services and certain restricted voice services. Many governments
also permit or tolerate the provision of international call-reorganization
services to customers in their territories. In many countries, however, the
rate of change and emergence of competition remain slow and the timing and
extent of future deregulation is uncertain.
On February 15, 1997, pursuant to the WTO Agreement, the United States and
more than 60 members of the WTO agreed to open their respective
telecommunications markets to competition and foreign ownership and adopted
regulatory measures to protect market entrants against anticompetitive
behavior by dominant telephone companies. Although the Company believes that
the WTO Agreement could provide the Company with significant opportunities to
compete in markets that were not previously accessible, reduce its costs and
provide more reliable services, the WTO Agreement could also provide similar
opportunities to the Company's competitors. In some countries, for example,
the Company will be allowed to own facilities or to interconnect to the public
switched network on reasonable and non-discriminatory terms. There can be no
assurance, however, that the pro-competitive effects of the WTO Agreement will
not have a material adverse effect on the Company's business, financial
condition and results of operations or that members of the WTO will implement
the terms of the WTO Agreement.
By eroding the traditional monopolies held by ITOs, many of which are wholly
or partially government owned, deregulation is providing U.S.-based providers
the opportunity to negotiate more favorable agreements with both the
traditional ITOs and emerging foreign providers. In addition, deregulation in
certain foreign countries is enabling U.S.-based providers to establish local
switching and transmission facilities in order to terminate their own traffic
and begin to carry international long distance traffic originated in those
countries.
INTERNATIONAL SWITCHED LONG DISTANCE SERVICES
International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based
upon a predetermined set of routing criteria. In the U.S., an international
long distance call typically originates on a LEC's network and is switched to
the caller's domestic long distance carrier. The domestic long distance
provider then carries the call to its own or another carrier's international
gateway switch. From there it is carried to a corresponding gateway switch
operated in the country of destination by the ITO of that country and then is
routed to the party being called though that country's domestic telephone
network.
International long distance providers can generally be categorized by the
extent, if any, of their ownership and use of their own switches and
transmission facilities. The largest U.S. carriers, AT&T, MCI, Sprint, and
WorldCom primarily utilize owned U.S. transmission facilities and generally
use other long distance providers to carry their overflow traffic. Only the
largest U.S. carriers have operating agreements with, and own transmission
facilities that carry traffic to, the over 200 countries to which major long
distance providers generally offer service. A significantly larger group of
long distance providers own and operate their own switches but either rely
solely on resale agreements with other long distance carriers to terminate
their traffic or use a combination of resale agreements and leased or owned
facilities in order to terminate their traffic, as discussed below.
Switched Resale Arrangements. A switched resale arrangement typically
involves the wholesale purchase of termination services by one long distance
provider from another on a variable, per minute basis. Such resale, which was
first permitted with the deregulation of the U.S. market, enables the
emergence of alternative international providers that rely at least in part on
transmission services acquired on a wholesale basis from other long distance
providers. A single international call may pass through the facilities of
multiple long distance resellers before it reaches the foreign facilities-
based carrier that ultimately terminates the call. Resale arrangements set per
minute prices for different routes, which may be guaranteed for a set time
period or subject to fluctuation following notice. The resale market for
international transmission is constantly changing, as new long distance
resellers emerge and existing providers respond to fluctuating costs and
competitive pressures. In order to effectively manage costs when utilizing
resale arrangements, long distance providers need timely access
46
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to changing market data and must quickly react to changes in costs through
pricing adjustments or routing decisions. The Company has entered into resale
agreements with more than 20 carriers in the U.S., U.K., Canada, the
Netherlands, Denmark, Australia, Hong Kong and Switzerland, four of which
accounted for approximately 60% of the Company's cost of revenues for the year
ended December 31, 1996 and 63% for the three months ended March 31, 1997.
Transit Arrangements. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country carries
the traffic to the country of destination.
Alternative Transit/Termination Arrangements. As the international long
distance market began to deregulate, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, ISR and ownership of switching facilities
in foreign countries. Refiling of traffic, which takes advantage of
disparities in settlement rates between different countries, allows traffic to
a destination country to be treated as if it originated in another country
that enjoys lower settlement rates with the destination country, thereby
resulting in a lower overall termination cost. The difference between transit
and refiling is that, with respect to transit, the long distance provider in
the destination country has a direct relationship with the originating long
distance provider and is aware of the arrangement, while with refiling, it is
likely that the long distance provider in the destination country is not aware
of the country in which the traffic originated or of the originating carrier.
To date, the FCC has made no pronouncement as to whether refiling complies
with either U.S. or ITU regulations, although it is considering such issues in
an existing proceeding. While the Company's revenues attributable to refiling
arrangements are minimal, refiling may constitute a larger portion of the
Company's operations in the future.
With ISR, a long distance provider completely bypasses the accounting rates
system by connecting an international leased private line (i) to the PSTN of
two countries or (ii) directly to the premises of a customer or partner in one
country and the PSTN in the other country. While ISR currently is only
sanctioned by applicable regulatory authorities on a limited number of routes,
including U.S.-U.K., U.S.-Canada, U.S.-Sweden, U.S.-New Zealand, U.K.-
worldwide and Canada-U.K., it is increasing in use and is expected to expand
significantly as deregulation of the international telecommunications market
continues. In addition, deregulation has made it possible for U.S.-based long
distance providers to establish their own switching facilities in certain
foreign countries, enabling them to directly terminate traffic. See
"Business--Government Regulation." The Company has been granted a license by
the FCC to engage in ISR in the U.S. It also has direct leased capacity into
Canada and is preparing to activate such links into Australia and New Zealand,
consistent with applicable laws. In the U.K., ISR is permitted with any
country, provided the U.K. based carrier has been granted the appropriate
license. The Company's wholly owned U.K. subsidiary, Telegroup UK Limited, has
been granted its U.K. ISR license. The Company anticipates that the FCC will
soon approve ISR with Australia, Denmark and Finland, with Japan and,
possibly, Hong Kong to follow in the near future.
Operating Agreements. Under traditional operating agreements, international
long distance traffic is exchanged under bilateral agreements between
international long distance providers that have rights in facilities in
different countries. Operating agreements provide for the termination of
traffic in, and return traffic from, the international long distance
providers' respective countries at a negotiated "accounting rate." Under a
traditional operating agreement, the international long distance provider that
originates more traffic compensates the long distance provider in the other
country by paying an amount determined by multiplying the net traffic
imbalance by the latter's share of the accounting rate.
The Company currently has an operating agreement with AT&T Canada (formerly
Unitel), Canada's second largest carrier. This agreement is used primarily to
transit/terminate traffic between the U.S. and Canada. Also, the Company has
purchased capacity on the CANTAT-3 cable system as a means of linking its
switching facilities in the U.S. and the U.K. In addition, the Company both
leases transmission facilities and resells
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switched minutes from carriers that have operating agreements. By aggressively
negotiating resale agreements with carriers who have entered into operating
agreements, the Company takes advantage of such carrier's economic incentive
to increase outgoing traffic to a particular country. The resold call volume
increases the market share for that carrier to a particular country, thereby
increasing such carrier's proportionate return traffic from the correspondent
under the accounting rate process. The Company may in the future enter into
additional operating agreements if such agreements would improve the Company's
profitability over these routes.
Under a typical operating agreement each carrier has a right in its portion
of the transmission facilities between two countries. A carrier gains
ownership rights in a digital fiber-optic cable by purchasing direct ownership
in a particular cable (usually prior to the time the cable is placed in
service), by acquiring an "Indefeasible Right of Use" ("IRU") in a previously
installed cable, or by leasing or obtaining capacity from another long
distance provider that either has direct ownership or IRU rights in the cable.
In situations where a long distance provider has sufficiently high traffic
volume, routing calls across leased or IRU cable capacity is generally more
cost-effective on a per call basis than the use of resale arrangements with
other long distance providers. However, leased capacity and acquisition of IRU
rights require a company to make a substantial initial investment of its
capital based on the amount of capacity being acquired. Telegroup's interest
in the CANTAT-3 Trans-Atlantic cable between New York and the U.K. is 50% IRU
and 50% leased. The Company intends to acquire 100% IRU ownership.
The rapidly changing international telecommunications market has created a
significant opportunity for carriers that can offer high quality, low cost
international long distance service. Deregulation, privatization, the
expansion of the resale market and other trends influencing the international
telecommunications market are resulting in decreased termination costs, a
proliferation of routing options, and increased competition. To be successful,
both the alternative and established international long distance companies
will need to aggregate enough traffic to maximize the use of both facilities-
based and resale opportunities, maintain systems which enable analysis of
multiple routing options, invest in facilities and switches and remain
flexible enough to locate and route traffic through the most advantageous
routes.
COMPETITIVE OPPORTUNITIES AND ADVANCES IN TECHNOLOGY
The combination of a continually expanding global telecommunications market,
consumer demand for lower prices with improved quality and service, and
ongoing deregulation has created competitive opportunities in many countries.
Further, as more small- and medium-sized businesses and residential customers
have come to rely on international telecommunications services for their
business and personal needs, an increasingly diverse and sophisticated
customer base has generated demand for a greater variety of services.
Increased competition has also resulted in improved quality of service at
lower prices. Similarly, new technologies, including fiber-optic cable and
improvements in digital compression, have improved quality and increased
transmission capacities and speed, with transmission costs decreasing as a
result.
Advances in technology have created multiple ways for telecommunications
carriers to provide customer access to their networks and services. These
include customer-paid local access, international and national toll-free
access, direct digital access through a dedicated line, equal access through
automated routing from the PSTN and call-reorigination. The type of access
offered depends on the proximity of switching facilities to the customer, the
needs of the customer, and the regulatory environment in which the carrier
competes. Overall, these changes have resulted in a trend towards bypassing
traditional international long distance operating agreements as international
long distance companies seek to operate more efficiently.
In a deregulated country such as the United States, carriers can establish
switching facilities, own or lease fiber-optic cable, enter into operating
agreements with foreign carriers and, accordingly, provide direct access
service. In markets that have not deregulated or are slow in implementing
deregulation, such as South Africa, international long distance carriers have
used advances in technology to develop innovative alternative access methods,
such as call-reorigination. In other countries, such as Japan and most EU
member states, where deregulation is imminent but not complete, carriers are
permitted to offer facilities-based data and facsimile
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services, as well as limited voice services including those to CUGs, but are
as yet precluded from offering full voice telephony. As countries deregulate,
the demand for alternative access methods typically decreases as carriers are
permitted to offer a wider range of facilities-based services on a transparent
basis.
The most common form of alternative international access, traditional call-
reorigination, avoids the high international rates offered by the ITO in a
particular regulated country by providing dial tone from a deregulated
country, typically the United States. To place a call using traditional call-
reorigination, a user dials a unique phone number to an international
carrier's switching center and then hangs up after it rings. The user then
receives an automated callback providing dial tone from the U.S. which enables
the user to complete the call. Technical innovations, ranging from inexpensive
dialers to sophisticated in-country switching platforms, have enabled
telecommunications carriers to offer a "transparent" form of call-
reorigination. The customer dials into the local switch, and then dials the
international number in the usual fashion, without the "hang-up" and
"callback," and the international call is automatically and swiftly processed.
Historically, a significant portion of the Company's revenue and operating
income has been derived from the provision of international traditional call-
reorigination services to retail customers on a global basis. The Company
believes that as deregulation occurs and competition increases in various
markets around the world, the pricing advantage of traditional call-
reorigination to most destinations relative to conventional call-through
international long distance service will diminish in those markets. The
Company believes that, in order to maintain its existing customer base and to
attract new customers in such markets, it will need to be able to offer call-
through services at prices significantly below the current prices charged for
call-reorigination. See "Risk Factors--Expansion and Operation of the TIGN."
The worldwide telecommunications market is increasingly served by a wide
range of telecommunications providers, many of which seek to focus on only a
limited segment of the overall market. ITOs and major global carriers
typically concentrate their efforts on multinational companies and other high
volume long distance telephone users that demand high quality and customized
services. Many alternative carriers, such as the Company, concentrate on
serving the international long distance needs of small- and medium-sized
business and high-volume residential customers who in the aggregate have
significant international long distance traffic.
The following table provides an overview of the Company's core international
telecommunications markets:
<TABLE>
<CAPTION>
1995
ORIGINATED
MINUTES OF
INT'L TRAFFIC DEREGULATION
COUNTRY (IN BILLIONS)(1) DATE ITO(S)
------- ---------------- ------------ ---------------------------
<S> <C> <C> <C>
United States... 15.6 1984(2) AT&T, MCI, Sprint, WorldCom
Netherlands..... 1.5 7/1/1997(3)(4) KPN
France.......... 2.8 1/1/1998(3) France Telecom
United Kingdom.. 4.0 1981(5) BT, Mercury
Germany......... 5.2 1/1/1998(3) Deutsche Telecom
Switzerland..... 1.8 1/1/1998(3) Swiss PTT
Sweden.......... 0.9 1980(6) Telia AB, Tele-2
Hong Kong....... 1.7 1995(7) HKTI
Australia....... 1.0 1991(8) Telstra, OPTUS
Japan........... 1.6 1998 KDD, IDC, ITJ
</TABLE>
- --------
(1) Source: TeleGeography 1996/97.
(2) Deregulation accelerated in the United States in 1984 with the divestiture
by AT&T of the RBOCs.
(3) Date set for complete liberalization of the telecommunications market
established by the EU Full Competition Directive.
(4) Current law allows competition with the ITO in Voice Telephony starting
July 1, 1997. It is possible, but not expected, that this monopoly will be
extended until later in 1997.
(5) The deregulation of the United Kingdom telecommunications market began in
1981, when a second national carrier, Mercury, was proposed.
(6) Although Sweden is subject to the EU deadline for complete liberalization,
it began permitting competition in 1980.
(7) To date, Hong Kong has not officially deregulated its telecommunications
market. However, in 1995, the Hong Kong regulator granted local FTNS
licenses to three carriers, and has since permitted the provision of
value-added and data services. In addition, it has recently announced that
it will grant licenses for the provision of virtual private network
services. China is scheduled to assume sovereignty of Hong Kong on July 1,
1997. See "Risk Factors--Substantial Government Regulation--The Pacific
Rim."
(8) Liberalization began in Australia in 1991, when a second facilities-based
carrier, OPTUS, was authorized to begin operation. Under Australian law,
competitors to the ITO may own international facilities beginning on July
1, 1997.
49
<PAGE>
United States. The U.S. long distance market, with 1995 revenue of
approximately $70.0 billion, is the largest and most competitive in the world.
The international segment of this market was 15.6 billion minutes of usage in
1995. According to TeleGeography, a leading industry publication, five of the
top six international calling routes originate or terminate in the U.S. The
U.S. domestic long distance market is largely dominated by the four major
carriers: AT&T (54.3%), MCI (28.5%), Sprint (11.3%), and WorldCom (3.5%),
which collectively control approximately 97% of the market. Several second and
third tier carriers, such as Frontier, LCI, Excel Communications, Inc., Tel-
Save Holdings, Inc. and Telco Communications Group, Inc., have made inroads in
both the high-volume residential and small- and medium-sized business sectors.
The second and third tier providers have largely employed a strategy of
switched resale targeted at the national long distance market. The
international long distance market for small- and medium-sized businesses,
which is the Company's primary focus, has been largely ignored by the major
carriers as well as the second and third tier national long distance
providers.
The Company believes that the U.S. long distance market will become more
competitive in the near future as the 1996 Telecommunications Act permits RBOC
entry into long distance. The Company believes that the RBOCs will focus their
marketing efforts on the high-end of the long distance market, where they will
be able to offer the greatest savings on local access charges to large
business customers, and on the low-end of the market, where they will be able
to provide small residential users with the convenience of a single bill.
Netherlands. The market for international telecommunications in the
Netherlands has historically been dominated by the Dutch ITO, KPN. The Company
believes it is the largest alternative provider of international
telecommunications services in this market. Two alternative carriers, Telfort
and Enertel, are currently building out networks to provide competitive
national and international services. The Company believes that new entrants
will drive down transmission costs and potentially open up opportunities in
the national long distance and wholesale sectors of the market.
France. The market for international telecommunications in France has
historically been dominated by the French ITO, France Telecom. The Company
believes it is the largest alternative provider of international
telecommunications services in this market. Telecom Developpement, a
consortium led by SNCF, the French National Railways Company, and Compagnie
Generale des Eaux, the leading French telecommunications group, has commenced
construction of a facilities-based, digital long distance network to offer a
broad range of voice and data services beginning in July 1997. In addition,
other competitors have entered the market, including WorldCom which has begun
a build-out of local fiber loops in the Paris region and Unisource which has
installed switches connected by leased lines throughout France.
United Kingdom. The deregulation of the U.K. telecommunications industry
began in 1981 when Mercury, a subsidiary of Cable & Wireless plc, was granted
a license to operate a facilities-based network and compete with BT. This
duopoly over all public voice telecommunication services continued until 1991
when the government further liberated the U.K. national telecommunications
market by stating it would license new national and regional public
telecommunications operators.
The U.K. international telecommunications market was not fully liberalized
until 1996. Competition was introduced into this market from 1993 onwards
through licensing of international simple resellers and other public operators
which were allowed to buy international private leased circuits by means of
which they could provide services to the public. In addition to BT and Mercury
there are over 40 other companies in the U.K. which presently hold licenses
authorizing the operation of systems which may be connected to foreign
systems. Some of these other new international licensees such as Energis and
WorldCom have commenced installing new international cables. The Company
believes that new market entrants will drive down costs and potentially extend
opportunities not only in the U.K. national long distance and wholesale
sectors but also in the U.K. international markets.
Germany. The market for international telecommunications in Germany has
historically been dominated by the German ITO, Deutsche Telecom. Mannesmann
Arcor, Viag Interkom, as well as o.tel.o GmbH a consortium of German utilities
companies, have commenced construction of a facilities-based digital long
50
<PAGE>
distance networks that are expected to offer a broad range of voice and data
services in competition with Deutsche Telecom. In addition, other competitors
have entered the market, including WorldCom which has begun build-out of local
fiber loops in the Frankfurt region.
Switzerland. The international telecommunications market in Switzerland has
been historically dominated by the ITO, Swiss PTT. Although Switzerland is not
a member of the EU, its government has announced that it will voluntarily
conform to the EU objective of deregulating telecommunications markets and
allowing cross border competition. Swiss PTT is a member of the Unisource
consortium. Global One has established a presence in Switzerland and is
currently offering private network services to large, corporate and
institutional customers. The Company believes that it is the primary
competitor to Swiss PTT for international voice services in Switzerland.
Sweden. The telecommunications market in Sweden is among the most
deregulated in the world. Sweden has liberalized its telecommunications market
so that competitors, led by Tele-2, accounted for approximately 30% of the
market in 1995. Telia is a member of the Unisource consortium and is also
authorized to provide facilities-based and resold services between the United
States and Sweden. The Company believes it will have opportunities to enter
into resale agreements with one or more companies in Sweden which will allow
it to offer fully transparent access to the TIGN and possibly national long
distance service as well.
Hong Kong. HKTI currently holds an exclusive license until September 30,
2006 to provide a variety of international services including the right to
operate an international gateway for the handling of all outgoing and incoming
international calls. There are four local fixed telephone network operators,
including the former monopoly, Hong Kong Telephone Company, that have been
licensed by the Office of the Telecommunications Authority ("OFTA"), the Hong
Kong regulator. Despite the fact that HKTI has the exclusive right under its
license to provide international telephone services, all three of the new
local fixed network operators have in recent years gained a significant share
of the international long distance call market by utilizing U.S. and Canada-
based call-reorigination services. Effective July 1, 1997, control of Hong
Kong will revert back to China, and it is unclear what effect, if any, this
will have on the Company's operations in Hong Kong. See "Risk Factors--
Substantial Government Regulation" and "Business--Government Regulation."
Australia. The market for international telecommunications services in
Australia has historically been dominated by Telstra. A smaller share of the
market is held by a new carrier, OPTUS. In the last two years, switched and
switchless service providers have increased their market share of
international telecommunications in Australia from 3.4% to 14%, largely at the
expense of Telstra. Recently, AAPT and Axicorp, a division of Primus, have
leased nationwide network capacity to compete with the two ITOs. Current
legislation prohibits service providers from installing and maintaining line
links between specific locations in Australia, but open competition will
commence on July 1, 1997, under the 1997 Australian Telecommunications Act.
Japan. The market for international long distance telecommunications
services in Japan has historically been dominated by the Japanese ITO, KDD. In
recent years, IDC and ITJ have grown rapidly and each have captured
approximately 17% of the market. Recently, it was announced that NTT, the
dominant provider of local and long distance services in Japan that was
prohibited from entering the international market, would be split into three
companies, including one international service provider. It was also announced
that ITJ will merge with a domestic Japanese carrier, Japan Telecom, Inc.
Additionally, several smaller companies have entered the Japanese market in
the last few years offering call-reorigination services.
51
<PAGE>
BUSINESS
OVERVIEW
Telegroup is a leading global alternative provider of international
telecommunications services. The Company offers a broad range of discounted
international and enhanced telecommunications services to small- and medium-
sized business and residential customers in over 170 countries worldwide.
Telegroup has achieved its significant international market penetration by
developing what it believes to be one of the most comprehensive global sales,
marketing and customer service organizations in the international
telecommunications industry. The Company operates a digital, switched-based
telecommunications network, the Telegroup Intelligent Global Network, to
deliver its services in a reliable, flexible and cost-effective manner to
approximately 204,000 active customers worldwide. According to FCC statistics,
Telegroup was the sixth largest U.S. carrier of outbound international traffic
in 1995. Telegroup's revenues have increased from $29.8 million in 1993 to
$213.2 million in 1996. In 1993, the Company had an operating loss of $450,000
and a net loss of $707,000, compared to operating income of $105,000 and a net
loss of $118,000 in 1996.
Telegroup provides an extensive range of telecommunications services on a
global basis under the Spectra, Global Access and other brand names. The
Company's services are typically priced competitively with the services of
other alternative telecommunications providers and below the prices offered by
the ITOs, which are often government-owned or protected telephone companies.
While the Company offers a broad range of telecommunications services, the
services offered in a particular market vary depending upon regulatory
constraints and local market demands. Telegroup historically has offered
traditional call-reorigination service (also known as callback) to penetrate
international markets having regulatory constraints. As major markets continue
to deregulate, the Company intends to migrate an increasing portion of its
customer base to "call-through" service, which includes conventional
international long distance service and a "transparent" form of call-
reorigination. The Company markets its call-through service under the brand
name Global Access Direct and its traditional call-reorigination service under
the brand name Global Access CallBack. Currently, the Company offers both
international and national long distance service, prepaid and postpaid calling
cards, toll-free service and enhanced services such as fax store and forward,
fax-mail, voice-mail and call conferencing. The Company believes its broad
array of basic and enhanced services enables the Company to offer a
comprehensive solution to its customers' telecommunications needs. The Company
also resells switched minutes on a wholesale basis to other telecommunications
providers and carriers. See "--Services."
Telegroup's extensive sales, marketing and customer service organization
consists of a worldwide network of independent agents and an internal sales
force who market Telegroup's services and provide customer service, typically
in local languages and in accordance with the cultural norms of the countries
and regions in which they operate. The Company's local sales, marketing and
customer service organization permits the Company to continually monitor
changes in each market and quickly modify service and sales strategies in
response to changes in particular markets. In addition, the Company believes
that it can leverage its global sales and marketing organization to quickly
and efficiently market new and innovative service offerings. As of April 30,
1997, the Company had approximately 1,300 independent agents worldwide. Thirty
Country Coordinators are responsible for coordinating Telegroup's operations,
including sales, marketing, customer service and independent agent support, in
63 countries. In addition, the Company has 30 internal sales personnel in the
United States and one each in France, Germany and the United Kingdom, and
intends to establish additional internal sales departments in selected core
markets. The Company believes that its comprehensive global sales, marketing
and customer service organization will enable the Company to increase its
market share and position itself as the leading alternative international long
distance provider in each of its target markets. The Company believes that it
is the largest alternative international long distance provider in three of
the largest international telecommunications markets in the world--France, the
Netherlands and Switzerland. See "--Sales, Marketing and Customer Service."
The Telegroup Intelligent Global Network includes a central Network
Operations Center in Iowa City, Iowa, as well as switches, owned and leased
transmission capacity and a proprietary distributed intelligent network
52
<PAGE>
architecture. The TIGN is designed to allow customer-specific information,
such as credit limits, language selection, waiting voice-mail and faxes, and
speed dial numbers to be distributed efficiently over a parallel data network
wherever Telegroup has installed a TIGN switch. In addition, the open,
programmable architecture of the TIGN allows the Company to rapidly deploy new
features, improve service quality, and reduce costs through least cost
routing. As of April 30, 1997, the TIGN consisted of (i) the Network
Operations Center, (ii) 13 Excel, NorTel or Harris switches in Fairfield,
Iowa, New York City, London, Paris, Amsterdam, Hong Kong, Sydney and Tokyo,
(iii) two enhanced services platforms in New York and Hong Kong, (iv) two
trans-oceanic fiber-optic cable links connecting its New York switches to its
switches in London and Sydney, and (v) leased parallel data transmission
capacity connecting Telegroup's switches to each other and to the networks of
other international and national carriers. The Company intends to further
develop the TIGN by upgrading existing facilities and by adding switches and
transmission capacity principally in and between major markets where the
Company has established a substantial customer base. During the next 18
months, the Company has scheduled the installation of additional switches in
New Jersey, Los Angeles, Chicago, Miami, Denmark, Germany, Switzerland, Italy
and Brazil and additional nodes in Sweden, Norway, Belgium, Italy, New
Zealand, Germany, Switzerland and Japan. Telegroup also anticipates purchasing
ownership in additional fiber-optic cables and leasing additional dedicated
transmission capacity to reduce the Company's per minute transmission costs.
See "--Network and Operations."
MARKET OPPORTUNITY
The global market for international telecommunications services is
undergoing significant deregulation and reform. The industry is being shaped
by the following trends: (i) deregulation and privatization of
telecommunications markets worldwide; (ii) diversification of services through
technological innovation; and (iii) globalization of major carriers through
market expansion, consolidation and strategic alliances. As a result of these
factors, it is anticipated that the industry will experience considerable
growth in the foreseeable future, both in terms of traffic volume and revenue.
According to the ITU, the international telecommunications industry accounted
for $52.8 billion in revenues and 60.3 billion minutes of use in 1995,
increasing from $21.7 billion in revenues and 16.7 billion minutes of use in
1986, which represents compound annual growth rates of 10% and 15%,
respectively. The ITU projects that international telecommunications revenues
will approach $76.0 billion by the year 2000 with the volume of traffic
expanding to 107.0 billion minutes of use, representing compound annual growth
rates of 7% and 12%, respectively, from 1995.
Deregulation and Privatization of Telecommunications Markets
Worldwide. Significant legislation and agreements have been adopted since the
beginning of 1996 which are expected to lead to the liberalization of the
majority of the world's telecommunication markets, including:
. The U.S. Telecommunications Act, signed in February 1996, establishes
parameters for the implementation of full competition in the U.S.
national long distance market.
. The EU Full Competition Directive, adopted in March 1996, abolishes
exclusive rights for the provision of Voice Telephony services
throughout the EU and the PSTNs of any member country of the EU by
January 1, 1998, subject to extension by certain EU member countries.
. The World Trade Organization Agreement, signed in February 1997, creates
a framework under which more than 60 countries have committed to
liberalize their telecommunications laws in order to permit increased
competition and, in most cases, foreign ownership in their
telecommunications markets, beginning in 1998.
. The 1997 Australian Telecommunications Act, adopted in March 1997, opens
the Australian market for the provision of telecommunications services
over a company's own telephone lines.
The Company believes that the foregoing initiatives, as well as other
proposed legislation and agreements, will result in reduced restrictions on
the ability of alternative carriers such as Telegroup to provide
telecommunications services in the subject markets. In many markets, Telegroup
believes that long distance
53
<PAGE>
callers have been charged relatively high, uncompetitive prices by the ITOs in
exchange for limited services. The ITU's projections for substantially
increased international minutes of use and revenue by the year 2000 are based
in part on the belief that reduced pricing as a result of deregulation and
competition will result in a substantial increase in the demand for
telecommunications services in most markets. Telegroup believes that its
comprehensive global sales, marketing and customer service organization
uniquely positions it among alternative telecommunications providers to
capitalize on the opportunities presented by these reduced restrictions.
Telegroup also believes that such global regulatory reform will expand the
availability of transmission capacity, enabling Telegroup to strategically add
transmission capacity to its network in order to reduce its cost of sales
through least cost routing.
Diversification of Services through Technological Innovation. The
deregulation of telecommunications markets throughout the world has coincided
with substantial technological innovation. The proliferation of digital fiber-
optic cable in and between major markets has significantly increased
transmission capacity, speed and flexibility. Improvements in computer
software and processing technology have enabled telecommunications providers
to offer a broad range of enhanced voice and data services. Unlike many
established telecommunications providers, the Company is not encumbered by
large, inflexible legacy switching systems. The TIGN uses primarily open-
architecture Excel switches which can be programmed to meet the specifications
of new enhanced service platforms. The Company believes that expansion of the
TIGN will enable it to deliver a flexible, comprehensive set of enhanced
telecommunications services to meet the evolving needs of its global customer
base.
Globalization of Major Carriers through Market Expansion, Consolidation and
Strategic Alliances. Faced with the prospect of declining market share in
their respective markets, AT&T and several of the European ITOs have sought
out alternative sources of revenue by expanding into new markets.
Additionally, certain ITOs have pursued mergers, acquisitions and other
strategic alliances, such as the proposed BT/MCI merger and the formation of
the Global One and Unisource consortia, to provide telecommunications services
in additional markets. Telegroup believes that it is uniquely positioned to
take advantage of these trends in the global telecommunications marketplace.
As telecommunications markets are deregulated, the Company believes that its
global sales, marketing and customer service organization and the design of
the TIGN will enable the Company to expand its customer base and its service
offerings in existing and new markets, and to reduce its cost of transmission
service obtained from other carriers. The Company believes that it will be
better able to negotiate favorable alternative transit/termination agreements
with facilities-based carriers or consortia in multiple markets because of its
large, globally distributed customer base and substantial traffic volumes.
BUSINESS STRATEGY
Telegroup's objective is to become the leading alternative provider of
telecommunications services to small- and medium-sized business and high-
volume residential customers in its existing core markets and in selected
target markets. Telegroup's strategy for achieving this objective is to
deliver additional services to customers in its markets through the continued
deployment of the TIGN and to expand its sales and marketing organization into
new target markets. The Company's business strategy includes the following key
elements:
Expand the Telegroup Intelligent Global Network. Telegroup is currently
expanding the TIGN by installing switches, purchasing ownership in additional
fiber-optic cable and leasing additional dedicated transmission capacity in
strategically located areas of customer concentration in Western Europe and
the Pacific Rim. During the next 18 months, the Company has scheduled the
installation of additional switches in New Jersey, Los Angeles, Chicago,
Miami, Denmark, Germany, Switzerland, Italy, and Brazil and additional nodes
in Sweden, Norway, Belgium, Italy, New Zealand, Germany, Switzerland and
Japan. The Company believes the expansion of the TIGN will enable Telegroup to
migrate customers from traditional call-reorigination services to Global
Access Direct. In order to maximize the Company's return on invested capital,
the Company employs a success-based approach to capital expenditures, locating
new switching facilities in markets where the Company has established a
customer base by marketing its call-reorigination services.
54
<PAGE>
Maximize Operating Efficiencies. Telegroup intends to reduce its costs of
providing telecommunications services by strategically deploying switching
facilities, adding leased and owned fiber-optic capacity and entering into
additional alternative "transit/termination agreements." This expansion of the
TIGN will enable the Company to originate, transport and terminate a larger
portion of its traffic over its own network, thereby reducing its overall
telecommunications costs. The Company believes that through least cost routing
and its cost effective Excel LNX switches, Telegroup will be able to further
reduce the overall cost of its services.
Expand Global Sales, Marketing and Customer Service Organization. The
Company believes that its experience in establishing one of the most
comprehensive global sales, marketing and customer service organizations in
the international telecommunications industry provides it with a competitive
advantage. The Company intends to expand its global sales, marketing and
customer service organization in new and existing markets. In new target
markets, the Company relies primarily on independent agents to develop a
customer base while minimizing its capital investment and management
requirements. As the customer base in a particular market develops, the
Company intends to selectively acquire the operations of its Country
Coordinator serving such market and recruit and train additional internal
sales personnel and independent agents. The Company believes that a direct
sales and marketing organization complements its existing independent agents
by enabling Telegroup to conduct test marketing and quickly implement new
marketing strategies. In addition to its sales offices in France, Germany and
the United Kingdom, the Company intends to open or acquire additional offices
in target markets in Europe and the Pacific Rim during 1997.
Position Telegroup as a Local Provider of Global Telecommunications
Services. Telegroup is one of the only alternative telecommunications
providers that offers in-country and regional customer service offices in
major markets on a global basis. The Company has 30 Country Coordinators
providing customer service in 63 countries. Telegroup believes this local
presence provides an important competitive advantage, allowing the Company to
tailor customer service and marketing to meet the specific needs of its
customers in a particular market. Customer service representatives speak the
local languages and are aware of the cultural norms in the countries in which
they operate. The Company continually monitors changes in the local market and
seeks to quickly modify service and sales strategies in response to such
changes. In many instances, this type of dedicated customer service and
marketing is not available to the Company's target customer base from the
ITOs.
Target Small- and Medium-Sized Business Customers. The Company believes that
small- and medium-sized business customers focus principally on obtaining
quality and breadth of service at low prices and have historically been
underserved by the ITOs and the major global telecommunications carriers.
Through the deployment of the TIGN, the Company expects to migrate existing
customers from traditional call-reorigination services to Global Access
Direct, thereby addressing the telecommunications needs of a wider base of
small- and medium-sized business customers. Telegroup believes that, with its
direct, face-to-face sales force and dedicated customer service, it can more
effectively attract and serve these business customers.
Broaden Market Penetration through Enhanced Service Offerings. The Company
believes that offering a broad array of enhanced services is essential to
retain existing customers and to attract new customers. The TIGN's enhanced
services platform and its distributed intelligent network architecture permit
the Company to provide a broad array of voice, data and enhanced services and
to efficiently distribute customer information, such as language selection,
waiting voice-mail and faxes and speed dial numbers throughout the TIGN. The
Company offers a comprehensive solution to its customers' telecommunications
needs by providing enhanced services, including fax store and forward, fax-
mail, voice-mail and call conferencing and intends to introduce e-mail-to-
voice-mail translation and voice recognition services. Telegroup believes that
its provision of such enhanced services will enable it to increase its revenue
from existing customers and to attract a broader base of small- and medium-
sized business customers.
Expand and Upgrade Management Information Systems. Telegroup believes that
reliable, sophisticated and flexible management information systems are
essential to remain competitive in the global telecommunications services
market. Accordingly, the Company has invested substantial resources to develop
and implement sophisticated information systems, which it will continue to
refine, in order to increase the speed,
55
<PAGE>
accuracy, accessibility and efficiency of its Company-wide provisioning,
billing, accounting and collections functions. The Company intends to use a
portion of the net proceeds of the Offering to expand and upgrade these
information systems.
Pursue Acquisitions, Investments and Strategic Alliances. In addition to
selective acquisitions of its Country Coordinators' operations, the Company
intends to expand its current operations and service offerings through
selective acquisitions of, and investments in, businesses that complement the
Company's current operations and service offerings. The Company also intends
to enter into strategic alliances with selective business partners that can
complement the Company's service offerings. The Company is continuously
reviewing opportunities and believes that such acquisitions, investments and
strategic alliances are an important means of increasing network traffic
volume and achieving economies of scale. The Company believes that its
management's extensive entrepreneurial, operational, technical and financial
expertise will enable the Company to identify and rapidly take advantage of
such opportunities.
CUSTOMERS
Telegroup's worldwide retail customer base is comprised of residential
customers and small- to medium-sized businesses with monthly bills averaging
between $50 and $5,000. At March 31, 1997, Telegroup had approximately 204,000
active retail customers (those that incurred charges during March 1997),
consisting of approximately 45,000 U.S. domestic and approximately 159,000
international customers. In addition, Telegroup markets its wholesale services
to both facilities-based carriers and switched-based long distance providers
that purchase the Company's service for resale to their own customers. As of
March 31, 1997, Telegroup had 21 active wholesale carrier customers.
The following chart sets forth the Company's 1996 combined retail and
wholesale revenues in its eight largest markets, determined by customers'
billing addresses:
<TABLE>
<CAPTION>
PERCENTAGE
COUNTRY 1996 REVENUES OF TOTAL REVENUES
------- ------------- -----------------
(IN MILLIONS)
<S> <C> <C>
United States............................. $60.4 28.3%
Netherlands............................... 23.0 10.8
Hong Kong................................. 15.6 7.3
France.................................... 15.4 7.2
Switzerland............................... 13.5 6.3
Australia................................. 8.7 4.1
Japan..................................... 8.0 3.8
Germany................................... 7.8 3.7
</TABLE>
For the year ended December 31, 1996, the Company's revenues from retail and
wholesale customers represented 84% and 16%, respectively, of the Company's
total revenues. For the three months ended March 31, 1997, the Company's
revenues from retail and wholesale customers represented 77% and 23%,
respectively, of the Company's total revenues.
Retail Customers. The Company's retail customer base is diversified both
geographically and by customer type. No single retail customer accounted for
more than 1% of the Company's total revenues for the year ended December 31,
1996 or for the three months ended March 31, 1997. The Company's sales and
marketing efforts target high-volume residential consumers and small- and
medium-sized businesses. The Company believes that high-volume residential
consumers are attracted to Telegroup's services because of its significant
price savings as compared to first-tier carriers, its simplified price
structure and its variety of service offerings. The Company believes that
small- and medium-sized businesses are attracted to Telegroup's services
because of significant price savings compared to first-tier carriers, and
because of its personalized approach to customer service and support,
including its local presence, customized billing and enhanced service
offerings.
56
<PAGE>
Wholesale Customers. Telegroup's wholesale marketing targets second- and
third-tier international and telecommunications providers. The Company
currently provides wholesale services to a total of 21 customers, of which 19
are U.S.-based providers and two are international providers. The Company
believes that long distance services, when sold to telecommunications carriers
and other resellers, are generally a commodity product with the purchase
decision based primarily on price. Sales to these other carriers and resellers
help the Company maximize the use of its network and thereby minimize fixed
costs per minute of use.
For the three months ended March 31, 1997, one wholesale customer in Hong
Kong, the Hong Kong Customer, accounted for approximately 12% of the Company's
total revenues. Substantially all of the services provided by the Company to
this customer consist of call-reorigination services. The initial term of the
Company's agreement with the Hong Kong Customer expires in October 1998,
automatically renews for one year periods, and may be terminated by the Hong
Kong Customer if it determines in good faith that the services provided
pursuant to the agreement are no longer commercially viable in Hong Kong. If
the Company loses its rights under its PNETS license and/or if it is unable to
provide call-reorigination services in Hong Kong on either a retail or
wholesale basis, such action could have a material adverse effect on the
Company's business, financial condition and results of operations. Similarly,
a material reduction in the level of services provided by the Company to the
Hong Kong Customer or a termination of the Company's agreement with the Hong
Kong Customer could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, China is scheduled
to resume sovereignty over Hong Kong as of July 1, 1997. See "Risk Factors--
Substantial Government Regulation--The Pacific Rim."
SALES, MARKETING AND CUSTOMER SERVICE
Telegroup's global sales, marketing and customer service organization
consists of Country Coordinators, independent agents and an internal sales
force who market Telegroup's services and provide customer service in local
languages and in accordance with the cultural norms of the countries in which
they operate. The Company's local sales, marketing and customer service
organization allows the Company to continually monitor changes in each market
and quickly modify service and sales procedures in response to market changes.
Since its inception, Telegroup's sales, marketing and customer service
strategy has been based on providing its network of agents and salespeople
with the systems, technology and infrastructure to attract and support
customers as efficiently as possible.
Global Independent Agent Network. Telegroup's international market
penetration has resulted primarily from the sales activities of independent
agents compensated on a commission-only basis. As of March 31, 1997, Telegroup
had approximately 1,300 active agents (those agents whose customers incurred
charges during March 1997) located in over 97 countries. The use of
independent agents has allowed the Company to limit marketing expenses and
customer acquisition costs. See "Risk Factors--Dependence on Independent
Agents; Concentration of Marketing Resources."
The Company's agreements with its independent agents typically provide for a
two-year term and require the agents to offer the Company's services at rates
prescribed by the Company and to abide by the Company's marketing and sales
policies and rules. Independent agent compensation is paid directly by the
Company and is based exclusively upon payment for the Company's services by
customers obtained for Telegroup by the independent agents. The commission
paid to independent agents ranges between five to twelve percent of revenues
received by the Company and varies depending on individual contracts, the
exclusivity of the agent and the type of service sold. Independent agents are
responsible for up to 40% of bad debt attributable to customers they enroll.
The Company's agreements with its independent agents typically provide that
the agents have no authority to bind Telegroup or to enter into any contract
on the Company's behalf.
Country Coordinators. In significant international markets, Telegroup
appoints Country Coordinators. Country Coordinators are typically self-
financed, independent agents, with contracts that bind them exclusively to
Telegroup. Country Coordinators also have additional duties beyond marketing
Telegroup services, including the responsibility in a country or region to
coordinate the activities of Telegroup independent agents, including training
and recruitment, customer service and collections. As of April 30, 1997,
Telegroup had 30 Country Coordinators who were responsible for sales,
marketing, customer service and collections in 63 countries.
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Telegroup has begun to vertically integrate its sales, marketing and customer
service operations by opening offices in Germany and the U.K. which provide
the services of a Country Coordinator and, in August 1996, acquired the
business operations of its Country Coordinator in France.
Country Coordinators offer the Company's services at rates prescribed by the
Company, and enforce standards for all advertising, promotional, and customer
training materials relating to Telegroup's services that are used or
distributed in the applicable country or region. Country Coordinators review
all proposed marketing or advertising material submitted to them by the
independent agents operating in their country or region and ensure such
agents' compliance with the Company's standards and policies. The Company's
agreements with its independent Country Coordinators typically have a two-year
term and include an exclusivity provision restricting the Country
Coordinator's ability to offer competing telecommunication services. Such
agreements typically entitle the Country Coordinator to an override based on a
percentage of revenues collected by Telegroup from customers within the
Country Coordinator's country or region, as well as a commission similar to
the commission paid to independent agents with respect to customers obtained
directly by the Country Coordinator. The Company's agreements with its Country
Coordinators typically provide that the agents have no right to enter into any
contract on Telegroup's behalf or to bind Telegroup in any manner not
expressly authorized in writing. See "Risk Factors--Dependence on Independent
Agents" and "--Agreements with Independent Agents."
Internal Sales Department. In early 1993, Telegroup began the development of
an internal sales force which, as of March 31, 1997, numbered 33 persons,
including 30 in the U.S. and one each in Germany, France and the United
Kingdom. The internal sales department, which is fully dedicated to marketing
Telegroup's services, provides increased control over existing customers and
enables the Company to quickly test new products and implement special
marketing campaigns. For the year ended December 31, 1996 and for the three
months ended March 31, 1997, Telegroup's internal sales department was
responsible for generating approximately one-half of the Company's revenues
from U.S. retail customers, with the balance being generated by independent
agents in the U.S. Internal sales representatives are compensated by means of
a base salary and a commission which varies depending upon the type of
services sold.
The Internet. In March 1995, Telegroup implemented an aggressive program to
use the World Wide Web as a marketing, order entry, and information
distribution tool. The Company currently processes approximately 90% of orders
submitted by its independent agents through its Web-based RepLink order entry
system. RepLink allows for customer provisioning in approximately 30 minutes
and provides agents with real-time access to customer information. In
addition, the Company's World Wide Web site provides a central source of
information about Telegroup, easily accessible to Telegroup's agents and
prospective customers around the world.
Customer Service. Telegroup is committed to providing its customers with
high-quality customer service, provided in the local language and in
accordance with local cultural norms. Telegroup currently has 30 Country
Coordinators, each of whom maintains a customer service office. These offices
provide customer support to Telegroup's customers in 63 countries. In
addition, Telegroup directly provides customer service to customers in an
additional 107 countries, 24 hours a day, 365 days a year, from its
headquarters in Fairfield, Iowa.
Customer service offices are equipped with Telegroup customer service and
sales support systems for use in the country or region. Customer service
representatives can access the Company's "RepLink" order entry system and
Integrated Databases ("IDB"), a customer information database. See "--
Management Information Systems." These systems facilitate and expedite
customer provisioning and changes to customer account information. In
addition, selected customer service offices are connected to Telegroup's
Fairfield, Iowa headquarters by high-speed frame relay data links which
provide real-time access to the Company's central databases.
SERVICES
Telegroup offers a broad array of telecommunications services through the
TIGN and through interconnections with the networks of other carriers. While
the Company offers a broad range of
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telecommunications services in each of its markets, the services offered in a
particular market vary depending upon regulatory constraints and local market
demands. In order to create a global brand identity, the Company markets its
products primarily under the Spectra or Global Access brands in virtually all
of its markets. The Company currently offers the following services:
International Long Distance. The Company provides international voice
services to its customers in over 170 countries. On a market-by-market
basis, access methods required to originate a call vary according to
regulatory requirements and the existing national telecommunications
infrastructure. The Company's call-reorigination services are available in
all of its markets, generally under the brand name Global Access CallBack.
Telegroup is actively migrating customers to Global Access Direct service,
which is currently available through TIGN switches located in Hong Kong,
France, the U.K. and the Netherlands. Global Access Direct provides
Telegroup customers call-through service, which includes the provision of
long distance service through conventional international long distance or
through a "transparent" form of call-reorigination.
National Long Distance. The Company currently provides national long
distance service in the United States and is preparing to launch its
national long distance service in Australia. The Company also expects to
provide national long distance service in New Zealand and the U.K. by the
end of 1997.
Prepaid (Debit) and Postpaid Calling Cards. The Company's prepaid (debit)
and postpaid Global Access Telecard may be used by customers for
international telephone calls from more than 60 countries to substantially
all other countries in the world. These calling cards also enable the
Company's customers to access Telegroup's enhanced services.
Toll-free Services. The Company currently provides domestic toll-free
services within the United States under its Spectra 800 brand, and toll-
free services for calls to overseas businesses which are originated in the
United States and Canada, under its Global Access 800 brand.
Enhanced Services. Telegroup's enhanced services include fax store and
forward, fax-mail, voice-mail, and call conferencing.
Wholesale Services. In addition to retail services, the Company provides
international and national call termination services and enhanced services
on a wholesale basis to switch-based telecommunications carriers in the
United States, the Pacific Rim and Europe. Such wholesale arrangements
typically involve the purchase of transmission services on a per-minute
basis, with rates varying according to the destination country and the time
of day the call is placed.
Telegroup constantly evaluates potential new service offerings in order to
increase customer retention and loyalty, and increase usage of the Company's
services. New services the Company expects to introduce in selected markets in
1997 include:
Internet Access Services. The Company intends to offer switched and
dedicated access to the Internet for use by commercial and residential
customers. These services may be offered on a direct connection to the
Internet or on a resale basis. Once connected to the Internet, customers
will be able to access services provided by others, such as World Wide Web
browsing, electronic mail, news feeds and bulletin boards.
Resold Local Switched and Switchless Service. The Company intends to
provide local service on a resale basis in the United States, subject to
commercial feasibility and regulatory limitations.
Mobile Resale. The Company intends to offer its customers resold mobile
telecommunications services in the United States and other selected
markets.
Integrated Voice-Mail, E-Mail and Fax-Mail. Integrated services enable
customers to convert e-mail and facsimile data to audio text and to receive
voice-mail messages in writing. The Company intends to offer its customers
integrated voice-mail, e-mail and fax-mail through the TIGN in all
countries where the Company's international telecommunications services are
available.
There can be no assurance that the Company will be able to launch such
services or that, if launched, such services will be successful.
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NETWORK AND OPERATIONS
The TIGN employs digital switching and fiber-optic technologies, runs on
proprietary software developed by Telegroup and is supported by comprehensive
monitoring and technical services at the Company's Network Operations Center
in Iowa City, Iowa. The TIGN also employs Telegroup's proprietary distributed
intelligent network architecture, enabling Telegroup to transmit customer-
specific information among its switches almost instantaneously over redundant
high-speed frame relay data networks.
Through the TIGN, Telegroup is able to deliver an expanded set of enhanced
services which may not be available from the ITO in a particular country. The
availability of these enhanced services enables Telegroup to attract a wider
base of small- to medium-sized business customers. In addition, the network
provides the Company with more efficient call routing and cost savings by
means of reduced circuit charges.
History of the TIGN. Since 1992, Telegroup has invested substantial
resources in developing the TIGN and related business operations. In 1992, the
Company installed its first Harris switch at its main office in Fairfield,
Iowa primarily to serve as a PBX for internal Company purposes. In 1993, the
Company installed a switch in New York City to handle call-reorigination
service for retail customers. In 1994, the Company installed a Harris switch
in London to provide call-reorigination services for intra-European calls and
leased a private data line for call setup and to transfer call detail reports
from the U.K. switch to the New York switch. In February 1995, Telegroup
entered into an operating agreement with AT&T-Canada (formerly Unitel)
providing for correspondent traffic termination rights.
In July 1995, the Company installed its first enhanced services switch at
the New York switch site to provide post-paid card services for domestic and
international customers in 40 countries. Also in 1995, Telegroup opened a new
office in Iowa City, Iowa to house the Network Operations Center and switch
development and deployment teams.
In February 1996, the Company installed its first Excel switch in Hong Kong
in addition to an identical mated switch in New York to provide Global Access
Direct service to Hong Kong customers using transparent call-reorigination. In
May 1996, Telegroup began to utilize the existing Harris switch at the main
office to receive incoming call-reorigination calls from international
customers. In September 1996, the Company installed a DMS-250 switch in New
York. The DMS-250 switch was connected via T-1 lines to other carriers whereby
wholesale traffic was brought in to the DMS-250 switch and then routed to
other carriers for international termination. In August 1996, the Company
installed a Harris switch in Amsterdam incorporating proprietary software
developed by the Telegroup Intelligent Network Department to provide Global
Access Direct service to international customers.
In January 1997, the Company installed a pair of Excel switches in Hong Kong
and New York, linked by the existing data network. Shortly thereafter, TIGN
switches were installed in France and Australia, opening those markets to
Global Access Direct services. At the same time, the Company acquired an
interest in the CANTAT-3 Trans-Atlantic circuit between New York and London.
Current Network Architecture. As of April 30, 1997, the TIGN consisted of
(i) the central NOC, (ii) 13 operational Excel, NorTel or Harris switches in
Fairfield, Iowa, New York City, London, Paris, Amsterdam, Hong Kong, Sydney
and Tokyo, (iii) two enhanced services platforms in New York and Hong Kong,
(iv) two trans-oceanic fiber-optic cable links connecting its New York
switches to its switches in London and Sydney, and (v) leased parallel data
transmission capacity connecting Telegroup's switches to each other and to the
networks of other international and national carriers. The Company intends to
further develop the TIGN by upgrading existing facilities and by adding
switches and transmission capacity principally in and between major markets
where the Company has already established a substantial customer base. During
the next 18 months, the Company has scheduled the installation of additional
switches in New Jersey, Los Angeles, Chicago, Miami, Denmark, Germany,
Switzerland, Italy and Brazil and additional nodes in Sweden, Norway, Belgium,
Italy, New
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Zealand, Germany, Switzerland and Japan. Telegroup also anticipates purchasing
ownership in additional fiber-optic cables and leasing additional dedicated
transmission capacity which will reduce the Company's per minute transmission
costs.
In markets in which the Company believes it is not optimal to own or lease
network facilities, the Company typically enters into agreements to resell the
facilities of other carriers. The Company purchases switched minute capacity
from various carriers and depends on such agreements for termination of
traffic from the TIGN. The Company is also a reseller of other carriers'
national long distance services. In 1997, as a result of the Company's
strategic relationship with AAPT, the Company will be a reseller of Australian
national long distance services. In other markets, the Company works with
multiple national long distance carriers in an effort to ensure that the
pricing and service on each route are the best available and that the Company
can provide an integrated long distance service to its customers. The Company
believes that the opportunities for resale will become increasingly attractive
as countries deregulate and grant additional carrier licenses, and competitive
pressures force carriers to find alternative sources of distribution. See
"Risk Factors--Dependence on Telecommunications Facilities Providers."
In general, the Company relies upon other carriers' networks to provide
redundancy in the event of technical difficulties on the TIGN. The Company
believes that the strategy of using other carriers' networks for redundancy is
currently more cost-effective than purchasing or leasing its own redundant
capacity. To the extent that the traffic over the TIGN exceeds the Company's
transmission capacity, the Company typically routes overflow traffic over
other carriers' networks, which may result in reduced margins on such calls.
The TIGN's Distributed Intelligent Network Architecture. Most
telecommunications companies operate their networks using software developed
by switch manufacturers. Consequently, switch software typically cannot be
modified or improved except by the switch manufacturer, which can result in
significant expense and delay. Through its Intelligent Network Department,
consisting of approximately 80 full-time employees, Telegroup develops and
continuously refines its proprietary TIGN software, enabling the Company to
purchase flexible, open-architecture switching hardware into which it
incorporates such software.
TIGN Competitive Advantages. The TIGN platform is designed to provide a
highly reliable, flexible and cost-effective network for processing calls and
delivering enhanced services. The design of the TIGN achieves the principles
established for Advanced Intelligent Networks ("AIN") specified by the ITU.
The TIGN platform provides significant competitive advantages over voice
networks of other providers. These advantages include:
. Distributed intelligence. The TIGN voice network is configured in
parallel with a frame relay data network for call setup and the sharing
of customer data among the TIGN switches. All customer information such
as current usage, credit limits, language selections, waiting voice-mail
and faxes, and speed numbers are distributed and available throughout
the TIGN.
. Rapid deployment of new services and features. The TIGN software allows
enhancements to existing services and new services to be quickly
developed and tested with minimal impact to existing software.
Enhancements to existing services can be added in days rather than
months and new services can be developed and tested in a few weeks
rather than many months or even years required by other network designs.
. Cost benefits versus conventional switching platforms. The switching
matrix employed within the TIGN platform consists of two redundant Excel
LNX switches, each with 2000 voice ports--one actively controlling call
processing and one in hot standby mode. This latest generation in
switching equipment from Excel provides a cost-per-port which is less
expensive than that found on larger, traditional switching equipment
used by conventional voice service providers.
. Flexible and adaptive signaling. Because of the many national and
carrier-specific variants on the international signaling protocol such
as ISDN and CCS7, one of the largest problems faced by international
carriers and voice service providers has been interconnecting to the
national ITOs. The TIGN software has been designed to take advantage of
the open architecture on the Excel LNX switches to facilitate
compatibility with various international signaling protocols.
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MANAGEMENT INFORMATION SYSTEMS
Telegroup believes that reliable, sophisticated and flexible billing and
information systems are essential to remain competitive in the global
telecommunications market. Accordingly, the Company has invested substantial
resources to develop and implement information systems. As the Company
continues to grow, it will need to invest additional capital to enhance and
upgrade its operating systems in order to meet its provisioning, billing,
costing and collection requirements. See "Risk Factors--Dependence on
Effective Management Information Systems."
The Company's information systems include (i) RepLink, an Internet Web-based
global order entry system; (ii) the IDB which stores client information using
client server architecture; (iii) a Small Business Technologies ("SBT")
accounting system; (iv) a proprietary customer billing system; and (v) a
proprietary call costing and reconciliation system which is currently being
tested and is expected to be operational in June 1997. The Company anticipates
that its SBT accounting, commissions, billing and possibly other systems will
be required to be upgraded or replaced in the next 12 to 18 months.
RepLink Order Entry System. The Company has developed RepLink, a unique
World Wide Web interface, primarily for its independent agents to send
customer information to the Company for fully automated provisioning. First
implemented in 1995, RepLink has reduced the average interval required to
provision a new customer from most countries to an average of 30 minutes or
less. Customer information is entered by the agent and screened during the
provisioning process to ensure data quality and accuracy. Agents can also
receive monthly usage reports, commission reports, and reports on new products
and features through RepLink.
IDB Customer Database. The IDB is the Company's integrated database for all
customer and service information. The IDB can be accessed through the IDB
custom user interface, which allows the Company's customer service and sales
support staff to maintain customer records and provide customer service. The
IDB interface also allows limited access to a customer's financial information
which is stored in the Company's SBT accounting system. Customer order
information is transferred directly from RepLink into the IDB. After final
data is reviewed, the customer is provisioned for the services requested by
the agent. Each hour, all provisioning information for Global Access services
flows automatically to the Company's switches. Several times each day,
provisioning information for Spectra services is transferred electronically to
the Company's underlying carriers.
SBT Accounting System. SBT, a modifiable, multi-user database accounting
software, provides the Company with the flexibility to create custom
accounting modules to support various accounting needs. All of SBT's
accounting products perform real-time posting and provide custom file
browsers. The IDB and SBT systems are linked by use of an open server through
which information is freely exchanged. Since the Company's new billing system
software is compatible with SBT, financial information is able to flow easily
between the two systems without manual intervention.
Billing System. The Company's new billing system streamlines and automates a
number of billing processes, including worldwide call detail data collection.
A call detail report ("CDR"), an itemized record of the activity which occurs
at a particular switch location, is downloaded and used in the generation of
customer invoices. The entire process of CDR import, matching and rating is
now combined into a single process, eliminating manual intervention. The
Company is able to review and analyze the CDR to ensure the accuracy of
customer bills and detect errors. Monthly customer invoices are created,
printed and mailed from the Company's facilities in Fairfield, Iowa.
Call Costing and Reconciliation System. To ensure that costs charged to the
Company by its carriers are accurate, the Company has developed a call costing
and reconciliation system which it is currently testing and is expected to be
operational in June 1997. This system is designed to reconcile the Company's
CDRs against invoices that the Company receives from its underlying carriers.
Each carrier invoice will be compared for total calls, total duration, total
cost, and the Telegroup rated cost. All discrepancies will be logged and an
audit for the carrier/day combinations that show discrepancies will be
scheduled to examine the details of the discrepancies between the Company's
data and the carrier's data. See "Risk Factors--Dependence on Effective
Management Information Systems."
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The Company believes that this suite of management information systems,
coupled with continued enhancements and additions, will enable the Company to
effectively provision and bill customers, produce accurate financial reports
and control costs.
COMPETITION
The international and national telecommunications industry is highly
competitive. The Company's success depends upon its ability to compete with a
variety of other telecommunications providers in each of its markets,
including the respective ITO in each country in which the Company operates and
global alliances among some of the world's largest telecommunications
carriers. Other potential competitors include cable television companies,
wireless telephone companies, Internet access providers, electric and other
utilities with rights of way, railways, microwave carriers and large end users
which have private networks. The intensity of such competition has recently
increased and the Company believes that such competition will continue to
intensify as the number of new entrants increases. If the Company's
competitors devote significant additional resources to the provision of
international or national long distance telecommunications services to the
Company's target customer base of high-volume residential consumers and small-
and medium-sized businesses, such action could have a material adverse effect
on the Company's business, financial condition and results of operations, and
there can be no assurance that the Company will be able to compete
successfully against such new or existing competitors.
The Company's larger competitor's include AT&T, MCI, Sprint, WorldCom,
Frontier and LCI in the United States; France Telecom in France; PTT Telecom
B.V. in the Netherlands; Cable & Wireless plc, BT, Mercury, AT&T, WorldCom,
Sprint and ACC Corp. in the United Kingdom; Deutsche Telecom in Germany; Swiss
PTT in Switzerland; Telia AB and Tele-2 in Sweden; HKTI in Hong Kong, Telstra
and Optus in Australia; and KDD, IDC and ITJ in Japan. The Company competes
with numerous other long distance providers, some of which focus their efforts
on the same customers targeted by the Company. In addition to these
competitors, recent and pending deregulation in various countries may
encourage new entrants. For example, as a result of the recently enacted 1996
Telecommunication Act in the United States, once certain conditions are met,
RBOCs will be allowed to enter the domestic long distance market in their
exchange territories as well as outside of such territories, AT&T, MCI and
other long distance carriers will be allowed to enter the local telephone
services market, and any entity (including cable television companies and
utilities) will be allowed to enter both the local service and long distance
telecommunications markets. Moreover, while the recently completed WTO
Agreement could create opportunities for the Company to enter new foreign
markets, implementation of the accord by the United States could result in new
competition from ITOs previously banned or limited from providing services in
the United States. Increased competition in the United States as a result of
the foregoing, and other competitive developments, including entry by Internet
service providers into the long-distance market, could have an adverse effect
on the Company's business, financial condition and results of operations. In
addition, many smaller carriers have emerged, most of which specialize in
offering international telephone services utilizing dial up access methods,
some of which have begun to build networks similar to the TIGN. See "The
International Telecommunications Industry."
The long distance telecommunications industry is intensely competitive and
is significantly influenced by the pricing and marketing decisions of the
larger industry participants. In the United States, the industry has
relatively limited barriers to entry with numerous entities competing for the
same customers. Customers frequently change long distance providers in
response to the offering of lower rates or promotional incentives by
competitors. Generally, the Company's domestic customers can switch carriers
at any time. The Company believes that competition in all of its markets is
likely to increase and that competition in non-United States markets is likely
to become more similar to competition in the United States market over time as
such non-United States markets continue to experience deregulatory influences.
In each of the countries where the Company markets its services, the Company
competes primarily on the basis of price (particularly with respect to its
sales to other carriers), and also on the basis of customer service and its
ability to provide a variety of telecommunications products and services.
There can be no assurance that the Company will be able to compete
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successfully in the future. The Company anticipates that deregulation and
increased competition will result in decreasing customer prices for
telecommunications services. The Company believes that the effects of such
decreases will be at least partially offset by increased telecommunications
usage and decreased costs as the percentage of its traffic transmitted over
the TIGN increases. There can be no assurance that this will be the case. To
the extent this is not the case, there could be an adverse effect on the
Company's margins and financial profits, and the Company's business, financial
condition and results of operations could be materially and adversely
effected.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems,
such as the proposed Iridium and GlobalStar systems, utilization of the
Internet for international voice and data communications and digital wireless
communication systems such as PCS. The Company is unable to predict which of
many possible future product and service offerings will be important to
maintain its competitive position or what expenditures will be required to
develop and provide such products and services.
GOVERNMENT REGULATION
Overview. The Company's provision of international and national long
distance telecommunications services is heavily regulated. Many of the
countries in which the Company provides, or intends to provide, services
prohibit or limit the services which the Company can provide, or intends to
provide and the transmission methods by which it can provide such services.
For example, in the United States, the Company plans to engage in the resale
of international private lines for the provision of switched communications
services pursuant to an authorization ("Section 214 Private Line
Authorization") under Section 214 of the Communications Act. Certain rules of
the FCC prohibit the Company from (i) transmitting calls routed over the
Company's leased line between the United States and the United Kingdom onward
over international leased lines (other than to countries which the FCC deems
to be "equivalent," currently the United Kingdom, Canada, Sweden and New
Zealand) or (ii) transmitting calls from European countries (other than those
deemed to be equivalent) over international leased lines and then onward over
its leased line between the United States and the United Kingdom. If a
violation of FCC rules concerning resale of international private line service
were found to exist, the FCC could impose sanctions and penalties, including
revocation of the Section 214 Private Line Authorization. FCC restrictions
thus materially limit the optimal and most profitable use of the Company's
leased line between the United States and the United Kingdom.
In addition, the Company provides a substantial portion of its customers
with access to its services through the use of call-reorigination. Revenues
attributable to call-reorigination represented 76.6% of the Company's revenues
in fiscal year 1996 and 72.8% of the Company's revenues for the three months
ended March 31, 1997, and are expected to continue to represent a significant
but decreasing portion of the Company's revenues. A substantial number of
countries have prohibited certain forms of call-reorigination as a mechanism
to access telecommunications services. This has caused the Company to cease
providing call-reorigination services in Bermuda, the Bahamas and the Cayman
Islands, and may require it to do so in other jurisdictions in the future. As
of May 1, 1997, reports had been filed with the ITU and/or the FCC claiming
that the laws in 63 countries prohibit call-reorigination. While the Company
provides call-reorigination services in substantially all of these countries,
no single country within this group accounts for more than 2% of the total
revenues of the Company for the 12 months ended March 31, 1997. There can be
no assurance that other countries where the Company derives material revenue
will not prohibit call-reorigination in the future. To the extent that a
country with an express prohibition against call-reorigination is unable to
enforce its laws against a provider of such services, it can request that the
FCC enforce such laws in the United States, by, for example, requiring a
provider of such services to cease providing call-reorigination services to
such country or by revoking such provider's FCC authorizations. Twenty-eight
countries have formally notified the FCC that call-reorigination services
violate their laws. The Company provides call-reorigination in all of these
countries, which countries accounted for 7.3% of the Company's total revenues
for the 12 months ended March 31, 1997. Two of the 28 countries have requested
assistance from the FCC in enforcing their prohibition on call-reorigination.
Neither of these two
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countries accounted for more than 2% of the Company's consolidated revenues
for the 12 months ended March 31, 1997. The FCC has held that it would
consider enforcement action against companies based in the United States
engaged in call-reorigination by means of uncompleted call signalling in
countries where this activity is expressly prohibited. While the FCC has not
initiated any action to date to limit the provisions of call-reorganization
services, there can be no assurance that it will not take action in the
future. Enforcement action could include an order to cease providing call-
reorigination services in such country, the imposition of one or more
restrictions on the Company, monetary fines or, ultimately, the revocation of
the Company's Section 214 Switched Voice Authorization, and could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Substantial Government Regulation--
United States."
Local laws and regulations differ significantly among the jurisdictions in
which the Company operates, and, within such jurisdictions, the interpretation
and enforcement of such laws and regulations can be unpredictable. For
example, EU member states have inconsistently and, in some instances,
unclearly implemented the Full Competition Directive under which the Company
provides certain voice services in Western Europe. As a result, some EU member
states may limit, constrain or otherwise adversely affect the Company's
ability to provide certain services. There can be no assurance that certain EU
member states will implement, or will implement consistently, the Full
Competition Directive, and either the failure to implement or inconsistent
implementation of such directives could have a material adverse effect on the
Company's business, financial condition and results of operations.
Additionally, there can be no assurance that future United States or foreign
regulatory, judicial or legislative changes will not have a material adverse
effect on the Company or that regulators or third parties will not raise
material issues with regard to the Company's compliance with applicable laws
or regulations. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof, such
events could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors--Substantial
Government Regulation."
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes, upon consultation
with counsel, to be permissible under applicable laws and regulations. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear, the Company's strategy may result in the
Company's (i) providing services or using transmission methods that are found
to violate local laws or regulations or (ii) failing to obtain approvals or
make filings subsequently found to be required under such laws or regulations.
Where the Company is found to be or otherwise discovers that it is in
violation of local laws and regulations and believes that it is subject to
enforcement actions by the FCC or the local authority, it typically seeks to
modify its operations or discontinue operation so as to comply with such laws
and regulations. There can be no assurance, however, that the Company will not
be subject to fines, penalties or other sanctions as a result of violations
regardless of whether such violations are corrected. If the Company's
interpretation of applicable laws and regulations proves incorrect, it could
lose, or be unable to obtain, regulatory approvals necessary to provide
certain of its services or to use certain of its transmission methods. The
Company also could have substantial monetary fines and penalties imposed
against it.
A summary discussion of the regulatory frameworks in certain geographic
regions in which the Company operates or has targeted for penetration is set
forth below. This discussion is intended to provide a general outline of the
more relevant regulations and current regulatory posture of the various
jurisdictions and is not intended as a comprehensive discussion of such
regulations or regulatory posture.
United States. The Company's provision of international service to, from,
and through the United States is subject to regulation by the FCC. Section 214
of the Communications Act requires a company to make application to, and
receive authorization from, the FCC to, among other things, resell
telecommunications services of other U.S. carriers with regard to
international calls. In May 1994, the FCC authorized the Company, pursuant to
the Section 214 Switched Voice Authorization, to resell public switched
telecommunications services
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of other U.S. carriers. The Section 214 Switched Voice Authorization requires,
among other things, that services be provided in a manner that is consistent
with the laws of countries in which the Company operates. As described above,
the Company's aggressive regulatory strategy could result in the Company's
providing services that ultimately may be considered to be provided in a
manner that is inconsistent with local law. If the FCC finds that the Company
has violated the terms of the Section 214 Switched Voice Authorization, it
could impose a variety of sanctions on the Company, including fines,
additional conditions on the Section 214 Switched Voice Authorization, cease
and desist or show cause orders, or the revocation of the Section 214 Switched
Voice Authorization, the latter of which is usually imposed only in the case
of serious violations. Depending upon the sanction imposed, such sanction
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors--Substantial Government
Regulation."
In order to conduct a portion of its business involving the origination and
termination of calls in the United States, the Company uses leased lines. The
Company's Section 214 Private Line Authorization permits the Company to resell
international private lines interconnected to the PSTNs in the United States
and the United Kingdom, for the purpose of providing switched
telecommunications services. However, the FCC imposes certain restrictions
upon the use of the Company's private line between the United States and the
United Kingdom. The Company may route over the private line traffic
originating in the United States or in the United Kingdom and terminating in
the United States or the United Kingdom. The Company may also route over the
private line traffic originating in the United States or the United Kingdom
and sent to third countries via the tariffed switched services of a carrier in
the United States or the United Kingdom. Similarly, the Company may route over
the private line calls that originate in a third country over an ITO's
tariffed switched services and terminate in the United States or the United
Kingdom. The Company may not route traffic to or from the United States over
the private line between the United States and the United Kingdom if such
traffic originates or terminates in a third country over a private line
between the United Kingdom and such third country, if the third country has
not been found by the FCC to offer "equivalent" resale opportunities. The
Company is currently not routing U.S.-originated traffic to or U.S. terminated
traffic to or from non-"equivalent" countries via private lines. To date, the
FCC has found that only Canada, the United Kingdom, Sweden and New Zealand
offer such opportunities. Following implementation of the Full Competition
Directive by EU member states, the FCC may authorize the Company to originate
and terminate traffic over its private line between the United States and the
United Kingdom and over an additional private line pursuant to ISR authority
to additional member states if the FCC finds that such additional member
states provide equivalent resale opportunities. However, there can be no
assurance that the FCC will find such equivalence.
The Company also owns capacity in international facilities to provide some
services, and may in the future acquire additional interests in international
facilities. The Company has a Section 214 facilities authorization to provide
services over international facilities between the United States and all
countries other than Cuba. The Company is also required to conduct its
facilities-based international business in compliance with the FCC's ISP. The
ISP establishes the permissible arrangements for U.S. based facilities-based
carriers and their foreign counterparts to settle the cost of terminating each
other's traffic over their respective networks. One of the Company's
arrangements with foreign carriers is subject to the ISP and it is possible
that the FCC could take the view that this arrangement does not comply with
the existing ISP rules. See "The International Telecommunications Industry--
International Switched Long Distance Services--Operating Agreements." If the
FCC, on its own motion or in response to a challenge filed by a third party,
determines that the Company's foreign carrier arrangements do not comply with
FCC rules, among other measures, it may issue a cease and desist order, impose
fines on the Company or revoke or suspend its FCC authorizations. See "Risk
Factors--Recent and Potential FCC Actions." Such action could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The Company is required to file and has filed with the FCC a tariff
containing the rates, terms and conditions applicable to its international
telecommunications services. The Company is also required to file with the FCC
any agreements with customers containing rates, terms, and conditions for
international telecommunications services, if those rates, terms, or
conditions are different than those contained in the Company's tariff.
Notwithstanding the foregoing requirements, to date, the Company has not filed
with the FCC certain
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commercially sensitive carrier-to-carrier customer contracts. If the Company
charges rates other than those set forth in, or otherwise violates, its tariff
or a customer agreement filed with the FCC, or fails to file with the FCC
carrier-to-carrier agreements, the FCC or a third party could bring an action
against the Company, which could result in a fine, a judgment or other
penalties against the Company. Such action could have a material adverse
effect on the Company's business, financial condition and results of
operations.
The Company's provision of domestic long distance service in the United
States is subject to regulation by the FCC and relevant state PSCs, which
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the
Company's domestic services are provided. In general, neither the FCC nor the
relevant state PSCs exercise direct oversight over cost justification for the
Company's services or the Company's profit levels, but either or both may do
so in the future. The Company, however, is required by federal and state law
and regulations to file tariffs listing the rates, terms and conditions of
services provided. The Company has filed domestic long distance tariffs with
the FCC. The October 29, 1996 Order eliminated the requirement that non-
dominant interstate carriers, such as the Company, maintain FCC tariffs.
However, on February 13, 1997, the DC Circuit ruled that the FCC's order will
be stayed pending judicial review of the appeals. Should the appeals fail and
the FCC's order become effective, the Company may benefit from the elimination
of FCC tariffs by gaining more flexibility and speed in dealing with
marketplace changes. However, the absence of tariffs will also require that
the Company secure contractual agreements with its customers regarding many of
the terms of its existing tariffs or face possible claims arising because the
rights of the parties are no longer clearly defined. The Company generally is
also required to obtain certification from the relevant state PSC prior to the
initiation of intrastate service. Telegroup has the authorizations required to
provide service in 47 states, and has filed or is in the process of filing
required tariffs in each such state. The Company has complied or is in the
process of complying with certain reporting requirements imposed by state PSCs
in each state in which it conducts business. Any failure to maintain proper
federal and state tariffing or certification or file required reports any
difficulties or delays in obtaining required authorizations could have a
material adverse effect on the Company's business, financial condition and
results of operations. The FCC also imposes some requirements for marketing of
telephone services and for obtaining customer authorization for changes in the
customer's primary long distance carrier.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from LECs or CLECs. Access charges represent a significant portion
of the Company's cost of U.S. domestic long distance services and, generally,
such access charges are regulated by the FCC for interstate services and by
PSCs for intrastate services. The FCC has undertaken a comprehensive review of
its regulation of LEC access charges to better account for increasing levels
of local competition. On May 16, 1997, the FCC released an order making
significant changes in the access service rate structure. Some of the changes
may result in increased costs to the Company for the "transport" component of
access services, although other revisions of the order likely will reduce
other access costs. Some issues in the FCC proceeding have not yet been
resolved, including a proposal under which LECs would be permitted to allow
volume discounts in the pricing of access charges. While the outcome of these
proceedings is uncertain, if these rate structures are adopted many long
distance carriers, including the Company, could be placed at a significant
cost disadvantage to larger competitors. In addition, the FCC has recently
announced actions to implement the 1996 Telecommunications Act that will
impose new regulatory requirements including the requirement that all
telecommunications service providers, including the Company, contribute some
portion of their telecommunications revenues to a "universal service fund"
designated to fund affordable telephone service for consumers, schools,
libraries and rural health care providers.
In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to
the implementation of such tax software and not be able to collect
reimbursement for such liability from its customers. While the Company
believes that any such liability will not be significant, there can be no
assurance that such tax liability, if any, will not have a material adverse
effect on the Company's business, financial condition or results of
operations.
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In November 1996, the FCC adopted rules that would require that
interexchange companies offering toll-free access through payphones compensate
certain payphone operators for customers' use of the payphone. This decision
is currently on appeal to the United States Circuit Court for the District of
Columbia. Although the Company cannot predict the outcome of the appeal or the
effect of the FCC's decision on the Company's business, it is possible that
the decision could have a material adverse effect on the Company's business,
financial condition and results of operations.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control and
corporate reorganizations, and assignments of regulatory authorizations. Such
requirements may delay, prevent or deter a change in control of the Company.
Europe. In Europe, the regulation of the telecommunications industry is
governed at a supra-national level by the EU (consisting of the following
member states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the
United Kingdom), which is responsible for creating pan-European policies and,
through legislation, has developed a regulatory framework to ensure an open,
competitive telecommunications market. The EU was established by the Treaty of
Rome and subsequent conventions and is authorized by such treaties to issue EC
"directives." EU member states are required to implement these directives
through national legislation. If an EU member state fails to adopt such
directives, the European Commission may take action, including referral to the
European Court of Justice, to enforce the directives.
In 1990, the EU issued the Services Directive requiring each EU member state
to abolish existing monopolies in telecommunications services, with the
exception of Voice Telephony. The intended effect of the Services Directive
was to permit the competitive provision of all services other than Voice
Telephony, including value-added services and voice services to CUGs. However,
as a consequence of local implementation of the Services Directive through the
adoption of national legislation, there are differing interpretations of the
definition of prohibited Voice Telephony and permitted value-added and CUG
services. Voice services accessed by customers through leased lines are
permissible in all EU member states. The European Commission has generally
taken a narrow view of the services classified as Voice Telephony, declaring
that voice services may not be reserved to the ITOs if (i) dedicated customer
access is used to provide the service, (ii) the service confers new value-
added benefits on users (such as alternative billing methods) or (iii) calling
is limited by a service provider to a group having legal, economic or
professional ties.
In March 1996, the EU adopted the Full Competition Directive containing two
provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the ITOs' monopolies
in Voice Telephony by 1998. The Full Competition Directive encouraged EU
member states to accelerate liberalization of Voice Telephony. To date,
Sweden, Finland, Denmark and the United Kingdom have liberalized facilities-
based services to all routes. Certain EU countries may delay the abolition of
the Voice Telephony monopoly based on exemptions established in the Full
Competition Directive. These countries include Spain (1998), Portugal and
Ireland (January 1, 2000) and Greece (2003).
Each EU member state in which the Company currently conducts its business
has a different regulatory regime and such differences are expected to
continue beyond January 1998. The requirements for the Company to obtain
necessary approvals vary considerably from country to country and are likely
to change as competition is permitted in new service sectors. Except with
respect to Voice Telephony and call-reorigination, the Company believes that,
to the extent required, it has either filed applications, received comfort
letters or obtained licenses from the applicable regulatory authorities.
The Company may be incorrect in its assumptions that (i) each EU member
state will abolish, on a timely basis, the respective ITO's monopoly to
provide Voice Telephony within and between member states and other countries,
as required by the Services Directive and the Full Competition Directive, (ii)
deregulation will continue to occur and (iii) the Company will be allowed to
continue to provide and to expand its services in the
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EU member countries. The Company's provision of services in Western Europe may
also be affected if any EU member state imposes greater restrictions on non-EU
international service than on such service within the EU. There can be no
assurance that EU member states will not adopt laws or regulatory requirements
that will adversely affect the Company.
United Kingdom. The Company owns and operates a switching facility in
London that is connected to the UK international gateway by private line
circuits leased by the Company from third parties. In the United Kingdom,
the Company offers direct access and call-reorigination, as well as
customized calling card and prepaid debit calling card services, and
provides international call termination services to other
telecommunications carriers and resellers on a wholesale switched minute
basis. The Company's services are subject to the Telecommunications Act of
1984 (the "UK Telecommunications Act"). The Secretary of State for Trade
and Industry (the "TI Secretary") is responsible for granting
telecommunications licenses and the Director General of Telecommunications
("DGT") and his staff, known as the Office of Telecommunications ("Oftel"),
the United Kingdom's telecommunications regulatory authority, are
responsible for enforcing the conditions of such licenses. On May 6, 1997,
the TI Secretary granted the Company an ISR license, which allows the
Company to offer certain international and national long distance services
via connection to the PSTN by leased lines. The loss of the Company's
license or the placement of significant restrictions thereon could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Substantial Government
Regulation."
To reduce transmission costs associated with leasing IPLCs owned by third
parties and to provide additional capacity between the United States and
United Kingdom, the Company has the option to acquire capacity on an IRU
basis in a digital undersea fiber-optic cable for the transmission of
traffic between its London switching facility and its international gateway
switching center in New York. Before providing service over this capacity,
the Company is required to apply to the TI Secretary to obtain an
International Facilities License ("IF License") that would permit it to run
international voice services over submarine cables in which it has an IRU
interest. The British government has not placed any limit on the number of
IF Licenses it will issue, but there can be no assurance that the Company
will be granted an IF License. The Company's failure to obtain an IF
License would prevent the Company from providing facilities-based services
to and from the United Kingdom through its own facilities (e.g., by IRU),
would adversely affect the Company's plans and ability to expand its
operations, and could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Netherlands. The regulation of telecommunications is currently
controlled by the Ministry of Transport, Public Works and Water Management,
Telecommunications and Post Department ("HDTP"). However, legislation is
pending in the Dutch parliament to transfer part of this authority to an
independent administrative authority. The Company presently owns and
operates a switching facility in Amsterdam, which the Company intends in
the future to connect by leased lines to its international gateway
switching center in New York, subject to Dutch and FCC rules. To keep pace
with competitors, the Company presently offers call-through services in the
Netherlands. In particular, the Company has begun to provide a range of
enhanced telecommunications services and switched voice services to
business users, including to CUGs, by routing traffic via the switched
networks of a competitor of the ITO. To date, the Dutch telecommunications
authority has not taken regulatory action to prevent the provision by the
Company of certain services, which might be regarded as prohibited services
under the Dutch telecommunications laws, and the Company is not aware of
any action taken in such regard by the Dutch ITO and/or PTT Telecom B.V. (a
wholly owned subsidiary of the Dutch ITO), in such regard. While the
Company believes that the Dutch regulatory authority will not seek to
prevent the Company and other carriers from competing with the ITO before
full liberalization which is expected on or before July 1, 1997, it is
possible that the Company's services may be regarded as prohibited
services. Should the Dutch telecommunications authority commence regulatory
action to prevent such competition, and/or if the Dutch ITO and/or PTT
Telecom B.V. were to claim damages, the Company's business in the
Netherlands would be adversely and materially affected. It is also possible
that the Company can be fined, or its application to provide services in
the future rejected, if the Company were found to be providing Voice
Telephony, and such actions could have a
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material adverse effect on the Company. See "Risk Factors--Substantial
Government Regulation--European Union." Current Dutch law permits
competition with the ITO starting July 1, 1997, although it is possible
that such competition will not be permitted until later in 1997.
Germany. The regulation of the telecommunications industry in Germany is
governed by Telekommunikations-gesetz, the Telecommunications Act of 1996
("TKG"), which, with respect to most of its provisions, became effective in
August 1996. Under the TKG, a license ("TKG License") is generally required
by any person that: (i) operates transmission facilities for the provision
of telecommunications services to the public; or (ii) offers Voice
Telephony services to the public through telecommunications networks
operated by such provider. While the TKG represents the final phase of the
reform of the German telecommunications industry, the law will continue to
protect the monopoly rights of Deutsche Telecom over the provision of Voice
Telephony until January 1, 1998.
In Germany, the Company is currently providing calling card services as
well as traditional call-reorigination services (through answered or
unanswered call signaling), but anticipates that it will migrate CUGs and
other customers to call-reorigination services provided through
Internet/X.25 data link signaling, to transparent call-reorigination and/or
to forms of call-through other than transparent call-reorigination prior to
January 1, 1998, the date on which full competition with the ITO will be
permitted. The Company anticipates providing a range of enhanced
telecommunications services and switched voice services to business users,
including to CUGs, by routing traffic via the international switched
networks of competitors to the ITO. While the Company believes that it will
not be found to be offering Voice Telephony prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the ITO or from the respective regulatory authorities that this will be the
case. It is possible that the Company could be fined, or that the Company
would not be allowed to provide specific services, if the Company were
found to be providing Voice Telephony before January 1, 1998, or after that
date without obtaining a proper license, such actions could have a material
adverse effect on the Company's business, financial condition and results
of operations.
In order to provide the Voice Telephony services to the public that the
Company intends to provide after January 1, 1998, and expand its network
switching facilities in Germany, the Company will be required to obtain a
TKG License. Under the TKG, an applicant is entitled to the grant of a
license subject to certain public policy considerations set forth in the
statute. A license may be revoked if, among other things, continued
effectiveness would be contrary to statutory public policy considerations.
There can be no assurance that the Company will be able to obtain, or, if
granted, thereafter maintain, a TKG License. The failure to obtain, or the
loss of, a TKG License or the placement of significant restrictions thereon
could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, there can be no assurance
that any future changes in, or additions to, any existing or future German
laws, regulations, government policy, court or administrative rulings
regarding telecommunications will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Risk Factors--Substantial Government Regulation--European Union."
France. The Company currently provides call-reorigination services,
including transparent call-reorigination. The Company is permitted to
provide call-reorigination over the ITO's network in France without a
license. Although it does not currently provide such services, under
current law, the Company may lease circuits and provide switched voice
services to CUGs in France without a license. UntilJanuary 1, 1998, the
Company may not provide Voice Telephony to the public in France. The
Company anticipates that it will migrate CUGs and other customers to forms
of call-through other than call-reorigination prior to January 1, 1998. The
Company anticipates providing a range of enhanced telecommunications
services and switched voice services to business users, including to CUGs,
by routing traffic via the international switched networks of competitors
to the ITO. While the Company believes that it will not be found to be
offering Voice Telephony prior to the expiration of the ITO's monopoly on
such services, the Company has received no assurance from the ITO or from
the respective regulatory authorities that this will be the case. It is
possible that the Company could be fined, or that the Company would not be
allowed to provide certain services, if the Company were found to be
providing Voice Telephony before
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January 1, 1998, or after that date without obtaining a proper license.
Such actions could have a material adverse effect on the Company's
business, financial condition and results of operations.
A new telecommunications law, passed in 1996 to implement the Full
Competition Directive, establishes a licensing regime and an independent
regulator and imposes various interconnection and other requirements
designed to facilitate competition. Depending on the establishment of rules
to implement this new law, the Company expects to be in a position to
expand its services to include, for example, all forms of call-through
services in France which the Company expects to provide on a facilities-
based or on a resale basis. After January 1, 1998, if it decides to provide
switched voice services to the public, including call-through services, or
to own facilities, the Company will have to apply for a license from the
Minister of Telecommunications. There can be no guarantee, however, that
the Company will be able to obtain necessary licenses, permits, or
interconnection arrangements to fully take advantage of such
liberalization. The lack of timely liberalization or the Company's
inability to take advantage of such liberalization could have a material
adverse impact on the Company's ability to expand its services as planned.
Switzerland. In Switzerland, the Company is currently providing call-
reorigination services, but anticipates that it will migrate CUGs and other
customers to forms of call-through other than call-reorigination prior to
January 1, 1998, the date on which full competition with the ITO will be
permitted. The Company anticipates providing a range of enhanced
telecommunications services and switched voice services to business users,
including to CUGs, by routing traffic via the international switched
networks of competitors to the ITO. While the Company believes that it will
not be found to be offering Voice Telephony prior to the expiration of the
ITO's monopoly on such services, the Company has received no assurance from
the ITO or from the respective regulatory authorities that this will be the
case. It is possible that the Company could be fined, or that the Company
would not be allowed to provide specific services, if the Company were
found to be providing Voice Telephony before January 1, 1998, or after that
date without obtaining a proper license, such actions could have a material
adverse effect on the Company's business, financial condition and results
of operations. The Company's existing services are subject to the Federal
Law on Telecommunications of June 21, 1991 ("LTC"). Although Switzerland is
not an EU member state, the Swiss government has expressed its intention to
maintain Swiss telecommunications regulations in line with EU directed
liberalization. Towards that end, on October 1, 1996, the Swiss federal
government published a draft law (the "Draft Law") designed to increase
competition in the telecommunications industry and to guarantee "universal"
services for the entire Swiss population at reasonable prices. Upon
deregulation of the Swiss telecommunications market and subject to FCC
rules, the Company plans to expand operations in Switzerland through the
installation of additional switching facilities in Zurich and other
metropolitan areas of Switzerland connected via international private
leased circuits ("IPLCs") to its international gateway switching center to
provide international and national long distance services with switched and
dedicated access. Under the Draft Law, the Company would not be required to
obtain a license unless it controls the infrastructure over which its
services are carried. Accordingly, the Company's provision of its existing
and intended services would require the Company only to deliver
notification of such services to the government. There can be no assurance
that the Draft Law as currently proposed will be adopted. See "Risk
Factors--Substantial Government Regulation."
Pacific Rim. Regulation of the Company varies in the Pacific Rim, depending
upon the particular country involved. The Company's ability to provide voice
telephony services is restricted in all countries where the Company provides
service except Australia and New Zealand, although service between Australia or
New Zealand and other countries may be constrained by restrictions in the other
countries. In Australia and New Zealand, regulation of the Company's provision
of telecommunications services is relatively permissive, although enrollment
(in Australia) or registration (in New Zealand) with the regulator is required
for ISR. The Company's Australian subsidiary has enrolled in Australia as a
Supplier of Eligible International Services and its subsidiary in New Zealand
has registered with the Ministry of Commerce as an International Service
Operator under the Telecommunications International Services Regulations of
1995. Additionally, in Japan, the Company provides call-reorigination services
but may not provide basic switched voice services to the public. The Company
may, with a license, provide a broad array of value-added services, as well as
limited switched voice
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services to CUGs. The Japanese government has indicated that it will permit
carriers such as the Company to apply for ISR authority some time in 1997. In
Hong Kong, the Company may provide call-reorigination under its existing
license. A range of international telephone services, including the operation
of an international gateway for all incoming and outgoing international calls,
is provided in Hong Kong solely by HKTI, the ITO, pursuant to an exclusive
license which will expire on October 1, 2006. However, the Hong Kong
government has entered into discussions with HKTI concerning a possible early
termination of its exclusive license. In all other Pacific Rim countries, the
Company is strictly limited in its provision of public voice and value added
services.
While some countries in the Pacific Rim oppose call-reorigination, the
Company generally has not faced significant regulatory impediments. China,
Indonesia, and the Philippines have specifically informed the FCC that call-
reorigination using uncompleted call signaling is illegal in those countries.
Australia, New Zealand, Japan and Hong Kong permit call-reorigination.
Australia. In Australia, the provision of the Company's services is
currently subject to federal regulation pursuant to the Telecommunications
Act of 1991 of Australia (the "Telecom Act") and federal regulation of
anticompetitive practices pursuant to the Trade Practices Act 1974. In
addition, other federal legislation, various regulations pursuant to
delegated authority and legislation, ministerial declarations, codes,
directions, licenses, statements of Commonwealth Government policy and
court decisions affecting telecommunications carriers also apply to the
Company. There can be no assurance that future declarations, codes,
directions, licenses, regulations, and judicial and legislative changes
will not have a material adverse effect on the Company's business,
financial condition and results of operations.
The Australian Telecommunications Authority ("AUSTEL"), Australia's
federal telecommunications regulatory authority, currently has control over
a broad range of issues affecting the operation of the Australian
telecommunications industry, including the licensing of carriers, the
promotion of competition, consumer protection and technical matters. Under
the 1997 Act, AUSTEL's authority will be divided between the Australian
Communications Authority and the Australian Competition and Consumer
Commission.
The Company owns and operates a switch in Sydney that is connected to the
New York international gateway switch via leased lines. On December 9,
1996, the Company's subsidiary, Telegroup Network Services pty Limited, was
enrolled as a Supplier of Eligible International Services ("Class License")
under Section 226 of the Telecom Act, which allows the Company to resell
national, local and long distance service, cellular service, and
international service, including to engage an ISR. Under the Telecom Act,
the Company's Australian subsidiary must comply with the conditions of the
ISP's Class License until the 1997 Act comes into effect on July 1, 1997.
Under the 1997 Act, the Company's subsidiary will be subject to certain
service provider rules, including an obligation to provide certain operator
services, directory assistance services and itemized billing for customers
of the subsidiary. It is currently expected that the Australian Government
will allow additional carriers, including the Company, to own transmission
facilities in July 1997. The Company intends to become a carriage service
provider which would entitle the Company to purchase IRUs for the
Australian portion of the underseas fiber-optic cable between Sydney and
New York, as well as Auckland, New Zealand. The Company will be required to
comply with the rules applicable to carriage service providers. If the
Company or its affiliate purchases or constructs a link between places in
Australia (e.g., to provide an extension to its international services), it
will be required to apply with AUSTEL for a carrier license. It would then
be subject to the terms of its own license and would be subject to greater
regulatory controls such as in areas of regulation of connectivity,
provision of access to service providers, land access and contributions to
the net cost of universal service throughout Australia (to provide
telecommunications services at reasonable prices to remote sections of that
country) applicable to licensed facilities-based carriers.
Since Australia is not recognized by the FCC as an "equivalent" country,
the Company is not authorized by the FCC to use the Australian ISR license
between the U.S. and Australia, as is allowed in the United Kingdom.
Although the Company anticipates that such authorization will be
forthcoming in the
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near future, especially given the passage of the 1997 Act, there is no
guarantee that the FCC will find Australia to be "equivalent." In the
absence of such authorization, the Company's plans to expand in Australia
would be adversely affected. The Company has requested that the FCC grant a
waiver allowing the Company to deviate from the existing, FCC-approved
$0.22 per minute settlement rate and allow the Company to contract at $0.05
per minute, pursuant to an agreement with its subsidiary in Australia. The
Company has not initiated service pursuant to this agreement, and will not
begin providing such services unless and until the arrangement is approved
by the FCC.
There can be no assurance that a change in government, in government
policy in relation to telecommunications or competition, or in AUSTEL's
enforcement of the Telecom Act or in the enforcement of the 1997 Act, will
not have a material adverse effect on the Company's business, financial
condition and results of operations. For example, both Telstra and Optus
have requested that the Australian government defer such date, and there
can be no assurance that the deregulatory process will proceed in
accordance with the government's announced timetable. Any delay in such
deregulatory process or in the granting of licenses to other entities
interested in developing their own transmission facilities in Australia
could delay potential price reductions anticipated in a more competitive
marketplace, thereby delaying the Company's access to potentially less
expensive transmission and access facilities.
Hong Kong. The Company acts as a wholesale carrier in Hong Kong,
utilizing its switch colocated at the business premises of one or more of
the local carriers licensed at Fixed Telecommunications Network Service
("FTNS") operators in Hong Kong to provide international services to such
FTNS providers. The Company carries a substantial amount of such FTNS
operators' international traffic on a transparent call-reorigination basis.
The Company operates under a PNETS license granted in 1995 and renewable on
an annual basis. The Company's PNETS license was most recently renewed in
March 1997. The Company's PNETS license will likely be renewed unless there
has been a material breach of one of the license conditions.
The telecommunications market in Hong Kong for the provision of public
telephone services can be categorized into two primary areas: international
long distance services and local telephone services. HKTI currently holds
an exclusive license until September 30, 2006 to provide a variety of
international services including the right to operate an international
gateway for the handling of all outgoing and incoming international calls.
However, there have been reports in the Hong Kong press in recent months of
talks between the Hong Kong Government and HKTI over the possibility of
HKTI relinquishing its monopoly on a range of international
telecommunications services (including public international long distance
calls) by terminating its existing exclusive license, which is not due to
expire until October 1, 2006.
Prior to June 1995, the Hong Kong Telephone Company Limited was the sole
operator of local fixed network telephone services. Subsequently, the
market was liberalized and the Hong Kong government granted licenses to
Hutchison, New World and New T&T Hong Kong Limited to provide fixed local
telephone network services. Each of the four fixed local telephone network
operators each currently hold a FTNS license issued by the Hong Kong
government. The Company plans to apply for a FTNS license if and when the
Hong Kong government decides to grant additional FTNS licenses, which, the
Hong Kong government has indicated, will be no earlier than 1998. Despite
the fact that HKTI has the exclusive right under its license to provide
international telephone services, all three of the other local fixed
network operators have in recent years gained a significant share of the
international long distance call market (approximately 30% to 40% according
to the Company's estimates) by utilizing U.S. and Canada-based call-
reorigination services. See "Risk Factors--Substantial Government
Regulation" and "The International Telecommunications Industry--Competitive
Opportunities and Advances in Technology."
There can be no assurance that, upon resuming sovereignty over Hong Kong,
China will continue the existing licensing regime with respect to the Hong
Kong telecommunications industry. There is also no assurance that China
will continue to implement the existing policies of the Hong Kong
government with respect to promoting the liberalization of the Hong Kong
telecommunications industry in general, including the policy allowing call-
reorigination, which is currently prohibited in China. For the three months
ended March 31, 1997, one wholesale customer in Hong Kong, the Hong Kong
Customer, accounted for
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approximately 12% of the Company's total revenues. Substantially all of the
services provided by the Company to this customer consist of call-
reorigination services. The initial term of the Company's agreement with
the Hong Kong Customer expires in October 1998, automatically renews for
one-year periods, and may be terminated by the Hong Kong Customer if it
determines in good faith that the services provided pursuant to the
agreement are no longer commercially viable in Hong Kong. If the Company
loses its rights under its PNETS license and/or if it is unable to provide
international telecommunications services in Hong Kong on a wholesale
basis, such action could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
material reduction in the level of services provided by the Company to the
Hong Kong Customer, or a termination of the Company's agreement with the
Hong Kong Customer, could have a material adverse effect on the Company's
business, financial condition and results of operations.
Japan. The Company owns and operates a switch in Tokyo. In Japan, the
Company offers traditional call-reorigination services, and anticipates
offering call-through as well as customized calling card and debit calling
card services. The Company's services in Japan are subject to regulation by
the Ministry of Post and Telecommunications (the "Japanese Ministry") under
the Telecommunications Business Law (the "Japanese Law"). The Company has
filed notice with the Japanese Ministry as a General Type II carrier which
permits it to provide its current services. The Company is in the process
of seeking a Special Type II registration which will permit the Company to
provide additional services in Japan. There can be no assurance that the
Company will be able to register with the Japanese Ministry as a Special
Type II carrier. The Company's failure to obtain rights as a Special Type
II carrier, could have a material adverse effect on the Company's ability
to expand its operations in Japan and could materially adversely effect the
Company's business, financial condition and results of operations.
EMPLOYEES
As of March 31, 1997, the Company had 372 full-time and 115 part-time
employees. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that the Company's relationship with
its employees is satisfactory.
AGREEMENTS WITH INDEPENDENT AGENTS
Independent Agents. The Company's agreements with its independent agents
(other than Country Coordinators) typically provide for a two-year term and
require the agents to offer the Company's services at rates prescribed by the
Company and to abide by the Company's marketing and sales policies and rules.
Independent agent compensation is paid directly by the Company and is based
exclusively upon payment for the Company's services by customers obtained for
Telegroup by the independent agents. The commission paid to independent agents
ranges between five to twelve percent of revenues received by the Company and
varies depending on individual contracts, the exclusivity of the agent and the
type of service sold. Commissions are paid each month based on payments
received during the prior month from customers obtained by independent agents.
Independent agents are held accountable for customer collections and are
responsible for up to 40% of bad debt attributable to customers they enroll.
The Company may change commissions on any of its services with 30 days written
notice to the independent agent.
As of March 31, 1997, approximately one-third of the Company's retail
revenues was derived from customers enrolled by agents who are contractually
prohibited from offering competitive telecommunications services to their
customers during the term of their contract and typically for a period of two
years thereafter. Contracts with independent agents entered into by the
Company after to July 1996 typically provide for such exclusivity. As earlier
agreements expire, the Company has generally required its independent agents
to enter into such new agreements. In the past, certain independent agents
have elected to terminate their relationships with the Company in lieu of
entering into new independent agent agreements. In the event that independent
agents transfer a significant number of customers to other service providers
or that a significant number of agents decline to renew their contracts under
the new terms and move their customers to another carrier, either of such
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<PAGE>
events may have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's agreements with its
independent agents typically provide that the agents have no authority to bind
Telegroup or to enter into any contract on the Company's behalf.
Country Coordinators. In significant international markets, Telegroup
appoints Country Coordinators. Country Coordinators are typically self-
financed, independent agents, with contracts that bind them exclusively to
Telegroup. Country Coordinators also have additional duties beyond marketing
Telegroup services, including the responsibility in a country or region to
coordinate the activities of Telegroup independent agents including training
and recruitment, customer service and collections. As of March 31, 1997,
Telegroup had 30 Country Coordinators who were responsible for sales,
marketing, customer service and collections in 63 countries. Telegroup has
begun to vertically integrate its operations by opening offices in Germany and
the U.K. which provide Country Coordinator services and, in August 1996,
acquired the business operations of its Country Coordinator in France.
Country Coordinators offer the Company's services at rates prescribed by the
Company, and enforce standards for all advertising, promotional, and customer
training materials relating to Telegroup's services that are used or
distributed in the applicable country or region. Country Coordinators review
all proposed marketing or advertising material submitted to them by the
independent agents operating in their country or region and ensure such
agents' compliance with the Company's standards and policies. The Company's
agreements with its independent Country Coordinators typically have a two-year
term and include an exclusivity provision restricting the County Coordinator's
ability to offer competing telecommunication services. Such agreements
typically entitle the Country Coordinator to an override based on a percentage
of revenues collected by Telegroup from customers within the Country
Coordinator's country or region, as well as a commission similar to the
commission paid to independent agents with respect to customers obtained
directly by the Country Coordinator. The Company's agreements with its Country
Coordinators typically provide that the agents have no right to enter into any
contract on Telegroup's behalf or to bind Telegroup in any manner not
expressly authorized in writing. See "Risk Factors--Dependence on Independent
Agents; Concentration of Marketing Resources."
LEGAL MATTERS
The Company makes routine filings and is a party to customary regulatory
proceedings with the FCC relating to its operations. The Company is not a
party to any lawsuit or proceeding which, in the opinion of management, is
likely to have a material adverse effect on the Company's business, financial
condition and results of operations.
In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a former
Country Coordinator for South Africa, filed a complaint (the "Complaint")
against the Company in the United States District Court for the Southern
District of Iowa (the "Action") alleging, among other things, breach of
contract, wrongful termination and intentional interference with contractual
relations. The Complaint requests compensatory and exemplary damages. Although
the Company is vigorously defending the Action, Management believes that the
Company will ultimately prevail and does not believe the outcome of the
Action, if unfavorable, will have a material adverse effect on the Company's
business, financial condition or results of operations, there can be no
assurance that this will be the case.
INTELLECTUAL PROPERTY AND PROPRIETARY INFORMATION
Intellectual Property. The Company owns U.S. registration number 1,922,458,
for the mark TELEGROUP GLOBAL ACCESS(R) for international long distance
telecommunications services. The Company also owns a U.S. application for
registration of its service mark TELEGROUP (SM) No. 74/692,511, for domestic
and international long distance telephone telecommunications services and
electronic transmission of messages and data. In addition, the Company owns
several foreign applications and registrations for the marks TELEGROUP,
TELEGROUP TECHNOLOGIES, INTELLIGENT GLOBAL NETWORK, TELEGROUP INTELLIGENT
GLOBAL NETWORK, SPECTRA, GLOBAL ACCESS, TELEGROUP GLOBAL ACCESS, TELECARD, and
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<PAGE>
the TELEGROUP logo. The Company relies primarily on common law rights to
establish and protect its intellectual property, its name, products, and long
distance services. There can be no assurance that the Company's measures to
protect its intellectual property will deter or prevent the unauthorized use
of the Company's intellectual property. If the Company is unable to protect
its intellectual property rights, including existing trademarks and service
marks, it could have a material adverse effect upon the Company's business,
financial condition and results of operations.
Proprietary Information. To protect rights to its proprietary know-how and
technology, the Company requires certain of its employees and consultants to
execute confidentiality and invention agreements that prohibit the disclosure
of confidential information to anyone outside the Company. These agreements
also require disclosure and assignment to the Company of discoveries and
inventions made by such persons while employed by the Company. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for any such breach, or that the Company's confidential
information will not otherwise become known or be independently developed by
competitors or others.
PROPERTY
The Company leases certain office space under operating leases and subleases
that expire at various dates through October 31, 2001, including the Company's
principal headquarters in Fairfield, Iowa. The principal offices currently
leased or subleased by the Company are as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
- -------- -------------- ----------------
<S> <C> <C>
Fairfield, Iowa (Corporate Headquarters)...... 31,632 January 2001
Fairfield, Iowa (Various Offices)............. 35,000 Various
Coralville, Iowa (Network Operations Center).. 7,200 October 2001
Dusseldorf, Germany (Sales and Customer 2,100
Service Office).............................. April 1999
London, England (Sales and Customer Service 1,200
Office)...................................... April 2001
Paris, France (Sales and Customer Service 1,600
Office)...................................... September 1999
</TABLE>
The Company's switches in New York City, Australia, France, Japan, Hong
Kong, the Netherlands and the U.K. are located in various facilities pursuant
to separate colocation agreements. The Company's aggregate rent expense for
its domestic and international operations, excluding costs relating to
colocation agreements, was $682,630 in 1996.
The Company recently purchased 39 acres in Fairfield, Iowa, on which it
intends to build its new corporate headquarters. The Company also has an
option to purchase an adjacent 26 acres.
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MANAGEMENT
The following table sets forth certain information regarding the Company's
directors, executive officers and certain other officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Fred Gratzon............. 51 Chairman of the Board and Director
Clifford Rees ........... 45 President, Chief Executive Officer and Director
John P. Lass............. 46 Senior Vice President and Chief Operating Officer
Ronald B. Stakland....... 44 Senior Vice President--International Marketing and
Operations and Director
Douglas A. Neish......... 41 Vice President--Finance, Chief Financial Officer,
Treasurer and Director
Stanley Crowe............ 51 Vice President--North America
Michael Lackman.......... 46 Vice President--Intelligent Networks
Eric E. Stakland......... 45 Vice President--Global Carrier Services
Ronald L. Jackenthal..... 33 Vice President--North American Carrier Sales
Robert E. Steinberg...... 42 Vice President and General Counsel
</TABLE>
Within 90 days following completion of the Offering, the Company intends to
elect two additional persons to the Company's Board of Directors who will be
independent directors. Such independent directors will not be employees of the
Company. Richard P. DeAngelis, formerly Vice President--Sales and Marketing of
the Company, was employed by the Company from 1993 until May 30, 1997.
Fred Gratzon, a co-founder of the Company, has served as Chairman of the
Company's Board of Directors and a Director since its formation in 1989. Mr.
Gratzon founded The Great Midwestern Ice Cream Company in Fairfield, Iowa, in
1979 and served as its Chairman from 1979 to 1988. Mr. Gratzon received a BA
in fine arts from Rutgers University in 1968.
Clifford Rees, a co-founder of the Company, has served as President, Chief
Executive Officer and a Director of the Company since its formation in 1989.
Prior to co-founding Telegroup, Mr. Rees was a co-founder of Amerex Petroleum
Corporation, a multinational oil brokerage company. Mr. Rees has been a member
of the Board of Directors of the Telecommunications Resellers Association
("TRA") since its inception, and was the founding chairman of the TRA's
International Resale Council, which advises the TRA Board of Directors on
issues concerning the expansion of telecommunications resale throughout the
world. Mr. Rees received a BA, summa cum laude, in biochemistry from Michigan
State University in 1974.
John P. Lass has served as Senior Vice President and Chief Operating Officer
of the Company since January 1, 1997. Prior to joining the Company, from
November 1987 through December 1996, Mr. Lass served as Director and President
of Capital Management Partners, Inc., an NASD-registered broker-dealer firm.
During the same period, Mr. Lass was also Director and President of Everest
Asset Management, Inc., an investment management firm. From 1983 to 1987, Mr.
Lass served as Investment Manager for the Zimmerman Capital Group and from
1982 to 1983, Mr. Lass was a consultant with the Boston Consulting Group. Mr.
Lass received an MBA from Harvard Business School in 1982, where he graduated
as a Baker Scholar. Mr. Lass received a BA from the University of Washington
in 1972.
Ronald B. Stakland has served as Senior Vice President of International
Marketing and Operations of the Company since 1992 and as a Director since
April 1997. Prior to joining the Company, Mr. Stakland was a broker for Prime
Energy, Inc., an oil brokerage company from January 1988 to August 1992. Mr.
Stakland received a BFA from the University of Minnesota in 1975.
Douglas A. Neish has served as Vice President of Finance of the Company
since November 1995, Treasurer since October 1996 and Chief Financial Officer
and a Director since April 1997. From 1990 to 1995, Mr. Neish served as Deputy
Treasurer for Canada Mortgage and Housing Corporation and from 1988 to 1990 as
Vice President of Canada Development Investment Corporation ("CDIC"). Prior to
his position with CDIC, from
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1979 to 1988, Mr. Neish was employed by Export Development Corporation where
he served in a number of positions including Senior Treasury Officer and
Manager of Marketing. Mr. Neish received a BA from Acadia University, Nova
Scotia, Canada in 1976 and an MBA from Dalhousie University, Nova Scotia,
Canada in 1979.
Stanley Crowe has served as Vice President of North America of the Company
since 1993. Prior to joining the Company, Mr. Crowe was a manager for Mall
Network Services, a telecommunications consulting and management firm from
1990 to 1993. Prior to his position with Mall Network Services, Mr. Crowe
served as Vice President of Marketing of Guild Investment Management, a
national investment management firm, from 1988 to 1990 and President of
Stanley Crowe & Associates (predecessor to Oakwood Corp.), a real estate
development and brokerage firm, from 1979 to 1986. Mr. Crowe received a BA
from the University of California in 1968.
Michael Lackman has served as Vice President of Intelligent Networks of the
Company since 1994. Mr. Lackman served as Senior Manager at MCI from 1991 to
1994, where he was responsible for managing global development projects for
MCI and its alliance partners. From 1988 to 1991, Mr. Lackman was development
manager for Computer Associates, Inc. From 1980 to 1988, Mr. Lackman was a
consultant with the Resource Consulting Group. From 1978 to 1980, he served as
a system administrator with the California Institute of Technology. He
received his BS in Computer Science from the University of Oregon in 1975.
Eric E. Stakland has served as Vice President of Global Carrier Services
since 1995. Prior to joining the Company, Mr. Stakland was Chief Executive
Officer of Impact Solutions, Inc. (also known as Fiberflex, Inc.), a golf club
manufacturing and marketing company based in Fairfield, Iowa, from July 1993
to October 1994. Prior to May 1993, Mr. Stakland was Chief Operating Officer
of USA Global Link, a telecommunications company. Mr. Stakland received a BSCI
from Maharishi European Research University in 1983 and an MBA from Maharishi
University of Management in 1985.
Ronald L. Jackenthal has served as Vice President of North American Carrier
Sales since May 1997. Prior to joining the Company, Mr. Jackenthal served as
National Director, Carrier Sales for Cable & Wireless, Inc., the U.S.
subsidiary of Cable & Wireless, PLC. Beginning in 1987, Mr. Jackenthal held
various positions at Cable & Wireless, including Manager Carrier Sales from
1993 to 1995 and National Manager, Major Accounts, from 1990 to 1993. Mr.
Jackenthal received a B.A. from the University of Florida in 1987.
Robert E. Steinberg has served as Vice President and General Counsel of the
Company since June 9, 1997. Prior to joining the Company, Mr. Steinberg served
from 1988 to May 1997 as Managing Partner of the Washington, D.C. office of
Porter, Wright, Morris & Arthur (a 250 attorney law firm based in Ohio). Mr.
Steinberg served from 1983 to 1986 as Special Assistant to U.S. Attorney
General William French Smith and as Special Litigation Counsel at the U.S.
Department of Justice. Mr. Steinberg is the author of five books and thirty
articles on regulatory and litigation topics, including in law journals at
Yale and Columbia law schools. Mr. Steinberg received a B.A. in 1976 and J.D.
in 1979 from Washington University.
All directors of the Company currently hold office until the next annual
meeting of the Company's shareholders or until their successors are elected
and qualified. Immediately prior to completion of the Offering, the Company's
Board of Directors will be divided into three classes serving staggered three-
year terms. See "Risk Factors--Antitakeover Considerations." At each annual
meeting of the Company's shareholders, successors to the class of directors
whose term expires at such meeting will be elected to serve for three-year
terms and until their successors are elected and qualified. Officers are
elected by, and serve at the discretion of, the Board of Directors. See
"Description of Capital Stock--Certain Provisions of the Company's Articles
and Bylaws."
Except for Eric E. Stakland and Ronald B. Stakland, who are brothers, there
are no family relationships among any of the directors and executive officers
of the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. After completion of the Offering, the Board of Directors
will establish an Audit Committee. The Audit Committee will be comprised
solely of independent directors and will be charged with
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recommending the engagement of independent accountants to audit the Company's
financial statements, discussing the scope and results of the audit with the
independent accountants, reviewing the functions of the Company's management
and independent accountants pertaining to the Company's financial statements
and performing such other related duties and functions as are deemed
appropriate by the Audit Committee and the Board of Directors.
Compensation Committee. After completion of the Offering, the Board of
Directors will establish a Compensation Committee. The Compensation Committee
will be comprised of "disinterested persons" or "Non-Employee Directors" as
such term is used in Rule 16b-3 promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), and "outside directors" as such term
is used in Treasury Regulation Section 1.162-27(c)(3) promulgated under the
Internal Revenue Code of 1986, as amended (the "Code"). The Compensation
Committee will be responsible for reviewing general policy matters relating to
compensation and benefits of employees and officers, determining the total
compensation of the officers and directors of the Company and administering
the Company's Stock Option Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee during fiscal
year 1996. As a result, Messrs. Gratzon and Rees, executive officers and the
only members of the Board of Directors in 1996, participated in deliberations
concerning executive officer compensation, including their own compensation.
After completion of the Offering, the Board of Directors will establish a
Compensation Committee comprised of directors who are not executive officers
or employees of the Company.
DIRECTOR REMUNERATION
After completion of the Offering, directors who are not employees of the
Company will receive an annual fee, a meeting fee for every board meeting
attended and each committee meeting held separately and a fee for each
telephonic board meeting or telephonic committee meeting held separately. The
Company is in the process of determining such fees. All directors will be
reimbursed for out-of-pocket expenses incurred in connection with attendance
at board and committee meetings. The Company may, from time to time and in the
sole discretion of the Company's Board of Directors, grant options to
directors under the Company's Stock Option Plan.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
the Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company, whose aggregate cash and cash
equivalent compensation exceeded $100,000 (collectively, the "Named
Officers"), with respect to the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------- ------------
SECURITIES
NAME OF INDIVIDUAL AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#) COMPENSATION ($)
---------------------- ---------- --------- ---------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Clifford Rees........... $690,000 $250,000 -- -- --
Chief Executive Officer
Fred Gratzon............ 600,000 250,000 -- -- --
Chairman of the Board
Ronald B. Stakland...... 250,000 71,417 -- -- --
Senior Vice President-
International Services
Michael Lackman......... 111,000 38,000 -- -- --
Vice President-
Intelligent Networks
Richard P. DeAngelis(2). 44,418 85,147 -- 148,732 $183,732(1)
Vice President-Sales &
Marketing
</TABLE>
- --------
(1)Represents payments by the Company to such individuals for earned
commissions.
(2)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.
STOCK OPTION GRANTS
The following table sets forth certain information regarding grants of
options to purchase Common Stock made by the Company during the fiscal year
ended December 31, 1996, to each of the Named Officers. No stock appreciation
rights were granted during 1996.
OPTION GRANTS IN 1996
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM ($) (2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------------
NAME GRANTED 1996 (%) (1) ($/SHARE) DATE (5%) (10%)
---- ---------- ------------- --------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard P.
DeAngelis(3)........... 148,732(4) 9.07% $1.31 1/1/06 $ 122,533 $ 310,523
</TABLE>
- --------
(1) The Company granted options to purchase a total of 1,639,570 shares of
Common Stock in 1996.
(2) Represents amounts that may be realized upon exercise of options
immediately prior to the expiration of their term assuming the specified
compounded rates of appreciation (5% and 10%) on the Common Stock over the
terms of the options. These assumptions do not reflect the Company's
estimate of future stock price appreciation. Actual gains, if any, on the
stock option exercises and Common Stock holdings are dependent on the
timing of such exercise and the future performance of the Common Stock.
There can be no assurance that the rates of appreciation assumed in this
table can be achieved or that the amounts reflected will be received by
the option holder.
(3)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.
(4) One half, or 74,366 shares, are performance based options conditioned upon
reaching certain sales objectives. Such sales objectives were met during
the fourth quarter of 1996.
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OPTION EXERCISES AND HOLDINGS
The following table sets forth certain information as of December 31, 1996,
regarding options to purchase Common Stock held by each of the Named Officers.
None of the Named Officers exercised any stock options or stock appreciation
rights during fiscal year 1996.
FISCAL 1996 YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL YEAR- "IN-THE-MONEY" OPTIONS AT
END (#) FISCAL YEAR-END ($) (1)
------------------------- -------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard P.
DeAngelis(2)........... 148,732 -- $973,080 --
</TABLE>
- --------
(1) Options are "in the money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set forth
represent the difference between $7.85 per share, the market value of the
Common Stock issuable upon exercise of options at December 31, 1996 (as
determined by the Board of Directors), and the exercise price of the
option, multiplied by the applicable number of shares underlying the
options.
(2)Mr. DeAngelis was employed by the Company from 1993 until May 30, 1997.
EMPLOYMENT AGREEMENTS
On April 7, 1997, the Company entered into employment agreements (the
"Employment Agreements") with each of Mr. Gratzon and Mr. Rees pursuant to
which Mr. Gratzon has agreed to serve as Chairman of the Board and Mr. Rees has
agreed to serve as President and Chief Executive Officer of the Company. The
Employment Agreements provide for an annual base salary for each of Mr. Gratzon
and Mr. Rees of $500,000 and incentive compensation of up to $500,000. The
incentive compensation component of the Employment Agreements will be
calculated and shared equally between Mr. Gratzon and Mr. Rees as follows: (i)
a total of $1 million if EBT (as defined below) for the immediately preceding
year is $2 million or more and; (ii) the excess of EBT over $1 million if EBT
for the immediately preceding year is between $1 million and $2 million. As
defined more particularly in the Employment Agreements "EBT" is equal to the
sum of net income of the Company and its subsidiaries, plus any provision for
income taxes deducted in computing net income. The Employment Agreements
provide that any additional annual base salary and incentive compensation will
be at the discretion of the Compensation Committee, will be commensurate with
bonuses paid to other employees of the Company and will take into account total
compensation paid to executives of competitors of the Company.
The Employment Agreements expire on December 31, 2000, unless earlier
terminated in accordance with their terms. In addition, the Employment
Agreements contain a non-competition covenant which prohibits Mr. Rees and Mr.
Gratzon from, during the term of their employment with the Company and for a
period of one year following the termination of the Employment Agreements in
most circumstances, working for any company that competes with the Company as
of the date of termination, without the written consent of the Company.
Prior to the completion of the Offering, the Company anticipates entering
into additional employment agreements with certain executive officers.
INDEMNIFICATION AGREEMENTS
Prior to completion of the Offering, the Company intends to enter into
indemnification agreements with certain of its executive officers and directors
(collectively, the "Indemnification Agreements"). Pursuant to the terms of the
Indemnification Agreements, each of the executive officers and directors who
are parties thereto will be indemnified by the Company to the full extent
provided by law in the event such officer or director is made or threatened to
be made a party to a claim arising out of such person acting in his capacity as
an officer or director of the Company. The Company has further agreed that,
upon a change in control, as defined in the Indemnification Agreements, the
rights of such officers and directors to indemnification payments and expense
advances will be determined in accordance with the provisions of the Iowa
Business Corporation Act and that, upon a potential change of control, as
defined in the Indemnification Agreements, it will create a trust in an
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amount sufficient to satisfy all indemnity expenses reasonably anticipated at
the time a written request to create such a trust is submitted by an officer
or director.
AMENDED AND RESTATED STOCK OPTION PLAN
On April 9, 1997, the Board of Directors of the Company adopted and the
shareholders of the Company approved the Amended and Restated 1996 Stock
Option Plan (the "Stock Option Plan"), which provides for the grant to
officers, key employees and directors of the Company and its subsidiaries of
both "incentive stock options" within the meaning of Section 422 of the Code,
and stock options that are non-qualified for federal income tax purposes. The
total number of shares for which options may be granted pursuant to the Stock
Option Plan is 4,000,000 and the maximum number of shares for which options
may be granted to any person is 1,875,000 shares, subject to certain
adjustments to reflect changes in the Company's capitalization. The Stock
Option Plan is currently administered by the Company's Board of Directors.
Upon the completion of the Offering, the Stock Option Plan will be
administered by the Compensation Committee. The Compensation Committee will
determine, among other things, which officers, employees and directors will
receive options under the plan, the time when options will be granted, the
type of option (incentive stock options, non-qualified stock options, or both)
to be granted, the number of shares subject to each option, the time or times
when the options will become exercisable, and, subject to certain conditions
discussed below, the option price and duration of the options. Members of the
Compensation Committee are not eligible to receive options under the Stock
Option Plan, but are entitled to receive options as directors.
The exercise price of incentive stock options are determined by the
Compensation Committee, but may not be less than the initial public offering
price if granted prior to the Offering or the fair market value of the Common
Stock on the date of grant if granted after the Offering and the term of any
such option may not exceed ten years from the date of grant. With respect to
any participant in the Stock Option Plan who owns stock representing more than
10% of the voting power of all classes of the outstanding capital stock of the
Company or of its subsidiaries, the exercise price of any incentive stock
option may not be less than 110% of the fair market value of such shares on
the date of grant and the term of such option may not exceed five years from
the date of grant.
The exercise price of non-qualified stock options are determined by the
Compensation Committee on the date of grant. In the case of non-qualified
stock options granted on or before the earliest of (i) the expiration or
termination of the Stock Option Plan; (ii) the material modification of the
Stock Option Plan; (iii) the issuance of all options under the Stock Option
Plan; or (iv) the first meeting of shareholders at which Directors are elected
occurring after the year 2000 (the "Reliance Period"), the exercise price of
such options may not be less than the initial public offering price if granted
prior to the Offering or the fair market value of the Common Stock on the date
of grant if granted after the Offering. In the case of non-qualified stock
options granted after the Reliance Period, the exercise price of such options
may not be less than the fair market value of the Common Stock on the date of
grant. In either case, the term of such options may not exceed ten years from
the date of grant.
Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of Common Stock having a fair market value
in the aggregate equal to the option price. Options granted pursuant to the
Stock Option Plan are not transferable, except by will or the laws of descent
and distribution. During an optionee's lifetime, the option is exercisable
only by the optionee.
The Compensation Committee has the right at any time and from time to time
to amend or modify the Stock Option Plan, without the consent of the Company's
shareholders or optionees; provided, that no such action may adversely affect
options previously granted without the optionee's consent, and provided
further that no such action, without the approval of a majority of the
shareholders of the Company, may increase the total number of shares of Common
Stock which may be purchased pursuant to options under the Stock Option Plan,
increase the total number of shares of Common Stock which may be purchased
pursuant to options under the Stock Option Plan by any person, expand the
class of persons eligible to receive grants of options under the Stock Option
Plan, decrease the minimum option price, extend the maximum term of options
granted under the Stock Option
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Plan, extend the term of the Stock Option Plan or change the performance
criteria on which the granting of options is based. The expiration date of the
Stock Option Plan after which no option may be granted thereunder, is April 1,
2007.
Promptly after the completion of the Offering, the Company expects to file
with the Commission a registration statement on Form S-8 covering the shares
of Common Stock underlying options granted under the Stock Option Plan.
As of December 31, 1996, options to purchase an aggregate of 1,635,438
shares of Common Stock were granted and outstanding under the original 1996
Stock Option Plan and a total of 500,954 shares of Common Stock remained
available for future grants under such plan. The outstanding options were held
by 320 individuals and were exercisable at $1.31 per share. During 1996,
certain stock options were granted with exercise prices below the estimated
fair market value of such shares. As a result, the Company recognized stock
option based compensation of $1,032,646 during the year ended December 31,
1996. Shares subject to options granted under the plan that have lapsed or
terminated may again be subject to options granted under the plan.
Certain Federal Income Tax Consequences. The following discussion is a
summary of the principal United States federal income tax consequences under
current federal income tax laws relating to option grants to employees under
the Stock Option Plan. This summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign income and other
tax consequences.
An optionee will not recognize any taxable income upon the grant of a non-
qualified option and the Company will not be entitled to a tax deduction with
respect to such grant. Generally, upon exercise of a non-qualified option, the
excess of the fair market value of the Common Stock on the exercise date over
the exercise price will be taxable as compensation income to the optionee.
Subject to the discussion below with respect to Section 162(m) of the Code and
the optionee including such compensation in income or the Company satisfying
applicable reporting requirements, the Company will be entitled to a tax
deduction in the amount of such compensation income. The optionee's tax basis
for the Common Stock received pursuant to such exercise will equal the sum of
the compensation income recognized and the exercise price. Special rules may
apply in the case of an optionee who is subject to Section 16 of the Exchange
Act.
In the event of a sale of Common Stock received upon the exercise of a non-
qualified option, any appreciation or depreciation after the exercise date
generally will be taxed to the optionee as capital gain or loss and will be
long-term capital gain or loss if the holding period for such Common Stock was
more than one year.
Subject to the discussion below, an optionee will not recognize taxable
income at the time of grant or exercise of an "incentive stock option" and the
Company will not be entitled to a tax deduction with respect to such grant or
exercise. The exercise of an "incentive stock option" generally will give rise
to an item of tax preference that may result in alternative minimum tax
liability for the optionee.
Generally, a sale or other disposition by an optionee of shares acquired
upon the exercise of an "incentive stock option" more than one year after the
transfer of the shares to such optionee and more than two years after the date
of grant of the "incentive stock option" will result in any difference between
the amount realized and the exercise price being treated as long-term capital
gain or loss to the optionee, with no deduction being allowed to the Company.
Generally, upon a sale or other disposition of shares acquired upon the
exercise of an "incentive stock option" within one year after the transfer of
the shares to the optionee or within two years after the date of grant of the
"incentive stock option," any excess of (i) the lesser of (a) the fair market
value of the shares at the time of exercise of the option and (b) the amount
realized on such sale or other disposition over (ii) the exercise price of
such option will constitute compensation income to the optionee. Subject to
the discussion below with respect to Section 162(m) of the Code and the
optionee including such compensation in income or the Company satisfying
applicable reporting requirements, the Company will be entitled to a deduction
in the amount of such compensation income. The excess of the amount realized
on such sale or disposition over the fair market value
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of the shares at the time of the exercise of the option generally will
constitute short-term or long-term capital gain and will not be deductible by
the Company.
Section 162(m) of the Code disallows a federal income tax deduction to any
publicly held corporation for compensation paid in excess of $1,000,000 in any
taxable year to the chief executive officer or any of the four other most
highly compensated executive officers who are employed by the corporation on
the last day of the taxable year. Under regulations promulgated under Section
162(m), the deduction limitation of Section 162(m) does not apply to any
compensation paid pursuant to a plan that existed during the period in which
the corporation was not publicly held, to the extent the prospectus
accompanying the initial public offering disclosed information concerning such
plan that satisfied all applicable securities laws. However, the foregoing
exception may be relied upon only for awards made before the earliest of (i)
the expiration of the plan; (ii) the material modification of the plan; (iii)
the issuance of all stock allocated under the plan; or (iv) the first meeting
of shareholders at which directors are elected occurring after the close of
the third calendar year following the calendar year in which the initial
public offering occurs (the "Reliance Period"). The compensation attributable
to awards granted under the Company's Stock Option Plan during the Reliance
Period is not subject to the deduction limitation of Section 162(m). The
Company has structured and implemented the Stock Option Plan in a manner so
that compensation attributable to awards made after the Reliance Period will
not be subject to the deduction limitation.
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CERTAIN TRANSACTIONS
SUBORDINATED NOTE PRIVATE PLACEMENT
On November 27, 1996, Telegroup issued $20 million in aggregate principal
amount of 12% Senior Subordinated Notes to Greenwich Street Capital Partners,
L.P. and its affiliated funds. The Company intends to use a portion of the net
proceeds of the Offering to prepay in full the Senior Subordinated Notes.
In connection with the Senior Subordinated Note private placement (the
"Subordinated Note Private Placement"), the Company also issued warrants (the
"Warrants") to the holders of the Senior Subordinated Notes to purchase 4.0%
of the issued and outstanding shares of Common Stock on a fully diluted basis,
exercisable at a nominal exercise price at any time prior to November 28,
2003. In the event that the Company does not complete the Offering prior to
July 1, 1997 or January 1, 1998, the holders of the Warrants will have the
right to acquire up to an additional 0.5% and 1.0%, respectively, of the
issued and outstanding shares of Common Stock on a fully diluted basis on such
dates, less certain excluded shares. The Warrants provide that excluded shares
include the following: (i) shares of Common Stock issued in a qualified public
offering; (ii) shares of Common Stock issued, other than in a qualified public
offering, at fair market value; (iii) shares of Common Stock that are (a)
issued or issuable pursuant to options that have fair market value exercise
prices and (b) granted to employees of the Company (other than to Messrs.
Gratzon or Rees), but only up to 7.5% of the sum of shares issued in (i) and
(ii) above; and (iv) shares of Common Stock that are (a) issued or issuable
pursuant to options that have fair market value exercise prices, (b) granted
to employees of the Company (other than to Messrs. Gratzon or Rees) and (c)
issued after a qualified public offering, but only up to the excess of 496,465
over the number of shares of Common Stock granted to employees in respect of
options prior to the closing of a qualified initial public offering.
The Warrants contain certain customary antidilution protection in the event
of stock splits, stock dividends, reorganizations and other similar events.
Pursuant to a registration rights agreement with the Company (the "Warrant
Shares Registration Rights Agreement"), a majority of the holders of the
Warrants are entitled to demand registration of their shares once in each of
the two years following the Offering, provided that any exercise must include
at least twenty percent (20%) of the shares into which the Warrants are
exercisable (the "Warrant Shares").
The holders of the Warrants also have piggyback registration rights with
respect to all registrations by the Company (other than a registration
statement filed on Form S-4 or S-8), including the Offering, pursuant to the
following priority rules: (i) in the case of the Offering, the Company has
first priority, the holders of the Warrants have second priority (with respect
to up to fifty percent (50%) of the outstanding Warrant Shares), other
shareholders have third priority (up to four percent (4%) of the issued and
outstanding shares of Common Stock prior to the Offering), and thereafter the
holders of the Warrants and other shareholders share on a one-third and two-
thirds basis, respectively; (ii) in the case of all other underwritten
offerings the Company has first priority, and the holders of the Warrants and
other shareholders (with rights to participate in the offering) have second
priority, pro rata with their holdings; and (iii) in all other offerings, the
Company has first priority, other shareholders with demand registration rights
have second priority, and the holders of the Warrants and all holders of
piggyback registration rights have third priority, pro rata with their
holdings.
Pursuant to the terms of the Warrant Shares Registration Rights Agreement,
the Company has agreed to (i) pay all fees and expenses incurred with any
registration, except for all underwriting discounts and commissions relating
to the Common Stock sold on behalf of such holders which will be borne by the
holders thereof, and (ii) indemnify the holders of the Warrants in connection
with any registration effected pursuant to the Warrant Shares Registration
Rights Agreement, including liabilities under the Securities Act.
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PRINCIPAL SHAREHOLDERS REGISTRATION RIGHTS AGREEMENT
Prior to completion of the Offering, the Company and each of Clifford Rees,
Fred Gratzon, Shelly Levin-Gratzon and Ronald Stakland (the "Principal
Shareholders") will enter into a registration rights agreement (the "Principal
Shareholders Registration Rights Agreement") granting the Principal
Shareholders and certain other shareholders demand and incidental registration
rights in connection with their ownership of shares of Common Stock. See
"Description of Capital Stock--Registration Rights--Principal Shareholders."
ACQUISITION OF COUNTRY COORDINATOR'S OPERATIONS
The Company acquired substantially all of the assets of Telegroup South
Europe, Inc., a Pennsylvania corporation ("TGSE") and Telecontinent, S.A., a
French company ("Telecontinent"). George Apple, the Company's Country
Coordinator in France, owned all of the issued and outstanding shares of TGSE
and substantially all of the shares of Telecontinent. Pursuant to separate
agreements, the Company paid Mr. Apple aggregate consideration of $1,031,547
in cash and 263,488 shares of the Company's Common Stock for TGSE and
Telecontinent.
LOANS TO CERTAIN EXECUTIVE OFFICERS
The Company has from time to time made various personal loans to Messrs.
Gratzon and Rees, the Chairman of the Board and President, respectively. Mr.
Gratzon received loans from the Company, during 1996, in the aggregate amount
of $162,318, at an interest rate equal to 12% per annum, all of which were
repaid in full by Mr. Gratzon in November 1996. The largest aggregate amount
of indebtedness owed by Mr. Gratzon to the Company at any time during 1996 was
$162,318.
Mr. Rees received loans from the Company during 1994 and 1995, and in
October 1996 in the aggregate amount of $135,878, at interest rates equal to
12% per annum. These loans were repaid in full by Mr. Rees in November 1996.
The largest aggregate amount of indebtedness owed by Mr. Rees to the Company
at any time during 1996 was $135,878.
MANAGEMENT AGREEMENT
During 1994, 1995 and a portion of 1996, the Company had a management
agreement with an affiliate of the Company owned by Messrs. Gratzon and Rees
pursuant to which it paid a management fee, determined annually, plus an
incentive fee based upon performance, to Messrs. Gratzon and Rees. Amounts
paid to Messrs. Gratzon and Rees under this agreement totaled $1,155,000,
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The
management agreement was terminated on May 15, 1996.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 22, 1997 (assuming the
Recapitalization had occurred as of the dates presented, except as otherwise
indicated) as adjusted to reflect the sale of Common Stock being offered
hereby by (i) each person known by the Company to beneficially own five
percent or more of any class of the Company's capital stock, (ii) each
director of the Company, (iii) each executive officer of the Company that is a
Named Officer, (iv) all directors and executive officers of the Company as a
group and (v) each selling shareholder. All information with respect to
beneficial ownership has been furnished to the Company by the respective
shareholders of the Company.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK PERCENT PRIOR
BENEFICIALLY OWNED PRIOR TO THIS PERCENT AFTER
BENEFICIAL OWNER TO OFFERING (1) OFFERING(2) THIS OFFERING(3)(4)
- ---------------- ------------------------ ------------- -------------------
<S> <C> <C> <C>
Fred and Shelley
Gratzon................ 11,898,624(5)(6) 45.2% 35.5%
Clifford Rees........... 11,744,383(6)(7) 44.6% 35.0%
Greenwich Street Capital
Partners, L.P. and its
affiliated funds....... 1,180,002(8) 4.3% 3.4%
Ronald B. Stakland...... 782,560(9) 3.0% 2.3%
Michael Lackman......... 521,705 2.0% 1.6%
Douglas A. Neish........ 121,190 * *
Richard P. DeAngelis.... 154,859 * *
Steven Rubin............ 394,092(10) 1.5% 1.2%
Steven Foster........... 394,092(10) 1.5% 1.2%
All directors and
executive officers as a
group
(10 persons)........... 25,305,950 94.8% 74.6%
</TABLE>
- --------
* Represents beneficial ownership of less than 1% of the outstanding shares
of Common Stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of Common
Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of May 22, 1997 are
deemed outstanding. Such shares, however, are not deemed outstanding for
the purposes of computing the percentage of ownership of any other
person. Except as otherwise indicated, and subject to community property
laws where applicable, the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as owned by them. Except as otherwise indicated, the address of
each of the persons in this table is as follows: c/o Telegroup, Inc.,
2098 Nutmeg Avenue, Fairfield, Iowa 52556.
(2) Assumes 26,348,809 shares of Common Stock outstanding prior to the
Offering, exercisable Warrants of 1,180,002 shares of Common Stock, and
exercisable options to purchase a total of 1,971,189 shares of Common
Stock.
(3) Assumes no exercise of the over-allotment options.
(4) Assumes 33,548,809 shares of Common Stock outstanding after the Offering,
exercisable Warrants of 1,180,002 shares of Common Stock, and exercisable
options to purchase a total of 1,971,189 shares of Common Stock.
(5) Represents (i) 5,949,312 shares of Common Stock owned by Fred Gratzon and
Shelley Levin-Gratzon as joint tenants, (ii) 2,251,305 shares of Common
Stock held by the Fred Gratzon Revocable Trust, (iii) 2,251,305 shares of
Common Stock held by the Shelley L. Levin-Gratzon Revocable Trust, (iv)
1,271,825 shares of Common Stock owned by the Gratzon Family Partnership
II, L.P., a Georgia limited partnership, and (v) 174,877 shares of Common
Stock owned by the Gratzon Family Partnership I, L.P., a Georgia limited
partnership. Fred Gratzon and Shelley Levin-Gratzon are husband and wife,
and together they (i) serve as trustees of the two trusts referenced in
the prior sentence and (ii) own and/or control the general partners of
the two partnerships referenced in the prior sentence. Fred Gratzon is
the sole beneficiary of the Fred Gratzon Revocable Trust and Shelley
Levin-Gratzon is the sole beneficiary of the Shelley L. Levin-Gratzon
Revocable Trust.
(6) It is currently anticipated that each of Mr. Clifford Rees and Fred and
Shelley Gratzon will grant the Underwriters an over-allotment option with
respect to 236,885 shares of Common Stock.
(7) Represents (i) 4,781,484 shares of Common Stock owned by Lakshmi
Partners, L.P., a Georgia limited partnerhsip, of which a corporation
owned and/or controlled by Mr. Rees serves as the general partner, and
(ii) 6,962,899 shares of Common Stock are held by a revocable trust of
which Mr. Rees is the trustee and sole beneficiary.
(8) The address of Greenwich Street Capital Partners, L.P. is 388 Greenwich
Street, New York, New York 10013. It is currently anticipated that
Greenwich Street Capital Partners, L.P. and its affiliated funds will
grant the Underwriters an over-allotment option with respect to 590,001
shares of Common Stock as follows: Greenwich Street Capital Partners,
L.P. (427,268), Greenwich Street Capital Offshore Fund, Ltd. (26,038),
TRV Employees Fund, L.P. (104,394), Travelers Insurance Company (21,641)
and Travelers Life and Annuity Company (10,660).
(9) Represents (i) 666,879 shares of Common Stock owned by Ronald Stakland,
(ii) 110,172 shares of Common Stock held by the Stakland Family Trust,
Ernst & Young Trustees Limited, trustee, and (iii) 5,509 shares of Common
Stock owned by Ronald Stakland's parents.
(10) It is currently anticipated that each of Messrs. Rubin and Foster will
grant the Underwriters an over-allotment option with respect to 8,115
shares of Common Stock.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
After completion of the Offering, the authorized capital stock of the
Company will consist of 150,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, no par value.
The statements under this caption are summaries of all material provisions
of the Company's Second Restated Articles of Incorporation (the "Second
Restated Articles of Incorporation") and Amended and Restated Bylaws (the
"Bylaws"), relating to the Company's capital stock which are filed as exhibits
to the Registration Statement of which this Prospectus is a part. Such
summaries do not purport to be complete and are subject to, and are qualified
in their entirety by reference to, such documents.
THE RECAPITALIZATION
Immediately prior to completion of the Offering, the Company will adopt the
Articles and the Bylaws. The Articles will provide for the reclassification of
the Company's Class A Common Stock, no par value, and its nonvoting Class B
Common Stock, no par value, into a single class of voting Common Stock, no par
value, (the "Reclassification"). The Articles will also provide for "blank
check" preferred stock. See "--Preferred Stock." In addition, immediately
prior to the completion of the Offering, the Company will effect an
approximately 5.51-for-one stock split of its then existing Common Stock (the
"Stock Split"). The Reclassification and the Stock Split are referred to
collectively herein as the "Recapitalization."
COMMON STOCK
Prior to the Offering, after giving effect to the Recapitalization, there
were 26,348,809 shares of Common Stock outstanding and held of record by
approximately 23 holders of record. Holders of shares of Common Stock are
entitled to one vote per share on all matters on which the holders of Common
Stock are entitled to vote and do not have any cumulative voting rights. This
means that the holders of more than 50% of the shares voting for the election
of directors can elect all of the directors if they choose to do so; and, in
such event, the holders of the remaining shares of Common Stock will not be
able to elect any person to the Board of Directors. Subject to the rights of
the holders of shares of any series of Preferred Stock, holders of Common
Stock are entitled to receive such dividends as may from time to time be
declared by the Board of Directors of the Company out of funds legally
available therefor. See "Dividends." Holders of shares of Common Stock have no
preemptive, conversion, redemption, subscription or similar rights. In the
event of a liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, holders of shares of Common Stock are entitled to
share ratably in the assets of the Company which are legally available for
distribution, if any, remaining after the payment or provision for the payment
of all debts and other liabilities of the Company and the payment and setting
aside for payment of any preferential amount due to the holders of shares of
any series of Preferred Stock. All outstanding shares of Common Stock are, and
all shares of Common Stock offered hereby when issued will be, upon payment
therefor, validly issued, fully paid and nonassessable.
At present there is no established trading market for the Common Stock. The
Common Stock has been approved for quotation on the Nasdaq National Market
under the proposed symbol "TGRP," subject to official notice of issuance.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time up
to 10,000,000 shares of Preferred Stock in one or more series and to fix the
rights, designations, preferences, qualifications, limitations and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, the terms of
any sinking fund, liquidation preferences and the number of shares
constituting any series, without any further action by the shareholders of the
Company. The issuance of Preferred Stock with voting rights could have an
adverse effect on the voting power of holders of Common Stock by increasing
the number of outstanding shares. In addition, if the Board of Directors
authorizes Preferred Stock
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with conversion rights, the number of shares of Common Stock outstanding could
potentially be increased up to the amount authorized under the Articles. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock. Any such issuance could
also have the effect of delaying, deterring or preventing a change in control
of the Company and may adversely affect the rights of holders of Common Stock.
The Board of Directors does not currently intend to issue any shares of
Preferred Stock.
WARRANTS
As of December 31, 1996, there were outstanding Warrants granting the
holders of the Warrants the right to acquire up to 1,166,181 shares of Common
Stock subject to the right of the holders of the Warrants to acquire up to an
additional 0.5% and 1.0%, respectively, of the issued and outstanding shares
of the Company on a fully diluted basis if the Company does not complete the
Offering prior to July 2, 1997 or January 2, 1998. The Warrants are
exercisable at any time prior to November 28, 2003. The Warrants are entitled
to certain antidilution protection in the event of additional issuances of
Common Stock, stock splits, stock dividends, reorganizations and other similar
events. The shares of Common Stock issued pursuant to the exercise of the
Warrants are entitled to certain registration rights described below. As a
result of certain options which were granted since March 31, 1997, the holders
of Warrants will have the right to acquire 1,180,002 shares of Common Stock.
REGISTRATION RIGHTS
Holders of the Warrants. The holders of the Warrants were granted
registration rights pursuant to the Warrant Shares Registration Rights
Agreement with the Company. Under the Warrant Shares Registration Rights
Agreement, a majority of the holders of the Warrants will be entitled to
demand registration of their shares once in each of the two years following
the Offering, provided that any exercise must include at least twenty percent
(20%) of the shares into which the Warrants are exercisable (the "Warrant
Shares").
The holders of the Warrants have piggyback registration rights with respect
to all registrations by the Company (other than a registration statement filed
on Form S-4 or S-8), including the Offering, pursuant to the following
priority rules: (i) in the case of the Offering, the Company has first
priority, the holders of the Warrants have second priority (with respect to up
to fifty percent (50%) of the Warrant Shares then held by such holders of the
Warrants), other shareholders have third priority (up to four percent (4%) of
the issued and outstanding shares of Common Stock prior to the Offering), and
thereafter the holders of the Warrants and other shareholders share on a one-
third to two-thirds basis; (ii) in the case of all other underwritten
offerings the Company has first priority, and the holders of the Warrants and
other shareholders (with rights to participate in the offering) have second
priority, pro rata with their holdings; and (iii) in all other offerings, the
Company has first priority, other shareholders with demand registration rights
have second priority, and the holders of the Warrants and all holders of
piggyback registration rights have third priority, pro rata with their
holdings.
Pursuant to the terms of the Warrant Shares Registration Rights Agreement,
the Company agreed to (i) pay all fees and expenses incurred with any
registration, except for all underwriting discounts and commissions relating
to the Common Stock sold by such holders, which will be borne by the holders
thereof, and (ii) indemnify the holders in connection with any registration
effected pursuant to the Warrant Shares Registration Rights Agreement,
including liabilities under the Securities Act.
Principal Shareholders. Prior to completion of the Offering, the Principal
Shareholders will be granted registration rights pursuant to the Principal
Shareholders Registration Rights Agreement. Under the Principal Shareholders
Registration Rights Agreement, the Principal Shareholders are entitled to
demand registration of their shares once in each of the two years following
the date the Company is eligible to file a registration statement on Form S-3,
provided that any such demand must include at least twenty percent (20%) of
the shares beneficially owned by the Principal Shareholders on the date of
such demand.
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The Principal Shareholders have piggyback registration rights with respect
to all other registrations by the Company (other than a registration statement
filed on Form S-4 or S-8), pursuant to the following priority rules: (i) in
the case of any underwritten registration on behalf of the Company, the
Company has first priority, and the Principal Shareholders and other
shareholders (with rights to participate in the offering) have second
priority, pro rata with their holdings; and (ii) in any underwritten secondary
registration on behalf of the Company's shareholders other than the Principal
Shareholders, the other shareholders with priority demand registration rights
have first priority, and the Principal Shareholders and all holders of
incidental registration rights have second priority, pro rata with their
holdings.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS
The Company's Second Restated Articles of Incorporation contain a provision
that eliminates the personal liability of the Company's directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, except (i) for liability for any breach of the director's duty
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of the law, (iii) for any transactions from which the director derived an
improper personal benefit, or (iv) for unlawful distributions in violation of
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment
of this provision by the shareholders of the Corporation will not adversely
affect any right or protection of a director existing at the time of such
repeal or amendment.
In addition, the Company's Bylaws provide that the Company will indemnify
directors and officers of the Company to the fullest extent permitted by the
Iowa Business Corporation Act.
The Second Restated Articles of Incorporation and Bylaws include certain
provisions which are intended to enhance the likelihood of continuity and
stability in the composition of the Company's Board of Directors and which may
have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company unless such takeover or change in control is
approved by the Company's Board of Directors. Such provisions may also render
the removal of the directors and management more difficult.
The Second Restated Articles of Incorporation provide that the Board of
Directors of the Company be divided into three classes serving staggered
three-year terms. The Company's Second Restated Articles of Incorporation or
Bylaws and/or the Iowa Business Corporation Act include restrictions on who
may call a special meeting of shareholders and/or that shareholders may only
act at an annual or special meeting or with the written consent of holders of
at least 90% of the outstanding shares of Common Stock. The Company's Bylaws
contain an advance notice procedure with regard to the nomination, other than
by or at the direction of the Board of Directors, of candidates for election
as directors and with regard to certain matters to be brought before an annual
meeting of shareholders of the Company. In general, notice must be received by
the Company not less than 90 days prior to the meeting and must contain
certain specified information concerning the person to be nominated or the
matter to be brought before the meeting and concerning the shareholder
submitting the proposal. The Second Restated Articles of Incorporation and
Bylaws provide that the affirmative vote of the holders of at least 65% of the
voting stock of the Company is required to amend the foregoing provisions.
The Second Restated Articles of Incorporation contain provisions restricting
certain "Business Combinations". The Second Restated Articles of Incorporation
require the affirmative vote of at least 65% of the outstanding shares of
voting stock of the Company for the approval of certain material transactions
between the Company and any individual, corporation, partnership or other
person or entity which, together with its affiliates and associates
beneficially owns in the aggregate 20% or more of the outstanding voting stock
of the Company ("Substantial Shareholder") unless one of the following is
true: (1) 2/3 of the "Continuing Directors" on the Board (a) have approved in
advance the acquisition that caused the Substantial Shareholder to become a
Substantial Shareholder or (b) have approved the Business Combination prior to
the Substantial Shareholder involved in the Business Combination having become
a Substantial Shareholder; (2) the Business Combination
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is solely between the Company and one of its wholly-owned subsidiaries; or (3)
the Business Combination is a merger or consolidation and the consideration
per share by holders of Common Stock of the Company in the Business
Combination satisfies the "fair price" requirements in the Second Restated
Articles of Incorporation. In general, a "fair-price" is not less than the
greater of (a) the highest per share price paid by the Substantial Shareholder
in acquiring any of it shares of stock of the Company or (b) an amount which
bears the same or greater percentage relationship to the market price of the
Common Stock of the Company immediately prior to the announcement of the
Business Combination equal to the highest percentage relationship that any per
share price theretofore paid by the Substantial Shareholder for any of its
holdings of Common Stock of the Company bore to the market price of the Common
Stock of the Company immediately prior to commencement of the acquisition by
the Substantial Shareholder.
"Continuing Director" means, with respect to a particular Substantial
Shareholder, a member of the Company's Board of Directors who was (1) a member
prior to the date on which a Substantial Shareholder became a Substantial
Shareholder or (2) designated as a Continuing Director by a majority of the
whole board, but only if a majority of the whole board shall then consist of
Continuing Directors, or if a majority of the whole board does not then
consist of Continuing Directors, by a majority of the then Continuing
Directors.
"Business combinations" subject to this approval requirement include
mergers, share exchanges, material dispositions of corporate assets not in the
ordinary course of business, certain dispositions to a Substantial Shareholder
of voting stock of the Company, or any reclassification, including reverse
stock splits, recapitalization or merger of the Company with its subsidiaries,
which increases the percentage of voting stock owned beneficially by a
Substantial Shareholder.
The "Business Combination" provisions of the Second Restated Articles of
Incorporation may not be repealed or amended in any respect, unless such
action is approved by the affirmative vote of the holders of not less than 65%
of the outstanding shares of voting stock of the Company; provided, that if an
amendment is recommended to shareholders by 2/3 of the whole board of
directors when a majority of the members of the board of directors acting upon
such matters are Continuing Directors then the affirmative vote of the holders
of not less than 50% of the outstanding shares of voting stock of the Company
is required.
IOWA BUSINESS CORPORATION ACT; ANTITAKEOVER EFFECTS
Under Chapter 502 of the Iowa Code a person making a "takeover offer,"
defined as an offer to acquire any equity securities of a "target company"
(defined as a public company with substantial assets in Iowa that is at least
20% owned by Iowa residents) from an Iowa resident pursuant to a tender offer
is required to file a registration statement with the designated Iowa public
official if the bidder would then own 10% of any class of outstanding equity
securities. Chapter 502 contains antifraud provisions and prohibits the
acquisition of equity securities from an Iowa resident within two years
following a takeover offer unless the holders are afforded a reasonable
opportunity to sell to the offeror upon substantially equivalent terms as
those provided in the earlier takeover offer.
The Iowa Business Corporation Act provides that in considering acquisition
proposals, directors may consider the effects on the Company's employees,
suppliers, creditors, customers and the communities in which it operates, as
well as the long-term and short-term interests of the Company. Consideration
of any or all community interest factors is not a violation of the business
judgment rule, even if the directors reasonably determine that effects on a
community or other factors outweigh the financial or other benefits to the
Company or a shareholder or group of shareholders. The Act also includes
authorization of "poison pills" which include, without limitation, provisions
that preclude or limit the exercise, transfer or receipt of stock rights by
persons owning or offering to acquire a specified number or percentage of a
corporation's outstanding shares. Unlike most states, Iowa does not presently
have a "business combination" law prohibiting business combinations with a
stockholder who holds over a specified percentage of stock for less than a
specified period after crossing the threshold. See "--Certain Provisions of
the Company's Articles and Bylaws."
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The foregoing provisions of state law could have the effect of delaying,
deferring or preventing a change in control of the Company if the Board of
Directors determines that a change of control is not in the best interest of
the Company, its shareholders and other constituencies. In addition, the
regulatory restrictions on acquisition of securities of the Company may also
deter attempts to effect, or prevent the consummation of, a change in control
of the Company.
TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company of New York will serve as transfer agent and
registrar for the Common Stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 33,548,809
outstanding shares of Common Stock, and 1,971,189 shares of Common Stock
subject to outstanding options, of which options to purchase 86,000 shares
will then be currently exercisable. In addition, 2,028,811 shares of Common
Stock are issuable upon exercise of options available for grant under the
Stock Option Plan and 1,180,002 shares are issuable upon exercise of the
Warrants (including Warrants exercisable for 590,001 of the shares of Common
Stock subject to the over-allotment option).
Of the Common Stock outstanding upon completion of the Offering the
7,200,000 shares of Common Stock sold in the Offering will be freely tradeable
without restriction or further registration under the Securities Act, except
for any shares held by "affiliates" of the Company, as that term is defined in
Rule 144 under the Securities Act, and the regulations promulgated thereunder
(an "Affiliate"), or persons who have been Affiliates within the preceding
three months and approximately 26,085,321 outstanding shares of Common Stock
will be currently eligible for sale under Rule 144 subject to restrictions on
the timing, manner and volume of sales of such shares.
Pursuant to the Principal Shareholders Registration Rights Agreement, the
Principal Shareholders or their permitted transferees are entitled to certain
piggyback registration rights, and, in the event the Company becomes eligible
to use a Form S-3 registration statement, two demand registration rights.
These rights are generally subject to certain conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration in certain circumstances. The Principal
Shareholders Registration Rights Agreement obligates the Company to pay all
expenses of any such registration, other than underwriting discounts and
commissions relating to the shares being sold on behalf of any Principal
Shareholders and to indemnify the Principal Shareholders against certain
liabilities, including liabilities under the Securities Act.
Sales of restricted securities in the public market or the perception that
such sales could occur could adversely affect the market price of the Common
Stock.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that, subject to certain exceptions, for a period
of 180 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., directly or indirectly, sell, offer to
sell, contract to sell, hypothecate, pledge or otherwise dispose of, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to purchase any
shares of Common Stock of the Company. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rule 144 or Rule 701 under the Securities Act, or otherwise,
shares subject to lock-up agreements will not be saleable until such
agreements expire.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be "affiliates" of
the Company, who has beneficially owned his or her shares for at least one
year since the later of the date of the acquisition of the securities from the
Company or from an affiliate is entitled to sell within any three-month period
that number of restricted securities that does not exceed the greater of (i)
1% of the then outstanding shares of securities of the same class or (ii) the
average weekly trading volume of such securities during the four calendar
weeks immediately preceding such sale, or the filing of notice of proposed
sale, if required, subject to the availability of adequate current public
information about the Company. After two years have elapsed since the later of
the date the securities were acquired from the Company or from an affiliate of
the Company, such shares may be sold without limitation by persons who are not
affiliates of the Company at the time and have not been affiliates of the
Company for at least three moths under Rule 144(k).
Rule 701 under the Securities Act provides that, beginning 90 days after the
date of this Prospectus, shares of Common Stock acquired on the exercise of
outstanding options prior to the date of this Prospectus may be resold by
persons other than affiliates subject only to the manner of sale provisions of
Rule 144, and by affiliates subject to all provisions of Rule 144 except its
one-year minimum holding period. The Company intends to file
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one or more registration statements under the Securities Act to register the
shares of Common Stock issued and reserved for issuance in compensatory
arrangements and under the Stock Option Plan. Registration would permit the
resale of such shares by non-affiliates and affiliates, subject to the lock-up
described above, in the public market without restriction under the Securities
Act.
In addition, the Company intends to register on Form S-8 under the
Securities Act 4,000,000 shares of Common Stock issuable under options subject
to the Company's Stock Option Plan. Shares issued under the Stock Option Plan
(other than shares issued to affiliates) generally may be sold immediately in
the public market, subject to vesting requirements and the lock-up agreements
described below under "Underwriters."
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
OF COMMON STOCK
General. The following discussion concerns the material United States
federal income and estate tax consequences of the ownership and disposition of
shares of Common Stock applicable to holders of such shares of Common Stock
who are not U.S. persons. The discussion is based on current law, which is
subject to change retroactively or prospectively, and is for general
information only. The discussion does not address all aspects of United States
federal income and estate taxation and does not address any aspects of state,
local or foreign tax laws. The discussion does not consider any specific facts
or circumstances that may apply to a particular investor. Accordingly,
prospective investors are urged to consult their tax advisors regarding the
current and possible future United States federal, state, local and non-U.S.
income and other tax consequences of holding and disposing of shares of Common
Stock.
In general, a "Non-U.S. Holder" is any beneficial owner of Common Stock that
is not (i) a citizen or resident, as specifically defined for U.S. federal
income tax purposes, of the United States, (ii) a corporation, partnership or
any entity treated as a corporation or partnership for U.S. federal income tax
purposes created or organized in the United States or under the laws of the
United States or of any State thereof, (iii) any other entity, including an
estate, whose income is includible in gross income for United States federal
income tax purposes regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have the authority to control all
substantial decisions of the trust.
Dividends. In general, dividends paid to a Non-U.S. Holder will be subject
to United States withholding tax at a 30% rate (or a lower rate as may be
specified by an applicable tax treaty) unless the dividends are (i)
effectively connected with a trade or business carried on by the Non-U.S.
Holder within the United States, and (ii) if a tax treaty applies,
attributable to a United States permanent establishment maintained by the Non-
U.S. Holder. Dividends effectively connected with such a trade or business or,
if a tax treaty applies, attributable to such permanent establishment will
generally not be subject to withholding (if the Non-U.S. Holder files certain
forms annually with the payor of the dividend) but will generally be subject
to United States federal income tax on a net income basis at regular graduated
individual or corporate rates. In the case of a Non-U.S. Holder that is a
corporation, such effectively connected income also may be subject to the
branch profits tax (which is generally imposed on a foreign corporation on the
deemed repatriation from the United States of effectively connected earnings
and profits) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. The branch profits tax may not apply if the
recipient is a qualified resident of certain countries with which the United
States has an income tax treaty.
To determine the applicability of a tax treaty providing for a lower rate of
withholding, dividends paid to an address in a foreign country are presumed
under current Treasury Regulations to be paid to a resident of that country,
unless the payor has definite knowledge that such presumption is not warranted
or an applicable tax treaty (or United States Treasury Regulations thereunder)
requires some other method for determining a Non-U.S. Holder's residence.
However, under proposed regulations, in the case of dividends paid after
December 31, 1997 or December 31, 1999 in the case of dividends paid to
accounts in existence on or before the date that is 60 days after the proposed
regulations are published as final regulations), a Non-U.S. Holder generally
would be subject to United States withholding tax at a 31-percent rate under
the backup withholding rules described below, rather than at a 30-percent rate
or at a reduced rate under an income tax treaty, unless certain certification
procedures (or, in the case of payments made outside the United States with
respect to an offshore account, certain documentary evidence procedures) are
complied with, directly or through an intermediary. Under current regulations,
the Company must report annually to the United States Internal Revenue Service
(the "IRS") and to each Non-U.S. Holder the amount of dividends paid to, and
the tax withheld with respect to, each Non-U.S. Holder. These reporting
requirements apply regardless of whether withholding was reduced or eliminated
by an applicable tax treaty. Copies of these information returns also may be
made available under the provisions of a specific treaty or agreement with the
tax authorities of the country in which the Non-U.S. Holder resides.
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A Non-U.S. Holder that is eligible for a reduced rate of United States
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund
with the IRS.
Sale of Common Stock. Generally, a Non-U.S. Holder will not be subject to
United States federal income tax, by withholding or otherwise, on any gain
realized upon the sale or other disposition of such holder's shares of Common
Stock unless (i) the gain is effectively connected with a trade or business
carried on by the Non-U.S. Holder within the United States and, if a tax
treaty applies, the gain is attributable to a permanent establishment
maintained by the Non-U.S. Holder in the United States; (ii) the Non-U.S.
Holder is an individual who holds the shares of Common Stock as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition, and either (a) such Non-U.S. Holder has a "tax home"
(as specifically defined for U.S. federal income tax purposes) in the United
States (unless the gain from disposition is attributable to an office or other
fixed place of business maintained by such non-U.S. Holder in a foreign
country and a foreign tax equal to at least 10% of such gain has been paid to
a foreign country), or (b) the gain from the disposition is attributable to an
office or other fixed place of business maintained by such Non-U.S. Holder in
the United States; (iii) the Non-U.S. Holder is subject to tax pursuant to the
provisions of U.S. tax law applicable to certain United States expatriates, or
(iv) the Company is or has been during certain periods a "U.S. real property
holding corporation" for U.S. federal income tax purposes (which the Company
does not believe that it has been, currently is or is likely to become) and,
assuming that the Common Stock is deemed for tax purposes to be "regularly
traded on an established securities market," the Non-U.S. Holder held, at any
time during the five-year period ending on the date of disposition (or such
shorter period that such shares were held), directly or indirectly, more than
five percent of the Common Stock.
Estate Tax. Shares of Common Stock owned or treated as owned by an
individual who is not a citizen or resident (as specially defined for United
States federal estate tax purposes) of the United States at the time of death
will be includible in the individual's gross estate for United States federal
estate tax purposes, unless an applicable tax treaty provides otherwise, and
may be subject to United States federal estate tax.
Backup Withholding and Information Reporting. As a general rule, under
current United States federal income tax law, backup withholding tax (which
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish the information required under the U.S.
information reporting requirements) and information reporting requirements
apply to the actual and constructive payments of dividends. The United States
backup withholding tax and information reporting requirements generally, under
current regulations, will not apply to dividends paid on Common Stock to a
Non-U.S. Holder at an address outside the United States that are either
subject to the 30% withholding discussed above or that are not so subject
because a tax treaty applies that reduces or eliminates such 30% withholding,
unless the payer has knowledge that the payee is a U.S. person. Backup
withholding and information reporting generally will apply to dividends paid
to addresses inside the United States on shares of Common Stock to beneficial
owners that are not recipients that are entitled to an exemption, as discussed
above and that fail to provide in the manner required certain identifying
information. However, under proposed regulations, in the case of dividends
paid after December 31, 1997, a Non-U.S. Holder generally would be subject to
backup withholding at a 31% rate, unless certain certification procedures (or,
in the case of payments made outside the United States with respect to an
offshore account, certain documentary evidence procedures) are complied with,
directly or through an intermediary.
The payment of the proceeds from the disposition of shares of Common Stock
to or through the United States office of a broker will be subject to
information reporting and backup withholding unless the holder, under
penalties of perjury, certifies, among other things, its status as a Non-U.S.
Holder, or otherwise establishes an exemption. Generally, the payment of the
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a non-U.S. broker will not be subject to backup withholding and
will not be subject to information reporting. In the case of the payment of
proceeds from the disposition of shares of Common Stock to or through a non-
U.S. office of a broker that is a U.S. person or a "U.S.-related person,"
existing regulations require (i) backup withholding if the broker has actual
knowledge that the owner is not a Non-U.S. Holder, and
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(ii) information reporting on the payment unless the broker receives a
statement from the owner, signed under penalties of perjury, certifying, among
other things, its status as a Non-U.S. Holder, or the broker has documentary
evidence in its files that the owner is a Non-U.S. Holder and the broker has
no actual knowledge to the contrary. For this purpose, a "U.S.-related person"
is (i) a "controlled foreign corporation" for United States federal income tax
purposes or (ii) a foreign person 50% or more of whose gross income from all
sources for the three-year period ending with the close of its taxable year
preceding the payment (or for such part of the period that the broker has been
in existence) is derived from activities that are effectively connected with
the conduct of a United States trade or business. The IRS recently proposed
regulations addressing the withholding and information reporting rules which
could affect the treatment of the payment of proceeds discussed above.
Non-U.S. Holders should consult their tax advisors regarding the application
of these rules to their particular situations, the availability of an
exemption therefrom, the procedure for obtaining such an exemption, if
available, and the possible application of the proposed regulations addressing
the withholding and information reporting rules.
Backup withholding is not an additional tax. Any amounts withheld from a
payment to a Non-U.S. Holder under the backup withholding rules will be
allowed as a credit against such holder's United States federal income tax
liability, if any, and provided that such holder furnishes the IRS with the
information entitling such holder to an exemption from or reduced rate of
withholding, such holder would be entitled to a refund.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the U.S. Underwriting
Agreement dated the date of this Prospectus, each of the underwriters of the
United States and Canadian offering of Common Stock named below (the "U.S.
Underwriters"), for whom Smith Barney Inc., Alex. Brown & Sons Incorporated
and Cowen & Company are acting as Representatives (the "Representatives"), has
severally agreed to purchase, and the Company has agreed to sell to each U.S.
Underwriter, the number of shares of Common Stock set forth opposite the name
of such U.S. Underwriter below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
---------------- ---------
<S> <C>
Smith Barney Inc. ..............................................
Alex. Brown & Sons Incorporated.................................
Cowen & Company.................................................
---------
Total......................................................... 5,760,000
=========
</TABLE>
Upon the terms and subject to the conditions stated in the International
Underwriting Agreement dated the date of this Prospectus, each of the managers
of the concurrent International Offering of Common Stock named below (the
"Managers" and, together with the U.S. Underwriters, the "Underwriters"), for
whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Cowen & Company
are acting as lead managers (the "Lead Managers"), has severally agreed to
purchase, and the Company has agreed to sell to each Manager, the number of
shares of Common Stock set forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER
MANAGER OF SHARES
------- ---------
<S> <C>
Smith Barney Inc................................................
Alex. Brown & Sons Incorporated.................................
Cowen & Company.................................................
---------
Total......................................................... 1,440,000
=========
</TABLE>
Each of the U.S. Underwriting Agreement and the International Underwriting
Agreement provides that the obligations of the several U.S. Underwriters and
the several Managers to pay for and accept delivery of the shares of Common
Stock are subject to approval of certain legal matters by counsel and to
certain other conditions. The U.S. Underwriters and the Managers are obligated
to take and pay for all of the shares of Common Stock offered hereby (other
than those covered by the over-allotment option described below) if any such
shares are taken.
The U.S. Underwriters and the Managers initially propose to offer part of
the shares of Common Stock directly to the public at the public offering price
set forth on the cover page of this Prospectus and part to certain dealers at
a price that represents a concession not in excess of $ per share below
the public offering price. The U.S. Underwriters and the Managers may allow,
and such dealers may reallow, a concession not in excess of $ per share to
the other U.S. Underwriters or Managers, respectively, or to certain other
dealers.
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After the initial public offering, the public offering price and such
concessions may be changed by the U.S. Underwriters and the Managers. The
Representatives of the U.S. Underwriters have advised the Company that the
U.S. Underwriters do not intend to confirm a sale of any shares to any
accounts over which they exercise discretionary authority.
The Selling Shareholders have granted to the U.S. Underwriters and the
Managers options, exercisable for 30 days from the date of this Prospectus, to
purchase from such Selling Stockholders up to an aggregate of 1,080,000
additional shares of Common Stock at the public offering price set forth on
the cover page of this Prospectus less underwriting discounts and commissions.
The U.S. Underwriters and the Managers may exercise such options solely for
the purpose of covering over-allotments, if any, in connection with the
Offering. To the extent such options are exercised, each U.S. Underwriter and
Manager will be obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number of
shares set forth opposite each U.S. Underwriter's or each Manager's name in
the preceding tables bears to the total number of shares listed in such
tables.
The Company, its executive officers and directors, and certain shareholders
of the Company have agreed that, subject to certain exceptions, for a period
of 180 days from the date of this Prospectus, they will not, without the prior
written consent of Smith Barney Inc., directly or indirectly, sell, offer to
sell, contract to sell, hypothecate, pledge or otherwise dispose of, any
shares of Common Stock of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to purchase any
shares of Common Stock of the Company.
In connection with the Offering and in compliance with applicable law, the
U.S. Underwriters and the Managers may overallot (i.e., sell more of the
Common Stock than the total amount shown on the list of U.S. Underwriters and
Managers and participations which appears above) and may effect transactions
which stabilize, maintain or otherwise affect the market price of the Common
Stock at levels above those which might otherwise prevail in the open market.
Such transactions may include placing bids for the Common Stock or effecting
purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the Offering. A syndicate
short position may be covered by exercise of the option described above rather
than by open market purchases. In addition, the contractual arrangements among
the U.S. Underwriters and the Managers include a provision whereby, if, prior
to termination of price and trading restrictions, the Representatives or the
Lead Managers purchase Common Stock in the open market for the account of the
underwriting syndicate and the securities purchased can be traced to a
particular U.S. Underwriter, Manager or member of the selling group, the
underwriting syndicate may require the U.S. Underwriter, Manager or selling
group member in question to purchase the Common Stock in question at the cost
price to the syndicate or may recover from (or decline to pay to) the U.S.
Underwriter, Manager or selling group member in question the selling
concession applicable to the securities in question. The U.S. Underwriters and
the Managers are not required to engage in any of these activities and any
such activities, if commenced, may be discontinued at any time.
The U.S. Underwriters and the Managers have entered into an Agreement
Between the U.S. Underwriters and the Managers pursuant to which each U.S.
Underwriter has agreed that, as part of the distribution of the 5,760,000
shares offered in the U.S. Offering (plus the U.S. Underwriters' portion of
the over-allotment option): (i) it is not purchasing any such shares for the
account of anyone other than a U.S. or Canadian Person and (ii) it has not
offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares outside the United States or Canada to anyone
other than a U.S. or Canadian Person. In addition, each Manager has agreed
that as part of the distribution of the 1,440,000 shares offered in the
International Offering (plus the Managers' portion of the over-allotment
option): (i) it is not purchasing any such shares for the account of any U.S.
or Canadian Person and (ii) it has not offered or sold, and will not offer,
sell, resell or deliver, directly or indirectly, any of such shares in the
United States or Canada or to any U.S. or Canadian Person. Each Manager has
also agreed that it will offer to sell shares only in compliance with all
relevant requirements of any applicable laws.
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The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the U.S. Underwriting Agreement, the
International Underwriting Agreement and the Agreement Between the U.S.
Underwriters and the Managers, including: (i) certain purchases and sales
between the U.S. Underwriters and the Managers, (ii) certain offers, sales,
resales, deliveries or distributions to or through investment advisors or
other persons exercising investment discretion, (iii) purchases, offers or
sales by a U.S. Underwriter who is also acting as a Manager or by a Manager
who is also acting as a U.S. Underwriter and (iv) other transactions
specifically approved by the Representatives and the Lead Managers. As used
herein, "U.S. or Canadian Person" means any resident or national of the United
States or Canada, any corporation, partnership or other entity created or
organized in or under the laws of the United States or Canada, or any estate
or trust the income of which is subject to U.S. or Canadian income taxation
regardless of the source of its income (other than the foreign branch of any
U.S. or Canadian Person), and includes any United States or Canadian branch of
a person other than a U.S. or Canadian Person.
Any offer of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the relevant province of Canada
in which such offer is made.
Each Manager has represented and agreed that (i) it will not offer or sell
any shares to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which will not involve an offer to the public in
the United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995 ("the Regulations"); (ii) it will comply with all applicable
provisions of the Financial Services Act 1986 and the Regulations with respect
to anything done by it in relation to the shares in, from, or otherwise
involving the United Kingdom; and (iii) it will only issue or pass on to any
person in the United Kingdom any document received by it in connection with
the offer of the shares if that person is of a kind described in Article 11(3)
of the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996 or is a person to whom such document may otherwise lawfully be
issued or passed on.
No action has been or will be taken in any jurisdiction by the Company or
the Managers that would permit an offering to the general public of the shares
offered hereby in any jurisdiction other than the United States.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page of this Prospectus.
Pursuant to the Agreement between the U.S. Underwriters and the Managers,
sales may be made between the U.S. Underwriters and the Managers of such
number of shares as may be mutually agreed. The price of any shares so sold
shall be the public offering price as then in effect for shares being sold by
the U.S. Underwriters and the Managers, less all or any part of the selling
concessions, unless otherwise determined by mutual agreement. To the extent
that there are sales between the U.S. Underwriters and the Managers pursuant
to the Agreement Between the U.S. Underwriters and the Managers, the number of
shares initially available for sale by the U.S. Underwriters and by the
Managers may be more or less than the number of shares appearing on the front
cover of this Prospectus.
Prior to the Offering, there has not been any public market for the Common
Stock. Consequently, the initial public offering price for the shares of
Common Stock included in the Offering has been determined by negotiations
among the Company, the Selling Shareholders, the Representatives and the Lead
Managers. Among the factors considered in determining such price were the
history of and prospects for the Company's business and the industry in which
it competes, an assessment of the Company's management and the present state
of the Company's development, the past and present revenues and earnings of
the Company, the prospects for growth of the Company's revenues and earnings,
the current state of the economy in the United States and abroad and the
current level of economic activity in the industry in which the Company
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company. There can be no
assurance that
100
<PAGE>
an active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above
the initial public offering price.
The Company, the Selling Shareholders, the U.S. Underwriters and the
Managers have agreed to indemnify each other against certain liabilities that
may be incurred in connection with the Offering, including liabilities under
the Securities Act.
Certain affiliates of Smith Barney Inc., a Representative and Lead Manager
in connection with the Offering, hold the Company's outstanding Senior
Subordinated Notes and will receive collectively in excess of 10% of the net
proceeds of the Offering in connection with the repayment of the Senior
Subordinated Notes upon consummation of the Offering. See "Use of Proceeds."
Accordingly, the Offering will be conducted in accordance with Section
2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc. ("NASD"), which requires that when more than ten percent of the
net proceeds of a public offering are paid to a member of the NASD
participating in the offering or to an affiliate of that member, the price at
which an equity security is offered to the public may not be higher than the
price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed
its usual standard of due diligence with respect thereto. Alex. Brown & Sons
Incorporated has agreed to act as Qualified Independent Underwriter for the
Offering, and the public offering price of the Common Stock will not be higher
than that recommended by Alex. Brown & Sons Incorporated.
101
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Swidler & Berlin, Chartered,
Washington, D.C. The validity of the issuance of the shares of Common Stock
offered hereby will be passed upon for the Company by Marcus & Thompson,
Fairfield, Iowa. Certain legal matters in connection with the Common Stock
offered hereby will be passed upon for the Underwriters by Chadbourne & Parke
LLP.
EXPERTS
The consolidated financial statements of Telegroup, Inc. and subsidiaries as
of December 31, 1995 and 1996, and for each of the years in the three-year
period ended December 31, 1996 have been included in this Prospectus and
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits thereto, referred to as
the "Registration Statement") under the Securities Act with respect to the
shares of Common Stock offered hereby. This Prospectus, which forms a part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the contents of any contract or other document are
not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by reference to
such contract or document. The Registration Statement may be inspected without
charge at the office of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the Registration Statement may be obtained from the
Commission at prescribed rates from the Public Reference Section of the
Commission at such address, and at the Commission's regional offices located
at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. In addition, registration statements and certain other filings
made with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov. The
Registration Statement, including all exhibits thereto and amendments thereof,
has been filed with the Commission through EDGAR.
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports with the Commission. In addition, the Company will furnish its
shareholders with annual reports containing audited financial statements
certified by its independent public accounts and quarterly reports for he
first three quarters of each fiscal year containing unaudited summary
financial information.
102
<PAGE>
GLOSSARY OF TERMS
accounting or settlement rate--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
call-reorigination
traditional call-reorigination (also known as "callback")--A form of dial
up access that allows a user to access a telecommunications company's
network by placing a telephone call, hanging up, and waiting for an
automated callback. The callback then provides the user with dial tone
which enables the user to initiate and complete a call.
transparent call-reorigination--Technical innovations have enabled
telecommunications carriers to offer a "transparent" form of call
reorigination without the usual "hang up" and "callback" whereby the call
is automatically and swiftly processed by a programmed switch.
call-through--The provision of international long distance service through
conventional long distance or "transparent" call-reorigination.
CLEC--Competitive Local Exchange Carrier.
core markets--The Company's "core markets" are the U.S., Germany, the U.K.,
France, Switzerland, Hong Kong, Japan, the Netherlands, Australia and Sweden.
Country Coordinators--Persons in the Company's markets responsible for
coordinating Telegroup's operations, including sales, marketing, customer
service and independent agent support. Telegroup currently has 31 Country
Coordinators responsible for providing such support in 48 countries.
CUG (Closed User Group)--A group of specified users, such as employees of a
company, permitted by applicable regulations to access a private voice or data
network, which access would otherwise be denied to them as individuals.
dedicated or direct access--A means of accessing a network through the use
of a permanent point-to-point circuit typically leased from a facilities-based
carrier. The advantage of dedicated access is simplified premises-to-anywhere
calling, faster call set-up times and potentially lower access and
transmission costs (provided there is sufficient traffic over the circuit to
generate economies of scale).
dial-up access--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a paid local access number.
distributed intelligence--The proprietary architecture supporting the TIGN
which allows customer information, such as credit limits, language selection,
waiting voice-mail and faxes, and speed dial numbers to be distributed to
customers cost-effectively over a parallel data network wherever.
European Union--Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the
United Kingdom.
facilities-based carrier--A carrier which transmits a significant portion of
its traffic over owned transmission facilities.
fiber-optic--A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
IPLC (International Private Line Circuits)--Point-to-point permanent
connections which can carry voice and data. IPLCs are owned and maintained by
ITOs or third party resellers.
103
<PAGE>
IRU (Indefeasible Rights of Use)--The rights to use a telecommunications
system, usually an undersea cable, with most of the rights and duties of
ownership, but without the right to control or manage the facility and,
depending upon the particular agreement, without any right to salvage or duty
to dispose of the cable at the end of its useful life.
ISDN (Integrated Services Digital Network)--A hybrid digital network capable
of providing transmission speeds of up to 128 kilobits per second for both
voice and data.
ISR (International Simple Resale)--The use of international leased lines for
the resale of switched telephony services to the public, by-passing the
current system of accounting rates.
ITO (Incumbent Telecommunications Operator)--The dominant carrier or
carriers in each country, often, but not always, government-owned or protected
(alternatively referred to as the Postal, Telephone and Telegraph Company, or
PTT).
LEC (Local Exchange Carrier)--Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.
local connectivity--Physical circuits connecting the switching facilities of
a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.
local exchange--A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.
node--A specially configured multiplexer which provides the interface
between the local PSTN where the node is located and the TIGN switch. A node
collects and concentrates call traffic from its local area and transfers it to
TIGN switches via private line for call processing. Nodes permit Telegroup to
extend its network into a new geographic locations by accessing the local PSTN
without requiring the deployment of a switch.
operating agreement--An agreement that provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries. These
agreements provide for the termination of traffic in, and return traffic from,
the international long distance providers' respective countries at a
negotiated "accounting rate." Under a traditional operating agreement, the
international long distance provider that originates more traffic compensates
the corresponding long distance provider in the other country by paying an
amount determined by multiplying the net traffic imbalance by the latter's
share of the accounting rate.
PBX (Public Branch Exchange)--Switching equipment that allows connection of
a private extension telephone to the PSTN or to a private line.
PNETs (Public Non-Exclusive Telecommunications Services) License--A license
allowing the licensee to provide certain telecommunications services in Hong
Kong. A PNETs licensee may not provide services the provision of which are
reserved to Hong Kong Telecommunications International Limited.
PSTN (Public Switched Telephone Network)--A telephone network which is
accessible by the public through private lines, wireless systems and pay
phones.
private line--A dedicated telecommunications connection between end user
locations.
resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
Switching facility--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
104
<PAGE>
TIGN--The Telegroup Intelligent Global Network.
Transit/termination agreements--An agreement that provides for the exchange
of international long distance traffic between international long distance
providers, which agreement provides for the termination of traffic in one or
more countries at negotiated termination costs. Such an agreement usually does
not include an "accounting rate" and often is not limited to the termination
of traffic in the home territories of the parties in the agreement.
Value-Added Tax (VAT)--A consumption tax levied on end-consumers of goods
and services in applicable jurisdictions.
Voice Telephony--A term used by the EU, defined as the commercial provision
for the public of the direct transport, enabling any user to use equipment
connected to such a network termination point in order to communicate with
another termination points. The term "voice telephony" is also used in the
Prospectus generally to refer to the direct transport and switching of speech
in real-time between public switched network termination points.
105
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and March 31,
1997 (unaudited).......................................................... F-3
Consolidated Statements of Operations for the years ended December 31,
1994, 1995 and 1996 and the three months ended March 31, 1996 and March
31, 1997 (unaudited)...................................................... F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1997 (unaudited)...................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1994, 1995 and 1996 and the three months ended March 31, 1996 and March
31, 1997 (unaudited)...................................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
When the transaction referred to in Note 1 (m) of the Notes to Consolidated
Financial Statements has been consummated, we will be in a position to render
the following report.
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Telegroup, Inc.:
We have audited the accompanying consolidated balance sheets of Telegroup,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, shareholders' equity (deficit), and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Telegroup,
Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Lincoln, Nebraska
March 28, 1997, except as to note 1 (m) which is as of
F-2
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- MARCH 31,
1995 1996 1997
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 4,591,399 14,155,013 16,327,047
Accounts receivable and unbilled services,
less allowance for credit losses of
$2,100,000 in 1995, $3,321,119 in 1996,
and 3,542,547 at March 31, 1997.......... 23,196,743 32,288,507 35,109,480
Income tax recoverable.................... -- 1,796,792 1,874,707
Deferred taxes (note 8)................... 1,134,730 1,392,058 1,622,574
Prepaid expenses.......................... 110,325 245,271 155,086
Receivables from shareholders............. 75,952 14,974 37,551
Receivables from employees................ 87,895 85,539 104,603
----------- ---------- ----------
Total current assets.................... 29,197,044 49,978,154 55,231,048
----------- ---------- ----------
Net property and equipment (note 5)......... 3,979,039 11,256,139 13,839,733
----------- ---------- ----------
Other assets:
Deposits and other assets................. 282,378 376,614 1,056,623
Goodwill, net of amortization of $22,768
in 1996 and 39,894 at March 31, 1997..... -- 1,001,841 984,765
Capitalized software, net of amortization
(note 1e)................................ 117,051 1,906,655 2,072,393
Debt issuance costs, net of amortization
(note 2)................................. -- 1,437,004 1,385,208
----------- ---------- ----------
399,429 4,722,114 5,498,989
----------- ---------- ----------
Total assets............................ $33,575,512 65,956,407 74,569,770
=========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $16,479,564 30,719,562 38,088,981
Accrued expenses.......................... 6,990,053 8,561,041 10,182,045
Unearned revenue.......................... -- 64,276 39,990
Income taxes payable...................... 3,526,900 -- --
Note payable.............................. 2,000,000 -- --
Customer deposits......................... 515,434 602,940 638,430
Current portion of long-term debt (note
2)....................................... -- 232,596 100,221
Current portion of capital lease
obligations (note 6)..................... 137,114 138,309 127,477
Due to shareholders....................... 25,881 -- --
----------- ---------- ----------
Total current liabilities............... 29,674,946 40,318,724 49,177,144
Deferred taxes (note 8)..................... 269,630 756,891 925,812
Capital lease obligations (note 6).......... 483,489 301,393 260,993
Long-term debt (note 2)..................... -- 11,216,896 11,097,885
Shareholders' equity (note 7):
Common stock, no par or stated value;
150,000,000 shares authorized, issued and
outstanding 24,781,055 in 1995,
26,348,809 in 1996 and 26,348,809 at
March 31, 1997........................... -- -- --
Additional paid-in capital................ 4,595 10,765,176 10,850,771
Retained earnings......................... 3,142,852 2,597,327 2,257,165
----------- ---------- ----------
Total shareholders' equity.............. 3,147,447 13,362,503 13,107,936
Commitments and contingencies (note 9)
----------- ---------- ----------
Total liabilities and shareholders'
equity................................. $33,575,512 65,956,407 74,569,770
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND
THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Retail................ $68,713,965 128,138,947 179,146,795 41,439,948 56,909,405
Wholesale............. -- 980,443 34,060,714 1,910,592 17,186,372
----------- ----------- ----------- ---------- ----------
Total revenues...... 68,713,965 129,119,390 213,207,509 43,350,540 74,095,777
Cost of revenues........ 49,512,724 83,100,708 150,536,859 27,741,329 53,282,940
----------- ----------- ----------- ---------- ----------
Gross profit........ 19,201,241 46,018,682 62,670,650 15,609,211 20,812,837
----------- ----------- ----------- ---------- ----------
Operating expenses:
Selling, general and
administrative
expenses............. 19,914,168 39,221,849 59,651,857 13,160,798 19,454,755
Depreciation and
amortization......... 300,784 654,966 1,881,619 261,031 806,539
Stock option based
compensation......... -- -- 1,032,646 -- 85,595
----------- ----------- ----------- ---------- ----------
Total operating
expenses........... 20,214,952 39,876,815 62,566,122 13,421,829 20,346,889
----------- ----------- ----------- ---------- ----------
Operating income
(loss)............. (1,013,711) 6,141,867 104,528 2,187,382 465,948
----------- ----------- ----------- ---------- ----------
Other income (expense):
Interest expense...... (112,152) (120,604) (578,500) (33,471) (729,450)
Interest income....... 102,836 193,061 377,450 65,875 184,359
Foreign currency
transaction gain
(loss)............... 31,024 (101,792) (147,752) (128,339) (367,564)
Other................. 105,303 298,627 118,504 51,717 31,048
----------- ----------- ----------- ---------- ----------
Earnings (loss) before
income taxes........... (886,700) 6,411,159 (125,770) 2,143,164 (415,659)
Income tax benefit
(expense) (note 8)..... 348,300 (2,589,700) 7,448 (755,637) 138,647
----------- ----------- ----------- ---------- ----------
Net earnings
(loss)............. $ (538,400) 3,821,459 (118,322) 1,387,527 (277,012)
=========== =========== =========== ========== ==========
Per share amounts:
Earnings (loss) per
common equivalent
share................ $ (0.02) 0.13 0.00 0.05 (0.01)
=========== =========== =========== ========== ==========
Weighted-average common
and common equivalent
shares outstanding..... 29,007,781 29,007,781 29,007,781 29,007,781 29,007,781
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THREE-MONTH PERIOD ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED SHAREHOLDERS'
----------------- PAID-IN EARNINGS EQUITY
SHARES AMOUNT CAPITAL (DEFICIT) (DEFICIT)
---------- ------ ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balances at January 1,
1994................... 24,781,055 $ -- 4,595 384,793 389,388
Net loss................ -- -- -- (538,400) (538,400)
---------- ----- ---------- --------- ----------
Balances at December 31,
1994................... 24,781,055 -- 4,595 (153,607) (149,012)
Dividends............... -- -- -- (525,000) (525,000)
Net earnings............ -- -- -- 3,821,459 3,821,459
---------- ----- ---------- --------- ----------
Balances at December 31,
1995................... 24,781,055 -- 4,595 3,142,852 3,147,447
Dividends............... -- -- -- (425,000) (425,000)
Net loss................ -- -- -- (118,322) (118,322)
Issuance of common
stock.................. 1,304,266 -- 52,366 -- 52,366
Notes receivable from
shareholders for common
stock.................. -- -- (52,366) -- (52,366)
Shares issued in
connection with
business combinations
(note 3)............... 263,488 -- 573,984 -- 573,984
Compensation expense in
connection with stock
option plan (note 7)... -- -- 1,032,646 -- 1,032,646
Warrants issued in
connection with the
Private Offering
(note 7)............... -- -- 9,153,951 -- 9,153,951
Change in foreign
currency translation... -- -- -- (2,203) (2,203)
---------- ----- ---------- --------- ----------
Balances at December 31,
1996................... 26,348,809 $ -- 10,765,176 2,597,327 13,362,503
Net loss (unaudited).... -- -- -- (277,012) (277,012)
Compensation expense in
connection with stock
option plan (note 7)
(unaudited)............ -- -- 85,595 -- 85,595
Change in foreign
currency translation
(unaudited)............ -- -- -- (63,150) (63,150)
---------- ----- ---------- --------- ----------
Balances at March 31,
1997 (unaudited)....... 26,348,809 $ -- 10,850,771 2,257,165 13,107,936
========== ===== ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
AND THREE-MONTH PERIODS ENDED MARCH 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------------- ----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net earnings (loss).... $ (538,400) 3,821,459 (118,322) 1,387,527 (277,012)
Adjustments to recon-
cile net earnings
(loss) to net cash
provided by operating
activities:
Depreciation and amor-
tization.............. 300,784 654,966 1,881,619 261,031 806,539
Deferred income tax-
es.................... (198,200) (937,200) 229,933 377,353 (61,595)
Loss on sale of equip-
ment.................. 4,422 261,241 -- -- --
Provision for credit
losses on accounts
receivable............ 1,056,781 3,981,525 5,124,008 1,227,488 2,473,265
Accretion of debt dis-
count................. -- -- 48,077 -- 127,263
Stock option based
compensation ex-
pense................. -- -- 1,032,646 -- 85,595
Changes in operating
assets and liabili-
ties, excluding the
effects of business
combinations:
Accounts receivable.... (8,450,053) (14,571,500) (14,199,095) (2,828,666) (5,294,238)
Prepaid expenses....... 1,603 145,656 (134,946) -- 90,185
Deposits and other as-
sets.................. 28,669 157,762 (80,001) 151,092 (680,009)
Accounts payable and
accrued expenses...... 8,860,164 8,375,566 16,292,448 5,756,600 8,990,423
Income taxes........... -- 3,526,900 (5,323,692) (2,550,928) (77,915)
Unearned revenue....... -- -- 64,276 1,125 (24,286)
Customer deposits...... 298,418 144,961 87,506 42,458 35,490
----------- ----------- ----------- ---------- ----------
Net cash provided by
operating activi-
ties................ 1,364,188 5,561,336 4,904,457 3,825,080 6,193,705
----------- ----------- ----------- ---------- ----------
Cash flows from invest-
ing activities:
Purchases of equip-
ment.................. (1,056,430) (2,651,823) (9,067,923) (1,890,981) (3,285,409)
Proceeds from sale of
equipment............. 13,815 9,543 -- -- --
Capitalization of soft-
ware.................. -- (117,051) (1,789,604) (428,238) (201,590)
Cash paid in business
combinations, net of
cash acquired......... -- -- (468,187) -- --
Net change in receiv-
ables from sharehold-
ers and employees..... 342,416 (58,464) 63,334 (153,857) (41,641)
----------- ----------- ----------- ---------- ----------
Net cash used in in-
vesting activities.. (700,199) (2,817,795) (11,262,380) (2,473,076) (3,528,640)
----------- ----------- ----------- ---------- ----------
Cash flows from financ-
ing activities:
Net payments on notes
payable............... -- -- (2,000,000) (2,000,000) --
Proceeds from issuance
of Private Offering... -- -- 20,000,000 -- --
Debt issuance costs.... -- -- (1,450,281) -- --
Dividends paid......... -- -- (950,000) -- --
Net proceeds (payments)
from long-term
borrowings............ 1,000,000 -- 530,803 975,668 (378,649)
Payments on capital
lease obligations..... (42,926) (112,863) (180,901) (61,479) (51,232)
Net change in due to
shareholders.......... -- (2,119) (25,881) (25,881) --
----------- ----------- ----------- ---------- ----------
Net cash (used in)
provided by financ-
ing activities...... 957,074 (114,982) 15,923,740 (1,111,692) (429,881)
----------- ----------- ----------- ---------- ----------
Effect of exchange rate
changes on cash........ -- -- (2,203) -- (63,150)
----------- ----------- ----------- ---------- ----------
Net increase in cash and
cash equivalents....... 1,621,063 2,628,559 9,563,614 240,312 2,172,034
Cash and cash equiva-
lents at beginning of
year................... 341,777 1,962,840 4,591,399 4,591,399 14,155,013
----------- ----------- ----------- ---------- ----------
Cash and cash equiva-
lents at end of year... $ 1,962,840 4,591,399 14,155,013 4,831,711 16,327,047
=========== =========== =========== ========== ==========
Supplemental cash flow
disclosures:
Dividends declared..... $ -- 525,000 425,000 425,000 --
=========== =========== =========== ========== ==========
Common stock issued in
connection with busi-
ness combinations..... $ -- -- 573,984 -- --
=========== =========== =========== ========== ==========
Common stock issued in
consideration for
notes receivable...... $ -- -- 52,366 -- --
=========== =========== =========== ========== ==========
Equipment acquired un-
der capital lease..... $ 480,007 87,553 -- -- --
=========== =========== =========== ========== ==========
Interest paid.......... $ 112,152 120,604 356,270 33,471 4,417
=========== =========== =========== ========== ==========
Taxes paid............. $ -- -- 5,164,634 2,929,212 975
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996 AND MARCH 31, 1997(INFORMATION AS OF AND FOR
THE THREE MONTHSENDED MARCH 31, 1996 AND 1997 IS UNAUDITED)
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Telegroup, Inc. and subsidiaries (the Company) is an alternative provider of
domestic and international telecommunications services. Telegroup's revenues
are derived from the sale of telecommunications to retail customers, typically
residential users and small- to medium-sized business and wholesale customers,
typically telecommunications carriers. The Company's customers are principally
located in the United States, Europe and the Pacific Rim which consists of
Asia, Australia and New Zealand. In both the retail and wholesale aspects of
its business, the Company extends credit to customers on an unsecured basis
with the risk of loss limited to outstanding amounts.
The Company markets its services through a worldwide network of independent
agents and supervisory "country coordinators". The Company extends credit to
its sales representatives and country coordinators on an unsecured basis with
the risk of loss limited to outstanding amounts, less commissions payable to
the representatives and coordinators.
A summary of the Company's significant accounting policies follows:
(b) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States,
and include the accounts of the Company and its wholly-owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
(c) Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. At December 31, 1996 and March
31, 1997 cash equivalents consisted of a certificate of deposit in the amount
of $60,000. There were no cash equivalents at December 31, 1995.
(d) Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the lower of the fair value of the asset or the net
present value of the minimum lease payments at the inception of the lease.
Depreciation is provided using the straight-line method over the useful lives
of the assets owned and the related lease term for equipment held under
capital leases.
(e) Capitalized Software Development Costs
The Company capitalizes software costs incurred in the development of its
telecommunications switching software, billing systems and other support
platforms. The Company capitalizes only direct labor costs incurred in the
development of internal use software. Capitalization begins at achievement of
technological feasibility and ends when the software is placed in service.
Amortization of capitalized software will be provided using the straight-line
method over the software's estimated useful life, which ranges from 3 to 5
years. There was no amortization during 1995 or 1996 as the software had not
yet been placed in service. For the three-month period ended March 31, 1997,
amortization of software development costs totalled $35,852.
F-7
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Stock-Based Compensation
The Company accounts for its stock-based employee compensation plan using
the intrinsic value based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretation (APB No. 25). The Company has provided pro forma disclosures as
if the fair value based method of accounting for these plans, as prescribed by
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), had been applied.
(g) Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS No. 121), which requires that the long-lived assets and certain
identifiable intangibles, held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. An impairment loss is
recognized when estimated undiscounted future cash flows expected to be
generated by the asset is less than its carrying value. Measurement of the
impairment loss is based on the fair value of the asset, which is generally
determined using valuation techniques such as the discounted present value of
expected future cash flows. The adoption of SFAS No. 121 had no effect on the
consolidated financial statements of the Company.
(h) Other Assets
Goodwill results from the application of the purchase method of accounting
for business combinations. Amortization is provided using the straight-line
method over a maximum of 15 years. Impairment is determined pursuant to the
methodology in SFAS No. 121.
(i) Income Taxes
The Company accounts for income taxes under the provisions of SFAS No. 109,
Accounting for Income Taxes (SFAS No. 109). Under the asset and liability
method of SFAS No. 109, deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(j) Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual amounts could differ from those
estimates.
(k) Business and Credit Concentration
Financial instruments which potentially expose the Company to a
concentration of credit risk, as defined by SFAS No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of Credit Risk, consist primarily of
accounts receivable. At December 31, 1996 and March 31, 1997, the Company's
accounts receivable balance from customers in countries outside of the United
States was approximately $18,100,000 and $15,300,000, respectively, with an
associated reserve for credit losses of $2,400,000 and $2,000,000,
respectively. At December 31, 1996 and March 31, 1997, approximately 3% and
4%, respectively, of the international accounts receivable balance is
collateralized by deposits paid by a portion or its international customers
upon the initiation of service.
F-8
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) Foreign Currency Contracts
During 1996, the Company began to use foreign currency contracts to hedge
foreign currency risk associated with its international accounts receivable
balances. Gains or losses pursuant to these foreign currency contracts are
reflected as an adjustment of the carrying value of the hedged accounts
receivable. At December 31, 1996 and March 31, 1997, the Company had no
material deferred hedging gains or losses.
(m) Common Stock and Earnings (Loss) Per Share
Earnings (loss) per common and common equivalent share have been computed
using the weighted-average number of shares of common stock outstanding during
each period as adjusted for the effects of the Securities and Exchange
Commission Staff Accounting Bulletin No. 83. Accordingly, options and warrants
to purchase common stock granted within one year of the Company's initial
public offering, which have exercise prices below the assumed initial public
offering price per share, have been included in the calculation of common
equivalent shares, using the treasury stock method, as if they were
outstanding for all periods presented. Additionally, common share amounts have
been adjusted to reflect the stock split of approximately 5.51-for-1 and
reclassification of the Company's Class A and Class B common stock into a
single class of common stock which will occur immediately prior to the
effectiveness of the Registration Statement.
(n) Revenues, Cost of Revenues and Commissions Expense
Revenues from retail telecommunications services are recognized when
customer calls are completed. Revenues from wholesale telecommunications
services are recognized when the wholesale carrier's customers' calls are
completed. Cost of retail and wholesale revenues is based primarily on the
direct costs associated with owned and leased transmission capacity and the
cost of transmitting and terminating traffic on other carriers' facilities.
The Company does not differentiate between the cost of providing transmission
services on a retail or wholesale basis. Commissions paid to acquire customer
call traffic are expensed in the period when associated call revenues are
recognized.
(o) Prepaid Phone Cards
Substantially all the prepaid phone cards sold by the Company have an
expiration date of 24 months after issuance or six months after last use. The
Company records the net sales price as deferred revenue when cards are sold
and recognizes revenue as the ultimate consumer utilizes calling time.
Deferred revenue relating to unused calling time remaining at each card's
expiration is recognized as revenue upon the expiration of such card.
(p) Foreign Currency Translation
The functional currency of the Company is the United States (U.S.) dollar.
The functional currency of the Company's foreign operations generally is the
applicable local currency for each wholly-owned foreign subsidiary. Assets and
liabilities of its foreign subsidiaries are translated at the spot rate in
effect at the applicable reporting date, and the combined statements of
operations and the Company's share of the results of operations of its foreign
subsidiaries are translated at the average exchange rates in effect during the
applicable period. The resulting unrealized cumulative translation adjustment
is recorded as a separate component of equity.
(q) Fair Value of Financial Instruments
The fair values of cash and cash equivalents, receivables, accounts payable
and lease obligations are estimated to approximate carrying value due to the
short-term maturities of these financial instruments. The carrying value of
the long-term debt approximates fair value as the debt was secured primarily
during November 1996 at rates consistent with those in effect at December 31,
1996 and March 31, 1997.
(r) Reclassifications
Certain amounts have been reclassified for comparability with the 1996
presentation.
F-9
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) DEBT
Long-term debt at December 31, 1996 and March 31, 1997 is shown below:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
<S> <C> <C>
12% senior subordinated notes, net of discount,
unsecured...................................... $10,894,126 $11,021,389
8.5% note payable, due monthly through fiscal
2000, secured by vehicle....................... 19,003 15,228
10.8% note payable, due monthly through fiscal
1998, secured by equipment financed............ 160,628 141,505
12.0% note payable, paid in 1997................ 74,319 --
12.0% note payable, paid in 1997................ 276,853 --
6.85% note payable, due monthly through fiscal
1999, unsecured................................ 14,138 12,322
8.00% note payable, due monthly through fiscal
1998, unsecured................................ 10,425 7,662
----------- -----------
11,449,492 11,198,106
Less current portion............................ (232,596) (100,221)
----------- -----------
$11,216,896 $11,097,885
=========== ===========
</TABLE>
There was no long-term debt at December 31, 1995.
On November 27, 1996, the Company completed a private placement (Private
Offering) of 12% Senior Subordinated Notes (Note) for gross proceeds of
$20,000,000 which is due and payable on November 27, 2003. Net proceeds from
the Private Offering, after issuance costs of $1,450,281, were $18,549,719. In
connection with the Private Offering, the Company issued 20,000 warrants to
purchase 1,166,181 of the Company's common stock (see note 7).
The Note was originally recorded at $10,846,049 (a yield of 26.8%), which
represents the $20,000,000 in proceeds less the $9,153,951 value assigned to
the detachable warrants, which is included in additional paid-in capital. The
value of the warrants was based on a valuation performed by the Company's
independent financial advisors. The value assigned to the warrants is being
accreted to the debt using the interest method over 7 years. The accretion of
the value assigned to the warrants is included in interest expense in the
accompanying consolidated financial statements.
The Company may redeem the Note in whole or in part, at the redemption
prices set forth in the agreement plus unpaid interest, if any, and a
prepayment penalty of $1,400,000, if applicable, at the date of redemption.
The Note indenture contains certain covenants which provide for limitations on
indebtedness, dividend payments, changes in control, and certain other
business transactions.
The Company had a credit agreement with a bank which provided for up to
$5,000,000 in committed credit at December 31, 1996. The credit line was
amended to provide up to $7,500,000 effective March 28, 1997 and terminating
June 30, 1998. There were no borrowings under the line at December 31, 1996
and March 31, 1997. The credit line is unsecured.
F-10
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a schedule by years of future minimum debt service
requirements as of December 31, 1996 and March 31, 1997:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
<S> <C> <C>
1997............................................... $ 232,596 100,221
1998............................................... 229,684 70,716
1999............................................... 91,271 5,780
2000............................................... 1,815 --
2001............................................... -- --
Later years........................................ 20,000,000 20,000,000
----------- ----------
20,555,366 20,176,717
Less unaccreted discount on the 12% note........... (9,105,874) (8,978,611)
----------- ----------
$11,449,492 11,198,106
=========== ==========
</TABLE>
(3) BUSINESS COMBINATIONS
On August 21, 1996, the Company purchased TeleContinent, S.A. for $200,000.
Also on August 21, 1996, the Company purchased Telegroup South Europe, Inc.
Consideration for the purchase was $1,031,547 and 263,488 shares of common
stock of the Company valued at $573,984, for total consideration of
$1,605,531. The value of the common stock was determined by management based
on information obtained from the Company's independent financial advisors.
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations are
included in the consolidated financial statements from the date of
acquisition. The aggregate purchase price of the acquisitions was allocated
based on fair values as follows:
<TABLE>
<S> <C>
Current assets................................................ $ 794,452
Property and equipment........................................ 54,571
Goodwill...................................................... 1,024,609
Current liabilities........................................... (68,101)
----------
Total....................................................... $1,805,531
==========
</TABLE>
Pro forma operating results of the Company, assuming these acquisitions were
consummated on January 1, 1994, do not significantly differ from reported
amounts.
(4) RELATED PARTIES
During 1994, 1995, and a portion of 1996, the Company had a management
agreement with an affiliate owned by certain shareholders of the Company
whereby it paid a management fee, determined annually, plus an incentive fee
based upon performance. Amounts paid under this agreement totaled $1,155,000,
$1,334,000 and $415,000 during 1994, 1995 and 1996, respectively. The
management agreement was terminated on May 15, 1996.
F-11
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) PROPERTY AND EQUIPMENT
Property and equipment, including assets owned under capital leases of
$813,790 in 1995 and $612,278 as of December 31, 1996 and March 31, 1997, is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31
USEFUL --------------------- MARCH 31,
LIVES 1995 1996 1997
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Land................................ -- $ 34,290 88,857 88,857
Building and improvements........... 2-20 -- 298,483 391,546
Furniture, fixtures and office
equipment.......................... 5-7 172,016 327,368 458,958
Computer equipment.................. 5 2,363,954 5,021,884 5,734,195
Network equipment................... 5 2,409,848 8,344,824 10,605,320
Automobiles......................... 5 62,055 104,260 100,538
---------- ---------- ----------
5,042,163 14,185,676 17,379,414
Less accumulated depreciation,
including amounts applicable to
assets acquired under capital
leases of $338,665 in 1995,
$269,098 in 1996 and $299,712 as of
March 31, 1997..................... 1,063,124 2,929,537 3,539,681
---------- ---------- ----------
Net property and equipment........ $3,979,039 11,256,139 13,839,733
========== ========== ==========
</TABLE>
Property and equipment includes approximately $800,000 of equipment which
has not been placed in service at December 31, 1996 and, accordingly, is not
being depreciated. The majority of this amount is related to new network
construction.
(6) LEASES
The Company leases certain network equipment under capital leases and leases
office space under operating leases. Future minimum lease payments under these
lease agreements for each of the next five years are summarized as shown on
the following page.
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ---------
<S> <C> <C>
Year ending December 31:
1997.................................................... $187,421 860,777
1998.................................................... 164,626 527,175
1999.................................................... 143,120 437,981
2000.................................................... 43,149 437,160
2001.................................................... -- 106,630
Thereafter.............................................. -- --
-------- ---------
Total minimum lease payments.......................... 538,316 2,369,723
=========
Less amount representing interest....................... (98,614)
--------
$439,702
========
</TABLE>
As operating leases expire, it is expected that they will be replaced with
similar leases. Rent expense under operating leases totaled $224,504, $306,933
and $682,630 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $106,407 and $271,945 for the three months ended March 31,
1996 and 1997, respectively.
F-12
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) SHAREHOLDERS' EQUITY
Stock Option Plan
The Company has a stock option plan (the Plan) pursuant to which the
Company's Board of Directors may grant unqualified and performance-based
options to employees. The Plan authorizes grants of option to purchase up to
4,000,000 shares of authorized but unissued common stock. All stock options
have a ten-year term and become fully exercisable on the date of grant or in
increments over a three-year vesting period. The following table summarizes
the stock option activity since the inception of the Plan. There was no
activity during the three months ended March 31, 1997
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE PRICE REMAINING
SHARES PER SHARE TERM
--------- -------------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1996 -- --
Granted................................... 1,639,570 $1.31
Canceled.................................. (4,132) --
Exercised................................. -- --
--------- -----
Outstanding at December 31, 1996............ 1,635,438 $1.31 9.2 years
========= =====
Exercisable at December 31, 1996............ 539,850 $1.31
========= =====
</TABLE>
The Company applies the intrinsic value method prescribed by APB Opinion No.
25 in accounting for its Plan and, accordingly, compensation costs of
$1,032,646 and $85,595 have been recognized for its stock options for the year
ended December 31, 1996 and for the three month period ended March 31, 1997,
respectively. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss and loss per share would have been:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss............................................. $118,322 79,767
======== ======
Loss per common equivalent share..................... $ 0.00 0.00
======== ======
</TABLE>
Under SFAS No. 123, the per-share minimum value of stock options granted in
1996 was $0.61. The minimum value, estimated as of the grant date, does not
take into account the expected volatility of the underlying stock as is
prescribed by SFAS No. 123 for privately held companies. Input variables used
in the model included an interest free rate of 6.43%, no expected dividend
yields, and an estimated option life of 10 years. The pro forma impact on
income assumes no options will be forfeited.
Options granted during 1996 included performance based options. The
compensation expense recorded for these performance based options under APB
Opinion No. 25 was greater than the expense recorded if the Company had
determined compensation cost under SFAS No. 123.
Warrants
In connection with the Private Offering, the Company issued 20,000 warrants
to purchase 1,166,181 of the Company's common stock. At the time of closing,
1,166,181 shares represented four percent of the Company's fully diluted
common stock. The warrants are currently exercisable, carry an exercise price
F-13
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of $.002 per share, and expire November 27, 2003. As of December 31, 1996, all
of these warrants remain outstanding. If the Company has not consummated an
initial public offering (IPO) prior to July 2, 1997, the holder of the
warrants will receive additional shares equal to one-half percent of the
outstanding shares on a fully diluted basis. If the Company has not
consummated an IPO prior to January 2, 1998, the holder of the warrants will
receive an additional amount equal to one-half percent of the outstanding
shares on a fully diluted basis.
(8) INCOME TAX MATTERS
Income tax expense (benefit) for the years ended December 31 is comprised of
the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ ----------------
1994 1995 1996 1996 1997
--------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Current....................... $(150,100) 3,526,900 (237,381) 378,284 (77,052)
Deferred...................... (198,200) (937,200) 229,933 377,353 (61,595)
--------- --------- -------- ------- --------
$(348,300) 2,589,700 (7,448) 755,637 (138,647)
========= ========= ======== ======= ========
</TABLE>
Income tax expense differs from the amount computed by applying the federal
income tax rate of 34% to earnings (loss) before taxes, as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
---------------------------- ----------------
1994 1995 1996 1996 1997
--------- --------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Expected federal income tax
(benefit).................... $(301,500) 2,180,000 (42,762) 728,676 (141,324)
State income tax (benefit),
net of federal effect........ (53,200) 384,700 (1,344) 23,493 (4,556)
Environmental tax............. -- 10,200 -- -- --
Other nondeductible expenses,
net.......................... 6,400 14,800 36,658 3,468 7,233
--------- --------- ------- ------- --------
$(348,300) 2,589,700 (7,448) 755,637 (138,647)
========= ========= ======= ======= ========
</TABLE>
F-14
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
The tax effect of significant temporary differences giving rise to deferred
income tax assets and liabilities are shown below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- MARCH 31,
1994 1995 1996 1997
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Deferred income tax liabilities:
Property and equipment, principally
depreciation adjustments............ $148,200 269,630 502,711 582,827
Capitalized software................. -- -- 669,160 739,913
Basis in subsidiaries................ -- -- 32,898 --
Unearned foreign exchange
difference.......................... -- -- -- 5,073
Cumulative adjustment, change in
accounting for income tax purposes.. 153,600 -- -- --
-------- --------- --------- ---------
Total gross deferred tax
liabilities....................... $301,800 269,630 1,204,769 1,327,813
-------- --------- --------- ---------
Deferred income tax assets:
Allowance for credit losses.......... 130,000 840,000 1,151,172 1,212,601
Accrued compensation................. 19,200 294,730 447,878 571,164
Net operating loss carryforward...... 44,900 -- -- --
Charitable contribution
carryforward........................ 35,600 -- 107,729 107,729
Unearned revenue..................... -- -- 22,558 14,035
Basis in subsidiaries................ -- -- -- 4,468
Unearned foreign exchange
difference.......................... -- -- 4,543 --
Other................................ -- -- 106,056 114,578
-------- --------- --------- ---------
Total gross deferred tax assets.... 229,700 1,134,730 1,839,936 2,024,575
-------- --------- --------- ---------
Net deferred tax asset
(liability)....................... $(72,100) 865,100 635,167 696,762
======== ========= ========= =========
</TABLE>
No valuation allowance for deferred taxes at December 31, 1994, 1995 and
1996 and March 31, 1997 was necessary.
(9) COMMITMENTS AND CONTINGENCIES
Commitment with Telecommunications Company
The Company has an agreement with Sprint Communications Company L.P.
(Sprint) with net monthly usage commitments of $1,500,000. In the event such
monthly commitments are not met, the Company is required to remit to Sprint
25% of the difference between the $1,500,000 monthly commitment and actual
usage. Such amount, if necessary, would be recorded as cost of revenue in the
period incurred. The Company has exceeded the monthly usage commitments since
the inception of this agreement. This agreement extends through December 1997.
Retirement Plan
Effective January 1, 1996, the Company adopted the Telegroup, Inc. 401(k)
Retirement Savings Plan (the Plan). The Plan is a defined contribution plan
covering all employees of the Company who have one year of service and have
attained the age of 21. Participants may contribute up to 15% of their base
pay in pretax dollars. The Company will match employee contributions on a
discretionary basis. Vesting in Company contributions is 100% after 5 years in
the Plan. The Company made no contributions to the Plan in 1996.
F-15
<PAGE>
TELEGROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
Litigation
In June 1996, Macrophone Worldwide (PTY) Ltd. (the "Plaintiff"), a former
Country Coordinator for South Africa, filed a complaint (the "Complaint")
against the Company in the United States District Court for the Southern
District of Iowa (the "Action") alleging, among other things, breach of
contract, wrongful termination and intentional interference with contractual
relations. The Complaint requests compensatory and exemplary damages. Although
the Company is vigorously defending the Action, mamagement believes that the
Company will ultimately prevail and does not believe the outcome of the
Action, if unfavorable, will have a material adverse effect on the Company's
business, financial condition or results of operations, although there can be
no assurance that this will be the case.
The Company is a party to certain other litigation which has arisen in the
ordinary course of business. In the opinion of management, the ultimate
resolution of these matters will not have a significant effect on the
financial statements of the Company.
(10) BUSINESS SEGMENT AND SIGNIFICANT CUSTOMER
The Company operates in a single industry segment. For the years ended
December 31, 1994, 1995 and 1996, substantially all of the Company's revenues
were derived from traffic transmitted through switch facilities in New York
and the United Kingdom. The geographic origin of revenue is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED MARCH 31,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
United States...... $29,490,585 35,154,246 60,360,882 11,448,685 23,353,992
Europe............. 12,306,408 41,173,425 81,137,404 18,025,650 25,566,459
Pacific Rim........ 8,485,055 22,613,550 42,185,403 6,326,101 17,225,801
Other.............. 18,431,917 30,178,169 29,523,820 7,550,104 7,949,525
----------- ----------- ----------- ----------- -----------
$68,713,965 129,119,390 213,207,509 43,350,540 74,095,777
=========== =========== =========== =========== ===========
</TABLE>
All revenue was derived from unaffiliated customers. For the period ended
March 31, 1997, approximately 12% of the Company's total revenues were derived
from a single customer.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, ANY SELLING SHAREHOLDERS, OR BY ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 30
Dividend Policy.......................................................... 30
Dilution................................................................. 31
Capitalization........................................................... 32
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
The International Telecommunications Industry............................ 45
Business................................................................. 52
Management............................................................... 77
Certain Transactions..................................................... 85
Principal and Selling Shareholders....................................... 87
Description of Capital Stock............................................. 88
Shares Eligible for Future Sale.......................................... 93
Certain United States Federal Income Tax Considerations for Non-U.S.
Holders of Common Stock................................................. 95
Underwriting............................................................. 98
Legal Matters............................................................ 102
Experts.................................................................. 102
Additional Information................................................... 102
Glossary of Terms........................................................ 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,200,000 SHARES
[LOGO OF TELEGROUP APPEARS HERE]
COMMON STOCK
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INCORPORATED
COWEN & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION, DATED JUNE 18, 1997
PROSPECTUS
7,200,000 SHARES
[LOGO OF TELEGROUP APPEARS HERE]
COMMON STOCK
--------
Of the 7,200,000 shares of Common Stock, no par value (the "Common Stock"),
offered hereby, 5,760,000 shares are being offered in the United States and
Canada (the "U.S. Offering") by the U.S. Underwriters (as defined) and
1,440,000 shares are being offered in a concurrent international offering (the
"International Offering" and, together with the U.S. Offering, the "Offering")
outside the United States and Canada by the Managers (as defined). The initial
public offering price and the aggregate underwriting discount per share are
identical for both offerings. All of the shares offered hereby are being issued
and sold by Telegroup, Inc. (the "Company").
Prior to the Offering, there has been no public market for the Common Stock.
It is currently anticipated that the initial public offering price of the
Common Stock will be between $14.00 and $16.00 per share. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price. The shares of Common Stock have been approved for
quotation on The Nasdaq National Market under the symbol "TGRP," subject to
official notice of issuance.
--------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 OF THIS PROSPECTUS FOR A DISCUSSION
OF RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SHARES OF COMMON STOCK OFFERED HEREBY.
--------
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>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and certain existing security holders (the "Selling
Shareholders") have agreed to indemnify the U.S. Underwriters and the
Managers against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,000,000, all of which will be
paid by the Company.
(3) The Selling Shareholders have granted the U.S. Underwriters and the
Managers a 30-day option to purchase up to an additional 1,080,000 shares
of Common Stock on the same terms as set forth above solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public and Underwriting Discounts and
Commissions will be
$ , and $ , respectively, and the Proceeds to Selling Shareholders will
be $ . See "Underwriting." The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders pursuant to
the over-allotment option.
--------
The shares of Common Stock are being offered by the several U.S. Underwriters
and the several Managers named herein, subject to prior sale, when, as and if
received and accepted by them and subject to certain conditions. It is expected
that certificates for shares of Common Stock will be available for delivery on
or about , 1997 at the offices of Smith Barney Inc., 333 W. 34th Street, New
York, New York 10001.
--------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INTERNATIONAL
COWEN & COMPANY
, 1997
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, ANY SELLING SHAREHOLDERS, OR BY ANY OF THE UNDERWRIT-
ERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN
THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT
LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS DOES
NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 30
Dividend Policy.......................................................... 30
Dilution................................................................. 31
Capitalization........................................................... 32
Selected Financial Data.................................................. 33
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 35
The International Telecommunications Industry............................ 45
Business................................................................. 52
Management............................................................... 77
Certain Transactions..................................................... 85
Principal and Selling Shareholders....................................... 87
Description of Capital Stock............................................. 88
Shares Eligible for Future Sale.......................................... 93
Certain United States Federal Income Tax Considerations for Non-U.S.
Holders of Common Stock................................................. 95
Underwriting............................................................. 98
Legal Matters............................................................ 102
Experts.................................................................. 102
Additional Information................................................... 102
Glossary of Terms........................................................ 103
Index to Consolidated Financial Statements............................... F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This is in addition to
the obligation of dealers to deliver a Prospectus when acting as Underwriters
and with respect to unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7,200,000 SHARES
[LOGO OF TELEGROUP APPEARS HERE]
COMMON STOCK
-------
PROSPECTUS
, 1997
-------
SMITH BARNEY INC.
ALEX. BROWN & SONS
INTERNATIONAL
COWEN & COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the shares registered for
offer and sale hereby, other than underwriting discounts and commissions. All
amounts shown represent estimates except the Securities Act registration fee
and the NASD filing fee.
<TABLE>
<S> <C>
Registration fee under the Securities Act of 1933............. $ 43,561
NASD filing fee............................................... 50,000
Nasdaq National Market fee.................................... 38,200
Printing expenses............................................. 350,000
Registrar and Transfer Agent's fees and expenses.............. 10,000
Accountants' fees and expenses................................ 100,000
Legal fees and expenses (not including Blue Sky).............. 375,000
Blue Sky fees and expenses.................................... 5,000
Miscellaneous................................................. 28,239
----------
Total..................................................... $1,000,000
==========
</TABLE>
- --------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Iowa Business Corporation Act confers broad powers upon corporations
incorporated in Iowa with respect to indemnification of any person against
liabilities incurred by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another Corporation or other business entity. These provisions are not
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement or otherwise.
The Company's Second Restated Articles of Incorporation contain a provision
that eliminates the personal liability of the Company's directors to the
Company or its shareholders for monetary damages for breach of fiduciary duty
as a director, except (i) for liability for any breach of the director's duty
of loyalty to the Corporation or its shareholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of the law, (iii) for any transaction from which the director derived an
improper personal benefit, or (iv) for unlawful distributions in violation of
Section 490.833 of the Iowa Business Corporation Act. Any repeal or amendment
of this provision by the shareholders of the Corporation will not adversely
affect any right or protection of a director existing at the time of such
repeal or amendment.
The Company's Amended and Restated Bylaws contain a provision entitling
officers and directors to be indemnified and held harmless by the Company
against expenses, liabilities and costs (including attorneys' fees) actually
and reasonably incurred by such person, to the fullest extent permitted by the
Iowa Business Corporation Act.
The Company has obtained a director and officer liability policy, under
which each director and certain officers of the Company would be insured
against certain liabilities.
Prior to completion of the Offering, the Company intends to enter into
indemnification agreements with certain of its executive officers and
directors (collectively, the "Indemnification Agreements"). Pursuant to the
terms of the Indemnification Agreements, each of the executive officers and
directors who are parties thereto will be indemnified by the Company to the
full extent provided by law in the event such officer or director is made or
threatened to be made a party to a claim arising out of such person acting in
his capacity as an officer or director of the Company. The Company has further
agreed that, upon a change in control, as defined in the
II-1
<PAGE>
Indemnification Agreements, the rights of such officers and directors to
indemnification payments and expense advances will be determined in accordance
with the provisions of the Iowa Business Corporation Act and has also agreed
that, upon a potential change of control, as defined in the Indemnification
Agreements, it will create a trust in an amount sufficient to satisfy all
indemnity expenses reasonably anticipated at the time a written request to
create such a trust is submitted by an officer or director.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs of this Item 15 describe all offers and sales of
securities by the Company within the last three years which were not registered
under the Securities Act of 1933, other than securities issued in connection
with stock reclassifications, stock dividends or stock splits:
On April 23, 1996, the Company issued 94,707 shares of Class B Common
Stock to Michael Lackman for the aggregate consideration of $20,946.53 paid
by Mr. Lackman with a promissory note in the principal amount of
$20,946.53.
On April 26, 1996, the Company issued 142,061 shares of Class B Common
Stock to Ronald Stakland for the aggregate consideration of $31,419.80 paid
by Mr. Stakland with a promissory note in the principal amount of
$31,419.80.
On August 21, 1996, in connection with the Plan and Agreement of
Reorganization between the Company, George Apple and Telegroup South
Europe, Inc. ("TGSE"), the Company issued 47,832 shares of Class A Common
Stock and made a cash payment to George Apple in exchange for substantially
all of the assets of TGSE.
Amended and Restated 1996 Telegroup, Inc. Stock Option Plan. See
"Management--Amended and Restated 1996 Telegroup, Inc. Stock Option Plan"
incorporated by reference herein from the Prospectus included in Part I of this
Registration Statement.
November 27, 1996 Issuance of Senior Subordinated Notes and Warrants. On
November 27, 1996, the Company completed a $20 million private placement of its
12.0% Senior Subordinated Notes, together with warrants to purchase 4.0% of the
Company's fully-diluted Common Stock. See "Certain Transactions--Subordinated
Note Placement" and "Description of Capital Stock--Warrants."
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention 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 Company.
II-2
<PAGE>
ITEM 16(A). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement
1.2 Form of International Underwriting Agreement
2.1 Plan and Agreement of Reorganization Between the
Company, George Apple and Telegroup South Europe,
Inc. Dated September 6, 1996
2.2 Plan and Agreement of acquisition between the
Company, Telecontinent, S.A. and Georges Apple
dated September 6, 1996.
**3.1 Restated Articles of Incorporation of Telegroup,
Inc.
3.2 Form of Second Restated Articles of Incorporation of
Telegroup, Inc.
**3.3 Bylaws of Telegroup, Inc.
3.4 Form of Amended and Restated Bylaws of Telegroup,
Inc.
4.1 Form of Common Stock Certificate of Telegroup, Inc.
4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
**4.3 Note and Warrant Purchase Agreement dated as of
November 27, 1996
**4.4 Form of Warrant to Purchase Class A Common Stock of
Telegroup, Inc.
**4.5 Indenture dated as of November 27, 1996 between
Telegroup, Inc. and The Chase Manhattan Bank
5.1 Opinion of Marcus & Thompson, P.C.
**10.1 Loan Agreement Dated as of March 28, 1997 by and
between the Company and American National Bank and
Trust Company of Chicago
10.1.1 First Amendment to Loan Agreement between the
Company and American National Bank and Trust
Company of Chicago dated as of June 6, 1997.
10.2 Amended and Restated 1996 Telegroup, Inc. Stock
Option Plan
**10.3 Form of Employment Agreement between the Company and
Fred Gratzon
**10.4 Form of Employment Agreement between the Company and
Clifford Rees
**10.5 Form of Indemnification Agreement
**10.6 Registration Rights Agreement among Telegroup, Inc.,
Greenwich Street Capital Partners, L.P., Greenwich
Street Capital Offshore Fund, Ltd., TRV Employees
Fund, L.P., The Travelers Insurance Company and The
Travelers Life and Annuity Company Dated as of
November 27, 1996
**10.7 Form of Registration Rights Agreement between the
Company and certain Shareholders of the Company
**+10.8 Agreement between Telegroup, Inc. and New T & T Hong
Kong Limited
**+10.9 Resale Solutions Switched Services Agreement between
Sprint Communications Company L.P. and Telegroup,
Inc.
10.10 Form of Employment Agreement between the Company and
John P. Lass
10.11 Form of Employment Agreement between the Company and
Ron Jackenthal
10.12 Form of Employment Agreement between the Company and
Certain Executive Officers
21.1 Subsidiaries of Telegroup, Inc.
23.2 Consent of KPMG Peat Marwick, LLP
23.3 Consent of Marcus & Thompson, P.C. (to be included
in Exhibit 5.1 to this Registration Statement)
**24.1 Power of Attorney
**27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential Treatment is being requested for portions of this document.
The redacted material is being filed separately with the Commission.
II-3
<PAGE>
ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.
II--Valuation and Qualifying Accounts (previously filed)
All other schedules are omitted either because they are not applicable or are
not material, or the information presented therein is contained in the
Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities 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 Securities 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 Securities
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.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF FAIRFIELD, STATE OF
IOWA, ON JUNE 18, 1997.
Telegroup, Inc.
*
By: ____________________________
CLIFFORD REES PRESIDENT AND CHIEF
EXECUTIVE OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JUNE 18, 1997.
SIGNATURE TITLE
* Chairman of the Board and Director
- -------------------------------------
FRED GRATZON
* Chief Executive Officer, President
- ------------------------------------- and Director (Principal Executive
Officer)
CLIFFORD REES
* Vice President--Finance, Chief
- ------------------------------------- Financial Officer, Treasurer and
Director (Principal Financial
Officer)
DOUGLAS A. NEISH
* Director of Finance and Controller
- ------------------------------------- (Principal Accounting Officer)
GARY KORF Senior Vice President, International
- ------------------------------------- Services and Director
RONALD B. STAKLAND
* Charles Johanson, by signing his name hereto, signs this document on behalf
of each of the persons so indicated above pursuant to powers of attorney
duly executed by such persons and filed with the Securities and Exchange
Commission.
/s/ Charles Johanson Attorney-in-Fact
_________________________________
CHARLES JOHANSON
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1.1 Form of U.S. Underwriting Agreement
1.2 Form of International Underwriting Agreement
2.1 Plan and Agreement of Reorganization Between the
Company, George Apple and Telegroup South Europe,
Inc. Dated September 6, 1996
2.2 Plan and Agreement of Acquisition between the Company,
TeleContinent, S.A. and Georges Apple dated September
6, 1996
**3.1 Restated Articles of Incorporation of Telegroup, Inc.
3.2 Form of Second Restated Articles of Incorporation of
Telegroup, Inc.
**3.3 Bylaws of Telegroup, Inc.
3.4 Form of Amended and Restated Bylaws of Telegroup, Inc.
4.1 Form of Common Stock Certificate of Telegroup, Inc.
4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
**4.3 Note and Warrant Purchase Agreement dated as of
November 27, 1996
**4.4 Form of Warrant to Purchase Class A Common Stock of
Telegroup, Inc.
**4.5 Indenture dated as of November 27, 1996 between
Telegroup, Inc. and The Chase Manhattan Bank
5.1 Opinion of Marcus & Thompson, P.C.
**10.1 Loan Agreement Dated as of March 28, 1997 by and
between the Company and American National Bank and
Trust Company of Chicago
10.1.1 First Amendment to Loan Agreement between the Company
and American National Bank and Trust Company of
Chicago dated as of June 6, 1997
10.2 Amended and Restated 1996 Telegroup, Inc. Stock Option
Plan
**10.3 Form of Employment Agreement between the Company and
Fred Gratzon
**10.4 Form of Employment Agreement between the Company and
Clifford Rees
**10.5 Form of Indemnification Agreement
**10.6 Registration Rights Agreement among Telegroup, Inc.,
Greenwich Street Capital Partners, L.P., Greenwich
Street Capital Offshore Fund, Ltd., TRV Employees
Fund, L.P., The Travelers Insurance Company and The
Travelers Life and Annuity Company Dated as of
November 27, 1996
**10.7 Form of Registration Rights Agreement between the
Company and certain Shareholders of the Company
**+10.8 Agreement between Telegroup, Inc. and New T & T Hong
Kong Limited
**+10.9 Resale Solutions Switched Services Agreement between
Sprint Communications Company L.P. and Telegroup,
Inc.
10.10 Form of Employment Agreement between the Company and
John P. Lass
10.11 Form of Employment Agreement between the Company and
Ron Jackenthal
10.12 Form of Employment Agreement between the Company and
Certain Executives
21.1 Subsidiaries of Telegroup, Inc.
23.2 Consent of KPMG Peat Marwick, LLP
23.3 Consent of Marcus & Thompson, P.C. (to be included in
Exhibit 5.1 to this Registration Statement)
**24.1 Power of Attorney
**27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
+ Confidential Treatment is being requested for portions of this document.
The redacted material is being filed separately with the Commission.
<PAGE>
EXHIBIT 1.1
5,760,000 Shares
TELEGROUP, INC.
Common Stock
FORM OF
U.S. UNDERWRITING AGREEMENT
June , 1997
SMITH BARNEY INC.
Alex. Brown & Sons Incorporated
COWEN & COMPANY
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Telegroup, Inc., an Iowa corporation (the "Company"), proposes to
issue and sell an aggregate of 5,760,000 shares of its common stock, no par
value per share (the "Firm Shares") to the several U.S. Underwriters named in
Schedule I hereto (the "U.S. Underwriters") for whom Smith Barney Inc., Alex.
Brown & Sons Incorporated and Cowen & Company are acting as representatives
(the "Representatives"). In addition, solely for the purpose of covering
over-allotments, the persons named in Schedule II hereto (the "Selling
Shareholders") propose to sell to the U.S. Underwriters, upon the terms and
conditions set forth in Section 2 hereof, up to an additional 864,000 shares
(the "Additional Shares") of the common stock of the Company. The Company and
the Selling Shareholders are hereinafter sometimes referred to as the
"Sellers." 590,001 of the Additional Shares to be sold by Greenwich Street
Capital Partners, L.P., Greenwich Street Capital Offshore Fund, Ltd., TRV
Employees Fund, L.P., The Travelers Insurance Company and The Travelers Life
and Annuity Company (collectively the "Greenwich Street Affiliates"), are
issuable upon exercise of warrants to purchase common stock of the Company
(the "Warrants"). Each Warrant entitles the holder thereof to purchase
shares of Common Stock (as defined herein) at an exercise price of $0.01 per
share. The Firm Shares and the Additional Shares are hereinafter collectively
referred to as the "Shares." The Company's common stock, no par value per
share, including the Shares and the International Shares (as defined herein),
is hereinafter referred to as the "Common Stock."
<PAGE>
It is understood that the Company and the Selling Shareholders are
concurrently entering into an International Underwriting Agreement, dated the
date hereof (the "International Underwriting Agreement"), providing for the
sale of 1,440,000 shares of the Common Stock (the "Firm International Shares")
by the Company (plus an option granted by the Selling Shareholders to purchase
up to an additional 216,000 shares of Common Stock (the "Additional
International Shares") solely for the purpose of covering over-allotments)
through arrangements with certain underwriters outside the United States and
Canada (the "Managers"), for whom Smith Barney Inc., Alex. Brown & Sons
Incorporated and Cowen & Company are acting as lead Managers (the "Lead
Managers"). All shares of Common Stock proposed to be offered to the Managers
pursuant to the International Underwriting Agreement, including the Firm
International Shares and the Additional International Shares, are herein
referred to as the "International Shares;" the International Shares and the
Shares, collectively, are herein referred to as the "Underwritten Shares."
The Company and the Selling Shareholders also understand that the
Representatives and the Lead Managers have entered into an agreement (the
"Agreement Between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the U.S. Underwriters and the
Managers and that, pursuant thereto and subject to the conditions set forth
therein, the U.S. Underwriters may purchase from the Managers a portion of the
International Shares or sell to the Managers a portion of the Shares. The
Company and the Selling Shareholders understand that any such purchases and
sales between the U.S. Underwriters and the Managers shall be governed by the
Agreement Between U.S. Underwriters and Managers and shall not be governed by
the terms of this Agreement or the International Underwriting Agreement.
The Company and the Selling Shareholders wish to confirm as follows
their respective agreements with you and the other several U.S. Underwriters
on whose behalf you are acting, in connection with the several purchases of
the Shares by the U.S. Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including prospectuses subject
to completion, relating to the Underwritten Shares. The term "Registration
Statement" as used in this Agreement means the registration statement
(including all financial schedules and exhibits), as amended at the time it
becomes effective, and as thereafter amended by post-effective amendment. The
term "Prospectuses" as used in this Agreement means the prospectuses in the
forms included in the Registration Statement, or, if the
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prospectuses included in the Registration Statement omit information in
reliance on Rule 430A under the Act and such information is included in
prospectuses filed with the Commission pursuant to Rule 424(b) under the Act,
the term "Prospectuses" as used in this Agreement means the prospectuses in
the forms included in the Registration Statement as supplemented by the
addition of the Rule 430A information contained in the prospectuses filed with
the Commission pursuant to Rule 424(b). The term "Prepricing Prospectuses" as
used in this Agreement means the prospectuses subject to completion in the
forms included in the Registration Statement at the time of the initial filing
of the Registration Statement with the Commission, and as such prospectuses
shall have been amended from time to time prior to the date of the
Prospectuses.
It is understood that two forms of Prepricing Prospectus and two
forms of Prospectus are to be used in connection with the offering and sale of
the Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to
the Shares that are to be offered and sold in the United States (as defined
herein) or Canada (as defined herein) to U.S. or Canadian Persons (the "U.S.
Prepricing Prospectus" and the "U.S. Prospectus," respectively), and a
Prepricing Prospectus and a Prospectus relating to the International Shares
which are to be offered and sold outside the United States or Canada to
persons other than U.S. or Canadian Persons (the "International Prepricing
Prospectus" and the "International Prospectus," respectively). The U.S.
Prospectus and the International Prospectus are herein collectively called the
"Prospectuses," and the U.S. Prepricing Prospectus and the International
Prepricing Prospectus are herein called the "Prepricing Prospectuses." For
purposes of this Agreement, "Exchange Act" means the Securities Exchange Act
of 1934, as amended, and the rules and regulations of the Commission
thereunder. "U.S. or Canadian Person" means any resident or national of the
United States or Canada, any corporation, partnership or other entity created
or organized in or under the laws of the United States or Canada or any estate
or trust the income of which is subject to United States or Canadian income
taxation regardless of the source of its income (other than the foreign branch
of any U.S. or Canadian Person), and includes any United States or Canadian
branch of a person other than a U.S. or Canadian Person; "United States" means
the United States of America (including the states thereof and the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction; and "Canada" means Canada and its territories, its possessions
and other areas subject to its jurisdiction.
2. Agreements to Sell and Purchase. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein and to such adjustments as you may
determine to avoid fractional shares, the Company hereby agrees to issue and
sell to each U.S. Underwriter and each U.S. Underwriter agrees, severally and
not
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jointly, to purchase from the Company, at a purchase price of [$ ]
per share (the "purchase price per share"), the number of Firm Shares that
bears the same proportion to the aggregate number of Firm Shares to be issued
and sold by the Company as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company.
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Selling Shareholders listed in Schedule II hereto agree to sell to the
U.S. Underwriters, and the U.S. Underwriters shall have the right to purchase
from such Selling Shareholders listed in Schedule II hereto, at the purchase
price per share, pursuant to an option (the "over-allotment option") which may
be exercised prior to 5:00 p.m., New York City time, on the 30th day after the
date of the U.S. Prospectus (or, if such 30th day shall be a Saturday or
Sunday or a holiday, on the next business day thereafter when the New York
Stock Exchange is open for trading), up to an aggregate of 864,000 Additional
Shares from the Selling Shareholders listed in Schedule II hereto (the maximum
number of Additional Shares that each of them agrees to sell upon the exercise
by the U.S. Underwriters of the over-allotment option is set forth opposite
their respective names in Schedule II). The number of Additional Shares that
the U.S. Underwriters elect to purchase upon any exercise of the
over-allotment option shall be provided by each Selling Shareholder who has
agreed to sell Additional Shares in proportion to the respective maximum
numbers of Additional Shares that each such Selling Shareholder has agreed to
sell. Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. Upon
any exercise of the over-allotment option, each U.S. Underwriter, severally
and not jointly, agrees to purchase from each Selling Shareholder who has
agreed to sell Additional Shares, the number of Additional Shares (subject to
such adjustments as you may determine in order to avoid fractional shares)
that bears the same proportion to the number of Additional Shares to be sold
by each Selling Shareholder who has agreed to sell Additional Shares as the
number of Firm Shares set forth opposite the name of such U.S. Underwriter in
Schedule I hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company.
Certificates in transferable form for the Additional Shares that
each of Fred Gratzon and Shelley L. Levin-Gratzon as joint tenants (each of
Fred Gratzon and Shelly L. Levin-Gratzon, collectively the "Gratzons") and
Clifford Rees agrees to sell pursuant to this Agreement have been placed in
custody with Swidler & Berlin, Chartered (the "Custodian") for delivery under
this Agreement pursuant to a Custody Agreement and Power of Attorney (the "GR
Custody Agreement") executed by each of the Gratzons and
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Clifford Rees appointing [ ] and [ ] as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). Each of the Gratzons and
Clifford Rees agrees that (i) the Additional Shares represented by the
certificates held in custody pursuant to the GR Custody Agreement are subject
to the interests of the U.S. Underwriters, the Company and each other Selling
Shareholder, (ii) the arrangements made by the Gratzons and Clifford Rees for
such custody are, except as specifically provided in the GR Custody Agreement,
irrevocable, and (iii) the obligations of the Gratzons and Clifford Rees
hereunder and under the GR Custody Agreement shall not be terminated by any
act of such Selling Shareholder or by operation of law, whether by the death
or incapacity of any of the Gratzons or Clifford Rees or the occurrence of any
other event. If any of the Gratzons or Clifford Rees shall die or be
incapacitated or if any other event shall occur before the delivery of the
Additional Shares of the Gratzons and Clifford Rees to be sold hereunder,
certificates for the Additional Shares of such Selling Shareholder shall be
delivered to the U.S. Underwriters by the Attorneys-in-Fact in accordance with
the terms and conditions of this Agreement and the GR Custody Agreement as if
such death or incapacity or other event had not occurred, regardless of
whether or not the Attorneys-in-Fact or any U.S. Underwriter shall have
received notice of such death, incapacity or other event. Each
Attorney-in-Fact is authorized, on behalf of each of the Gratzons and Clifford
Rees, to execute this Agreement and any other documents necessary or desirable
in connection with the sale of the Additional Shares to be sold hereunder by
the Gratzons and Clifford Rees, to make delivery of the certificates for such
Additional Shares, to receive the proceeds of the sale of such Additional
Shares, to give receipts for such proceeds, to pay therefrom any expenses to
be borne by the Gratzons and Clifford Rees in connection with the sale and
public offering of such Additional Shares, to distribute the balance thereof
to the Gratzons and Clifford Rees, and to take such other action as may be
necessary or desirable in connection with the transactions contemplated by
this Agreement. Each Attorney-in-Fact agrees to perform his duties under the
GR Custody Agreement.
Certificates in transferable form for the Additional Shares that
each of Steve Rubin and Steve Foster agrees to sell pursuant to this Agreement
have been placed in custody with the Custodian for delivery under this
Agreement pursuant to a Custody Agreement and Power of Attorney (the "RF
Custody Agreement") executed by Mr. Rubin and Mr. Foster appointing
[ ] and [ ] as agents and attorneys-in-fact (the "RF
Attorneys-in-Fact"). Each of Steven Rubin and Steven Foster agrees that (i)
the Additional Shares represented by the certificates held in custody pursuant
to the RF Custody Agreement are subject to the interests of the U.S.
Underwriters, the Company and each other Selling Shareholder, (ii) the
arrangements made by Steven Rubin and Steven Foster, for such custody are,
except as specifically provided in the RF Custody Agreement, irrevocable, and
(iii) the obligations of Steven Rubin and Steven Foster hereunder and under
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<PAGE>
the RF Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of any
of Steven Rubin or Steven Foster or the occurrence of any other event. If any
of Steven Rubin or Steven Foster shall die or be incapacitated or if any other
event shall occur before the delivery of the Additional Shares of Steven Rubin
and Steven Foster to be sold hereunder, certificates for the Additional Shares
of such Selling Shareholder shall be delivered to the U.S. Underwriters by the
RF Attorneys-in-Fact in accordance with the terms and conditions of this
Agreement and the RF Custody Agreement, respectively, as if such death or
incapacity or other event had not occurred, regardless of whether or not the
respective Attorneys-in-Fact or any U.S. Underwriter shall have received
notice of such death, incapacity or other event. The RF Attorneys-in-Fact are
authorized, on behalf of Steven Rubin and Steven Foster, to execute this
Agreement and any other documents necessary or desirable in connection with
the sale of the Additional Shares to be sold hereunder by Steven Rubin and
Steven Foster to make delivery of the certificates for such Additional Shares,
to receive the proceeds of the sale of such Additional Shares, to give
receipts for such proceeds, to pay therefrom any expenses to be borne by
Steven Rubin and Steven Foster in connection with the sale and public offering
of such Additional Shares, to distribute the balance thereof to Steven Rubin
and Steven Foster and to take such other action as may be necessary or
desirable in connection with the transactions contemplated by this Agreement.
Each RF Attorney-in-Fact agrees to perform his duties under the RF Custody
Agreement.
Certificates in transferable form for the Warrants which are
exercisable for the Additional Shares that the Greenwich Street Affiliates
agree to sell pursuant to this Agreement have been placed in custody with the
Custodian for delivery under this Agreement pursuant to a Custody Agreement
(the "Greenwich Street Custody Agreement" and collectively with the GR Custody
Agreement, and the RF Custody Agreement, the "Custody Agreements"). The
Greenwich Street Affiliates agree that (i) the Warrants and Additional Shares
represented by the certificates held in custody pursuant to the Greenwich
Street Custody Agreement are subject to the interests of the U.S.
Underwriters, the Company and each other Selling Shareholder, (ii) the
arrangements made by the Greenwich Street Affiliates are, except as
specifically provided in the Greenwich Street Custody Agreement, irrevocable,
and (iii) the obligations of the Greenwich Street Affiliates hereunder and
under the Greenwich Street Custody Agreement shall not be terminated by any
act of the Greenwich Street Affiliates or by operation of law, whether upon
any dissolution, winding up, distribution of assets or other event affecting
the legal existence of any of the Greenwich Street Affiliates. If any event
shall occur before the delivery of the Additional Shares to be sold by the
Greenwich Street Affiliates hereunder or if any of the Greenwich Street
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<PAGE>
Affiliates shall dissolve, wind up, distribute assets or if any other event
affecting the legal existence of any of the Greenwich Street Affiliates shall
occur before the delivery of the Additional Shares to be sold by the Greenwich
Street Affiliates hereunder, the Warrants shall be exercised for the
Additional Shares to be sold by the Greenwich Street Affiliates hereunder and
certificates evidencing such Additional Shares shall be delivered to the U.S.
Underwriters by the Custodian in accordance with the terms and conditions of
this Agreement and the Greenwich Street Custody Agreement as if such
dissolution, winding up or distribution of assets or other event had not
occurred, regardless of whether or not any U.S. Underwriter shall have
received notice of such dissolution, winding up or distribution of assets or
other event.
Each U.S. Underwriter represents, warrants, covenants and agrees
that, except as contemplated under Section 2 of the Agreement Between U.S.
Underwriters and Managers dated the date hereof, (i) it is not purchasing any
Shares for the account of anyone other than a U.S. or Canadian Person, (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any Shares or distribute any U.S. Prepricing Prospectus or U.S.
Prospectus outside the United States or Canada or to anyone other than a U.S.
or Canadian Person, and (iii) any offer of Shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
relevant province of Canada in which such offer is made.
3. Terms of Public Offering. The Sellers have been advised by you
that the U.S. Underwriters propose to make a public offering of their
respective portions of the Shares as soon after the Registration Statement and
this Agreement have become effective as in your judgment is advisable and
initially to offer the Shares upon the terms set forth in the U.S. Prospectus.
4. Delivery of the Shares and Payment Therefor. Delivery to the U.S.
Underwriters of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, NY 10013, at 10:00 A.M.,
New York City time, on [ ], 1997 (the "Closing Date"). The place of
closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the U.S. Underwriters of and payment for any Additional
Shares to be purchased by the U.S. Underwriters shall be made at the
aforementioned office of Smith Barney Inc. at such time on such date (the
"Option Closing Date"), which may be the same as the Closing Date but shall in
no event be earlier than the Closing Date nor earlier than two nor later than
ten business days after the giving of the notice hereinafter referred to, as
shall be specified in a written notice from you on behalf of the U.S.
Underwriters to the Attorneys-in-Fact of the U.S. Underwriters' determination
to purchase a number, specified in such notice, of Additional Shares. The
place of closing for any Additional Shares and the Option Closing Date, if
any, for such Shares may be varied by agreement between you and the
Attorneys-in-Fact.
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Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice, it being understood that
a facsimile transmission shall be deemed written notice, prior to 9:30 A.M.,
New York City time, on the second business day preceding the Closing Date or
the Option Closing Date, as the case may be. Such certificates shall be made
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates and
stock powers evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the
Option Closing Date, as the case may be, against payment of the purchase price
therefor in immediately available funds.
5. Agreements of the Company. The Company agrees with the several
U.S. Underwriters as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission of
which the Company has knowledge for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectuses or the Prospectuses or for
additional information; (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction or the initiation of any proceeding for such purpose of which the
Company has knowledge; and (iii) within the period of time referred to in
paragraph (f) below, of any change in the Company's condition (financial or
other), business, prospects, properties, net worth or results of operations,
or of the happening of any event, including the filing of any information,
documents or reports pursuant to the Exchange Act, that makes any statement of
a material fact made in the Registration Statement or the Prospectuses (as
then amended or supplemented) untrue or which requires the making of any
additions to or changes in the Registration Statement or the Prospectuses (as
then amended or supplemented) in order to state a material fact required by
the Act to be stated therein or necessary in order to make the statements
therein not misleading, or of the necessity to amend or supplement the
Prospectuses (as then amended or
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supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
(c) The Company will furnish to you, without charge, four (4)
signed copies of the Registration Statement as originally filed with the
Commission and of each amendment thereto, including financial statements and
all exhibits to the Registration Statement and will also furnish to you,
without charge, such number of conformed copies of the Registration Statement
as originally filed and of each amendment thereto, but without exhibits, as
you may reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses of which you
shall not previously have been advised or to which you shall reasonably object
in writing after being so advised or (ii) so long as, in the written opinion
of counsel for the U.S. Underwriters (a copy of which shall be delivered to
the Company), a prospectus is required to be delivered in connection with
sales by any U.S. Underwriter or dealer, file any information, documents or
reports pursuant to the Exchange Act, without delivering a copy of such
information, documents or reports to you, as Representatives of the U.S.
Underwriters, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered or will deliver to you, without charge, in such
quantities as you have reasonably requested or may hereafter reasonably
request, copies of each form of the U.S. Prepricing Prospectus. The Company
consents to the use, in accordance with the provisions of the Act and with the
securities or Blue Sky laws of the jurisdictions in which the Shares are
offered by the several U.S. Underwriters and by dealers, prior to the date of
the U.S. Prospectus, of each U.S. Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the U.S. Underwriters (a copy of which shall be
delivered to the Company) a U.S. Prospectus is required by the Act to be
delivered in connection with sales by any U.S. Underwriter or dealer, the
Company will expeditiously deliver to each U.S. Underwriter and each dealer,
without charge, as many copies of the U.S. Prospectus (and of any amendment or
supplement thereto) as you may reasonably request. The Company consents to
the use of the U.S. Prospectus (and of any amendment or supplement thereto) in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the several U.S.
Underwriters and by all dealers to whom Shares may be sold,
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both in connection with the offering and sale of the Shares and for such
period of time thereafter as the U.S. Prospectus is required by the Act to be
delivered in connection with sales by any U.S. Underwriter or dealer. If
during such period of time any event shall occur that in the judgment of the
Company or in the written opinion of counsel for the U.S. Underwriters (a copy
of which shall be delivered to the Company) is required to be set forth in the
U.S. Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the U.S. Prospectus to comply with the Act or
any other law, the Company will forthwith prepare and, subject to the
provisions of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto and will expeditiously furnish to the U.S.
Underwriters and dealers a reasonable number of copies thereof.
(g) The Company will cooperate with you and with counsel for the
U.S. Underwriters in connection with the registration or qualification of the
Shares for offering and sale by the several U.S. Underwriters and by dealers
under the securities or Blue Sky laws of such jurisdictions as you may
reasonably designate and will file such consents to service of process or
other documents necessary or appropriate in order to effect such registration
or qualification; provided that in no event shall the Company be obligated to
qualify to do business in any jurisdiction where it is not now so qualified or
to take any action that would subject it to service of process in suits, other
than those arising out of the offering or sale of the Shares, in any
jurisdiction where it is not now so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering
a twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
reasonably practicable after the end of such period, which consolidated
earnings statement shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to stockholders or filed with the Commission or the Nasdaq National
Market, and (ii) from time to time such other information concerning the
Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the U.S. Underwriters because of any failure
or refusal on the part of the Company or any of the Selling
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Shareholders to comply, in any material respect, with the terms or fulfill, in
any material respect, any of the conditions of this Agreement, the Company
agrees to reimburse the Representatives for all reasonable out-of-pocket
expenses (including reasonable fees and expenses of counsel for the U.S.
Underwriters) incurred by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectuses pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
(m) For a period of 180 days after the date hereof (the "Lock-up
Period"), the Company will not, without the prior written consent of Smith
Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common
Stock (or any securities convertible into or exercisable or exchangeable for
Common Stock) or grant any options or warrants to purchase Common Stock,
except for (i) the Company's issuance of shares of Common Stock in connection
with the reclassification of its Common Stock, (ii) the Company's issuance of
shares of its Common Stock in connection with the approximate 5.51-for-1 stock
split, (iii) the Company's issuance of shares of Common Stock upon exercise of
the Warrants, (iv) the issuance of Common Stock upon the exercise of stock
options granted, or the grant of stock options under the Company's Stock
Option Plan (and the filing of a Form S-8 Registration Statement with respect
to such shares of Common Stock) and (v) sales to the U.S. Underwriters
pursuant to this Agreement and the Managers pursuant to the International
Underwriting Agreement.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance reasonably satisfactory to you, signed by each
of its current officers and directors and each of ___________.
(o) Except as stated in this Agreement and in the International
Underwriting Agreement and in the Prepricing Prospectuses and Prospectuses,
the Company has not taken, nor will it take, directly or indirectly, any
action designed to or that might reasonably be expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(p) The Company will use its reasonable best efforts to have the
Common Stock listed, subject to notice of issuance, on the Nasdaq National
Market concurrently with the effectiveness of the registration statement.
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6. Agreements of the Selling Shareholders. Each of the Selling
Shareholders agrees, severally and not jointly, with the several U.S.
Underwriters as follows:
(a) Messrs. Gratzon and Rees will cooperate to the extent
necessary to cause the registration statement or any post-effective amendment
thereto to become effective at the earliest possible time and each of the
other Selling Shareholders will cooperate to the extent necessary in
furnishing all information with respect to itself of a type referred to in
Item 507 of Regulation S-K under the Act so as to permit the registration
statement or any post effective amendment thereto to become effective at the
earliest possible time.
(b) Such Selling Shareholder will pay all Federal and other
taxes, if any on the transfer or sale of such Additional Shares that are sold
by the Selling Shareholder to the U.S. Underwriters.
(c) Such Selling Shareholder will do or perform all things
required to be done or performed by the Selling Shareholder under this
Agreement prior to the Closing Date or any Option Closing Date, as the case
may be, to satisfy all conditions precedent to the delivery of the Additional
Shares pursuant to this Agreement.
(d) For a period of 180 days after the date hereof, such Selling
Shareholder will not, without the prior written consent of Smith Barney Inc.,
offer, sell, contract to sell or otherwise dispose of any Common Stock (or any
securities convertible into or exercisable or exchangeable for Common Stock)
or grant any options or warrants to purchase Common Stock, except for the sale
of Additional Shares to the Underwriters pursuant to this Agreement and sale
to the Managers under the International Underwriting Agreement.
(e) Except as stated in this Agreement and the International
Underwriting Agreement and in the Prepricing Prospectuses and the
Prospectuses, such Selling Shareholder has not taken, nor will it take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly upon
becoming aware, and if requested by you, will confirm such advice in writing,
within the period of time referred to in Section 5(f) hereof, of any change in
the Company's condition (financial or other), business, prospects, properties,
net worth or results of operations, or of the happening of any event that
makes any statement of material fact made in the Registration Statement or the
Prospectuses (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the
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Registration Statement or the Prospectuses (as then amended or supplemented)
in order to state a material fact required by the Act to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectuses (as then amended or
supplemented) to comply with the Act or any other law.
7. Representations and Warranties of the Company, Fred Gratzon and
Clifford Rees. Each of the Company, Fred Gratzon, and Clifford Rees
represents and warrants to each U.S. Underwriter that:
(a) Each U.S. Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act; except that
this representation and warranty does not apply to statements in or omissions
from such U.S. Prepricing Prospectus (or any amendment or supplement thereto)
made in reliance upon and in conformity with information relating to any U.S.
Underwriter or Manager furnished to the Company in writing by a U.S.
Underwriter through the Representatives or by a Manager through the Lead
Managers expressly for use therein. The Commission has not issued any order
preventing or suspending the use of any Prepricing Prospectus.
(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectuses and any
supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects with
the provisions of the Act and will not at any such time contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
except that this representation and warranty does not apply to statements in
or omissions from the Registration Statement or the Prospectuses made in
reliance upon and in conformity with information relating to any U.S.
Underwriter or Manager furnished to the Company in writing by or on behalf of
a U.S. Underwriter through the Representatives or by or on behalf of a Manager
through the Lead Managers expressly for use therein.
(c) All the outstanding shares of Common Stock of the Company
(including the Additional Shares to be sold by the Gratzons and Clifford Rees)
have been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Firm Shares to be issued
and sold by the Company have been duly authorized and, when issued and
delivered to the U.S. Underwriters against payment therefor in accordance with
the terms hereof, will be validly issued, fully paid and nonassessable and
free of any preemptive or similar rights; the Additional Shares issuable upon
exercise of the Warrants have been
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duly authorized for issuance and, when issued and delivered to the Greenwich
Street Affiliates by the Company upon exercise of the Warrants against payment
of the exercise price therefor, will be validly issued, fully paid and
nonassessable and free of any preemptive or similar rights; and the capital
stock of the Company conforms in all material respects to the description
thereof in the Registration Statement and the Prospectuses.
(d) Each of the Warrants has been duly and validly authorized by
the Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
as (i) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally and (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be
brought.
(e) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Iowa with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction where the nature of its properties or
the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, properties,
net worth or results of operations of the Company and the Subsidiaries (as
hereinafter defined), taken as a whole (a "Material Adverse Effect").
(f) All of the Company's subsidiaries (collectively, the
"Subsidiaries") are listed in Exhibit 21.1 to the Registration Statement.
Each Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a Material Adverse
Effect; all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and, except as set forth in the Prospectus, are owned by the
Company directly, or indirectly through one of the other Subsidiaries, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance.
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(g) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries which are materially adverse to the Company and its Subsidiaries,
taken as a whole, or to which the Company or any of the Subsidiaries, or to
which any of their respective properties, is subject which are material to the
Company and its Subsidiaries, taken as a whole, that are required to be
described in the Registration Statement or the Prospectuses but are not
described as required, and there are no agreements, contracts, indentures,
leases, licenses or other instruments or documents relating to the Company or
the Subsidiaries that are required to be described in the Registration
Statement or the Prospectuses or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act. The
descriptions of the terms of any such agreements, contracts, indentures,
leases, licenses, instruments or documents contained in the Registration
Statement or the Prospectuses are correct in all material respects.
(h) Neither the Company nor any of the Subsidiaries is in (i)
violation of its certificate or articles of incorporation, by-laws, or other
organizational documents, (ii) in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
any of the Subsidiaries or of any decree of any court or governmental agency
or body having jurisdiction over the Company or any of the Subsidiaries
(except where any such violation or violations in the aggregate would not have
a Material Adverse Effect), or (iii) in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or in any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound, and
no condition or state of facts exists, which with the passage of time or the
giving of notice or both, would constitute such a default (except where any
such default or defaults in the aggregate would not have a Material Adverse
Effect).
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or the International Underwriting
Agreement by the Company nor the consummation by the Company of the
transactions contemplated hereby and thereby (including, without limitation,
the inclusion in the Registration Statement of the Additional Shares to be
sold by the Selling Shareholders) (i) requires any consent, approval,
authorization or other order of or registration or filing with, any court,
regulatory body, administrative agency or other governmental body, agency or
official (except such as may be required for the registration of the Shares
under the Act and compliance with the securities or Blue Sky laws of various
jurisdictions, all of which have been or will be effected in accordance with
this Agreement), (ii) conflicts or will conflict with or constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws, or other organizational
15
<PAGE>
documents, of the Company or any of the Subsidiaries or (iii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, any agreement, indenture, lease, license or other instrument to which
the Company or any of the Subsidiaries is a party or by which any of them or
any of their respective properties may be bound, or violates or will violate
any statute, law, regulation or filing or judgment, injunction, order or
decree applicable to the Company or any of the Subsidiaries or any of their
respective properties, or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of the Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to which
any of the property or assets of any of them is subject except in the case of
clauses (i) and (iii) where the failure to obtain such consent, approval,
authorization or order, or effect such filing or registration, or such
conflicts, defaults, violations or other action will not have, individually or
in the aggregate, a Material Adverse Effect.
(j) The accountants, KPMG Peat Marwick LLP, who have certified or
shall certify the financial statements filed or to be filed as part of the
Registration Statement or the Prospectuses (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectuses (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations, cash flows and changes in stockholders'
equity of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectuses (and any amendment or
supplement thereto) are accurately presented in all material respects and
prepared on a basis consistent in all material respects with the books and
records of the Company and its Subsidiaries.
(l) The execution and delivery of, and the performance by the
Company of its obligations under, each of this Agreement and the International
Underwriting Agreement have been duly and validly authorized by the Company,
and each of this Agreement and the International Underwriting Agreement has
been duly executed and delivered by the Company and constitutes the valid and
legally binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (i) the enforceability hereof or thereof may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar
16
<PAGE>
laws now or hereafter in effect relating to rights of creditors and other
obligees generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be brought
and (iii) rights to indemnity and contribution hereunder or thereunder may be
limited by federal or state securities laws or the public policy underlying
such laws.
(m) Except as disclosed in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectuses (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
capital stock of the Company, or material increase in the short-term debt or
long-term debt, of the Company or any of the Subsidiaries, or any development
having or which would reasonably be expected to have, a Material Adverse
Effect.
(n) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectuses as being owned by it, free and clear of all liens, claims,
security interests or other encumbrances except such as are described in the
Registration Statement and the Prospectuses or in a document filed as an
exhibit to the Registration Statement, except where the failure to have such
title would not have a Material Adverse Effect and all property described in
the Prospectuses as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally or by general equitable principles with only such exceptions as in
the aggregate are not materially burdensome and do not interfere in any
material respect with the conduct of the business of the Company and the
Subsidiaries, taken as a whole.
(o) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date or the Option Closing Date, if any, and (ii)
completion of the distribution of the Shares, will not distribute any offering
material in connection with the offering and sale of the Shares other than the
Registration Statement, the Prepricing Prospectuses, the Prospectuses or other
materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries have such consents,
approvals, permits, licenses, franchises and authorizations of and from all
United States and foreign, federal,
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<PAGE>
state or provincial, local and other governmental or regulatory authorities
(collectively, the "Licenses") as are necessary to own its respective
properties and to conduct its business in the manner described in the
Prospectuses, except where the failure to have any such License would not have
a Material Adverse Effect and subject to such qualifications as may be set
forth in the Prospectuses; the Company and each of the Subsidiaries has
fulfilled and performed all its material obligations with respect to such
Licenses and no event has occurred that allows, or after notice or lapse of
time or both would allow, revocation or termination thereof or results in any
other material impairment of the rights of the holder of any such License,
except where any of the foregoing would not have individually or in the
aggregate a Material Adverse Effect and subject in each case to such
qualification as may be set forth in the Prospectuses; and, except as
described in the Prospectuses, none of such Licenses contains any restriction
or conditions that is materially burdensome to the Company or any of the
Subsidiaries. Without limiting the generality of this paragraph 7(p):
(i) The Company and each of the Subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations, consents
and approvals (the "Telecommunications Licenses") required from the
Federal Communications Commission (the "FCC") for the Company and the
Subsidiaries to conduct their business in the manner described in or
contemplated by the Prospectuses, except as would not have, individually
or in the aggregate, a Material Adverse Effect; the Telecommunications
Licenses have been duly and validly issued and are in full force and
effect, except where the failure to be in full force and effect would not
have, individually or in the aggregate, a Material Adverse Effect; no
proceedings to revoke or restrict the Telecommunications Licenses are
pending or, to the best of our knowledge, threatened; neither the Company
nor the Subsidiaries are in violation of any of the terms and conditions
of any of the Telecommunications Licenses, are in violation of the
Communications Act of 1934, as amended (the "Communications Act"), or are
in violation of any FCC rules and regulations, except as would not have,
individually or in the aggregate, a Material Adverse Effect; and the
Company and the Subsidiaries have in effect with the FCC all
international and domestic service tariffs necessary to conduct their
business in the manner described in or contemplated by the Prospectuses
except as would not have, individually or in the aggregate, a Material
Adverse Effect;
(ii) The Company and the Subsidiaries have obtained all state
Telecommunications Licenses and filed all tariffs required for the
provision of telecommunications services in any state to conduct their
business in the manner described in or contemplated by the Prospectuses,
except where the failure to do so would not have, individually or in the
aggregate, a Material Adverse Effect;
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<PAGE>
(iii) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC or any state public
utility commission or similar state agency ("PUC") against the Company or
the Subsidiaries or any action, proceeding or investigation pending
before the FCC or any state PUC, or, to the best of the Company's
knowledge, threatened by the FCC or any state PUC against the Company or
the Subsidiaries which, if the subject of any unfavorable decision,
ruling or finding, would have a Material Adverse Effect on the Company or
the Subsidiaries;
(iv) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC on the
part of the Company or the Subsidiaries is required in connection with
the issuance or sale of the Common Stock;
(v) Neither the issuance and sale of the Common Stock nor
the performance by the Company or the Subsidiaries of their obligations
under the U.S. Underwriting Agreement or the International Underwriting
Agreement will result in a violation in any material respect of the
Communications Act or any applicable FCC rules or regulations, or any
order, writ, judgment, injunction, decree or award of the FCC binding on
the Company or the Subsidiaries; and
(vi) Neither the Company nor the Subsidiaries are in non-
compliance in the provision of international call-back service with the
laws of any foreign jurisdiction that would constitute a violation of the
Telecommunications Licenses, except where such non-compliance would not
have a Material Adverse Effect and subject to such qualifications as may
be set forth in the Prospectuses.
(q) The Company maintains 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 to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in
the Prospectuses.
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(s) Except as disclosed in the Prospectuses, the Company and each
of the Subsidiaries have filed all material tax returns required to be filed,
which returns are true and correct in all material respects, and neither the
Company nor any Subsidiary is in default in the payment of any taxes which
were payable pursuant to said returns or any assessments with respect thereto.
(t) Except as described in the Prospectuses, no holder of any
security of the Company has any right to require registration of shares of
Common Stock or any other security of the Company because of the filing of the
Registration Statement or consummation of the transactions contemplated by
this Agreement or the International Underwriting Agreement, or otherwise. No
such rights with respect to shares of Common Stock not listed in Schedule II
hereto were exercised nor will be exercised in connection with the sale of the
Shares and for a period of 180 days after the date hereof. Except as
described in or contemplated by the Prospectuses, there are no outstanding
options, warrants or other rights calling for the issuance of, and there are
no commitments, plans or arrangements to issue, any shares of Common Stock of
the Company or any security convertible into or exchangeable or exercisable
for Common Stock of the Company.
(u) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registration, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectuses as being owned by them or any of them or
necessary for the conduct of their respective businesses except where the lack
of such ownership or possession would not have a Material Adverse Effect, and
the Company is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect to
the foregoing.
(v) The Company is not and, upon sale of the Shares to be issued
and sold in accordance herewith and upon application of the net proceeds to
the Company from such sale as described in the Prospectuses under the caption
"Use of Proceeds," will not be an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(w) The Company has complied with all provisions of Florida
Statutes, Section 517.075, relating to issuers doing business with Cuba.
(x) The Recapitalization (as defined in the Prospectus) and the
Stock Split (as defined in the Prospectus) will be, prior to or simultaneously
with the consummation of the public offering of the Shares contemplated
hereby, consummated in the manner described in the Prospectus.
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<PAGE>
(y) Each of the Company and the Subsidiaries maintains insurance of
the types and in the amounts reasonably adequate for its business, including,
but not limited to, business interruption insurance and insurance covering
real and personal property owned or leased by the Company or such Subsidiary
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against by corporations of established reputation engaged
in the same or similar businesses and similarly situated, all of which
insurance is in full force and effect.
8. Representations and Warranties of the Selling
Shareholders.
A. Each of the Selling Shareholders, other than the Greenwich
Street Affiliates, severally and not jointly, represents and warrants to each
U.S. Underwriter that:
(a) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, valid and marketable title to
the Additional Shares to be sold by such Selling Shareholder, free and clear
of any lien, claim, security interest or other encumbrance, including, without
limitation, any restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, full legal right, power and
authorization, and any approval required by law, to sell, assign, transfer and
deliver such Additional Shares in the manner provided in this Agreement and
the International Underwriting Agreement, and upon delivery of and payment for
such Additional Shares hereunder, the several U.S. Underwriters will acquire
valid and marketable title to such Additional Shares free and clear of any
lien, claim, security interest, or other encumbrance (other than any lien,
claim or security interest placed thereon by the U.S. Underwriters or
Managers).
(c) This Agreement, the International Underwriting Agreement and
the Custody Agreement entered into by such Selling Shareholder, have been duly
authorized, executed and delivered by or on behalf of such Selling Shareholder
and are the valid and binding agreements of such Selling Shareholder
enforceable against such Selling Shareholder in accordance with their terms,
except that (i) the enforceability hereof or thereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws now or hereafter in effect relating to rights of creditors
or other obligees generally, (ii) the remedy of specific performance and other
forms of equitable relief may be subject to certain equitable defenses and
principles and to the discretion of the court before which the proceedings may
be brought and (iii) rights to indemnity and contribution hereunder or
thereunder may be limited by federal or state securities laws or the public
policy underlying such laws.
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<PAGE>
(d) Neither the sale of the Additional Shares, the execution,
delivery or performance of this Agreement, the International Underwriting
Agreement or the Custody Agreement entered into by such Selling Shareholder by
or on behalf of such Selling Shareholder nor the consummation by or on behalf
of such Selling Shareholder of the transactions contemplated hereby and
thereby (i) requires any consent, approval, authorization or other order of,
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency or official (except such as may be
required for the registration of the Shares under the Act and compliance with
the securities or Blue Sky laws of various jurisdictions, all of which have
been or will be effected in accordance with this Agreement) or (ii) conflicts
or will conflict with or constitutes or will constitute a breach of, or a
default under, any agreement, indenture, lease or other instrument to which
such Selling Shareholder is a party or by which such Selling Shareholder is or
may be bound, or violates or will violate any statute, law, regulation or
filing or judgment, injunction, order or decree applicable to such Selling
Shareholder, or will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of such Selling Shareholder
pursuant to the terms of any agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder may be bound or to
which any of the property or assets of such Selling Shareholder is subject
except where the failure to obtain such consent, approval, authorization or
order, or effect such filing or registration, or such conflicts, defaults,
violations or other action will not have, individually or in the aggregate, a
Material Adverse Effect.
(e) The information pertaining to such Selling Shareholder under
the caption "Principal and Selling Shareholders" in the Prospectuses, does not
and will not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) The representations and warranties of such Selling
Shareholder in the Custody Agreement entered into by such Selling Shareholder
are, and on the Closing Date and any Option Closing Date will be, true and
correct.
(g) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares, except for the lock-up
arrangements referred to in the Prospectuses.
B. Each Greenwich Street Affiliate represents and warrants to each
U.S. Underwriter that:
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(a) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, valid and marketable title to
the Warrants exercisable for the Additional Shares to be sold by such Selling
Shareholder hereunder, free and clear of any lien, claim, security interest or
other encumbrance, including, without limitation, any restriction on transfer;
and on the Closing Date and the Option Closing Date, if any, such Selling
Shareholder will have, valid and marketable title to the Additional Shares
issuable upon exercise of the Warrants and to be sold by such Selling
Shareholder hereunder, free and clear of any lien, claim, security interest or
other encumbrance, including, without limitation, any restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, full legal right, power and
authorization, and any approval required by law, to exercise the Warrants for
the Additional Shares and sell, assign, transfer and deliver such Additional
Shares in the manner provided in this Agreement and the International
Underwriting Agreement, and upon delivery of and payment for such Additional
Shares hereunder, the several U.S. Underwriters will acquire valid and
marketable title to such Shares free and clear of any lien, claim, security
interest, or other encumbrance.
(c) This Agreement, the International Underwriting Agreement and
the Greenwich Street Custody Agreement have been duly authorized, executed and
delivered by or on behalf of such Selling Shareholder and are the valid and
binding agreements of such Selling Shareholder enforceable against such
Selling Shareholder in accordance with their terms, except that (i) the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be brought
and (iii) rights to indemnity and contribution hereunder or thereunder may be
limited by federal or state securities laws or the public policy underlying
such laws.
(d) None of the exercise of the Warrants for the Additional
Shares to be sold by such Selling Shareholder hereunder, the sale of such
Additional Shares, the execution, delivery or performance of this Agreement,
the International Underwriting Agreement or the Greenwich Street Custody
Agreement by or on behalf of such Selling Shareholder nor the consummation by
or on behalf of such Selling Shareholder of the transactions contemplated
hereby and thereby (i) requires any consent, approval, authorization or other
order of, or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Shares under the Act or
compliance with the
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<PAGE>
securities or Blue Sky laws of various jurisdictions), or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, any agreement, indenture, lease or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder is or may
be bound, or violates or will violate any statute, law, regulation or filing
or judgment, injunction, order or decree applicable to such Selling
Shareholder, or will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of such Selling Shareholder
pursuant to the terms of any agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder may be bound or to
which any of the property or assets of such Selling Shareholder is subject.
(e) The information pertaining to such Selling Shareholder under
the caption "Principal and Selling Shareholders" in the Prospectuses, does not
and will not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) The representations and warranties of such Selling
Shareholder in the Greenwich Street Custody Agreement are, and on the Closing
Date and the Option Closing Date, if any, will be, true and correct.
(g) Such Selling Shareholder has not taken, directly or
indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares, except for the lock-up
arrangements referred to in the Prospectuses.
9. Indemnification and Contribution. (a) The Company, Fred Gratzon
and Clifford Rees (the "Indemnifying Selling Shareholders"), jointly and
severally, agree to indemnify and hold harmless you and each other U.S.
Underwriter and each person, if any, who controls any U.S. Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act from
and against any and all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation) arising out of or based upon any
untrue statement or alleged untrue statement of a material fact contained in
any U.S. Prepricing Prospectus or in the Registration Statement or the U.S.
Prospectus or in any amendment or supplement thereto, or arising out of or
based upon any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
expenses arise out of or are based upon any untrue statement or omission or
alleged untrue statement or omission which has been made therein or omitted
therefrom in reliance upon and in conformity with the information relating to
such U.S. Underwriter or Manager furnished in writing to the
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Company by or on behalf of any U.S. Underwriter through you or by or on behalf
of any Manager through a Lead Manager expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any U.S. Prepricing Prospectus shall not inure
to the benefit of any U.S. Underwriter (or to the benefit of any person
controlling such U.S. Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such U.S.
Underwriter to any person if a copy of the U.S. Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder, and the untrue statement or alleged untrue statement
or omission or alleged omission of a material fact contained in such U.S.
Prepricing Prospectus was corrected in the U.S. Prospectus, provided that the
Company has delivered the corrected U.S. Prospectus to the several U.S.
Underwriters in requisite quantity on a timely basis to permit such delivery
or sending.
(b) If any action, suit or proceeding shall be brought against any
U.S. Underwriter or any person controlling any U.S. Underwriter in respect of
which indemnity may be sought against the Company or any Indemnifying Selling
Shareholder, such U.S. Underwriter or such controlling person shall promptly
notify the parties against whom indemnification is being sought (the
"indemnifying parties"), and such indemnifying parties shall assume the
defense thereof, including the employment of counsel and payment of all fees
and expenses. Such U.S. Underwriter or any such controlling person shall have
the right to employ separate counsel in any such action, suit or proceeding
and to participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such U.S. Underwriter or such controlling
person unless (i) the indemnifying parties have agreed in writing to pay such
fees and expenses, (ii) the indemnifying parties have failed to assume the
defense and employ counsel, or (iii) the named parties to any such action,
suit or proceeding (including any impleaded parties) include both such U.S.
Underwriter or such controlling person and the indemnifying parties and such
U.S. Underwriter or such controlling person shall have been advised by its
counsel in writing that representation of such indemnified party and any
indemnifying party by the same counsel would be inappropriate under applicable
standards of professional conduct (whether or not such representation by the
same counsel has been proposed) due to actual or potential differing interests
between them (in which case the indemnifying party shall not have the right to
assume the defense of such action, suit or proceeding on behalf of such U.S.
Underwriter or such controlling person). It is understood, however, that the
indemnifying parties shall, in connection with any one such action, suit or
proceeding or separate but substantially similar or related actions, suits or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses
of only one separate firm of attorneys (in addition to any local counsel) at
any time for all such U.S. Underwriters and
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controlling persons not having actual or potential differing interests with
you or among themselves, which firm shall be designated in writing by Smith
Barney Inc., and that all such reasonable fees and expenses shall be
reimbursed as they are incurred. The indemnifying parties shall not be liable
for any settlement of any such action, suit or proceeding effected without
their written consent, but if settled with such written consent, or if there
be a final judgment for the plaintiff in any such action, suit or proceeding,
the indemnifying parties agree to indemnify and hold harmless any U.S.
Underwriter and any such controlling person, to the extent provided in the
preceding paragraph, from and against any loss, claim, damage, liability or
expense by reason of such settlement or judgment.
(c) Each other Selling Shareholder agrees, severally and not
jointly, to indemnify and hold harmless each of you and each other U.S.
Underwriter and each person, if any, who controls any U.S. Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, the
Company, its directors, its officers who sign the Registration Statement, and
any person who controls the Company within the meaning of Section 15 of the
Act or Section 20(a) of the Exchange Act to the same extent as the foregoing
indemnity from the Company and the Indemnifying Selling Shareholders to each
U.S. Underwriter, but only with respect to the information furnished in
writing by or on behalf of such Selling Shareholder expressly for use in the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto. If any action, suit or proceeding
shall be brought against any U.S. Underwriter, any such controlling person of
any U.S. Underwriter, the Company, any of its directors, any such officer, or
any such controlling person of the Company, based on the Registration
Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus or any
amendment or supplement thereto, and in respect of which indemnity may be
sought against any Selling Shareholder pursuant to this paragraph (c), such
Selling Shareholder shall have the rights and duties given to the Company by
paragraph (b) above (except that if the Company shall have assumed the defense
thereof such Selling Shareholder shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof, but
the fees and expenses of such counsel shall be at such Selling Shareholder's
expense), and each U.S. Underwriter, each such controlling person of any U.S.
Underwriter, the Company, its directors, any such officer, and any such
controlling person of the Company shall have the rights and duties given to
the U.S. Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which any Selling Shareholder
may otherwise have.
(d) Each U.S. Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, any person who controls the Company within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and the
Selling Shareholders, to
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the same extent as the foregoing indemnity from the Company and the
Indemnifying Selling Shareholders to each U.S. Underwriter, but only with
respect to information relating to such U.S. Underwriter furnished in writing
by or on behalf of such U.S. Underwriter through you expressly for use in the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto. If any action, suit or proceeding
shall be brought against the Company, any of its directors, any such officer,
any such controlling person or any Selling Shareholder based on the
Registration Statement, the U.S. Prospectus or any U.S. Prepricing Prospectus,
or any amendment or supplement thereto, and in respect of which indemnity may
be sought against any U.S. Underwriter pursuant to this paragraph (d), such
U.S. Underwriter shall have the rights and duties given to the Company and the
Indemnifying Selling Shareholders by paragraph (b) above (except that if the
Company or the Selling Shareholders shall have assumed the defense thereof
such U.S. Underwriter shall not be required to do so, but may employ separate
counsel therein and participate in the defense thereof, but the fees and
expenses of such counsel shall be at such U.S. Underwriter's expense), and the
Company, its directors, any such officer, any such controlling person, and the
Selling Shareholders, shall have the rights and duties given to the U.S.
Underwriters by paragraph (b) above.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages, liabilities or expenses (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Selling Shareholders on the one hand and the U.S.
Underwriters on the other hand from the offering of the Shares, or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Selling Shareholders on the one hand and the U.S. Underwriters on the
other hand in connection with the statements or omissions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Shareholders on the one hand and the U.S. Underwriters
on the other hand shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Shareholders bear to the total underwriting discounts
and commissions received by the U.S. Underwriters, in each case as set forth
in the table on the cover page of the U.S. Prospectus; provided that, in the
event that the U.S. Underwriters shall have purchased any Additional Shares
hereunder, any determination of the relative benefits received by the Company,
the Selling Shareholders
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or the U.S. Underwriters from the offering of the Shares shall include the net
proceeds (before deducting expenses) received by the Selling Shareholders, and
the underwriting discounts and commissions received by the U.S. Underwriters,
from the sale of such Additional Shares, in each case computed on the basis of
the respective amounts set forth in the notes to the table on the cover page
of the U.S. Prospectus. The relative fault of the Company and the Selling
Shareholders on the one hand and the U.S. Underwriters on the other hand shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Selling Shareholders on the one hand or by the U.S.
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
(f) The Company, the Selling Shareholders and the U.S. Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the U.S.
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable
considerations referred to in paragraph (e) above. The amount paid or payable
by an indemnified party as a result of the losses, claims, damages,
liabilities and expenses referred to in paragraph (e) above shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating any claim or defending any such action, suit or proceeding.
Notwithstanding the provisions of this Section 9, no U.S. Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds
the amount of any damages which such U.S. Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and none of the Greenwich Street Affiliates shall
be required to contribute an amount hereunder with respect to any loss, claim,
damage, liability or expense in excess of the amount such Selling Shareholder
would have been required to pay under Section 9 hereof with respect thereto if
the indemnification provided for in Section 9 had been available with respect
to such loss, claim, damage, liability or expense. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The U.S. Underwriters' obligations to
contribute pursuant to this Section 9 are several in proportion to the
respective numbers of Firm Shares set forth opposite their names in Schedule I
hereto (or such numbers of Firm Shares increased as set forth in Section 12
hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement of
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any pending or threatened action, suit or proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any U.S.
Underwriter or any person controlling any U.S. Underwriter, the Company, its
directors or officers or the Selling Shareholders, any director, officer or
partner of a Selling Shareholder or any person controlling the Company or any
Selling Shareholder, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
U.S. Underwriter or any person controlling any U.S. Underwriter, or to the
Company, its directors or officers, or to a Selling Shareholder, any director,
officer or partner of a Selling Shareholder or any person controlling the
Company or any Selling Shareholder, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
9.
10. Conditions of U.S. Underwriters' Obligations. The several
obligations of the U.S. Underwriters to purchase the Firm Shares hereunder are
subject to the following conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M. New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and
all filings, if any, required by Rules 424 and 430A under the Act shall have
been timely made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Company or any
U.S. Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectuses or otherwise) shall have been complied with to
your reasonable satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development
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involving a prospective change, that would have a Material Adverse Effect in
or affecting the condition (financial or otherwise), business, prospects,
properties, net worth or results of operations of the Company or the
Subsidiaries not contemplated by the Prospectuses, which in your opinion, as
Representatives of the several U.S. Underwriters, would materially, adversely
affect the market for the Shares, or (ii) any event or development relating to
or involving the Company or any officer or director of the Company or any
Selling Shareholder which makes any statement made in the Prospectuses untrue
in any material respect or which, in the opinion of the Company and its
counsel or the U.S. Underwriters and their counsel, requires the making of any
addition to or change in the Prospectuses in order to state a material fact
required by the Act or any other law to be stated therein or necessary in
order to make the statements therein not misleading, if amending or
supplementing the Prospectuses to reflect such event or development would, in
your opinion, as Representatives of the several U.S. Underwriters, materially
adversely affect the market for the Shares.
(c) You shall have received on the Closing Date an opinion of
Swidler & Berlin, Chartered, counsel for the Company, the Gratzons, Clifford
Rees, Steve Rubin and Steve Foster (the "TG Selling Shareholders"), dated the
Closing Date and addressed to you, as Representatives of the several U.S.
Underwriters, to the effect that:
(i) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the knowledge
of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission; and any required filing of
the Prospectuses pursuant to Rule 424(b) has been made in accordance with Rule
424(b);
(ii) Neither the issuance, sale or delivery of the
Underwritten Shares, nor the execution, delivery or performance of the U.S.
Underwriting Agreement or the International Underwriting Agreement, or
compliance by the Company with all provisions of this Agreement and the
International Underwriting Agreement, nor consummation by the Company of the
transactions contemplated hereby or by the International Underwriting
Agreement constitutes or will constitute a breach of, or a default under, the
certificate or articles of incorporation or bylaws of the Company or its
Subsidiaries or any material agreement, indenture, lease or other instrument
to which the Company or any Subsidiary is a party or by which they or any of
their properties is bound and that is made an exhibit to the Registration
Statement, or, except as disclosed in the Registration Statement, will result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any Subsidiary under any such agreement,
indenture, lease or other instrument, which breach default or other
30
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event would have a Material Adverse Effect, nor will any such action result in
any violation of any existing law, regulation, ruling (assuming compliance
with all applicable state securities and Blue Sky laws), judgment, injunction,
order or decree known to such counsel after reasonable inquiry, to be
applicable to the Company, any Subsidiary or any of their properties, which
violation would have a Material Adverse Effect;
(iii) No consent, approval, authorization or other order,
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the part
of the Company (except as have been obtained under the Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) for the valid issuance and sale of the Shares to
the U.S. Underwriters as contemplated by the U.S. Underwriting Agreement;
(iv) The Registration Statement and the Prospectuses and
any supplements or amendments thereto (except for the financial statements,
schedules, and notes thereto and other financial and statistical data included
therein or omitted therefrom, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements of
the Act;
(v) To the knowledge of such counsel, (A) other than as
described in the Prospectuses, there are no legal or governmental proceedings
pending or threatened against the Company or any Subsidiary or to which the
Company's or any Subsidiary's properties are subject, which, if adversely
determined, would reasonably be expected to have a Material Adverse Effect,
and (B) there are no agreements, contracts, indentures, leases or other
instruments relating to the Company or any Subsidiary, of a character that are
required to be described in the Registration Statement or the Prospectuses or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required, as the case may be;
(vi) The U.S. Underwriting Agreement, the International
Underwriting Agreement and the Custody Agreements have each been duly executed
and delivered by or on behalf of each of the TG Selling Shareholders and are
valid and binding agreements of each TG Selling Shareholder enforceable
against each TG Selling Shareholder in accordance with their respective terms
except that (i) enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyances, moratorium or other similar laws now
or hereafter in effect relating to rights of creditors and other obligees
generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be brought
and (iii) rights to indemnity and contribution thereunder may be limited by
Federal or state securities laws or the public policy underlying such laws;
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(vii) Each TG Selling Shareholder has full legal right,
power and authority, and any approval required by law, to sell, assign,
transfer and deliver good and marketable title to the Additional Shares which
such TG Selling Shareholder has agreed to sell pursuant to the U.S.
Underwriting Agreement and the International Underwriting Agreement;
(viii) The execution and delivery of the U.S. Underwriting
Agreement, the International Underwriting Agreement and the Custody Agreement
by the TG Selling Shareholders and the consummation of the transactions
contemplated thereby will not conflict with, constitute a breach of, or a
default under any material agreement, indenture, lease or other instrument
known to such counsel to which any TG Selling Shareholder is a party or by
which any of them or any of their assets or property is bound, or violate any
statute, law, regulation, court order or decree known to such counsel to be
applicable to any TG Selling Shareholder or to any of the property or assets
of any TG Selling Shareholder, except for any such conflicts, breaches,
defaults or violations that would not have a Material Adverse Effect on the
ability of such TG Selling Shareholder to consummate the transactions
contemplated by the Underwriting Agreements;
(ix) (A) Each TG Selling Shareholder has full right power,
and authority to enter into this Agreement, the International Underwriting
Agreement, the respective Powers of Attorneys and the Custody Agreements, and
(B) upon delivery of the Additional Shares to be sold by such TG Selling
Shareholder hereunder and payment of the purchase price therefor as herein
contemplated, each of the U.S. Underwriters will receive good and marketable
title to its ratable share of the Additional Shares purchased by it from such
TG Selling Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equity, assuming the U.S. Underwriters acquire the
Additional Shares without notice of any adverse claim as such term is used in
Section 8-302 of the Uniform Commercial Code in effect in the State of New
York;
(x) The Section 214 Switched Voice Authorization, the
Section 214 Private Line Authorization, and the Section 214 Facilities
Authorization (as such terms are defined in the Prospectus) are the only
telecommunications regulatory licenses, permits, authorizations, consents and
approvals ("Telecommunications Licenses") required from the Federal
Communications Commission (the "FCC") for each of the Company and the
Subsidiaries to conduct its business in the manner described in the
Prospectus. The FCC Telecommunications Licenses currently held by each of the
Company and the Subsidiaries have been duly and validly issued and are in full
force and effect, and no proceedings to revoke or restrict such FCC
Telecommunications Licenses are pending or, to our knowledge, threatened.
Each of the Company and the Subsidiaries is not in violation of any of
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the terms and conditions of any of its FCC Telecommunications Licenses, is not
in violation of the Communications Act of 1934, as amended, and is not in
violation of any FCC rules and regulations, except to the extent that such
violation is disclosed in the Registration Statement and would not have a
Material Adverse Effect. Each of the Company and the Subsidiaries has in
effect with the FCC all international switched, international private line
and/or United States domestic interexchange service tariffs necessary to
conduct its business in the manner described in the Prospectus;
(xi) To the extent they constitute a summary of legal
matters, documents or proceedings referred to therein, the statements in the
Prospectus under the captions "Risk Factors - Substantial Government
Regulation-United States" and "Business-Government Regulation" are accurate in
all material respects and fairly summarize in all material respects all
matters referred to therein, and there are no material omissions under such
captions with respect to such legal matters, documents and proceedings;
(xii) Each of the Company and the Subsidiaries has obtained
all state Telecommunications Licenses and filed all tariffs required for the
provision of telecommunications services in any state to conduct its business
in the manner described in or contemplated by the Prospectus except where the
failure to obtain such licenses and/or file such tariffs would not have,
individually or in the aggregate, a Material Adverse Effect;
(xiii) There is no outstanding adverse judgment,
injunction, decree or order that has been issued by the FCC against the
Company or any Subsidiary or any action, proceeding or investigation pending
before the FCC or, to such counsel's knowledge, threatened by the FCC against
the Company or any Subsidiary or otherwise which, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect;
(xiv) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by any state public utility commission
("PUC") against the Company or any Subsidiary or any action, proceeding or
investigation pending before or, to counsel's knowledge, threatened by any
state PUC against the Company or any Subsidiary which, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect;
(xv) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC on the part of
the Company or any Subsidiary is required in connection with the issuance or
sale of the Common Stock;
(xvi) Neither the issuance and sale of the Common Stock nor
the performance by the Company of its obligations under
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the U.S. Underwriting Agreement or the International Underwriting Agreement
will result in a violation of the Communications Act, or any applicable rules
or the regulations promulgated under the Communications Act, or, to counsel's
knowledge, any order, writ, judgment, injunction, decree or award of the FCC
binding on the Company or any Subsidiary; and
(xvii) The Section 214 Switched Voice Authorization, the
Section 214 Private Line Authorization and the Section 214 Facilities
Authorization require the Company and its Subsidiaries to provide any
international call-back service using uncompleted call signaling in a manner
that is consistent with the laws of the countries in which they operate.
Although we do not provide legal services to the Company or its Subsidiaries
regarding the application or interpretation of any non-U.S. law and although we
have performed no due diligence in this regard other than discussing with
management of the Company the Company's operations and compliance with
applicable FCC requirements and reviewing any portions of the opinions of local
counsel of Australia, France, Germany, Hong Kong, Japan, the Netherlands,
Sweden, Switzerland, and the United Kingdom specifically regarding the provision
of international call-back service in certain jurisdictions in which the Company
operates, we are not aware of any non-compliance in the provision of
international call-back service by the Company with the laws of any of these
foreign jurisdictions in which the Company operates that would constitute a
violation of the Section 214 Switched Voice Authorization, the Section 214
Private Line Authorization, or the Section 214 Facilities Authorization and have
a Material Adverse Effect on the Company and its Subsidiaries, taken as a whole,
except as described in the Prospectuses under the captions "Risk Factors --
Substantial Government Regulation" and "Business -- Government Regulation
Overview." For the purpose of making this statement, we have relied upon our
discussions with management of the Company and our review of any portions of the
opinions of local counsel of Australia, France, Germany, Hong Kong, Japan, the
Netherlands, Sweden, Switzerland, and the United Kingdom specifically regarding
the provision of international call-back service provided by the Company,
without any further inquiry or any independent review of any laws of any such
jurisdictions.
In addition, such counsel shall state that although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectuses, including general review and discussion of the contents
thereof but has made no independent check or verification thereof (relying as
to materiality to a large extent upon the opinions of officers and other
representatives of the Company), and no facts have come to the attention of
such counsel that would lead them to believe that the Registration Statement
at the time the Registration Statement became effective, or the Prospectuses,
as of
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their respective dates and as of the Closing Date or the Option Closing Date,
as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated in the Prospectuses or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or that any amendment or supplement
to the Prospectuses, as of its respective date, and as of the Closing Date or
the Option Closing Date, as the case may be, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated in
the Prospectuses or necessary in order to make the statements in the
Prospectuses, in the light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no
statement with respect to the financial statements, schedules, pro forma
financial statements and the notes thereto and other financial and statistical
data included in or omitted from the Registration Statement or the
Prospectuses).
In rendering their opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of officers of the
Company and the Selling Shareholders and, as to matters of law, may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States, the State of Delaware or the State of New York provided that (1) each
such local counsel is reasonably acceptable to the Representatives, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to the Representatives and is, in form and
substance reasonably satisfactory to them and their counsel, and (3) counsel
shall state in their opinion that they believe that they and the U.S.
Underwriters are justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Debevoise & Plimpton, counsel for the Greenwich Street Affiliates, dated the
Closing Date and addressed to you, as Representatives of the several U.S.
Underwriters, to the effect that:
(i) The U.S. Underwriting Agreement, the International
Underwriting Agreement and the Greenwich Street Custody Agreement have each
been duly executed and delivered by or on behalf of each of the Greenwich
Street Affiliates and are valid and binding agreements of each of the
Greenwich Street Affiliates enforceable against each Greenwich Street
Affiliate in accordance with their respective terms except that (i)
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyances, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) the
remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) rights to
indemnity and
35
<PAGE>
contribution thereunder may be limited by Federal or state securities laws or
the public policy underlying such laws;
(ii) Each Greenwich Street Affiliate has full legal right,
power and authority, and any approval required by law, to exercise the
Warrants for the Additional Shares to be sold by it, and to sell, assign,
transfer and deliver good and marketable title to the Additional Shares which
such Affiliate has agreed to sell pursuant to the U.S. Underwriting Agreement
and the International Underwriting Agreement;
(iii) The execution and delivery of the U.S. Underwriting
Agreement, the International Underwriting Agreement and the Greenwich Street
Custody Agreement by the Greenwich Street Affiliates and the consummation of
the transactions contemplated thereby will not conflict with, constitute a
breach of, or a default under any material agreement, indenture, lease or
other instrument known to such counsel to which any Greenwich Street Affiliate
is a party or by which any of them or any of their assets or property is
bound, or violate any statute, law, regulation, court order or decree known to
such counsel to be applicable to any Greenwich Street Affiliate or to any of
the property or assets of any Greenwich Street Affiliate, except for any such
conflicts, breaches, defaults or violations that would not have a Material
Adverse Effect on the ability of such Greenwich Street Affiliate to consummate
the transactions contemplated by the Underwriting Agreements;
(iv) (A) Each Greenwich Street Affiliate has full right
power, and authority to enter into this Agreement, the International
Underwriting Agreement and the Greenwich Street Custody Agreement, and (B)
upon delivery of the Additional Shares to be sold by such Greenwich Street
Affiliate hereunder and payment of the purchase price therefor as herein
contemplated, each of the U.S. Underwriters will receive good and marketable
title to its ratable share of the Additional Shares purchased by it from such
Greenwich Street Affiliate, free and clear of any pledge, lien, security
interest, encumbrance, claim or equity, assuming the U.S. Underwriters acquire
the Additional Shares without notice of any adverse claim as such term is used
in Section 8-302 of the Uniform Commercial Code in effect in the State of New
York;
In rendering their opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of officers of the
Company and the Selling Shareholders and, as to matters of law, may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States, the State of Delaware or the State of New York provided that (1) each
such local counsel is reasonably acceptable to the Representatives, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to the
36
<PAGE>
Representatives and is, in form and substance reasonably satisfactory to them
and their counsel, and (3) counsel shall state in their opinion that they
believe that they and the U.S. Underwriters are justified in relying thereon.
(e) You shall have received on the Closing Date an opinion of
Marcus & Thompson, special counsel for the Company and the TG Selling
Shareholders in connection with matters relating to Iowa law, dated the
Closing Date and addressed to you, as Representatives of the several U.S.
Underwriters, to the effect that:
(i) The Company is a corporation duly incorporated and
validly existing in good standing under the laws of the State of Iowa with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly qualified and in good standing in all other
jurisdictions in which the nature of the business transacted or property owned
or leased by it makes such qualification necessary, except where the failure so
to qualify or be in good standing would not have, individually or in the
aggregate, a Material Adverse Effect on the Company and its Subsidiaries taken
as a whole;
(ii) (A) The Company has the corporate power and authority
to enter into the U.S. Underwriting Agreement and the International
Underwriting Agreement and to issue, sell and deliver the Shares to be sold by
it to the U.S. Underwriters and Managers as provided therein, and (B) each of
the U.S. Underwriting Agreement and the International Underwriting Agreement
have been duly authorized, executed and delivered by the Company and is a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except that (1) enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating to rights
of creditors and other obligees generally, (2) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and principles and to the discretion of the court before
which the proceedings may be brought and (3) rights to indemnity and
contribution thereunder may be limited by Federal or state securities laws or
the public policy underlying such laws;
(iii) The authorized capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectuses; and the
authorized capital stock of the Company conforms in all material respects as
to legal matters to the description thereof contained in the Prospectuses
under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company
outstanding prior to the issuance of the Shares to be issued and sold by the
Company pursuant to the U.S. Underwriting Agreement and
37
<PAGE>
the International Underwriting Agreement (including the Shares to be sold by
the Gratzons, Clifford Rees, Steve Rubin and Steve Foster) have been duly
authorized and validly issued, are fully paid, nonassessable and free of
preemptive or similar rights;
(v) Each of the Warrants has been duly and validly authorized
by the Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally and (ii) the remedy
of specific performance and other forms of equitable relief may be subject to
certain equitable defenses and principles and to the discretion of the court
before which the proceedings may be brought.
(vi) The Shares to be issued and sold to the U.S.
Underwriters and Managers by the Company under the U.S. Underwriting Agreement
and the International Underwriting Agreement have been duly authorized and
when issued and delivered to the U.S. Underwriters and Managers against
payment therefor in accordance with the terms of the U.S. Underwriting
Agreement and the International Underwriting Agreement, will be (A) duly
authorized and validly issued, fully paid and nonassessable and (B) free of
any preemptive or similar rights; and
(vii) The Additional Shares and the Additional
International Shares to be issued and sold to the U.S. Underwriters and
Managers by the Greenwich Street Affiliates under the U.S. Underwriting
Agreement and the International Underwriting Agreement have duly authorized
for issuance upon exercise of the Warrants and, when issued and delivered to
the Greenwich Street Affiliates by the Company upon exercise of the Warrants
against payment of the exercise price therefor, will be validly issued, fully
paid and non-assessable and free of any preemptive or similar rights.
(viii) The form of certificates for the Shares conforms to
the requirements of the Business Corporation Act of the State of Iowa.
(f) You shall have received on the Closing Date opinions of Baker &
McKenzie (Australia) in the form attached hereto as exhibit , Baker &
McKenzie (Hong Kong) in the form attached hereto as exhibit , Baker &
McKenzie (Germany) in the form attached hereto as exhibit , Coudert Freres
(France) in the form attached hereto as exhibit , TMI Associates (Japan) in
the form attached hereto as exhibit , Stibbe Simont Monahan Duhot (The
Netherlands) in the form attached hereto as exhibit ,[ ] (United
Kingdom) in the form attached hereto as exhibit , [ ] (Sweden) in
the form attached hereto as exhibit and [ ] (Switzerland) in the
form attached hereto as exhibit , special regulatory counsel for the Company
in
38
<PAGE>
each of the jurisdictions described above, each dated the Closing Date and
addressed to you, as Representatives of the several U.S. Underwriters, to the
effect that, with respect to each such jurisdiction:
(g) You shall have received on the Closing Date an opinion from
Charles Johanson, Esq., Corporate Counsel for the Company, dated the Closing
Date and addressed to you, as Representatives of the several U.S.
Underwriters, to the effect that:
(i) Each of the Subsidiaries is a corporation duly
organized, validly existing and in good standing in the jurisdiction of its
incorporation, with full corporate power and authority to own, lease, and
operate its properties and to conduct its business as described in the
Registration Statement and the Prospectuses; and all the outstanding shares of
capital stock of each of the Subsidiaries that is a corporation have been duly
authorized and validly issued, are fully paid and nonassessable, and, except
for director's qualifying shares and as otherwise disclosed in the
Prospectuses, are owned by the Company directly, or indirectly through one of
the other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance; and
(ii) None of the Company or its Subsidiaries is (A) in
violation of its certificate or articles of incorporation or bylaws, or other
organizational documents or (B) to the best knowledge of such counsel after
reasonable inquiry, in default in any material respect in the performance of
any material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as may be disclosed
in the Prospectuses or where any such default or defaults in the aggregate
would not have a Material Adverse Effect.
In addition, the Company's Corporate Counsel shall state that
although Counsel has not undertaken, except as otherwise indicated in its
opinion, to determine independently, and does not assume any responsibility
for, the accuracy, completeness or fairness of the statements in the
Registration Statement, such counsel has participated in the preparation of
the Registration Statement and the Prospectuses, including general review and
discussion of the contents thereof but has made no independent check or
verification thereof (relying as to materiality to a large extent upon the
opinions of officers and other representatives of the Company), and no facts
have come to the attention of such Counsel that would lead him to believe that
the Registration Statement at the time the Registration Statement became
effective, or the Prospectuses, as of their respective dates and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated in the Prospectuses or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or that any amendment or supplement to the Prospectuses, as of its
respective date, and as of the Closing Date or the Option Closing Date, as the
case may be, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated in the Prospectuses or necessary
in order to make the statements in the Prospectuses, in the light of the
39
<PAGE>
circumstances under which they were made, not misleading (it being understood
that the Company's Corporate Counsel need express no statement with respect to
the financial statements, schedules, pro forma financial statements and the
notes thereto and other financial and statistical data included in or omitted
from the Registration Statement or the Prospectuses).
In rendering such opinion as aforesaid, the Company's Corporate
Counsel may, as to factual matters, rely upon written certificates or
statements of officers of the Company and the Subsidiaries and, as to matters
of law, may rely upon an opinion or opinions, each dated the Closing Date, of
other counsel retained by him or the Company as to laws of any jurisdiction
other than the United States or the State of Iowa provided that (1) each such
local counsel is reasonably acceptable to the Representatives, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to the Representatives and is, in form and
substance reasonably satisfactory to them and their counsel, and (3) Charles
Johanson shall state in his opinion that he believes that they and the U.S.
Underwriters are justified in relying thereon.
(h) You shall have received on the Closing Date an opinion of
Chadbourne & Parke LLP, counsel for the U.S. Underwriters, dated the Closing
Date, with respect to the matters referred to in clauses (c)(i), (c)(iv),
(c)(ix)(B), the paragraph immediately following clause (xvii) of the foregoing
paragraph (c) and (d)(iv)(B) and such other related matters as you may
request.
(i) You shall have received letters addressed to you, as
Representatives of the several U.S. Underwriters, and dated the date hereof
and the Closing Date from KPMG Peat Marwick LLP, independent certified public
accountants, substantially in the forms heretofore approved by you.
(j) (1) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (2) there
shall not have been any material change in the capital stock of the Company
nor any material increase in the short-term or long-term debt of the Company
(other than in the ordinary course of business) from that set forth or
contemplated in the Registration Statement or the Prospectuses (or any
amendment or supplement thereto); (3) there shall not have been, since the
respective dates as of which
40
<PAGE>
information is given in the Registration Statement and the Prospectuses (or
any amendment or Supplement thereto), except as may otherwise be stated in the
Registration Statement and Prospectuses (or any amendment or supplement
thereto), any material adverse change in the condition (financial or other),
business, prospects, properties, net worth or results of operations of the
Company and the Subsidiaries taken as a whole; and (4) all the representations
and warranties of the Company contained in this Agreement shall be true and
correct on and as of the date hereof and on and as of the Closing Date as if
made on and as of the Closing Date, and you shall have received a certificate,
dated the Closing Date and signed by the chief executive officer and the chief
financial officer of the Company (or such other officers as are acceptable to
you), to the effect set forth in this Section 10(j) and in Section 10(k)
hereof.
(k) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein contained
and required to be performed or complied with by it hereunder at or prior to
the Closing Date.
(l) All the representations and warranties of the Selling
Shareholders contained in this Agreement shall be true and correct, on and as
of the date hereof and on and as of the Closing Date as if made on and as of
the Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by or on behalf of the Selling Shareholders to the effect set
forth in this Section 10(l) and in Section 10(m) hereof.
(m) The Selling Shareholders shall not have failed at or prior to
the Closing Date to have performed or complied with any of their agreements
contained in this Agreement or the International Underwriting Agreement and
required to be performed or complied with by them at or prior to the Closing
Date.
(n) The Sellers shall have furnished or caused to be furnished to
you such further certificates and documents as you shall have reasonably
requested.
(o) The Common Stock shall have been listed or approved for listing
subject to notice of issuance, on the Nasdaq National Market.
(p) The closing under the International Underwriting Agreement
shall have occurred or shall be occurring concurrently with the closing
hereunder on the Closing Date.
All such opinions, certificates, letters and other documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory in form and substance to you and your counsel.
41
<PAGE>
Any certificate or document signed by any officer of the Company or
any Attorney-in-Fact or any Selling Shareholder and delivered to you, as
Representatives of the U.S. Underwriters, or to counsel for the U.S.
Underwriters, shall be deemed a representation and warranty by the Company,
the Selling Shareholders or the particular Selling Shareholder, as the case
may be, to each U.S. Underwriter as to the statements made therein.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the satisfaction on and as of the
Option Closing Date, if any, of the conditions set forth in this Section 10,
except that, if any Option Closing Date is other than the Closing Date, the
certificates, opinions and letters referred to in this Section 10 shall be
dated the Option Closing Date in question and the opinions or letters called
for by paragraphs (c), (d), (e), (f), (g),(h) and (i) shall be revised to
reflect the sale of Additional Shares.
11. Expenses. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by them
of their obligations hereunder: (i) the preparation, printing or
reproduction, and filing with the Commission of the registration statement
(including financial statements and exhibits thereto), each Prepricing
Prospectus, the Prospectus, and each amendment or supplement to any of them;
(ii) the printing (or reproduction) and delivery (including postage, air
freight (or reproduction) and delivery (including postage, air freight charges
and charges for counting and packaging) of such copies of the registration
statement, each Prepricing Prospectus, the Prospectus, and all amendments or
supplements to any of them as may be reasonably requested for use in
connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the
Shares, including any stamp taxes in connection with the original issuance and
sale of the Shares; (iv) the printing (or reproduction) and delivery of this
Agreement, the Blue Sky Memorandum and all other agreements or documents
printed (or reproduced) and delivered in connection with the offering of the
Shares; (v) the registration of the Common Stock under the Exchange Act and
the listing of the Shares on the Nasdaq National Market; (vi) the registration
or qualification of the Shares for offer and sale under the securities or Blue
Sky laws of the several states as provided in Section 5(g) hereof (including
the reasonable fees, expenses and disbursements of counsel for the
Underwriters relating to the preparation, printing or reproduction, and
delivery of the Blue Sky Memorandum and such registration and qualification,
if any, up to $ .); (vii) the filing fees and the fees and expenses of
counsel for the Underwriters in connection with any filings required to be
made with the National Association of Securities Dealers, Inc. including the
fees and expenses of any qualified independent underwriter; (viii) the
transportation and other expenses incurred by or on behalf of representatives
of the Company in connection with presentations to prospective purchasers
42
<PAGE>
of the Shares; and (ix) the fees and expenses of the Company's accountants and
the fees and expenses of counsel (including local and special counsel) for the
Company and the Selling Shareholders.
12. Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto;
or (ii) if, at the time this Agreement is executed and delivered, it is
necessary for the registration statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time
as this Agreement shall have become effective, it may be terminated by the
Company, by notifying you, or by you, as Representatives of the several U.S.
Underwriters, by notifying the Company and the Selling Shareholders.
If any one or more of the U.S. Underwriters shall fail or refuse to
purchase Shares which it or they are obligated to purchase hereunder on the
Closing Date, and the aggregate number of Shares which such defaulting U.S.
Underwriter or Underwriters are obligated but fail or refuse to purchase is
not more than one-tenth of the aggregate number of Shares which the U.S.
Underwriters are obligated to purchase on the Closing Date, each
non-defaulting U.S. Underwriter shall be obligated, severally, in the
proportion which the number of Firm Shares set forth opposite its name in
Schedule I hereto bears to the aggregate number of Firm Shares set forth
opposite the names of all non-defaulting U.S. Underwriters or in such other
proportion as you may specify in accordance with Section 20 of the Master
Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting U.S. Underwriter or Underwriters are obligated, but fail
or refuse, to purchase. If any one or more of the U.S. Underwriters shall
fail or refuse to purchase Shares which it or they are obligated to purchase
on the Closing Date and the aggregate number of Shares with respect to which
such default occurs is more than one-tenth of the aggregate number of Shares
which the U.S. Underwriters are obligated to purchase on the Closing Date and
arrangements satisfactory to you and the Company for the purchase of such
Shares by one or more non-defaulting U.S. Underwriters or other party or
parties approved by you and the Company are not made within 36 hours after
such default, this Agreement will terminate without liability on the part of
any non-defaulting U.S. Underwriter or the Company. In any such case which
does not result in termination of this Agreement, either you or the Company
shall have the right to postpone the Closing Date, but in no event for longer
than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting U.S. Underwriter from liability in respect of any such
default of any such U.S. Underwriter under this Agreement. The term "U.S.
Underwriter" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I
43
<PAGE>
hereto who, with your approval and the approval of the Company, purchases
Shares which a defaulting U.S. Underwriter is obligated, but fails or refuses,
to purchase.
Any notice under this Section 12 may be given by telegram, telecopy
or telephone but shall be subsequently confirmed by letter.
13. Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
U.S. Underwriter to the Company or any Selling Shareholder, by notice to the
Company, if prior to the Closing Date or the Option Closing Date, if any, (if
different from the Closing Date and then only as to the Additional Shares), as
the case may be, (i) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended or materially limited, (ii) a general moratorium on commercial
banking activities in New York shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis
or change in political, financial or economic conditions, the effect of which
on the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the U.S. Prospectus or to enforce contracts for the resale of the Shares by
the U.S. Underwriters.
Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
14. Information Furnished by the U.S. Underwriters. The statements
set forth in the last paragraph on the cover page, the stabilization legend on
the inside front cover page, and the statements in the first, second, fourth,
seventh, eighth, ninth, tenth, eleventh (as it relates to the Managers),
fourteenth and seventeenth paragraphs under the caption "Underwriting" in any
U.S. Prepricing Prospectus and in the U.S. Prospectus constitute the only
information furnished by or on behalf of the U.S. Underwriters through you as
such information is referred to in Sections 7(b) and 9 hereof.
15. Miscellaneous. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company, Fred Gratzon or
Clifford Rees at the office of the Company at, 2098 Nutmeg Avenue, Fairfield,
Iowa 52556, Attention: Fred Gratzon, Chairman; (ii) if to the Greenwich Street
Affiliates, to Stephen R. Hertz at Debevoise & Plimpton, 875 Third Avenue New
York, New York 10022; or (iii) if to you, as Representatives of the several
U.S. Underwriters, care of Smith Barney Inc., 388 Greenwich
44
<PAGE>
Street, New York, New York 10013, Attention: Manager, Investment Banking
Division.
This Agreement has been and is made solely for the benefit of the
several U.S. Underwriters, the Selling Shareholders, the Company, its
directors and officers, the other controlling persons referred to in Section 9
hereof and the Selling Shareholders and their respective successors and
assigns, to the extent provided herein, and no other person shall acquire or
have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any U.S. Underwriter of any of the Shares in
his status as such purchaser.
16. Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York
applicable to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
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<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and the several U.S. Underwriters.
Very truly yours,
TELEGROUP, INC.
By:
-------------------------
Name:
--------------------
Title:
-------------------
FRED GRATZON
By:
-------------------------
Name:
--------------------
Title:
-------------------
SHELLEY L. LEVIN-GRATZON
By:
-------------------------
Name:
--------------------
Title:
-------------------
CLIFFORD S. REES
By:
-------------------------
Name:
--------------------
Title:
-------------------
STEVEN RUBIN
By:
-------------------------
Name:
--------------------
Title:
-------------------
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<PAGE>
STEVEN FOSTER
By:
-------------------------
Name:
--------------------
Title:
-------------------
GREENWICH STREET CAPITAL
PARTNERS, L.P.
By:
-------------------------
Name:
--------------------
Title:
-------------------
GREENWICH STREET CAPITAL
OFFSHORE FUND, LTD.
By:
-------------------------
Name:
--------------------
Title:
-------------------
TRV EMPLOYEES FUND, L.P.
By:
-------------------------
Name:
--------------------
Title:
-------------------
THE TRAVELERS INSURANCE COMPANY
By:
-------------------------
Name:
--------------------
Title:
-------------------
THE TRAVELERS LIFE AND
ANNUITY COMPANY
By:
-------------------------
Name:
--------------------
Title:
-------------------
47
<PAGE>
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several U.S.
Underwriters named in Schedule I
hereto.
SMITH BARNEY INC.
Alex. Brown & Sons Incorporated
COWEN & COMPANY
As Representatives of the Several U.S. Underwriters
By: SMITH BARNEY INC.
By:
---------------------------------
Managing Director
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<PAGE>
SCHEDULE I
Telegroup, Inc.
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- ------------ ------------- ----------- -------------
Smith Barney Inc. ...
Alex. Brown & Sons
Incorporated
Cowen & Company
-------------
Total
-------------
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<PAGE>
SCHEDULE II
Telegroup, Inc.
Number of
Selling Shareholders Additional Shares
- --------------------- ------------------
Mr. Fred Gratzon and Shelley L.
Levin-Gratzon, as joint tenants
Mr. Clifford S. Rees
Mr. Steven Rubin
Mr. Steven Foster
Greenwich Street Capital Partners, L.P.
Greenwich Street Capital Offshore Fund, Ltd.
TRV Employees Fund, L.P.
The Travelers Insurance Company
The Travelers Life and Annuity Company
-----------------
Total
-----------------
50
<PAGE>
EXHIBIT 1.2
FORM OF INTERNATIONAL UNDERWRITING AGRMT
1,440,000 Shares
TELEGROUP, INC.
Common Stock
FORM OF
INTERNATIONAL UNDERWRITING AGREEMENT
June , 1997
SMITH BARNEY INC.
ALEX. BROWN & SONS INCORPORATED
COWEN & COMPANY
As Lead Managers for the Several Managers
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
Telegroup, Inc., an Iowa corporation (the "Company"), proposes to
issue and sell an aggregate of 1,440,000 shares of its common stock, no par
value per share (the "Firm Shares") to the several Underwriters named in
Schedule I hereto (the "Managers") for whom Smith Barney Inc., Alex. Brown &
Sons Incorporated and Cowen & Company are acting as representatives (the "Lead
Managers"). In addition, solely for the purpose of covering over-allotments,
the persons named in Schedule II hereto (the "Selling Shareholders") propose
to sell to the Managers, upon the terms and conditions set forth in Section 2
hereof, up to an additional 216,000 shares (the "Additional Shares") of common
stock of the Company. The Company and the Selling Shareholders are
hereinafter sometimes referred to as the "Sellers." The Additional Shares to
be sold by Greenwich Street Capital Partners, L.P., Greenwich Street Capital
Offshore Fund, Ltd., TRV Employees Fund, L.P., The Travelers Insurance Company
and The Travelers Life and Annuity Company (collectively the "Greenwich Street
Affiliates"), are issuable upon exercise of warrants to purchase common stock
of the Company (the "Warrants"). Each Warrant entitles the holder thereof to
purchase ______ shares of Common Stock (as defined herein) at an exercise
price of $0.01 per share. The Firm Shares and the Additional Shares are
hereinafter collectively referred to as the "Shares." The Company's common
stock, no par value per share, including the Shares and the U.S. Shares (as
defined herein), is hereinafter referred to as the "Common Stock."
<PAGE>
It is understood that the Company and the Selling Shareholders are
concurrently entering into a U.S. Underwriting Agreement, dated the date
hereof (the "U.S. Underwriting Agreement"), providing for the sale of
5,760,000 shares of the Common Stock (the "Firm U.S. Shares"), plus an option
granted by certain of the Selling Shareholders to purchase up to an additional
864,000 shares of Common Stock (the "Additional U.S. Shares") solely for the
purpose of covering over-allotments) through arrangements with certain
underwriters in the United States and Canada (the "U.S. Underwriters"), for
whom Smith Barney Inc., Alex. Brown & Sons Incorporated and Cowen & Company
are acting as representatives (the "Representatives"). All shares of Common
Stock proposed to be offered to U.S. Underwriters pursuant to the U.S.
Underwriting Agreement, including the Firm U.S. Shares and the Additional U.S.
Shares, are herein referred to as the "U.S. Shares"; the U.S. Shares and the
Shares, collectively, are herein referred to as the "Underwritten Shares."
The Company and the Selling Shareholders also understand that the
Lead Managers and the Representatives have entered into an agreement (the
"Agreement Between U.S. Underwriters and Managers") contemplating the
coordination of certain transactions between the Managers and the U.S.
Underwriters and that, pursuant thereto and subject to the conditions set
forth therein, the Managers may purchase from U.S. Underwriters a portion of
the U.S. Shares or sell to the Managers a portion of the Shares. The Company
and the Selling Shareholders understand that any such purchases and sales
between the Managers and the U.S. Underwriters shall be governed by the
Agreement Between U.S. Underwriters and Managers and shall not be governed by
the terms of this Agreement or the U.S. Underwriting Agreement.
The Company and the Selling Shareholders wish to confirm as follows
their respective agreements with you and the other several Managers on whose
behalf you are acting, in connection with the several purchases of the Shares
by the Underwriters.
1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared
and filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-1, including prospectuses subject
to completion, relating to the Underwritten Shares. The term "Registration
Statement" as used in this Agreement means the registration statement
(including all financial schedules and exhibits), as amended at the time it
becomes effective, and as thereafter amended by post-effective amendment. The
term "Prospectuses" as used in this Agreement means the prospectuses in the
forms included in the Registration Statement, or, if the prospectuses included
in the Registration Statement omit information in reliance on Rule 430A under
the Act and such information is included in prospectuses filed with the
Commission
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pursuant to Rule 424(b) under the Act, the term "Prospectuses" as used in this
Agreement means the prospectuses in the forms included in the Registration
Statement as supplemented by the addition of the Rule 430A information
contained in the prospectuses filed with the Commission pursuant to Rule
424(b). The term "Prepricing Prospectuses" as used in this Agreement means
the prospectuses subject to completion in the forms included in the
Registration Statement at the time of the initial filing of the Registration
Statement with the Commission, and as such prospectuses shall have been
amended from time to time prior to the date of the Prospectuses.
It is understood that two forms of Prepricing Prospectus and two forms of
Prospectus are to be used in connection with the offering and sale of the
Underwritten Shares: a Prepricing Prospectus and a Prospectus relating to the
U.S. Shares that are to be offered and sold in the United States (as defined
herein) or Canada (as defined herein) to U.S. or Canadian Persons (the "U.S.
Prepricing Prospectus" and the "U.S. Prospectus," respectively), and a
Prepricing Prospectus and a Prospectus relating to the Shares which are to be
offered and sold outside the United States or Canada to persons other than U.S.
or Canadian Persons (the "International Prepricing Prospectus" and the
"International Prospectus," respectively). The U.S. Prospectus and the
International Prospectus are herein collectively called the "Prospectuses," and
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses." For purposes of this Agreement,
"Exchange Act" means the Securities Exchange Act of 1934, as amended and the
rules and regulations of the Commission thereunder; "U.S. or Canadian Person"
means any resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction; and "Canada" means Canada and its
territories, its possessions and other areas subject to its jurisdiction.
the U.S. Prepricing Prospectus and the International Prepricing Prospectus are
herein called the "Prepricing Prospectuses." For purposes of this Agreement,
"Exchange Act" means the Securities Exchange Act of 1934, as amended and the
rules and regulations of the Commission thereunder; "U.S. or Canadian Person"
means any resident or national of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada or any estate or trust the income of which is subject to
United States or Canadian income taxation regardless of the source of its income
(other than the foreign branch of any U.S. or Canadian Person), and includes any
United States or Canadian branch of a person other than a U.S. or Canadian
Person; "United States" means the United States of America (including the states
thereof and the District of Columbia) and its territories, its possessions and
other areas subject to its jurisdiction; and "Canada" means Canada and its
territories, its possessions and other areas subject to its jurisdiction.
2. AGREEMENTS TO SELL AND PURCHASE. Upon the basis of the
representations, warranties and agreements contained herein and subject to all
the terms and conditions set forth herein, and to such adjustments as you may
determine to avoid fractional shares, the Company hereby agrees, to issue and
sell to each Manager and each Manager agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $ ______ per share (the
"purchase price per share"), the number of Firm Shares that bears the same
proportion to the aggregate number of Firm Shares to be
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<PAGE>
issued and sold by the Company as the number of Firm Shares set forth opposite
the name of such Manager in Schedule I hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company.
Upon the basis of the representations, warranties and agreements
contained herein and subject to all the terms and conditions set forth herein,
the Selling Shareholders listed in Schedule II hereto agree to sell to the
Managers, and the Managers shall have the right to purchase from such Selling
Shareholders listed in Schedule II hereto, at the purchase price per share,
pursuant to an option (the "over-allotment option") which may be exercised
prior to 5:00 p.m., New York City time, on the 30th day after the date of the
International Prospectus (or, if such 30th day shall be a Saturday or Sunday
or a holiday, on the next business day thereafter when the New York Stock
Exchange is open for trading), up to an aggregate of 216,000 Additional Shares
from the Selling Shareholders listed in Schedule II hereto (the maximum number
of Additional Shares that each of them agrees to sell upon the exercise by the
Managers of the over-allotment option is set forth opposite their respective
names in Schedule II). The number of Additional Shares that the Managers
elect to purchase upon any exercise of the over-allotment option shall be
provided by each Selling Shareholder who has agreed to sell Additional Shares
in proportion to the respective maximum numbers of Additional Shares that each
such Selling Shareholder has agreed to sell. Additional Shares may be
purchased only for the purpose of covering over-allotments made in connection
with the offering of the Firm Shares. Upon any exercise of the over-allotment
option, each Manager, severally and not jointly, agrees to purchase from each
Selling Shareholder who has agreed to sell Additional Shares the number of
Additional Shares (subject to such adjustments as you may determine in order
to avoid fractional shares) that bears the same proportion to the number of
Additional Shares to be sold by each Selling Shareholder who has agreed to
sell Additional Shares as the number of Firm Shares set forth opposite the
name of such Manager in Schedule II hereto (or such number of Firm Shares
increased as set forth in Section 12 hereof) bears to the aggregate number of
Firm Shares to be sold by the Company.
Certificates in transferable form for the Additional Shares that each
of Fred Gratzon and Shelley L. Levin-Gratzon as joint tenants (each of Fred
Gratzon and Shelly L. Levin-Gratzon, collectively the "Gratzons") agrees to sell
pursuant to this Agreement have been placed in custody with Swidler & Berlin,
Chartered (the "Custodian") for delivery under this Agreement pursuant to a
Custody Agreement and Power of Attorney (the "GR Custody Agreement") executed by
each of the Graztons and Clifford Rees appointing and , as
agents and attorneys-in-fact (the "Attorneys-in-Fact"). Each of the Graztons and
Clifford Rees agrees that (i) the Additional Shares represented by the
certificates held in custody pursuant to
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the GR Custody Agreement are subject to the interests of the Managers, the
Company and each other Selling Shareholder, (ii) the arrangements made by the
Graztons and Clifford Rees for such custody are, except as specifically
provided in the GR Custody Agreement, irrevocable, and (iii) the obligations
of the Graztons and Clifford Rees hereunder and under the GR Custody Agreement
shall not be terminated by any act of such Selling Shareholder or by operation
of law, whether by the death or incapacity of any of the Graztons or Clifford
Rees or the occurrence of any other event. If any of the Graztons or Clifford
Rees shall die or be incapacitated or if any other event shall occur before
the delivery of the additional Shares of the Gratzons and Clifford Rees to be
sold hereunder, certificates for the Additional Shares of such Selling
Shareholders shall be delivered to the Underwriters by the Attorneys-in-Fact
in accordance with the terms and conditions of this Agreement and the GR
Custody Agreement as if such death or incapacity or other event had not
occurred, regardless of whether or not the Attorneys-in-Fact or any Manager
shall have received notice of such death, incapacity or other event. Each
Attorney-in-Fact is authorized, on behalf of each of the Graztons and Clifford
Rees, to execute this Agreement and any other documents necessary or desirable
in connection with the sale of the Additional Shares to be sold hereunder by
the Graztons or Clifford Rees, to make delivery of the certificates for such
Additional Shares, to receive the proceeds of the sale of such Additional
Shares, to give receipts for such proceeds, to pay therefrom any expenses to
be borne by the Graztons and Clifford Rees in connection with the sale and
public offering of such Additional Shares, to distribute the balance thereof
to the Gratzons and Clifford Rees, and to take such other action as may be
necessary or desirable in connection with the transactions contemplated by
this Agreement. Each Attorney-in-Fact agrees to perform his duties under the
Custody Agreement.
Certificates in transferable form for the Additional Shares that each of
Steve Rubin and Steve Foster agrees to sell pursuant to this Agreement have been
placed in custody with the Custodian for delivery under this Agreement pursuant
to a Custody Agreement and Power of Attorney (the "RF Custody Agreement")
executed by Mr. Rubin and Mr. Foster appointing [ ] and [ ]
as agents and attorneys-in-fact (the "RF Attorneys-in-Fact"). Each of Steven
Rubin and Steven Foster agrees that (i) the Additional Shares represented by the
certificates held in custody pursuant to the RF Custody Agreement are subject to
the interests of the Managers, the Company and each other Selling Shareholder,
(ii) the arrangements made by Steven Rubin and Steven Foster, for such custody
are, except as specifically provided in the RF Custody Agreement, irrevocable,
and (iii) the obligations of Steven Rubin and Steven Foster hereunder and under
the RF Custody Agreement shall not be terminated by any act of such Selling
Shareholder or by operation of law, whether by the death or incapacity of any of
Steven Rubin or Steven
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<PAGE>
Foster or the occurrence of any other event. If any of Steven Rubin or Steven
Foster shall die or be incapacitated or if any other event shall occur before
the delivery of the Additional Shares of Steven Rubin and Steven Foster to be
sold hereunder, certificates for the Additional Shares of such Selling
Shareholder shall be delivered to the Managers by the RF Attorneys-in-Fact in
accordance with the terms and conditions of this Agreement and the RF Custody
Agreement, respectively, as if such death or incapacity or other event had not
occurred, regardless of whether or not the respective Attorneys-in-Fact or any
Manager shall have received notice of such death, incapacity or other event.
The RF Attorneys-in-Fact are authorized, on behalf of Steven Rubin and Steven
Foster, to execute this Agreement and any other documents necessary or
desirable in connection with the sale of the Additional Shares to be sold
hereunder by Steven Rubin and Steven Foster to make delivery of the
certificates for such Additional Shares, to receive the proceeds of the sale
of such Additional Shares, to give receipts for such proceeds, to pay
therefrom any expenses to be borne by Steven Rubin and Steven Foster in
connection with the sale and public offering of such Additional Shares, to
distribute the balance thereof to Steven Rubin and Steven Foster and to take
such other action as may be necessary or desirable in connection with the
transactions contemplated by this Agreement. Each RF Attorney-in-Fact agrees
to perform his duties under the RF Custody Agreement.
Certificates in transferable form for the Warrants which are
exercisable for the Additional Shares that the Greenwich Street Affiliates
agree to sell pursuant to this Agreement have been placed in custody with the
Custodian for delivery under this Agreement pursuant to a Custody Agreement
(the "Greenwich Street Custody Agreement" and collectively with the GR Custody
Agreement and the RF Custody Agreement, the "Custody Agreements"). The
Greenwich Street Affiliates agree that (i) the Warrants and Additional Shares
represented by the certificates held in custody pursuant to the Greenwich
Street Custody Agreement are subject to the interests of the Managers, the
Company and each other Selling Shareholder, (ii) the arrangements made by the
Greenwich Street Affiliates are, except as specifically provided in the
Greenwich Street Custody Agreement, irrevocable, and (iii) the obligations of
the Greenwich Street Affiliates hereunder and under the Greenwich Street
Custody Agreement shall not be terminated by any act of the Greenwich Street
Affiliates or by operation of law, whether upon any dissolution, winding up,
distribution of assets or other event affecting the legal existence of any of
the Greenwich Street Affiliates. If any event shall occur before the delivery
of the Additional Shares to be sold by the Greenwich Street Affiliates
hereunder or if any of the Greenwich Street Affiliates shall dissolve, wind
up, distribute assets or if any other event affecting the legal existence of
any of the Greenwich Street Affiliates shall occur before the delivery of the
Additional Shares to be sold by the Greenwich Street Affiliates hereunder, the
Warrants shall be exercised for the Additional Shares to be sold by the
Greenwich Street Affiliates hereunder and certificates evidencing such
Additional Shares shall be delivered to the
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<PAGE>
Managers by the Custodian in accordance with the terms and conditions of this
Agreement and the Greenwich Street Custody Agreement as if such dissolution,
winding up or distribution of assets or other event had not occurred,
regardless of whether or not any Manager shall have received notice of such
dissolution, winding up or distribution of assets or other event.
3. TERMS OF PUBLIC OFFERING. The Sellers have been advised by you
that the Managers propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the International Prospectus.
4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the
Managers of and payment for the Firm Shares shall be made at the office of
Smith Barney Inc., 388 Greenwich Street, New York, N.Y. 10013, at 10:00 A.M.,
New York City time, on , 1997 (the "Closing Date"). The place
of closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the Managers of and payment for any Additional Shares to be
purchased by the Managers shall be made at the aforementioned office of Smith
Barney Inc. at such time on such date (the "Option Closing Date"), which may
be the same as the Closing Date but shall in no event be earlier than the
Closing Date nor earlier than two nor later than ten business days after the
giving of the notice hereinafter referred to, as shall be specified in a
written notice from you on behalf of the Managers to the Company and the
Attorneys-in-Fact of the Managers' determination to purchase a number,
specified in such notice, of Additional Shares. The place of closing for any
Additional Shares and the Option Closing Date, if any, for such Shares may be
varied by agreement among you, the Company and the Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such
denominations as you shall request by written notice, it being understood that
a facsimile transmission shall be deemed written notice, prior to 9:30 A.M.,
New York City time, on the second business day preceding the Closing Date or
the Option Closing Date, as the case may be. Such certificates shall be made
available to you in New York City for inspection and packaging not later than
9:30 A.M., New York City time, on the business day next preceding the Closing
Date or the Option Closing Date, as the case may be. The certificates and
stock powers evidencing the Firm Shares and any Additional Shares to be
purchased hereunder shall be delivered to you on the Closing Date or the
Option Closing Date, as the case may be, against payment of the purchase price
therefor in immediately available funds.
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5. AGREEMENTS OF THE COMPANY. The Company agrees with the several
Managers as follows:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Company will endeavor to cause the Registration Statement or such
post-effective amendment to become effective as soon as possible and will
advise you promptly and, if requested by you, will confirm such advice in
writing, when the Registration Statement or such post-effective amendment has
become effective.
(b) The Company will advise you promptly and, if requested by you,
will confirm such advice in writing: (i) of any request by the Commission of
which the Company has knowledge for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectuses or the Prospectuses or for
additional information; (ii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or of the
suspension of qualification of the Shares for offering or sale in any
jurisdiction or the initiation of any proceeding for such purpose of which the
Company has knowledge; and (iii) within the period of time referred to in
paragraph (f) below, of any change in the Company's condition (financial or
other), business, prospects, properties, net worth or results of operations,
or of the happening of any event, that makes any statement of a material fact
made in the Registration Statement or the Prospectuses (as then amended or
supplemented) untrue or which requires the making of any additions to or
changes in the Registration Statement or the Prospectuses (as then amended or
supplemented) in order to state a material fact required by the Act or the
regulations thereunder to be stated therein or necessary in order to make the
statements therein not misleading, or of the necessity to amend or supplement
the Prospectuses (as then amended or supplemented) to comply with the Act or
any other law. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will
make every reasonable effort to obtain the withdrawal of such order at the
earliest possible time.
(c) The Company will furnish to you, without charge four (4) signed
copies of the Registration Statement as originally filed with the Commission
and of each amendment thereto, including financial statements and all exhibits
to the Registration Statement and will also furnish to you, without charge,
such number of conformed copies of the Registration Statement as originally
filed and of each amendment thereto, but without exhibits, as you may
reasonably request.
(d) The Company will not (i) file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectuses of which you
shall not previously have been advised or
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to which you shall reasonably object in writing after being so advised or (ii)
so long as, in the written opinion of counsel for the Managers a prospectus is
required to be delivered in connection with sales by any Manager or dealer,
file any information, documents or reports pursuant to the Exchange Act,
without delivering a copy of such information, documents or reports, to you,
as Lead Managers for the Managers, prior to or concurrently with such filing.
(e) Prior to the execution and delivery of this Agreement, the
Company has delivered or will deliver to you, without charge, in such
quantities as you have reasonably requested or may hereafter reasonably
request, copies of each form of the International Prepricing Prospectus. The
Company consents to the use, in accordance with the provisions of the Act and
with the securities laws of the jurisdictions in which the Shares are offered
by the several Managers and by dealers, prior to the date of the International
Prospectus, of each International Prepricing Prospectus so furnished by the
Company.
(f) As soon after the execution and delivery of this Agreement as
possible and thereafter from time to time for such period as in the written
opinion of counsel for the Managers (a copy of which shall be delivered to the
Company) an International Prospectus is required by the Act to be delivered in
connection with sales by any Manager or dealer, the Company will expeditiously
deliver to each Manager and each dealer, without charge, as many copies of the
International Prospectus (and of any amendment or supplement thereto) as you
may reasonably request. The Company consents to the use of the International
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the Act and with the securities laws of the jurisdictions in
which the Shares are offered by the several Managers and by all dealers to
whom Shares may be sold, both in connection with the offering and sale of the
Shares and for such period of time thereafter as the International Prospectus
is required by the Act to be delivered in connection with sales by any Manager
or dealer. If during such period of time any event shall occur that in the
judgment of the Company or in the written opinion of counsel for the Managers
(a copy of which shall be delivered to the Company) is required to be set
forth in the International Prospectus (as then amended or supplemented) or
should be set forth therein in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading, or if
it is necessary to supplement or amend the International Prospectus in to
comply with the Act or any other law, the Company will forthwith prepare and,
subject to the provisions of paragraph (d) above, file with the Commission an
appropriate supplement or amendment thereto, and will expeditiously furnish to
the Managers and dealers a reasonable number of copies thereof. In the event
that the Company and you, as Lead Managers for the several Managers, agree
that the International Prospectus should be amended or supplemented, the
Company, if requested by you, will promptly issue a press release
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<PAGE>
announcing or disclosing the matters to be covered by the proposed amendment
or supplement.
(g) The Company will cooperate with you and with counsel for the
Managers in connection with the registration or qualification of the Shares
for offering and sale by the several Managers and by dealers under the
securities laws of such jurisdictions as you may reasonably designate and will
file such consents to service of process or other documents necessary or
appropriate in order to effect such registration or qualification; provided
that in no event shall the Company be obligated to qualify to do business in
any jurisdiction where it is not now so qualified or to take any action that
would subject it to service of process in suits, other than those arising out
of the offering or sale of the Shares, in any jurisdiction where it is not now
so subject.
(h) The Company will make generally available to its security
holders a consolidated earnings statement, which need not be audited, covering
a twelve-month period commencing after the effective date of the Registration
Statement and ending not later than 15 months thereafter, as soon as
reasonably practicable after the end of such period, which consolidated
earnings statement shall satisfy the provisions of Section 11(a) of the Act.
(i) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to Shareholders or filed with the Commission or the Nasdaq National
Market, and (ii) from time to time such other information concerning the
Company as you may reasonably request.
(j) If this Agreement shall terminate or shall be terminated after
execution pursuant to any provisions hereof (otherwise than pursuant to the
second paragraph of Section 12 hereof or by notice given by you terminating
this Agreement pursuant to Section 12 or Section 13 hereof) or if this
Agreement shall be terminated by the Managers because of any failure or
refusal on the part of the Company or any of the Selling Shareholders to
comply in any material respect with the terms or fulfill in any material
respect any of the conditions of this Agreement, the Company agrees to
reimburse the Lead Managers for all reasonable out-of-pocket expenses
(including reasonable fees and expenses of counsel for the Managers) incurred
by you in connection herewith.
(k) The Company will apply the net proceeds from the sale of the
Shares to be sold by it hereunder substantially in accordance with the
description set forth in the Prospectuses.
(l) If Rule 430A of the Act is employed, the Company will timely
file the Prospectuses pursuant to Rule 424(b) under the Act and will advise
you of the time and manner of such filing.
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(m) For a period of 180 days after the date hereof (the "Lock-Up
Period"), the Company will not, without the prior written consent of Smith
Barney Inc., offer, sell, contract to sell or otherwise dispose of any Common
Stock (or any securities convertible into or exercisable or exchangeable for
Common Stock) or grant any options or warrants to purchase Common Stock,
except for (i) the Company's issuance of shares of Common Stock in connection
with the reclassification of its Common Stock, (ii) the Company's issuance of
shares of its Common Stock in connection with the approximate 5.51 for 1 stock
split, (iii) the Company's issuance of shares of Common Stock upon exercise of
the Warrants, (iv) the issuance of Common Stock upon the exercise of stock
options granted, or the grant of stock options under the Company's Stock
Option Plan (and the filing of a Form S-8 Registration Statement with respect
to such shares of common stock), and (v) the sale to the U.S. Underwriters
pursuant to the U.S. Underwriting Agreement and to the Managers pursuant to
this Agreement.
(n) The Company has furnished or will furnish to you "lock-up"
letters, in form and substance reasonably satisfactory to you, signed by each
of its current officers and directors and each of ( ).
(o) Except as stated in this Agreement and in the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and Prospectuses, the Company has
not taken, nor will it take, directly or indirectly, any action designed to or
that might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or resale
of the Shares.
(p) The Company will use its reasonable best efforts to have the
Common Stock listed, subject to notice of issuance, on the Nasdaq National
Market concurrently with the effectiveness of the registration statement.
(q) The Company will use its best efforts to satisfy on or before
the Closing Date or any Option Closing Date, as the case may be, all
conditions to the Managers' obligations to purchase the Shares.
6. AGREEMENTS OF THE SELLING SHAREHOLDERS. Each of the Selling
Shareholders agrees severally and not jointly with the several Managers as
follows:
(a) Messrs. Gratzon and Rees will cooperate to the extent necessary
to cause the registration statement or any post-effective amendment thereto to
become effective at the earliest possible time and each of the other Selling
Shareholders will cooperate to the extent necessary in furnishing all
information with respect to itself of a type referred to in Item 507 of
Regulation S-K under the Act so as to permit the
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Registration Statement or any post-effective amendment thereto to become
effective at the earliest possible time.
(b) Such Selling Shareholder will pay all Federal and other taxes,
if any on the transfer or sale of such Additional Shares that are sold by the
Selling Shareholder to the Managers.
(c) Such Selling Shareholder will do or perform all things required
to be done or performed by the Selling Shareholder under this Agreement prior
to the Closing Date or any Option Closing Date, as the case may be, to satisfy
all conditions precedent to the delivery of the Additional Shares pursuant to
this Agreement.
(d) For a period of 180 days after the date hereof, such Selling
Shareholder will not, without the prior written consent of Smith Barney Inc.,
offer, sell, contract to sell or otherwise dispose of any Common Stock (or any
securities convertible into or exercisable or exchangeable for Common Stock)
or grant any options or warrants to purchase Common Stock, except for sales of
Additional Shares to the Managers pursuant to this Agreement and sales to the
U.S. Underwriters under the U.S. Underwriting Agreement.
(e) Except as stated in this Agreement and the U.S. Underwriting
Agreement and in the Prepricing Prospectuses and the Prospectuses, such
Selling Shareholder has not taken, nor will it take, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(f) Such Selling Shareholder will advise you promptly upon becoming
aware, and if requested by you, will confirm such advice in writing, within
the period of time referred to in Section 5(f) hereof, of any change in the
Company's condition (financial or other), business, prospects, properties, net
worth or results of operations, or of the happening of any event that makes
any statement of a material fact made in the Registration Statement or the
Prospectuses (as then amended or supplemented) untrue or which requires the
making of any additions to or changes in the Registration Statement or the
Prospectuses (as then amended or supplemented) in order to state a material
fact required by the Act or the regulations thereunder to be stated therein or
necessary in order to make the statements therein not misleading, or of the
necessity to amend or supplement the Prospectuses (as then amended or
supplemented) to comply with the Act or any other law. If at any time the
Commission shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to
obtain the withdrawal of such order at the earliest possible time.
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7. REPRESENTATIONS AND WARRANTIES OF FRED GRATZON AND CLIFFORD REES
AND THE COMPANY. Each of the Company, Fred Gratzon and Clifford Rees
represents and warrants to each Manager that:
(a) Each International Prepricing Prospectus included as part of
the registration statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the Act, complied when
so filed in all material respects with the provisions of the Act; except that
this representation and warranty does not apply to statements in or omissions
from such International Prepricing Prospectus (or any amendment or supplement
thereto) made in reliance upon and in conformity with information relating to
any Manager furnished to the Company in writing by a Manager through the Lead
Managers or by a Manager through the Lead Managers expressly for use therein.
The Commission has not issued any order preventing or suspending the use of
any Prepricing Prospectus.
(b) The Registration Statement in the form in which it became or
becomes effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the Prospectuses and any
supplement or amendment thereto when filed with the Commission under Rule
424(b) under the Act, complied or will comply in all material respects with
the provisions of the Act and will not at any such time contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
except that this representation and warranty does not apply to statements in
or omissions from the Registration Statement or the Prospectuses made in
reliance upon and in conformity with information relating to any Manager
furnished to the Company in writing by or on behalf of a Manager through the
Lead Managers or by a U.S. Underwriter through the Representatives expressly
for use therein.
(c) All the outstanding shares of Common Stock of the Company
(including the Additional Shares to be sold by the Gratzons and Clifford Rees)
have been duly authorized and validly issued, are fully paid and nonassessable
and are free of any preemptive or similar rights; the Firm Shares to be issued
and sold by the Company have been duly authorized and, when issued and
delivered to the Managers against payment therefor in accordance with the
terms hereof, will be validly issued, fully paid and nonassessable and free of
any preemptive or similar rights; the Additional Shares issuable upon exercise
of the Warrants have been duly authorized for issuance and, when delivered to
the Greenwich Street Affiliates by the Company upon exercise of the Warrants
against payment of the exercise price therefor, will be validly issued, fully
paid and nonassessable and free of any preemptive or similar rights and the
capital stock of the Company conforms in all material respects to the
description thereof in the Registration Statement and the Prospectuses.
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(d) Each of the Warrants has been duly and validly authorized by
the Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
as (i) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors or other obligees
generally and (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be
brought.
(e) The Company is a corporation duly organized and validly
existing in good standing under the laws of the State of Iowa with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly registered and qualified to conduct its business and
is in good standing in each jurisdiction where the nature of its properties or
the conduct of its business requires such registration or qualification,
except where the failure so to register or qualify does not have a material
adverse effect on the condition (financial or other), business, prospects,
properties, net worth or results of operations of the Company and the
Subsidiaries (as hereinafter defined) (a "Material Adverse Effect") taken as a
whole.
(f) All of the Company's subsidiaries (collectively, the
"Subsidiaries") are listed in Exhibit 21.1 to the Registration Statement.
Each Subsidiary is a corporation duly organized, validly existing and in good
standing in the jurisdiction of its incorporation, with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus, and is
duly registered and qualified to conduct its business and is in good standing
in each jurisdiction or place where the nature of its properties or the
conduct of its business requires such registration or qualification, except
where the failure so to register or qualify does not have a Material Adverse
Effect; all the outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable, and, except as set forth in the Prospectus, are owned by the
Company directly, or indirectly through one of the other Subsidiaries, free
and clear of any lien, adverse claim, security interest, equity or other
encumbrance.
(g) There are no legal or governmental proceedings pending or, to
the knowledge of the Company, threatened, against the Company or any of the
Subsidiaries which are materially adverse to the Company and its Subsidiaries,
taken as a whole, or to which the Company or any of the Subsidiaries, or to
which any of their respective properties is subject which are material to the
Company and its Subsidiaries taken as a whole, that are required to be
described in the Registration Statement or the Prospectuses but are
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not described as required, and there are no agreements, contracts, indentures,
leases, licenses, or other instruments or documents relating to the Company or
the Subsidiaries that are required to be described in the Registration
Statement or the Prospectuses or to be filed as an exhibit to the Registration
Statement that are not described or filed as required by the Act or the
Exchange Act. The descriptions of the terms of any such agreements,
indentures, leases, licenses, instruments, contracts or documents contained in
the Registration Statement or the Prospectuses are correct in all material
respects.
(h) Neither the Company nor any of the Subsidiaries is in
(i) violation of its certificate or articles of incorporation or by-laws, or
other organizational documents, (ii) in violation of any law, ordinance,
administrative or governmental rule or regulation applicable to the Company or
any of the Subsidiaries or of any decree of any court or governmental agency
or body having jurisdiction over the Company or any of the Subsidiaries
(except where any such violation or violations in the aggregate would not have
a Material Adverse Effect), or (iii) in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note or
any other evidence of indebtedness or in any agreement, indenture, lease or
other instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound, and
no condition or state of facts exists which with the passage of time or the
giving of notice or both, would constitute such a default (except where any
such default or defaults in the aggregate would not have a Material Adverse
Effect).
(i) Neither the issuance and sale of the Shares, the execution,
delivery or performance of this Agreement or the U.S. Underwriting Agreement
by the Company nor the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the inclusion
in the Registration Statement of the Additional Shares to be sold by the
Selling Shareholders) (i) requires any consent, approval, authorization or
other order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official (except
such as may be required for the registration of the Shares under the Act and
compliance with the securities or Blue Sky laws of various jurisdictions, all
of which have been or will be effected in accordance with this Agreement) (ii)
conflicts or will conflict with or constitutes or will constitute a breach of,
or a default under, the certificate or articles of incorporation or bylaws, or
other organizational documents, of the Company or any of the Subsidiaries or
(iii) conflicts or will conflict with or constitutes or will constitute a
breach of, or a default under any agreement, indenture, lease, license, on
other instrument to which the Company or any of the Subsidiaries is a party or
by which any of them or any of their respective properties may be bound, or
violates or will violate any statute, law, regulation or filing or judgment,
injunction, order
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or decree applicable to the Company or any of the Subsidiaries or any of their
respective properties, or will result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any
of the Subsidiaries pursuant to the terms of any agreement or instrument to
which any of them is a party or by which any of them may be bound or to which
any of the property or assets of any of them is subject except in the case of
clauses (i) and (iii) where the failure to obtain such consent, approval,
authorization or order, or to effect such filing or registration, or such
conflicts, defaults, violations or other action will not have, individually or
in the aggregate, a Material Adverse Effect.
(j) The accountants, KPMG Peat Marwick LLP, who have certified or
shall certify the financial statements filed or to be filed as part of the
Registration Statement or the Prospectuses (or any amendment or supplement
thereto) are independent public accountants as required by the Act.
(k) The financial statements, together with related schedules and
notes forming part of the Registration Statement and the Prospectuses (and any
amendment or supplement thereto), present fairly the consolidated financial
position, results of operations, cash flows and changes in stockholders'
equity of the Company and the Subsidiaries on the basis stated in the
Registration Statement at the respective dates or for the respective periods
to which they apply; such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as disclosed
therein; and the other financial and statistical information and data set
forth in the Registration Statement and the Prospectuses (and any amendment or
supplement thereto) are accurately presented in all material respects and
prepared on a basis consistent in all material respects with such financial
statements and the books and records of the Company and its Subsidiaries.
(l) The execution and delivery of, and the performance by the
Company of its obligations under, each of this Agreement and the U.S.
Underwriting Agreement have been duly and validly authorized by the Company,
and each of this Agreement and the U.S. Underwriting Agreement has been duly
executed and delivered by the Company and constitutes the valid and legally
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except (i) the enforceability hereof or thereof may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating to rights
of creditors and other obligees generally, (ii) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and principles and to the discretion of the court before
which the proceedings may be brought and (iii) rights to indemnity and
contribution hereunder or thereunder may be limited
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by federal or state securities laws or the public policy underlying such laws.
(m) Except as disclosed in the Registration Statement and the
Prospectuses (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectuses (or any amendment or supplement thereto),
neither the Company nor any of the Subsidiaries has incurred any liability or
obligation, direct or contingent, or entered into any transaction, not in the
ordinary course of business, that is material to the Company and the
Subsidiaries taken as a whole, and there has not been any change in the
capital stock of the Company, or material increase in the short-term debt or
long-term debt of the Company or any of the Subsidiaries, or any material
adverse change, or any development having or which would reasonably be
expected to have, a prospective Material Adverse Effect.
(n) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectuses as being owned by it, free and clear of all liens, claims,
security interests or other encumbrances except such as are described in the
Registration Statement and the Prospectuses or in a document filed as an
exhibit to the Registration Statement, except where the failure to have such
title would not have a Material Adverse Effect and all the property described
in the Prospectuses as being held under lease by each of the Company and the
Subsidiaries is held by it under valid, subsisting and enforceable leases
except as enforcement may be limited by applicable bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors and other obligees
generally or by general equitable principles with only such exceptions as in
the aggregate are not materially burdensome and do not interfere in any
material respect with the conduct of the business of the Company and the
Subsidiaries, taken as a whole.
(o) The Company has not distributed and, prior to the later to
occur of (i) the Closing Date or the Option Closing Date, if any, and (ii)
completion of the distribution of the Shares, will not distribute any offering
material in connection with the offering and sale of the Shares other than the
Registration Statement, the Prepricing Prospectuses, the Prospectuses or other
materials, if any, permitted by the Act.
(p) The Company and each of the Subsidiaries have such consents,
approvals, permits, licenses, franchises and authorizations of and from all
United States and foreign, federal, state or provincial, local and other
governmental or regulatory authorities (collectively, the "Licenses") as are
necessary to own its respective properties and to conduct its business in the
manner described in the Prospectuses except where the failure to have any such
License would not have a Material Adverse Effect and subject
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to such qualifications as may be set forth in the Prospectuses; the Company
and each of the Subsidiaries has fulfilled and performed all its material
obligations with respect to such Licenses and no event has occurred that
allows, or after notice or lapse of time or both would allow, revocation or
termination thereof or results in any other material impairment of the rights
of the holder of any such Licenses, except where any of the foregoing would
not have, individually or in the aggregate, a Material Adverse Effect and
subject in each case to such qualification as may be set forth in the
Prospectuses; and, except as described in the Prospectuses, none of such
Licenses contains any restriction or conditions that is materially burdensome
to the Company or any of the Subsidiaries.
Without limiting the generality of this paragraph 7(p):
(i) The Company and each of the Subsidiaries hold all
telecommunications regulatory licenses, permits, authorizations, consents
and approvals (the "Telecommunications Licenses") required from the
Federal Communications Commission (the "FCC") for the Company and the
Subsidiaries to conduct their business in the manner described in or
contemplated by the Prospectuses, except as would not have, individually
or in the aggregate, a Material Adverse Effect; the Telecommunications
Licenses have been duly and validly issued and are in full force and
effect, except where the failure to be in full force and effect would not
have individually or in the aggregate a Material Adverse Effect; no
proceedings to revoke or restrict the Telecommunications Licenses are
pending or, to the best of our knowledge, threatened; neither the Company
nor the Subsidiaries are in violation of any of the terms and conditions
of any of the Telecommunications Licenses, are in violation of the
Communications Act of 1934, as amended (the "Communications Act"), or are
in violation of any FCC rules and regulations, except as would not have,
individually or in the aggregate a Material Adverse Effect; and the
Company and the Subsidiaries have in effect with the FCC all
international and domestic service tariffs necessary to conduct their
business in the manner described in or contemplated by the
Prospectuses except as would not have, individually or in the aggregate,
a Material Adverse Effect;
(ii) The Company and the Subsidiaries have obtained all state
Telecommunications Licenses and filed all tariffs required for the
provision of telecommunications services in any state to conduct their
business in the manner described in or contemplated by the Prospectuses,
except where the failure to do so would not have, individually or in the
aggregate, a Material Adverse Effect;
(iii) There is no outstanding adverse judgment, injunction, decree
or order that has been issued by the FCC or any state public utility
commission or similar state agency ("PUC") against the Company or the
Subsidiaries or any action,
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proceeding or investigation pending before the FCC or any state PUC, or,
to the best of the Company's knowledge, threatened by the FCC or any
state PUC against the Company or the Subsidiaries which, if the subject
of any unfavorable decision, ruling or finding, would have a Material
Adverse Effect on the Company or the Subsidiaries;
(iv) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC on the
part of the Company or the Subsidiaries is required in connection with
the issuance or sale of the Common Stock;
(v) Neither the issuance and sale of the Common Stock nor the
performance by the Company or the Subsidiaries of their obligations under
the U.S. Underwriting Agreement or the International Underwriting Agreement
will result in a violation in any material respect of the Communications
Act or any applicable FCC rules or regulations, or any order, writ,
judgment, injunction, decree or award of the FCC binding on the Company or
the Subsidiaries; and
(vi) Neither the Company nor the Subsidiaries are in non-
compliance in the provision of international call-back service with the
laws of any foreign jurisdiction that would constitute a violation of the
Telecommunications Licenses, except where such non-compliance would not
have a Material Adverse Effect and subject to such qualifications as may be
set forth in the Prospectuses.
(q) The Company maintains 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 to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and (iv)
the recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) To the Company's knowledge, neither the Company nor any of its
Subsidiaries nor any employee or agent of the Company or any Subsidiary has
made any payment of funds of the Company or any Subsidiary or received or
retained any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be disclosed in
the Prospectuses.
(s) Except as disclosed in the Prospectuses, the Company and each
of the Subsidiaries have filed all material tax returns required to be filed,
which returns are true and correct in all material respects, and neither the
Company nor any Subsidiary
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<PAGE>
is in default in the payment of any taxes which were payable pursuant to said
returns or any assessments with respect thereto.
(t) Except as described in the Prospectuses, no holder of any
security of the Company has any right to require registration of shares of
Common Stock or any other security of the Company because of the filing of the
Registration Statement or consummation of the transactions contemplated by
this Agreement or the U.S. Underwriting Agreement, or otherwise. No such
rights with respect to shares of Common Stock not listed in Schedule II hereto
were exercised nor will be exercised in connection with the sale of the Shares
and for a period of 180 days after the date hereof. Except as described in or
contemplated by the Prospectuses, there are no outstanding options, warrants
or other rights calling for the issuance of, and there are no commitments,
plans or arrangements to issue, any shares of Common Stock of the Company or
any security convertible into or exchangeable or exercisable for Common Stock
of the Company.
(u) The Company and the Subsidiaries own or possess all patents,
trademarks, trademark registration, service marks, service mark registrations,
trade names, copyrights, licenses, inventions, trade secrets and rights
described in the Prospectuses as being owned by them or any of them or
necessary for the conduct of their respective businesses except where the lack
of such ownership or possession would not have a Material Adverse Effect, and
the Company is not aware of any claim to the contrary or any challenge by any
other person to the rights of the Company and the Subsidiaries with respect to
the foregoing.
(v) The Company is not and, upon sale of the Shares to be issued
and sold in accordance herewith and upon application of the net proceeds to
the Company from such sale as described in the Prospectuses under the caption
"Use of Proceeds," will not be an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(w) The Company has complied with all provisions of Florida
Statutes, Section 517.075, relating to issuers doing business with Cuba.
(x) The Recapitalization (as defined in the Prospectus) and the
Stock Split (as defined in the Prospectus) will be, prior to or simultaneously
with the consummation of the public offering of the Shares contemplated
hereby, consummated in the manner described in the Prospectus.
(y) Each of the Company and the Subsidiaries maintains insurance of
the types and in the amounts reasonably adequate for its business, including,
but not limited to, business interruption insurance and insurance covering
real and personal property owned or leased by the Company or such Subsidiary
against theft, damage, destruction, acts of vandalism and all other risks
customarily
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insured against by corporations of established reputation engaged in the same
or similar businesses and similarly situated, all of which insurance is in
full force and effect.
8. Representations and Warranties of the Selling
Shareholders.
A. Each of the Selling Shareholders, other than the Greenwich
Street Affiliates severally and not jointly represents and warrants to each
Manager that:
(a) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, valid and marketable title to
the Additional Shares to be sold by such Selling Shareholder, free and clear
of any lien, claim, security interest or other encumbrance, including, without
limitation, any restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date
and the Option Closing Date, if any, will have, full legal right, power and
authorization, and any approval required by law, to sell, assign, transfer and
deliver such Additional Shares in the manner provided in this Agreement and
the U.S. Underwriting Agreement, and upon delivery of and payment for such
Additional Shares hereunder, the several Managers will acquire valid and
marketable title to such Additional Shares free and clear of any lien, claim,
security interest, or other encumbrance (other than any lien, claim or
security interest placed thereon by the U.S. Underwriters or Managers).
(c) This Agreement, the U.S. Underwriting Agreement and the Custody
Agreement entered into by such Selling Shareholder have been duly authorized,
executed and delivered by or on behalf of such Selling Shareholder and are the
valid and binding agreements of such Selling Shareholder enforceable against
such Selling Shareholder in accordance with their terms, except that (i) the
enforceability hereof or thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other similar laws now or
hereafter in effect relating to rights of creditors or other obligees generally,
(ii) the remedy of specific performance and other forms of equitable relief may
be subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) rights to
indemnity and contribution hereunder or thereunder may be limited by federal or
state securities laws or the public policy underlying such laws.
(d) Neither the sale of the Additional Shares, the execution,
delivery or performance of this Agreement, the U.S. Underwriting Agreement or
the Custody Agreement entered into by such Selling Shareholder by or on behalf
of such Selling Shareholder nor the consummation by or on behalf of such
Selling Shareholder of the transactions contemplated hereby and thereby (i)
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requires any consent, approval, authorization or other order of, or
registration or filing with, any court, regulatory body, administrative agency
or other governmental body, agency or official (except such as may be required
for the registration of the Shares under the Act and compliance with the
securities or Blue Sky laws of various jurisdictions, all of which have been
or will be effected in accordance with this Agreement), or (ii) conflicts or
will conflict with or constitutes or will constitute a breach of, or a default
under, any agreement, indenture, lease or other instrument to which such
Selling Shareholder is a party or by which such Selling Shareholder is or may
be bound, or violates or will violate any statute, law, regulation or filing
or judgment, injunction, order or decree applicable to such Selling
Shareholder, or will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of such Selling Shareholder
pursuant to the terms of any agreement or instrument to which such Selling
Shareholder is a party or by which such Selling Shareholder may be bound or to
which any of the property or assets of such Selling Shareholder is subject
except where the failure to obtain such consent, approval, authorization or
order, or effect such filing or registration, or such conflicts, defaults,
violations or other action will not have, individually or in the aggregate, a
Material Adverse Effect.
(e) The information pertaining to such Selling Shareholder under
the caption "Principal and Selling Shareholders" in the Prospectuses does not
and will not contain an untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) The representations and warranties of such Selling Shareholder in
the Custody Agreement entered into by such Selling Shareholder are, and on the
Closing Date and any Option Closing Date will be, true and correct.
(g) Such Selling Shareholder has not taken, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares, except for the lock-up arrangements referred
to in the Prospectuses.
B. Each Greenwich Street Affiliate represents and warrants to each
Manager that:
(a) Such Selling Shareholder now has, and on the Closing Date and the
Option Closing Date, if any, will have, valid and marketable title to the
Warrants exercisable for the Additional Shares to be sold by such Selling
Shareholder hereunder, free and clear of any lien, claim, security interest or
other encumbrance, including, without limitation, any restriction on transfer,
and on the Closing Date and the Option Closing Date, if any, such Selling
Shareholder
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will have, valid and marketable title to the Additional Shares issuable upon
exercise of the Warrants and to be sold by such Selling Shareholder hereunder,
free and clear of any lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on transfer.
(b) Such Selling Shareholder now has, and on the Closing Date and the
Option Closing Date, if any, will have, full legal right, power and
authorization, and any approval required by law, to exercise the Warrants for
the Additional Shares and sell, assign, transfer and deliver such Additional
Shares in the manner provided in this Agreement and the U.S. Underwriting
Agreement, and upon delivery of and payment for such Additional Shares
hereunder, the several Managers will acquire valid and marketable title to
such Additional Shares free and clear of any lien, claim, security interest,
or other encumbrance.
(c) This Agreement, the U.S. Underwriting Agreement and the Greenwich
Street Custody Agreement have been duly authorized, executed and delivered by
or on behalf of such Selling Shareholder and are the valid and binding
agreements of such Selling Shareholder enforceable against such Selling
Shareholder in accordance with their terms, except that (i) the enforceability
hereof or thereof may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyance, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) the
remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) rights to
indemnity and contribution hereunder or thereunder may be limited by federal
or state securities laws or the public policy underlying such laws.
(d) None of the exercise of the Warrants for the Additional Shares to
be sold by such Selling Shareholder hereunder, the sale of such Additional
Shares, the execution, delivery or performance of this Agreement, the U.S.
Underwriting Agreement or the Greenwich Street Custody Agreement by or on behalf
of such Selling Shareholder nor the consummation by or on behalf of such Selling
Shareholder of the transactions contemplated hereby and thereby (i)requires any
consent, approval, authorization or other order of, or registration or filing
with, any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required for the registration of
the Shares under the Act or compliance with the securities or Blue Sky laws of
various jurisdictions), or (ii) conflicts or will conflict with or constitutes
or will constitute a breach of, or a default under, any agreement, indenture,
lease or other instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder is or may be bound, or violates or will violate
any statute, law, regulation or filing or judgment, injunction, order or decree
applicable to such Selling Shareholder, or will result in the
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<PAGE>
creation or imposition of any lien, charge or encumbrance upon any property or
assets of such Selling Shareholder pursuant to the terms of any agreement or
instrument to which such Selling Shareholder is a party or by which such
Selling Shareholder may be bound or to which any of the property or assets of
such Selling Shareholder is subject.
(e) The information pertaining to such Selling Shareholder under the
caption "Principal and Selling Shareholders" in the Prospectuses, does not and
will not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
(f) The representations and warranties of such Selling Shareholder in
the Greenwich Street Custody Agreement are, and on the Closing Date and the
Option Closing Date, if any, will be, true and correct.
(g) Such Selling Shareholder has not taken, directly or indirectly,
any action designed to or that might reasonably be expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares, except for the lock-up arrangements referred
to in the Prospectuses.
9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company, Fred Gratzon
and Clifford Rees (the "Indemnifying Selling Shareholders"), jointly and
severally, agree to indemnify and hold harmless you and each other Manager and
each person, if any, who controls any Manager within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act from and against any and all
losses, claims, damages, liabilities and expenses (including reasonable costs
of investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any International Prepricing
Prospectus or in the Registration Statement or the International Prospectus or
in any amendment or supplement thereto, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement or omission which has been made therein or omitted therefrom in
reliance upon and in conformity with the information relating to such Manager
furnished in writing to the Company by or on behalf of any Manager through you
or by or on behalf of any Lead Manager expressly for use in connection
therewith; provided, however, that the indemnification contained in this
paragraph (a) with respect to any International Prepricing Prospectus shall
not inure to the benefit of any Manager (or to the benefit of any person
controlling such Manager) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such Manager to
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any person if a copy of the International Prospectus shall not have been
delivered or sent to such person within the time required by the Act and the
regulations thereunder, and the untrue statement or alleged untrue statement
or omission or alleged omission of a material fact contained in such
International Prepricing Prospectus was corrected in the International
Prospectus, provided that the Company has delivered the corrected
International Prospectus to the several Managers in requisite quantity on a
timely basis to permit such delivery or sending.
(b) If any action, suit or proceeding shall be brought against any
Manager or any person controlling any Manager in respect of which indemnity
may be sought against the Company or any Indemnifying Selling Shareholder such
Manager or such controlling person shall promptly notify the parties against
whom indemnification is being sought (the "indemnifying parties"), and such
indemnifying parties shall assume the defense thereof, including the
employment of counsel and payment of all fees and expenses. Such Manager or
any such controlling person shall have the right to employ separate counsel in
any such action, suit or proceeding and to participate in the defense thereof,
but the fees and expenses of such counsel shall be at the expense of such
Manager or such controlling person unless (i) the indemnifying parties have
agreed in writing to pay such fees and expenses, (ii) the indemnifying parties
have failed to assume the defense and employ counsel, or (iii) the named
parties to any such action, suit or proceeding (including any impleaded
parties) include both such Manager or such controlling person and the
indemnifying parties and such Manager or such controlling person shall have
been advised by its counsel in writing that representation of such indemnified
party and any indemnifying party by the same counsel would be inappropriate
under applicable standards of professional conduct (whether or not such
representation by the same counsel has been proposed) due to actual or
potential differing interests between them (in which case the indemnifying
party shall not have the right to assume the defense of such action, suit or
proceeding on behalf of such Manager or such controlling person). It is
understood, however, that the indemnifying parties shall, in connection with
any one such action, suit or proceeding or separate but substantially similar
or related actions, suits or proceedings in the same jurisdiction arising out
of the same general allegations or circumstances, be liable for the reasonable
fees and expenses of only one separate firm of attorneys (in addition to any
local counsel) at any time for all such Managers and controlling persons not
having actual or potential differing interests with you or among themselves,
which firm shall be designated in writing by Smith Barney Inc., and that all
such reasonable fees and expenses shall be reimbursed as they are incurred.
The indemnifying parties shall not be liable for any settlement of any such
action, suit or proceeding effected without their written consent, but if
settled with such written consent, or if there be a final judgment for the
plaintiff in any such action, suit or proceeding, the indemnifying parties
agree to indemnify and hold harmless any Manager, to the
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extent provided in the preceding paragraph and any such controlling person
from and against any loss, claim, damage, liability or expense by reason of
such settlement or judgment.
(c) Each other Selling Shareholder agrees, severally and not jointly,
to indemnify and hold harmless each of you and each other Manager and each
person, if any, who controls any Manager within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, the Company, its directors, its
officers who sign the Registration Statement, and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act to the same extent as the foregoing indemnity from the Company
and the Indemnifying Selling Shareholders to each Manager, but only with
respect to the information furnished in writing by or on behalf of such
Selling Shareholder expressly for use in the Registration Statement, the
Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto. If any action, suit or proceeding shall be brought against any
Manager, any such controlling person of any Manager, the Company, any of its
directors, any such officer, or any such controlling person of the Company,
based on the Registration Statement, the Prospectus or any Prepricing
Prospectus or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Selling Shareholder pursuant to this
paragraph (c), such Selling Shareholder shall have the rights and duties given
to the Company by paragraph (b) above (except that if the Company shall have
assumed the defense thereof such Selling Shareholder shall not be required to
do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such Selling
Shareholder's expense), and each Manager, each such controlling person of any
Manager, the Company, its directors, any such officer, and any such
controlling person of the Company shall have the rights and duties given to
the Managers by paragraph (b) above. The foregoing indemnity agreement shall
be in addition to any liability which any Selling Shareholder may otherwise
have.
(d) Each Manager agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the
Registration Statement, any person who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and the Selling
Shareholders, to the same extent as the foregoing indemnity from the Company
and the Indemnifying Selling Shareholder to each Manager, but only with
respect to information relating to such Manager furnished in writing by or on
behalf of such Manager through you expressly for use in the Registration
Statement, the International Prospectus or any International Prepricing
Prospectus, or any amendment or
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supplement thereto. If any action, suit or proceeding shall be brought
against the Company, any of its directors, any such officer, any such
controlling person or any Selling Shareholder based on the Registration
Statement, the International Prospectus or any International Prepricing
Prospectus, or any amendment or supplement thereto, and in respect of which
indemnity may be sought against any Manager pursuant to this paragraph (d),
such Manager shall have the rights and duties given to the Company and the
Indemnifying Selling Shareholder by paragraph (b) above (except that if the
Company or the Selling Shareholders shall have assumed the defense thereof
such Manager shall not be required to do so, but may employ separate counsel
therein and participate in the defense thereof, but the fees and expenses of
such counsel shall be at such Manager's expense), and the Company, its
directors, any such officer, any such controlling person and the Selling
Shareholders shall have the rights and duties given to the Managers by
paragraph (b) above.
(e) If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a) or (c) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the Managers on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Shareholders on
the one hand and the Managers on the other hand in connection with the
statements or omissions that resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Shareholders on
the one hand and the Managers on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the Managers, in each case as
set forth in the table on the cover page of the International Prospectus;
provided that, in the event that the Managers shall have purchased any
Additional Shares hereunder, any determination of the relative benefits received
by the Company, the Selling Shareholders or the Managers from the offering of
the Shares shall include the net proceeds (before deducting expenses) received
by the Selling Shareholders, and the underwriting discounts and commissions
received by the Managers, from the sale of such Additional Shares, in each case
computed on the basis of the respective amounts set forth in the notes to the
table on the cover page of the International Prospectus. The relative fault of
the Company and the Selling Shareholders on the one hand and the Managers on the
other hand shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the
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Selling Shareholders on the one hand or by the Managers on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
(f) The Company, the Selling Shareholders and the Managers agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by a pro rata allocation (even if the Managers were treated as
one entity for such purpose) or by any other method of allocation that does not
take account of the equitable considerations referred to in paragraph (e) above.
The amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in paragraph (e) above
shall be deemed to include, subject to the limitations set forth above, any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating any claim or defending any such action, suit or
proceeding. Notwithstanding the provisions of this Section 9, no Manager shall
be required to contribute any amount in excess of the amount by which the total
price of the Shares underwritten by it and distributed to the public exceeds the
amount of any damages which such Manager has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission and none of the Greenwich Street Affiliates shall be required to
contribute an amount hereunder with respect to any loss, claim, damage,
liability or expense in excess of the amount such Selling Shareholder would have
been required to pay under Sections 9 hereof with respect thereto if the
indemnification provided for in Section 9 had been available with respect to
such loss, claim, damage, liability or expense. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Managers' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule I hereto (or such numbers of Firm Shares
increased as set forth in Section 12 hereof) and not joint.
(g) No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
(h) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
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representations and warranties of the Company and the Selling Shareholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Managers or
any person controlling any Manager, the Company, its directors or officers or
the Selling Shareholders or any director, partner or officer of a Selling
Shareholder, any person controlling the Company or any Selling Shareholder,
(ii) acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Manager or any person
controlling any Manager, or to the Company, its directors or officers, or to a
Selling Shareholder, any director, officer or partner of a Selling
Shareholder, any person controlling the Company or any Selling Shareholder,
shall be entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 9.
10. CONDITIONS OF MANAGERS' OBLIGATIONS. The several obligations of the
Managers to purchase the Firm Shares hereunder are subject to the following
conditions:
(a) If, at the time this Agreement is executed and delivered, it is
necessary for the Registration Statement or a post-effective amendment thereto
to be declared effective before the offering of the Shares may commence, the
Registration Statement or such post-effective amendment shall have become
effective not later than 5:30 P.M. New York City time, on the date hereof, or
at such later date and time as shall be consented to in writing by you, and
all filings, if any, required by Rules 424 and 430A under the Act shall have
been timely made; no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that
purpose shall have been instituted or, to the knowledge of the Company or any
Manager, threatened by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or the
Prospectuses or otherwise) shall have been complied with to your reasonable
satisfaction.
(b) Subsequent to the effective date of this Agreement, there shall
not have occurred (i) any change, or any development involving a prospective
change, that would have a Material Adverse Effect in or affecting the
condition (financial or other), business, prospects, properties, net worth or
results of operations of the Company or the Subsidiaries not contemplated by
the Prospectuses, which in your opinion, as Lead Managers of the several
Managers, would materially, adversely affect the market for the Shares, or
(ii) any event or development relating to or involving the Company or any
officer or director of the Company or any Selling Shareholder which makes any
statement made in the Prospectuses untrue in any material respect or which, in
the opinion of the Company and its counsel or the Managers and their counsel,
requires the making of any addition to or change in the Prospectuses in order
to state a material fact required by the Act
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or any other law to be stated therein or necessary in order to make the
statements therein not misleading, if amending or supplementing the
Prospectuses to reflect such event or development would, in your opinion, as
Lead Managers for the several Managers, materially adversely affect the market
for the Shares.
(c) You shall have received on the Closing Date an opinion of
Swidler & Berlin, Chartered, counsel for the Company, the Gratzons, Clifford
Rees, Steve Rubin and Steve Foster (the "TG Selling Shareholders"), dated the
Closing Date and addressed to you, as Lead Managers of the several Managers,
to the effect that:
(i) The Registration Statement and all post-effective
amendments, if any, have become effective under the Act and, to the knowledge
of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose are
pending before or contemplated by the Commission; and any required filing of
the Prospectuses pursuant to Rule 424(b) has been made in accordance with Rule
424(b);
(ii) Neither the issuance, sale or delivery of the
Underwritten Shares, nor the execution, delivery or performance of the U.S.
Underwriting Agreement or the International Underwriting Agreement, or
compliance by the Company with all provisions of this Agreement and the U.S.
Underwriting Agreement, nor consummation by the Company of the transactions
contemplated hereby or by the U.S. Underwriting Agreement constitutes or will
constitute a breach of, or a default under, the certificate or articles of
incorporation or bylaws of the Company or its Subsidiaries or any material
agreement, indenture, lease or other instrument to which the Company or any
Subsidiary is a party or by which they or any of their properties is bound and
that is made an exhibit to the Registration Statement, or, except as disclosed
in the Registration Statement, will result in the creation or imposition of
any lien, charge or encumbrance upon any property or assets of the Company or
any Subsidiary under any such agreement, indenture, lease or other instrument,
which breach default or other event would have a Material Adverse Effect, nor
will any such action result in any violation of any existing law, regulation,
ruling (assuming compliance with all applicable state securities and Blue Sky
laws), judgment, injunction, order or decree known to such counsel after
reasonable inquiry, to be applicable to the Company, any Subsidiary or any of
their properties, which violation would have a Material Adverse Effect;
(iii) No consent, approval, authorization or other order,
or registration or filing with, any court, regulatory body, administrative
agency or other governmental body, agency, or official is required on the part
of the Company (except as have been obtained under the Act or such as may be
required under state securities or Blue Sky laws governing the purchase and
distribution of the Shares) for the valid issuance and sale of the Shares to
the
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Managers or Underwriters as contemplated by the U.S. Underwriting Agreement
and this Agreement;
(iv) The Registration Statement and the Prospectuses and
any supplements or amendments thereto (except for the financial statements,
schedules, and notes thereto and other financial and statistical data included
therein or omitted therefrom, as to which such counsel need not express any
opinion) comply as to form in all material respects with the requirements of
the Act;
(v) To the knowledge of such counsel, (A) other than as
described in the Prospectuses, there are no legal or governmental proceedings
pending or threatened against the Company or any Subsidiary or to which the
Company's or any Subsidiary's properties are subject, which, if adversely
determined, would reasonably be expected to have a Material Adverse Effect,
and (B) there are no agreements, contracts, indentures, leases or other
instruments relating to the Company or any Subsidiary, of a character that are
required to be described in the Registration Statement or the Prospectuses or
to be filed as an exhibit to the Registration Statement that are not described
or filed as required, as the case may be;
(vi) The U.S. Underwriting Agreement, the International
Underwriting Agreement and the Custody Agreements have each been duly executed
and delivered by or on behalf of each of the TG Selling Shareholders and are
valid and binding agreements of each TG Selling Shareholder enforceable
against each TG Selling Shareholder in accordance with their respective terms
except that (i) enforceability may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyances, moratorium or other similar laws now
or hereafter in effect relating to rights of creditors and other obligees
generally, (ii) the remedy of specific performance and other forms of
equitable relief may be subject to certain equitable defenses and principles
and to the discretion of the court before which the proceedings may be brought
and (iii) rights to indemnity and contribution thereunder may be limited by
Federal or state securities laws or the public policy underlying such laws;
(vii) Each TG Selling Shareholder has full legal right,
power and authority, and any approval required by law, to sell, assign,
transfer and deliver good and marketable title to the Additional Shares which
such TG Selling Shareholder has agreed to sell pursuant to the U.S.
Underwriting Agreement and the International Underwriting Agreement;
(viii) The execution and delivery of the U.S. Underwriting
Agreement, the International Underwriting Agreement and the Custody Agreement
by the TG Selling Shareholders and the consummation of the transactions
contemplated thereby will not conflict with, constitute a breach of, or a
default under any material agreement, indenture, lease or other instrument
known to such counsel to which any TG Selling Shareholder is a party or by
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which any of them or any of their assets or property is bound, or violate any
statute, law, regulation, court order or decree known to such counsel to be
applicable to any TG Selling Shareholder or to any of the property or assets
of any TG Selling Shareholder, except for any such conflicts, breaches,
defaults or violations that would not have a Material Adverse Effect on the
ability of such TG Selling Shareholder to consummate the transactions
contemplated by the Underwriting Agreements;
(ix) (A) Each TG Selling Shareholder has full right power,
and authority to enter into this Agreement, the U.S. Underwriting Agreement,
the respective Powers of Attorneys and the Custody Agreements, and (B) upon
delivery of the Additional Shares to be sold by such TG Selling Shareholder
hereunder and payment of the purchase price therefor as herein contemplated,
each of the Managers will receive good and marketable title to its ratable
share of the Additional Shares purchased by it from such TG Selling
Shareholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equity, assuming the Managers acquire the Additional
Shares without notice of any adverse claim as such term is used in Section 8-302
of the Uniform Commercial Code in effect in the State of New York;
(x) The Section 214 Switched Voice Authorization, the
Section 214 Private Line Authorization, and the Section 214 Facilities
Authorization (as such terms are defined in the Prospectus) are the only
telecommunications regulatory licenses, permits, authorizations, consents and
approvals ("Telecommunications Licenses") required from the Federal
Communications Commission (the "FCC") for each of the Company and the
Subsidiaries to conduct its business in the manner described in the
Prospectus. The FCC Telecommunications Licenses currently held by each of the
Company and the Subsidiaries have been duly and validly issued and are in full
force and effect, and no proceedings to revoke or restrict such FCC
Telecommunications Licenses are pending or, to our knowledge, threatened.
Each of the Company and the Subsidiaries is not in violation of any of the
terms and conditions of any of its FCC Telecommunications Licenses, is not in
violation of the Communications Act of 1934, as amended, and is not in
violation of any FCC rules and regulations, except to the extent that such
violation is disclosed in the Registration Statement and would not have a
Material Adverse Effect. Each of the Company and the Subsidiaries has in
effect with the FCC all international switched, international private line
and/or United States domestic interexchange service tariffs necessary to
conduct its business in the manner described in the Prospectus;
(xi) To the extent they constitute a summary of legal matters,
documents or proceedings referred to therein, the statements in the Prospectuses
under the captions "Risk Factors - Substantial Government Regulation-United
States" and "Business-Government Regulation" are accurate in all material
respects and
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fairly summarize in all material respects all matters referred to therein, and
there are no material omissions under such captions with respect to such legal
matters, documents and proceedings;
(xii) Each of the Company and the Subsidiaries has obtained
all state Telecommunications Licenses and filed all tariffs required for the
provision of telecommunications services in any state to conduct its business
in the manner described in or contemplated by the Prospectus except where the
failure to obtain such licenses and/or file such tariffs would not have,
individually or in the aggregate, a Material Adverse Effect;
(xiii) There is no outstanding adverse judgment,
injunction, decree or order that has been issued by the FCC against the
Company or any Subsidiary or any action, proceeding or investigation pending
before the FCC or, to such counsel's knowledge, threatened by the FCC against
the Company or any Subsidiary or otherwise which, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect;
(xiv) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by any state public utility commission
("PUC") against the Company or any Subsidiary or any action, proceeding or
investigation pending before or, to counsel's knowledge, threatened by any
state PUC against the Company or any Subsidiary which, if the subject of an
unfavorable decision, ruling or finding, would have a Material Adverse Effect;
(xv) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC on the part of
the Company or any Subsidiary is required in connection with the issuance or
sale of the Common Stock;
(xvi) Neither the issuance and sale of the Common Stock nor
the performance by the Company of its obligations under the U.S. Underwriting
Agreement or the International Underwriting Agreement will result in a
violation of the Communications Act, or any applicable rules or the
regulations promulgated under the Communications Act, or, to counsel's
knowledge, any order, writ, judgment, injunction, decree or award of the FCC
binding on the Company or any Subsidiary; and
(xvii) The Section 214 Switched Voice Authorization, the
Section 214 Private Line Authorization and the Section 214 Facilities
Authorization require the Company and its Subsidiaries to provide any
international call-back service using uncompleted call signaling in a manner
that is consistent with the laws of the countries in which they operate.
Although we do not provide legal services to the Company or its Subsidiaries
regarding the application or interpretation of any non-U.S. law and although
we have performed no due diligence in this regard other than
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discussing with management of the Company the Company's operations and
compliance with applicable FCC requirements and reviewing any portions of the
opinions of local counsel of Australia, France, Germany, Hong Kong, Japan, the
Netherlands, Sweden, Switzerland, and the United Kingdom specifically
regarding the provision of international call-back service in certain
jurisdictions in which the Company operates, we are not aware of any non-
compliance in the provision of international call-back service by the Company
with the laws of any of these foreign jurisdictions in which the Company
operates that would constitute a violation of the Section 214 Switched Voice
Authorization, the Section 214 Private Line Authorization, or the Section 214
Facilities Authorization and have a Material Adverse Effect on the Company and
its Subsidiaries, taken as a whole, except as described in the Prospectuses
under the captions "Risk Factors -- Substantial Government Regulation" and
"Business -- Government Regulation Overview." For the purpose of making this
statement, we have relied upon our discussions with management of the Company
and our review of any portions of the opinions of local counsel of Australia,
France, Germany, Hong Kong, Japan, the Netherlands, Sweden, Switzerland, and the
United Kingdom specifically regarding the provision of international call-back
service provided by the Company, without any further inquiry or any independent
review of any laws of any such jurisdictions.
In addition, such counsel shall state that although counsel has not
undertaken, except as otherwise indicated in their opinion, to determine
independently, and does not assume any responsibility for, the accuracy,
completeness or fairness of the statements in the Registration Statement, such
counsel has participated in the preparation of the Registration Statement and
the Prospectuses, including general review and discussion of the contents
thereof but has made no independent check or verification thereof (relying as
to materiality to a large extent upon the opinions of officers and other
representatives of the Company), and no facts have come to the attention of
such counsel that would lead them to believe that the Registration Statement
at the time the Registration Statement became effective, or the Prospectuses,
as of their respective dates and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated in the Prospectuses or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or that any amendment or supplement
to the Prospectuses, as of its respective date, and as of the Closing Date or
the Option Closing Date, as the case may be, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated in
the Prospectuses or necessary in order to make the statements in the
Prospectuses, in the light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no
statement with respect to the financial statements, schedules, pro forma
financial statements and the notes thereto and other financial and
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statistical data included in or omitted from the Registration Statement or the
Prospectuses).
In rendering their opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of officers of the
Company and the Selling Shareholders and, as to matters of law, may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States, the State of Delaware or the State of New York provided that (1) each
such local counsel is reasonably acceptable to the Lead Managers, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to the Lead Managers and is, in form and
substance reasonably satisfactory to them and their counsel, and (3) counsel
shall state in their opinion that they believe that they and the Managers are
justified in relying thereon.
(d) You shall have received on the Closing Date an opinion of
Debevoise & Plimpton, counsel for the Greenwich Street Affiliates, dated the
Closing Date and addressed to you, as Lead Managers of the several Managers,
to the effect that:
(i) The U.S. Underwriting Agreement, the International
Underwriting Agreement and the Greenwich Street Custody Agreement have each
been duly executed and delivered by or on behalf of each of the Greenwich
Street Affiliates and are valid and binding agreements of each of the
Greenwich Street Affiliates enforceable against each Greenwich Street
Affiliate in accordance with their respective terms except that (i)
enforceability may be limited by bankruptcy, insolvency, reorganization,
fraudulent conveyances, moratorium or other similar laws now or hereafter in
effect relating to rights of creditors and other obligees generally, (ii) the
remedy of specific performance and other forms of equitable relief may be
subject to certain equitable defenses and principles and to the discretion of
the court before which the proceedings may be brought and (iii) rights to
indemnity and contribution thereunder may be limited by Federal or state
securities laws or the public policy underlying such laws;
(ii) Each Greenwich Street Affiliate has full legal right,
power and authority, and any approval required by law, to exercise the
Warrants for the Additional Shares to be sold by it, and to sell, assign,
transfer and deliver good and marketable title to the Additional Shares which
such Affiliate has agreed to sell pursuant to the U.S. Underwriting Agreement
and the International Underwriting Agreement;
(iii) The execution and delivery of the U.S. Underwriting
Agreement, the International Underwriting Agreement and the Greenwich Street
Custody Agreement by the Greenwich Street Affiliates and the consummation of
the transactions contemplated thereby will not conflict with, constitute a
breach of, or a
35
<PAGE>
default under any material agreement, indenture, lease or other instrument
known to such counsel to which any Greenwich Street Affiliate is a party or by
which any of them or any of their assets or property is bound, or violate any
statute, law, regulation, court order or decree known to such counsel to be
applicable to any Greenwich Street Affiliate or to any of the property or
assets of any Greenwich Street Affiliate, except for any such conflicts,
breaches, defaults or violations that would not have a Material Adverse Effect
on the ability of such Greenwich Street Affiliate to consummate the
transactions contemplated by the Underwriting Agreements;
(iv) (A) Each Greenwich Street Affiliate has full right
power, and authority to enter into this Agreement, the U.S. Underwriting
Agreement and the Greenwich Street Custody Agreement, and (B) upon delivery of
the Additional Shares to be sold by such Greenwich Street Affiliate hereunder
and payment of the purchase price therefor as herein contemplated, each of the
Managers will receive good and marketable title to its ratable share of the
Additional Shares purchased by it from such Greenwich Street Affiliate, free
and clear of any pledge, lien, security interest, encumbrance, claim or
equity, assuming the Managers acquire the Additional Shares without notice of
any adverse claim as such term is used in Section 8-302 of the Uniform
Commercial Code in effect in the State of New York;
In rendering their opinion as aforesaid, counsel may, as to factual
matters, rely upon written certificates or statements of officers of the
Company and the Selling Shareholders and, as to matters of law, may rely upon
an opinion or opinions, each dated the Closing Date, of other counsel retained
by them or the Company as to laws of any jurisdiction other than the United
States, the State of Delaware or the State of New York provided that (1) each
such local counsel is reasonably acceptable to the Lead Managers, (2) such
reliance is expressly authorized by each opinion so relied upon and a copy of
each such opinion is delivered to the Lead Managers and is, in form and
substance reasonably satisfactory to them and their counsel, and (3) counsel
shall state in their opinion that they believe that they and the Managers are
justified in relying thereon.
(e) You shall have received on the Closing Date an opinion of
Marcus & Thompson, special counsel for the Company and the TG Selling
Shareholders in connection with matters relating to Iowa law, dated the
Closing Date and addressed to you, as Lead Managers of the several Managers,
to the effect that:
(i) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Iowa with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Registration Statement and the
Prospectuses, and is duly qualified and in good standing in all other
jurisdictions in which
36
<PAGE>
the nature of the business transacted or property owned or leased by it makes
such qualification necessary, except where the failure so to qualify or be in
good standing would not have, individually or in the aggregate, a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole;
(ii) (A) The Company has the corporate power and authority
to enter into the U.S. Underwriting Agreement and the International
Underwriting Agreement and to issue, sell and deliver the Shares to be sold by
it to the U.S. Underwriters and Managers as provided therein, and (B) each of
the U.S. Underwriting Agreement and the International Underwriting Agreement
have been duly authorized, executed and delivered by the Company and is a
legal, valid and binding agreement of the Company, enforceable against the
Company in accordance with its terms, except that (1) enforceability may be
limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws now or hereafter in effect relating to rights
of creditors and other obligees generally, (2) the remedy of specific
performance and other forms of equitable relief may be subject to certain
equitable defenses and principles and to the discretion of the court before
which the proceedings may be brought and (3) rights to indemnity and
contribution thereunder may be limited by Federal or state securities laws or
the public policy underlying such laws;
(iii) The authorized capital stock of the Company is as set
forth under the caption "Capitalization" in the Prospectuses; and the
authorized capital stock of the Company conforms in all material respects as
to legal matters to the description thereof contained in the Prospectuses
under the caption "Description of Capital Stock";
(iv) All the shares of capital stock of the Company outstanding
prior to the issuance of the Shares to be issued and sold by the Company
pursuant to the U.S. Underwriting Agreement and the International Underwriting
Agreement (including the Shares to be sold by the Gratzons, Clifford Rees, Steve
Rubin and Steve Foster) have been duly authorized and validly issued, are fully
paid, nonassessable and free of preemptive or similar rights;
(v) Each of the Warrants has been duly and validly authorized
by the Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms, except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to rights of creditors and other obligees generally and (ii) the remedy
of specific performance and other forms of equitable relief may be subject to
certain equitable defenses and principles and to the discretion of the court
before which the proceedings may be brought.
37
<PAGE>
(vi) The Shares to be issued and sold to the U.S. Underwriters
and Managers by the Company under the U.S. Underwriting Agreement and the
International Underwriting Agreement have been duly authorized and when issued
and delivered to the U.S. Underwriters and Managers against payment therefor in
accordance with the terms of the U.S. Underwriting Agreement and the
International Underwriting Agreement, will be (A) duly authorized and validly
issued, fully paid and nonassessable and (B) free of any preemptive or similar
rights; and
(vii) The Additional Shares and the Additional International
Shares to be issued and sold to the U.S. Underwriters and Managers by the
Greenwich Street Affiliates under the U.S. Underwriting Agreement and the
International Underwriting Agreement have duly authorized for issuance upon
exercise of the Warrants and, when issued and delivered to the Greenwich Street
Affiliates by the Company upon exercise of the Warrants against payment of the
exercise price therefor, will be validly issued, fully paid and non-assessable
and free of any preemptive or similar rights.
(viii) The form of certificates for the Shares conforms to
the requirements of the Business Corporation Act of the State of Iowa.
(f) You shall have received on the Closing Date opinions of Baker &
McKenzie (Australia) in the form attached hereto as exhibit , Baker &
McKenzie (Hong Kong) in the form attached hereto as exhibit , Baker &
McKenzie (Germany) in the form attached hereto as exhibit , Coudert Freres
(France) in the form attached hereto as exhibit , TMI Associates (Japan) in
the form attached hereto as exhibit , Stibbe Simont Monahan Duhot (The
Netherlands) in the form attached hereto as exhibit ,[ ] (United
Kingdom) in the form attached hereto as exhibit , [ ] (Sweden) in
the form attached hereto as exhibit and [ ] (Switzerland) in the
form attached hereto as exhibit , special regulatory counsel for the Company
in each of the jurisdictions described above, each dated the Closing Date and
addressed to you, as Lead Managers of the several Managers:
(g) You shall have received on the Closing Date an opinion from
Charles Johanson, Esq., Corporate Counsel for the Company, dated the Closing
Date and addressed to you, as Lead Managers of the several Managers, to the
effect that:
(i) Each of the Subsidiaries is a corporation duly organized,
validly existing and in good standing in the jurisdiction of its incorporation,
with full corporate power and authority to own, lease, and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectuses; and all the outstanding shares of capital stock
of each of the Subsidiaries that is a corporation have been duly authorized and
validly issued, are fully paid and nonassessable,
38
<PAGE>
and, except for director's qualifying shares and as otherwise disclosed in the
Prospectuses, are owned by the Company directly, or indirectly through one of
the other Subsidiaries, free and clear of any lien, adverse claim, security
interest, equity or other encumbrance; and
(ii) None of the Company or its Subsidiaries is (A) in violation
of its certificate or articles of incorporation or bylaws, or other
organizational documents or (B) to the best knowledge of such counsel after
reasonable inquiry, in default in any material respect in the performance of any
material obligation, agreement or condition contained in any bond, debenture,
note or other evidence of indebtedness, except as may be disclosed in the
Prospectuses or where any such default or defaults in the aggregate would not
have a Material Adverse Effect.
In addition, the Company's Corporate Counsel shall state that although
Counsel has not undertaken, except as otherwise indicated in its opinion, to
determine independently, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the Registration
Statement, such counsel has participated in the preparation of the
Registration Statement and the Prospectuses, including general review and
discussion of the contents thereof but has made no independent check or
verification thereof (relying as to materiality to a large extent upon the
opinions of officers and other representatives of the Company), and no facts
have come to the attention of such Counsel that would lead him to believe that
the Registration Statement at the time the Registration Statement became
effective, or the Prospectuses, as of their respective dates and as of the
Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
required to be stated in the Prospectuses or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or that any amendment or supplement to the Prospectuses, as of its
respective date, and as of the Closing Date or the Option Closing Date, as the
case may be, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated in the Prospectuses or necessary
in order to make the statements in the Prospectuses, in the light of the
circumstances under which they were made, not misleading (it being understood
that the Company's Corporate Counsel need express no statement with respect to
the financial statements, schedules, pro forma financial statements and the
notes thereto and other financial and statistical data included in or omitted
from the Registration Statement or the Prospectuses).
In rendering such opinion as aforesaid, the Company's Corporate
Counsel may, as to factual matters, rely upon written certificates or
statements of officers of the Company and the Subsidiaries and, as to matters
of law, may rely upon an opinion or opinions, each dated the Closing Date, of
other counsel retained by
39
<PAGE>
him or the Company as to laws of any jurisdiction other than the United States
or the State of Iowa provided that (1) each such local counsel is reasonably
acceptable to the Lead Managers, (2) such reliance is expressly authorized by
each opinion so relied upon and a copy of each such opinion is delivered to
the Representatives and is, in form and substance reasonably satisfactory to
them and their counsel, and (3) Charles Johanson shall state in his opinion
that he believes that they and the Managers are justified in relying thereon.
(h) You shall have received on the Closing Date an opinion of
Chadbourne & Parke LLP, counsel for the U.S. Underwriters, dated the Closing
Date, with respect to the matters referred to in clauses (c)(i), (c)(iv),
(c)(ix)(B), the paragraph immediately following clause (xvii) of the foregoing
paragraph (c) and (d)(iv)(B) and such other related matters as you may
request.
(i) You shall have received letters addressed to you, as Lead
Managers of the several Managers, and dated the date hereof and the Closing
Date from KPMG Peat Marwick LLP, independent certified public accountants,
substantially in the forms heretofore approved by you.
(j) (1) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (2) there
shall not have been any material change in the capital stock of the Company
nor any material increase in the short-term or long-term debt of the Company
(other than in the ordinary course of business) from that set forth or
contemplated in the Registration Statement or the Prospectuses (or any
amendment or supplement thereto); (3) there shall not have been, since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses (or any amendment or Supplement thereto),
except as may otherwise be stated in the Registration Statement and
Prospectuses (or any amendment or supplement thereto), any material adverse
change in the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the Subsidiaries taken
as a whole; and (4) all the representations and warranties of the Company
contained in this Agreement shall be true and correct on and as of the date
hereof and on and as of the Closing Date as if made on and as of the Closing
Date, and you shall have received a certificate, dated the Closing Date and
signed by the chief executive officer and the chief financial officer of the
Company (or such other officers as are acceptable to you), to the effect set
forth in this Section 10(j) and in Section 10(k) hereof.
(k) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its
40
<PAGE>
agreements herein contained and required to be performed or complied with by
it hereunder at or prior to the Closing Date.
(l) All the representations and warranties of the Selling
Shareholders contained in this Agreement shall be true and correct, on and as
of the date hereof and on and as of the Closing Date as if made on and as of
the Closing Date, and you shall have received a certificate, dated the Closing
Date and signed by or on behalf of the Selling Shareholders to the effect set
forth in this Section 10(l) and in Section 10(m) hereof.
(m) The Selling Shareholders shall not have failed at or prior to
the Closing Date to have performed or complied with any of their agreements
contained in this Agreement or the International Underwriting Agreement and
required to be performed or complied with by them at or prior to the Closing
Date.
(n) The Sellers shall have furnished or caused to be furnished to
you such further certificates and documents as you shall have reasonably
requested.
(o) The Common Stock shall have been listed or approved for listing
subject to notice of issuance, on the Nasdaq National Market.
(p) The closing under the U.S. Underwriting Agreement shall have
occurred or shall be occurring concurrently with the closing hereunder on the
Closing Date.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
in form and substance to you and your counsel.
Any certificate or document signed by any officer of the Company or any
Attorney-in-Fact or any Selling Shareholder and delivered to you, as Lead
Managers for the several Managers, or to counsel for the Managers, shall be
deemed a representation and warranty by the Company, the Selling Shareholders
or the particular Selling Shareholder, as the case may be, to each Manager as
to the statements made therein.
The several obligations of the Managers to purchase Additional Shares
hereunder are subject to the satisfaction on and as of the Option Closing
Date, if any, of the conditions set forth in this Section 10, except that, if
any Option Closing Date is other than the Closing Date, the certificates,
opinions and letters referred to in this Section 10 shall be dated the Option
Closing Date in question and the opinions or letters called for by paragraphs
(c), (d), (e), (f), (g), (h) and (i) shall be revised to reflect the sale of
Additional Shares.
41
<PAGE>
11. EXPENSES. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance by the
Sellers of their obligations hereunder: (i) the preparation, printing or
reproduction, and filing with the Commission of the registration statement
(including financial statements and exhibits thereto), each of the Prepricing
Prospectuses, the Prospectuses, and each amendment or supplement to any of
them; (ii) the printing (or reproduction) and delivery (including postage, air
freight (or reproduction) charges and charges for counting and packaging) of
such copies of the registration statement, each International Prepricing
Prospectus, the International Prospectus and all amendments or supplements to
any of them, as may be reasonably requested for use in connection with the
offering and sale of the Shares; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this
Agreement, the U.S. Underwriting Agreement, the Supplemental Agreement Among
U.S. Underwriters, the Agreement Among Managers, the Agreement Between U.S.
Underwriters and Managers, the International Selling Agreement, the Managers'
Questionnaire, the Blue Sky Memorandum and all other agreements, memoranda,
correspondence and other documents printed (or reproduced) and delivered in
connection with the offering of the Underwritten Shares; (v) the registration
of the Common Stock under the Exchange Act and the listing of the Shares on
the Nasdaq National Market; (vi) the registration or qualification of the
Shares for offer and sale under the securities laws of the several
jurisdictions as provided in Section 5(g) hereof (including the reasonable
fees, expenses and disbursements of counsel for the U.S. Underwriters and
Managers relating Underwriters relating to the preparation, printing or
reproduction, and delivery of the Blue Sky Memorandum and such registration
and qualification, if any, up to $ ); (vii) the filing fees and the
fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities
Dealers, Inc. including the fees and expenses of any qualified independent
underwriter; (viii) the transportation and other expenses incurred by or on
behalf of representatives of the Company in connection with presentations to
prospective purchasers of the Shares; and (ix) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local
and special counsel) for the Company and the Selling Shareholders.
12. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective:
(i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at
the time this Agreement is executed and delivered, it is necessary for the
registration statement or a post-effective amendment thereto to be declared
effective before the offering of the Shares may commence, when notification of
the effectiveness of the registration statement or such post-effective amendment
has been released by the Commission. Until such time as this Agreement shall
have become effective, it may be terminated by
42
<PAGE>
the Company, by notifying you, or by you, as Lead Managers for the several
Managers, by notifying the Company and the Selling Shareholders.
If any one or more of the Managers shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing
Date, and the aggregate number of Shares which such defaulting Manager or
Managers are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Managers are obligated
to purchase on the Closing Date, each non-defaulting Manager shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule I hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Managers or in
such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the
Shares which such defaulting Manager or Managers are obligated, but fail or
refuse, to purchase. If any one or more of the Managers shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Managers are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Managers or other party or parties approved by you and the
Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Manager or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven days, in order that the
required changes, if any, in the Registration Statement and the Prospectus or
any other documents or arrangements may be effected. Any action taken under
this paragraph shall not relieve any defaulting Manager from liability in
respect of any such default of any such Manager under this Agreement. The
term "Manager" as used in this Agreement includes, for all purposes of this
Agreement, any party not listed in Schedule I hereto who, with your approval
and the approval of the Company, purchases Shares which a defaulting Manager
is obligated, but fails or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
13. TERMINATION OF AGREEMENT. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Manager to the Company or any Selling Shareholder, by notice to the Company,
if prior to the Closing Date or the Option Closing Date, if any (if different
from the Closing Date and then only as to the Additional Shares), as the case
may be, (i) trading in securities generally on the New York Stock
43
<PAGE>
Exchange, the American Stock Exchange or the Nasdaq National Market shall have
been suspended or materially limited, (ii) a general moratorium on commercial
banking activities in New York shall have been declared by either federal or
state authorities, or (iii) there shall have occurred any outbreak or
escalation of hostilities or other international or domestic calamity, crisis
or change in political, financial or economic conditions, the effect of which
on the financial markets of the United States is such as to make it, in your
judgment, impracticable or inadvisable to commence or continue the offering of
the Shares at the offering price to the public set forth on the cover page of
the International Prospectus or to enforce contracts for the resale of the
Shares by the Managers.
Notice of such termination may be given by telegram, telecopy or
telephone and shall be subsequently confirmed by letter.
14. INFORMATION FURNISHED BY THE MANAGERS. The statements set forth
in the last paragraph on the cover page, the stabilization legend on the
inside front cover page, and the statements in the first, second, fourth,
seventh, eighth, ninth, tenth, eleventh (as it relates to the Managers),
fourteenth and seventeenth paragraphs under the caption "Underwriting" in any
International Prepricing Prospectus and in the International Prospectus,
constitute the only information furnished by or on behalf of the Managers
through you as such information is referred to in Sections 7(b) and 9 hereof.
15. MISCELLANEOUS. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall
be in writing and shall be delivered (i) if to the Company, Fred Gratzon or
Clifford Rees at the office of the Company, 2098 Nutmeg Avenue, Fairfield,
Iowa 52556, Attention: Fred Gratzon, Chairman; (ii) if to the Greenwich Street
Affiliates, to Stephen R. Hertz at Debevoise & Plimpton, 875 Third Avenue New
York, New York 10022 or (iii) if to you, as Lead Managers for the several
Managers, care of Smith Barney Inc., 388 Greenwich Street, New York, New York
10013, Attention: Manager, Investment Banking Division.
This Agreement has been and is made solely for the benefit of the several
Managers, the Company, its directors and officers, and the other controlling
persons referred to in Section 9 hereof and the Selling Shareholders and their
respective successors and assigns, to the extent provided herein, and no other
person shall acquire or have any right under or by virtue of this Agreement.
Neither the term "successor" nor the term "successors and assigns" as used in
this Agreement shall include a purchaser from any Manager of any of the Shares
in his status as such purchaser.
16. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed
by and construed in accordance with the laws of the State
44
<PAGE>
of New York applicable to contracts made and to be performed within the State
of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and the several Managers.
Very truly yours,
TELEGROUP, INC.
By:
----------------------------
Name:
----------------------
Title:
----------------------
FRED GRATZON
By:
----------------------------
Name:
----------------------
Title:
----------------------
SHELLEY L. LEVIN-GRATZON
By:
----------------------------
Name:
----------------------
Title:
----------------------
CLIFFORD S. REES
By:
----------------------------
Name:
----------------------
Title:
----------------------
STEVEN RUBIN
By:
----------------------------
Name:
----------------------
Title:
----------------------
45
<PAGE>
STEVEN FOSTER
By:
----------------------------
Name:
----------------------
Title:
----------------------
GREENWICH STREET CAPITAL
PARTNERS, L.P.
By:
----------------------------
Name:
----------------------
Title:
----------------------
GREENWICH STREET CAPITAL
OFFSHORE FUND, LTD.
By:
----------------------------
Name:
----------------------
Title:
----------------------
TRV EMPLOYEES FUND, L.P.
By:
----------------------------
Name:
----------------------
Title:
----------------------
THE TRAVELERS INSURANCE COMPANY
By:
----------------------------
Name:
----------------------
Title:
----------------------
THE TRAVELERS LIFE AND
ANNUITY COMPANY
By:
----------------------------
Name:
----------------------
Title:
----------------------
46
<PAGE>
Confirmed as of the date first
above mentioned on behalf of
themselves and the other several
Managers named in Schedule I
hereto.
SMITH BARNEY INC.
ALEX. BROWN & SONS INCORPORATED
COWEN & COMPANY
As Lead Managers for the Several Managers
By SMITH BARNEY INC.
By ...................................
Managing Director
47
<PAGE>
SCHEDULE I
Telegroup, Inc.
Number of Number of
Underwriter Firm Shares Underwriter Firm Shares
- ----------- ------------ ----------- -----------
Smith Barney Inc. ...
Alex. Brown & Sons
Incorporated
Cowen & Company
-----------
Total
-----------
48
<PAGE>
SCHEDULE II
Telegroup, Inc.
Number of
Selling Shareholders Additional Shares
- --------------------- -----------------
Mr. Fred Gratzon and Shelley L. Levin-Gratzon,
as joint tenants
Mr. Clifford S. Rees
Mr. Steven Rubin
Mr. Steven Foster
Greenwich Street Capital Partners, L.P.
Greenwich Street Capital Offshore Fund, Ltd.
TRV Employees Fund, L.P.
The Travelers Insurance Company
The Travelers Life and Annuity Company
--------------
Total
--------------
49
<PAGE>
EXHIBIT 2.1
PLAN AND AGREEMENT OF REORGANIZATION
This Plan and Agreement of Reorganization ("Agreement") is entered into
in Jefferson County, Iowa this 6th day of September 1996, between Telegroup,
Inc., an Iowa corporation ("TGI"), Telegroup South Europe, Inc., a
Pennsylvania corporation ("TGSE"), and George Apple ("Apple"), who on the
closing date of this Agreement owns all the outstanding capital stock of TGSE.
TGI will acquire from Apple all of the outstanding shares of capital
stock of TGSE in exchange for the cash described in Paragraph 1.02 and 47,832
shares of Class A voting common stock of TGI. Under this Plan, the acquired
corporation will become a subsidiary of TGI. The parties hereto agree to make
an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as
amended.
As further consideration for the consideration to be paid by TGI, Apple
shall transfer all right, title and interest in all contracts which he may
own, individually and as owner of TGSE, relating to the sale of TGI services
in France and elsewhere.
In order to consummate the Plan of Exchange, TGI, Apple and TGSE, in
consideration of the mutual covenants and on the basis of the representations
and warranties set forth, agree as follows:
ARTICLE 1
EXCHANGE OF CAPITAL STOCK
TRANSFER OF TGSE'S CAPITAL STOCK
1.01 Subject to the terms and conditions of this Agreement, Apple
will transfer and deliver to TGI on the Closing Date all of his shares of
capital stock of TGSE, free and clear of all liens, claims and encumbrances of
any nature whatsoever. Any approvals necessary for the transfer of such shares
by Apple to TGI have been obtained. In addition, Apple will assign, transfer
and convey to TGI all right, title and interest which is owned by him
individually and as-sole stockholder of TGSE in all commission contracts,
overrides, coordinator contract and representative contracts among TGSE, Apple
and TGI relating to the sale of services of TGI in France and other parts of
Europe shown in Exhibit A attached hereto and made a part hereof. Apple
represents that except for any ownership in TGSE or TGI, he is the sole owner
of all rights in said contracts, and the transfer described hereby shall
result in TGI owning all such rights.
CONSIDERATION FOR TRANSFER
1.02. In exchange for the TGSE shares transferred by Apple pursuant
to Paragraph 1.01, TGI will issue and cause to be delivered to Apple on
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 1
<PAGE>
the Closing Date 47,832 shares of Class A Common Stock of TGI, plus cash or a
check in an amount equal to $935,475 plus $95,000 more or less, which
additional amount is the amount of commissions due to TGSE for the month of
August, less appropriate adjustments. By virtue of the foregoing, the
estimated cash consideration to Apple is $1,030,475.
REPAYMENT OF PROMISSORY NOTE
1.03. Apple agrees to repay in full on the Date of Closing the
promissory note in the amount of $50,000.00 executed by him in favor of TGSE.
CLOSING DATE
1.04. Subject to the conditions precedent set forth in this
Agreement, and the other obligations of the parties set forth in this
Agreement, the Plan of Reorganization shall be consummated at the hour, place
and date the parties fix by mutual consent. Consummation shall include the
delivery by Apple of TGSE of all of his shares of Capital Stock of TGSE, as
provided in Paragraph 1.01 of this Agreement, and the delivery by TGI of its
shares of Common Stock and cash consideration, as provided in Paragraph 1.02
of this Agreement. The date of the consummation of this Agreement is referred
to as the "Closing Date."
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF APPLE AND TGSE
ORGANIZATION AND STANDING OF TGSE
Apple and TGSE, jointly and severally, make the representations,
warranties and agreements to TGI set forth in this Article 2.
2.01 TGSE is a corporation duly organized, validly existing, and in
good standing under the laws of Pennsylvania, with full corporate power and
authority to own its property and carry on its business as it is now being
conducted. Copies of the articles of incorporation of TGSE, and any amendments
thereto, which have been certified by the Secretary of State of Pennsylvania
and delivered to TGI, and copies of its bylaws and minutes of all board
meetings which have been delivered to TGI, are complete and accurate as of the
date of this Agreement. TGSE is qualified to transact business as a foreign
corporation and is in good standing in all jurisdictions in which its
principal properties are located.
SUBSIDIARIES
2.02. TGSE has no subsidiaries nor any interest in any other
corporation, firm, or partnership.
Plan and Agreement of Reorganization
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CAPITALIZATION
2.03 TGSE has an authorized capitalization of 10,000 shares of
capital stock, all of one class of no par value per share, and as of the date
of this Agreement 1,000 shares are issued and outstanding, fully paid, and
nonassessable, all of which shall be sold to TGI by Apple hereunder. All
issued shares shall, as of the Closing Date, be fully paid and nonassessable.
There are no outstanding subscriptions, options, contracts, commitments, or
demands relating to the authorized but unissued stock of TGSE or other
agreements of any character under TGSE would be obligated to issue or purchase
shares of its capital stock.
FINANCIAL STATEMENTS
2.04.
(a) Attached to this Agreement as Exhibits B through E are the
unaudited Balance Sheets of TGSE as of August 21, 1996, and December 31, 1995,
and the related statements of income and retained earnings for the periods
then ended, prepared by TGSE and subject only to nonmaterial changes resulting
from year-end audit. All the financial statements described in this paragraph
have been prepared in conformity with generally accepted accounting
principles, applied on a consistent basis, and present fairly the financial
position of TGSE as of August 21, 1996, and December 31, 1995.
(b) Since December 31, 1995, there have been, and at the Closing
Date there will be, no materially adverse changes in the financial condition
of TCSA or its business or prospects, except as may be reflected in the
financial statements dated August 21, 1996.
(c) Subject to any changes as a result of the ordinary and usual
course of business, the assets of TGSE at the Closing Date will be
substantially those owned by it and shown on its financial statements as of
August 21, 1996.
OPERATIONS SINCE BALANCE SHEET DATE
2.05. Since its Balance Sheet date of December 31, 1995, TGSE has
kept its business intact and has not, and prior to the Closing Date will not
have:
(a) Issued or sold any stock, bond, or other corporate securities.
(b) Except for current liabilities incurred and obligations entered
into in the ordinary course of business, incurred any absolute or contingent
obligation, including long-term debt.
(c) Except for current liabilities shown on the balance sheet and
current liabilities incurred since that date in the ordinary course of
business,
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discharged or satisfied any lien or encumbrance, or paid any obligation or
liability.
(d) Mortgaged, pledged, or subjected to lien any of its assets.
(e) Except in the ordinary course of business, sold or transferred
any of its tangible assets, or canceled any debts or claims, or waived any
rights of substantial value.
(f) Sold, assigned, or transferred any patents, formulas,
trademarks, trade names, copyrights, licenses, or other intangible assets.
(g) Incurred any materially adverse losses or damage, or become
involved in any strikes or other labor disputes.
(h) Entered into any transaction other than in the ordinary course
of business, except for the transaction that is the subject matter of this
Agreement.
(i) Suffered any loss or damage to its business or properties.
TITLE TO ASSETS
2.06. TGSE has good and marketable title to all its assets and the same
are specified in the Schedule described in Paragraph 2.0i, and reflected in
the Balance Sheet dated August 21, 1996. All such assets are not subject to
any mortgage, pledge, lien, charge, security interest, encumbrance, or
restriction except those that:
(a) Are disclosed on the Balance Sheet as securing specified
liabilities;
(b) Are disclosed in the Schedule of Assets listed in Paragraph
2.07;
(c) Do not materially adversely affect the use of the asset. The
assets of TGSE, including buildings and equipment of TGSE, if any, are in good
condition and repair.
SCHEDULE OF ASSETS
2.07. Attached hereto is Schedule 2.07, a Schedule of Assets, containing:
(a) All Representative Agreements between TGSE, Apple or TGI with
third parties for sale of services of TGI in France or other areas which Apple
or TGSE may have an interest;
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(b) All agreements between Apple or TGSE with TGI for payment of
commissions and overrides in France and other countries which Apple/TGSE may
have any interest;
(c) A true and complete list of all contracts and leases, including
but not limited to contracts and leases between Apple/TGSE and any third
parties. Copies of the contracts have been delivered to TGI and initialed by
Apple.
(d) A true and complete list of all other assets used in the
business.
INDEBTEDNESS
2.08. (a) Except as set forth in the Balance Sheet of TGSE dated
August 21, 1996, described in Paragraph 2.04, TGSE presently has no
outstanding indebtedness other than liabilities incurred in the ordinary
course of business or in connection with this transaction, which in the
aggregate do not exceed $50,000. TGSE is not in default with respect to any
terms or conditions of any indebtedness.
(b) TGSE has not made any assignment for the benefit of
creditors, nor has any involuntary or voluntary petition in bankruptcy been
filed by or against TGSE.
LITIGATION
2.09. (a) TGSE is not party to, nor has it been threatened with,
any litigation or governmental proceeding that, if decided adversely to it,
would have a material adverse effect on the transaction contemplated by this
Agreement, or on the financial condition, net worth, prospects, or business of
TGSE. There is no litigation that will result in any action, suit, or other
proceeding that will have any material adverse change in the business or
financial condition of TGSE.
(b) To the best of its knowledge, TGSE is not infringing on
or otherwise acting adversely to any copyrights, trademark rights, patent
rights, or licenses owned by any other person, and there is no pending claim
or threatened action with respect to such rights. TGSE is not obligated to
make any payments in the form of royalties, fees, or otherwise to any owner or
licensor of any patent, trademark, trade name, or copyright.
(c) A summary of all litigation affecting TGSE or Apple is set
forth on Schedule 2.09.
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 5
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COMPLIANCE WITH LAW AND OTHER INSTRUMENTS/
BINDING NATURE OF AGREEMENT
2.10. The business operation of TGSE has been and is being conducted in
accordance with all applicable laws, rules, and regulations of all
authorities. TGSE is not in violation of, or in default under, any term or
provision of its Articles of Incorporation, its Bylaws, or of any lien,
mortgage, lease, agreement, instrument, order, judgment, decree, or contract,
including any restriction that would prevent consummation of the exchange of
securities contemplated by this Agreement. This Agreement constitutes the
valid and binding agreement of TGSE and Apple, enforceable in accordance with
its terms.
CONTRACTUAL OBLIGATIONS
2.11. TGSE is not a party to or bound by any written or oral:
(a) Contract not made in the ordinary course of business;
(b) Employment or consultant contract that is not terminable at
will without cost or other liability to TGSE or any successor, except the
following:
(c) Contract with any labor union;
(d) Bonus, pension, profit-sharing, retirement, stock option,
hospitalization, group insurance, or similar plan providing employee benefits;
(e) Any real or personal property lease as lessor;
(f) Advertising contract or contract for public relations
services;
(g) Purchase, supply, or service contracts;
(h) Deed of trust, mortgage, conditional sales contract,
security agreement, pledge agreement, trust receipt, or any other agreement
subjecting any of assets or properties of TGSE to a lien, encumbrance, or
other restriction;
(i) Term contract continuing for a period of more than 30 days
that is not terminable without liability to TGSE or its successors; or
(j) Contract that
(i) Contains a redetermination of price or similar type of
provision; or
(ii) Provides for a fixed price for goods or services sold.
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(k) Contract outside the ordinary course of the business of
TGSE, inc.luding without limitation any loan or employment or other
compensation agreement, lease agreement, or guarantee agreement. Except as set
forth on Schedule 2.11, all obligations required to be performed by it to date
have been performed, and TGSE is not in material default under any of the
contracts, leases, or other arrangements by which it is bound. None of the
parties with whom TGSE has contractual arrangements are in default of their
obligations.
CHANGES IN COMPENSATION
2.12 Since the Balance Sheet date of December 31, 1995, TGSE has not
granted any general pay increase to employees or changed the rate of
compensation, commission, or bonus payable to any officer, employee, director,
agent, or stockholder.
INVENTORIES
2.13 Since the Balance Sheet date of December 31, 1995, TGSE has
continued to replenish its inventories in the customary manner of entities
engaged in the business TGSE conducts, and will continue to do so until the
Closing Date.
RECORDS
2.14 All of the account books, minute books, stock certificate books,
and stock transfer ledgers of TGSE are complete and accurate as of September
30, 1996.
NO BROKERS OR FINDERS
2.15 All negotiations on the part of all parties related to this
Agreement have been accomplished solely by the parties without the assistance
of any person employed as a broker or finder. TGSE and Apple have done nothing
to give rise to any valid claims against TGI or TGSE for a brokerage
commission, finder's fee, or any similar charge.
TAXES
2.16 (a) TGSE has filed all federal income tax returns and, in each
jurisdiction where qualified or incorporated, or otherwise required to pay
taxes, including all state income tax and franchise tax returns that are
required to be filed. TGSE has paid all taxes as shown on the returns as have
become due, including all income and withholding taxes, and has paid all
assessments received that have become due.
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(b) Apple and TGSE will indemnify TGI for any deficiencies in any
years' taxes determined against TGSE.
FULL DISCLOSURE
2.17 As of the Closing Date, TGSE will have disclosed in writing all
events, conditions, and facts materially affecting the business and prospects
of TGSE. TGSE has not withheld knowledge of any events, conditions, and facts
that they have reasonable ground to know may materially affect the business or
prospects of TGSE. None of the representations, warranties or agreements made
by TGSE or Apple in this Agreement or set forth in any other instrument
furnished to TGI contains any untrue statement of a material fact, or fails to
state a material fact necessary to make the statements made not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TGI
TGI makes the representations, warranties and agreements set forth in
this Article 3 below:
ORGANIZATION AND STANDING OF TGI
3.01. TGI is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Iowa, with corporate power to own
property and carry on its business as it is now being conducted. Copies of the
articles of incorporation of TGI, and amendments thereto, which have been made
available TGSE, are complete and accurate as of the date of this Agreement.
TGI is not required to be qualified as a foreign corporation to transact
business in any other jurisdiction.
CAPITALIZATION
3.02. TGI has an authorized capitalization of 15,000,000 shares of
common stock of no par value, of which 10,000,000 shares are Class A common
shares and 5,000,000 are Class B common non-voting stock. Before issuing stock
to Apple, there are 4,320,000 Class A shares and 415,362 Class B shares
issued, outstanding, and fully paid as of the date of this Agreement. Except
for 232,332 shares of authorized but unissued stock that are reserved for
employee stock options, there are no outstanding options, contracts, calls,
commitments, or demands relating to the authorized but unissued stock of TGI.
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 8
<PAGE>
FINANCIAL STATEMENTS
3.03. TGI has delivered to TGSE:
(a) The balance sheets of TGI as of December 31, 1994 and December
31, 1995, and the statements of income and retained earnings of TGI for the
(2) years ending December 31, 1994 and December 31, 1995. These statements
have been audited by KPMG Peat Marwick LLP, independent certified public
accountants.
(b) An unaudited interim balance sheet of TGI as of June 30, 1996,
and related statements of earnings and stockholders' equity for the six-month
period ended June 30, 1996. These statements are subject to a year-end audit.
All the financial statements listed in this Paragraph present fairly the
financial condition of TGI at the specified dates and the results of its
operations for the period specified. The statements were prepared i n
accordance with generally accepted accounting principles applied in a manner
consistent with prior accounting periods.
FINANCIAL CONDITION SINCE BALANCE SHEET DATE
3.04 Since the Balance Sheet date of June 30, 1996, no change, event,
or condition has occurred that materially and adversely affects the financial
condition, assets, business, or prospects of TGI, to the best of the knowledge
of TGI.
STATUS OF TRANSFERRED SHARES
3.05 The shares of stock of TGI that are to be issued and delivered
to Apple pursuant to the terms of this Agreement will be validly authorized
and issued, and will be fully paid and nonassessable. No shareholder of TGI
will have any preemptive right of subscription or purchase with respect to the
shares to be transferred.
LITIGATION
3.06 TGI is not a party to any litigation or governmental proceeding
that could have a material, adverse effect on the transaction contemplated by
this Agreement or on the financial condition of TGI except as set forth in
financial statements provided to Apple.
TGI'S AUTHORITY
3.07 The execution and performance of this Agreement have been duly
authorized by all requisite corporate action. This Agreement constitutes a
valid and binding obligation of TGI, enforceable in accordance with its
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Telegroup South Europe, Inc. Page 9
<PAGE>
terms. No provision of TGI's Articles of Incorporation, Bylaws, minutes, share
certificates, or contracts prevents TGI from delivering good title to its
shares of capital stock in the manner contemplated by this Agreement.
BROKERS
3.08 TGI has not retained nor otherwise utilized the services of any
broker or finder in connection with the transaction contemplated by this
agreement. TGI has done nothing to give rise to any valid claims against TGSE
for a brokerage commission, finder's fee, or any similar charge.
FULL DISCLOSURE
3.09 TGI has not withheld knowledge of any events, conditions, or
facts it has reasonable ground to know may materially affect the business and
prospects of TGI. None of the representations and warranties made by TGI in
this Agreement or set forth in any other instrument furnished to TGSE contain
any untrue statement of a material fact, or fails to state a material fact
necessary to make the statements made not misleading.
ARTICLE 4
CONDUCT OF BUSINESS OF TGSE UP TO THE CLOSING DATE
CONDUCT OF BUSINESS IN ITS ORDINARY COURSE
4.01. TGSE will carry on its business in a good and proper manner and
in substantially the same manner as previous to the date of execution of this
Agreement, and will:
(a) Continue in full force the amount and scope of insurance
coverage carried prior to that date;
(b) Maintain its business organization and keep it intact, to
retain its present employees, and to maintain its goodwill with suppliers,
customers, and others having business relationships with it;
(c) Exercise due diligence in safeguarding and maintaining
confidential reports and data used in its business;
(d) Maintain its assets and properties in good condition and
repair, and not sell or otherwise dispose of any of its assets or properties,
except sales of inventory in the ordinary course of business.
ACCESS TO INFORMATION AND DOCUMENTS
4.02. (a) Apple and TGSE will afford the officers and
representatives of TGI, from the date of this Agreement until consummation of
the Plan of
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Reorganization, full access during normal business hours to all properties,
books, accounts, contracts, commitments, and any other records of any kind of
TGSE. Sufficient access shall be allowed to provide TGI with full opportunity
to make any investigation it desires to make of TGSE, and to keep itself fully
informed of the affairs of TGSE. Any investigation by TGI shall in no way
detract from the representations, warranties and agreements of TGSE and Apple
hereunder.
(b) In addition, TGSE will permit TGI to make extracts or copies of
all such books, accounts, contracts, commitments, and records, and to furnish
to TGI, within ten (10) days after demand, any further financial and operating
data of the corporation as TGI reasonably requests.
(c) TGI will use any information obtained under this Paragraph only
for its own purposes in connection with the consummation of the transaction
contemplated by this Agreement, and will not divulge the information to any
other person.
NEGATIVE COVENANTS
4.03. Except with the prior written consent of TGI and except as
disclosed on a Schedule to this Agreement or on its balance sheets, TGSE will
not prior to the Closing:
(a) Incur any liabilities other than current liabilities incurred
in the ordinary course of business;
(b) Incur any mortgage, lien, pledge, hypothecation, charge,
encumbrance, or restriction of any kind;
(c) Become a party to any contract, or renew, extend, or modify any
existing contract except in the ordinary course of business;
(d) Make any capital expenditures, except for ordinary repairs,
maintenance, and replacement;
(e) Declare or pay any dividend on or make any other distribution
to shareholders;
(f) Purchase, retire, or redeem any shares of its capital stock;
(g) Issue or sell additional shares of its capital stock, whether
or not such shares have been previously authorized or issued;
(h) Issue or sell any warrants, rights, or options to acquire any
shares of its capital stock;
(i) Amend its Articles of Incorporation or Bylaws;
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(j) Pay or agree to pay any bonus, increase in compensation,
pension, or severance pay to any director, stockholder, officer, consultant,
agent, or employee;
(k) Discharge or satisfy any lien or encumbrance, nor pay any
obligation or liability, except current liabilities shown on the Balance Sheet
dated December 31, 1995, or incurred in the ordinary course of business since
that date;
(l) Merge or consolidate with any other entity;
(m) Enter into any transactions or take any acts that would
constitute a breach of the representations, and warranties contained in this
Agreement; and
(n) Institute, settle, or agree to settle any action or proceeding
before any court or governmental body.
CONSULTATION
4.04. TGSE will consult with TGI at all times until the Closing Date
with respect to the operation and conduct of TGSE's business.
ARTICLE 5
CONDUCT OF BUSINESS OF TGI UP TO CLOSING DATE
CONDUCT OF BUSINESS
5.01. TGI will carry on its business in a good and proper manner
between the date hereof and the Closing.
SATISFY CONDITIONS PRECEDENT
5.02. TGI will use its best efforts to satisfy all conditions
precedent to be fulfilled by it prior to the Closing.
ACCESS TO INFORMATION AND DOCUMENTS
5.03. (a) TGI will provide TGSE from the date of this Agreement
until the Closing Date full access during normal business hours to all
properties, books, accounts, contracts, commitments, and records of TGI
reasonably necessary in connection with this Agreement. Sufficient access
shall be allowed to provide TGSE and Apple with full opportunity to make any
investigation they reasonably desire to make.
(b) TGI will permit Apple to make extracts or copies of all
books, accounts, contracts, commitments, and records. Additionally, TGI will
furnish
Plan and Agreement of Reorganization
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to Apple, prior to the Closing, any further financial and operating data and
other information concerning its business and assets that Apple may reasonably
request.
(c) TGSE may use any information secured pursuant to this
Paragraph only for its own purposes in connection with the consummation of the
transaction contemplated by this Agreement and may not divulge the information
to any other persons.
NEGATIVE COVENANTS
5.04. Except with the prior written consent of TGSE, TGI may not
declare or pay any dividend or make any other distribution to its shareholders
during the time between execution of this Agreement and Consummation.
ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATIONS OF TGSE
CONDITIONS PRECEDENT TO CLOSING
6.01. The obligations of TGSE to consummate the Plan of
reorganization in this Agreement shall be subject to the conditions precedent
specified in this Article 6.
TRUTH OF REPRESENTATIONS AND WARRANTIES
AND COMPLIANCE WITH COVENANTS
6.02. The representations and warranties of TGI contained in this
Agreement shall be true as of the Closing Date with the same effect as though
made on the Closing Date. TGI shall have performed all obligations and comply
with all covenants required by this Agreement to be performed or complied with
by it prior to the Closing Date.
OPINION FROM COUNSEL FOR TGI
6.03. On the Closing Date, TGI shall furnish to TGSE an opinion from
counsel for TGI, dated the Closing Date, to the effect that TGI is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Iowa, and that the shares of common stock of TGI
delivered to TGSE on the Closing Date have been duly authorized, issued, and
delivered and are validly issued and outstanding, fully paid and nonassessable
shares of common stock of TGI.
Plan and Agreement of Reorganization
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NO RESTRICTIONS
6.04. No action or proceeding by any governmental body or agency
shall have been threatened, asserted, or instituted to prohibit the
consummation of the transactions contemplated by this Agreement.
ARTICLE 7
CONDITIONS PRECEDENT TO OBLIGATIONS OF TGI
CONDITIONS PRECEDENT TO CLOSING
7.01. The obligations of TGI to consummate the Plan of reorganization
in this Agreement shall be subject to the conditions precedent specified in
this Article 7.
TRUTH OF REPRESENTATIONS AND WARRANTIES
AND COMPLIANCE WITH COVENANTS
7.02. The representations and warranties of TGSE contained in this
Agreement shall be true as of the Closing Date, with the same effect as though
made on the Closing Date. TGSE shall perform all obligations and comply with
all covenants required by this Agreement to be performed or complied with by
them prior to the closing date. TGSE shall deliver to TGI a certificate dated
the Closing Date and signed by an officer of TGSE, certifying the truth of the
representations and warranties.
ACCEPTABILITY OF PAPERS AND PROCEEDINGS
7.03. To the extent requested by TGI, the form and substance of all
papers and proceedings under this Agreement shall be acceptable to counsel for
TGI.
OPINION FROM COUNSEL FOR APPLE AND TGSE
7.04. Apple and TGSE shall deliver to TGI an opinion dated the
Closing Date of counsel for TGSE ("Counsel") in form and substance
satisfactory to TGI, to the effect that:
(a) TGSE is a corporation duly organized, validly existing, and
in good standing under the laws of Pennsylvania with full corporate power to
carry on the business in which it is engaged;
(b)(i) The shares of capital stock of TGSE, which are the
subject of this Agreement, have been duly authorized and
validly issued, and are fully paid and nonassessable; and
(ii) The shares of capital stock transferred by Apple to TGI
in this transaction constitute all the issued and
outstanding
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shares of capital stock of TGSE; and such
shares have been duly transferred to TGI hereunder.
(c) The Articles of Incorporation, bylaws, minutes, share
certificates, and any contracts to which TGSE or Apple is a party do not
prevent Apple from delivering good title to the shares of such capital stock
in the manner specified under this Agreement;
(d) This Agreement constitutes the valid and binding obligation
of TGSE and Apple, enforceable in accordance with its terms, except as limited
by bankruptcy, insolvency, or other laws affecting the enforcement of
creditors' rights;
(e) Counsel has no knowledge of any facts that might adversely
affect the title of TGI to the shares of capital stock being transferred under
this Agreement. Counsel has no knowledge of any defects or limitations on the
title of TGSE to any of its assets or properties;
(f) Counsel has no knowledge of any litigation, or governmental
investigation or labor dispute pending or threatened against TGSE, its
business, properties, or the capital stock of TGSE transferred under this
Agreement.
RESIGNATIONS OF OFFICERS AND DIRECTORS
7.05 There shall be delivered to TGI the written resignations of the
officers and directors of TGSE.
NO RESTRICTIONS
7.06 No action or proceeding by any governmental body or agency shall
be threatened asserted, or instituted that prohibits the consummation of the
transactions contemplated by this Agreement.
NO CONTRACTS TERMINATED
7.07 TGSE shall not terminate any contracts prior to the Closing Date
that in the aggregate would materially and adversely affect its business.
NO DAMAGE TO ASSETS
7.08 At the Closing Date the machinery, equipment, inventory, or
other tangible property of TGSE shall not be damaged by fire, flood, accident,
labor strife, act of war, or any other cause beyond the reasonable power and
control of TGSE to an extent that substantially affects the value of the
property and assets. Loss or damage shall be considered to affect
substantially the value of the properties and assets within the meaning of
this Paragraph if the book
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value of the properties and assets lost or damaged exceeds twenty (20) percent
of the total book value of all assets.
ARTICLE 8
SURVIVAL OF WARRANTIES AND LIABILITY
NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES
8.01. All statements of fact contained in this Agreement, or in any
memorandum, certificate, letter, document, or other instrument delivered by or
on behalf of TGSE or TGI pursuant to this Agreement shall be deemed
representations and warranties made by any such party, respectively, to each
other party under this Agreement. The covenants, representations, and
warranties of the parties shall survive the Closing Date, and all inspections,
examinations, or audits on behalf of the parties and the shareholder for a
period of three (3) years following the Closing Date, and suit thereon may be
brought by any party within such period.
EXPENSES
8.02 Apple shall pay its own expenses incurred by TGSE and Apple
arising out of this Agreement and the transactions contemplated in this
Agreement, including but not limited to all fees and expenses of their counsel
and accountants, whether or not this Agreement is consummated.
ARTICLE 9
COMPLIANCE WITH SECURITIES LAWS
UNREGISTERED STOCK UNDER FEDERAL SECURITIES ACT
9.01. (a) Apple acknowledges that the shares of TGI's Stock to be
delivered to Apple pursuant to this Agreement have not been registered under
the Federal Securities Act of 1933, as amended, referred to in this Agreement
as the "1933 Act, and that therefore the stock is not freely traceable except
as permitted under various exemptions contained in the 1933 Act and the rules
of the Securities and Exchange Commission interpreting the 1933 Act. The
provisions contained in this Paragraph 9.01 are intended to ensure compliance
with the 1933 Act.
NO DISTRIBUTION OF STOCK TO PUBLIC
(b) Apple represents and warrants to TGI that he is acquiring
the shares of TGI's Common Stock under this Agreement for his own account for
investment, and not for the purpose of a resale or any other distribution of
the shares. Apple also represents and warrants that he has no present
intention of disposing of all or any part of such shares at any particular
time, for any particular price, or on the happening of any particular
circumstances. Apple acknowledges that TGI is relying on the truth and
accuracy of the warranties
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and representations set forth in this Paragraph in issuing the shares without
first registering the shares under the 1933 Act.
NO TRANSFERS IN VIOLATION OF THE 1933 ACT
(c) Apple covenants and represents that none of the shares of
TGSE's capital stock that will be issued to him pursuant to this Agreement,
will be offered, sold, assigned, pledged, transferred, or otherwise disposed
of except after full compliance with all of the applicable provisions of the
1933 Act and the rules and regulations of the Securities and Exchange
Commission under the 1933 Act. Therefore, Apple agrees not to sell or
otherwise dispose of any of the shares of TGI's common stock received pursuant
to this Agreement unless he:
(i) Has delivered to TGI a written legal opinion in form
and substance satisfactory to counsel for TGI to the
effect that the disposition is permissible under the
terms of the 1933 Act and regulations interpreting the
Act;
(ii) Has complied with the registration and prospectus
requirements of the 1933 Act relating to such a
disposition; or
(iii) Has presented TGI satisfactory evidence that such a
disposition is exempt from registration under the Act.
Investment Legend on Certificates
INVESTMENT LEGEND ON SECURITIES
(d) Apple agrees that the certificates evidencing the shares the
shareholder will receive under this Agreement will contain the following
legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THE SECURITIES MAY NOT BE SOLD UNLESS A
REGISTRATION STATEMENT UNDER THE FEDERAL SECURITIES ACT OF 1933, AS
AMENDED, IS IN EFFECT FOR THE SECURITIES, OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF SUCH ACT IS APPLICABLE TO SUCH SALE.
ARTICLE 10
TERMINATION
DEFAULT
TGI or TGSE may, on or at any time prior to the Closing Date, terminate
this Agreement by notice to the other party in the event:
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 17
<PAGE>
(a) The other party has defaulted by failing to perform any of its
covenants and agreements contained in this Agreement; and
(b) Such default has not been fully cured within fifteen (15) days
after receipt of the notice specifying particularly the nature of the default.
(c) Notwithstanding anything to the contrary in this Agreement,
Apple and TGI, along with Telecontinent, S.A., a French corporation ("TCSA")
are parties to a Plan and Agreement of Acquisition dated this date. The
parties acknowledge and agree that any default by Apple or TCSA under the
Acquisition Agreement or by Apple and TGSE hereunder shall be deemed a default
hereunder, and the liability of Apple hereunder shall not be limited to the
amount of consideration received by Apple hereunder. The parties acknowledge
that TGI would not enter into this Agreement but for the Agreement, and Apple
shall be liable for breaches of representations hereunder and under the
Acquisition Agreement to the extent of any consideration received by Apple or
any related party under both this Agreement and the Acquisition Agreement.
ARTICLE 11
MISCELLANEOUS
AMENDMENT
11.01. This Agreement may be amended or modified at any time and in
any manner only by an instrument in writing executed by the parties.
WAIVER
11.02. Either TGI or TGSE may, in writing:
EXTENSION OF TIME
(a) Extend the time for the performance of any of the obligations
of any other party to the Agreement.
WAIVING INACCURACIES
(b) Waive any inaccuracies and misrepresentations contained in this
Agreement or any document delivered pursuant to the Agreement made by any
other party to the Agreement.
WAIVING COMPLIANCE WITH COVENANTS
(c) Waive compliance with any of the covenants or performance of
any obligations contained in this Agreement by any other party to the
Agreement.
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 18
<PAGE>
WAIVING SATISFACTION OF CONDITION PRECEDENT
(d) Waive the fulfillment of any condition precedent to the
performance by any other party to the Agreement.
ASSIGNMENT
11.03. (a) Neither this entire Agreement nor any right created by
the Agreement shall be assignable by any party without the prior written
consent of the other, except by the laws of succession.
(b) Except as limited by the provisions of subparagraph (a),
this Agreement shall be binding on and inure to the benefit of the respective
successors and assigns of the parties, as well as the parties.
(c) Nothing in this Agreement, expressed or implied, is
intended to confer upon any person, other than the parties and their
successors, any rights or remedies under this Agreement.
NOTICES
11.04. Any notice or other communication required or permitted by
this Agreement must be in writing and shall be deemed to be properly given
when delivered in person to an officer of the other party; when deposited in
the United States mail, in the case of TGI, or with the French PTT, in the
case of Apple/TGSE, for transmittal by certified or express mail, postage
prepaid; or when deposited for delivery with private carrier such as Airborne,
Federal Express, or DHL; provided that the communication is addressed:
(a) In the case of TGI, to:
Clifford Rees, President
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
with a copy to:
Ron Stakland, Executive Vice President
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield. Iowa 52556
or to such other person or address designated by TGI to receive
notice.
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 19
<PAGE>
(b) In the case of TGSE, to:
George Apple
13 Rue Tamara
Saint Germain-en-Laye
FRANCE 78104
and to such other person or address designated by TGSE to receive notice.
HEADINGS
11.05 Paragraph and other headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
ENTIRE AGREEMENT
11.06 This instrument and the exhibits to this instrument contain the
entire Agreement between the parties with respect to the transaction
contemplated by the Agreement. It may be executed in any number of
counterparts but the aggregate of the counterparts together constitute only
one and the same instrument.
EFFECT OF PARTIAL INVALIDITY
11.07 In the event that anyone or more of the provisions contained in
this Agreement shall for any reason be held to be invalid, illegal, or
unenforceable in any respect, such invalidity, illegality, or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be constructed as if it never contained any such invalid, illegal, or
unenforceable provisions.
CONTROLLING LAW/JURISDICTION
11.08 The validity, interpretation, and performance of this agreement
shall be controlled by and construed under the laws of the State of Iowa. Any
action arising out of, or relating to this Agreement, including any action in
contract or tort, shall be resolved in the courts in the State of Iowa, which
shall have exclusive jurisdiction. Any judgment may be enforced in any court
of competent jurisdiction.
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 20
<PAGE>
ATTORNEY'S FEES
11.09 If any action at law or in equity, including an action for
declaratory relief, is brought to enforce or interpret the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees from the other party. The attorney's fees may be ordered by
the court in the trial of any action described in this Paragraph or may be
enforced in a separate action brought for determining attorney's fees.
SPECIFIC PERFORMANCE
11.10 The parties declare that it is impossible to measure in money
the damages that will accrue to a party or its successors as a result of the
other parties' failure to perform any of the obligations under this Agreement.
Therefore, if a party or its successor institutes any action or proceeding to
enforce the provisions of this Agreement, any party opposing such action or
proceeding agrees that specific performance may be sought and obtained for any
breach of this Agreement.
NON-COMPETITION
11.11 Unless otherwise agreed to in writing, Apple agrees not to sell
or otherwise represent, directly or indirectly, any non-TGI telecommunications
service which would compete with the services marketed by TGI, directly or
indirectly, or to solicit customers of TGI services or sales agents, for any
purpose other than the promotion of TGI services for an additional two years
(24 months) after Apple ceases to be employed by TGSE or to do business with
TGSE or TGI. Violation of this provision by Apple shall give TGI the right to
immediately obtain an injunction or other equitable relief to prevent the
prohibited conduct, in addition to any damages which TGI may be entitled.
CONFIDENTIAL INFORMATION/OTHER INFORMATION.
11.12 Apple agrees that during the period of his business
relationship with TGI or TGSE, and for a period of two (2) years after the
termination of such relationship, Apple shall not, at any time, disclose to
any person, or use for his own benefit or the benefit of anyone, any
information learned by him as a result of this Agreement or his employment by
TGI, TGSE or any affiliated entity, without the prior express written consent
of TGI. Apple understands that certain information learned by him as a result
of his association with TGSE and TGI constitute the proprietary and
confidential information of TGI or TGSE, including the identities of its
agents, customers, the methods of marketing, potential customers, and other
information generally deemed by TGI or TGSE as confidential ("Confidential
Information"). Apple understands the Confidential Information constitutes
trade secret information of TGI and TGSE, has been developed at significant
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 21
<PAGE>
cost to TGI or TGSE giving either or both a competitive advantage.
Accordingly, Apple agrees that he will not, at any time, in perpetuity,
divulge Confidential Information to any person, or use such Information for
his own benefit or the benefit of anyone else, without the prior written
consent of TGI.
Executed on September 6, 1996, at Fairfield, Iowa.
TELEGROUP, INC.
By /s/ Fred Gratzon
---------------------------
TELEGROUP SOUTH EUROPE, INC.
By /s/ George Apple
--------------------------
/s/ George Apple
--------------------------
GEORGE APPLE, INDIVIDUALLY
Plan and Agreement of Reorganization
Telegroup South Europe, Inc. Page 22
<PAGE>
SCHEDULE 2.07
ASSET SCHEDULE
TELEGROUP SOUTH EUROPE, INC.
SEPTEMBER 6, 1996
COORDINATOR, OVERRIDE, REPRESENTATIVES
(a) Representative agreements as exclusive agency
(b) Exclusive agreement with George Apple - TGSE Spain
(c) Exclusive agreement with George Apple - TGSE-France, Monaco and
Andorra
(d) Contract of Sale from TGI to TGSE-France
(e) Contract of Sale from TGI to TGSE-Spain
AMENDMENT TO EXCLUSIVE AGENCY
(g) Agreement between TGSF and TCSA for payment of commissions to
TCSA
(h) $50,000 Promissory Note
BANK ACCOUNTS
Corestates Hamilton, Harrisburg, Pennsylvania
Hamilton Capital Growth Acct. #140857-3528 Balance 7/31/96 -
$232,254.22
Federated Investors Acct. #2517544890 Balance - $356,818.99
Counsel letter regarding corporation
Stock certificates
RESIGNATION OF OFFICERS AND DIRECTORS
<PAGE>
SCHEDULE 2.09
TELEGROUP, SOUTH EUROPE
NONE
<PAGE>
SCHEDULE 2.11
TELEGROUP, SOUTH EUROPE
NONE
<PAGE>
EXHIBIT 2.2
PLAN AND AGREEMENT OF ACQUISITION
This plan and Agreement of Acquisition ("Agreement") is entered into in
Jefferson County, Iowa this 6th day of September, 1996, among Telegroup, Inc.,
an Iowa corporation ("TGI"), TeleContinent, S.A., a French corporation
("TCSA"), and Georges Apple ("Apple") who shall on the Closing Date of this
Agreement own all the outstanding capital stock of TCSA.
TGI will acquire from Apple all of the issued and outstanding shares of
capital stock of TCSA, in exchange solely for the cash consideration recited
below.
In order to consummate the Plan of Exchange, TGI, Apple, and TCSA, in
consideration of the mutual covenants and on the basis of the representations
and warranties set forth, agree as follows:
ARTICLE 1
EXCHANGE OF CAPITAL STOCK
1.01 Transfer of TCSA's Capital Stock. Subject to the terms and
conditions of this Agreement, Georges Apple shall transfer to TGI on the
Closing Date all issued and outstanding shares of capital stock of TCSA, free
and clear of all liens, claims and encumbrances of any nature whatsoever.
Prior to the Closing Date, Apple will have acquired the shares held by Lynn
Apple, David Apple, Alizza Apple, Jessie Apple, Joseph Garner and Phyllis
Garner in order to transfer them to TGI. Apple represents and warrants that
after the transfer, TGI will validly own all issued and outstanding shares of
capital stock of TCSA.
1.02 Resignation of Directors. Apple shall secure the resignation of
the directors of TCSA' effective the Closing Date.
1.02. Consideration for Transfer. In exchange for the shares transferred
by Apple to TGI pursuant to Paragraph 1.01, TGI shall pay to Apple the sum of
$200,000.00 US on the Closing Date.
1.03. Closing Date. Subject to the conditions precedent set forth in this
Agreement, and the other obligations of the parties set forth in this
Agreement, the Plan of Acquisition shall be consummated at the hour, place and
date the parties fix by mutual consent. Consummation shall include the
delivery by Apple to TCSA of all of his shares of capital stock of TCSA, which
shall be duly transferred, and the delivery by TGI of the funds therefor, as
provided in Paragraph 1.02 of this Agreement. The date of the consummation of
this Agreement is referred to as the "Closing Date."
ARTICLE 2
REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF APPLE
AND TCSA
Apple and TCSA, jointly and severally make the representations,
warranties and agreements set forth below in this Article 2.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 1
<PAGE>
2.01. Organization and Standing of TCSA. TCSA is a corporation duly
organized, validly existing, and in good standing under the laws of France, with
full corporate power and authority to own its property and carry on its business
as it is now being conducted. Copies of the articles of incorporation of TCSA,
and any amendments thereto, have been registered in appropriate Commercial Court
of France and delivered to TGI. In addition, copies of TCSA's bylaws and minutes
of all board meetings have been delivered to TGI, and are complete and accurate
as of the date of this Agreement. TCSA is qualified to transact business in
France and all other jurisdictions where its business is conducted or its
properties are located and is in good standing in all jurisdictions in which its
principal properties are located or its business is conducted.
2.02. Subsidiaries. TCSA has no subsidiaries nor any interest in any other
corporation, firm, or partnership.
2.03. Capitalization. TCSA has an authorized capitalization of 10,000
shares of capital stock, and 2,500 shares are issued and outstanding, all of
which shall be sold to TGI by Apple hereunder. The registered capital of TCSA is
of 250,000 Francs divided into 2,500 shares of the same category with a par
value of 100 Francs each. All issued shares shall, as of the Closing Date, be
fully paid and non-assessable. There are no outstanding subscriptions, options,
contracts, commitments, or demands relating to the authorized but unissued stock
of TCSA or other agreements of any character under TCSA would be obligated to
issue or purchase shares of its capital stock.
2.04. Financial Statements
(a) Attached to this Agreement as Exhibits 1 through 3 are the
Balance Sheets of TCSA as of August 21, 1996, and December 31, 1995, and the
related statements of income and retained earnings for the periods then ended.
All the financial statements have been prepared by TCSA and are subject to non-
material changes resulting from year-end audit. All the financial statements
described in this Paragraph 2.04 have been prepared in conformity with generally
accepted accounting principles, applied on a consistent basis, and present
fairly the financial position of TCSA as of their respective dates.
(b) Since December 31, 1995, there have been, and at the Closing
Date there will be, no materially adverse changes in TCSA's- business or
prospects, or the financial condition of TCSA, except as may be reflected in the
financial statements dated August 21, 1996.
(c) Subject to any changes as a result of the ordinary and usual
course of business, the assets of TCSA at the Closing Date will be substantially
those owned by it and shown on its financial statements as of August 21, 1996.
2.05. Operations Since Balance Sheet Date. Since its Balance Sheet date of
December 31, 1995, TCSA has kept its business intact and has not, and prior to
the Closing Date will not, have:
(a) Issued or sold any stock, bond, or other corporate securities.
(b) Except for current liabilities incurred and obligations entered
into in
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 2
<PAGE>
the ordinary course of business, incurred any absolute or contingent obligation,
including long-term debt.
(c) Except for current liabilities shown on the balance sheet and
current liabilities incurred since that date in the ordinary course of business,
discharged or satisfied any lien or encumbrance, or paid any obligation or
liability
(d) Mortgaged, pledged, or subjected to lien any of its assets.
(e) Except in the ordinary course of business, sold or transferred
any of its tangible assets, or canceled any debts or claims, or waived any
rights of substantial value.
(f) Sold, assigned, or transferred any patents, formulas,
trademarks, trade names, copyrights, licenses, or other intangible assets.
(g) Incurred any materially adverse losses or damage, or become
involved in any strikes or other labor disputes.
(h) Entered into any transaction other than in the ordinary course
of business, except for the transaction that is the subject matter of this
Agreement.
(i) Suffered any loss or damage to its business or properties.
2.06. Title to Assets. TCSA has good and marketable title to all its
assets, and the same are specified in the Schedule described in Paragraph 2.08,
and reflected in the Balance Sheet dated August 21, 1996. All such assets are
not subject to any mortgage, pledge, lien, charge, security interest,
encumbrance, or restriction except those that:
(a) Are disclosed on the August 21st, 1996 Balance Sheet as securing
specified liabilities;
(b) Are disclosed in the Schedule of Assets listed in Paragraph
2.07; or
(c) Do not materially adversely affect the use of the asset. All
property of TCSA, including buildings and equipment of TCSA, if any, are in good
condition and repair.
2.07. Schedule of Assets. Attached hereto is Schedule 2.07, a Schedule of
Assets, containing a true and complete:
(a) Summary of all leases of real property owned by TCSA, and any
real property in which TCSA has a leasehold interest, with the leases attached
thereto;
(b) A true and complete list of all licenses, trademarks, trademark
registrations, trade names, copyrights, and copyright registrations owned by
TCSA; and
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 3
<PAGE>
(c) A list of all contracts, including but not limited to contracts
between TCSA and Telegroup, Inc. and Telegroup South Europe, Inc. and any other
third parties. Copies of the contracts have been delivered to TGI and initialed
by Apple.
(d) A description of all other assets of TCSA.
2.08. Indebtedness.
(a) Except as set forth in the Balance Sheet of TCSA dated August
21, 1996, described in Paragraph 2.05, TCSA presently has no outstanding
indebtedness other than liabilities incurred in the ordinary course of business
or in connection with this transaction, which in the aggregate do not exceed
$50,000. TCSA's liabilities in connection with this transaction shall not exceed
$15,000 U.S. TCSA is not in default with respect to any terms or conditions of
any indebtedness.
(b) TCSA has not made any assignment for the benefit of creditors,
nor has any involuntary or voluntary petition in bankruptcy been filed by or
against TCSA.
2.09. Litigation.
(a) Other than the pending litigation pending litigation with
Telegroup, S.A., in France, TCSA is not party to, nor has it been threatened
with, any litigation or governmental proceeding that, if decided adversely to
it, would have a material adverse effect on the transaction contemplated by this
Agreement, or on the financial condition, net worth, prospects, or business of
TCSA. There is no litigation that will result in any action, suit, or other
proceeding that will have any material adverse effort on the business or
financial condition of TCSA.
(b) To the best of its knowledge, TCSA is not infringing on or
otherwise acting adversely to any copyrights, trademark rights, patent rights,
or licenses owned by any other person, and there is no pending claim or
threatened action with respect to such rights. TCSA is not obligated to make any
payments in the form of royalties, fees, or otherwise to any owner or licensor
of any patent, trademark, trade name, or copyright.
(c) A summary of all litigation affecting TCSA or Apple is set forth
on Schedule 2.09, other than the litigation with Telegroup SA in France.
2.10. Compliance With Law and Other Instruments/Binding Nature of
Agreement.. The business operations of TCSA have been and are being conducted in
accordance with all applicable laws, rules, and regulations of all authorities.
TCSA is not in violation of, or in default under, any term or provision of its
Articles of Incorporation, its Bylaws, or of any lien, mortgage, lease,
agreement, instrument, order, judgment, decree, including any restriction that
would prevent consummation of the exchange of securities contemplated by this
Agreement. Any necessary approvals, including governments approvals, for the
transfer of shares by Apple to TGI have been obtained. This agreement
constitutes the valid and binding agreement of TCSA and Apple, enforceable in
accordance with its terms.
2.11. Contractual Obligations. TCSA is not a party to or bound by any
written or oral:
(a) Contract not made in the ordinary course of business;
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 4
<PAGE>
(b) Employment or consultant contract that is not terminable at will
without cost or other liability to TCSA or any successor, except the following:
(c) Contract with any labor union;
(d) Bonus, pension, profit-sharing, retirement, stock option,
hospitalization, group insurance, or similar plan providing employee benefits;
(e) Any real or personal property lease as lessor;
(f) Advertising contract or contract for public relations services;
(g) Purchase, supply, or service contracts;
(h) Deed of trust, mortgage, conditional sales contract, security
agreement, pledge agreement, trust receipt, or any other agreement subjecting
any of assets or properties of TCSA to a lien, encumbrance, or other
restriction;
(i) Term contract continuing for a period of more than 30 days that
is not terminable without liability to TCSA or its successors: or
(j) Contract that
(i) Contains a redetermination of price or similar type of
provision; or
(ii) Provides for a fixed price for goods or services sold.
(k) Contract outside the ordinary course of the business of TCSA,
including without limitation any loan or employment or other compensation
agreement, lease agreement, or guarantee agreement. Except as set forth on
Schedule 2. 11, all obligations required to be performed by TCSA to date have
been performed, and TCSA is not in material default under any of the contracts,
leases, or other arrangements by which it is bound. None of the parties with
whom TCSA has contractual arrangements are in default of their obligations.
2.12 Changes in Compensation. Since the Balance Sheet date of August 21,
1996, TCSA has not granted any general pay increase to employees or changed the
rate of compensation, commission, or bonus payable to any officer, employee,
director, agent, or stockholder, except as previously disclosed in writing by
Apple to TGI.
2.13 Inventories. Since the Balance Sheet date of December 31, 1995, TCSA
has continued to replenish its inventories in the customary manner of entities
engaged in the business TCSA conducts, and will continue to do so until the
Closing Date.
2.14. Records. All of the account books, minute books, and stock transfer
ledgers of TCSA will be complete and accurate by September 30, 1996.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 5
<PAGE>
2.15. No Brokers or Finders. All negotiations on the part of all parties
related to this Agreement have been accomplished solely by the parties without
the assistance of any person employed as a broker or finder. TCSA and Apple have
done nothing to give rise to any valid claims against TGI or TCSA for a
brokerage commission, finder's fee, or any similar charge.
2.16. Taxes. (a) TCSA has filed all local and French income tax returns
and, returns in each jurisdiction where qualified or incorporated or otherwise
required to pay taxes, including all state income and franchise tax returns that
are required to be filed. TCSA has paid all taxes as they have become due,
including all income and withholding taxes. and has paid all assessments
received that have become due.
2.17. Environmental Laws. TCSA has complied with all environmental and
hazardous substances laws, including laws relating to the presence, storage, or
disposal of chemicals, medical or other wastes, materials that may be hazardous
to the environment or to animal or human health or safety, or due to potentially
harmful properties or effects. All properties leased by TCSA or owned by it are
free from the presence of hazardous substances. Neither TCSA or Apple has
received any notice of failure to comply with environmental laws and
regulations, and they have no reason to believe that any of its properties are
affected adversely by hazardous substances or that their properties violate
environmental laws.
2.18. Full Disclosure. Apple and TCSA have disclosed in writing to TGI all
events, conditions, and facts materially affecting the business and prospects of
TCSA. Neither TCSA nor Apple has withheld knowledge of any events, conditions,
and facts that they have reasonable ground to know may materially affect the
business or prospects of TCSA. None of the representations, warranties or
agreements made by TCSA in this Agreement or set forth in any other instrument
furnished to TGI contain any untrue statement of a material fact, or fails to
state a material fact necessary to make the statements made not misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TGI
TGI makes the following representations, warranties and agreements set
forth in this Article 3 below:
3.01. TGI's Authority. The execution and performance of this Agreement have
been duly authorized by all requisite corporate action. This Agreement
constitutes the valid and binding obligation of TGI, enforceable in accordance
with its terms. No provision of TGI's Articles of Incorporation, bylaws,
minutes, share certificates, or contracts prevents TGI from delivering good
title to its shares of such capital stock in the manner contemplated by this
Agreement.
3.02. Brokers. TGI has not retained nor otherwise utilized the services of
any broker or finder in connection with the transaction contemplated by this
agreement. TGI has done nothing to give rise to any valid claims against TCSA
for a brokerage commission, finder's fee, or any similar charge.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 6
<PAGE>
ARTICLE 4
CONDUCT OF BUSINESS OF TCSA UP TO THE CLOSING DATE
4.01. Conduct of Business in Its Ordinary Course. TCSA will carry on its
business in a good and proper manner and in substantially the same manner as
previous to the date of execution of this Agreement, and will:
(a) Continue in full force the amount and scope of insurance
coverage carried prior to that date;
(b) Maintain its business organization and keep it intact, to retain
its present employees, and to maintain its goodwill with suppliers, customers,
and others having business relationships with it;
(c) Exercise due diligence in safeguarding and maintaining
confidential reports and data used in its business;
(d) Maintain its assets and properties in good condition and repair,
and not sell or otherwise dispose of any of its assets or properties, except
sales of inventory in the ordinary course of business.
4.02. Access to Information and Documents. (a) Apple and TCSA will afford
the officers and representatives of TGI, from the date of this Agreement until
consummation of the Plan of Acquisition, full access during normal business
hours to all properties, books, accounts, contracts, commitments, and any other
records of any kind of TCSA. Sufficient access shall be allowed to provide TGI
with full opportunity to make any investigation it desires to make of TCSA, and
to keep itself fully informed of the affairs of TCSA, any investigation by TGI
still in no way detract from the representation warranties and agreements of
TCSA and Apple herein.
(b) In addition, TCSA will permit TGI to make extracts or copies of
all such books, accounts, contracts, commitments, and records, and to furnish to
TGI, within ten (10) days after demand, any further financial and operating data
of the corporation as TGI reasonably requests.
(c) TGI will use any information obtained under this Paragraph only
for its own purposes in connection with the consummation of the transaction
contemplated by this Agreement, and will not divulge the information to any
other person.
4.03. Negative Covenants. Except with the prior written consent of TGI, and
except as disclosed to TGI on a Schedule to this Agreement, TCSA will not prior
to the Closing:
(a) Incur any liabilities other than current liabilities incurred in
the ordinary course of business;
(b) Incur any mortgage, lien, pledge, hypothecation, charge,
encumbrance, or restriction of any kind;
(c) Become a party to any contract, or renew, extend, or modify any
existing contract, except in the ordinary course of business;
(d) Make any capital expenditures, except for ordinary repairs,
maintenance, and replacement;
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 7
<PAGE>
(e) Declare or pay any dividend on or make any other distribution to
shareholders:
(f) Purchase, retire, or redeem any shares of its capital stock;
(g) Issue or sell additional shares of its capital stock, whether or
not such shares have been previously authorized or issued;
(h) Issue or sell any warrants, rights, or options to acquire any
shares of its capital stock;
(i) Amend its Articles of Incorporation or Bylaws;
(j) Pay or agree to pay any bonus, increase in compensation,
pension, or severance pay to any director, stockholder, officer, consultant,
agent, or employee;
(k) Discharge or satisfy any lien or encumbrance, nor pay any
obligation or liability, except current liabilities shown on the Balance Sheet
dated December 31, 1995, or incurred in the ordinary course of business since
that date;
(1) Merge or consolidate with any other entity;
(m) Enter into any transactions or take any acts that would
constitute a breach of the representations, and warranties contained in this
Agreement; and
(n) Institute, settle, or agree to settle any action or proceeding
before any court or governmental body.
4.04. Consultation. TCSA will consult with TGI at all times until the
Closing Date with respect to the operation and conduct of TCSA's business.
ARTICLE 5
CONDUCT OF BUSINESS OF TGI UP TO CLOSING DATE
5.01. Conduct of Business. TGI will carry on its business in a good and
proper manner between the date hereof and the Closing.
5.02. Conditions Precedent. TGI will use its best efforts to satisfy all
conditions precedent to be fulfilled by it prior to the Closing Date.
5.03. Access to Information and Documents.
(a) TGI will provide TCSA from the date of this Agreement until the
Closing Date full access during normal business hours to all properties, books,
accounts, contracts, commitments, and records of TGI reasonably necessary in
connection with this agreement. Sufficient access shall be allowed to provide
TCSA with full opportunity to make any reasonable investigation it desire to
make TGI, and to keep themselves fully informed of the affairs of TGI.
(b) TGI will permit the TCSA to make extracts or copies of all
books,
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 8
<PAGE>
accounts, contracts, commitments, and records as reasonably necessary.
Additionally, TGI will furnish to the shareholders, within ten (10) days after
demand, any further financial and operating data and other information
concerning its business and assets that the Shareholders reasonably request.
(c) TCSA may use any information secured pursuant to this Paragraph
only for its own purposes in connection with the consummation of the transaction
contemplated by this Article and may not divulge the information to any other
persons.
ARTICLE 6
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PARTNERS
6.01. Conditions Precedent to Closing. The obligations of TCSA and TGI to
consummate the Plan of Acquisition and this Agreement shall be subject to the
conditions precedent specified in this Article 6.
6.02. Truth of Representations and Warranties and Compliance With
Covenants. The representations and warranties of TGI and TCSA contained in this
Agreement shall be true as of the Closing Date with the same effect as though
made on the Closing Date. TGSA and TGI, shall have performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with by them prior to the Closing Date.
6.03. Opinion From Counsel for TCSA. On the Closing Date, TCSA shall
furnish to TGI an opinion of counsel for TCSA, dated the Closing Date, in form
and substance satisfactory to TGI, to the effect that TCSA is a corporation duly
registered with the proper Commercial Court of France, validly existing, and in
good standing under the laws of France, and that the shares of common stock of
TCSA delivered to TGI on the closing date have been duly authorized, issued,
transferred and delivered, are validly issued and outstanding, fully paid and
non assessable shares of common stock of TCSA and operate to legally transfer
ownership of all capital stock in TCSA to TGI.
6.04. No Restrictions. No action or proceeding by any governmental body or
agency shall have been threatened, asserted, or instituted to prohibit the
consummation of the transactions contemplated by this Agreement.
ARTICLE 7
SURVIVAL OF WARRANTIES AND LIABILITY
7.01. Nature and Survival of Representations and Warranties. Covenants,
representations, and warranties of the parties shall survive the Closing Date,
and all inspections, examinations, or audits on behalf of the parties for a
period of three (3) years following the Closing Date, and suit thereon maybe
brought for any breach of representations, warranties or agreements within such
period and served. If presently or at any time in the future any of the
representations, warranties or agreements of Apple or TCSA contained in this
Agreement should fail to be correct. Apple agrees to indemnify
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 9
<PAGE>
hold harmless TGI against any claims, liabilities, penalties, costs, and
expenses that may be asserted against or suffered by TGI as a result of such
inaccurate representation, warranty or agreement.
7.02 Expenses. TCSA shall not bear any expenses arising out of this
Agreement and the transactions contemplated in this Agreement, including but not
limited to all fees and expenses of their counsel and accountants. All such
expenses shall be paid 50% by Apple and 50% by TGI. Whether or not this
Agreement is terminated, each of the parties shall bear all expenses incurred by
it in connection with this Agreement and in the consummation of the transactions
contemplated by and in preparation for the Agreement.
ARTICLE 8
TERMINATION
8.01. Default and Cross Default.
(a) Any party may, on or at any time prior to the Closing Date,
terminate this Agreement by notice to the other party in the event of the
failure of any condition precedent to the terminating party's obligations or:
(i) The other party has defaulted by failing to
perform any of its covenants and agreements
contained in this Agreement; and
(ii) Such default has not been fully cured within
fifteen (15) days after receipt of the notice
specifying particularly the nature of the
default.
(b) Notwithstanding anything to the contrary in this Agreement,
Apple and TGI, along with Telegroup South Europe, Inc.( "TGSF') are parties to a
Plan of Agreement of Reorganization dated this date ("Reorganization
Agreement"). The parties acknowledge and agree that any default by Apple or TGSE
under the Reorganization Agreement or by Apple and TCSA hereunder shall be
deemed a default hereunder, and the liability of Apple hereunder shall not be
limited to the amount of consideration received by Apple hereunder. The parties
acknowledge that TGI would not enter into this Agreement but for the
Reorganization Agreement, and Apple shall be liable for breaches of
representations hereunder and under the Reorganization Agreement to the extent
of any consideration received by Apple or any related party under both this
Agreement and the Reorganization Agreement.
ARTICLE 9
MISCELLANEOUS
9.01. Amendment. This Agreement may be amended or modified at any time and
in any manner only by an instrument in writing executed by the Parties.
9.02. Waiver. Either TGI or TCSA may, in writing:
(a) Extension of Time. Extend the time for the performance of any of
the obligations of any other party to the Agreement.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 10
<PAGE>
(b) Waiving Inaccuracies. Waive any inaccuracies and
misrepresentations contained in this Agreement or any document delivered
pursuant to the Agreement made by any other party to the Agreement.
(c) Waiving Compliance With Covenants. Waive compliance with any of
the covenants or performance of any obligations contained in this Agreement by
any other party to the Agreement.
(d) Waiving Satisfaction of Condition Precedent. Waive the
fulfillment of any condition precedent to the performance by any other party to
the Agreement.
9.03. Assignment. (a) Neither this entire Agreement nor any right created
by the Agreement shall be assignable by either TCSA or TGI without the prior
written consent of the other, except by the laws of succession.
(b) Except as limited by the provisions of subparagraph (a), this
Agreement shall be binding on and inure to the benefit of the respective
successors and assigns of the parties, as well as the parties.
(c) Nothing in this Agreement, expressed or implied, is intended to
confer upon any person, other than the parties and their successors, any rights
or remedies under this Agreement.
9.04. Notices. Any notice or other communication required or permitted by
this Agreement must be in writing and shall be deemed to be properly given when
delivered in person to an officer of the other party; when deposited in the
United States mail, in the case of TGI, or with the French PTT, in the case of
Apple/TCSA, for transmittal by certified or express mail, postage prepaid; or
when deposited for delivery with private carrier such as Airborne, Federal
Express, or DHL; provided that the communication is addressed:
(a) In the case of TGI, to:
Clifford Rees, President
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
with a copy to:
Ron Stakland, Executive Vice President
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
or to such other person or address designated by TGI to receive
notice.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 11
<PAGE>
(b) In the case of TCSA, to:
Georges Apple
13 Rue Tamara
Saint Germain-en-Laye
FRANCE 78104
and to such other person or address designated by TCSA to receive notice.
9.05. Headings. Paragraph and other headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.06. Entire Agreement. This instrument and the exhibits to this instrument
contain the entire Agreement between the parties with respect to the transaction
contemplated by the Agreement. It may be executed in any number of counterparts
but the aggregate of the counterparts together constitute only one and the same
instrument.
9.07. Effect of Partial Invalidity. In the event that any one or more of
the provisions contained in this Agreement shall for any reason be held to be
invalid, illegal, or unenforceable in any respect, such invalidity, illegality,
or unenforceability shall not affect any other provisions of this Agreement, but
this Agreement shall be constructed as if it never contained any such invalid,
illegal, or unenforceable provisions.
9.08. Controlling Law/Jurisdiction. The validity, interpretation, and
performance of this Agreement shall be controlled by and construed under the
laws of the State of Iowa, the state in which this Agreement is being executed.
Any action arising out of, or relating to this Agreement, including any action
in contract or tort, shall be resolved in the courts in the State of Iowa, which
shall have exclusive jurisdiction. Any judgement may be enforced in any court of
competent jurisdiction.
9.09 Attorney's Fees. If any action at law or in equity, including an
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party shall be entitled to recover reasonable
attorney's fees from the other party. The attorney's fees may be ordered by the
court in the trial of any action described in this Paragraph or may be enforced
in a separate action brought for determining attomey's fees.
9.10 Specific Performance. The parties declare that it may be impossible
to measure in money the damages that will accrue to a party or its successors as
a result of the other parties' failure to perform any of the obligations under
this Agreement. Therefore, if a party or its successor institutes any action or
proceeding to enforce the provisions of this Agreement, any party opposing such
action or proceeding agrees that specific performance may be sought and obtained
for any breach of this Agreement.
9.11 Other Documents. The Parties shall execute all documents as may be
necessary to consummate the transaction contemplated by this Agreement.
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 12
<PAGE>
9.12 Non-Competition. Unless otherwise agreed to in writing, Apple agrees
not to sell or otherwise represent, directly or indirectly, any non-TGI
telecommunications service which would compete with the services marketed by
TGI, directly or indirectly, or to solicit customers of TGI services or agents
of TGI or TGSE, for any purpose other than the promotion of TGI services for an
additional two years (24 months) after Apple ceases to be employed by TCSA or to
do business with TCSA or TGI, Apple agrees not to sell or promote any
telecommunications service which would compete with the services of TGI to
customers of TGI service. Violation of this provision by Apple shall give TGI
the right to immediately obtain an injunction or other equitable relief to
prevent the prohibited conduct, in addition to any damages which TGI may be
entitled.
9.13 Confidential Information/Other Information. Apple agrees that during
the period of his business relationship with TGI, and for a period of two (2)
years after the termination of the relationship, or TCSA, Apple shall not, at
any time, disclose to any person, or use for his own benefit or the benefit of
anyone, any information reamed by him as a result of this Agreement or his
employment by TGI, TCSA or any affiliated entity, without the prior express
written consent of TGI. Apple understands that certain information learned by
him as a result of his association with TCSA and TGI constitute the proprietary
and confidential information of TCSA, including the identities of its agents,
customers, the methods of marketing, potential customers, and other information
generally deemed by TGI or TCSA as confidential (hereinafter, "Confidential
Information".) Apple understands the Confidential Information constitutes trade
secret information of TGI and TCSA, has been developed at significant cost to
TGI or TCSA giving either or both a competitive advantage. Accordingly, Apple
agrees that he will not, at any time, in perpetuity, divulge Confidential
Information to any person, or use such Information for his own benefit or the
benefit of anyone else, without the prior written consent of TGI.
Executed on September 6, 1996, at Fairfield, Iowa.
TELEGROUP. INC.
By /s/ Fred Gratzon
----------------------
TELECONTINENT. S.A.
By /s/ George Apple
------------------------
/s/ George Apple
-------------------------
Georges Apple, Individually
Plan and Agreement of Acquisition
TeleContinent, S.A.
Page 13
<PAGE>
SCHEDULE 2.07
ASSET SCHEDULE
TELECONTINENT, S.A.
SEPTEMBER 6, 1996
1. Shares of Stock - Transfer of Stock
2. Minute Books
3. Articles of Incorporation
4. Letter from French counsel
5. Lynn Apple to sign letter of Authorization of Transfer
<PAGE>
SCHEDULE 2.09
TELECONTINENT, S.A.
NONE
<PAGE>
SCHEDULE 2.11
TELECONTINENT, S.A.
NONE
<PAGE>
EXHIBIT 3.2
FORM OF SECOND RESTATED ARTICLES OF INCORPORATION
OF
TELEGROUP, INC.
TO THE SECRETARY OF STATE OF IOWA:
Pursuant to Section 1007 of the Iowa Business Corporation Act, the
undersigned corporation adopts the following Second Restated Articles of
Incorporation:
1. The name of the corporation is Telegroup, Inc.
2. The Second Restated Articles of Incorporation of Telegroup, Inc.
attached hereto as Exhibit A amend the Restated Articles of Incorporation in a
manner requiring shareholder approval. The Second Restated Articles of
Incorporation were approved by the shareholders of Telegroup, Inc. The
designation, number of outstanding shares, number of votes entitled to be cast
by each voting group entitled to vote separately on the Second Restated
Articles of Incorporation, and the number of votes of each voting group
represented at the meeting are as follows:
Votes Entited
To Be Cast On Votes
Designation Shares Second Restated Represented
of Group Outstanding Articles At Meeting
- ------------- ------------ ---------------- --------------
Class A Common 4,367,832 4,367,832
Class B Commmon 415,362 415,362
3. The total number of votes cast for and against the Second Restated
Articles of Incorporation by each voting group entitled to vote separately on
the Second Restated Articles of Incorporation:
Voting Group Votes For Votes Against
- ------------ ---------- -------------
Class A Common
Class B Common
The number of votes cast for the Second Restated Articles of
Incorporation by each voting group was sufficient for approval by that voting
group.
<PAGE>
4. The Second Restated Articles of Incorporation so adopted read in
full as set forth in Exhibit A attached hereto and is hereby incorporated by
reference.
5. The duly adopted Second Restated Articles of Incorporation
supersede the Restated Articles of Incorporation and all amendments thereto.
Date: ______________________
TELEGROUP, INC.
By:
-------------------------
Name:
-----------------------
Title:
------------------------
<PAGE>
EXHIBIT A
SECOND RESTATED ARTICLES OF INCORPORATION
OF
TELEGROUP, INC.
I
The name of the corporation is TELEGROUP, INC. (the "Corporation"). The
address of the Corporation's registered office in the State of Iowa is 2222
Grand Avenue, Des Moines, Iowa 50312, the County of Polk. The name of the
Corporation's registered agent at such address is The Corporation System.
II
The Corporation is organized for the purpose of engaging in any lawful
business for which corporations may be organized under the Iowa Business
Corporation Act.
III
Capitalization. The total number of shares of stock of all classes which
the Corporation shall have authority to issue is 160,000,000 shares, of which
10,000,000 shares shall be preferred stock, no par value per share
(hereinafter called "Preferred Stock"), and 150,000,000 shares of which shall
be common stock, no par value per share (hereinafter called "Common Stock").
Upon the filing of these Second Restated Articles of Incorporation of the
Corporation, each share of the Corporation's Class A Common Stock, no par
value, and Class B Common Stock, no par value, outstanding immediately prior to
the filing hereof shall be automatically reclassified into a single class of
Common Stock of the Corporation, no par value, and each such outstanding share
of Common Stock shall be automatically changed, pursuant to a stock split of the
Corporation, into 5.5086223 shares of Common Stock of the Corporation, no par
value.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of the shares of each
class are as follows:
1. The Preferred Stock may be issued from time to time in one or more
series, the shares of each series of Preferred Stock to have the voting
powers, full or limited, and the designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof as are stated and expressed herein or in
the resolution or resolutions providing for the issuance of the series of
Preferred Stock, adopted by the board of directors as hereinafter provided.
2. Authority is hereby expressly granted to the board of directors of
the Corporation, subject to the provisions of this Article III and to the
limitations prescribed by law, to authorize the issuance of one or more series
of Preferred Stock and with respect to each series of Preferred Stock to fix
by resolution or resolutions providing for the issuance of the series of
Preferred Stock the voting powers, full or limited, if any, of the shares of
the series of Preferred Stock and the designations, preferences and relative,
participating, optional or other special rights, and the qualifications,
limitations or restrictions thereof. Each series of Preferred Stock shall
consist of such number of shares as shall be stated and expressed in the
resolution or resolutions providing for the issuance of the stock of the
series of Preferred Stock together with such
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<PAGE>
additional number of shares as the board of directors by resolution or
resolutions may from time to time determine to issue as a part of the series
of Preferred Stock. The board of directors may from time to time decrease the
number of shares of any series of Preferred Stock (but not below the number
thereof then outstanding) by providing that any unissued shares previously
assigned to the series of Preferred Stock shall no longer constitute part
thereof and may assign the unissued shares to an existing or newly created
series of Preferred Stock.
The authority of the board of directors with respect to each series of
Preferred Stock shall include, but not be limited to, the determination or
fixing of the following:
(a) The designation of the series of Preferred Stock.
(b) The dividend rate of the series of Preferred Stock, the conditions
and dates upon which dividends shall be payable, the relation which the
dividends shall bear to the dividends payable on any other class or classes of
stock, and whether the dividends shall be cumulative or non-cumulative.
(c) Whether the shares of the series of Preferred Stock shall be subject
to redemption by the Corporation and, if made subject to redemption, the
times, prices and other terms and conditions of the redemption.
(d) The rights of the holders of the shares of the series of Preferred
Stock upon the dissolution of, or upon the distribution of assets of, the
Corporation, and the amount payable on the shares in the event of voluntary or
involuntary liquidation.
(e) The terms and amount of any sinking fund provided for the purchase
or redemption of the shares of the series of Preferred Stock.
(f) Whether or not the shares of the series of Preferred Stock shall be
convertible into or exchangeable for shares of any other classes or of any
other series of Preferred Stock of any class or classes of stock of the
Corporation and, if provision be made for conversion or exchange, the times,
prices, rates, adjustments, and other terms and conditions of the conversion
or exchange.
(g) The extent, if any, to which the holders of the shares of the series
of Preferred Stock shall be entitled to vote with respect to the election of
directors or otherwise.
3. The holders of shares of each series of Preferred Stock shall be
entitled to receive, when and as declared by the board of directors, out of
funds legally available for the payment of dividends, dividends at the rates
fixed by the board of directors for such series of Preferred Stock, and no
more, before any dividends, other than dividends payable in Common Stock,
shall be declared and paid, or set apart for payment, on the Common Stock with
respect to the same dividend period.
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<PAGE>
4. Whenever, at any time, dividends on the then outstanding Preferred
Stock as may be required with respect to any series of Preferred Stock
outstanding shall have been paid or declared and set apart for payment and
after complying with respect to any retirement or sinking fund or funds for
any series of Preferred Stock, the board of directors may, subject to the
provisions of the resolution or resolutions creating any series of Preferred
Stock, declare and pay dividends on the Common Stock, and the holders of
shares of Preferred Stock shall not be entitled to share therein.
5. The holders of shares of each series of Preferred Stock shall be
entitled upon liquidation or dissolution or upon the distribution of the
assets of the Corporation to such preferences as provided in the resolution or
resolutions creating the series of Preferred Stock, and no more, before any
distribution of the assets of the Corporation shall be made to the holders of
shares of Common Stock. Whenever the holders of shares of Preferred Stock
shall have been paid the full amounts to which they shall be entitled, the
holders of shares of the Common Stock shall be entitled to share ratably in
all the remaining assets of the Corporation.
6. At all meetings of the shareholders of the Corporation, the holders
of shares of the Common Stock shall be entitled to one vote for each share of
Common Stock held by them. Except as otherwise required by law and except for
such voting powers with respect to the election of directors or other matters
as may be stated in the resolution or resolutions of the board of directors
providing for the issuance of any series of Preferred Stock, the holders of
the series of Preferred Stock shall have no voting power whatsoever.
7. No holder of any share of any class of stock of the Corporation shall
have any preemptive right to subscribe for or acquire additional shares of
stock of any class of the Corporation or warrants or options to purchase, or
securities convertible into, shares of any class of stock of the Corporation.
IV
The number of directors of the Corporation shall be fixed from time to
time in the manner provided in the bylaws but shall not be fewer than three
nor more than twelve. The directors shall be divided into three classes:
Class I, Class II, and Class III. Each class shall consist, as nearly as may
be possible, of one-third of the total number of directors. At each annual
meeting of shareholders, successors to the class of directors whose term
expires at that annual meeting shall be elected for a three-year term. The
initial expiration dates for the terms of the Class I, Class II and Class III
directors shall coincide with the dates of the annual meetings of shareholders
to be held in 1998, 1999 and 2000, respectively. If the number of directors
is changed, any increase or decrease shall be apportioned among the classes so
as to maintain the number of directors in each class as nearly equal as
possible, and any additional director of any class shall hold office for a
term that shall coincide with the remaining term of that class, but in no case
will a decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the year
in which his or her term expires and until a successor shall be elected and
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<PAGE>
qualified, subject, however, to prior death, resignation, retirement,
disqualification or removal from office. Any vacancy occurring on the board of
directors may be filled by a majority of the directors in office, although
less than a quorum, or by a sole remaining director, and any vacancy on the
board of directors that results from an increase in the number of directors
may be filled by a majority of the board of directors in office. Any director
elected to fill a vacancy shall have the same remaining term as that of his or
her predecessor.
A director may be removed only for (i) cause or (ii) by the affirmative
vote of the holders of not less than sixty-five percent (65%) of the
outstanding shares of Voting Stock (as hereinafter defined) at a meeting of
shareholders duly called for the consideration of such removal. Cause shall
mean conviction of a felony or adjudication of liability for negligence or
misconduct in the performance of a director's duty to the Corporation.
The affirmative vote of the holders of not less than sixty-five percent
(65%) of the outstanding shares of Voting Stock is required to amend the
provisions of this Article IV.
V
Notwithstanding any other provisions of these Second Restated Articles of
Incorporation or bylaws (and notwithstanding the fact that some lesser
percentage may be specified by law), any amendment of these Second Restated
Articles of Incorporation which would permit the holders of stock of the
Corporation to amend, alter, change or repeal the bylaws or any part thereof,
shall require the affirmative vote of holders of not less than sixty-five
percent(65%) of the outstanding shares of Voting Stock of the Corporation.
Any amendment of the Second Restated Articles of Incorporation which would
permit the holders of a lesser percentage of stock of the Corporation to
amend, alter, change or repeal the bylaws or any part thereof, shall require
the affirmative vote of holders of not less than sixty-five percent (65%) of
the outstanding shares of Voting Stock of the Corporation.
VI
The affirmative vote of the holders of not less than sixty-five percent
(65%) of the outstanding shares of Voting Stock of the Corporation shall be
required for the approval or authorization of any "Business Combination" (as
hereinafter defined) of the Corporation with any "Substantial Shareholder" (as
hereinafter defined); provided, however, that the sixty-five percent (65%)
voting requirement shall not be applicable if:
1. The "Continuing Directors" of the Corporation (as hereinafter
defined) by a two-thirds (2/3) vote (a) have expressly approved in advance the
acquisition of outstanding shares of Voting Stock of the Corporation that
caused the Substantial Shareholder to become a Substantial Shareholder or (b)
have approved the Business Combination prior to the Substantial Shareholder
involved in the Business Combination having become a Substantial Shareholder;
4
<PAGE>
2. The Business Combination is solely between the Corporation and
another corporation, one-hundred percent (100%) of the Voting Stock of which
is owned directly or indirectly by the Corporation; or
3. The Business Combination is a merger or consolidation and the cash or
fair market value of the property, securities or "Other Consideration to be
Received" (as hereinafter defined) per share by holders of Common Stock of the
Corporation in the Business Combination is not less than the "Fair Price" (as
hereinafter defined) of the Common Stock.
For the purposes of these Articles:
1. The term "Business Combination" shall mean (a) any merger or
consolidation of the Corporation or a subsidiary with or into a Substantial
Shareholder, (b) any sale, lease, exchange, transfer or other disposition,
including without limitation a mortgage or any other security device, of all
or any "Substantial Part" (as hereinafter defined) of the assets either of the
Corporation (including without limitation any voting securities of a
subsidiary) or of a subsidiary, to the Substantial Shareholder, (c) any merger
or consolidation of a Substantial Shareholder with or into the Corporation or
a subsidiary of the Corporation, (d) any sale, lease, exchange, transfer or
other disposition of all or any Substantial Part of the assets of the
Substantial Shareholder to the Corporation or a subsidiary of the Corporation
for consideration aggregating $5,000,000 or more, (e) the issuance of any
securities of the Corporation or a subsidiary of the Corporation to a
Substantial Shareholder, (f) any reclassification or recapitalization
(including any reverse stock split) of the Corporation or any of its
subsidiaries or a reorganization, in any case having the effect, directly or
indirectly, of increasing the percentage interest of a Substantial Shareholder
in any class of equity securities of the Corporation or such subsidiary, and
(g) any agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination.
2. The term "Substantial Shareholder" shall mean and include any
individual, corporation, partnership or other person or entity which, together
with its "affiliates" and "associates" (as defined in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, in effect on _____________ (the
"Exchange Act"), "beneficially owns" (as defined in Rule 13d-3 under the
Exchange Act) in the aggregate twenty percent (20%) or more of the outstanding
Voting Stock of the Corporation, and any affiliate or associate of any such
individual, corporation, partnership or other person or entity.
3. The term "Substantial Part" shall mean assets having a "Fair Value"
(as hereinafter defined) in excess of ten percent (10%) of the fair market
value of the total consolidated assets of the Corporation in question as of
the end of its most recent fiscal year ending prior to the time the
determination is being made.
4. Without limitation, any shares of Common Stock of the Corporation
that any Substantial Shareholder has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise, shall be deemed beneficially owned by the Substantial Shareholder.
5
<PAGE>
5. The term "Other Consideration to be Received" shall include, without
limitation, Common Stock of the Corporation retained by its existing public
shareholders in the event of a Business Combination in which the Corporation
is the surviving corporation.
6. The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors and each reference to a proportion of shares of Voting Stock shall
refer to such proportion of the votes entitled to be cast by such shares.
7. The term "Continuing Director" shall mean any director of the Company
who has served as a director since May 1997, or one elected or appointed prior
to the time the Substantial Shareholder in question acquired such status, or
one designated as a Continuing Director (prior to his or her initial election
or appointment) by a majority of the whole board, but only if a majority of
the whole board shall then consist of Continuing Directors, or if a majority
of the whole board does not then consist of Continuing Directors, by a
majority of the then Continuing Directors.
8. The term "Fair Price" shall mean not less than the greater of (a) the
highest per share price paid by the Substantial Shareholder in acquiring any
of its shares of stock of the Corporation or (b) an amount which bears the
same or greater percentage relationship to the market price of the Common
Stock of the Corporation immediately prior to the announcement of the Business
Combination equal to the highest percentage relationship that any per share
price theretofore paid by the Substantial Shareholder for any of its holdings
of Common Stock of the Corporation bore to the market price of the Common
Stock of the Corporation immediately prior to commencement of the acquisition
of the Corporation's Common Stock by the Substantial Shareholder.
9. The term "Fair Value" shall mean the fair market value thereof at any
time 90 days prior to the date of the consummation of any transaction, which
value and time shall be determined by a majority of the Continuing Directors
who may, if they wish, be advised on such value by an investment banking firm
selected by them. The fees of any such investment banking firm shall be paid
by the Corporation.
The provisions set forth at this Article VI herein may not be repealed or
amended in any respect, unless such action is approved by the affirmative vote
of the holders of not less than sixty-five percent (65%) of the outstanding
shares of Voting Stock of the Corporation; provided, however, that this sixty-
five percent (65%) vote requirement shall not apply if an amendment is
recommended to shareholders by two-thirds (2/3) of the whole board of directors
when a majority of the board of directors acting upon such matters are
Continuing Directors.
6
<PAGE>
VII
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve the intentional misconduct or a
knowing violation of the law, (iii) for any transaction from which the
director derives an improper personal benefit, or (iv) under Section 490.833
of the Iowa Business Corporation Act.
Any repeal or modification of this Article VII shall not adversely affect
any right or protection of a director of the Corporation existing at the time
of such repeal or modification.
Date:
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TELEGROUP, INC.
By:
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Name:
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Its:
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ATTEST:
By:
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Name:
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Title: Secretary
<PAGE>
EXHIBIT 3.4
FORM OF AMENDED AND RESTATED BYLAWS
OF
TELEGROUP, INC.
ARTICLE I. OFFICES
Section 1. The principal office of the corporation within the State
of Iowa shall be located in the City of Fairfield, County of Jefferson.
Section 2. The corporation may also have offices and places of
business at such other places within or without the State of Iowa as the Board
of Directors may from time to time determine or the business of the
corporation may require.
ARTICLE II. SHAREHOLDERS
Section 1. ANNUAL MEETING. The annual meeting of the shareholders
shall be held on the second Wednesday in the month of April in each year, at
the hour of 10:00 a.m., at the principal office of the corporation or at such
other date, time and place as may be fixed from time to time by resolution of
the Board of Directors and set forth in the notice of the meeting, for the
purpose of electing directors and transacting such other business as may
properly come before the meeting.
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before an annual meeting. To be
properly brought before an annual meeting, business must be (i) specified in
the notice of the meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (ii) otherwise properly brought before
the meeting by or at the direction of the Board of Directors or (iii)
otherwise properly brought before the meeting by a shareholder of the
corporation who was a shareholder of record at the time of giving of notice
provided for in this Section, who is entitled to vote at the meeting and who
complied with the notice procedures set forth in this Section. For business to
be properly brought before an annual meeting by a shareholder, the shareholder
must have given timely notice thereof in writing to the Secretary of the
corporation at the principal executive offices of the corporation. To be
timely, a shareholder's notice shall be delivered not less than 90 days prior
to the first anniversary of the preceding year's meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date, notice by
the shareholder, to be timely, must be so delivered not later than the 90th
day prior to such annual meeting or the 10th day following the day on which
public announcement (as defined herein) of the date of such meeting is first
made.
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Such shareholder's notice shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting and any material interest
in such business of such shareholder and the beneficial owner, if any, on
whose behalf the proposal is made; and (ii) as to the shareholder giving the
notice and the beneficial owner, if any, on whose behalf the proposal is made
(A) the name and address of such shareholder, as they appear on the
corporation's books, and the name and address of such beneficial owner and (B)
the class and number of shares of the corporation which are owned beneficially
and of record by such shareholder and such beneficial owner; and (iii) in the
event that such business includes a proposal to amend either the Articles of
Incorporation or the Bylaws of the corporation, the language of the proposed
amendment. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any annual meeting except in accordance with
this paragraph, and the Chairman of the Board or other person presiding at an
annual meeting of shareholders, may refuse to permit any business to be
brought before an annual meeting without compliance with the foregoing
procedures. For the purposes of this paragraph "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the corporation with the Securities and Exchange Commission pursuant
to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). In addition to the provisions of this paragraph, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth herein. Nothing in these Bylaws shall be deemed to affect any rights of
shareholders to request inclusion of proposals in the corporation's proxy
statement pursuant to Rule 14a-8 under the Exchange Act.
Section 2. SPECIAL MEETINGS. Special meetings of the shareholders, for
any purpose or purposes, may be called by the Chairman of the Board, the
President, the Secretary, or the Board of Directors. The holders of shares
having not less than one-tenth of the voting power of the corporation may
demand in writing stating the purpose or purposes, and signed, dated and
delivered to the Secretary of the corporation, that a special meeting of the
shareholders be held. The time, date and place of any such special meeting
shall be determined by the Board of Directors or at its direction, by the
Chairman. Business transacted at a special meeting of the shareholders shall
be confined to the purpose or purposes of the meeting described in the notice
of the meeting.
Section 3. PLACE OF SHAREHOLDERS' MEETING. The Board of Directors may
designate any place, either within or without the State of Iowa as the place
of meeting for any annual meeting or for any special meeting of shareholders.
If no designation is made the place of meeting shall be the principal office
of the corporation in the State of Iowa.
Section 4. NOTICE OF MEETING. Written or printed notice stating the
place, day and
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hour of the meeting and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not
less than ten days, nor more than sixty days before the date of the meeting,
either personally or by mail, by or at the direction of the Chairman of the
Board, the President, the Secretary, or the Board of Directors, to each
shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the shareholder at the address as it appears on the stock
transfer books of the corporation, with postage thereon prepaid.
Section 5. POSTPONEMENT OF MEETINGS. Any previously scheduled annual or
special meeting of shareholders may be postponed by resolution of the Board of
Directors upon public announcement (as defined in Article II, Section 1 of
these Bylaws) made on or prior to the date previously scheduled for such
annual or special meeting.
Section 6. FIXING OF RECORD DATE. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholders
or any adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the corporation may fix in advance a
date as the record date for any such determination of shareholders, such date
in any case to be not more than seventy days and, in case of a meeting of
shareholders, not less than ten days prior to the date on which the particular
action requiring such determination of shareholders is to be taken. If no
record date is fixed for the determination of shareholders entitled to notice
of or to vote at a meeting of shareholders, or shareholders entitled to
receive payment of a dividend, the day before the first date on which notice
of the meeting is mailed or the day before the date on which the resolution of
the Board of Directors declaring such dividend is adopted, as the case may be,
shall be the record date for such determination of shareholders. In order to
determine the shareholders entitled to demand a special meeting, the record
date shall be the sixtieth day preceding the date of receipt by the
corporation of written demands sufficient to require the calling of such
meeting, unless otherwise fixed by the Board of Directors. When a
determination of shareholders entitled to vote at any meeting of shareholders
has been made as provided in this section, such determination shall apply to
any adjournment thereof, unless the Board of Directors selects a new record
date or unless a new record date is required by law.
Section 7. VOTING LISTS. After the record date for a meeting has been
fixed, the officer or agent having charge of the stock transfer books for
shares of the corporation shall make, at least ten days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting, or any adjournment thereof, arranged by voting group and within each
voting group, in alphabetical order, with the address of and the number and
class of shares held by each, which list, for a period beginning two business
days after notice of the meeting was first given for which the list was
prepared and continuing through the meeting, shall be kept on file at the
principal office of the corporation or at the place identified in the meeting
notice in the city where the meeting will be held. The list shall be subject
to inspection by any shareholder at any
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time during usual business hours. Such list shall also be produced and kept
open at the time and place of the meeting and shall be subject to the
inspection of any shareholder during the whole time of the meeting. The list
furnished to the corporation by its stock transfer agent shall be prima facie
evidence as to who are the shareholders entitled to examine such list or
transfer books or to vote at any meeting of shareholders.
Section 8. QUORUM. At any meeting of the shareholders, a majority of
the votes entitled to be cast on the matter by a voting group constitutes a
quorum of that voting group for action on that matter, unless the
representation of a different number is required by law, and in that case, the
representation of the number so required shall constitute a quorum. If a
quorum shall fail to attend any meeting, the chairman of the meeting or a
majority of the votes present may adjourn the meeting to another place, date
or time. When a meeting is adjourned to another place, date or time, notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than one hundred
twenty (120) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, notice of the
place, date and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.
Section 9. PROXIES. At all meetings of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder or by the shareholder's
duly authorized attorney in fact. Such proxy shall be filed with the
Secretary of the corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from the date of its execution, unless
otherwise provided in the proxy. No holder of any share of any class of stock
of the corporation shall sell the vote pertaining to such share or issue a
proxy to vote such share in consideration of any sum of money or anything of
value.
Section 10. VOTING OF SHARES. Except as may be otherwise provided by
the Articles of Incorporation, each outstanding share entitled to vote shall
be entitled to one (1) vote in person or by proxy for each share of common
stock standing in the holder's name on the stock transfer records of the
corporation.
Section 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the
name of another corporation may be voted by such officer, agent or proxy as
the Bylaws of such corporation may prescribe, or, in the absence of such
provision, as the board of directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted, either in person or by proxy, without a transfer of such shares. Shares
standing in the name of a trustee
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may be voted by the trustee, either in person or by proxy, but no trustee
shall be entitled to vote shares so held without a transfer of such shares
into the name of the trustee.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof if authority so to do be contained in an
appropriate order of the court by which such receiver was appointed.
A shareholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so
transferred.
Neither treasury shares nor, absent special circumstances, shares held by
another corporation if a majority of the shares entitled to vote for the
election of directors of such other corporation is held by the corporation,
shall be voted at any meeting or counted in determining the total number of
outstanding shares at any given time.
Section 12. VOTING BY BALLOT. Voting by shareholders on any question or
in any election may be viva voce unless the presiding officer shall order or
any shareholder shall demand that voting be by ballot.
ARTICLE III. BOARD OF DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the corporation
shall be managed by its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS; NOMINATIONS. Within the
limits set forth in Article IV of the Articles of Incorporation, the number of
directors of the corporation shall be as fixed from time to time by resolution
of the Board of Directors. The directors shall be divided into classes, and
hold office for the terms as provided in Article IV of the Articles of
Incorporation. Directors need not be residents of the State of Iowa or
shareholders of the corporation.
Nominations of persons for election as directors may be made by the Board
of Directors or by any shareholder entitled to vote for the election of
directors. Any shareholder entitled to vote for the election of directors may
nominate a person or persons for election as director only if written notice
of such shareholder's intent is delivered to the Secretary of the corporation
at the principal executive offices of the corporation (i) with respect to an
election to be held at an annual meeting of shareholders, not later than 90
days prior to the first anniversary of the preceding year's annual meeting, or
as set out below, and (ii) with respect to an election to be held
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at a special meeting of shareholders for the election of directors, not later
than 10 days following the date on which public announcement (as defined in
Article II, Section 1 of these Bylaws) of the date of such meeting is first
made. In the event that the date of the annual meeting is advanced by more
than 30 days or delayed by more than 60 days from the anniversary date of the
annual meeting, notice by the shareholder must be delivered not less than 90
days prior to such annual meeting or the 10th day following the day on which
public announcement of the date of such meeting is first made. Notwithstanding
anything in the foregoing sentence to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the corporation
is increased and there is no public announcement naming all of the nominees
for director or specifying the size of the increased Board of Directors made
by the corporation at least 100 days prior to the first anniversary of the
preceding year's annual meeting, a shareholder's notice required by this
Section shall also be considered timely, but only with respect to nominees for
any new positions created by such increase, if it shall be delivered to the
Secretary of the corporation not later than the close of business on the 10th
day following the day on which such public announcement is first made.
Such shareholder's notice shall set forth: (a) the name and address of
the shareholder who intends to make the nomination and the name, address, age,
and principal occupation or employment of the person or persons to be
nominated; (b) a representation that the shareholder is a holder of record of
stock of the corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) the number and class of shares of the corporation
which are owned by such shareholder and the beneficial owner, if any, and the
number and class of shares, if any, beneficially owned by the nominee; (d) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (e) such other information regarding each nominee that is
required to be disclosed in connection with the solicitation of proxies for
the election of directors, or as otherwise required, in each case pursuant to
Regulation 14A under the Exchange Act (including, without limitation, such
person's written consent to being named in a proxy statement as a nominee and
to serving as a director if nominated). The Chairman of the Board or other
person presiding at a meeting of shareholders may refuse to acknowledge the
nomination of any person not made in accordance with the procedures prescribed
by these Bylaws, and in that event the defective nomination shall be
disregarded.
Section 3. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately
after, and at the same place as, the annual meeting of shareholders. The
Board of Directors may provide, by resolution, the time and place, either
within or without the State of Iowa, for the holding of additional regular
meetings without other notice than such resolution.
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Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the request of the Chairman of the Board, the
President, Secretary or any two directors. The person or persons authorized
to call special meetings of the Board of Directors may fix any place, either
within or without the State of Iowa, as the place for holding any special
meeting of the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be given at least two days previously thereto by written
notice delivered personally or mailed to each director at the director's
business address, or by telephone, cable, telefax, wireless or telegram. If
mailed, such notice shall be deemed to be delivered when deposited in the
United States mail so addressed, with postage thereon prepaid. If notice be
given by telegram such notice shall be deemed to be delivered when the
telegram is delivered to the telegraph company. Any director may waive notice
of any meeting. The attendance of a director at a meeting shall constitute a
waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any 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 such
meeting.
Section 6. QUORUM. A majority of the number of directors fixed pursuant
to Section 2 of this Article III shall constitute a quorum for the transaction
of business at any meeting of the Board of Directors, but if less than such
majority is present at a meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice.
Section 7. MANNER OF ACTING. Except as otherwise specified in these
Bylaws, the act of the majority of the directors present at a meeting at which
a quorum is present shall be the act of the Board of Directors.
Section 8. VACANCIES. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board of Directors. A director elected to
fill a vacancy shall be elected for a term which shall expire at the next
election of directors by the shareholders. A director elected by the
shareholders to fill a vacancy shall be elected for the unexpired term of the
director last elected by the shareholders with respect to the position being
filled. Any directorship to be filled by reason of any increase in the number
of directors by not more than thirty percent (30%) of the number of directors
last approved by the shareholders, may be filled by the Board of Directors for
a term of office continuing only until the next election of directors by the
shareholders.
Section 9. COMPENSATION. By resolution of the Board of Directors, those
directors who are not at the time active employees of the corporation may be
paid an annual retainer and a fixed sum for attendance at each meeting of the
Board of Directors. All directors may be
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reimbursed for expenses incurred in connection with their services. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 10. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action
taken unless the director's dissent shall be entered in the minutes of the
meeting or unless the director shall file a written dissent to such action
with the person acting as the Secretary of the meeting before the adjournment
thereof or shall forward such dissent by registered or certified mail to the
Secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director who voted in favor of such
action.
Section 11. INFORMAL ACTION BY DIRECTORS. Any action required to be
taken at a meeting of the directors, or any other action which may be taken at
a meeting of the directors, may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by all of the
directors entitled to vote with respect to the subject matter thereof.
Section 12. COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution or resolutions adopted by a majority of the Board of Directors,
designate from among its members an Executive Committee, Audit Committee,
Compensation Committee or other Committees, each consisting of two (2) or more
directors, and each of which, to the extent provided in any such resolution,
shall have all the authority of the Board, except as provided by law, the
Articles of Incorporation or these Bylaws. The Board of Directors may
designate one or more directors as alternate members of any such Committee who
may replace any absent member or members at any meeting of such Committee.
Each such Committee shall serve at the pleasure of the Board of Directors. It
shall keep minutes of its meetings and report the same to the Board.
ARTICLE IV. OFFICERS
Section 1. NUMBER. The officers of the corporation shall be a Chairman
of the Board, a President, one or more Senior Vice Presidents and one or more
Vice Presidents (the number thereof to be determined by the Board of
Directors), a Treasurer and a Secretary, and such other officers as the Board
of Directors may from time to time designate by resolution, each of whom shall
be elected by the Board of Directors. Any two or more offices may be held by
the same person. In its discretion, the Board of Directors may delegate the
powers or duties of any officer to any other officer or agents,
notwithstanding any provision of these Bylaws, and the Board of Directors may
leave unfilled for any such period as it may fix, any office except those of
Chairman of the Board, President, Vice President-Finance, Treasurer and
Secretary.
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Section 2. ELECTION AND TERM OF OFFICE. The officers of the corporation
to be elected by the Board of Directors shall be elected annually by the Board
of Directors at the first meeting of the Board of Directors held after each
annual meeting of the shareholders. If the election of officers shall not be
held at such meeting, such election shall be held as soon thereafter as
conveniently may be. Each officer shall hold office until such officer's
successor shall have been duly elected or until death or until such officer
shall resign or shall have been removed in the manner hereinafter provided.
Section 3. REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the corporation would be served thereby, but
such removal shall be without prejudice to the contract rights, if any, of the
person so removed.
Section 4. VACANCIES. A vacancy in the office of Chairman of the Board
or President because of death, resignation, removal, disqualification or
otherwise, may be filled only by the Board of Directors for the unexpired
portion of the term. A vacancy in any other office may be filled either by the
Chairman of the Board or, after consultation with the Chairman of the Board,
by the President.
Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board, subject to
the control of the Board of Directors, and in conjunction with the President,
shall in general supervise and control all of the business, policies and
affairs of the corporation and all other officers of the corporation. The
Chairman of the Board shall, when present, preside at all meetings of the
shareholders and of the Board of Directors. The Chairman of the Board shall
perform such other duties as may be prescribed by the Board of Directors from
time to time.
Section 6. PRESIDENT. The President, subject to the control of the
Board of Directors, and in conjunction with the Chairman of the Board, shall
in general supervise and control all of the business, policies and affairs of
the corporation and all other officers of the corporation. The President
shall perform such duties as may be prescribed by the Board of Directors from
time to time.
Section 7. SENIOR VICE PRESIDENTS AND VICE PRESIDENTS. Each corporate
Senior Vice President or Vice President shall perform such duties as may be
assigned by the Board of Directors, or the Chairman of the Board or the
President. A Senior Vice President or Vice President may be assigned the
operating authority for managing one or more operating units or service
operations of the corporation as established by the Board of Directors. Upon
assignment by the Board of Directors of operating authority for an operation
or service unit, such Senior Vice President or Vice President shall in general
supervise and control all of the business and affairs of such operation or
service unit, subject only to such supervision and direction as the
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Board of Directors, the Chairman of the Board or the President may provide.
Each Senior Vice President and Vice President shall be authorized to sign
contracts and other documents related to the corporation or to the operations
under such officer's supervision and control.
Section 10. VICE PRESIDENT-FINANCE. The Vice President-Finance shall be
the principal and chief finance officer of the corporation. In that
capacity, the Vice President-Finance shall keep and maintain, or cause to be
kept and maintained accurate, correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
the assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The Vice President-Finance shall deposit all
monies and other valuables in the name and to the credit of the corporation
with such depositories as may be designated by the Board of Directors. The
Vice President-Finance shall disburse the funds of the corporation as may be
ordered by the Board of Directors, shall render to the Chairman of the Board,
or President and or the Board of Directors, upon their request, an account of
the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed from time to time by the
Board of Directors, or the Chairman of the Board or the President.
Section 11. THE SECRETARY. The Secretary shall: (a) keep the minutes
of the shareholders, Board of Directors, and committees of the board meetings
in one or more books provided for that purpose; (b) see that all notices are
duly given in accordance with the provisions of these Bylaws or as required by
law; (c) be custodian of the corporate records and of the seal of the
corporation and see that the seal of the corporation is affixed to all
documents the execution of which on behalf of the corporation under its seal
is duly authorized; (d) keep a register of the post office address of each
shareholder which shall be furnished to the Secretary by such shareholder,
unless such register is maintained by the transfer agent or registrar of the
corporation; (e) have general charge of the stock transfer books of the
corporation; and (f) in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned by the
Board of Directors, or the Chairman of the Board or the President.
Section 12. THE TREASURER. The Treasurer shall: (a) have charge and
custody of and be responsible for all funds and securities of the corporation;
receive and give receipts for monies due and payable to the corporation from
any source whatsoever, and deposit all such monies in the name of the
corporation in such banks, trust companies or other depositories as shall be
selected in accordance with the provisions of Article VI of these Bylaws; (b)
be responsible for filing all required tax returns, and (c) in general perform
all of the duties incident to the office of treasurer and such other duties as
from time to time may be assigned by the Board of Directors, or the Chairman
of the Board, or the President or the Vice President-Finance.
Section 13. THE CONTROLLER. The Controller shall maintain adequate
records showing the financial condition of the corporation and the results of
its operations by established
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accounting periods, and see that adequate audits thereof are regularly and
currently made. The Controller shall perform such other duties as from time
to time may be assigned by the Board of Directors, or the Chairman of the
Board, or the President or the Vice President-Finance.
Section 14. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
Assistant Secretaries, when authorized by the Board of Directors, may sign
with the Chairman of the Board or the President or a Vice President
certificates for shares of the corporation, the issuance of which shall have
been authorized by a resolution of the Board of Directors. The Assistant
Secretaries, in general, shall perform such duties as shall be assigned to
them by the Secretary, or by the Chairman of the Board, the President, or the
Board of Directors. The Assistant Treasurers, in general, shall perform such
duties as shall be assigned to them by the Treasurer or by the Chairman of the
Board, or the President, or the Board of Directors or the Vice President-
Finance.
Section 15. OTHER ASSISTANT AND ACTING OFFICERS. The Board of Directors
or the Chairman of the Board or, after consultation with the Chairman of the
Board, the President shall have the power to appoint any person to act as
assistant to any officer, or to perform the duties of such officer whenever
for any reason it is impracticable for such officer to act personally, and
such assistant or acting officer so appointed by the Chairman of the Board,
the Board of Directors or, after consultation with the Chairman of the Board,
by the President, shall have the power to perform all the duties of the office
to which the person is so appointed to be assistant, or as to which the person
is so appointed to act, except as such power may be otherwise defined or
restricted by the Board of Directors.
Section 16. SALARIES. The salaries of the officers shall be fixed from
time to time by the Board of Directors or by such committee or superior
officer as may be designated by the Board of Directors, and no officer shall
be prevented from receiving such salary by reason of also being a director of
the corporation.
ARTICLE V. CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Chairman of the Board or the President may at
any time execute and deliver any deeds, mortgages or bonds which the Board of
Directors has authorized to be executed and delivered and may at any time
execute and deliver any lease, bid, application, note, guarantee, consent,
election, notice or other contract, document or instrument as may be required
in the ordinary course and scope of the business of the corporation or as may
be specifically authorized by the Board of Directors. The Chairman of the
Board or the President may in writing delegate the foregoing authority, and
may delegate authority to redelegate such authority, to any other officer or
officers, agent or agents, or other persons and the authority so delegated may
be general or confined to specific instances. The Board of Directors may
authorize any other officer or officers, agent or agents or other persons to
execute and deliver any other
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contracts, documents or instruments and such authority may be general or
confined to specific instances.
Section 2. LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the Board of Directors. Such authority
may be general or confined to specific instances.
Section 3. EVIDENCES OF INDEBTEDNESS. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness
issued in the name of the corporation, shall be signed by such officer or
officers, agent or agents of the corporation and in such manner as shall from
time to time be determined by resolution of the Board of Directors.
Section 4. DEPOSITS. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies or other depositories as the Board of
Directors, or committees or officers to whom the Board of Directors have
delegated such authority may select.
ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 1. CERTIFICATES FOR SHARES. Certificates for shares of capital
stock of the corporation shall be in such form as shall be determined by the
Board of Directors. They shall be issued in consecutive order and shall be
numbered in the order of their issue and shall be signed by the Chairman of
the Board or the President or a Vice President and the Secretary or an
Assistant Secretary, provided, however, that if any stock certificate is
countersigned by a transfer agent, other than the corporation or its employee,
or by a registrar, other than the corporation or its employee, any other
signature, including that of any such officer, on such certificate may be a
facsimile, engraved, stamped or printed. In case any officer or agent who has
signed or whose facsimile signature shall be used on any stock certificate
shall cease to be such officer or agent of the corporation because of death,
resignation or otherwise before such stock certificate shall have been
delivered by the corporation, such stock certificate may nevertheless be
issued and delivered as though the person or agent who signed the certificate
or whose facsimile signature shall have been used thereon had not ceased to be
such officer or agent of the corporation.
Section 2. TRANSFER OF SHARES. Upon surrender to the corporation or its
transfer agent of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall
be the duty of the corporation to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction on its
books.
Section 3. REGISTERED SHAREHOLDERS. The corporation shall be entitled
to treat
12
<PAGE>
the holder of record of any share or shares of stock as the holder in
fact thereof and, accordingly, shall not be bound to recognize any equitable
claim or other interest in such share or shares on the part of any other
person, whether or not it shall have express or other notice thereof, except
as otherwise provided by the laws of Iowa.
Section 4. LOST CERTIFICATES. Upon the making of an affidavit that a
certificate has been lost or destroyed, the Board of Directors may direct that
a new certificate be issued to the person alleging the loss or destruction of
such certificate. When authorizing such issuance of a new certificate, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost or destroyed certificate or
such owner's legal representative to give the corporation a bond in such sums
as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost or
destroyed.
Section 5. STOCK REGULATIONS. The Board of Directors shall have the
power and authority to make all such further rules and regulations not
inconsistent with the statutes of Iowa as they may deem expedient concerning
the issue, transfer and registration of certificates representing shares of
the corporation.
ARTICLE VII. FISCAL YEAR
The fiscal year of the corporation shall be determined by the Board of
Directors.
ARTICLE VIII. DIVIDENDS
The Board of Directors may from time to time declare, and the corporation
may pay, dividends on its outstanding shares in the manner and upon the terms
and conditions provided by law and its Articles of Incorporation.
ARTICLE IX. SEAL
The Board of Directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the corporation
and the state of incorporation and the words, "Corporate Seal."
ARTICLE X. WAIVER OF NOTICE
Whenever any notice is required to be given to any shareholder or
director of the corporation under the provisions of the Articles of
Incorporation or under the provisions of the Iowa Business Corporations Act, a
waiver thereof in writing, signed by the person or persons
13
<PAGE>
entitled to such notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice.
ARTICLE XI. INDEMNIFICATION OF DIRECTORS, OFFICERS OR EMPLOYEES
Section 1. RIGHT TO INDEMNIFICATION. Each person who was or is a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director,
officer or employee of the corporation or is or was serving at the request of
the corporation as director, officer or employee of another corporation or of
a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans, shall be indemnified and held harmless
by the corporation to the fullest extent consistent with the laws of Iowa as
the same now or may hereafter exist (but, in the case of any change, only to
the extent that such change authorizes the corporation to provide broader
indemnification rights than said law permitted the corporation to provide
prior to such change) against all costs, charges, expenses, liabilities and
losses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith and such indemnification shall
continue as to a person who has ceased to be a director, officer or employee
and shall inure to the benefit of the heirs, executors and administrators of
such person; provided, however, that the right to indemnification conferred in
this Section shall be conditioned upon the corporation being afforded the
opportunity to participate directly on behalf of such person in such
proceeding and any settlement discussions relating thereto. The right to
indemnification conferred in this Section shall be a contract right and shall,
except with respect to an action or proceeding against the corporation by an
employee who is neither a director nor an officer of the corporation, include
the right to be paid by the corporation the expenses incurred in defending any
such proceeding in advance of its final disposition upon receipt by the
corporation of an undertaking, by or on behalf of such director, officer or
employee to repay all amounts so advanced if it shall ultimately be determined
that the director, officer or employee is not entitled to be indemnified under
this Section or otherwise.
Section 2. RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 1
of this Article is not paid in full by the corporation within thirty days
after a written claim has been received by the corporation, the claimant may
at any time thereafter bring suit against the corporation to recover the
unpaid amount of the claim and, if successful in whole or in part, the
claimant shall also be entitled to be paid the expense of prosecuting such
claim. It shall be a defense to any action (other than an action brought to
enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking has been tendered to
the corporation) that the claimant has failed to meet a standard of conduct
which makes it permissible under Iowa law for the corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall
be on the corporation. Neither the
14
<PAGE>
failure of the corporation (including its Board of Directors, independent
legal counsel, or its shareholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is
permissible in the circumstances because such person has met such standard of
conduct, nor an actual determination by the corporation (including its Board
of Directors, independent legal counsel, or its shareholders) that the
claimant has not met such standard of conduct, nor the termination of any
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall create a presumption that the claimant has
failed to meet the required standard of conduct.
Section 3. NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
provision of the Articles of Incorporation, bylaw, agreement, vote of
shareholders or disinterested directors or otherwise.
Section 4. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such
expense, liability or loss under Iowa law.
Section 5. EXPENSES AS A WITNESS. To the extent that any director,
officer or employee of the corporation is by reason of such position, or a
position with another entity at the request of the corporation, a witness in
any proceeding, such person shall be reimbursed for all costs and expenses
actually and reasonably incurred in connection therewith.
Section 6. EFFECT OF AMENDMENT. Any amendment, repeal or modification
of any provision of this Article by the shareholders or the directors of the
corporation shall not adversely affect any right or protection of a director,
officer or employee of the corporation existing at the time of such amendment,
repeal or modification.
Section 7. SEVERABILITY. In the event any one or more of the
provisions contained in this Article shall, for any reason, be held to be
invalid, illegal or unenforceable, such invalidity, illegality, or
unenforceability shall not affect any other provisions of this Article.
ARTICLE XII. AMENDMENTS
These Bylaws may be altered, amended or repealed and new Bylaws may be
adopted by the Board of Directors at any regular or special meeting of the
Board of Directors, or by the affirmative vote of the holders of not less than
65% of the oustanding shares of voting stock of the corporation.
15
<PAGE>
EXHIBIT 4.1
NO PAR VALUE [LOGO OF TELEGROUP, INC.] NO PAR VALUE
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE SEE REVERSE FOR
LAWS OF THE STATE OF IOWA CERTAIN DEFINITIONS
TELEGROUP, INC. CUSIP
COMMON STOCK
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, WITHOUT PAR VALUE, OF
TELEGROUP, INC.
("Corporation") transferable on the books of the Corporation by the holder
hereof, in person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed or accompanied by the proper assignment. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
President Countersigned and Registered:
FIRST CHICAGO TRUST COMPANY
[CORPORATE SEAL] OF NEW YORK
Transfer Agent and Registrar,
BY
Secretary Authorized Signature
<PAGE>
[REVERSE OF CERTIFICATE]
TELEGROUP, INC.
The Articles of Incorporation, as amended, of TELEGROUP, INC. on file in
the office of the Secretary of State of Iowa set forth a full statement of (a)
all of the designations, preferences, limitations and relative rights of the
shares of each class of shares authorized to be issued, (b) the authority of
the Board of Directors to fix and determine the relative rights and
preferences of the shares of preferred stock which the corporation is
authorized to issue and (c) the denial to shareholders of preemptive rights to
acquire unissued or treasury shares of the Corporation. The Corporation will
furnish a copy of such statement to the record holder of this certificate
without charge on written request to the Corporation at its principal place of
business or registered office.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the ----- ------
entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act
in common --------------------------
(State)
Additional abbreviations may also be use though not in the above list.
For value received, hereby sell, assign and
-------------------------
Please insert social security or
other identifying number of assignee
------------------------------------
transfer unto / /
------------------------------------------------------------
- ---------------------------------------------------------------------------
(please print or typewrite name and address including postal zip code of
assignee)
- ----------------------------------------------------------------------------
Shares of the capital stock represented by the within
- ------------------
Certificate, and do hereby irrevocably constitute and appoint ------------------
- --------------------------------------------------------------------------------
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated,
-----------------------
-------------------------------------------------------------
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MARCUS & THOMPSON, P.C.]
June 17, 1997
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
Re: Issuance of Shares of Common Stock by Telegroup, Inc.
-----------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Telegroup, Inc. (the "Company") in
connection with certain matters arising out of the Company's filing pursuant
to the Securities Act of 1933, as amended (the "Act"), of a registration
statement on Form S-1, File No. 333-25065 (the "Registration Statement"),
relating to (i) the issuance of 7,200,000 shares of common stock, no par value
per share (the "Common Stock"), of the Company and (ii) the possible sale of
up to 1,080,000 shares of Common Stock by certain shareholders of the Company
pursuant to the exercise of an over-allotment option by the underwriters and
managers. You have requested our opinion as to certain matters with respect
to the issuance of the Common Stock.
We have examined such corporate records of the Company, including its
Second Restated Articles of Incorporation and its Amended and Restated Bylaws
approved by the Board of Directors and stockholders effective upon
consummation of the Company's public offering, and resolutions of the Board of
Directors and stockholders of the Company as well as such other documents as
we deem necessary for rendering the opinion hereinafter expressed.
On the basis of the foregoing, we are of the opinion that the Common
Stock has been duly authorized by the Board of Directors of the Company and
the Company's stockholders, and when issued and sold as described in the
Registration Statement, and upon filing the Second Restated Articles of
Incorporation with the Secretary of State of Iowa, the Common Stock will be
legally issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration
<PAGE>
Telegroup, Inc.
June 17, 1997
Page 2
Statement and to the use of the name of our firm therein under the caption
"Legal Matters" in the Prospectus filed as a part of the Registration
Statement.
Sincerely yours,
MARCUS & THOMPSON, P.C.
By: /s/ Jay B. Marcus
------------------------------
<PAGE>
EXHIBIT 10.1.1
FIRST AMENDMENT TO
LOAN AGREEMENT
June 6, 1997
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
Gentlemen:
Reference is made to that certain Loan Agreement ("Loan Agreement"),
dated as of March 28, 1997, between Telegroup, Inc. ("Telegroup") and American
National Bank and Trust Company of Chicago ("Bank"). Unless defined herein,
capitalized terms used herein shall have the meaning provided to such terms in
the Loan Agreement.
Telegroup has requested that Bank amend the Loan Agreement in certain
respects and Bank has agreed to do so in the manner described herein and
subject to the terms hereof, as follows.
A. Amendments. The Loan Agreement is hereby amended as of the date
hereof as follows:
1. The term "Termination Date", as defined in Section 1.1 of the Loan
Agreement, is hereby amended to mean June 30, 1998.
2. The term "Revolving Note" , as defined in Section 2.2 of the Loan
Agreement, is hereby amended to mean the First Amended and Restated
Revolving Loan Promissory Note, dated as of the date hereof, made by
Telegroup, Inc. in favor of the Bank.
B. Effectiveness. The amendments described herein shall be effective
upon delivery to Bank of the following fully executed agreements and
instruments, all in form and substance satisfactory to Bank in its sole
discretion:
1. This First Amendment to Loan Agreement;
2. The First Amended and Restated Revolving Loan Promissory Note; and
3. Secretary's Certificate as to corporate resolutions evidencing the
approval of Telegroup, Inc.'s board of directors of the execution
of all instruments and documents described herein.
<PAGE>
C. Counterparts. This First Amendment to Loan Agreement may be executed
in counterparts, each of which shall be deemed an original, but all of which
counterparts taken together shall constitute one and the same instrument.
Very truly yours,
AMERICAN NATIONAL BANK AND TRUST COMPANY OF
CHICAGO
By:
------------------------------------
Its:
------------------------------------
ACKNOWLEDGED AND AGREED TO
AS OF THIS 6TH DAY OF JUNE, 1997.
TELEGROUP, INC.
By:
------------------------------
Its:
-----------------------------
<PAGE>
EXHIBIT 10.2
FORM OF TELEGROUP, INC.
AMENDED AND RESTATED 1996 STOCK OPTION PLAN
1. PURPOSE
-------
This Amended and Restated 1996 Stock Option Plan for Telegroup, Inc.
(the "Company") is intended to provide incentive to directors, officers, key
employees, and agents of the Company and its Subsidiaries by providing those
persons with opportunities to purchase shares of the Company's Common Stock
under (a) Incentive Stock Options and (b) other stock options.
2. DEFINITIONS
-----------
Except as otherwise expressly provided herein or unless the context
otherwise requires, as used in this Plan, the following words and phrases
shall have the meanings set forth in this Section 2.
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(c) "COMMON STOCK" shall mean the Common Stock, no par value, of the
Company.
(d) "COMPANY" shall mean Telegroup, Inc., the employer which has
established this Plan.
(e) "DISINTERESTED" shall mean disinterested within the meaning of
any applicable regulatory requirements, including Rule 16b-3, as
amended from time to time, as promulgated by the Securities and
Exchange Commission pursuant to the Securities Exchange Act of
1934, as amended from time to time.
(f) "FAIR MARKET VALUE" per share as of a particular date shall mean
(i) the closing sales price per share of Common Stock on the
principal national securities exchange, if any, on which the
Common Stock shall then be listed for the last preceding date on
which there was a sale of such Common Stock on such exchange, or
(ii) if the Common Stock is not then listed on a national
securities exchange, the last sales price per share of Common
Stock entered on a national inter-dealer quotation system for the
last preceding date on which there was a sale of such Common
Stock on such national inter-dealer quotation system, or (iii) if
no closing or last sales price per share of Common Stock is
entered on a national inter-dealer quotation system, the average
of the closing bid and asked prices for the Common Stock in the
over-the-counter market for the last preceding date on which
there was a quotation for such Common Stock in such market or
(iv) if no price can be determined under the preceding
alternatives, then the price per share as determined by the
Committee in good faith.
<PAGE>
(g) "INCENTIVE STOCK OPTION" shall mean one or more options to
purchase Common Stock which, at the time such options are granted
under this Plan or any other such plan of the Company, qualify as
incentive stock options under Section 422 of the Code.
(h) "IPO" shall mean the initial public offering of the Company's
Common Stock.
(i) "NON-INCENTIVE STOCK OPTION" shall mean any option or options
that are not Incentive Stock Options.
(j) "OPTION" shall mean any option, including any Incentive Stock
Option or other option issued pursuant to this Plan.
(k) "OPTIONEE" shall mean any person to whom an Option is granted
under this Plan.
(l) "PARENT" shall mean any corporation (other than the Company) in
an unbroken chain of corporations ending with the Company if, at
the time of granting an Option, each of the corporations other
than the Company owns stock possessing fifty-one percent (51%) or
more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
(m) "PLAN" shall mean this Amended and Restated 1996 Stock Option
Plan.
(n) "RELIANCE PERIOD TERMINATION DATE" shall mean the date that is
the earlier of:
(1) The date of expiration or termination of the Plan;
(2) The date of any material modification of the Plan,
within the meaning of Treasury Regulation section
1.162-27(h)(1)(iii);
(3) The first date as of which all Options provided
for under the Plan have been issued; and
(4) The date of the first meeting of shareholders of
the Company at which Directors are to be elected
that occurs after the year 2000.
(o) "SUBSIDIARY" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company
if, at the time of granting an Option, each of the corporations
other than the last corporation in the unbroken chain owns stock
possessing fifty-one percent (51%) or more of the total combined
voting power of all classes of stock in one of the other
corporations in such chain.
<PAGE>
(p) "TEN PERCENT SHAREHOLDER" shall mean an Optionee who, at the time
an Option is granted, owns directly or indirectly (within the
meaning of Section 424(d) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all
classes of stock of the Company, its Parent or a Subsidiary.
3. GENERAL ADMINISTRATION
----------------------
(a) The Plan shall be administered by the Compensation Committee
(the "Committee"), consisting of not less than two members of the Board. From
and after the consummation of the IPO, no person may serve as a member of the
Committee unless such person is both a Disinterested person as well as an
"outside director" within the meaning of Treasury Regulation section
1.162-27(e)(3)(i).
(b) The Committee shall have the authority in its discretion, subject
to the terms and conditions hereof, to administer this Plan and to exercise
all the powers and authorities either specifically granted to it hereunder or
that are necessary or that are advisable in the administration of the Plan,
including, without limitation, the authority to grant Options; to determine
the purchase price of shares of Common Stock covered by each Option (the
"OPTION PRICE"); to determine the persons to whom, and the time or times at
which, Options shall be granted; to determine the number of shares of Common
Stock to be covered by each Option; to interpret the Plan; to prescribe, amend
and rescind rules and regulations relating to the Plan; and to determine the
terms and provisions of the Option agreements (which need not be identical)
entered into in connection with Options granted under the Plan ("OPTION
AGREEMENTS").
(c) The Board shall fill all vacancies, however caused, in the
Committee. The Board may from time to time appoint additional members to the
Committee and may at any time, under the terms and conditions of the Company's
Bylaws, remove one or more Committee members and substitute others.
(d) No member of the Board or Committee shall be liable for any
action taken or determination made in good faith with respect to this Plan or
any Option granted hereunder.
4. RESTRICTIONS ON GRANTS TO COMMITTEE MEMBERS
-------------------------------------------
From and after the IPO, directors serving on the Committee are not
eligible to receive Options pursuant to the Plan.
5. GRANTING OF OPTIONS
-------------------
Options may be granted under this Plan at any time prior to April 1,
2007.
<PAGE>
6. ELIGIBILITY
-----------
(a) Subject to Section 4, Options may be granted to any director,
officer, key employee or agent of the Company or any Subsidiary, however,
incentive stock options will be available only to employees of the Company.
In determining from time to time the directors, officers, employees and agents
to whom Options shall be granted and the number of shares of Common Stock to
be covered by each Option, the Committee shall consider the duties of the
respective directors, officers, employees and agents, their present and
potential contributions to the success of the Company and its Subsidiaries and
such other factors as the Committee shall deem relevant in connection with
accomplishing the purposes of the Plan.
(b) At the time each Option is granted under the Plan the Committee
shall determine whether such Option is to be designated as an Incentive Stock
Option. Incentive Stock Options shall not be granted to a director who is not
an employee of the Company.
(c) An Option designated an Incentive Stock Option can, prior to its
exercise, be changed to a non-incentive Option if the Optionee consents to
amend his Option Agreement to provide that the exercise period of such Option
will be governed by Section 8(e)(2) hereof.
7. STOCK
-----
(a) The stock subject to the Options shall be shares of Common Stock.
Such shares may, in whole or in part, be authorized but unissued shares
contributed directly by the Company or shares which shall have been or which
may be acquired by the Company. The aggregate number of shares of Common
Stock for which Options may be granted from time to time under this Plan shall
be four (4) million shares (determined after the Company's planned split in
connection with the IPO), subject to adjustment as provided in Section 8(h)
hereof. The maximum number of shares of Common Stock for which any one person
may be granted Options under the Plan is one million eight-hundred
seventy-five thousand (1.875 million) shares (determined after the Company's
planned split in connection with the IPO), subject to adjustment as provided
in Section 8(h) hereof.
(b) If any outstanding Option under the Plan for any reason expires
or is terminated without having been exercised in full, the shares of Common
Stock allocable to the unexercised portion of such Option shall (unless this
Plan shall have been terminated) become available for subsequent grants of
Options hereunder.
8. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted pursuant to this Plan shall be evidenced by one or
more Option Agreements in such forms as the Committee may from time to time
approve. Options shall comply with and be subject to the following terms and
conditions:
<PAGE>
(a) INCENTIVE STOCK OPTION PRICE. Each Incentive Stock Option shall
state the Option Price, which, shall be not less than one hundred percent
(100%) of the Fair Market Value of the shares of Common Stock on the date of
grant of the Option; provided, however, in the case of an Incentive Stock
Option granted to a Ten Percent Shareholder, the Option Price shall not be
less than one hundred ten percent (110%) of such Fair Market Value. The
Option Price shall be subject to adjustment as provided in Section 8(h)
hereof. The date on which the Committee adopts a resolution expressly
granting an Option shall be considered the day on which such Option is
granted.
(b) NON-INCENTIVE STOCK OPTION PRICE. Each Option that is not an
Incentive Stock Option shall state the Option Price. In the case of Non-
Incentive Stock Options granted on or before the Reliance Period Termination
Date, the Option Price shall not be less than fifty percent (50%) of the Fair
Market Value of the shares of Common Stock on the date of grant of the Option.
In the case of Non-Incentive Stock Options granted after the Reliance Period
Termination Date, the Option Price shall not be less than one hundred percent
(100%) of the Fair Market Value of the shares of Common Stock on the date of
grant of the Option. The Option Price shall be subject to adjustment as provided
in Section 8(h) hereof. The date on which the Committee adopts a resolution
expressly granting an Option shall be considered the day on which such Option is
granted.
(c) RESTRICTIONS. Any Common Stock issued under this Plan may
contain restrictions and limitations including, but not limited to,
limitations on transferability that may constitute substantial risks of
forfeiture, as the Committee may determine.
(d) VALUE OF SHARES. Options may be granted to any eligible person
for shares of Common Stock of any value, provided that the aggregate Fair
Market Value (determined at the time the Option is granted) of the Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by the Optionee during any calendar year (under all the plans of
the Company, its Parent and its Subsidiaries) shall not exceed $100,000.
(e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in
full, at the time of exercise, in cash or, with the approval of the Committee,
in shares of Common Stock having a Fair Market Value in the aggregate equal to
such Option Price or in a combination of cash and such shares.
<PAGE>
(f) TERM AND EXERCISE OF OPTIONS.
-----------------------------
(1) INCENTIVE STOCK OPTIONS. Incentive Stock Options shall
be exercisable over the exercise period specified by the Committee in an
Option Agreement, but in no event shall such period exceed ten (10) years from
the date of the grant of each such Incentive Stock Option; provided, however,
that in the case of an Incentive Stock Option granted to a Ten Percent
Shareholder, the exercise period shall not exceed five (5) years from the date
such Option is granted. An Incentive Stock Option may be exercised, as to any
or all full shares of Common Stock as to which the Incentive Stock Option has
become exercisable, by giving written notice of such exercise to the
Committee; provided, that an Incentive Stock Option may not be exercised at
any one (1) time for less than one hundred (100) shares of Common Stock (or
such number of shares as to which the Incentive Stock Option is then
exercisable if such number of shares is less than 100).
(2) NON-INCENTIVE STOCK OPTIONS. Options which have not been
designated by the Committee as Incentive Stock Options shall be exercisable
over a period of ten (10) years.
<PAGE>
(g) NONTRANSFERABILITY OF OPTIONS. Options granted under this Plan
are not transferable other than by will or by the laws of descent and
distribution, and, during Optionee's lifetime, Options may be exercised only
by the Optionee.
(h) Effect of Certain Changes.
(1) If there is any change in the number of shares of
Common Stock through the declaration of stock dividends,
recapitalization resulting in stock splits, or combinations or
exchanges of such shares, then the number of shares of Common
Stock available for Options, the number of such shares covered by
outstanding Options, and the Option Price of such Options shall
be proportionately adjusted to reflect any increase or decrease
in the number of issued shares of Common Stock; provided,
however, that any fractional shares resulting from such
adjustment shall be eliminated.
(2) In the event of a proposed dissolution or liquidation
of the Company, each Option granted under this Plan shall
terminate as of a date to be fixed by the Committee, provided,
however, that each Optionee shall have the right, immediately
prior to such termination, to exercise the Options as to all or
any part of the shares of Common Stock covered thereby, including
shares as to which such Options would not otherwise be
exercisable.
(3) In the event of any merger, consolidation or
reorganization of the Company, the Committee shall promptly make
an appropriate adjustment to the number and class of shares of
Common Stock available for Options, and to the amount and kind of
shares or other securities or property receivable upon exercise
of any outstanding Options after the effective date of such
transaction, and the price thereof (subject to the limitations of
Section 424 of the Code), to preserve each Optionee's propor
ionate interest therein and to preserve unchanged the aggregate
Option Price.
(4) In the event of a change in the Common Stock as
presently constituted, which is limited to a change of all of its
authorized shares without par value into the same number of
shares with a par value or, if such shares have a par value, then
with a different par value, the shares resulting from any such
change shall be deemed to be Common Stock within the meaning of
the Plan.
<PAGE>
(5) To the extent that the foregoing adjustments relate
to stock or securities of the Company, such adjustments shall be
made by the Committee, whose determination in that respect shall
be final, binding and conclusive, provided that each Option
granted pursuant to this Plan and designated an Incentive Stock
Option shall not be adjusted in a manner that causes the Option
to fail to continue to qualify as an Incentive Stock Option
within the meaning of Section 422 of the Code.
(6) Except as expressly provided in this Section 8(h), the
Optionee shall have no rights by reason of any subdivision or
consolidation of shares of stock of any class or the payment of
any stock dividend or any other increase or decrease in the
number of shares of stock of any class or by reason of any
dissolution, liquidation, merger, or consolidation, and any issue
by the Company of shares of stock of any class, or securities
convertible into or exchangeable for shares of stock of any
class, shall not affect, and no adjustment by reason thereof
shall be made with respect to, the number or Option Price of
shares of Common Stock subject to an Option. The grant of an
Option pursuant to this Plan shall not affect in any way the
right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or
business structure or to merge, consolidate, or dissolve,
liquidate, sell or transfer all or any part of its business or
assets.
(i) Rights as a Shareholder. An Optionee or a transferee of an
Option shall have no rights as a shareholder with respect to any shares
covered by an Option until the date of the issuance of a stock certificate to
such Optionee for such shares. No adjustments shall be made for dividends
(ordinary or extraordinary, whether in cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such stock certificate is issued, except as expressly provided in Section 8(h)
hereof.
(j) Other Provisions. The Option Agreements authorized under this
Plan shall contain such other provisions, including, without limitation, (i)
the imposition of restrictions upon the exercise of an Option and (ii) the
inclusion of any condition not inconsistent with such Option qualifying as an
Incentive Stock Option, as the Committee shall deem advisable, including
provisions with respect to compliance with federal and applicable state
securities laws.
9. Agreement by Optionee Regarding Withholding Taxes
-------------------------------------------------
(a) No later than the date of exercise of any Option granted
hereunder, the Optionee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state and/or
local taxes of any kind required by law to be withheld upon the exercise of
such Option, and
<PAGE>
(b) The Company shall, to the extent permitted or required by law,
have the right to deduct from any payment of any kind otherwise due to the
Optionee any federal, state and/or local taxes of any kind required by law to
be withheld upon the exercise of such Option.
10. Term of Plan
------------
Options may be granted pursuant to this Plan from time to time within a
period of ten (10) years from the date on which this Plan is adopted by the
Board, provided that no Options granted under this Plan shall become
exercisable unless and until this Plan shall have been approved by the
Company's shareholders.
11. Savings Clause
--------------
Notwithstanding any other provision hereof, this Plan is intended to
qualify as a plan pursuant to which Incentive Stock Options may be issued
under Section 422 of the Code. If this Plan or any provision of this Plan
shall be held to be invalid or to fail to meet the requirements of Section 422
of the Code or the regulations promulgated thereunder, such invalidity or
failure shall not affect the remaining parts of this Plan, but rather it shall
be construed and enforced as if the Plan or the affected provision thereof, as
the case may be, complied in all respects with the requirements of Section 422
of the Code.
12. Amendment and Termination of the Plan
-------------------------------------
The Committee may at any time and from time to time suspend, terminate,
modify or amend this Plan, provided that any amendment that would increase the
aggregate number of shares of Common Stock as to which Options may be granted
under this Plan or the maximum number that may be granted to any individual
person shall be subject to the approval of the holders of a majority of the
Common Stock issued and outstanding, except that any such increase or
modification that may result from adjustments authorized by Section 8(h)
hereof shall not require such approval. Except as provided in Section 8
hereof, no suspension, termination, modification or amendment of this Plan may
adversely affect any Option previously granted unless the written consent of
the Optionee is obtained.
Adopted by the Board of Directors on , 1997.
Attest:
-----------------------------
Secretary
<PAGE>
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
AGREEMENT made as of the execution date set forth below, by and between
TELEGROUP, INC. ("Employer"), an Iowa corporation with offices at 505 North
Third Street, Fairfield, Iowa, and JOHN LASS ("Employee") of 902 South Main
Street, Fairfield, Iowa 52556.
1. Employment. The Employer hereby employs Employee and Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. Term. Employment of the Employee hereunder shall commence on
January 1, 1997 and terminate on December 31, 1998. If neither party gives
notice of termination of the employment 60 days in advance of December 31,
1998, this Agreement shall continue after December 31, 1998 for a period of
six months. At the end of the six month period, and at the end of each
subsequent six month period, this Agreement shall continue if neither party
has given notice of termination 30 days prior to the end of the six month
period.
3. Duties. During the term hereof, the Employee shall hold the
office and perform the duties of Chief Operating Officer of the Employer,
subject to the Employee's responsibility to the Board of Directors of
Employer.
4. Base Compensation. For all services rendered by him and for all
covenants undertaken by the Employee pursuant to this Agreement, the Employer
shall pay and the Employee shall accept a base compensation at the rate of One
Hundred Sixty-Five Thousand Dollars ($165,000) per year, payable in
installments at such regular intervals as executives of Employer are paid.
5. Incentive Compensation. In addition to the base compensation, the
Employer and Employee shall, during the period of 90 days after the date of
this Agreement, negotiate specific performance criteria which, if fulfilled,
would result in additional incentive compensation to the Employee up to a
maximum compensation (including base compensation) of Two Hundred Fifty
Thousand Dollars ($250,000) per annum (i.e., in the event an agreement is
reached, the incentive compensation will entitle the Employee to a maximum of
$85,000 per annum in incentive compensation). Nothing herein shall obligate
either party to agree to any particular incentive compensation, but the
parties shall negotiate in good faith with a view to reaching agreement.
<PAGE>
6. Stock Options. Employee shall be granted the option to purchase
an aggregate of 25,000 shares of Class B common stock of Employer. The
options shall be automatically converted to options to purchase Class A common
stock (voting common stock) convertible upon the closing by the Employer of an
initial public offering which results in no less than $10,000,000 in capital
being raised by the Employer which shall be a gross amount prior to expenses
or commissions (hereinafter such offering is referred to as the "Initial
Public Offering"). In the event options have been exercised by the Employee
prior to the Initial Public Offering, Employee's shares of Class B common
stock shall be automatically converted to Class A common stock. The
Employer's options are more particularly described in this paragraph 6, (and
all references herein to common stock shall mean the non-voting Class B common
stock).
(a) Employee shall be granted the option to purchase 15,000 shares
of common stock of the Employer at a price of $7.20 per share, with these
options to vest and become exercisable as follows: In the event the Employee
is still employed by the Employer on July 1, 1997, options to purchase 5,000
shares of the common stock of the Employer shall vest in the Employee and
become exercisable; in the event the Employee is still employed by the
Employer at January 1, 1998, options with respect to an additional 5,000
shares of common stock of the Employer shall vest in the Employee and become
exercisable; and in the event the Employee is still employed by the Employer
at July 1, 1998, options with respect to an additional 5,000 shares of common
stock of the Employer shall vest in the Employee and become exercisable.
After the vesting of options, the Employee shall have the right to exercise
options with respect to those shares that shall have vested, all as set forth
in the stock option agreement attached hereto as Exhibit A.
(b) In addition to the stock options set forth in paragraph 6(a)
above (relating to 15,000 shares of stock), the Employee shall be granted
options to purchase a further 10,000 shares of common stock of the Employer at
the price of $7.20 per share, with such options to vest and be subject to the
contingencies set forth in this section 6(b):
(i) During the period between the date of this Agreement and
April 30, 1997, Employer and Employee shall negotiate in good faith with
respect to setting certain performance criteria which, if fulfilled, would
result in the Employee having the option to purchase a further 5,000 shares of
the common stock of the Employer, which shall vest in the Employee in the
event the criteria established by the parties shall have been fulfilled and in
the event Employee shall have continuously been an employee of the Company for
the two-year term of this Agreement ending at December 31, 1998.
(ii) In addition, the performance criteria to be negotiated as
set forth in paragraph 6(b) (i) shall include performance criteria for options
to purchase a further 5,000 shares of the common stock of the Employer which
shall vest at December 31, 1999, and shall be conditional on the Employee
having been continuously employed by Employer for the approximately three-year
period ending December 31, 1999, and the performance criteria for the vesting
of such options having been fulfilled.
<PAGE>
(c) The performance criteria referred to in this Agreement shall
be set forth in writing promptly following any agreement with respect to such
criteria. For purposes of this Agreement, the Employee shall be deemed to
have been continuously employed by the Employer during a period, provided that
his employment has not been terminated by the Employer, or he has not
terminated his employment voluntarily; provided, however, the Employee's
employment shall be deemed terminated as of the date of his death or his total
and permanent disability, which shall mean his inability to perform services
for the Employer for a continuous period of 120 days.
(d) Notwithstanding anything to the contrary in this Agreement,
in the event the Employer is acquired by or merged into any other entity, or
in the event there is, in a single transaction, a sale of more than 25% of the
outstanding capital stock of the Employer, then all options granted to
Employee pursuant to paragraph 6(a) and (b) above shall vest immediately in
Employee at the time of the merger, acquisition or change of stock ownership;
provided, however, that there shall be no accelerated vesting hereunder as a
result of (i) the contemplated private placement of capital stock of the
Employer pursuant to which the Employer is seeking $20 million from a party
introduced by Smith, Barney, or (ii) the sale of capital stock of Employer in
the Initial Public Offering. For purposes of determining whether more than
25% of the outstanding capital stock of Employer is sold, this criterion shall
be deemed to have been satisfied if after the transaction in question, the
owner or owner(s) who acquired capital stock in the new transaction own more
than 25% of the capital stock of the Employer, counting only the stock
acquired in such transaction.
(e) Employer agrees that upon the consummation of its Initial
Public Offering of capital stock, it will take necessary steps, including the
filing of form S-8, to register the stock of optionees such as Employee,
subject, however, to the approval and regulations of any underwriter (who
shall be entitled to nullify such registration rights for a particular
offering if it determines, in good faith, that such rights would adversely
affect the market for Employer's stock or the Employer's ability to register
and sell its stock). In the event that the registration contemplated in the
preceding sentence is not possible, Employer agrees that after its Initial
Public Offering of capital stock, it will grant Employee the right, subject to
the reasonable regulations of any underwriter (who shall be entitled to
nullify the piggyback registration rights for a particular offering if it
determines, in good faith, that such rights would adversely affect the
Employer's ability to register and sell its stock), piggyback registration
rights so Employee can exercise some or all of his options and thereafter
immediately sell the shares of common stock of the Employee underlying his
options in the public market. Such piggyback registrations shall require the
Employee to pay any underwriting commissions or discounts in connection with
the sale by the Employee of his shares, and no more than two piggyback
registrations shall be available to the Employee hereunder. Notwithstanding
the foregoing, in the event the option shares should become freely tradeable
pursuant to any exemption available under the rules and regulations of the
Securities and Exchange Commission, the piggyback registrations hereunder
<PAGE>
shall no longer be available to Employee. The Employee shall, in connection
with either of the above contemplated methods of registration, also comply
with the reasonable requirements of the Employer and all the rules and
regulations of the Securities and Exchange Commission.
7. Fringe Benefits. The Employee will be entitled to participate in
any disability, life, accident or health insurance plans which the Employer
has in effect from time to time for the benefit of its employees. In the
discretion of the Employer, Employee may participate in any profit sharing or
bonus plan of Employer.
8. Termination for Cause.
(a) In addition to the Employer's termination rights under paragraphs 9
and 10, the Employer may terminate this Agreement for "cause" which shall mean
only one or more of the following:
(i) Commission by the Employee of any fraudulent or
grossly negligent act which, in the good faith opinion of the Employer, would
then impair the Employee's ability to perform his duties;
(ii) The conviction of a felony (from which, through
lapse of time or otherwise, no successful appeal shall have been made) which,
in the good faith opinion of the Employer, would impair the Employee's ability
to perform his duties or injure Employer's business reputation;
(iii) The willful refusal to carry out reasonable
instructions of the Board of Directors of the Employer; provided, however,
that the Employee may only be discharged under this paragraph 8(a)iii after he
shall have been given 30 days' written notice setting forth his alleged
deficiencies and the Employee shall not, within such 30-day period, have
ceased or otherwise cured the activity or activities or omission constituting
the grounds for termination; or
(iv) The willful disclosure of any trade secrets or
confidential corporate information of the Employer to persons not authorized
to know the same, unless such disclosure is required by any law or court order
or similar process, or the use by the Employee for his personal benefit and
not the benefit of the Employer, of trade secrets or confidential corporate
information of the Employer.
(b) In addition to any other rights Employee may have under this
Agreement, Employee may terminate this Agreement for "cause" which shall mean
the following:
(i) A transfer of Employee by Employer to a job site at a
geographic location outside the Fairfield, Iowa area, which would require
Employee to move his permanent residence, or a change in the job
responsibilities of the Employee such that he is no longer a senior management
employee.
<PAGE>
9. Illness or Disability of Employee. If Employee is unable to
perform services for the Employer for a continuous period of more than 120
days, the Employee shall be deemed to be permanently and totally disabled,
whereupon Employer may terminate this Agreement upon not less than 30 days
written' notice to the Employee. In the event of such termination, all of the
Employer's obligations hereunder will terminate as of the end of the 120-day
period.
10. Death of Employee. This Agreement will terminate immediately
upon the death of the Employee. If Employee dies during the term of this
Agreement, the Employer will pay to the Employee's estate the compensation
that would otherwise be payable to the Employee through the end of the month
of the Employee's death.
11. Expenses. In addition to the compensation payable hereunder, the
Employee shall be entitled to be reimbursed, upon submission of appropriate
vouchers, for such reasonable out-of-pocket expenses as he may incur in the
performance of duties contemplated hereby.
12. Devotion to Business. Employee shall devote substantially full
time, attention and energies to the Employer's business during the period of
his employment.
13. Restrictive Covenants.
(a) Employee agrees that during his employment, and for a period
of one year thereafter, Employee will not, without the written consent of the
Employer, engage, directly or indirectly, either as principal, agent,
proprietor, director, officer, or employee, or participate in the ownership,
management, operation or control of any business competitive with the business
conducted by the Employer at the date of termination of this Agreement.
Nothing contained in the foregoing shall prevent the Employee from purchasing
securities of any corporation whose securities are regularly traded on any
national securities exchange, or in the over-the-counter market; provided that
such purchases shall not result in the Employee owing, directly or indirectly,
at any time, ten percent (10%) or more of the voting securities of any
corporation engaged in any business competitive to that carried on by Employer
at the termination of this Agreement. Any other provisions hereof
notwithstanding, this Section 13(a) shall not apply in the event that Employee
terminates this Agreement in a bona fide good faith exercise of his rights
under Section 8(b) hereof, or if Employee's employment is terminated by
Employer for any reason other than a termination by Employer for cause or
intentional misconduct of Employee.
(b) Employee agrees that he will not, during the term of this
Agreement and for a period of two years thereafter, directly or indirectly,
individually or on behalf of other persons, aid or endeavor to solicit or
induce (i) then remaining employees of the Employer or its affiliates, or
agents or coordinators, to leave their employment or independent contractor
positions to accept employment or positions with another person or entity, or
(ii) then customers of the Employer to purchase products or services then sold
or provided by the Employer from another person or entity.
<PAGE>
(c) Employee agrees that he will not, during the term of this
Agreement, or at any time thereafter, disclose to any unauthorized person,
firm or corporation, any trade secrets or other confidential business
information of the Employer or its affiliates. The Employee acknowledges and
agrees that trade secrets and other confidential information constitute the
Employer's sole and exclusive property. For purposes of this section, the term
"confidential information" refers to any information that is not generally
known to persons engaged in a business similar to that conducted or
contemplated by the Employer and includes, without limitation: customer lists,
sales agent lists, coordinator lists, research and development data, financial
records, operational manuals, software programs used in the Employer's
business, and any business plans. The term "confidential information,"
however, shall not include information (i) which is or becomes readily
available in public records or documents through a source not attributable to
Employee; (ii) which can be shown by Employee, by written documentation, to
have been known by him prior to its disclosure to him by Employer; or
(iii) which Employee is required to disclose under applicable laws or
regulations or in connection with judicial or administrative proceedings,
provided that to the extent possible Employee shall notify Employer if
compelled to disclose confidential information, prior to its disclosure, so as
to permit Employer an opportunity to seek a protective order or other
appropriate relief it deems prudent. Employee will return all documents and
other tangible evidence related to the Employer's trade secrets and any
confidential information on termination of the Employee's employment with or
without cause. No breach or alleged breach of this Agreement by the Employer
shall alter the obligations of the Employee set forth in this paragraph 13(c).
14. Right to Injunctive Relief and Other Remedies. Employee agrees
that the restrictions contained in paragraph 13 hereof are necessary for the
protection of Employer and any breach thereof may cause Employer irreparable
damage for which there may not be adequate remedy at law. Employee consents
in the event of such breach to the issuance of an injunction in favor of
Employer enjoining the breach of the aforesaid covenants by any Court of
competent jurisdiction. Employee agrees that the rights of Employer to obtain
an injunction shall not be considered a waiver of Employer's rights to assert
any other remedy it may have at law or in equity.
15. Automatic Modification. If any provision of this Agreement shall
be deemed to be invalid, it shall not affect the remaining provisions of this
Agreement. In addition, if any provision of this Agreement shall be deemed to
be invalid as it relates to the restrictive covenants in paragraph 13, such
provision shall be modified automatically
to provide for the maximum restriction on the Employee that is lawful as, for
example, by decreasing the geographical area or duration of any such
restriction.
16. Succession. This Agreement shall extend to and be binding upon
Employee and upon Employer, its successors and assigns.
<PAGE>
17. Entire Agreement. This Agreement contains the entire agreement
of the parties with respect to its subject matter, and no waiver, modification
or change of any of its provisions shall be valid unless in writing and signed
by the parties against whom such claimed waiver, modification or change is
sought to be enforced, and as to the Employer, no waiver, modification or
change shall be binding unless consented to in writing by Telegroup. This
Agreement shall be governed by Iowa law.
18. Waiver of Breach. The waiver of any breach of any term or
condition of this Agreement shall not be deemed to constitute a waiver of any
other term or condition of this Agreement.
19. Notices. All notices pursuant to this Agreement, shall be given
by personal delivery, or registered or certified mail, return receipt
requested, addressed to the parties hereto at the addresses set forth above,
or to such other address as may hereafter be specified by notice in writing in
the same manner by any party or parties.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year set forth below.
TELEGROUP, INC.
Execution date: By
November 29, 1996 -------------------------------------
EMPLOYEE:
----------------------------------------
John Lass
<PAGE>
EXHIBIT 10.11
FORM OF
EMPLOYMENT AGREEMENT
AGREEMENT made as of the execution date set forth below, by and between
TELEGROUP, INC. ("Employer"), an Iowa corporation with offices at 2098 Nutmeg
Avenue, Fairfield, Iowa 52556, and Ron Jackenthal ("Employee"), a resident of
Virginia, residing at 1314 Park Garden Lane, Reston, Virginia 20194.
1. EMPLOYMENT. The Employer hereby employs employee and Employee
hereby accepts employment upon the terms and conditions hereinafter set forth.
2. TERM. Subject to the remaining terms of this Agreement, including
but not limited to paragraphs 6 and 9, the Employment of the Employee
hereunder shall commence as soon as possible hereafter the date hereof and
terminate on the last day of April in the year 2000 (the "3-Year Period");
provided, however, that either party may, at any time, terminate this
Agreement on thirty (30) days' notice to the other.
3. DUTIES. During the term hereof, the Employee shall hold the office
and perform the duties of Vice President of North American Carrier Sales of
the Employer, subject to the Employee's responsibility to the Board of
Directors of Employer.
4. COMPENSATION.
(a) For all services rendered by him and for all covenants
undertaken by the Employee pursuant to this Agreement, the Employer shall pay
and the Employee shall accept performance-based compensation for each calendar
month as set forth below in paragraph 4(b); provided, however, that during the
term of this Agreement, the Employer guarantees that Employee shall earn not
less than $300,000 per year (the "Guaranteed Compensation"). The Guaranteed
Compensation shall be paid on a twice monthly basis (i.e., $12,500 shall be
paid twice each month) at the times employees of the Employer are regularly
paid their compensation, which is presently on the last day of the month and
the 15th of each month.
(b) The Employer shall pay the Employee the performance-based
compensation set forth in this paragraph 4(b), reduced, however, by any
Guaranteed Compensation paid to Employee pursuant to paragraph 4(a). If
earned by the Employee, the performance-based compensation shall be paid each
month on the 15th of the month (or on the first business day thereafter if the
15th shall be a weekend of holiday) with respect to the Contribution Dollars
derived in the previous calendar month. The performance-based compensation
shall be 15% (fifteen percent) of the Contribution Dollars, using the
following definitions:
Net Collections The gross collections each month from all North
American switch-based carriers and switch-based
and switchless resellers ("Carrier Customers")
<PAGE>
for all wholesale carrier services provided by
Employer whether services are provided in North
America or elsewhere (including collections from
all existing Carrier Customers), reduced by
refunds.
Base Sales Cost The sum of the actual carrier charges to Employer for
the Net Collections, plus $.01 per minute.
Program Budget The sums of the monthly actual expenditures directly
allocable to the North American Carrier Sales office
managed by Employee and the actual home office
Carrier Services Department expenditures reasonably
allocable to the servicing of Carrier Customers,
including but not necessarily limited to rent,
postage, utilities, phone, personnel expenses,
travel, entertainment, and promotion.
Bad Debt Allowance 2% of the Net Collections for the first six months of
this Agreement, then 1% thereafter subject, however,
to reasonable increases or decreases at Telegroup's
sole discretion after the first six months of this
Agreement to reflect the actual bad debt recovery
allocable to Carrier Customers, but in no event shall
the Bad Debt Allowance exceed 3%.
Contribution Dollars Net Collections minus Base Sales Cost minus Program
Budget minus Bad Debt Allowance.
(c) In the event carrier services are provided to Carrier Customers
at Employer's international locations, Employee shall be compensated as set
forth in paragraph 4(b) above, reduced, however, by any compensation or fees
paid by Employer or its affiliates to Employer's or affiliates' foreign agents
and/or employees provided that Employee shall only be paid for such services
provided to Carrier Customers if the Carrier Customer's home office and center
of decision-making is in North America. If the Carrier Customer's home office or
center of decision-making in not in North America, any compensation payable to
Employee shall be determined by Employer in good faith on a case by case basis
taking into account Employee's contribution to generating such revenues.
5. BUDGET FOR SAN FRANCISCO OFFICE.
(a) The Employer shall provide support for the Employee's duties
hereunder by paying budget expenses and all other approved expenses for the
San Francisco office in an amount determined to be appropriate by Employer and
by providing reasonable support from Telegroup's home office in Iowa.
Employer shall, from time to time, in good faith consider adding carrier
connection points to support Employee's sales efforts, but the decision to add
2
<PAGE>
such connection points shall be based on numerous factors, and is in the
discretion of Employer. Initially, however, it is anticipated that two
additional points-of-presence or connection points will be established in the
Southeastern U.S. and the Midwest.
(b) The expenses within the budgeted amount shall be paid by
Employer, and be subject to Employer's approval. Such expenses shall include
office rent, trade show participation, employee expenses of sales and support
personnel working under Employee's supervision, and reasonable travel and
entertainment. Subject to ongoing review and amendment by Employer,
following the completion of a successful public offering by the Employer, it
is contemplated that the budget will be approximately $1.0 million and that
such budget will thereafter increase. However, the actual budget and expenses
for the San Francisco office will be based on numerous factors, and are
understood to be solely in the Employer's discretion. Employer shall use its
reasonable efforts to make options to purchase up to 1,000 shares of common
stock available to such key employees in the San Francisco office as are
mutually determined by Employer and Employee, it being understood that the
terms and conditions of such options shall be determined at the sole
discretion of Employer.
(c) Employer understands that the Employer's business of providing
wholesale carrier services to Carrier Customers must be regulated by Employer
in a manner to prevent excessive bad debts or excessive expenses attributable
to the San Francisco office. Accordingly, from time to time, Employer may
impose various restrictions on the contracts with Carrier Customers designed
to minimize the occurrence of bad debts or various restrictions on the
activities of the San Francisco office, and such restrictions may conflict
with Employee's objective of increasing the Contribution Dollars. For
purposes of creating a bad debt pool to cover any bad debts from existing
Carrier Customers, the amount in the bad debt pool as of the date of commence
of Employee's employment shall be equal to 2% of the total sales to Carrier
Customers during the period of September 1, 1995 through April 30, 1997. This
imputed bad debt pool plus the Bad Debt Allowance shall be applied to cover
losses due to bad debt from Carrier Customers, present and future. Employee
acknowledges that a bad debt experience in excess of the foregoing bad debt
pool and Allowance are among the circumstances that would result in
restrictions on the contracts of Carrier Customers to minimize the bad debt
experience of Employer.
6. STOCK OPTIONS.
(a) Employee is hereby granted the option to purchase an aggregate
of 25,000 shares of Class B common stock of Employer. The exercise price for
all options hereby granted is the fair market value, which the parties agree
shall be as follows:
(i) In the event the effective date of the Employer's
"Initial Public Offering" (as defined below) occurs on or before December 31,
1997, the option price per share shall be equal to the Initial Public Offering
price for the Employer's common stock.
3
<PAGE>
(ii) In the event the effective date of the Employer's
Initial Public Offering occurs after December 31, 1997, Employee's option
price shall be at a price per share equal to$93.75.
(b) The options shall be automatically converted to options to
purchase Class A common stock (voting common stock) upon the closing by the
Employer of an initial public offering which results in no less than
$10,000,000 in capital being raised by the Employer which shall be a gross
amount prior to expense or commissions (such offering is hereby referred to as
the "Initial Public Offering"). In the event options have been exercised by
the Employee prior to the Initial Public Offering, Employee's shares of
Class B common stock shall be automatically converted to Class A common stock.
The Employer's options are more particularly described in this paragraph 6
(and all references herein to common stock shall mean the non-voting Class B
common stock).
(c) The options shall vest as set forth below.
(i) Employee's options with respect to 4,000 shares on
common stock shall vest at the time Employee's employment hereunder shall
commence.
(ii) The Employee's options with respect to 21,000 shares
shall vest according to the following schedule: 7,000 shares upon the
completion of each year after the commencement of employment (using the first
day of the month in which the employment commences as the beginning of the
three-year term for these purposes).
(iii) The Employee's employment hereunder shall be required
to continue until the end of each year in question for the Employee's options
to vest; provided, however, (x) in the event Employee terminates this
Agreement within 90 days after the occurrence of an event that constitutes a
"change of control," as defined in paragraph 9, all Employee's options shall
immediately vest, and (y) in the event Employee terminates this Agreement at
any time other than within 90 days after the occurrence of an event that
constitutes a change of control, Employee's options that would have vested as
of the end of the contract year shall vest pro rata to the end of the last
full month of service by Employee prior to his notice of termination (and it
shall not be necessary for the Employee to have ben continuously employed
until the end of the year for the Employee's options for such year to vest),
as a result of which if Employee would be entitled to 7,000 shares vesting
upon the completion of the full year of employment at issue, in the event the
notice of termination was in the middle of such year, 3,500 shares shall then
vest, and all other options shall be null and void, and (z) in the event of
the termination of the employment of the Employee by Employer without "cause,"
as defined in paragraph 9, the Employee's options that would have vested as of
the end of the contract year shall vest pro rata as of the end of the last
full month of service prior to the Employer's notice of termination and, in
addition, Employee shall have vested an additional number of shares that would
have vested in the 12 months after Employer's notice of termination (i.e.,
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7,000 additional shares). By virtue of the provisions of paragraph
6(c)(iii)(z), in the event the Employer gives notice of termination without
cause on October 31, 1997, the Employee shall have vested 14,500 shares, and
all other options shall be null and void.
(d) All the options issued hereunder, once vested, shall be
required to be exercised within a period of ten years after vesting.
(e) Attached hereto as Exhibit A is the Stock Option Agreement to
be executed by Employer and Employee.
7. FRINGE BENEFITS.
(a) The Employee will be entitled to participate in any disability,
life, accident and health insurance plans which the Employer has in effect
from time to time for the benefit of its employees.
(b) Employee may, at his option, as an alternative to the
prevention-oriented health programs offered by the Employer, enroll in a
health program of his choice in California, the expenses of which shall be
paid directly by Employer in an amount not to exceed $3,000 per year.
(c) In the discretion of the Employer, Employee may participate in
any profit sharing or bonus plan of Employer.
(d) The Employer shall pay the reasonable moving expenses of the
Employee relocating from Virginia to San Francisco, including but not limited
to direct moving costs, storage, temporary living, temporary furniture rental,
and travel between California and Virginia to facilitate sale of the
Employee's Virginia residents; provided, however, the maximum payment under
this paragraph 7(d), shall be $30,000.
(e) Employee shall be reimbursed for the expenditures under
paragraphs 7(b) and (d) upon submission to the Employer vouchers concerning
the expenses incurred.
8. VACATIONS. Employee shall be entitled to such reasonable vacations
as he determines, provided that the same do not interfere with the performance
by the Employee of his responsibilities hereunder. Without the approval of
the Board of Directors of the Employer, the Employee shall not take more than
30 days vacation in any performance year during the term of this Agreement.
9. TERMINATION AND ITS EFFECTS.
(a) TERMINATION BY EMPLOYER FOR CAUSE. In addition to the
Employer's termination rights under paragraph 11, the Employer may terminate
this Agreement for "cause," in which event all stock options that shall not
have theretofore vested shall be null and void, and all obligations of
Employer to pay compensation to Employee and to provide fringe benefits under
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this Agreement shall terminate effective as of the date of termination.
Termination for cause shall mean only one or more of the following:
(i) Commission by the Employee of any fraudulent act in the
course of his employment (other than any such acts of an insignificant
nature);
(ii) The conviction of a felony (from which, through lapse
of time or otherwise, no successful appeal shall have been made) whether or
not committed in the course of his employment by Employer;
(iii) The willful refusal to carry out reasonable
instructions of the Board of Directors of the Employer; provided, however,
that the Employee may only be discharged under this paragraph 9(a)(iii) after
he shall have been given 10 days' written notice setting forth his alleged
deficiencies and the Employee shall not, within such 10-day period, have
ceased or otherwise cured the activity or activities or omission constituting
the grounds for termination; or
(iv) The willful disclosure of any trade secrets or confidential
information of the Employer to persons not authorized to know the same, or the
use by the Employee for his personal benefit and not the benefit of the Employer
of trade secrets or confidential corporate information of the Employer, or by
the use by Employee on Employer's behalf of the trade secrets of any third
party.
(b) TERMINATION BY EMPLOYER WITHOUT CAUSE. The Employer may also
terminate this Agreement without cause with the consequences set forth in this
paragraph 9(b). In the event Employer terminates this Agreement without
cause, as severance pay, Employee shall receive aggregate compensation equal
to half the Guaranteed Compensation (i.e., $150,000), but no performance-based
compensation, payable in a lump sum within 30 days after such termination.
(c) RESIGNATION BY EMPLOYEE.
(i) Subject to paragraph 9(c)(ii), in the event the Employee
terminates this Agreement for any reason other than a material breach by the
Employer of the terms of this Agreement, the Employee shall receive no further
compensation or fringe benefits after the effective date of his resignation.
(ii) In the event the Employee terminates his employment with
the Employer within 90 days after a "change of control" of the Employer, the
Employee shall be entitled to severance pay in the amount of the Guaranteed
Compensation (i.e., $300,000) but no performance-based compensation. Such sum
shall be paid within 30 days after the effective date of the resignation of
Employee. For purposes of this Agreement, a change of control shall mean any
of the following events:
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(w) the merger or consolidation of the Employer with or
into another company other than under circumstances where the majority of the
board of directors of the merged or consolidated entity following the merger
or consolidation shall be persons who were directors of the Employer prior to
the merger or consolidation,
(x) the sale of all or substantially all of the assets of
the Employer to, any person not affiliated with the Employer prior to the
events, or
(y) the sale of securities of the Employer in a single
transaction, other than in a public offering, representing 51% or more of the
total combined voting power of the Employer's then issued and outstanding
stock if such securities are sold to any person or group of persons not
affiliated with the Employer, or
(z) the approval by the stockholders of the Employer of
any plan or proposal for liquidation or dissolution of the Employer.
(d) Notwithstanding anything to the contrary in paragraphs 9(b) or
(c), after the end of the 3-Year Period, no termination of this Agreement by
the Employer or Employee for any reason shall result in any severance pay to
Employee unless Employer and Employee shall have entered into a separate
written agreement with respect to such severance compensation.
10. INDEMNIFICATION. Subject to Employee's compliance with the Job
Guidelines furnished to him, Employer hereby indemnifies Employee and agrees
to hold him harmless to the maximum extent permissible by law from and against
all claims made against him arising out of his activities or an employee or
officer of Employer. In connection with any proceedings requiring
indemnification hereunder of Employee, the Employer shall advance all
reasonable expenses incurred by Employee in connection with such proceedings
within 20 days after receipt by Employer of a statement from the Employee
requesting such advance and reasonably evidencing the expenses incurred. Such
statement shall include an undertaking by Employee to repay any such expenses
if it shall ultimately be determined that the Employee was not entitled to be
indemnified against such expenses. If the Employer disputes Employee's
entitlement to advances hereunder, unless the Employee otherwise consents,
Employer shall, at its expense, retain an independent counsel (meaning a law
firm or member of a law firm who has not previously represented Employer or
any of its directors or principal officers), and the Employer shall have the
burden of proof of persuading the independent counsel, by clear and convincing
evidence, that indemnification is not required, in order to avoid the
advancement of expenses hereunder. The ruling of the independent counsel
shall be binding on the issue of the advancement of expenses but shall have no
bearing on the ultimate determination as to whether indemnification is
required hereunder.
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11. ILLNESS OR DISABILITY OF EMPLOYEE. If Employee is unable to
perform services for the Employer for a continuous period of more than 120
days, the Employee shall be deemed to be permanently and totally disabled,
whereupon Employer may terminate this Agreement upon not less than 30 days'
written notice to the Employee. In the event of such termination, all of the
employer's obligations hereunder will terminate as of the end of the 120-day
period.
12. DEATH OF EMPLOYEE. This Agreement will terminate immediately upon
the death of the Employee. If Employee dies during the term of this
Agreement, the Employer will pay to the Employee's estate the compensation
that would otherwise be payable to the Employee through the end of the month
of the Employee's death.
13. EXPENSES. In addition to the compensation payable hereunder, the
Employee shall be entitled to be reimbursed, upon submission of appropriate
vouchers, for such reasonable out-of-pocket expenses as he may incur in the
performance of duties contemplated hereby.
14. DEVOTION TO BUSINESS. Employee shall devote substantially full
time, attention and energies to the Employer's business during the period of
his employment.
15. RESTRICTIVE COVENANTS, TRADE SECRETS, CERTAIN REPRESENTATIONS.
(a) Employee agrees that he will not, during the term of this
Agreement and for a period of one year thereafter, directly or indirectly,
individually or on behalf of other persons, aid or endeavor to solicit or
induce (i) then remaining employees of the Employer or its affiliates, or
agents or coordinators, to leave their employment or independent contractor
positions to accept employment or positions with another person or entity, or
(ii) carriers who are customers of Employer at some time during the term of
this Agreement and are not during the term of this Agreement either (x)
Carrier Customers, or (y) carrier customers with whom Employee's former
Employer (Cable & Wireless) had a contractual relationship prior to this
Agreement and with respect to whom Employee engaged in sales or solicitation
activities on behalf of Cable & Wireless while a Cable & Wireless employee
(hereinafter such customers are referred to as "Reserved Customers"), to
purchase products or services provided by the Employer. By virtue of the
foregoing, among those persons that Employee will not solicit business from
during the one-year period after the termination of this Agreement are New T&T
Hong Kong Limited and New World Telephone Limited.
(b)(i) Employee agrees that he will not, during the term of this
Agreement, or at any time thereafter, disclose to any unauthorized person,
firm or corporation, or use (other than in Employer's business) any trade
secrets or other confidential business information of the Employer or its
affiliates. The Employee acknowledges and agrees that trade secrets and other
confidential information constitute the Employer's sole and exclusive
property. For purposes of this section, the term "trade secrets" refers to
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any information that is not generally known to persons engaged in a business
similar to that conducted or contemplated by the Employer and includes,
without limitation: customer lists, sales agent lists, coordinator lists,
research and development data, financial records, operational manuals,
software programs used in the Employer's business, business plans, and
information about the Reserved Customers and their business activities
(including but not limited to those business activities of New T&T Hong Kong
Limited and New World Telephone Limited, and the personnel at such companies
with whom Telegroup does business) which Employer utilizes in the course of
its business or has utilized in developing its foreign business, including but
not limited to, knowledge of the foreign markets, carrier settlement
procedures, rates for services, and foreign government procedures, all of
which trade secrets have been acquired and developed by Employer after the
expenditure of significant time, effort, and money. Employee agrees to
maintain such trade secrets in confidence both during and subsequent to the
term of this Agreement irrespective of the reason for the termination of this
Agreement.
(ii) Notwithstanding the provisions of paragraph 15(b)(i)
above, the term "trade secrets," shall not include information (A) which is or
becomes readily available in public records or documents through a source not
attributable by Employee; (B) which can be shown by Employee, by written
documentation, to have been known by him prior to its disclosure to him by
Employer; or (C) which Employee is required to disclose under applicable laws
or regulations or in connection with judicial or administrative proceedings,
provided that to the extent possible Employee shall notify Employer if
compelled to disclose confidential information, prior to its disclosure, so as
to permit Employer an opportunity to seek a protective order or other
appropriate relief it deems prudent. Employee will return all documents and
other tangible evidence related to the Employer's trade secrets and any
confidential information on termination of the Employee's employment with or
without cause. No breach or alleged breach of this Agreement by the Employer
shall alter the obligations of the Employee set forth in this paragraph 15(b).
(c) Employee represents that he is not a party to any written
trade secrets, confidentiality, non-disclosure, or non-solicitation agreement
with his current employer of any former employer, or any other agreement
containing restrictive covenants applicable to employment.
16. RIGHT TO INJUNCTIVE RELIEF AND OTHER REMEDIES. Employee agrees
that the restrictions contained in paragraph 15 hereof are necessary for the
protection of Employer and any breach thereof may cause Employer irreparable
damage for which there may not be adequate remedy at law. Employee consents
in the event of such breach to the issuance of an injunction in favor of
Employer enjoining the breach of the aforesaid covenants by any Court of
competent jurisdiction. Employee agrees that the rights of Employer to obtain
an injunction shall not be considered a waiver of Employer's rights to assert
any other remedy it may have at law or in equity.
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17. AUTOMATIC MODIFICATION. If any provision of this Agreement shall
be deemed to be invalid, it shall not affect the remaining provisions of this
Agreement. In addition, if any provision of this Agreement shall be deemed to
be invalid as it relates to the restrictive covenants in paragraph 15, such
provision shall be modified automatically to provide for the maximum
restriction on the Employee that is lawful as, for example, by decreasing the
geographical area or duration of any such restriction.
18. SUCCESSION. This Agreement shall extend to and be binding upon
Employee and upon Employer, its successors and assigns.
19. ENTIRE AGREEMENT. This Agreement contains the entire agreement
of the parties with respect to its subject matter, and no waiver, modification
or change of any of its provisions shall be valid unless in writing and signed
by the parties against whom such claimed waiver, modification or change is
sought to be enforced, and as to the Employer, no waiver, modification or
change shall be binding unless consented to in writing by Telegroup. This
Agreement shall be governed by Iowa law.
20. WAIVER OF BREACH. The waiver of any breach of any term or condition
of this Agreement shall not be deemed to constitute a waiver of any other term
or condition of this Agreement.
21. NOTICES. All notices pursuant to this Agreement, shall be given
by personal delivery, or registered or certified mail, return receipt
requested, addressed to the parties hereto at the addresses set forth above,
or to such other address as may hereafter be specified by notice in writing in
the same manner by any party or parties.
22. GOVERNING LAW AND VENUE. Employer's principal place of business
is in Fairfield, Iowa. Employer would prefer that Employee relocate to Iowa,
rather than San Francisco, but Employer has acceded to Employee's request that
he be permitted to perform his principal activities from offices in
California. In addition, Employer and Employee recognize that, among other
things, Employee's activities shall be supervised from Iowa and supported by
the home office activities in Iowa. As a result, this employment relationship
and any dispute arising out of or relating to this Agreement shall be governed
by Iowa law. Any dispute arising out of or relating to this Agreement or the
relationship of the parties shall be resolved by arbitration in St. Louis,
Missouri, in accordance with the Rules of the American Arbitration Association
and its decision shall be final and binding. In any arbitration the
prevailing party shall be entitled to all costs of arbitration including
reasonable attorneys' fees.
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IN WITNESS WHEREOF, the parties have executed this Agreement the day and
year set forth below.
TELEGROUP, INC.
Execution date: By
-----------------------------------
May __, 1997
EMPLOYEE:
-----------------------------------
Ron Jackenthal
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EXHIBIT 10.12
FORM OF
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of the
__th day of _____, 1997 between Telegroup, Inc., an Iowa corporation (the
"Company"), and _____________ (the "Executive").
W I T N E S S E T H :
-------------------
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the parties agree as follows:
1. EMPLOYMENT.
(a) The Company hereby employs the Executive as
_______________________ and the Executive hereby accepts such employment,
on the terms and subject to the conditions hereinafter set forth.
(b) Executive shall report directly to the Chief Executive
Officer, and shall perform such duties consistent with his position as
__________________ pursuant to the direction of the Chief Executive
Officer.
(c) Attention and Effort. The Executive shall be required to
devote his full business time, attention and effort to the Company's
business and affairs except for vacation time and reasonable periods of
absence due to sickness, personal injury or other disability and shall
perform diligently such duties as are customarily performed by executives
in similar positions with companies similar in character or size to the
Company, all subject to the direction of the Chief Executive Officer,
together with such other duties as may be reasonably requested from time
to time by the Chief Executive Officer, which duties shall be consistent
with his positions as set forth above. The Executive agrees to use all
of his skills and business judgment and render services to the best of
his ability to serve the interests of the Company. Subject to the terms
of Section 6, this shall not preclude Executive from serving on community
and civic boards, participating in industry associations, pursuing his
personal financial and legal affairs, or otherwise engaging in other
activities, so long as such activities do not unreasonably interfere with
his duties to the Company.
(d) Support Services. The Executive shall be entitled to all of
the administrative, operational and facility support customary for a
similarly situated
<PAGE>
executive. This support shall include, without limitation, a suitably
appointed private office, a secretary or administrative assistant, and
payment of or reimbursement for reasonable cellular telephone expenses,
business, travel and entertainment expenses, expenses of the Executive
maintaining his professional license and standing and any and all other
business expenses reasonably incurred on behalf of or in the course of
performing duties for the Company, all in accordance with the expense
reimbursement policies established from time to time by the Company. The
Executive agrees to provide such documentation of these expenses as may
be reasonably required.
2. TERM. Subject to the provisions for termination hereinafter
provided, the Term shall begin on the date hereof and shall continue for a
period of one (1) year. Thereafter, at the discretion of the Board of
Directors (the "Board"), the Term may be extended for one (1) year periods.
The Board will provide Executive at least three (3) months notice prior to the
end of each one (1) year period whether it intends to extend the Term.
3. COMPENSATION.
Throughout the Term the Company shall pay or provide, as the case may be,
to the Executive the compensation and other benefits and rights set forth in
this Section 3.
(a) The Company shall pay to the Executive a "Base Salary,"
payable in accordance with the Company's usual pay practices (and in any
event no less frequently than monthly), of $__________ per annum. The
Board shall annually review Executive's Base Salary and may, in its
discretion, increase such Base Salary by an amount it determines is
appropriate.
(b) The Company shall pay to the Executive bonus compensation
for each fiscal year, or part thereof that he is employed by the Company,
to be determined at the discretion of the Board.
(c) The Company shall provide medical, hospitalization,
disability and dental insurance for Executive, his spouse and eligible
family members, subject to and in accordance with the Company's policy,
the proportion of the cost thereof to be borne by the Company and the
Executive to be in accordance with such policy.
(d) The Executive shall participate in all retirement and other
benefit plans of the Company generally available from time to time to
employees of the Company and for which the Executive qualifies under the
terms thereof (and nothing in this Agreement shall, or shall be deemed
to, in any way affect the Executive's right and benefits thereunder
except as expressly provided herein).
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(e) The Executive shall be entitled to at least twenty two (22)
days of vacation allowance each year and a sick leave allowance as
provided under the Company's vacation and sick leave policy for executive
officers.
(f) The Executive shall be entitled to participate in any equity
or other employee benefit plan that is generally available to senior
executive officers, as distinguished from general management, of the
Company, at the highest level provided for any employee. The Executive's
participation in and benefits under any such plan shall be on the terms
and subject to the conditions specified in the governing document of the
particular plan.
4. PERMANENT DISABILITY.
(a) For purposes of this Agreement, the Executive's "Permanent
Disability" shall be deemed to have occurred one day after one hundred
eighty (180) days in the aggregate during any consecutive twelve (12)
month period, or one day after one hundred twenty (120) consecutive days,
during which one hundred eighty (180) or one hundred twenty (120) days,
as the case may be, the Executive, by reason of his physical or mental
disability or illness, shall have been unable to discharge fully his
duties under this Agreement.
(b) If either the Company or the Executive, after receipt of
notice of the Executive's Permanent Disability from the other, disputes
that the Executive's Permanent Disability shall have occurred, the
Executive shall promptly submit to a physical examination by the chief of
medicine of any major accredited hospital in the metropolitan Chicago,
Illinois area, and, unless such physician shall issue his written
statement to the effect that, in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full
time and energy to discharging fully his duties hereunder within thirty
(30) days after the date of such statement, such Permanent Disability
shall be deemed to have occurred on the day above specified.
5. TERMINATION.
(a) The Executive's employment under this Agreement and the Term
shall be terminated immediately on the death of the Executive and may be
terminated by the Board, with the concurrence of the Chief Executive
Officer:
(i) at any time after the Permanent Disability of the
Executive;
(ii) at any time for "Cause" (as defined below); or
(iii) at any time without Cause.
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For purposes hereof, Cause shall mean:
(A) Active participation by the Executive in fraudulent conduct
against the Company, a felony involving moral turpitude, an
act or series of deliberate acts which were not taken in good
faith by Executive and which, in the reasonable judgment of
the Board, results or will likely result in material
injury to the business, operations or business reputation of
the Company, or an act or series of acts constituting willful
malfeasance or gross misconduct or the Executive's continued
willful failure to perform any of his duties under this
Agreement.
(B) A substantial and continual refusal by Executive in breach of
this Agreement to perform the duties, responsibilities or
obligations assigned to Executive pursuant to the terms
hereof, which breach has not been cured (if it is of a nature
that can be cured) to the Board's reasonable satisfaction
within ten (10) days after the Company gives written notice
thereof to the Executive;
(C) Excessive absenteeism by the Executive; provided that
absenteeism (i) related to illness or otherwise covered by
Section 4(a) hereof, (ii) required to be permitted under
applicable federal or state laws, or (iii) permitted under
Company policy, shall not be deemed to be excessive; or
(D) The voluntary resignation of the Executive without Good Reason
(as defined below) and without the prior consent of the Board.
Executive shall be permitted to respond and defend himself before
the Board within thirty (30) days after delivery to Executive of written
notification of any proposed termination for Cause which specifies in
detail the reasons for such termination. If the majority of the members
of the Board (excluding Executive) do not confirm that the Company had
grounds for a Cause termination, Executive shall have the option to treat
his employment as not having terminated or as having been terminated
pursuant to a termination without Cause.
(b) TERMINATION BY DEATH. If the Executive's employment is
terminated by death, the Executive's estate shall be entitled to receive
(i) life insurance benefits pursuant to any life insurance purchased by
the Company and any other benefits, payable within ninety (90) days after
the date of death, accrued by him hereunder up to and including the date
of Executive's death and (ii) reimbursement for all expenses incurred by
Executive pursuant to Section 1(d) prior to his death.
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(c) TERMINATION FOR CAUSE. If the Executive's employment is
terminated by the Company for Cause, the Company shall not have any other
or further obligations to the Executive under this Agreement except (i)
as to that portion of any unpaid Base Salary accrued and earned under
this Agreement through the date of such termination, (ii) as to benefits,
if any, provided by any insurance policies in accordance with their terms
and any other benefits, payable within ninety (90) days after
termination, accrued by him hereunder up to and including the date of
termination, and (iii) reimbursement for all expenses incurred by
Executive pursuant to Section 1(d) prior to his termination. In
addition, if the Executive's employment is terminated by the Company for
Cause at any time during the Term, the Executive shall immediately
forfeit any and all other unvested stock rights and stock options and
other such unvested incentives or awards previously granted to him by the
Company. The foregoing sentence shall be in addition to, and not in lieu
of, any and all other rights and remedies which may be available to the
Company under the circumstances, whether at law or in equity.
(d) TERMINATION WITHOUT CAUSE. If the Executive's employment is
terminated by the Company without Cause (including a termination resulting
from the lapse of the Term specified in Section 1), the Executive shall be
entitled to receive (i) severance compensation equal to what would have
been his Base Salary under Section 3(a), payable at such times as his Base
Salary would have been paid if his employment had not been terminated, for
a period of one (1) year following such termination; provided, that if the
Executive obtains employment at any time during such period, such severance
payments shall cease at the later to occur of (A) the date that is three
months from the date of termination and (B) the date such Executive is
first employed by a third party, (ii) as to other benefits, if any,
provided by any insurance policies in accordance with their terms, and
other benefits, payable within ninety (90) days after the date of such
termination, accrued by him hereunder up to and including the date of such
termination, and (iii) reimbursement for all expenses incurred by Executive
pursuant to Section 1(d) prior to his termination. In the event that
Executive's employment is terminated by the Company within ninety (90) days
following a "Change in Control," then the severance compensation referred
to in Subsection (d)(i) above shall be paid for a period of one (1) year
following such termination of employment. For purposes of this Agreement a
"Change in Control" shall be deemed to occur if, at any time any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Securities Exchange Act), other than Fred Gratzon and Clifford Rees become
the beneficial owners of more than 50% of the total voting power of the
common stock of the Company.
(e) TERMINATION FOR PERMANENT DISABILITY. If the Executive's
employment is terminated by the Company for Permanent Disability, the
Executive shall be entitled to receive (i) severance compensation equal
to what would have been his Base Salary under Section 3(a) for the longer
of one (1) year or the remainder of what would have been the Term (but
not longer than two (2) years), payable at such times as his Base Salary
would have been paid if his employment had not been terminated, less any
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disability insurance benefits pursuant to any disability insurance
provided by the Company or purchased by Executive, the cost of which is
reimbursed by the Company, which are payable in respect of the period
after such termination, (ii) other benefits, payable within ninety (90)
days after termination for Permanent Disability, accrued by him hereunder
up to and including the date of termination for Permanent Disability,
and (iii) reimbursement for all expenses incurred by Executive pursuant
to Section 1(d) prior to his termination.
(f) TERMINATION BY EXECUTIVE FOR GOOD REASON. If the Executive
terminates his employment for Good Reason, the Executive shall be
entitled to receive (i) severance compensation equal to his Base Salary
under Section 3(a), payable at such times as his Base Salary would have
been paid if his employment had not been terminated, for one (1) year
following the date of termination, (ii) as to benefits, if any, provided
by any insurance policies in accordance with their terms, and as to any
other benefits, payable within ninety (90) days after the date of such
termination, accrued by him hereunder up to and including the date of
such termination and (iii) reimbursement for all expenses incurred by
Executive pursuant to Section 1(d) prior to his termination. Good Reason
means a termination of Executive's employment by Executive within ninety
(90) days following (i) a material reduction in Executive's annual Base
Salary or incentive compensation or equity participation opportunity,
(ii) a material reduction or change in Executive's positions, duties and
responsibilities or reporting lines from those described in Section 1
hereof where such reduction or change occurs within ninety (90) days
following a "Change in Control", (iii) a change in the location of the
Company's headquarters or of the office of the Executive from the
Fairfield, Iowa area, (iv) a material breach of this Agreement by the
Company. In addition, if Executive terminates his employment within
ninety (90) days following a Change in Control, even if there has been
non-material reduction in the Executive's positions, duties,
responsibilities or reporting lines, then such termination shall be
treated as for Good Reason pursuant to this Section 5(f) except that the
Executive shall receive Base Salary only for three (3) months following
employment termination. Notwithstanding the foregoing, a termination
shall not be treated as a termination for Good Reason (i) if Executive
shall have consented in writing to the occurrence of the event giving
rise to the claim of termination for Good Reason or (ii) unless Executive
shall have delivered a written notice to the Board within thirty (30)
days of his having actual knowledge of the occurrence of one of such
events stating that he intends to terminate his employment for Good
Reason and specifying the factual basis for such termination, and such
event, if capable of being cured, shall not have been cured within ten
(10) days of the receipt of such notice.
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(g) MITIGATION. The Executive is not required to mitigate the
amount of any payments to be made by the Company pursuant to this
Agreement following his termination by seeking other employment or
otherwise. In addition, except so provided in Section 5(d), the amount of
any post-termination payments provided for in this Agreement shall not be
reduced by any remuneration earned by the Executive during the period
following the termination of his employment as a result of employment by
another employer or otherwise after the date of termination of his
employment with the Company.
6. COVENANTS AND CONFIDENTIAL INFORMATION.
(a) The Executive acknowledges the Company's reliance on and
expectation of the Executive's continued commitment to performance of his
duties and responsibilities during the Term. In light of such reliance
and expectation on the part of the Company, during the applicable period
hereafter specified in Section 6(b), the Executive shall not, directly or
indirectly, do or suffer either of the following:
(i) Own, manage, control or participate in the ownership,
management or control of, or be employed or engaged by or
otherwise affiliated or associated as a consultant,
independent contractor or otherwise with, any other
corporation, partnership, proprietorship, firm, association
or other business entity engaged in the business of, or
otherwise engage in the business of, marketing or providing
telecommunication services within the United States in
competition with the Company; provided, however, that the
beneficial and/or record ownership of not more than four and
nine-tenths percent (4.9%) of any class of publicly traded
securities of any entity shall not be deemed a violation of
this covenant; or
(ii) Disclose, divulge, discuss, copy or otherwise use or suffer
to be used in any manner, other than in accordance with the
Executive's duties hereunder, any confidential or
proprietary information relating to the Company's business,
prospects, finances, operations, properties or otherwise to
its particular business or other trade secrets of the
Company, it being acknowledged by the Executive that all
such information regarding the business of the Company
compiled or obtained by, or furnished to, the Executive
while the Executive shall have been employed by or
associated with the Company is confidential and/or
proprietary information and the Company's exclusive
property; provided, however, that the foregoing restrictions
shall not apply to the extent that such information:
(A) is clearly obtainable in the public domain;
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(B) becomes obtainable in the public domain, except by
reason of the breach by the Executive of the terms
hereof or by another person barred by a similar duty
of confidentiality; or
(C) is required to be disclosed by rule of law or by
order of a court or governmental body or agency.
(b) The applicable periods shall be: (i) so long as the
Executive is an employee of the Company; (ii) as to clause (ii) of
Section 6(a), at any time after the Executive is no longer an employee of
the Company; and (iii) as to clause (i) of Section 6(a), for a period of
one (1) year after termination of employment by the Company or
Executive; provided, that the Board may, in its sole discretion, waive or
shorten such one (1) year period.
(c) The Executive agrees and understands that the remedy at law
for any breach by him of this Section 6 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being
measured in monetary terms. Accordingly, it is acknowledged that the
Company shall be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in
this Section 6 shall be deemed to limit the Company's remedies at law or
in equity for any breach by the Executive of any of the provisions of
this Section 6 which may be pursued or availed of by the Company.
(d) THE EXECUTIVE HAS CAREFULLY CONSIDERED THE NATURE AND EXTENT
OF THE RESTRICTIONS UPON HIM AND THE RIGHTS AND REMEDIES CONFERRED UPON
THE COMPANY UNDER THIS SECTION 6, AND HEREBY ACKNOWLEDGES AND AGREES THAT
THE SAME ARE REASONABLE IN TIME AND TERRITORY, ARE DESIGNED TO ELIMINATE
COMPETITION WHICH OTHERWISE WOULD BE UNFAIR TO THE COMPANY, DO NOT STIFLE
THE INHERENT SKILL AND EXPERIENCE OF THE EXECUTIVE, WOULD NOT OPERATE AS
A BAR TO THE EXECUTIVE'S SOLE MEANS OF SUPPORT, ARE FULLY REQUIRED TO
PROTECT THE LEGITIMATE INTERESTS OF THE COMPANY AND DO NOT CONFER A
BENEFIT UPON THE COMPANY DISPROPORTIONATE TO THE DETRIMENT TO THE
EXECUTIVE.
(e) The Executive acknowledges that the Executive's obligations
under this Section 6 shall survive in accordance with paragraph (b) above
regardless of whether the Executive's employment by the Company is
terminated, voluntarily or involuntarily, by the Company or the
Executive, with Cause or without Cause, or the Executive with or without
Good Reason.
7. INDEMNIFICATION. During the Term, the Company shall indemnify
Executive and hold Executive harmless from and against any claim, loss or
cause of action arising from or out of Executive's performance as an officer,
director or employee of the Company or any of its subsidiaries or in any other
capacity, including any fiduciary capacity, in which Executive serves at the
request of the Company to the maximum extent permitted by applicable law. If
any claim is asserted hereunder with respect to which Executive reasonably
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believes in good faith he is entitled to indemnification, the Company shall
pay Executive legal expenses (or cause such expenses to be paid) on a monthly
basis, provided that Executive shall reimburse the Company for such amounts if
Executive shall be found by a court of competent jurisdiction not to have been
entitled to indemnification. In addition, the Company agrees to provide
Executive with coverage under a directors and officers liability insurance
policy.
8. MISCELLANEOUS.
(a) The Executive represents and warrants that he is not a
party to any agreement, contract or understanding, whether employment or
otherwise, which would restrict or prohibit him from undertaking or
performing employment in accordance with the terms and conditions of this
Agreement.
(b) The provisions of this Agreement are severable and if any
one or more provisions may be determined to be illegal or otherwise
unenforceable, in whole or in part, the remaining provisions and any
partially unenforceable provision to the extent enforceable in any
jurisdiction nevertheless shall be binding and enforceable.
(c) The rights and obligations of the Company under this
Agreement shall inure to the benefit of, and shall be binding on, the
Company and, if in connection with a transfer of substantially all of its
business, its successors and assigns, and the rights and obligations
(other than obligations to perform services) of the Executive under this
Agreement shall inure to the benefit of, and shall be binding upon, the
Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to this
Agreement, or the breach thereof, shall be settled by mediation, and if
not settled within 14 days of the submission to mediation, by arbitration
in accordance with the Voluntary Labor Arbitration Rules of the American
Arbitration Association, and the arbitration shall be held in the
metropolitan Kansas City area. The arbitrator shall be acceptable to
both the Company and Executive. If the parties cannot agree on an
acceptable arbitrator, the dispute shall be heard by a panel of three (3)
arbitrators, one appointed by each of the parties and the third appointed
by the other two arbitrators. Judgment upon the award rendered by the
arbitrator or arbitrators may be entered in any court having jurisdiction
thereof. The arbitrator or arbitrators shall be deemed to possess the
powers to issue mandatory orders and restraining orders in connection
with such arbitration; provided, however, that nothing in this Section(d)
shall be construed so as to deny the Company the right and power to seek
and obtain injunctive relief in a court of equity for any breach or
threatened breach by the Executive of any of his covenants contained in
Section 6 of this Agreement.
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(e) All notices and other communications required or permitted
under this Agreement shall be in writing, and shall be deemed properly
given if delivered personally, mailed by registered or certified mail in
the United States mail, postage prepaid, return receipt requested, sent
by facsimile, or sent by Express Mail, Federal Express or other
nationally recognized express delivery service, as follows:
If to the Company or the Board:
The Corporation System
2222 Grand Avenue
Des Moines, Iowa 50312
If to the Executive:
-----------------------
-----------------------
-----------------------
-----------------------
With a copy to:
-----------------------
-----------------------
-----------------------
-----------------------
Notice given by hand, certified or registered mail, or by Express
Mail, Federal Express or other such express delivery service, shall be
effective upon actual receipt. Notice given by facsimile transmission
shall be effective upon actual receipt if received during the recipient's
normal business hours, or at the beginning of the recipient's next
business day after receipt if not received during the recipient's normal
business hours. All notices by facsimile transmission shall be confirmed
promptly after transmission in writing by certified mail or personal
delivery.
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Any party may change any address to which notice is to be given to
it by giving notice as provided above of such change of address.
(f) The failure of either party to enforce any provision or
provisions of this Agreement shall not in any way be construed as a
waiver of any such provision or provisions as to any future violations
thereof, nor prevent that party thereafter from enforcing each and every
other provision of this Agreement. The rights granted the parties herein
are cumulative and the waiver of any single remedy shall not constitute a
waiver of such party's right to assert all other legal remedies available
to it under the circumstances.
(g) This Agreement supersedes all prior agreements and
understandings between the parties as to the subject hereof and may not
be modified or terminated orally. No modification or attempted waiver
shall be valid unless in writing and signed by the party against whom the
same is sought to be enforced.
(h) This Agreement shall be governed by, and construed in
accordance with the provisions of, the law of the State of Iowa, without
reference to provisions that refer a matter to the law of any other
jurisdiction. Each party hereto hereby irrevocably submits itself to the
non-exclusive personal jurisdiction of the federal court sitting in Des
Moines, Iowa and state courts sitting in Jefferson County, Iowa;
accordingly, subject to the provisions for mediation and arbitration
provided in Section 8(d), any justiciable matters involving the Company
and the Executive with respect to this Agreement may be adjudicated only
in a federal or state court sitting in the aforementioned jurisdictions..
(i) All payments required to be made by the Company hereunder to
the Executive shall be subject to the withholding of such amounts
relating to taxes and other government assessments as the Company may
reasonably determine it should withhold pursuant to any applicable law,
rule or regulation.
(j) Captions and section headings used herein are for
convenience and are not a part of this Agreement and shall not be used in
construing it.
(k) Where necessary or appropriate to the meaning hereof, the
singular and plural shall be deemed to include each other, and the
masculine, feminine and neuter shall be deemed to include each other.
(l) If the Company fails to make any payment to Executive within
ten (10) days of the date due, the payment shall be made with interest
from the date due to the date of payment, at the rate, compounded
annually, from time to time specified as its prime rate by Citibank, N.A.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first set forth above.
Telegroup, Inc.,
an Iowa corporation
By:
----------------------------
Name:
Title:
<PAGE>
EXHIBIT 21.1
TELEGROUP SUBSIDIARIES
Global Access Pty Ltd.
Telecontinent, S.A.
Telegroup Deutschland GmbH (Dusseldorf)
Telegroup Financial Services Pty Limited
A.C.N. 069159646
Telegroup Hong Kong Limited
Telegroup International Management Pty Limited
Australian Company Number 075 304 915
Telegroup Japan Kabushiki Kaisha
Telegroup Nederland B.V.
Telegroup Network Services Pty Limited
Australian Company Number 075 304 871
Telegroup Network Services New Zealand Limited
Telegroup Network Services, S.A.
Telegroup UK Limited
Telegroup UK (No. 2) Limited
Telegroup South Europe, Inc.
Telegroup Technologies, Inc.
Telegroup Technologies Limited
<PAGE>
EXHIBIT 23.2
ACCOUNTANT'S CONSENT
The Board of Directors
Telegroup, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Lincoln, Nebraska
June 18, 1997
