<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998.
REGISTRATION STATEMENT NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
PT-1 COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 4813 11-3265685
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
30-50 WHITESTONE EXPRESSWAY JOHN J. KLUSARITZ, ESQ.
FLUSHING, NEW YORK 11354 EXECUTIVE VICE PRESIDENT AND GENERAL
(718) 939-9000 COUNSEL
(ADDRESS, INCLUDING ZIP CODE, AND PT-1 COMMUNICATIONS, INC.
TELEPHONE NUMBER, INCLUDING AREA 30-50 WHITESTONE EXPRESSWAY
CODE, OF REGISTRANT'S PRINCIPAL FLUSHING, NEW YORK 11354
EXECUTIVE OFFICES) (718) 939-9000
(NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MORRIS F. DEFEO, JR., ESQ. ROBERT W. SMITH, JR., ESQ.
ANDREW M. RAY, ESQ. PIPER & MARBURY L.L.P.
SWIDLER & BERLIN, CHARTERED 36 SOUTH CHARLES STREET
3000 K STREET, N.W., SUITE 300 BALTIMORE MD 21201
WASHINGTON, D.C. 20007 (410) 539-2530
(202) 424-7500
---------------
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: [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1)(2) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par
value..................... $87,000,000 $25,665
</TABLE>
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- --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o).
(2) Includes shares of Common Stock which the Underwriters have the option to
purchase to cover over-allotments, if any.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
FEBRUARY 12, 1998
SHARES
[INSERT LOGO]
PT-1 COMMUNICATIONS, INC.
COMMON STOCK
-----------
Of the shares of Common Stock offered hereby (the "Offering"), shares
are being sold by PT-1 Communications, Inc. ("PT-1" or the "Company") and
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). The Company will not receive any proceeds from the sale of
shares by the Selling Shareholders. See "Principal and Selling Shareholders."
Prior to this Offering, there has been no public market for the Common Stock of
the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for the factors to
be considered in determining the initial offering price. The Company intends to
apply for the listing of the Common Stock on the NASDAQ National Market under
the symbol " ."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS COMPANY(1) SHAREHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)........................... $ $ $ $
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $ .
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to additional shares of Common Stock solely to cover over-allotments, if
any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ , $ and
$ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN________________________________________________ HAMBRECHT & QUIST
THE DATE OF THIS PROSPECTUS IS , 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
[Maps to be added displaying the locations of the Company's
distributors and its telecommunications network.]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and the Company's financial statements, including the notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
the information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. References in this Prospectus to the "Company" and "PT-
1" refer to PT-1 Communications, Inc. and its subsidiary, except where the
context otherwise requires.
THE COMPANY
PT-1 is a leading emerging provider of international long distance services
to retail customers and telecommunications carriers. The Company currently
provides its retail services by marketing prepaid telephone calling cards
("Prepaid Cards"), primarily under the PT-1 brand name, through an extensive
network of distributors and believes that its Prepaid Cards are sold in more
than 50,000 independent retail outlets throughout the United States. The
Company targets retail markets with substantial international long distance
calling requirements, and believes that its Prepaid Cards provide consumers
with a convenient, attractively priced alternative to traditional presubscribed
long distance services. PT-1 has used its significant retail international
traffic to negotiate international termination arrangements with attractive
rates and develop an efficient telecommunications network, enabling the Company
to market its services competitively on a wholesale basis to telecommunications
carriers. The Company believes that it is the fifth largest provider of retail
international long distance services and the largest provider of Prepaid Cards
in the United States based upon revenues for the six months ended September 30,
1997. For that same period, the Company generated revenues and net income of
$187.0 million and $6.5 million, respectively.
The Company was founded in April 1995 to capitalize on the growing market for
international long distance services. PT-1 initially entered the retail
international long distance market through the distribution of Prepaid Cards
targeted at ethnic communities. After building significant international
traffic, in 1996 the Company began to negotiate reduced transmission rates
based upon volume with underlying carriers and began to invest in switching
equipment and lease transmission capacity to further reduce its cost of service
as a percentage of revenues. In August 1996, the Company began to leverage its
significant volume of international traffic by selling international long
distance services on a wholesale basis to other carriers. For the six months
ended September 30, 1997 revenues from retail sales and from wholesale sales
were $163.3 million and $23.7 million, respectively.
The Company believes its competitive strengths are its (i) established
Prepaid Card brand names, (ii) extensive distribution infrastructure, including
more than 50,000 retail outlets, (iii) substantial experience in identifying,
targeting and marketing to communities and markets with significant
international long distance usage, (iv) position as a leading provider of
telecommunications traffic to various international destinations and (v)
efficient telecommunications network. PT-1 believes that its competitive
strengths will enable it to continue to profitably increase its retail and
wholesale customer bases and its traffic volume and negotiate lower costs.
The Company's retail customers can use its Prepaid Cards at any touch tone
telephone by dialing an access number, followed by a personal identification
number (a "PIN") assigned to each Prepaid Card and the telephone number the
customer wishes to reach. The Company's switch completes the call, and its
debit card platform ("Debit Card Platform") reduces the Prepaid Card balance
during the call. The Company offers Prepaid Cards that can be used to access
the Company's network by dialing an 800 number or, in specific metropolitan
markets, local area calling cards ("LAC Cards") that only require a local call.
PT-1 believes that customers typically use its Prepaid Cards as their primary
means of making long distance calls due to (i) attractive rates, (ii) reliable
service, (iii) the ease of monitoring and budgeting their long distance
spending and (iv) the appealing variety of Prepaid Cards offered by the Company
to different market segments.
1
<PAGE>
The Company currently offers 24 Prepaid Cards and plans to introduce up to 10
additional Prepaid Cards by June 1998, including additional LAC Cards and
Prepaid Cards targeted at specific ethnic communities ("Country Calling
Cards"). In July 1995, the Company introduced its first Prepaid Card, The PT-1
Card, targeted initially at ethnic communities in the New York metropolitan
area. The Company issued its first LAC Card, The New York Phone Card, in July
1996. Since February 1997, the Company has introduced seven new LAC Cards (The
New Jersey Phone Card, The Florida Card, The Boston Card, The Detroit Card, The
Connecticut Card, The Chicago Card and The D.C.-Maryland-Virginia Card), the
Alo Brasil and Hola Mexico Country Calling Cards aimed at the Brazilian and
Mexican communities in the United States, as well as The PT-1 Worldwide Phone
Card and other Prepaid Cards.
As of December 31, 1997, PT-1's telecommunications network included (i) four
Nortel DMS250 Supernode switches, located in Edison, New Jersey (installed in
November 1996 and operated for the Company by a third party), Flushing, New
York (installed in August 1997), Jersey City, New Jersey (installed in November
1997) and Miami, Florida (installed in December 1997), (ii) Debit Card
Platforms located in Edison, New Jersey (owned and operated for the Company by
a third party), Jersey City, New Jersey and Flushing, New York, (iii) network
points-of-presence ("POPs") in 31 cities in 14 states and (iv) leased
transmission lines connecting the network POPs with the Company's switches. The
Company purchases transmission capacity from approximately 35 local, domestic
and international long distance carriers, including WorldCom, Inc. ("WorldCom")
and Teleport Communications Group, Inc. ("Teleport") under various arrangements
(including leased line, fixed cost arrangements and per-minute resale
arrangements). In addition, the Company recently opened an office in the United
Kingdom and expects to install a Nortel DMS300 switch in that country by the
end of the third quarter of 1998. The Company intends to further expand its
international network by installing additional switches and network POPs,
entering into additional transmission agreements with foreign carriers and
investing in undersea fiber optic cables.
PT-1 believes that, by implementing the following strategies, it will (i)
increase its market share of international minutes in existing and new
geographic markets, thereby increasing revenues and (ii) reduce its operating
costs as a percentage of revenues, thereby improving gross margins and
enhancing its ability to provide competitive pricing.
Continue to Target Consumers with Significant International Long Distance
Usage. PT-1 primarily targets consumers with significant international long
distance usage by delivering reliable international long distance services at
attractive rates. The Company believes that the $61.0 billion international
long distance market provides an appealing opportunity because of its higher
revenues and gross profits per minute and its higher expected growth rate
relative to the domestic long distance market. The Company believes its brand
awareness, its large number of international retail customers and its
international network traffic and infrastructure will enable it to continue to
successfully market international long distance service originating in
countries in North America, Latin America, Europe and in other countries to
which PT-1's domestic customers direct a substantial volume of calls.
Increase Retail Distribution of the Company's Products. The Company estimates
that its Prepaid Cards are currently sold in more than 50,000 independent
retail outlets, providing customers with convenient access to PT-1's services.
The Company intends to increase this retail distribution infrastructure by
expanding the number of distributors and retail outlets within existing
geographic markets, entering new geographic markets and by bringing certain of
its distributors in-house. The Company initially concentrated its marketing and
distribution efforts in the New York metropolitan area but has expanded and is
continuing to expand its market penetration in other regions of the United
States with significant ethnic populations.
Expand Offerings of Retail Products and Services. PT-1 intends to introduce
new LAC Cards in additional metropolitan areas, offer additional Country
Calling Cards and market other innovative Prepaid Cards, further segmenting the
Prepaid Card market. PT-1 also intends to begin marketing "dial around" and
presubscribed
2
<PAGE>
long distance service. The Company believes that its brand awareness, large
number of international retail customers and its ability to provide
attractively priced long distance services will enable it to successfully
market convenient, attractively priced dial around and presubscribed long
distance service to new and existing customers.
Expand PT-1's International Telecommunications Network. PT-1 intends to
continue to expand the international reach of its telecommunications network in
order to reduce transmission and other operating costs per minute. PT-1 seeks
to establish substantial traffic volume in a geographic region before investing
in network infrastructure in that region, in order to reduce the risks
associated with capital investment and maximize the efficiency of network
expansion.The Company intends to expand its network to include (i) additional
switches, Debit Card Platforms and network POPs in strategic geographic regions
in the United States, Europe and elsewhere, (ii) additional leased capacity
connecting the Company's switches and network POPs, thereby enabling the
Company to originate and terminate an increased portion of its long distance
services on its own network ("on-net") and (iii) investments in undersea fiber
optic cables to lower transmission costs with respect to certain segments of
its international traffic. The Company believes its United Kingdom office will
facilitate its negotiation of additional direct termination agreements with
other United Kingdom and European based carriers and serve as a base for
expanded wholesale and retail marketing activities. The Company also intends to
negotiate additional termination arrangements with foreign carriers in
countries where the Company terminates significant traffic, concurrently with
the investment in undersea fiber optic cables.
Increase Wholesale Carrier Revenues. The Company believes that its increasing
volume of international retail traffic will allow it to continue to negotiate
more favorable transmission rates and to negotiate attractive direct
termination arrangements with foreign carriers. These factors, together with
the continued expansion of the Company's telecommunications network, are
expected to reduce the Company's transmission cost per minute thereby enabling
PT-1 to offer attractive wholesale rates to other carriers. The Company intends
to continue to increase wholesale carrier revenues, allowing it to improve the
usage and the efficiency of its network and to further reduce the Company's
overall transmission cost per minute.
The Company's principal executive offices are located at 30-50 Whitestone
Expressway, Flushing, New York 11354, and its telephone number is 718-939-9000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.... shares
-------------
Common Stock offered by the Selling
Shareholders.......................... shares
-------------
Common Stock to be outstanding after
the Offering.......................... shares (1)
Use of proceeds........................ To fund expansion of the Company's
network, repay indebtedness and for
additional working capital and general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market
Symbol................................
</TABLE>
- --------------------
(1) Excludes (i) options outstanding as of September 30, 1997 to purchase
620,500 shares of Common Stock at a weighted average exercise price of $
per share (of which 38,331 are vested and exercisable as of February 12,
1998); (ii) warrants issued to certain employees of InterExchange, Inc.
("InterExchange") and outstanding on the date hereof to acquire shares with
a fair market value of $3.0 million at an aggregate exercise price of $1.0
million (one-third of which vest and become exercisable upon completion of
the Offering); (iii) shares of Common Stock valued at $850,000 issuable to
certain employees of the Company pursuant to the Pannullo Transactions (as
defined in "Certain Transactions") and (iv) 2,879,500 shares of Common
Stock available for issuance under the Company's 1997 Stock Incentive Plan.
See "Dilution," "Management--Stock Incentive Plan," "Description of Capital
Stock--The InterExchange Warrants" and "Certain Transactions--Transactions
with The Interactive Telephone Company, Godotsoft, L.L.C. and Joseph
Pannullo."
4
<PAGE>
SUMMARY FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM ENDED SEPTEMBER 30,
INCEPTION(1) TO FISCAL YEAR ENDED ----------------------
MARCH 31, 1996 MARCH 31, 1997 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND OTHER DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues(2)............. $11,923 $169,635 $ 57,205 $ 187,044
Cost of services........ 13,812 166,184 59,265 170,753
------- -------- --------- ----------
Gross profit (loss)..... (1,889) 3,451 (2,060) 16,291
Operating expenses:
Selling and marketing
expenses.............. 318 1,762 782 1,828
General and
administrative
expenses.............. 705 2,613 806 4,109
Stock based
compensation (3)...... -- -- -- 1,855
------- -------- --------- ----------
Operating profit
(loss)................. (2,912) (924) (3,648) 8,499
Earnings (loss) before
income taxes........... (2,910) (820) (3,629) 8,527
Income tax provision.... -- -- -- (2,018)
------- -------- --------- ----------
Net earnings (loss)..... (2,910) (820) (3,629) 6,509
======= ======== ========= ==========
Net earnings (loss) per
share (4).............. $ $ $ $
Weighted average number
of common shares and
common share
equivalents............
OTHER FINANCIAL DATA:
Gross profit (loss)..... $(1,890) $ 3,451 $ (2,061) $ 16,291
Gross margin............ (15.85)% 2.03 % (3.60)% 8.71%
EBITDA(5)............... $(2,903) $ (849) $ (3,641) $ 9,128
EBITDA margin........... (24.35)% (0.50)% (6.36)% 4.88%
Capital expenditures.... $ 74 $ 1,489 $ 122 $ 7,949
OTHER OPERATING DATA:
Number of PINs activated
(in thousands)......... N/A 31,087 11,967 28,694
Minutes terminated (in
thousands) (6)......... 38,977 615,006 201,274 687,007
Revenues per minute
terminated (2).........
Number of employees at
end of period.......... 22 69 35 142
Number of switches at
end of period.......... 0 1 0 2
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
------------------------
ACTUAL AS ADJUSTED(7)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................. $ 11,546 $
Working capital........................... (20,456)
Property and equipment, net............... 9,152
Total assets.............................. 48,678
Long term debt, less current portion...... 5,000
Total shareholders' equity (deficiency)... (10,363)
</TABLE>
- --------------------
(1) The Company was incorporated in New York on April 21, 1995 and had limited
operations until July 1995.
(2) Revenues are recorded net of distributor discounts.
(3) Relates to (i) the grant to Mr. Pannullo, on May 9, 1997, of options to
purchase 1,048,600 shares of Common Stock exercisable at a nominal price
and (ii) the grant to certain other employees of the Company of options to
purchase shares of Common Stock with a value of $850,000, exercisable at a
nominal price. See "Certain Transactions--Transactions with The Interactive
Telephone Company, GodotSoft, L.L.C and Joseph Pannullo."
(4) See Note 1 to the Company's financial statements for an explanation of the
method used to determine the number of shares used in computing net
earnings (loss) per share and weighted average number of common shares and
common share equivalents.
(5) EBITDA consists of Earnings before Interest, Income Taxes, Depreciation and
Amortization. EBITDA is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance. EBITDA
is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity. See the Company's Financial Statements included
elsewhere in this Prospectus.
(6) "Minutes terminated" represents minutes billed by underlying carriers for
terminating the Company's long distance traffic.
(7) Adjusted to reflect the sale of shares of Common Stock by the Company
and the application of net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. Certain statements
contained under "Management's Discussion and Analysis of Financial Condition
and Results of Operations," such as statements concerning the Company's
ability to increase revenues and gross margins and to decrease cost of
services as a percentage of revenues, certain statements under "Business,"
such as statements concerning future growth in the demand for Prepaid Cards,
the introduction of new products and services, the future of the
telecommunications industry and PT-1's plans to expand its telecommunications
and distribution networks and other statements contained herein regarding
matters that are not historical facts, are forward-looking statements (as such
term is defined in the Securities Act of 1933, as amended (the "Securities
Act")). Because such forward-looking statements include risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Factors that could cause actual
results to differ materially include, but are not limited to, those discussed
under "Risk Factors."
Limited Operating History; Net Losses. The Company was organized in April
1995 and has had only a limited operating history upon which investors may
base an evaluation of its performance. The Company incurred operating and net
losses from inception through the fiscal year ended March 31, 1997. Net loss
for the fiscal year ended March 31, 1997 was ($820,000). Although the Company
reported net income of $6.5 million for the six months ended September 30,
1997, there can be no assurance that the Company will be profitable in the
future. A substantial portion of the Company's revenues for the six months
ended September 30, 1997 was derived from the provision of resale services
provided to other telecommunications providers, and the Company expects the
provision of these services to represent a growing percentage of total
revenues in the future. Accordingly, the Company's prospects must be
considered in light of the risks, expenses, problems and delays inherent in
establishing a new business in a rapidly changing industry. See "--Ability to
Manage Growth" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Ability to Manage Growth; Need to Hire Additional Employees. Although PT-1
has experienced substantial growth in revenues since inception and expects to
continue to grow, there can be no assurance that the growth experienced by the
Company will continue or that the Company will be able to expand its
telecommunications infrastructure, add services, expand its customer bases and
markets, install additional POPs or implement the other features of its
business strategy at the rate or to the extent presently planned. This growth
has placed, and is expected to continue to place, significant demands on all
aspects of the Company's business, including its management, financial,
technical and administrative personnel and its systems. There can be no
assurance that the Company's systems, procedures and controls and existing
office space will be adequate to support expansion of the Company's
operations. The Company's future operating results will substantially depend
upon the ability of its executive officers to manage its growth and to attract
and retain additional highly qualified personnel. 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 and marketing
resources. While the Company's executive officers have experience managing
start-up companies and in other entrepreneurial activities, none has had
experience in managing a public company or other large business. There can be
no assurance that the Company will successfully manage its expanding
operations and continued growth or attract additional personnel, and any
failure to do so could have a material adverse effect on the Company's
business, operating results, financial condition or prospects (a "Material
Adverse Effect"). See "Business--Strategy," "Business--Employees" and
"Management."
Variability of Operating Results. The Company's operating results may vary
significantly in the future due to numerous factors, including (i) changes in
operating expenses, such as payments to carriers from which the Company
purchases origination, transport and termination services, (ii) the impact of
the Company's efforts to expand its own facilities-based network and resulting
increases in fixed and other costs, (iii) the timing of the introduction of
new products and services, (iv) changes in legislation and regulation which
affect the competitive environment for the Company's products and services,
(v) market acceptance of new products and services and
6
<PAGE>
(vi) other competitive conditions. Accordingly, the Company believes that
prior results of operations should not be relied upon as an indication of the
Company's future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business--Telecommunications
Products and Services" and "Business--Competition."
Dependence on Facilities, Information Systems and Third Party Services. The
Company's network currently includes switches and Debit Card Platforms located
in Edison, New Jersey, Jersey City, New Jersey and Flushing, New York and a
switch located in Miami, Florida. The Company's provision of reliable
telecommunications services is dependent upon its ability to protect its
switches, Debit Card Platforms and other equipment and data at such facilities
against damage that may be caused by fire, power loss, technical failures,
unauthorized intrusion, natural disasters, sabotage and other similar events.
Although the Company has taken precautions and continues to review how best to
protect itself and its customers from events that could interrupt delivery of
services, there can be no assurance that a fire, power loss, technical
failure, unauthorized intrusion, natural disaster, sabotage or other similar
or unforeseen event would not cause the failure of a switch, Debit Card
Platform or other significant technical component, thereby resulting in an
interruption in telecommunications services. Such an interruption could have a
Material Adverse Effect.
The Debit Card Platform located in Edison, New Jersey (the "Edison Debit
Card Platform"), is owned and operated for the Company by InterExchange.
Through December 31, 1997, a significant portion of the Company's Prepaid Card
minutes have been processed through the Edison Debit Card Platform. Although
the Company expects its dependence upon the Edison Debit Card Platform to
decrease as the Company increases the capacity of Company-owned and operated
Debit Card Platforms, it expects to continue to rely significantly on
InterExchange and the Edison Debit Card Platform. Any interruption of services
by InterExchange could have a Material Adverse Effect. See "Business--
Information Systems; Debit Card Platforms."
The Company uses information systems and software (including software
licensed to the Company by GodotSoft, L.L.C.) to provide information to
management, deliver services to its customers, track inventory, control fraud
and monitor system usage. Although the Company engages in extensive testing of
its software prior to introduction, there can be no assurance that errors will
not be found in such information systems or software. Any such error may
result in an interruption in telecommunications services or a partial or total
failure of the Company's network or information systems which could have a
Material Adverse Effect. See "Business--Information Systems; Debit Card
Platforms" and "Certain Transactions--Transactions with The Interactive
Telephone Company, GodotSoft, L.L.C. and Joseph Pannullo."
Dependence on and Concentration of Independent Distributors. Because the
Company distributes substantially all of its Prepaid Cards through wholesale
distributors and does not have an internal retail sales department, its
success is significantly dependent upon its ability to recruit, maintain and
motivate a network of independent distributors. A significant element of the
Company's growth strategy is to increase retail distribution of the Company's
products and services by expanding its distribution network in existing
markets and by extending this network into new markets. There can be no
assurance that the Company will be able to continue to effectively recruit,
maintain and motivate independent distributors or to prevent its distributors
from marketing other Prepaid Cards, and, to the extent the Company is unable
to do so, a Material Adverse Effect may result. See "Business--Strategy."
At March 31, 1997, the Company's accounts receivable were concentrated among
distributors primarily in the Northeast, with two distributors individually
representing approximately 35% and 15% of the net accounts receivable balance.
At September 30, 1997, these two distributors represented approximately 31%
and 13% of the net accounts receivable balances. While the Company believes
that it could replace any of these distributors, a loss of these or other
distributors could have a Material Adverse Effect.
Intense Competition. The telecommunications services industry is intensely
competitive. The Company competes with other providers of Prepaid Cards and
with providers of telecommunications services in general. Many of the largest
telecommunications providers currently offer Prepaid Cards in addition to the
other
7
<PAGE>
telecommunications services the Company intends to provide in the future. As a
service provider in the long distance telecommunications market, the Company
competes with four dominant providers, AT&T Corp. ("AT&T"), MCI
Communications, Inc. ("MCI"), Sprint, Inc. ("Sprint") and WorldCom. These
companies are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories,
greater name recognition and larger customer bases than the Company. The
Company also competes with smaller, emerging carriers in both the Prepaid Card
retail market and in the wholesale market, including IDT Corporation, Star
Telecommunications, Inc., RSL Communications, SmarTalk Teleservices, Inc.,
Pacific Gateway Exchange, Inc., FaciliCom International, Inc. and Telegroup,
Inc. To the extent the Company begins providing services to customers outside
the U.S. market, it may compete with the large PTTs such as British
Telecommunications plc ("BT") in the U.K. The Company believes that additional
competitors will be attracted to the Prepaid Card market (including Internet-
based service providers and other telecommunications companies). There can be
no assurance that competition from existing or new competitors or a decrease
in the rates charged for telecommunications services by the major long
distance carriers or other competitors will not have a Material Adverse
Effect. See "--Rapid Technological Change."
Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position. The Telecommunications Act of 1996
(the "Telecommunications Act") is expected to open the long distance market to
competition from the Regional Bell Operating Companies (the "RBOCs"). The
entry of these well-capitalized and well-known entities into the long distance
market likely will increase competition for long distance customers, including
customers who use Prepaid Cards to make long distance calls. The
Telecommunications Act also grants the Federal Communications Commission
("FCC") the authority to deregulate other aspects of the telecommunications
industry, which in the future may, if authorized by the FCC, facilitate the
offering of telecommunications services by other entities, in competition with
the Company. See "Regulation," "Business--Competition" and "Business--
Government Regulation."
New Industry Segment; Uncertainty of Market Acceptance. The Prepaid Card
segment of the telecommunications industry is an emerging business with an
increasing and substantial number of new market entrants. These entrants are
seeking to market, advertise and position their products and services as the
preferred method for accessing long distance telephone services. Because the
Prepaid Card segment is an emerging market, demand for and market acceptance
of newly introduced products and services is uncertain. There can be no
assurance that substantial markets will continue to develop for Prepaid Cards
or that the Company will be able to meet its current marketing objectives,
succeed in positioning its products and services as a preferred method for
accessing long distance telephone services, increase market acceptance of its
existing products and services or achieve significant market acceptance of its
new products and services. See "Business--Industry Overview."
Dependence upon Telecommunications Providers. In addition to using its own
network capacity, the Company relies upon the transmission capacity of
approximately 35 local, domestic and international long distance
telecommunications carriers, including WorldCom and Teleport, to originate,
transport and terminate various segments of its long distance traffic. The
Company's agreements with these carriers provide that rates charged to the
Company may fluctuate with rate change notice periods varying from five days
to one month. PT-1's ability to maintain and expand its business depends, in
part, upon its ability to continue to obtain these services at favorable rates
and terms from these carriers. In addition, regulatory changes, competitive
pressures and changes in access charges may adversely affect the charges
imposed upon PT-1 by other telecommunications providers, some of which may be
applied retroactively to the Company. No assurance can be given that the
Company will continue to be able to obtain origination, transport or
termination services at favorable rates and terms, and a material increase in
the prices at which the Company obtains such services or the imposition of any
retroactive charges, could have a Material Adverse Effect. See "--Intense
Competition" and "Business--Products and Telecommunications Services."
In addition to favorable rates and terms, the Company also requires the
cooperation and efficiency of incumbent local exchange carriers ("LECs"),
competitive local exchange carriers ("CLECs"), and foreign carriers to
originate and terminate service for its customers in a timely manner. Although
the Company has not experienced significant losses in the past because of
interruptions of service provided by these carriers, no assurance can be made
that the Company will not experience interruptions in the future or that such
interruptions will not have a Material Adverse Effect.
8
<PAGE>
Rapid Technological Change. The telecommunications service industry is
characterized by rapid technological change, new product and service
introduction, new sales channels and evolving industry standards. The
Company's success will depend, in significant part, upon its ability to make
timely and cost-effective enhancements and additions to its technology and to
introduce new products and services that meet customer demands. The Company
expects new products and services to be developed and introduced by other
companies that compete with its products and services. The proliferation of
new telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including Prepaid Cards. There can be no assurance that the Company will be
successful in responding to these or other technological changes, evolving
industry standards or to new products and services offered by the Company's
current and future competitors. The inability of the Company to respond to
these changes could have a Material Adverse Effect. See "Business--
Competition" and "Business--Telecommunications Products and Services."
Dependence on Key Management. The Company believes that its continued
success will depend, to a significant extent, upon the efforts and abilities
of its executive officers. Although the Company's executive officers have
entered into multi-year employment agreements (which include noncompetition
covenants), and the Company believes that it would be able to locate a
suitable replacement for each of its executive officers if his services were
lost, there can be no assurance that it would be able to do so. Accordingly,
the loss of services of any of the Company's executive officers could have a
Material Adverse Effect. See "--Ability to Manage Growth; Need to Hire
Additional Employees " and "Management."
Regulation. The Company is subject to U.S. federal and state regulation of
its long distance telecommunications services. The Company is regulated at the
federal level by the FCC and currently is required to maintain both domestic
and international tariffs for its services containing the currently effective
rates, terms and conditions of service. In addition, the Company is required
to obtain a Section 214 license from the FCC to provide its international
services. As a condition of its Section 214 license, the Company must comply
with a variety of reporting and filing requirements related to its traffic and
revenues, its foreign applications and its correspondent and/or termination
relationships with foreign carriers, if any.
The Company's services can also be used to complete a long distance call
between localities within the same state ("intrastate" calling), and therefore
are subject to various state laws and regulations, including prior
certification, notification or registration requirements. The Company
generally must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in most states in which it offers
service. In most of these jurisdictions, the Company also must file and obtain
prior regulatory approval of tariffs for intrastate services. In addition, the
Company must update or amend the tariffs when the Company adjusts its rates or
adds new products.
The FCC and numerous 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. As a
result, the Company has filed or will file certain notices and applications
with respect to the consummation of the Offering. While the Company expects to
receive all such approvals that have been requested and believes that it is or
shall soon be otherwise in compliance with the applicable state and federal
regulations governing telecommunications service, there can be no assurance
that the FCC or the regulatory authorities in one or more states will not
raise material issues with regard to the Company's compliance with applicable
regulations, including transfer, stock issuance and similar regulations, or
that other regulatory matters will not have a Material Adverse Effect. In
addition, changes in the federal and state regulations requiring LECs to
provide equal access for origination and termination of calls by long distance
subscribers (such as the Company's customers) or in the regulations governing
the fees to be charged for such access services, particularly changes allowing
variable pricing based upon volume, could have a Material Adverse Effect. See
"Business--Government Regulation."
9
<PAGE>
A small portion of the Company's customers use pay phones to access the
Company services. The Telecommunications Act requires long distance carriers
such as the Company to compensate pay phone owners when a pay phone is used to
originate a telephone call through a toll-free number. Recent regulations
adopted under the Telecommunications Act mandate compensation in the amount of
$0.284 per call. The Company is currently implementing changes to pass these
costs on to its customers who use pay phones. However, there can be no
assurance that the Company will be able to successfully pass these costs on to
its customers or that these charges will not have a Material Adverse Effect.
See "Business--Government Regulations."
The FCC requires all telecommunications carriers providing interstate
telecommunications services to contribute to universal service support by
contributing to a fund (the "Universal Service Fund"). Universal Service Fund
contributions are generally equal to approximately four percent of a carrier's
interstate and international, plus approximately one percent of its
intrastate, "end-user" gross telecommunications revenues, effective January 1,
1998. In addition, states may establish their own intrastate universal service
funding programs, to which the Company may in some cases be required to
contribute. While the Company expects that the industry will incorporate these
charges into the rates charged to end users, there can be no assurance that
this will be the case or that a delay in passing these charges on to end users
will not have a Material Adverse Effect. In addition, the FCC will adjust the
amount of these contributions each calendar quarter, and may increase them
significantly in future periods.
As a holder of certain licenses issued by the Secretary for Trade and
Industry (the "TI Secretary") of the United Kingdom, the Company is subject to
the U.K. Office of Telecommunications ("Oftel") regulations. Oftel is the U.K.
regulatory agency responsible for enforcing conditions of the Company's U.K.
licenses. See "Business--Government Regulation--United Kingdom."
The foregoing discussion is not a complete description of all present and
proposed international, federal, state and local legislation and regulations
affecting the Company's business. These laws and regulations are subject to
change. There can be no assurance that future legal and regulatory
developments will not have a Material Adverse Effect.
In addition, in recent years, the telecommunications industry has
increasingly come under the scrutiny of the Federal Trade Commission (the
"FTC") and state regulatory agencies with respect to the promotion, marketing
and advertising of effective rates, terms and conditions of telecommunications
services and products. In July 1997, the Company was notified by the FTC and
the New York Attorney General's Office (the "NYAG") that it was the subject of
an investigation alleging deceptive advertising practices in connection with
the sale of its Prepaid Cards and that the FTC and the NYAG were reviewing
whether the Company properly decrements minutes from its Prepaid Cards. While
the Company believes that its advertising has complied with federal and state
regulations regarding advertising and that its Prepaid Cards are properly
decremented, there can be no assurance that the pending review by the FTC and
the NYAG or any future federal or state regulatory inquiries will not raise
material issues with respect to the Company's past or present promotion,
marketing, advertising or other practices, or that the resolution of such
issues will not result in civil penalties (including fines), require the
Company to modify its advertisements or decrementing practices or have a
Material Adverse Effect. See "Business--Legal Proceedings."
Taxes. The taxation of Prepaid Cards sales and use is evolving and is not
specifically addressed by the laws of many of the states in which the Company
does business. While the Company believes that it has adequately reserved for
any state taxes it may ultimately be required to pay, there can be no
assurance that this will be the case. In addition, certain states may enact
legislation which specifically provides for taxation of Prepaid Cards or may
interpret current laws in a manner resulting in additional tax liabilities.
Fraud; Theft of Services; Uncollectible Accounts. From time to time, callers
have obtained services without rendering payment to the Company by unlawfully
using the Company's access numbers and PINs. The Company attempts to manage
these theft and fraud risks through its internal controls and its monitoring
and blocking systems. Although the Company believes that its risk management
practices are adequate, and to date the Company has not experienced material
losses due to such unauthorized use of access numbers and PINs,
10
<PAGE>
there can be no assurance that the Company's risk management practices will be
sufficient to protect the Company in the future from unauthorized transactions
or thefts of services which could have a Material Adverse Effect.
In addition, the Company has recently begun to sell Prepaid Cards to certain
of its distributors on credit, and the Company also intends to introduce new
services such as dial around and presubscribed long distance for which
customers will be billed after services are rendered. Although the Company
believes that it will be able to adequately evaluate the risk of uncollectible
accounts, there can be no assurance that the Company will collect all amounts
due for services rendered. See "Business--Information Systems; Debit Card
Platforms" and "Business--Prepaid Card Productions and Inventory Control."
Limited Protection of Proprietary Rights; Risks of Infringement. The Company
believes that PT-1 and its Prepaid Card products have achieved significant
brand awareness among distributors, retail outlets and many ethnic communities
and other consumer groups. The Company has filed for federal trademark
protection of the PT-1 Communications and PT-1 service marks and for other
names the Company uses or intends to use to market its Prepaid Cards,
including The PT-1 Card and The New York Card. In addition, the Company
recently changed its name from Phonetime, Inc. and the name of one of its
Prepaid Cards from The PTI Card to The PT-1 Card in response to letters
challenging the Company's use of these names. There can be no assurance that
the Company's efforts to protect its proprietary rights will be successful or
that other companies will not challenge the Company's use of its trademarks
and service marks. The Company's inability to protect its proprietary rights
or continue to use such marks, could result in a Material Adverse Effect. See
"Business--Trademarks and Service Marks."
Substantial Discretion of Management Concerning Use of Proceeds. The Company
has allocated approximately $40 million of the net proceeds of the Offering
for specific identified purposes, with the remaining approximately $30 million
to be used for working capital requirements and for general corporate
purposes. Accordingly, management will have substantial discretion in spending
a large percentage of the proceeds to be received by the Company. See "Use of
Proceeds."
Control of Company. Upon completion of the Offering, the present directors
and executive officers of the Company and their respective affiliates will
beneficially own shares (approximately %) of the outstanding
Common Stock, of which shares (approximately %) will be
beneficially owned by Mr. Samer Tawfik, the Chief Executive Officer and
Chairman of the Board of Directors of the Company (the "Board of Directors").
As a result, these shareholders in general, and Mr. Tawfik in particular, will
be able to exercise significant influence over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership also may
have the effect of delaying or preventing a change in control of the Company.
See "Management," "Principal and Selling Shareholders" and "Description of
Capital Stock--Certain Provisions of the Company's Certificate and Bylaws."
Antitakeover Considerations. The Company's Restated Certificate of
Incorporation (the "Certificate") and Amended and Restated Bylaws (the
"Bylaws"), to be adopted prior to the closing of the Offering, will include
certain provisions that may have the effect of delaying, deterring or
preventing a future takeover or change in control of the Company without the
approval of the Board of Directors. Such provisions also may render the
removal of directors and management more difficult. Among other things, the
Certificate and/or Bylaws: (i) provide for a classified board of directors,
(ii) restrict who may call a special meeting of shareholders, (iii) require
that shareholder action be taken only by unanimous written consent or at
shareholder meetings and (iv) specify advance notice requirements for certain
shareholder proposals, including 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 up to 15 million shares of preferred stock, no par value (the
"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 its rights, preferences and designations, may
have the effect of delaying, deterring or preventing a change in control of
the Company. Further, the New York Business Corporation Law (the "NYBCL") and
certain provisions of the Certificate
11
<PAGE>
impose restrictions on the ability of a third party to effect a change in
control of the Company. In addition, 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 "--Regulation" and
"Description of Capital Stock."
Absence of Public Market and Possible Volatility of Stock Price. Prior to
the Offering, there has been no public market for the Common Stock and there
can be no assurance that an active market will develop upon consummation of
the Offering. The initial public offering price will be determined by
negotiations among the Company, the Selling Shareholders and the Underwriters.
See "Underwriting" for a description of the factors to be considered in
determining the initial public offering price. There is no assurance that the
market price of the Common Stock after the Offering will not decline below the
initial public offering price. The Company believes factors such as actual or
anticipated quarterly fluctuations in financial results, changes in earnings
estimates by securities analysts and announcements of material events by the
Company or its competitors may cause the market price for the Common Stock to
fluctuate, perhaps substantially. In addition, in recent years the stock
market has experienced extreme price and volume fluctuations which have
affected the market price for many companies in the telecommunications and
other industries and which often have been unrelated to the operating
performance of these companies. These fluctuations, as well as general
economic conditions, may have a material adverse effect on the price of the
Common Stock. See "Underwriting."
Shares Eligible for Future Sale. Future sales of substantial amounts of
Common Stock by existing shareholders could adversely affect the market price
of the Common Stock. The shares offered hereby will be eligible for
immediate sale in the public market without restriction under the Securities
Act except any shares purchased by an "affiliate" of the Company (as that term
is defined under the rules and regulations of the Securities Act), which
shares will be subject to the resale restrictions of Rule 144 ("Rule 144")
promulgated under the Securities Act. Of the remaining shares of
Common Stock which will be outstanding upon the completion of this Offering
(including shares issuable upon the exercise of vested and exercisable
options, but excluding warrants to acquire shares of Common Stock with a fair
market value of $1.0 million at an aggregate exercise price of $333,333 which
vest and become exercisable upon the completion of the Offering), shares
will be subject to 180-day lock-up agreements between the holders thereof and
the Underwriters. After the expiration of such lock-up agreements, pursuant to
Rule 144, such holders may sell such shares without registration, subject to
certain holding requirements and volume limitations. A decision by any such
holders to publicly sell a significant number of shares of Common Stock could
adversely affect the market price of the Common Stock and may impair the
ability of the Company to raise capital in the future at prices or on terms
favorable to the Company. See "Description of Capital Stock--Registration
Rights," "Description of Capital Stock--The InterExchange Warrants," "Shares
Eligible for Future Sale" and "Underwriting."
Benefits of Offering to Existing Shareholders. The existing shareholders of
the Company will receive certain benefits from the sale of the Common Stock
offered hereby. The Offering will establish a public market for the Common
Stock and provide increased liquidity to the existing shareholders for the
shares of Common Stock they will own after the Offering, subject to certain
limitations. See "Shares Eligible for Future Sale." Six employees of the
Company and a former executive officer and director of the Company
(collectively, the "Selling Shareholders") will sell shares of Common
Stock in the Offering and will receive approximately $ million in net
proceeds. See "Principal and Selling Shareholders." A portion of the net
proceeds of the Offering will be used to repay indebtedness under a promissory
note to Mr. Thomas Hickey (the "Note"), the former executive officer and
director named above, which as of September 30, 1997 had an outstanding
balance, including accrued interest, of approximately $10.4 million. See "Use
of Proceeds" and "Certain Transactions--Transactions with Thomas Hickey."
Additionally, immediately following the Offering, existing shareholders will
have a substantial unrealized gain over the original cost of the shares that
will continue to be held by them. See "Dilution."
Immediate and Substantial Dilution to New Investors. Purchasers of shares of
Common Stock in the Offering will experience immediate and substantial
dilution of the net tangible book value per share of Common Stock. To the
extent options or warrants to purchase Common Stock are exercised in the
future, there will be further dilution. See "Dilution."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (at an assumed initial offering price of $ per share, the
midpoint of the range set forth on the cover page of this Prospectus) are
estimated to be approximately $70 million, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company. The Company will not receive any of the proceeds from the sale of
shares of Common Stock by the Selling Shareholders.
The Company intends to use approximately (i) $30 million of the net
proceeds from the Offering to expand and develop its network; (ii) $ million
of the net proceeds to repay $ million of existing indebtedness to Thomas
Hickey, a former executive officer, director and significant shareholder of
the Company, $10.0 million of which represents outstanding principal (the
indebtedness accrues interest at a rate of 8.0% per annum) and (iii) $
million of the net proceeds for working capital requirements arising from the
introduction of new services (including dial around and presubscribed) and
increasing sales of existing wholesale services, as well as for general
capital purposes. The Company may use a portion of the net proceeds from 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. See "Business--Strategy." In connection with (ii) above,
the Company is obligated to pay $5.0 million of principal on March 25, 1998
and the remaining principal and accrued and unpaid interest on March 25, 1999.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and "Business--Strategy" and "Certain Transactions--
Transactions with Thomas Hickey."
Prior to the application of the net proceeds of the Offering as described
above, such funds will be invested in investment grade, short-term, interest-
bearing securities, in interest-bearing bank accounts or in U.S. government
securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock, and the
current policy of the Board of Directors is to retain any available earnings
for use in the operation and expansion of the Company's business. Therefore,
the payment of cash dividends on its Common Stock is unlikely in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of the Board of Directors and will depend upon the Company's
earnings, capital requirements, financial condition and any other factors
deemed relevant by the Board of Directors.
13
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the Company as
of September 30, 1997, and the capitalization of the Company as adjusted to
reflect the issuance and sale by the Company of shares of Common Stock
offered hereby (assuming an initial public offering price of $ per share)
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the financial
statements and the related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
ACTUAL AS ADJUSTED
----------------------------
<S> <C> <C>
Cash and cash equivalents......................... $ 11,546 $
============= ===========
Notes payable:
Current portion of notes payable................ $ 5,520 $
Notes payable, net of current portion........... 5,000
------------- -----------
Total notes payable............................... 10,520
Shareholders' equity:
Preferred Stock, no par value $.01 per share;
15,000,000 shares authorized; no shares issued
or outstanding................................. -- --
Common Stock, par value $.01 per share;
150,000,000 shares authorized; 71,050,000
shares issued actual and shares issued as
adjusted (1)................................... 711
Additional paid-in capital...................... 1,148
Retained earnings (accumulated deficit)......... 2,779
Treasury stock, at cost, 25,053,000 shares
outstanding actual and no shares outstanding as
adjusted (2)................................... (15,000)
------------- -----------
Total shareholders' equity (deficiency)....... (10,362)
------------- -----------
Total capitalization.............................. $ 158 $
============= ===========
</TABLE>
- ---------------------
(1) Excludes: (i) options outstanding as of September 30, 1997 to purchase
620,500 shares of Common Stock at a weighted average exercise price of $
per share (of which options to purchase 38,331 shares are vested and
exercisable at February 12, 1998) (i) (ii) warrants issued to certain
employees of InterExchange outstanding on the date hereof to acquire
shares with a fair market value of $3.0 million at an aggregate exercise
price of $1.0 million (one-third of which vest and become exercisable upon
completion of the Offering); (iii) shares of Common Stock valued at
$850,000 issuable to certain employees of the Company pursuant to the
Pannullo Transactions (as defined in "Certain Transactions"); and (iv)
2,879,500 shares of Common Stock available for issuance under the
Company's 1997 Stock Incentive Plan. See "Dilution," "Management--Stock
Incentive Plan," "Description of Capital Stock--The InterExchange
Warrants" and "Certain Transactions--Transactions with The Interactive
Telephone Company, Godotsoft, L.L.C. and Joseph Pannullo."
(2) Reflects the cancellation and restoration to the status of authorized and
unissued certain shares of Common Stock that were repurchased from Thomas
Hickey, held in treasury and pledged to secure the payment of indebtedness
to Mr. Hickey. A portion of the net proceeds of the Offering will be used
to repay the indebtedness. See "Use of Proceeds" and "Certain
Transactions--Transactions with Thomas Hickey."
14
<PAGE>
DILUTION
The net tangible book value (deficiency) of the Company's Common Stock as of
September 30, 1997 was $( ) million or $( ) per share. "Net tangible book
value (deficiency)" per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of shares of Common Stock
offered hereby, and after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company and receipt of the net
proceeds of the Offering by the Company, the pro forma net tangible book value
(deficiency) of the Company as of September 30, 1997 would have been $
million, or $ per share, representing an immediate increase in net tangible
book value of $ per share to existing shareholders and an immediate dilution
of $ per share to new investors purchasing shares in the Offering. The
following table illustrates the resulting per share dilution with respect to
the shares of Common Stock to be sold by the Company in the Offering:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Net tangible book value (deficiency) per share at September 30,
1997.............................................................. $( )
Increase per share attributable to new investors...................
----
Pro forma net tangible book value (deficiency) per share after the
Offering (1)........................................................
---
Dilution per share to new investors (1).............................. $
===
</TABLE>
- ---------------------
(1) If the over-allotment option is exercised in full, the pro forma net
tangible book value and dilution per share to new investors would be $
and $ , respectively.
The foregoing computations assume no exercise of stock options or warrants
prior to completion of the Offering. Options to purchase an aggregate of
shares of Common Stock at exercise prices ranging from $ to $ per share,
with a weighted average exercise price of $ per share and warrants to
purchase an aggregate of shares of Common Stock at exercise prices ranging
from $ to $ , with a weighted average exercise price of $ per share, will
be outstanding and unexercised upon completion of the Offering. If all of such
stock options and warrants had been exercised at September 30, 1997, the pro
forma net tangible book value (deficiency) per share after the Offering would
be $ , representing an increase in pro forma net tangible book value of $
per share and dilution to new investors of $ per share.
The following table summarizes the difference between existing shareholders
and new investors with respect to the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company before
deduction of underwriting discounts and commissions and estimated offering
expenses and the weighted average price paid per share by the existing
shareholders and by the investors purchasing shares of Common Stock in the
Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION WEIGHTED AVERAGE
NUMBER PERCENT AMOUNT PERCENT PRICE PER SHARE
------ ---------- --------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Existing
shareholders(1)........ % $ % $
New investors...........
--- --- --------- ---------
Total................. 100% $ 100%
=== === ========= =========
</TABLE>
- ---------------------
(1) Excludes: (i) options outstanding as of September 30, 1997 to purchase
620,500 shares of Common Stock at a weighted average exercise price of
$ per share (of which options to purchase 38,331 shares are vested and
exercisable as of February 12, 1998); (ii) warrants issued to certain
employees of InterExchange and outstanding on the date hereof to acquire
shares with a fair market value of $3.0 million at an aggregate exercise
price of $1.0 million (one-third of which vest and become exercisable upon
completion of the Offering); (iii) shares of Common Stock valued at
$850,000 issuable to certain employees of the Company pursuant to the
Pannullo Transactions (as defined); and (iv) shares of Common Stock
available for issuance under the Company's 1997 Stock Incentive Plan. See
"Dilution," "Management--Stock Incentive Plan," "Description of Capital
Stock--The InterExchange Warrants" and "Certain Transactions--Transactions
with The Interactive Telephone Company, Godotsoft, L.L.C. and Joseph
Pannullo."
15
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other information for
the Company. The Statement of Operations Data for the period ended March 31,
1996 and for the fiscal year ended March 31, 1997 have been derived from the
Company's audited financial statements and notes thereto, which are included
elsewhere in this Prospectus. The financial information for the six month
periods ended September 30, 1996 and 1997 has been derived from the unaudited
financial statements of the Company and notes thereto, included elsewhere in
this Prospectus, which in the opinion of management, have been prepared on the
same basis as the audited financial statements and include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position and results of operations for
such periods. The results of operations for the interim periods are not
necessarily indicative of a full year of operations. The following financial
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM ENDED SEPTEMBER 30,
INCEPTION(1) TO FISCAL YEAR ENDED ----------------------
MARCH 31, 1996 MARCH 31, 1997 1996 1997
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS AND OTHER DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues(2)............. $11,923 $169,635 $ 57,205 $ 187,044
Cost of services........ 13,812 166,184 59,265 170,753
------- -------- --------- ----------
Gross profit (loss)..... (1,889) 3,451 (2,060) 16,291
Operating expenses:
Selling and marketing
expenses.............. 318 1,762 782 1,828
General and
administrative
expenses.............. 705 2,613 806 4,109
Stock based
compensation (3)...... -- -- -- 1,855
------- -------- --------- ----------
Operating profit
(loss)................. (2,912) (924) (3,648) 8,499
Earnings (loss) before
income taxes........... (2,910) (820) (3,629) 8,527
Income tax provision.... -- -- -- (2,018)
------- -------- --------- ----------
Net earnings (loss)..... (2,910) (820) (3,629) 6,509
======= ======== ========= ==========
Net earnings (loss) per
share (4).............. $ $ $ $
Weighted average number
of common shares and
common share
equivalents............
OTHER FINANCIAL DATA:
Gross profit (loss)..... $(1,890) $ 3,451 $ (2,061) $ 16,291
Gross margin............ (15.85)% 2.03 % (3.60)% 8.71 %
EBITDA(5)............... $(2,903) $ (849) $ (3,641) $ 9,128
EBITDA margin........... (24.35)% (0.50)% (6.36)% 4.88 %
Capital expenditures.... $ 74 $ 1,489 $ 122 $ 7,949
OTHER OPERATING DATA:
Number of PINs activated
(in thousands)......... N/A 31,087 11,967 28,694
Minutes terminated (in
thousands) (6)......... 38,977 615,006 201,274 687,007
Revenues per minute
terminated(2)..........
Number of employees at
end of period.......... 22 69 35 142
Number of switches at
end of period.......... 0 1 0 2
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
AS OF AS OF AS OF ACTUAL AS ADJUSTED(7)
MARCH 31, 1996 MARCH 31, 1997 SEPTEMBER 30, 1996 -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ 694 5,577 2,775 $ 11,546 $
Working capital......... (3,064) (17,426) (7,571) (20,456)
Property and equipment,
net.................... 69 1,484 183 9,152
Total assets............ 2,186 18,899 11,099 48,678
Long term debt, less
current portion........ -- 5,000 -- 5,000
Total shareholders'
equity (deficiency).... (2,907) (18,727) (6,536) (10,363)
</TABLE>
(footnotes continue on following page)
16
<PAGE>
- ---------------------
(1) The Company was incorporated in New York on April 21, 1995 and had limited
operations until July 1995.
(2) Revenues are recorded net of distributor discounts and are not necessarily
comparable to other telecommunications carriers.
(3) Relates to (i) the grant to Mr. Pannullo, on May 9, 1997, of options to
purchase 1,048,600 shares of Common Stock exercisable at a nominal price
and (ii) the grant to certain other employees of the Company of options to
purchase shares of Common Stock with a value of $850,000, exercisable at a
nominal price. See "Certain Transactions--Transactions with the
Interactive Telephone Company, GodotSoft, L.L.C. and Joseph Pannullo."
(4) See Note 1 to the Company's financial statements for an explanation of the
method used to determine the number of shares used in computing net
earnings (loss) per share and weighted average number of common shares and
common share equivalents.
(5) EBITDA consists of Earnings before Interest, Income Taxes, Depreciation
and Amortization. EBITDA is a measure commonly used in the communications
industry to analyze companies on the basis of operating performance.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to
net income as a measure of performance nor as an alternative to cash flow
as a measure of liquidity. See the Company's Financial Statements included
elsewhere in this Prospectus.
(6) "Minutes terminated" represents minutes billed by underlying carriers for
terminating the Company's long distance traffic.
(7) Adjusted to reflect the sale of shares of Common Stock by the Company
and the application of net proceeds therefrom. See "Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements, including the notes thereto, and other detailed information
regarding the Company included elsewhere in this Prospectus. Certain
statements set forth below, such as statements concerning the Company's
ability to increase revenues and gross margins and to decrease costs of
services as a percentage of revenues, statements concerning future growth in
the demand for Prepaid Cards, the introduction of new products and services,
the future of the telecommunications industry and PT-1's plans to expand its
telecommunications and distribution networks and other statements contained
herein regarding matters that are not historical facts, are forward-looking
statements (as such term is defined in the Securities Act). Because such
forward-looking statements include risks and uncertainties, actual results may
differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, those discussed under "Risk Factors."
OVERVIEW
PT-1 is a leading emerging provider of international long distance services
to retail customers and telecommunications carriers. The Company currently
provides its retail services by marketing Prepaid Cards, primarily under the
PT-1 brand name, through an extensive network of distributors and believes
that its Prepaid Cards are sold in more than 50,000 independent retail outlets
throughout the United States. The Company targets retail markets with
substantial international long distance calling requirements, such as ethnic
communities, and believes that its Prepaid Cards provide consumers with a
convenient, attractively priced alternative to traditional presubscribed long
distance services. PT-1 has used its significant retail international traffic
to negotiate international termination arrangements with attractive rates and
develop an efficient telecommunication network, enabling the Company to market
its services competitively on a wholesale basis to telecommunications
carriers. The Company believes that it is the fifth largest provider of retail
international long distance services and the largest provider of Prepaid Cards
in the United States based upon revenues for the six months ended September
30, 1997. The Company generated revenues and net income of $187.0 million and
$6.5 million, respectively.
Revenues. The Company generates revenues from the sale of Prepaid Cards to
distributors and from the sale of transmission service on a wholesale basis to
other carriers. The Company has established itself in the international long
distance market through its Prepaid Card business and has used its
international traffic volume to develop a significant wholesale customer base.
PT-1's target markets include ethnic communities with substantial
international long distance calling requirements and for the three months
ended September 30, 1997, approximately 74.6% of the Company's revenues were
derived from the sale of international long distance telecommunications
services and 25.4% from the sale of domestic long distance services. Rates in
the international long distance market have declined in recent years and, as
competition in this segment of the telecommunications industry continues to
intensify, the Company believes that this downward trend in rates is likely to
continue. While the Company believes that any reduction in rates will be
offset in whole or in part by efficiencies attributable to the planned
expansion of the Company's telecommunications network as well as by lower
transmission costs per minute resulting from the Company's increased volume of
minutes there can be no assurance that this will be the case. See "Risk
Factors--Intense Competition."
In July 1995, the Company introduced its first Prepaid Card, The PT-1 Card,
initially targeted at ethnic communities with substantial international long
distance calling requirements in the New York city metropolitan area. The
Company issued its first local area calling card ("LAC Card"), The New York
Phone Card, in July 1996. Since February 1997, the Company has introduced
seven new LAC Cards (The New Jersey Phone Card, The Florida Card, The Boston
Card, The Detroit Card, The Connecticut Card, The Chicago Card and The D.C.-
Maryland-Virginia Card), the Alo Brasil and Hola Mexico cards targeted at the
Brazilian and Mexican communities in the U.S., as well as other Prepaid Cards.
The Company currently offers 24 Prepaid Cards targeted at various market
segments and plans to introduce up to 10 additional Prepaid Cards by June
1998.
18
<PAGE>
The Company sells its Prepaid Cards to distributors at a discount to their
face values of $5, $10, $20, $25, $50 and $100, and records the sale as
deferred revenue until the card user utilizes the calling time. Revenues from
the wholesale provision of international and domestic long distance services
to other carriers is also recognized at the time of customer usage. The
Company intends to record revenue from the sale of dial around services
(expected to be introduced during the first six months of 1998) and
presubscribed long distance services (expected to be introduced during the
first six months of 1998) upon customer usage and to bill its customers for
these services through billing and collection arrangements with LECs. The
Company's revenues are reported net of certain federal and state excise and
use taxes imposed upon Prepaid Cards. Commencing November 1, 1997, the Company
became subject to a 3% federal excise tax based upon the retail value of its
Prepaid Cards. See "Risk Factors--Taxes."
Cost of Services. Cost of services primarily includes payments to other
carriers for origination, transport and termination of the Company's
international and domestic long distance traffic. Historically, origination
costs have consisted largely of payments to other carriers, including LECs and
CLECs, for local access, and transport and termination costs have included
payments to other carriers for completing calls. Most of the Company's
transport costs are variable payments based upon usage for domestic and
international traffic, and the remainder are fixed cost lease payments for
leased lines. As a result, most of the Company's transmission cost is
variable. Currently, the Company relies upon the transmission capacity of
approximately 35 different carriers to provide these services. The Company's
agreements with these carriers provide that rates may fluctuate with rate
change notice periods varying from five days to one month and are typically
terminable upon 30 days notice. The variable nature of the cost of services
and many of the Company's contracts and agreements subject the Company to the
possibility of unanticipated cost increases and the loss of cost-effective
routing alternatives. See "Risk Factors--Dependence upon Telecommunications
Providers."
Other components of the cost of services include the cost of operating the
Company's switches in Jersey City, New Jersey, Flushing, New York and Miami,
Florida (excluding depreciation), and the Company's Debit Card Platforms in
Jersey City, New Jersey and Flushing, New York, as well as payments to
InterExchange for operating the Edison Debit Card Platform and the Company's
switch in Edison, New Jersey. Cost of services also includes the costs of
producing and distributing the Company's Prepaid Cards.
The Company intends to incur additional capital expenditures in connection
with the expansion of its telecommunications network. See "--Liquidity and
Capital Resources." The expansion of the telecommunications network is
expected to enable the Company to replace variable costs based upon usage with
fixed cost leased capacity payments. The Company believes that, as a result of
the expansion of its network, its cost of services as a percentage of revenue
will continue to improve. However, there can be no assurance that this will be
the case.
Gross Margin. The Company's gross margin has improved since inception,
primarily as a result of economies of scale associated with the Company's
increasing volume of terminated minutes. The Company intends to continue to
improve its gross margin per minute by (i) using the Company's additional
traffic to obtain lower usage-based charges from providers of origination,
transport and termination capacity and services, (ii) continuing to invest in
telecommunications network facilities and to enter into fixed cost and leased
line agreements when traffic volumes justify such investment, (iii) continuing
to use least-cost routing to reduce its per minute transmission costs and (iv)
leveraging its telecommunications network by attracting additional consumers
and other telecommunications carrier customers. No assurances can be given
that the Company will be successful in continuing to improve its gross
margins.
Selling and Marketing Expenses. Selling and marketing expenses consist
primarily of commissions, salaries, freight, advertising and promotion costs
and other expenses associated with the marketing and sale of Prepaid Cards and
other products and services. As the Company introduces dial around and
presubscribed long distance services, it expects selling and marketing
expenses to increase as a percentage of revenues.
19
<PAGE>
General and Administrative Expenses. General and administrative expenses
consist primarily of officers' salaries, professional fees, accounting and
office salaries, customer service salaries, depreciation and amortization, an
allowance for doubtful accounts and other corporate overhead costs. The
Company expects its expense for uncollectible accounts to increase as a
percentage of revenues as a result of (i) the Company's expected introduction
of dial around and presubscribed long distance services and other services for
which payment is made by its customers after usage and (ii) the Company's
recent increase in sales of Prepaid Cards to its distributors on credit. See
"Risk Factors--Fraud; Theft of Services; Uncollectible Accounts."
Stock Based Compensation. The Company expects to continue to incur an
expense for stock based compensation related to the issuance of certain
warrants to employees of InterExchange and options granted to certain
employees as part of the Pannullo Transactions (as defined below under
"Certain Transactions--Transactions with The Interactive Telephone Company,
GodotSoft, L.L.C., and Joseph Pannullo"). As a result of the grants of these
options and warrants, the Company expects to incur stock based compensation
expense of approximately $2,200,000, $1,400,000 and $1,000,000 in 1998, 1999
and 2000. See "Description of Capital Stock--The InterExchange Warrants."
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM FISCAL YEAR ENDED
INCEPTION TO ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, ---------------
1996 1997 1996 1997
<S> <C> <C> <C> <C>
Revenues............................ 100.0 % 100.0 % 100.0 % 100.0%
Cost of services.................... 115.8 98.0 103.6 91.3
----- ----- ------ ------
Gross profit (loss)............... (15.8) 2.0 (3.6) 8.7
Operating expenses:
Selling and marketing expenses.... 2.7 1.0 1.4 1.0
General and administrative
expenses......................... 5.9 1.5 1.4 2.2
Stock based compensation.......... -- -- -- 1.0
----- ----- ------ ------
Operating profit (loss)............. (24.4) (0.5) (6.4) 4.5
Net earnings (loss) before income
taxes.............................. (24.4) (0.5) (6.3) 4.6
Income tax provision................ -- -- -- 1.1
----- ----- ------ ------
Net earnings (loss)............... (24.4)% (0.5)% (6.3)% 3.5%
===== ===== ====== ======
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996
Revenues. Revenues increased to $187.0 million for the six months ended
September 30, 1997 from $57.2 million for the six months ended September 30,
1996. Revenues from the usage of Prepaid Cards increased to $163.5 million for
the 1997 period from $57.0 million for the 1996 period. This increase in
Prepaid Card revenues was generated primarily from (i) increased market
acceptance of The PT-1 Card, (ii) an increase in the number of distributors,
(iii) the introduction of new Prepaid Country Calling Cards and (iv) a
decrease in the average discount from Prepaid Card face value provided to
distributors. As a result of the foregoing, the number of PINs activated
increased from 11,967,000 to 28,694,000 and the number of minutes terminated
increased from 201,192,000 to 687,007,000. Revenues for the 1997 period also
include $23.6 million from wholesale services compared to $172,000 for the
1996 period.
Cost of Services. Cost of services increased to $170.8 million for the six
months ended September 30, 1997 from $59.3 million for the six months ended
September 30, 1996. Cost of services as a percentage of revenues decreased to
91.3% for the 1997 period compared to the 1996 period in which cost of
services represented 103.6% of revenues. This decrease was primarily the
result of (i) improvements in the Company's ability to use least-cost routing
to reduce its per minute transmission costs, (ii) rate per minute decreases
20
<PAGE>
negotiated with underlying carriers as a result of the Company's substantially
increased volume of traffic, (iii) an increased percentage of
telecommunications traffic being transported over the Company's leased lines
and a corresponding reduction in the percentage of traffic carried and billed
by other carriers on a per minute basis and (iv) increased efficiencies in the
Company's telecommunications network attributable to the addition of a switch
and other equipment.
Gross Profit (Loss). Gross profit increased to $16.3 million for the six
months ended September 30, 1997 from a gross loss of ($2.1 million) for the
six months ended September 30, 1996. Gross margin improved to 8.7% during the
1997 period from (3.6)% in the prior period, for the reasons discussed above.
Selling and Marketing Expenses. Selling and marketing expenses increased to
$1.8 million for the six months ended September 30, 1997 from $782,200 for the
six months ended September 30, 1996. Selling and marketing expenses were
principally comprised of commissions, salaries and freight expenses which
accounted for 70.0% of all selling and marketing expenses. The increases in
commissions, salaries and freight expenses were directly related to the
Company's increased sales of Prepaid Cards.
General and Administrative Expenses. General and administrative expenses
increased to $4.1 million for the six months ended September 30, 1997 from
$805,600 for the six months ended September 30, 1996. This increase was
primarily due to increases in salaries, professional fees, rent and
depreciation and amortization expenses, which comprised 85.3% of general and
administrative expenses for the 1997 period, as compared to 73.3% for the 1996
period. Salaries for customer service, accounting and network administration
increased due to additional hiring made necessary by the continued increases
in traffic volume and the expansion of the Company's telecommunications
network capacity. Rent expense increased primarily due to the relocation of
the Company's principal executive offices in May 1997 to accommodate the
increased number of employees. Depreciation and amortization expenses
increased due to additional capital expenditures for telecommunications and
other equipment.
Stock Based Compensation. Stock based compensation during the six months
ended September 30, 1997 reflects the Company's recording of the expense
related to (i) the issuance on May 9, 1997 to Mr. Joseph Pannullo, the
Company's Chief Operating Officer, of an option to purchase 1,048,600 shares
of the Company's Common Stock at a nominal exercise price and (ii) the
issuance on September 30, 1997 to various employees of the Company of options
to purchase an aggregate of 150,000 shares of the Company's Common Stock,
10,000 of which are exercisable at a nominal exercise price and 140,000 of
which are exercisable at an exercise price of $10 per share. See "Management--
Employment Agreements."
FISCAL YEAR ENDED MARCH 31, 1997 COMPARED TO PERIOD FROM APRIL 21, 1995
(INCEPTION) TO MARCH 31, 1996
Revenues. Revenues increased to $169.6 million for the fiscal year ended
March 31, 1997 from $11.9 million for the period from April 21, 1995
(inception) to March 31, 1996. Revenues from usage of Prepaid Cards increased
to $162.6 million during the 1997 fiscal year from $11.9 million in the prior
period. This increase in Prepaid Card revenues was generated primarily from
(i) increased market acceptance of the The PT-1 Card, (ii) an increase in the
number of distributors, (iii) the introduction of new Prepaid Country Calling
Cards and (iv) a decrease in the average discount from Prepaid Card face value
provided to distributors. Revenues for the 1997 fiscal year also include $7.1
million from services provided to other telecommunications providers for
resale during the last quarter. The Company did not provide such services
during the prior period.
Cost of Services. Cost of services increased to $166.2 million for the
fiscal year ended March 31, 1997 from $13.8 million for the period from April
21, 1995 (inception) to March 31, 1996. Cost of services as a percentage of
revenues decreased to 98.0% for the 1997 fiscal year from 115.8% during the
prior period, primarily as a result of (i) increases in the rates to selected
destinations, (ii) decreases in the switching fees from
21
<PAGE>
InterExchange, (iii) price decreases negotiated with vendors for the printing
and packaging of the Company's products, (iv) rate per minute decreases
negotiated with the underlying carriers as a result of the Company's
substantially increased volume of traffic and (v) an increasing percentage of
telecommunications traffic being transported over the Company's leased lines
and a corresponding reduction in the percentage of traffic carried and billed
by other carriers on a per minute basis.
Gross Profit (Loss). Gross profit increased to $3.5 million for the fiscal
year ended March 31, 1997 from a gross loss of $(1.9) million for the period
from April 21, 1995 (inception) to March 31, 1996. Gross margin improved to
2.0% during the 1997 fiscal year from (15.8)% in the prior period, for the
reasons discussed above, particularly the decrease in discounts provided to
distributors.
Selling and Marketing Expenses. Selling and marketing expenses increased to
$1.8 million for the fiscal year ended March 31, 1997 from $318,000 for the
period from April 21, 1995 (inception) to March 31, 1996. Selling and
marketing expenses were principally comprised of commissions, salaries,
freight and advertising and promotional expenses, which increased in direct
relation to the growth in revenues from 1996 to 1997.
General and Administrative Expenses. General and administrative expenses
increased to $2.6 million for the fiscal year ended March 31, 1997 from
$704,000 for the period from April 21, 1995 (inception) to March 31, 1996.
This increase was primarily due to the additional salary expense that was
incurred for employees hired to accommodate the Company's growth during the
1997 fiscal year. Depreciation and amortization expense, which is included in
general and administrative expense, increased primarily due to the purchase
and expansion of the Edison, New Jersey switch in July 1996, as well as the
Company's increased capital expenditures for office equipment as a result of
the expansion of its employee base.
22
<PAGE>
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly financial data
for each of the quarters since the three months ended September 30, 1995. In
the opinion of management, the unaudited quarterly financial information has
been prepared on the same basis as the audited financial statements and
includes all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the information for the periods
presented. The unaudited quarterly information should be read in conjunction
with the audited financial statements and notes thereto included elsewhere in
this Prospectus. The unaudited quarterly operating results are not necessarily
indicative of results of operations for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996 1996 1997 1997 1997
------------ --------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.......... $2,597 $ 7,988 $21,909 $35,295 $49,768 $62,662 $87,235 $101,009
Cost of services.. 2,862 9,271 21,595 37,670 48,923 57,996 80,803 91,150
------ ------- ------- ------- ------- ------- ------- --------
Gross profit
(loss)........... (265) (1,283) 314 (2,375) 845 4,666 6,432 9,859
Operating expenses
Selling and
marketing
expenses......... 82 194 350 432 449 530 798 1,030
General and
administrative
expenses......... 51 618 320 485 730 1,077 1,592 2,517
Stock based
compensation..... -- -- -- -- -- -- 1,050 805
------ ------- ------- ------- ------- ------- ------- --------
Operating profit
(loss)........... (398) (2,095) (356) (3,292) (334) 3,059 2,992 5,507
Net earnings
(loss)........... $ (398) $(2,094) $ (356) $(3,272) $ (288) $ 3,096 $ 3,162 $ 3,347
====== ======= ======= ======= ======= ======= ======= ========
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1995 1996 1996 1996 1996 1997 1997 1997
------------ --------- -------- ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues.......... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of services.. 110.2 116.1 98.6 106.7 98.3 92.6 92.6 90.2
------ ------- ------- ------- ------- ------- ------- --------
Gross profit
(loss)........... (10.2) (16.1) 1.4 (6.7) 1.7 7.4 7.4 9.8
Operating expenses
Selling and
marketing
expenses......... 3.2 2.4 1.6 1.2 0.9 0.8 0.9 1.0
General and
administrative
expenses......... 2.0 7.7 1.5 1.4 1.5 1.7 1.8 2.5
Stock based
compensation..... 0.0 0.0 0.0 0.0 0.0 0.0 1.2 0.8
------ ------- ------- ------- ------- ------- ------- --------
Operating profit
(loss)........... (15.3) (26.2) (1.6) (9.3) (0.7) 4.9 3.4 5.5
Net earnings
(loss)........... (15.3)% (26.2)% (1.6)% (9.3)% (0.6)% 4.9% 3.6% 3.3%
====== ======= ======= ======= ======= ======= ======= ========
</TABLE>
The Company's operating results may vary significantly in the future due to
numerous factors, including (i) changes in operating expenses, such as
payments to long distance and local carriers from which the Company purchases
origination, transport and termination services, (ii) timing of the
introduction of new products and services, (iii) changes in legislation and
regulation which affect the competitive environment for the Company's products
and services, (iv) market acceptance of new products and services, (v) other
competitive conditions and (vi) general economic factors. Accordingly, the
Company believes that prior results of operations should not be relied upon as
an indication of the Company's future performance. See "Risk Factors--
Variability of Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has funded its operating and capital needs
primarily from cash generated by operations. During the fiscal year ended
March 31, 1997 and the six months ended September 30, 1997, the
23
<PAGE>
Company generated $13.5 million and $19.3 million of cash from operating
activities, respectively. Net cash provided by operations is primarily due to
the receipt of cash from distributors generally upon shipment of the Company's
Prepaid Cards and prior to utilization of the Company's services, and the
incurrence by the Company of related costs of services. The Company expects
its working capital requirements to increase as a result of its (i) expected
introduction of dial around and presubscribed long distance services and other
services for which payment is made by its customers after services are
rendered and (ii) the recent increase in sales of Prepaid Cards to its
distributors on credit.
The Company used $1.5 million and $8.3 million for capital expenditures
during the fiscal year ended March 31, 1997 and the six months ended September
30, 1997, respectively. The Company also issued a $650,000 non-interest
bearing promissory note, due in ten equal monthly installments, as a portion
of the consideration for certain software licensing rights. See "Certain
Transactions--Transactions with The Interactive Telephone Company, GodotSoft,
L.L.C. and Joseph Pannullo." Additionally, the Company used excess cash to
purchase short term investments of $2.1 million and $4.6 million during the
fiscal year ended March 31, 1997 and the six months ended September 30, 1997,
respectively.
On March 26, 1997, the Company repurchased shares of Common Stock from
Thomas Hickey, a former executive officer and director of the Company, for a
cash payment of $5.0 million and the issuance of the Note in the principal
amount of $10.0 million. The Note bears interest at a rate of 8.0% per annum,
compounded semi-annually, and is secured by certain of the repurchased shares.
The Company must repay $5.0 million of the principal amount of the Note on or
before March 25, 1998 and the remaining outstanding principal and all accrued
and unpaid interest on or prior to March 25, 1999. The proceeds of the
Offering will be used, in part, to prepay the Note. See "Use of Proceeds" and
"Certain Transactions--Transactions with Thomas Hickey."
On October 8, 1997, the Company entered into a $5.0 million revolving credit
facility and a $5.0 million letter of credit facility with Chase Manhattan
Bank, N.A (the "Credit Facility"). As of , 1998, no amounts are
outstanding under the Credit Facility. Borrowings under the Credit Facility
bear interest at a rate equal to either the designated London Interbank
Offered Rate plus 2.25%, the prime rate or a fixed rate to be determined
pursuant to the Credit Facility. Borrowings under the Credit Facility are
secured by the Company's equipment and accounts receivable. The Company may
borrow up to 75% of the value of eligible equipment and accounts receivable.
The Credit Facility expires in March 1998.
The Company has identified approximately $30 million in capital expenditures
which it intends to undertake prior to the end of 1998. The Company believes
that the net proceeds from the Offering, together with funds generated from
operations, will be sufficient to finance the Company's operations and capital
expenditures through the end of 1999.
EFFECTS OF NEWLY-ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings
Per Share," which supersedes Accounting Principles Board Opinion No. 15 and
establishes standards for computing and presenting earnings per share ("EPS").
It replaces the presentation of primary EPS with a presentation of basic EPS.
Dual presentation of basic and diluted EPS on the face of the income statement
is also required. SFAS 128 is effective for fiscal periods ending after
December 15, 1997. The Company does not expect the adoption of SFAS 128 to
have a material effect on the Company's EPS.
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income."
This statement is effective for financial statements issued for periods ending
after December 15, 1997. Management has not yet evaluated the effect of its
financial reporting from the adoption of this statement but does not expect
the adoption of SFAS 130 to have a material effect on the Company's financial
position or results of operations.
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In June 1997, the FASB issued SFAS 131 "Disclosure about Segments of an
Enterprise and Related Information." SFAS 131 requires the reporting of profit
and loss, specific revenue and expense items and assets for reportable
segments. It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts disclosed for
segments, to the corresponding amounts in the general purpose financial
statements. SFAS 131 is in effect for fiscal years beginning after December
15, 1997. The Company has not yet determined what additional disclosures may
be required, if any, in connection with the adoption of SFAS 131.
INFLATION
Inflation has not had a significant impact on the Company's operations.
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BUSINESS
OVERVIEW
PT-1 is a leading emerging provider of international long distance services
to retail customers and telecommunications carriers. The Company currently
provides its retail services by marketing Prepaid Cards, primarily under the
PT-1 brand name, through an extensive network of distributors and believes
that its Prepaid Cards are sold in more than 50,000 independent retail outlets
throughout the United States. The Company targets retail markets with
substantial international long distance calling requirements, such as ethnic
communities, and believes that its Prepaid Cards provide consumers with a
convenient, attractively priced alternative to traditional presubscribed long
distance services. PT-1 has used its significant retail international traffic
to negotiate international termination arrangements with attractive rates,
enabling the Company to market its services competitively on a wholesale basis
to telecommunications carriers and develop an efficient telecommunications
network. The Company believes that it is the fifth largest provider of retail
international long distance services and the largest provider of Prepaid Cards
in the United States based upon revenues for the six months ended
September 30, 1997. For the same period, the Company generated revenues and
net income of $187.0 million and $6.5 million, respectively.
INDUSTRY
Overview
The telecommunications market is typically segmented into the local exchange
market, the domestic long distance market and the international long distance
market. The Company operates in the latter two markets in the U.S., targeting
retail and wholesale customers with significant volumes of international long
distance usage.
International Long Distance Industry Overview
The international long distance industry, which principally consists of the
transmission of voice and data between countries, is undergoing a period of
fundamental change that has resulted, and is expected to continue to result,
in significant growth in usage of international telecommunications services.
According to TeleGeography, in 1996, the international long distance
telecommunications industry accounted for approximately $61 billion in
revenues and 70 billion minutes of use, an increase from approximately $22
billion in revenues and 18.5 billion minutes of use in 1986. TeleGeography
estimates that by 2000 this market will expand to $86 billion in revenues and
122 billion minutes of use, representing compound annual growth rates from
1996 of 8.7% and 15.0%, respectively.
The Company believes that growth in international long distance services is
being driven by (i) the globalization of the world's economies, (ii) the
worldwide trend toward deregulation of the telecommunications sector, (iii)
declining prices arising from increased competition, (iv) increased worldwide
telephone density and accessibility arising from technological advances and
greater investment in telecommunications infrastructure, including the
deployment of wireless networks, (v) a wider selection of products and
services and (vi) the growth in the transmission of data traffic via internal
company networks and the Internet. The Company believes that traffic
originated in markets outside the U.S. will grow more quickly than traffic
originated within the United States due to recent deregulation in many foreign
markets, relative economic growth rates and increasing access to
telecommunications facilities in emerging markets.
Regulatory and Competitive Environment
Consumer demand and competitive initiatives have 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 typically 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 necessary to receive
volume discounts on international traffic from the larger
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facilities-based carriers such as AT&T, MCI, Sprint and WorldCom. In addition,
these companies have only a limited ability to invest in international
facilities and therefore seek to resell switched internal travel services
provided by other carriers. Alternative international carriers, such as the
Company, have capitalized on this demand for less expensive international
transmission facilities. These alternative international carriers are able to
take advantage of larger traffic volumes in order to obtain volume discounts
on international routes (resale traffic) and/or invest in facilities when the
volume of particular routes justifies 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 outside of the United States first began in the United Kingdom
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 spread to other European countries 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,
including the markets for public switched voice services, in most EU member
states by the end of 1998. A similar movement toward deregulation has already
taken place in Australia and New Zealand and is also taking place in Japan,
Mexico, Hong Kong and other markets. Governments that have not taken steps to
deregulate the market for public switched voice services 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. Deregulation and privatization have also allowed new long distance
providers to emerge in other foreign markets. In many countries, however, the
rate of change and emergence of competition remain slow, and the timing and
extent of future deregulation is uncertain.
In February 1997, the U.S. and 68 other countries signed the WTO Agreement
and agreed to open their telecommunications markets to competition and foreign
ownership starting in January 1998. These 69 countries represent approximately
95% of worldwide telecommunications traffic. The Company believes that the WTO
Agreement will create competitive opportunities for the Company and other
carriers in new markets. The FCC recently released an order that significantly
changes U.S. regulation of international services in order to implement the
U.S. "open market" commitments under the WTO Agreement. This order is expected
to increase opportunities for foreign carriers to compete in the U.S.
telecommunications market, while increasing opportunities for U.S. and other
carriers to enter foreign markets and to develop alternative termination
arrangements with non-dominant carriers in other countries.
Deregulation has encouraged competition, which in turn has prompted carriers
to offer a wider selection of products and services at lower prices. The
Company believes that the lower prices resulting from increased competition
have been more than offset by cost decreases and increases in
telecommunications usage. For example, based on FCC data for the period 1989
through 1995, per-minute settlement payments by U.S.-based carriers to foreign
PTTs fell 31.4%, from $0.70 per minute to $0.48 per minute. Over this same
period, however, per-minute international billed revenues fell only 10.8%,
from $1.02 in 1989 to $0.91 in 1995. The Company believes that as settlement
rates and costs for leased capacity continue to decline, international long
distance will continue to provide high revenues and per-minute gross profits.
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 United States, 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 to another carrier's
international gateway switch. From there it is carried to a corresponding
gateway switch operated in the country of destination by the PTT in that
country and then is routed to the party being called through 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 own their U.S. transmission facilities and have operating
agreements with, and own
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transmission facilities that carry traffic to, the countries to which they
provide service. A significantly larger group of long distance providers own
and operate their own switches and generally carry the overflow traffic of
larger long distance providers. These carriers either rely solely on resale
agreements with other long distance carriers to terminate traffic or use a
combination of resale agreements and leased or owned facilities in order to
terminate their traffic, as discussed below.
Operating Agreements. Under a typical operating agreement, each carrier has
a right in its portion of the transmission facilities between two countries. A
carrier obtains ownership rights in a fiber optic cable by purchasing direct
ownership in a particular cable (usually prior to the time that 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 substantial initial capital investment based on the
amount of capacity acquired. The typical operating agreement provides for
facilities based carriers in different countries to terminate each other's
traffic, and the carrier terminating more minutes is compensated for
terminating the additional minutes at a negotiated rate.
Transit Arrangements. In addition to operating agreements, an international
long distance provider may enter into transit arrangements pursuant to which a
long distance provider in an intermediate country transports 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/ISVR and ownership of switching
facilities in foreign countries.
Refiling and transiting of traffic takes advantage of disparities in
settlement rates between different countries, allowing traffic to a
destination country to be treated as if it originated in another country that
benefits from 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 these issues
in an existing proceeding. Under ISR/ISVR, a long distance provider completely
bypasses the Accounting Rate system by connecting an international leased
private line (i) to the PSTN of two countries (under U.K. and U.S.
regulations) or (ii) directly to the premises of a customer in one country and
the PSTN in the other country (only under U.S. regulations). While ISR/ISVR
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.S.-Australia, U.S.-Netherlands, 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 terminate ISR/ISVR traffic directly.
Switched Resale Arrangements. A switched resale arrangement typically
involves the wholesale purchase of termination services on a variable, per-
minute basis by one long distance provider from another. 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. Such resale, first permitted with the
deregulation of the U.S. market, enabled the emergence of alternative
international providers that relied, at least in part, on transmission
services acquired on a wholesale basis from other long distance providers.
Resale arrangements set per-minute prices for different routes that may be
guaranteed for a set time period or subject to fluctuation following notice.
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The resale market for international transmission is constantly changing, as
new long distance resellers emerge, and as 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 to changing market data and must react quickly to changes in costs
through pricing adjustments or routing decisions.
Evolution of the U.S. Long Distance Industry and the Prepaid Card Segment
Since the break-up of AT&T in 1984, the domestic long distance market has
roughly doubled to an estimated $ billion in annual revenues in 1996 and
AT&T's share has declined to approximately 50.2% of the market. MCI, Sprint,
and WorldCom have increased their market shares to approximately 28.5%, 13.2%,
and 4.5% of the market, respectively. AT&T, MCI, Sprint, and WorldCom
constitute what generally is regarded as the first tier in the U.S. long
distance market. The remainder of the market is held by numerous long distance
companies, many of whom have grown rapidly through the development and
combination of innovative product offerings and marketing approaches such as
the Company, SmarTalk Teleservices, and Excel Communications. Some emerging
carriers have been able to grow rapidly, take share from incumbent carriers
and attract new users through new approaches including Prepaid Cards and dial
around.
The Company believes Prepaid Card service providers are positioned to
capture an increasing share of international and domestic long distance
revenues in the United States. In markets outside the United States, primarily
Europe and Japan, Prepaid Cards have achieved widespread consumer acceptance
as a convenient means of making telephone calls. The Company believes that
convenient, reliable and attractively priced Prepaid Cards are enjoying
increasing acceptance in the United States and are becoming an increasingly
significant method for distributing and providing international and domestic
long distance services. The Company believes Prepaid Cards that offer
attractive rates are an effective means to target ethnic groups and create
incremental demand for international long distance services. Accordingly, the
Company believes that the increasing demand for and market acceptance of
Prepaid Cards offer the Company substantial growth opportunities.
STRATEGY
The Company was founded in April 1995 to capitalize on the growing market
for international long distance services. PT-1 initially entered the retail
international long distance market through the distribution of Prepaid Cards
targeted at ethnic communities. After building significant international
traffic, in 1996 the Company began to negotiate reduced transmission rates
based upon volume with underlying carriers and began to invest in switching
equipment and lease transmission capacity to further reduce its cost of
service as a percentage of revenues. In August 1996, the Company began to
leverage its significant volume of international traffic by selling
international long distance services on a wholesale basis to other carriers.
For the six months ended September 30, 1997, revenues from retail sales and
from wholesale sales were $163.5 million and $23.6 million, respectively.
The Company believes its competitive strengths are its (i) established
Prepaid Card brand names, (ii) extensive distribution infrastructure,
including more than 50,000 retail outlets, (iii) substantial experience in
identifying, targeting and marketing to communities and markets with
significant international long distance usage,(iv) position as a leading
provider of telecommunications traffic to various international destinations
and (v) efficient telecommunications network. PT-1 believes that its
competitive strengths will enable it to profitably continue to increase its
retail and wholesale customer bases and its traffic volume and leverage these
increases to negotiate lower telecommunications costs.
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PT-1 believes that, by implementing the following strategies, it will (i)
reduce its operating costs as a percentage of revenues, thereby improving
gross margins and enhancing its ability to provide competitive pricing and
(ii) increase its market share in existing and new geographic markets, thereby
increasing revenues:
Expand PT-1's International Telecommunications Network. PT-1 intends to
continue to expand the international reach of its telecommunications network
in order to reduce transmission and other operating costs per minute. PT-1
seeks to establish substantial traffic volume in a geographic region before
investing in network infrastructure in that region, in order to reduce the
risks associated with capital investment and maximize the efficiency of
network expansion. The Company intends to expand its network to include (i)
additional switches, Debit Card Platforms and network POPs in strategic
geographic regions in the United States, Europe and elsewhere, (ii) additional
leased capacity connecting the Company's switches and network POPs, thereby
enabling the Company to originate and terminate an increased portion of its
long distance services on its own network ("on-net") and (iii) investments in
undersea fiber optic cables to lower transmission costs with respect to
certain segments of its international traffic. The Company believes its United
Kingdom office will facilitate its negotiation of additional direct
termination agreements with other United Kingdom and European based carriers
and serve as a base for expanded wholesale and retail marketing activities.
The Company also intends to negotiate additional termination arrangements with
foreign carriers in countries where the Company terminates significant
traffic, concurrently with the investment in undersea fiber optic cables.
Increase Retail Distribution of the Company's Products. The Company
estimates that its Prepaid Cards are currently sold in more than 50,000
independent retail outlets, providing customers with convenient access to PT-
1's services. The Company intends to increase this retail distribution
infrastructure by expanding the number of distributors and retail outlets
within existing geographic markets, entering new geographic markets and by
bringing certain of its distributors in-house. The Company initially
concentrated its marketing and distribution efforts in the New York
metropolitan area, but has expanded and is continuing to expand its market
penetration in other regions of the United States with significant ethnic
populations.
Expand Offerings of Retail Products and Services. PT-1 intends to introduce
new LAC Cards in additional metropolitan areas, offer additional Country
Calling Cards and market other innovative Prepaid Cards, further segmenting
the Prepaid Card market. PT-1 also intends to begin marketing "dial around"
and presubscribed long distance service. The Company believes that its brand
awareness, large number of international retail customers and its ability to
provide attractively priced long distance services will enable it to
successfully market convenient, attractively priced dial around and
presubscribed long distance service to new and existing customers.
Continue to Target Consumers with Significant International Long Distance
Usage. PT-1 primarily targets consumers with significant international long
distance usage by delivering reliable international long distance services at
attractive rates. The Company believes that the $61.3 billion international
long distance market provides an appealing opportunity because of its higher
revenues and gross profits per minute and its higher expected growth rate
relative to the domestic long distance market. The Company believes its brand
awareness, large number of international retail customers and its
international network traffic and infrastructure will enable it to continue to
successfully market international long distance service originating in
countries in North America, Latin America, Europe and in other countries where
PT-1's U.S. customers direct a substantial volume of calls.
Increase Wholesale Carrier Revenues. The Company believes that its
predictable, increasing volume of international retail traffic will allow it
to continue to negotiate more favorable transmission rates and to negotiate
attractive direct termination arrangements with foreign carriers. These
factors, together with the continued expansion of the Company's
telecommunications network, are expected to reduce the Company's transmission
cost per minute thereby enabling PT-1 to offer attractive wholesale rates to
other carriers. The Company intends to continue to increase wholesale carrier
revenues, allowing it to improve the usage and the efficiency of its network
and to further reduce the Company's overall transmission cost per minute.
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TELECOMMUNICATIONS PRODUCTS AND SERVICES
PT-1 offers high quality retail and wholesale telecommunications services
over its own network and by interconnecting its network with the network of
other carriers.
Retail Services
Prepaid Cards. The Company primarily offers retail services through a
variety of Prepaid Cards that provide access to more than 230 countries and
territories at rates that are between 10% and 50% less than rates for
comparable calls charged by the major facilities-based carriers. PT-1's
Prepaid Cards can be used at any touch tone telephone simply by dialing an
access number, followed by a PIN assigned to the card, and the telephone
number the customer wishes to reach. Prior to the connection, the caller is
informed of the remaining dollar balance and number of minutes available. PT-
1's Prepaid Cards are designed to appeal to a variety of market segments in
the U.S. that generate high levels of international and domestic traffic.
The Company's Prepaid Cards include the following:
The PT-1 Card (introduced in July 1995) was the Company's first Prepaid
Card and offers competitively priced domestic and international long
distance calling. Customers using the PT-1 Card access the Company's
network by dialing a toll-free number.
Local Area Calling Cards ("LAC Cards") are targeted at customers in
specific regions and enable them to access the Company's network by dialing
either a local number or a toll-free number depending upon the region. The
Company currently markets The New York Phone Card (introduced in July
1996), The New Jersey Card (introduced in February 1997), The Detroit Card
(introduced in July 1997), The Connecticut Card (introduced in September
1997), The Boston Card, The Chicago Card, The D.C.-Maryland-Virginia Card
and The Florida Card (all introduced in November 1997). The Company expects
to offer additional LAC Cards in other target metropolitan markets where
the Company believes that there is sufficient demand during 1998.
Country Calling Cards are designed for specific ethnic communities and
offer attractive rates to the countries to which they generate high levels
of international traffic. The Company currently markets the Alo Brasil and
the Hola Mexico cards that offer competitive rate to Brazil and Mexico, and
are targeted to Mexican and Brazilian calling communities in the United
States and intends to introduce additional Country Calling Cards that will
appeal to other market segments.
Co-Branded Cards are used by major corporations for national marketing
programs and promotional gifts. Co-Branded Cards are designed and packaged
using logos, trademarks and other design elements linking the benefits of
the cards to the corporation's product and services. The Company currently
offers an Amoco Prepaid Card pursuant to an agreement with Amoco Oil
Company and expects to offer additional cards.
The World Card (introduced in September 1996) which offers both a
different commission structure to the Company's distributors and different
rates is designed to appeal to a variety of market segments.
In addition, the Company expects to offer additional retail services which
the Company believes will increase customer retention and loyalty, broaden
distribution channels, appeal to new customer groups and increase usage of the
Company's services by its existing customers. The Company expects to introduce
the following services during 1998.
Dial Around. The Company intends to begin offering dial around long
distance services within 1998, targeting its current customer base, which
has significant international calling requirements. This method of long
distance calling is sometimes referred to as "dial around" because
customers are not required to change their presubscribed long distance
carrier in order to use the service. In August 1997, the Company received a
carrier identification code (a "CIC Code"). The CIC Code, sometimes
referred to as a "101XXXX" code, is a seven-digit code beginning with 101
and followed by four other numbers, in PT-1's
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case, 6868. By entering PT-1's CIC Code (where this service is available)
before dialing a long distance number, the Company's customers will be able
to access PT-1's network and its reliable, competitively priced services
without purchasing its Prepaid Cards. The Company intends to bill and
collect dial around long distance services through billing and collection
arrangements with LECs, under which PT-1's customers will be billed for the
Company's services as part of their monthly phone bills.
Presubscribed Long Distance Services. During 1998, the Company also
intends to use its significant retail distribution network to introduce
presubscribed long distance services targeted to ethnic communities, other
consumers and commercial accounts through its retail distribution network.
With this service, a customer's telephone is automatically connected to the
Company's network, and all long distance calls made by the customer are
completed over the Company's network.
International Origination. The Company intends to capitalize on its brand
awareness in certain ethnic communities in the United States by offering
international long distance services, through the sale of Prepaid Cards, to
consumers located in the United Kingdom, Canada and other countries to
which the Company's U.S. customers direct a substantial number of calls.
There can be no assurance that the Company will be able to introduce such
services or that, if introduced, such services will be successful.
WHOLESALE SERVICES
The Company markets its international and domestic long distance services to
other telecommunications providers on a wholesale basis. The Company's
substantial Prepaid Card customer base and monthly traffic enable it to
negotiate favorable rates for transmission and termination services for
various routes and countries and to sell these services to other
telecommunications providers. During the six months ended September 30, 1997,
PT-1's revenues from services provided to other telecommunications providers
for resale were $23.6 million, as compared to $7.1 million for the fiscal year
ended March 31, 1997. The Company started offering wholesale services in
August 1996 and derived revenues of $12.2 million from sales of wholesale
services during the quarter ended September 30, 1997.
THE TELECOMMUNICATIONS NETWORK
OVERVIEW
The Company currently manages its own telecommunications network and also
utilizes the transmission capacity of approximately 35 different local and
long distance carriers, including WorldCom and Teleport. The Company believes
that increasing the percentage of traffic it carries on-net will enable it to
increase margins and profitability and ensure quality. In addition, the
Company's use of multiple carriers increases cost efficiencies by establishing
additional routing capability, adding network redundancy and enabling the
Company to obtain sufficient capacity to support its rapid growth.
NETWORK AND OPERATIONS
Switching Facilities. The Company manages a state-of-the-art digital switch
based network consisting of approximately 60,000 switch ports, 30,000 Prepaid
Card processing ports, and a central switching center located at the Company's
headquarters in Flushing, New York. The Company has selected Northern Telecom
("Nortel") as its primary switch vendor and has entered into a support
agreement with Nortel to provide 24 hours per day, 365 days per year support
services to the Company, including technical assistance, trouble resolution
and network maintenance. The Company currently has Nortel DMS250 Supernode
switches installed at its Edison, New Jersey switch site (operated for the
Company by InterExchange), at its corporate headquarters in Flushing, New
York, in Jersey City, New Jersey and in Miami, Florida. The Company is
planning to install additional Nortel DMS250 Supernode switches in California,
and Texas and a Nortel DMS 300 switch in the United Kingdom by the third
quarter of 1998.
Network Capacity. The Company purchases transmission services on a per
minute basis and leases transmission capacity on a fixed cost basis from a
variety of local and long distance carriers. The Company is
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currently expanding its leased on-net capacity in an attempt to lower costs in
its largest distribution areas. The Company obtains capacity from
approximately 35 local and domestic and international carriers, including
WorldCom and Teleport. The Company's agreements with these carriers provide
that rates may fluctuate with rate change notice periods varying from five
days to one month. The variable nature of the cost of services and many of the
Company's contracts and agreements subject the Company to the possibility of
unanticipated cost increases and the loss of cost-effective routing
alternatives. The Company has also entered into a direct termination agreement
in the Dominican Republic with Codetel. See "Risk Factors--Dependence upon
Telecommunications Providers."
Points of Presence. As of September 30, 1997 the Company had network POPs in
31 cities in 14 states. In areas where the Company has network POPs, calls are
transported to the Company's network POPs by LECs or CLECs and then
transported from the network POPs to the Company's switches over leased
transmission lines. The Company intends to double the number of network POPs
by the end of 1998.
Telecommunications Network Management and Information Systems. The Company's
network management and information systems enable it to (i) economically and
efficiently route traffic over the Company's network and the networks of other
carriers, (ii) offer reliable services with high call completion rates and
voice quality and (iii) focus its marketing efforts. The Company believes that
these systems, particularly their ability to provide high quality service to
international destinations, provide it with a competitive advantage relative
to many other providers of telecommunication services. The Company monitors
its network and initiates changes to its overall switch network and traffic
routing where appropriate to optimize routing and minimize costs. Because a
substantial portion of the traffic carried by the Company terminates overseas
and call completions vary by carrier, the Company closely monitors the call
completion efficiencies of its suppliers 24 hours a day, 7 days a week. The
Company tracks call completions to all destinations for all carriers on an
hourly basis and re-routes its traffic accordingly. The Company intends to
configure large portions of its network with Common Channel Signaling System 7
(SS7). This network protocol reduces call setup and connect time delays and
provides additional technical capabilities and efficiencies for call routing
and network engineering. With the installation of the switch in Jersey City,
New Jersey, the Company has duplicated the functional network management
capabilities in this alternate site in accordance with its ongoing review of
site diversity and disaster recovery procedures. See "--Billing and Data
Processing; Debit Card Platforms."
INFORMATION SYSTEMS; DEBIT CARD PLATFORMS
The Company markets a wide variety of Prepaid Cards, each with a specific
rate table (updated periodically). In addition, each Prepaid Card distributed
by the Company is assigned a unique PIN and a face value ranging from $5 to
$100. The Prepaid Card's dollar balance is reduced by the cost of each call,
which is based upon a number of factors, including the type of Prepaid Card,
destination and special promotions then in effect. The cost of each call is
decremented by one of the Company's Debit Card Platforms at the time of the
call.
The ability to maintain accurate Prepaid Card dollar balances and to
decrement these balances at the proper rates is essential to the Company's
continued success. Accordingly, the Company has invested significant resources
in the acquisition, development and maintenance of its Debit Card Platforms
and information systems and software. The Company's information systems enable
it to track real-time customer usage and to quickly generate cost and profit
reports (by route). The information systems also produce more than 100 daily
reports concerning network routing, call completion rates and usage for the
preceding day, as well as a variety of weekly and monthly reports. The
Company's Prepaid Card systems are supported by redundant systems and
databases. Critical Prepaid Card information is backed up, depending on the
sensitivity of the information, on a daily, weekly or monthly basis.
Under the InterExchange Agreement (which expires January 2000), operation of
the Company's Edison Debit Card Platform was outsourced to InterExchange and,
at December 31, 1997, a substantial volume of the Company's traffic was
carried over the Edison platform. The Company also operates a second Debit
Card
33
<PAGE>
Platform in Flushing, New York and expects to migrate an increasing amount of
traffic through that platform. Pursuant to the InterExchange Agreement,
InterExchange (i) provides certain services in connection with the activation
and use of Prepaid Cards (at the direction of the Company), (ii) migrates
certain of the Company's leased capacity from switches owned by InterExchange
to the Company's switch in Edison, New Jersey and (iii) assists the Company in
the expansion of its overall capacity.
Prepaid Card services performed by InterExchange include the operation and
maintenance of the Edison Debit Card Platform 24 hours per day 7 days per
week, activating PINs at the direction of the Company, decrementing Prepaid
Card dollar balances and maintaining and modifying the Company's rate tables.
Other services provided by InterExchange include programming of information
for new installations on the Company's Edison, New Jersey switch, writing,
testing and installing software and maintaining leased capacity and providing
certain management reports on a regular basis.
The InterExchange Agreement may be renewed for four consecutive six-month
periods unless the Company gives InterExchange written notice at least six
months in advance. The Company pays InterExchange a fee based on minutes
processed. As additional consideration for the services rendered by
InterExchange, the Company granted to certain principals of InterExchange
warrants to purchase shares of the Company's Common Stock. See "Description of
Capital Stock--The InterExchange Warrants."
The Company believes that its internal systems have been equipped to
appropriately handle any information management issues which may arise in
connection with transactions occurring on or after January 1, 2000. The
Company has also contacted its significant vendors to determine whether their
systems are being evaluated, and modified if necessary, to ensure year 2000
compliance. The Company expects to continue to monitor year 2000 compliance
issues with its significant vendors.
MARKETING AND DISTRIBUTION
RETAIL
Since inception, the Company has focused on building a substantial network
of wholesale distributors which, in turn, sell to sub-distributors and
directly to retail outlets. The sub-distributors generally sell only to retail
outlets. As of August 31, 1997, 207 distributors purchased Prepaid Cards
directly from the Company, reaching over 50,000 independent retail outlets.
The Company has targeted heavily populated metropolitan areas, with an
emphasis on areas with substantial ethnic community populations which generate
significant international calling volume, in the development and expansion of
its distribution network. Many of the Company's distributors are members of
such ethnic communities or otherwise have personal or business relationships
in such communities. In developing relationships with distributors, the
Company also focuses on expansion into new geographic and metropolitan areas,
again with an emphasis on those areas with substantial ethnic community
populations. The Company believes that the success of its Prepaid Cards has
created significant brand loyalty and encourages distributors and retail
outlets to actively market the Company's products. The Company regularly
provides distributors and retail outlets with point-of-purchase advertising
and explanatory materials including posters of various sizes presenting
certain of the Company's current rates, and detailed rate sheets. The Company
frequently adds new Prepaid Card products to its service offerings, and
adjusts its pricing for particular traffic segments in order to target certain
customer groups, respond to competitive pressures and otherwise increase
market share.
The Company has recently expanded its internal sales department to focus on
larger retail chains and department stores, the tourist industry, airport and
hotel gift shops, gas stations and other retail outlets owned or franchised by
larger companies.
WHOLESALE
The Company has recently established a carrier resale division, with
employees located in New York and the United Kingdom, to market the Company's
telecommunications services to other carriers. At September 30, 1997, the
Company had approximately 26 wholesale carrier customers.
CUSTOMER SERVICE
The Company believes that effective and convenient multilingual customer
service is essential to attracting and retaining customers. The Company's
customer service center handles an average of 3,000 to 4,000 customer
34
<PAGE>
inquiries per day, including inquiries relating to Prepaid Card balances,
Prepaid Card availability, rates, international calling service, billing and
becoming a distributor. PT-1 currently employs 46 full-time customer service
representatives ("CSRs"), seven senior CSRs and a director of customer
service. All CSRs are fluent in both English and Spanish, and some are fluent
in Portuguese. PT-1's customer service center is operational ten hours per
day, six days per week. The Company intends to expand the customer service
center and its hours of operation during the next twelve months. Calls coming
into PT-1's customer service center are categorized by Prepaid Card product.
The Company's internal software system provides real-time access to on-screen
call records, complete with historical detail, to track, resolve, protect and
support the individual needs of PT-1's entire customer base.
PREPAID CARD PRODUCTION AND INVENTORY CONTROL
The Company controls its Prepaid Card inventory by PIN and by physical
count. Generally, Prepaid Cards are received by, stored at and shipped from
the warehouse facility located at the Company's headquarters. Physical
inventory is counted on a daily basis and reconciled against all incoming card
deliveries and outgoing shipments to distributors. The Company utilizes
multiple print vendors for card production and packaging.
All PINs are inactive when the Prepaid Cards arrive at the Company's storage
facilities. Calls cannot be completed until PINs are activated by the Company
or by InterExchange (at the Company's direction). PINs are activated only
shortly before the cards are shipped from the Company's warehouses to
distributors, in order to minimize the number of cards with activated PINs in
its warehouse.
PINs are created electronically with unique inventory and batch codes. The
Company has developed PIN generation and database management software enabling
the Debit Card Platforms to quickly locate Prepaid Card information while
limiting fraud and other forms of unauthorized access. In addition, if
security or financial controls have been compromised, the Company also
maintains the ability to deactivate specified PINs and block calls from
specified telephone numbers.
COMPETITION
The telecommunications services industry is intensely competitive. The
Company competes with other providers of Prepaid Cards and with providers of
telecommunications services in general. Many of the largest telecommunications
providers currently offer Prepaid Cards, in addition to the other
telecommunications services the Company intends to provide in the future. As a
service provider in the long distance telecommunications industry, the Company
competes with four dominant providers, AT&T, MCI, Sprint and WorldCom, all of
which are substantially larger and have greater financial, technical,
engineering, personnel and marketing resources, longer operating histories,
greater name recognition and larger customer bases than the Company. The
Company also competes with smaller, emerging carriers in both the Prepaid Card
retail market and in the wholesale market, including IDT Corporation, Star
Telecommunications, Inc., RSL Communications, SmarTalk Teleservices, Inc.,
Pacific Gateway Exchange, Inc., FaciliCom International, Inc. and Telegroup,
Inc. To the extent the Company begins providing services to customers outside
the U.S. market, it may compete with the large PTTs such as BT in the U.K. The
Company believes that its success will attract additional competitors to the
Prepaid Card market. However, the Company believes it has certain advantages
that will discourage potential competitors from entering the Prepaid Card
market, including brand loyalty, its established distribution network, its
ability to offer competitive rates and its Debit Card Platforms and associated
hardware and software. See "Risk Factors--Intense Competition."
The telecommunications industry is rapidly evolving and subject to constant
technological change. The Company believes that existing competitors are
likely to continue to expand their service offerings and to develop new sales
channels. The ability of the Company to compete effectively in the
telecommunications services industry will depend in part upon the Company's
continued ability to develop additional products appealing to increasingly
specialized segments of the market for telecommunications service. See "Risk
Factors--Rapid Technological Change."
35
<PAGE>
Recent changes in the regulation of the telecommunications industry may
affect the Company's competitive position. The Telecommunications Act is
expected to open the long distance market to competition from the RBOCs. The
entry of these well-capitalized and well-known entities into the long distance
market likely will increase competition for long distance customers, including
customers who use Prepaid Cards to make long distance calls. The
Telecommunications Act also grants the FCC the authority to deregulate other
aspects of the telecommunications industry, which in the future may, if
authorized by the FCC, facilitate the offering of telecommunications services
by regulated entities, including the RBOCs, in competition with the Company.
See "Risk Factors--Regulation" and "--Government Regulation."
GOVERNMENT REGULATION
PT-1's business operations are subject to extensive U.S. federal and state
regulation. The Telecommunications Act and FCC regulations apply to interstate
telecommunications and international telecommunications that originate or
terminate in the United States. State regulatory authorities have jurisdiction
over telecommunications that originate and terminate within the state. In its
provision of services in the United Kingdom, the Company is subject to the
regulations of the Oftel, the telecommunications regulator in the United
Kingdom. See "Risk Factors--Regulation."
FEDERAL
The Telecommunications Act opened the local telecommunications market to
competition, and significantly opens the long distance market to local
exchange carriers, including the RBOCs, to provide inter-LATA (local access
and transport area) long distance telephone service. The new legislation will
likely result in increased competition in the industry, including from the
RBOCs, in the future. The Telecommunications Act also grants the FCC the
authority to deregulate other aspects of the telecommunications industry and
to implement certain policy objectives, including access charge reform and
establishment of the Universal Service Fund. Pursuant to an FCC order (the
"Universal Service Order") Universal Service Fund contributions are generally
equal to approximately four percent of a carrier's interstate and
international and approximately one percent of its intra-state "end user"
gross revenues, effective January 1, 1998. However, the FCC will adjust the
amount of these contributions each calendar quarter, and they may increase
significantly in future periods.
As a non-dominant international carrier, the Company must obtain Section 214
authority from the FCC. The Company has been issued "global" Section 214
authority by the FCC. As a Section 214 licensee, the Company must also comply
with a variety of reporting requirements concerning traffic and revenues,
international circuits, interlocking directors, foreign affiliates and
agreements it enters into with other carriers. No specific authorization is
required by the FCC to provide interstate service.
Both domestic interstate and international non-dominant carriers must
maintain current tariffs on file with the FCC. Although the tariffs of non-
dominant carriers, and the rates and charges they specify, are subject to FCC
review, they are presumed to be lawful. As a domestic interstate and
international non-dominant carrier, the Company is required to include
detailed rate schedules in its international tariffs. The FCC has adopted an
order (which is currently stayed pending appeal) which eliminates the
interstate (but not the international) tariff filing requirements.
Interstate carriers are also subject to a variety of miscellaneous
regulations that, for instance, govern the documentation and verifications
necessary to change a consumer's long distance carriers, and limit the use of
toll-free numbers for pay-per-call services. Interstate carriers such as the
Company must also pay various regulatory fees and charges.
36
<PAGE>
STATE
The Company's intrastate services are subject to various state laws and
regulations, including prior certification, notification and registration
requirements. In certain states, prior regulatory approval may be required for
changes in control of telecommunications operations. Most states require PT-1
to apply for certification to provide telecommunications services, or at least
to register, before commencing intrastate service. In most of the states where
certification or registration is required, PT-1 must file and maintain
detailed tariffs listing rates for intrastate service. Many states also impose
various reporting requirements and/or require prior approval for transfers of
control of certified carriers and assignments of carrier assets, including
customer bases, carrier stock offerings and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. Fines and other penalties,
including revocation, may be imposed for such violations. In addition, states
may establish their own intrastate universal service funding programs, to
which the company may in some cases be required to contribute.
The Company has made and is continuing to make the filings and taken the
actions it believes are necessary to become certified or tariffed to provide
intrastate telecommunications services to customers throughout the U.S. The
Company is certified to do business as a domestic or foreign corporation in
all 50 states and in Puerto Rico and provides intrastate telecommunications
services in 25 states. The Company will obtain intrastate telecommunications
authority, as necessary in the remaining states in which it intends to sell
its Prepaid Cards to its distributors. See "Risk Factors--Regulation."
UNITED KINGDOM
The Company has received an ISVR license and a telecommunications services
license ("TSL") from the TI Secretary in the United Kingdom. The ISVR license
permits the Company to lease lines (typically on a fixed price basis) and to
provide telecommunications services over such lines interconnected to the PSTN
at both ends. The TSL allows the Company to lease lines for other purposes and
to resell switched services. The Company is also applying for an international
facilities license from the TI Secretary, enabling it to own interests in
undersea fiber optic cables landing in the United Kingdom, as well as other
telecommunications facilities.
The Telecommunications Act of 1984 (the "UK Telecommunications Act") governs
the provision of telecommunications services in the United Kingdom. The TI
Secretary is responsible for granting telecommunications licenses and the
Director General of Telecommunications and his staff, the Oftel, are
responsible for enforcing the conditions of such licenses. The loss of the
Company's license, or the placement of significant restrictions thereon could
have a Material Adverse Effect. See "Risk Factors--Regulation."
CANADA
In Canada, the Company is registered with the Canadian Radio-television and
Telecommunications Commission ("CRTC") as a reseller. Under this registration,
the Company may resell switched services or private lines to provide Canada-
Canada, Canada-U.S., or Canada-overseas telecommunications services. In its
provision of services in Canada, the Company is subject to the Canadian
Telecommunications Act of 1991 (the "Canadian Act") and, to a limited degree,
to the rules and policies of the CRTC. CRTC policy currently prohibits the
Company from routing Canada-Canada, Canada-overseas, or overseas-Canada
traffic through the United States. In addition, although the Canadian Act
currently prohibits the CRTC from imposing licensing requirements or imposing
other significant regulations on resellers such as the Company, legislation
pending in the Canadian Parliament, if enacted, would allow the CRTC to
require resellers such as the Company to obtain a license and to abide by
certain requirements.
37
<PAGE>
TRADEMARKS AND SERVICE MARKS
The Company uses the names "PT-1 Communications" and "PT-1" as its' primary
business names and has filed for federal trademark protection of these service
marks. In addition, filings have been made at the U.S. Patent and Trademark
Office to register the distinctive PT-1 logo, as well as over 30 names which
the Company uses or intends to use to identify its Prepaid Cards. These
filings are all pending and the Company has no assurance that they will be
granted. The Company regards its trademarks, service marks and trade names as
valuable assets and believes they have value in the marketing of its products
and services. See "Risk Factors--Limited Protection of Proprietary Rights;
Risks of Infringement."
EMPLOYEES
As of September 30, 1997, the Company had 142 full-time employees. None of
the Company's employees are members of a labor union or are covered by a
collective bargaining agreement. Management believes that the Company's
relationship with its employees is good.
PROPERTIES
The Company leases certain office space under operating leases and
subleases, including the Company's principal headquarters in Flushing, New
York. The principal offices, warehouses, sales offices and switch sites
currently leased or subleased by the Company are as follows:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE LEASE EXPIRATION
<S> <C> <C>
Flushing, New York (headquarters and
warehouse)................................ 34,800 March 2002
Houston, Texas............................. 4,000 August 2000
Staten Island, New York.................... 2,700 October 2001
Newport Beach, California.................. 1,600 February 1998
Cleveland, Ohio............................ 1,500 June 2000
Jersey City, New Jersey.................... 300 September 1999
</TABLE>
LEGAL PROCEEDINGS
In July 1997, the Company was notified by the FTC and the NYAG that it was
the subject of an investigation alleging deceptive advertising practices in
connection with the sale of its Prepaid Cards and that the FTC and the NYAG
were reviewing whether the Company properly decrements minutes from its
Prepaid Cards. The Company believes that the FTC and the NYAG have also been
reviewing the practices of other companies in the telecommunications industry.
In connection with this inquiry in October 1997, the FTC and the NYAG
requested that the Company and certain of its directors and officers provide
financial and other information. In response to the inquiry, the Company has
thoroughly reviewed its systems for documenting minutes from its Prepaid Cards
and believes that it properly decrements minutes. The Company does not believe
its advertising practices are deceptive or that it is improperly decrementing
minutes from its Prepaid Cards and is currently cooperating with the FTC and
the NYAG to resolve their allegations and questions. The Company is presently
unable to evaluate the likelihood that a claim will actually be filed, or, if
so, the likelihood of a favorable or unfavorable outcome. In the event a
complaint is filed, the Company will defend such complaint vigorously.
The Company is not aware of any pending legal proceedings against the
Company which, individually or in the aggregate, the Company would expect to
have a Material Adverse Effect. The Company is, from time to time, involved in
various regulatory proceedings before various public utilities commissions, as
well as before the FCC. See "Risk Factors--Regulation."
RESEARCH AND DEVELOPMENT
The Company has not expended material amounts on research and development
since inception.
38
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the Company's
directors, executive officers and certain other key employees as of January
31, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Samer Tawfik........ 32 Chief Executive Officer, Chairman and Director
Peter M. Vita....... 37 President and Director
Douglas Barley...... 46 Chief Financial Officer and Director
Joseph Pannullo..... 37 Chief Operating Officer and Director
John J. Klusaritz... 40 Executive Vice President, General Counsel and Director
Richard Harding..... 46 Senior Vice President Carrier Relations/Sales
Michael Burns....... 38 Vice President, Commercial Sales
Stuart Hinkley...... 34 Managing Director UK
Nigel Downton....... 40 Commercial Director UK
</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.
SAMER TAWFIK founded the Company in April 1995 and has been Chairman of the
Board of Directors and Chief Executive Officer of the Company since inception.
From 1984 to 1994, Mr. Tawfik was principal owner and manager of three
amusement companies which sold and distributed amusement video games through a
substantial distribution network to retail outlets in the New York tri-state
area and were ultimately positioned among the leading amusements video game
providers in the United States. From 1989 to 1995, Mr. Tawfik also invested in
and managed fixed and liquid asset portfolios for his personal and private
accounts.
PETER M. VITA has been President of the Company since March 1997, and prior
to that had been Executive Vice President, Sales and Marketing of the Company
since joining the Company in July 1995. From July 1994 until June 1995 he
served as principal, director and VP of Finance for Advanced Communications
Group, Inc., a start-up entity that developed, marketed and distributed
various co-branded and collectible Prepaid Cards. From November 1992 to June
1995, Mr. Vita acted as a consultant conducting company research and due
diligence for private investors. From 1991 to 1992, Mr. Vita was a broker with
Whale Securities and, from 1982 to 1991 with Gruntal & Co. Mr. Vita has been a
director of the Company since October 1997.
DOUGLAS BARLEY has been Chief Financial Officer since joining the Company in
March 1996 and Corporate Secretary since April, 1997. From October 1994 until
joining the Company, Mr. Barley was CFO for Charlotte Shops, Ltd., a specialty
retailer. From June 1990 to October 1994, Mr. Barley served as CFO for several
public and private companies assisting in obtaining venture and equity
capital. From 1980 through June 1990, Mr. Barley was employed by international
and regional public accounting and consulting firms, where he specialized in
startup companies and SEC registrations. Mr. Barley has been licensed by New
York State as a Certified Public Accountant since 1986, and has been a member
of the American Institute of Certified Public Accountants and the New York
State Society of CPAs. Mr. Barley has been a director of the Company since
October 1997.
JOSEPH PANNULLO has been Chief Operating Officer since May 1997 and a
Director since October 1997. Prior to May of 1997, Mr. Pannullo was in the
telecommunications services industry for 14 years. From 1990 until joining the
Company, Mr. Pannullo was the founder, President and Chief Executive Officer
of The Interactive Telephone Company ("Interactive"), a prepaid call
processing service company. Prior to Interactive, Mr. Pannullo served as the
President of Valor Telecom Ltd., a systems integrator of interactive voice
response applications using proprietary software for sale to Fortune 1000 and
other companies. Since 1983 to date, Mr. Pannullo has delivered advanced
technology applications to various telecom companies and commercial end users.
From 1986 until 1988, Mr. Pannullo was a member of the Board of Directors and
Treasurer of the American Telemarketing Association. Mr. Pannullo has a B.A.
in Philosophy from American University. See "Certain Transactions--
Transactions with The Interactive Telephone Company, GodotSoft L.L.C., and
Joseph Pannullo.
39
<PAGE>
JOHN J. KLUSARITZ has been Executive Vice President and General Counsel of
the Company since joining the Company in September 1997. Prior to joining the
Company, Mr. Klusaritz had been in private practice in Washington, D.C. for
sixteen years from 1981 until 1997. From 1992 until joining the Company, Mr.
Klusaritz was a partner in the Washington, D.C. law firm of Swidler & Berlin,
where he represented domestic and international telecommunications companies
(including PT-1) in financing transactions, mergers and acquisitions, tax
restructuring, joint ventures and other business combinations. Mr. Klusaritz
graduated cum laude from Harvard Law School and has served as an Adjunct
Professor of Law at the Georgetown University Law Center since 1987. Mr.
Klusaritz has been a director of the Company since October 1997. See "Legal
Matters."
RICHARD HARDING has been Senior Vice President Carrier Relations/Sales since
June 1997. Prior to joining the Company, he worked in the telecommunications
industry for over 16 years. From June 1996 until joining the Company, he was
Vice President of Carrier Sales with Network Plus, Inc. Prior to joining
Network Plus, Mr. Harding held senior management positions with Star Telecom,
Cherry Communications, GE Capital Communications and Sprint. Mr. Harding
graduated from Fordham University with a Bachelor of Science Degree.
MICHAEL BURNS has been Vice President, Commercial Sales since February 1998.
Prior to joining the Company, he worked in the telecommunications industry for
11 years. From February 1997 until joining the Company, he was National
Accounts Manager for Teldata Control Inc., a telecommunications
audit/consulting firm. Prior to joining Teldata, Mr. Burns was Director of
U.S. Sales of ViTel International, an international provider of facsimile and
telex services marketed to Fortune 100 companies. Prior to joining ViTel, from
March 1987 to February 1993, Mr. Burns held various sales and management
positions in the Commercial Division at MCI.
STUART HINKLEY,has been Managing Director UK since February 1998. From
September 1995 until joining the Company, he was Managing Director of Cherry
Communications UK Limited, where he was responsible for leading its network
build-out in Europe and the Far East. He previously worked for Cook
Communications PLC as Sales Director until its acquisition by Cherry
Communications. Prior to that time, Mr. Hinkley was Managing Director of GTN
Limited, a switchless reseller targeting the international retail market, from
August 1994 to April 1995, having entered the telecommunications industry
after working in financial services at a UK leading High Street Bank.
NIGEL DOWNTON has been Commercial Director UK since February 1998. From
January 1996 until he joined the Company, he was Commercial Director of Cherry
Communications UK Limited, where he was responsible for negotiating the
technical and contractual terms of its network build-out and carrier
interconnects, network costing and retail programs. Prior to joining Cherry
Communications he was Managing Director of World Access Communications Agency
Limited, a switchless reseller, which he sold to GoldenLine of France. Prior
to entering the telecommunications industry in 1995, Mr. Downton worked in UK
High Street banking and financial services sales and marketing, principally at
the Sales Director level.
The Company's Board of Directors is divided into three classes serving
staggered three-year terms. 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. Mr. Pannullo's term expires at the 1999
annual meeting of shareholders, Mr. Barley's and Mr. Klusaritz's terms expire
at the 2000 annual meeting of shareholders, and Mr. Tawfik's and Mr. Vita's
terms expire at the 2001 annual meeting of shareholders. Officers are elected
by, and serve at the discretion of, the Board of Directors. There are no
family relationships among any of the directors or 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
40
<PAGE>
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 solely 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 directors and officers,
determining the total compensation of the officers and directors of the
Company and administering the Company's Stock Incentive Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors did not have a Compensation Committee during the
fiscal year ended March 31, 1997. As a result, Messrs. Tawfik and Hickey, the
only members of the Board of Directors at that time who were also executive
officers of the Company, 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. For information related to certain transactions between the Company
and each of Messrs. Tawfik and Hickey, see "Certain Transactions."
DIRECTOR REMUNERATION
After completion of the Offering, directors who are not employees of the
Company will receive an annual fee and a fee for each board and committee
meeting attended. All directors will be reimbursed for out-of-pocket expenses
incurred in connection with attendance at board and committee meetings. The
Company may grant options to directors under the Company's Stock Incentive
Plan.
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 the other most highly compensated
executive officers of the Company whose aggregate cash and cash equivalent
compensation exceeded $100,000 (collectively, the "Named Executive Officers"),
with respect to the fiscal year ended March 31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME OF INDIVIDUAL
AND PRINCIPAL POSITION SALARY($) BONUS($)
<S> <C> <C>
Samer Tawfik............................................... 197,954 141,375
Chairman and Chief
Executive Officer
Peter Vita................................................. 105,577 150,302
President
Thomas Hickey (2).......................................... 146,182 139,875
</TABLE>
- ---------------------
(1) Other annual compensation in the form of perquisites and other personal
benefits has been omitted because the aggregate amount of such
compensation is less than $50,000 and less than ten percent of the total
annual salary and bonus reported for the Named Executive Officers.
(2) Mr. Hickey resigned from his position as Chief Operating Officer and as a
director of the Company on March 26, 1997. See "Certain Transactions--
Transactions with Thomas Hickey."
41
<PAGE>
None of the Named Executive Officers were awarded any options or stock
appreciation rights from April 21, 1995 (inception) through March 31, 1997,
the end of the Company's most recent fiscal year.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of (i) Mr.
Tawfik (dated as of October 1, 1997), (ii) Messrs. Vita and Barley (each dated
as of April 6, 1996), (iii) Mr. Pannullo (dated as of May 9, 1997) and (iv)
Mr. Klusaritz (dated as of May 26, 1997) (collectively, the "Employment
Agreements"), providing for base compensation of $450,000, $200,000, $160,000,
$140,000 and $280,000, respectively, to be reviewed by the Board of Directors
(or Compensation Committee) annually. Each of the Employment Agreements also
provides for an annual discretionary bonus, as well as fringe benefits
customarily offered by the Company to its senior officers. Each of the
Employment Agreements has a three-year term, with one year automatic renewals
(unless one month's prior notice is given by either party). In addition, each
of the Employment Agreements generally provides for continued payment of
compensation and benefits for the remainder of its term if the executive
officer's employment is terminated by the Company other than for cause (as
defined), death or disability of the executive officer. Each of the Employment
Agreements also includes confidentiality, six-month nonsolicitation and one-
year noncompetition covenants.
Pursuant to the Employment Agreements with Messrs. Vita and Barley, the
Company has the right to repurchase the shares of the Company's Common Stock
held by each such officer at fair market value (as defined) in the event such
officer's employment is terminated for the foregoing reasons prior to the
expiration of the Employment Agreement. Such repurchase right lapses ratably
over the term of the respective Employment Agreement. Concurrently with the
execution of their Employment Agreements, Messrs. Vita and Barley were issued
6,503,000 and 2,597,000 shares of Common Stock, respectively, by the Company
for nominal consideration. At such time, Messrs. Vita and Barley also
purchased 2,247,000 and 903,000 shares of Common Stock, respectively, from Mr.
Hickey.
Concurrently with the execution of his Employment Agreement, Mr. Pannullo
was granted an option by the Company to acquire 1,048,600 shares of the
Company's Common Stock (the "Pannullo Option"). On May 20, 1997, Mr. Pannullo
exercised his option to purchase 1,048,600 shares of Common Stock for a
nominal exercise price. Mr. Pannullo has the right to receive a one year,
market rate loan from the Company of up to $350,000, to be secured by a pledge
of his option shares, to enable Mr. Pannullo to pay any federal or state
income taxes due as a result of the exercise of his option. Pursuant to Mr.
Pannullo's Employment Agreement, in the event that Mr. Pannullo's employment
is terminated for cause or as a result of a voluntary termination (each as
defined), in either case within one year of May 9, 1997, the Company has the
right to repurchase the option shares at a purchase price or termination
payment equal to the fair market value per share.
Concurrently, with the execution of his Employment Agreement, Mr. Klusaritz
was granted an option by the Company to acquire 1,916,600 shares of the
Company's Common Stock. Pursuant to his option agreement, Mr. Klusaritz has
antidilution rights upon the occurrence of certain events, including prior to
the closing of the Offering, significant changes in the capitalization of the
Company. On October 15, 1997, Mr. Klusaritz exercised his option to purchase
1,916,600 shares of Common Stock for an aggregate exercise price of $3.6
million and obtained a loan in that amount from the Company. The loan is
recourse and non-interest bearing for a period of up to eighteen months, bears
interest at a market rate thereafter and matures on the earlier of (i) two
years from the date of the loan, (ii) one year after the closing of the
Offering or (iii) upon a sale of "control" (as defined under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of the Company.
STOCK INCENTIVE PLAN
On September 30, 1997, the Board of Directors adopted, and the shareholders
of the Company approved, the PT-1 Communications, Inc. 1997 Stock Incentive
Plan (the "Stock Incentive Plan"), which provides for the
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grant to officers, key employees and non-employee directors of the Company and
its subsidiaries of "incentive stock options" within the meaning of Section
422 of the Code, stock options that are non-qualified for federal income tax
purposes and stock appreciation rights ("SARs"). The total number of shares
for which options may be granted pursuant to the Stock Incentive Plan and the
maximum number of shares for which options may be granted to any person is
3,500,000 shares, subject to certain adjustments to reflect changes in the
Company's capitalization. The Stock Incentive Plan is currently administered
by the Company's Board of Directors. Upon the completion of the Offering, the
Stock Incentive Plan will be administered by the Compensation Committee. The
Compensation Committee will determine, among other things, which officers,
employees and non-employee 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.
The exercise price of incentive stock options will be determined by the
Compensation Committee, but may not be less than the fair market value of the
Common Stock on the date of grant 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 Incentive Plan who owns stock representing more than 10% of the
voting power of all classes of the outstanding capital stock of the Company
and 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 will be 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 date of expiration
or termination of the plan, (ii) the date of any material modification of the
plan, (iii) the first date as to which all options provided for under the plan
have been issued, or (iv) the date of the first meeting of shareholders at
which directors are to be elected occurring after the year 2000 (the "Reliance
Period Termination Date"), the exercise price of such options may not be less
than 50% of the fair market value of the Common Stock on the date of grant
(or, in the case of an amendment, the date of the amendment). In the case of
non-qualified stock options granted after the Reliance Period Termination
Date, the exercise price of such options may not be less than the fair market
value of the Common Stock on the date of grant (or, in the case of an
amendment, the date of the amendment). 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 check or, with the
approval of the Compensation Committee by promissory note, or in shares of
Common Stock having a fair market value on the date of exercise in the
aggregate equal to the option price. Options granted pursuant to the Stock
Incentive Plan are not transferable, except (i) by will or the laws of descent
and distribution or pursuant to a qualified domestic relations order as
defined in Section 414(p) of the Code or Title I, Section 206(d)(3) of
Employee Retirement Income Security Act of 1974, as amended ("ERISA") (to the
same extent as if the plan were subject thereto), or the applicable rules
thereunder, (ii) pursuant to another exception to transfer restrictions
expressly permitted by the Compensation Committee and set forth in the option
award, (iii) in the case of options, or SARs intended to satisfy the
conditions of Rule 16b-3, as promulgated by the Commission pursuant to the
Exchange Act ("Rule 16b-3"), to the extent permitted by Rule 16b-3, and (iv)
in the case of incentive stock options, as permitted by the Code. During an
optionee's lifetime, the option is exercisable only by the optionee, except
that the Compensation Committee may permit options, or SARs to be exercised by
and paid to certain persons or entities related to the optionee who are
transferees of the optionee without consideration, but only pursuant to such
conditions and procedures as the Compensation Committee may expressly
establish and (for options, or SARs intended to satisfy the conditions of Rule
16b-3) as may be permitted under Rule 16b-3.
The Board has the right at any time to terminate or, from time to time, to
amend, modify or suspend the Stock Incentive Plan, without the consent of the
Company's shareholders or optionees; provided, that no such action may
materially adversely affect options previously granted without the optionee's
written consent, and
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provided further that if any amendment to the plan would (i) materially
increase the benefits accruing to optionees under the plan, (ii) materially
increase the aggregate number of securities that may be issued under the plan,
or (iii) materially modify the requirements as to eligibility for
participation in the plan, then to the extent required under applicable law,
or deemed necessary or advisable by the Board, such amendment shall be subject
to shareholder approval. The expiration date of the Stock Incentive Plan,
after which no option may be granted thereunder, is September 30, 2007.
Promptly after the completion of the Offering, the Company expects to file
with the Securities and Exchange Commission (the "Commission") a registration
statement on Form S-8 covering the shares of Common Stock underlying options
granted under the Stock Incentive Plan.
As of December 31, 1997, options to purchase an aggregate of 620,500 shares
of Common Stock were granted under the Stock Incentive Plan. At such time, a
total of 2,879,500 shares of Common Stock remained available for future
grants. The outstanding options were held by seven individuals and were
exercisable at a weighted average exercise price of $ per share. Shares
subject to options granted under the plan that have lapsed or terminated may
again be subject to options granted under the plan.
Certain U.S. Federal Income Tax Consequences. The following discussion is a
summary of the principal U.S. federal income tax consequences under current
federal income tax laws relating to option grants to employees under the Stock
Incentive 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 (i) the discussion below with respect to Section 162(m)
of the Code, (ii) the optionee including such compensation in income and (iii)
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 upon exercise 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," the excess, if any, 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 (i) the discussion below with respect to Section
162(m) of the Code, (ii) the optionee including such compensation in income
and (iii) the Company satisfying applicable reporting requirements, the
Company will be entitled to a tax deduction in the amount of such compensation
income. The excess of the amount realized on
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<PAGE>
such sale or disposition over the fair market value of the shares at the time
of the exercise of the option generally will constitute short-term or long-
term capital gain (depending on the length of time between exercise and sale)
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 million 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 Reliance Period
Termination Date, as discussed above. The compensation attributable to awards
granted under the Company's Stock Incentive Plan before the Reliance Period
Termination Date is not subject to the deduction limitation of Section 162(m).
The Company has structured and implemented the Stock Incentive Plan and plans
to continue implementing the Stock Incentive Plan in a manner so that
compensation attributable to awards made after the Reliance Period Termination
Date will not be subject to the deduction limitation.
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<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS WITH THOMAS HICKEY
On March 26, 1997, the Company repurchased 25,052,632 shares of Common Stock
from Thomas Hickey, a former director and executive officer of the Company
(the "Redemption"), in exchange for (i) a cash payment of $5.0 million and
(ii) the Note in the principal amount of $10.0 million. The Note accrues
interest at a rate of 8.0% per annum, compounded semi-annually. The Company
must repay $5.0 million of the principal amount of the Note on or before March
26, 1998 and the remaining outstanding principal and all accrued but unpaid
interest on or prior to March 26, 1999. The Company is not obligated to pay
interest on the Note until it matures or is prepaid. The Company pledged two-
thirds of the shares of Common Stock it redeemed from Mr. Hickey as collateral
for the Note. There is no penalty for prepaying the Note and the Company is
obligated to prepay the Note with a portion of the proceeds of the Offering.
See "Use of Proceeds." In connection with the Redemption, Mr. Hickey entered
into a one year non-competition agreement with the Company, and the Company
granted Mr. Hickey certain piggyback registration rights with respect to the
shares retained by Mr. Hickey. See "Description of Capital Stock--Registration
Rights." In connection with the Redemption, the Company and Messrs. Tawfik,
Hickey, Vita and Barley each executed a mutual release of all claims relating
to the equity interests of Messrs. Vita and Barley in the Company. See
"Management--Employment Agreements."
Prior to the Offering, Mr. Hickey raised issues regarding, among other
things, the adequacy of the consideration he received as part of the
Redemption. On November 7, 1997, the Company and Messrs. Hickey (and his
affiliates), Tawfik, Vita, Barley, Pannullo and Klusaritz entered into certain
agreements (the "Hickey Settlement") pursuant to which (i) Mr. Hickey
reaffirmed the validity of the Redemption and agreed to extend the period of
his non-competition agreement for an additional three years through March 26,
2001 and (ii) the Company issued an additional 483,980 shares of Common Stock
to Mr. Hickey. In addition, as part of the Hickey Settlement, a comprehensive
release was executed in which all parties released and discharged each other
from any and all claims of every kind and nature whatsoever, including without
limitation claims relating to Mr. Hickey's (and his affiliates') equity
interest in the Company, the Redemption and the Offering.
From its inception through March 31, 1996, the Company sold Prepaid Cards to
a corporation controlled by Mr. Hickey on terms identical to those extended to
other distributors. The aggregate amount of such sales was $1.1 million.
TRANSACTIONS WITH THE INTERACTIVE TELEPHONE COMPANY, GODOTSOFT, L.L.C. AND
JOSEPH PANNULLO
On April 3, 1996, the Company, Interactive and Messrs. Tawfik, Hickey and
Pannullo entered into a settlement agreement and other related agreements
pursuant to which, among other things, (i) Interactive relinquished its rights
to any equity interest in the Company, (ii) the Company and Messrs. Tawfik and
Hickey (a) granted Interactive an option to acquire 5% of the outstanding
shares of each class of capital stock of the Company and (b) agreed to
indemnify Interactive and Mr. Pannullo against certain third party vendor
claims and (iii) the parties entered into certain other agreements relating to
the discontinuance of certain litigation and the release of various other
claims related to their business relationship and prior course of dealing. The
option granted to Interactive was repurchased by the Company in April 1996 for
$150,000.
On May 9, 1997 (the "Transaction Date"), the Company entered into a series
of transactions with Mr. Joseph Pannullo and certain companies controlled by
Mr. Pannullo, and Mr. Pannullo became an executive officer of, and entered
into an Employment Agreement with, the Company (the "Pannullo Transactions").
As part of the Pannullo Transactions, the Company entered into a software
license agreement (the "Software Agreement") with Mr. Pannullo and GodotSoft,
L.L.C. ("Godot"), a company controlled by Mr. Pannullo. Pursuant to the terms
of the Software Agreement, Godot granted the Company a non-exclusive,
perpetual license to use certain software within the United States, Canada,
Puerto Rico or the U.S. Virgin Islands (the "License Area"), in connection
with the development and use of the Company's products and services. Through
May 2001, the licensed technology is exclusive to the Company for use on
telephone equipment located within the
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<PAGE>
License Area. Applications of the technology include on-line rating and
billing systems for debit and credit calling cards, including Prepaid Cards,
dial around and presubscribed long distance. The total fee for the license was
$1.0 million, $350,000 of which was paid in cash on May 9, 1997 and the
remaining $650,000 of which was paid in the form of a non-interest bearing
promissory note, payable in ten monthly installments of $65,000 each on the
first business day of each month, which payments commenced in August 1997. In
addition, the Software Agreement provides that if (i) the Company engages in a
specified transfer of control transaction and (ii) Mr. Tawfik and his
affiliates and family members receive at least $100 million in cash or
publicly held securities as a result of such transaction, the Company must pay
a fee of $2.0 million to Godot. It is not anticipated that this Offering will
constitute a transfer of control transaction.
On the Transaction Date, a wholly owned subsidiary of the Company, Phonetime
Technologies, Inc., a Delaware corporation ("PT-Tech"), acquired certain
computer hardware and other assets from Interactive. The Company paid $600,000
in cash for the assets. Pursuant to a separate agreement, PT-Tech assumed
Interactive's obligations under a lease for the premises located at 111
Pavonia Avenue, Jersey City, New Jersey.
Also, as part of the Pannullo Transactions, the Company entered into an
Employment Agreement with Mr. Pannullo. Pursuant to the agreement, in the
event that Mr. Pannullo's employment is terminated for cause or as a result of
a voluntary termination (each as defined), in either case within one year of
May 9, 1997, the Company has the right to repurchase the Option Shares granted
pursuant to the Pannullo Option at a purchase price or termination payment
equal to their fair market value. On the Transaction Date, the Company also
granted Mr. Pannullo the Pannullo Option to purchase up to 1,048,600 shares of
Common Stock at a nominal exercise price per share (as adjusted in the event
of any stock split or dividend) (the "Pannullo Option Shares"). See
"Management--Employment Agreements."
LOANS TO CERTAIN EXECUTIVE OFFICERS
The Company has from time to time made various personal loans to Messrs.
Tawfik and Hickey, the Chief Executive Officer and a former executive officer,
respectively, at an interest rate of 8% per annum. The largest aggregate
amount of indebtedness owed by Mr. Tawfik to the Company since inception was
$305,824. At September 30, 1997, $194,150 remained outstanding. The largest
amount of indebtedness owed by Mr. Hickey to the Company since inception was
$294,952. At September 30, 1997, $165,424 remained outstanding.
For information regarding loans made and obligated to be made by the Company
to each of Messers. Klusaritz and Pannullo, respectively, in connection with
the exercise of their options to acquire Common Stock, see "Management--
Employment Agreements."
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of January 31, 1998, 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 (including the Named Executive Officers),
(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.
<TABLE>
<CAPTION>
SHARES OF COMMON SHARES OF
STOCK BENEFICIALLY COMMON STOCK
OWNED PRIOR TO BENEFICIALLY OWNED
OFFERING (1) SHARES OF AFTER OFFERING (1)(2)
--------------------- COMMON STOCK -------------------------
BENEFICIAL OWNER NUMBER PERCENT(3) BEING OFFERED NUMBER PERCENT(2)
<S> <C> <C> <C> <C> <C>
Samer Tawfik............ 30,450,000
Peter M. Vita........... 8,750,000
Douglas Barley.......... 3,500,000
Thomas Hickey(3)........ 2,731,330
Joseph J. Pannullo...... 1,048,600
John J. Klusaritz(4).... 1,916,600
Helene Kidary(5)........ 10,000
All directors and
executive
officers as a group (7
persons)............... 48,406,530
</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 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 dispositive 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 PT-1 Communications, Inc., 30-50
Whitestone Expressway, Flushing, New York 11354.
(2) Assumes 48,406,530 shares of Common Stock outstanding prior to the
Offering and shares of Common Stock outstanding after the Offering.
(3) On September 9, 1997, Mr. Hickey transferred 1,400,000 shares of Common
Stock to a family trust. Mr. Hickey's address is c/o Craig S. Libson,
Esq., Parker Duryee Rosoff & Haft, 529 Fifth Avenue, New York, New York
10017. Excludes 16,701,755 shares of Common Stock held in treasury and
pledged by the Company to secure its obligation to Mr. Hickey under the
Note. See "Certain Transactions--Transactions with Thomas Hickey."
(4) Mr. Klusaritz's shares are pledged to the Company to secure repayment of
a loan made by the Company to Mr. Klusaritz. See "Management--Employment
Agreements."
(5) Represents 10,000 shares of Common Stock issuable upon exercise of
outstanding stock options exercisable currently or within 60 days.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Effective upon completion of the Offering, the Company's authorized capital
stock will consist of (i) 150 million shares of Common Stock and (ii) 15
million shares of Preferred Stock. As of January 31, 1998, there were
48,396,530 shares of Common Stock issued and outstanding held by six
shareholders of record and no shares of Preferred Stock issued and
outstanding. As of September 30, 1997, the Company's capitalization also
included (i) outstanding options to purchase 620,500 shares of Common Stock at
a weighted average exercise price of $ per share (of which options to
purchase 38,331 shares are vested and exercisable) and (ii) outstanding
warrants to acquire shares with a fair market value of $3 million at an
aggregate exercise price of $999,000 (one-third of which vest and become
exercisable upon completion of the Offering). In addition, 2,879,500 shares of
Common Stock were reserved for issuance under the Stock Incentive Plan.
The following statements are brief summaries of certain provisions with
respect to the Company's capital stock contained in its Certificate and
Bylaws, copies of which have been filed as exhibits to the Registration
Statement. The following is qualified in its entirety by reference thereto.
COMMON STOCK
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 which may be issued in the future, the holders of
outstanding shares 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. 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. See "Dividends."
At present there is no established trading market for the Common Stock.
Application will be made to have the Common Stock approved for listing on the
Nasdaq National Market ("NASDAQ") under the symbol " ."
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time up
to 15 million 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, 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 with conversion
rights, the number of shares of Common Stock outstanding could potentially be
increased up to the amount authorized under the Certificate. 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
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<PAGE>
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.
THE INTEREXCHANGE WARRANTS
In connection with the execution of the InterExchange Agreement, the Company
granted warrants for the purchase of shares of Common Stock to certain
employees of InterExchange (collectively, the "InterExchange Warrants"). The
InterExchange Warrants are exercisable for shares of Common Stock with an
aggregate fair market value (as defined) equal to (i) $1.0 million, at a
nominal exercise price and (ii) $2.0 million, at an aggregate exercise price
equal to $1.0 million (collectively, the "Warrant Shares"). InterExchange
Warrants with respect to one-third of the Warrant Shares vest and become
exercisable upon each of: (i) the earlier to occur of the closing of the
Offering or March 31, 1998, (ii) January 1, 1999 and (iii) December 1, 1999,
in each case if and only if the InterExchange Agreement has not been
terminated on or before such date (other than as a result of a breach by the
Company). The InterExchange Warrants expire upon the fifth anniversary of
their respective vesting dates. In the event of a "change of control" (as
defined), any unvested InterExchange Warrants at such time shall vest
immediately and become exercisable and the fair market value shall be fixed as
of the date of such change of control.
REGISTRATION RIGHTS
Prior to the completion of the Offering, the Company intends to enter into a
Registration Rights Agreement (the "Registration Rights Agreement") with
Messrs. Tawfik, Vita, Barley, Pannullo and Klusaritz (collectively, the
"Holders"). The Registration Rights Agreement provides that Mr. Tawfik will
have the right to request on two separate occasions that the Company file a
registration statement under the Securities Act covering shares of Common
Stock held by Mr. Tawfik having an aggregate fair market value (as defined) in
each case in excess of $10.0 million ("Demand Registration Rights"). No Demand
Registration Right may be exercised within six months after any other
registration statement filed pursuant to such right is declared effective.
Such Demand Registration Rights may only be exercised by Mr. Tawfik after the
Company becomes eligible to register its securities by means of a registration
statement on Form S-3 under the Securities Act, and only for the two-year
period thereafter.
The Registration Rights Agreement also provides that if the Company files a
registration statement under the Securities Act covering any of its
securities, subject to certain exceptions, the Holders will be entitled to
notice of such registration and may include in the offering shares of Common
Stock issued to such Holders ("Piggyback Registration Rights"). The Company
will pay all costs incurred in connection with the exercise of Demand
Registration Rights and Piggyback Registration Rights, except for all
underwriting discounts and commissions relating to the Common Stock sold by
the Holders, which will be borne by the Holders. The Registration Rights
Agreement expires no later than five years from its effective date.
Pursuant to a Share Purchase Agreement, dated as of March 26, 1997, among
the Company and Messrs. Hickey, Tawfik, Vita and Barley, the Company granted
Mr. Hickey the right to participate pari passu in any registration of Common
Stock effected by the Company, subject to certain restrictions. See "Certain
Transactions--Transactions with Thomas Hickey."
All directors and executive officers and certain shareholders, option
holders and warrantholders have agreed to a limitation on their ability to
sell or distribute shares of Common Stock and other securities for 180 days
after the date of this Prospectus, without the prior written consent of the
Underwriters. See "Underwriting."
CERTAIN PROVISIONS OF THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION AND
BYLAWS
As permitted by the NYBCL, the Company's Certificate provides that, to the
fullest extent permitted by the NYBCL, no director of the Company shall be
liable to the Company or its shareholders for monetary damages for the breach
of fiduciary duty in such capacity. Such provision does not eliminate or limit
the liability of any
50
<PAGE>
director (i) if a judgment or other final adjudication adverse to such
director establishes that his acts or omissions were in bad faith or involved
intentional misconduct or a knowing violation of law or that he personally
gained a material profit or other advantage to which he was not legally
entitled or that his acts violated Section 719 of the NYBCL, or (ii) for any
act or omission prior to the adoption of this provision. As a result of this
provision, the Company and its shareholders may be unable to obtain monetary
damages from a director for breach of his duty of care. Although shareholders
may continue to seek injunctive or other equitable relief for an alleged
breach of fiduciary duty by a director, shareholders may not have any
effective remedy against the challenged conduct if equitable remedies are
unavailable.
Under the Certificate the Company has agreed to indemnify and advance
expenses to each person who is or was a director or officer of the
Corporation, to the fullest extent permitted by the NYBCL. In addition, at the
Company's option, it may indemnify any other person (his testator or
intestate) who is or was serving at the request of the Company as a director
or officer of any another corporation of any type or kind, domestic or
foreign, of any partnership, joint venture, trust, employee benefit plan or
other enterprise to the fullest extent permitted by the NYBCL. The Company
intends to obtain officers' and directors' liability insurance for members of
its Board of Directors and executive officers. In addition to the
indemnification provided in the Company's Certificate, the Company intends to
enter into agreements to indemnify its directors and officers.
The Certificate 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. See "Risk Factors--Antitakeover Considerations."
The Company's Certificate provides that the Board of Directors of the
Company shall be divided into three classes serving staggered three-year
terms. The Bylaws also restrict who may call a special meeting of shareholders
and provide that shareholders may only act at an annual or special meeting or
by unanimous written consent. The Bylaws establish 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 60
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 Board of Directors may alter, amend or repeal the Bylaws of the Company
by the affirmative vote of at least a majority of the entire Board of
Directors, provided that any Bylaws adopted by the Board of Directors may be
amended or repealed by the shareholders. The shareholders may also adopt,
repeal, or amend the Bylaws of the Company by the affirmative vote of at least
a majority of the shares that are issued and outstanding and entitled to vote.
NEW YORK BUSINESS CORPORATION LAW; ANTITAKEOVER EFFECTS
Section 912 of the NYBCL prohibits a company from entering into a business
combination (e.g., a merger, consolidation, sale of 10% or more of a company's
assets, or issuance of securities with an aggregate market value of 5% or more
of the aggregate market value of all of the company's outstanding capital
stock) with a beneficial owner of 20% or more of a company's securities (a
"20% shareholder") for a period of five years following the date such
beneficial owner became a 20% shareholder (the "stock acquisition date"),
unless, among other things, such business combination or the purchase of stock
resulting in the 20% shareholder's beneficial ownership was approved by the
company's board of directors prior to the stock acquisition date or the
business combination is approved by the affirmative vote of the holders of a
majority of the outstanding voting stock exclusive of the stock beneficially
owned by the 20% shareholder. The applicability of this provision to the
Company may discourage unsolicited takeover bids by third parties.
51
<PAGE>
The Certificate and the Bylaws, to be adopted prior to the closing of the
Offering, will include certain provisions that may have the effect of
delaying, deterring or preventing a future takeover or change in control of
the Company without the approval of the Board of Directors. Such provisions
also may render the removal of directors and management more difficult. Among
other things, the Certificate and/or Bylaws: (i) provide for a classified
board of directors, (ii) impose restrictions on who may call a special meeting
of shareholders, (iii) include a requirement that shareholder action be taken
only by unanimous written consent or at shareholder meetings 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 up to 15 million 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 its rights, preferences and designations, may
have the effect of delaying, deterring or preventing a change in control of
the Company. In addition, 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 "--Regulation" and "Description of
Capital Stock."
TRANSFER AGENT
The transfer agent and registrar for the Company's Common Stock is Registrar
and Transfer Company.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have shares of Common
Stock outstanding. Of these shares, the shares sold in this Offering will
be freely tradeable without restriction or further registration under the
Securities Act, except for shares purchased by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act (which may generally
be sold only in compliance with Rule 144).
The remaining outstanding shares are deemed "Restricted Shares" under Rule
144 in that they were originally issued and sold by the Company in private
transactions in reliance upon exemptions from the registration provisions of
the Securities Act. Upon the expiration of the 180-day lock-up agreements
described below, none of the Restricted Shares will be eligible for sale
pursuant to Rule 144 until the expiration of one year from the date such
Restricted Shares were acquired.
In addition to the Restricted Shares described in the preceding paragraph,
approximately shares of Common Stock which may be acquired within 180 days
after the effective date of this Offering upon the exercise of currently
outstanding stock options and warrants are subject to the 180-day lock-up
agreements but may be eligible for resale following the expiration of the 180-
day lock-up agreements (subject, in the case of affiliates, to certain
limitations) pursuant to Rule 701 under the Securities Act. Additional options
will continue to vest and may be exercised and sold from time to time by
option holders following the expiration of the 180-day lock-up agreements. See
"Management--Stock Incentive Plan" and "Underwriting."
The Company, its directors and officers and substantially all of the other
shareholders of the Company, who upon completion of the Offering will own in
the aggregate outstanding shares of Common Stock, as well as the holders of
currently outstanding options and warrants to purchase additional shares
of Common Stock, have entered into "lock-up" agreements with the Underwriters,
providing that they will not, subject to certain exceptions (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common
Stock or (ii) enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of any
Common Stock (regardless of whether any of the transactions described in
clause (i) or (ii) is to be settled by the delivery of Common Stock, or such
other securities, in cash or otherwise) for a period of 180 days after the
date of this Prospectus without the prior written consent of BT Alex. Brown
Incorporated except that the Company may issue and may grant options to
purchase and register shares of Common Stock under the Stock Incentive Plans.
In addition, during such period, the Company also has agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain shareholders and warrantholders of the Company
(including the Selling Shareholders) has agreed not to make any demand for, or
exercise any right with respect to, the registration of any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock without BT Alex. Brown Incorporated's prior written consent. See
"Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons deemed to be affiliates, whose
Restricted Shares have been fully paid for and held for at least one year from
the date of issuance by the Company may sell such securities in brokers'
transactions or directly to market makers, provided the number of shares sold
in any three month period does not exceed the greater of (i) 1% of the then
outstanding shares of the Common Stock ( shares based on the number of
shares to be outstanding after this Offering) or (ii) the average weekly
trading volume in the public market during the four calendar weeks immediately
preceding the filing of the seller's Form 144. Sales under Rule 144 are also
subject to certain notice requirements and the availability of current public
information concerning the Company. After two years have elapsed from the
issuance of Restricted Shares by the Company, such shares generally may be
sold without limitation by persons who have not been affiliates of the Company
for at least three months. Rule 144 also provides that affiliates who are
selling shares which are not Restricted Shares must nonetheless comply (with
the exception of the holding period requirements) with the same restrictions
applicable to Restricted Shares. The foregoing summary of Rule 144 is not
intended to be a complete description thereof.
53
<PAGE>
In general, under Rule 701 as currently in effect, any employee, officer,
director, consultant or advisor of the Company who purchased shares from the
Company pursuant to a written compensatory benefit plan or written contract
relating to compensation is eligible to resell such shares ninety days after
the effective date of this Offering in reliance upon Rule 144, but without the
requirement to comply with certain restrictions contained in such rule. Shares
obtained pursuant to Rule 701 may be sold by non-affiliates without regard to
the holding period, volume limitations, or information or notice requirements
of Rule 144, and by affiliates without regard to the holding period
requirements.
The Company intends to file Form S-8 Registration Statements under the
Securities Act to register all shares of Common Stock issuable under its Stock
Incentive Plan, as well as certain of the shares of Common Stock previously
issued under its Stock Incentive Plan. This registration statement is expected
to be filed as soon as practicable after the date of this Prospectus and is
expected to become effective immediately upon filing. Shares covered by such
registration statement will be eligible for sale in the public market after
the effective date of such registration statement subject to Rule 144
limitations applicable to affiliates of the Company and to certain lock-up
arrangements with the Underwriters. See "Management--Stock Incentive Plan."
The Company has granted registration rights to certain of its shareholders.
See "Description of Capital Stock--Registration Rights."
Prior to the Offering, there has been no public market for the Common Stock
and it is impossible to predict with certainty the effect, if any, that market
sales of shares or the availability of such shares for sale will have on the
market price of the Common Stock. Nevertheless, sales of substantial amounts
of Common Stock in the public market may have an adverse impact on such market
price and could impair the Company's ability to raise capital through the sale
of its equity securities.
54
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated and Hambrecht & Quist LLC, have severally agreed
to purchase from the Company and the Selling Shareholders the following
respective numbers of shares of Common Stock at the initial public offering
price less the underwriting discounts and commissions set forth on the cover
page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
<S> <C>
----
Total..........................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other dealers. After the initial public offering, the public
offering price and other selling terms may be changed by the Representatives
of the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to
additional shares of Common Stock, at the initial public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to , and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the Common Stock offered hereby. If purchased,
the Underwriters will offer such additional shares on the same terms as those
on which the shares of Common Stock are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Shareholders against certain civil
liabilities, including liabilities under the Securities Act.
To facilitate the Offering, the Underwriters may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Specifically, the Underwriters may over-allot shares of the Common Stock in
connection with the Offering, thereby creating a short position in the
Underwriters' syndicate account. Additionally, to cover such over-allotments
or to stabilize the market price of the Common Stock, the Underwriters may bid
for, and purchase, shares of the Common Stock in the open market. Any of these
activities may maintain the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The Underwriters are
not required to engage in these activities, and if commenced, any such
activities may be discontinued at any time. The Representatives, on behalf of
the Underwriters, also may reclaim selling concessions allowed to an
Underwriter or dealer, if the syndicate repurchases shares distributed by that
Underwriter or dealer.
55
<PAGE>
The Company and each of its directors and executive officers and certain of
its securityholders, who in the aggregate will hold, following this offering,
shares of Common Stock and options to purchase shares of Common Stock,
have agreed that they will not directly or indirectly, without the prior
written consent of BT Alex. Brown Incorporated, offer, sell, offer to sell,
contract to sell, or otherwise dispose of any shares of Common Stock for a
period of 180 days after the date of this Prospectus, except that the Company
may issue, and grant options to purchase, shares of Common Stock under its
current stock option and purchase plans and other currently outstanding
options. In addition, the Company may issue shares of Common Stock in
connection with any acquisition of another company if the terms of such
issuance provide that such Common Stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence. See
"Shares Eligible for Future Sale."
The Representatives of the Underwriters have advised the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations among the Company, the Selling
Stockholders and the Representatives of the Underwriters. Among the factors to
be considered in such negotiations are the prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies which the Company
and the Representatives of the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant. Application
has been made to list the Common Stock for quotation on the Nasdaq National
Market under the symbol "PTIC."
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Swidler & Berlin, Chartered, Washington, D.C. John J.
Klusaritz, Executive Vice President, General Counsel and a director of the
Company, was a member of Swidler & Berlin prior to joining the Company in
September 1997. Certain legal matters will be passed upon for the Underwriters
by Piper & Marbury L.L.P.
EXPERTS
The financial statements of the Company as of March 31, 1996 and 1997 and
the period from April 21, 1995 (inception) to March 31, 1996, and for the year
ended March 31, 1997 appearing herein and in the Registration Statement have
been audited by KPMG Peat Marwick LLP, independent Certified Public
Accountants, as set forth in their report appearing elsewhere herein and in
the Registration Statement of which this Prospectus forms a part and upon the
authority of said firm as experts in accounting and auditing.
56
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto.
Certain items are omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement and to
the exhibits and schedules filed as parts thereof. Statements contained in
this Prospectus as to the contents of any contract or other document referred
to are not necessarily complete, and in each instance, reference is made to
the copy of such contract or document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference.
As a result of the Offering, the Company will be subject to the
informational requirements of the Exchange Act, and in accordance therewith,
will file reports and other information with the Commission. A copy of the
Registration Statement, including the exhibits and schedules thereto, and the
reports and other information filed by the Company in accordance with the
Exchange Act, may be inspected without charge at the principal office of the
Commission in Washington, D.C. and copies may be obtained from the Public
Reference Section at the Commission's principal office, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and are also available for inspection
and copying at the Commission's regional offices at Seven World Trade Center,
13th Floor, New York, New York 10048 and at Northwest Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 upon payment of the fees
prescribed by the Commission. Such material may also be accessed
electronically by means of the Commission's home page on the Internet at
http://www.sec.gov.
57
<PAGE>
PT-1 COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets as of March 31, 1996 and 1997 and September 30, 1997
(unaudited)............................................................. F-3
Statements of Operations for the period from April 21, 1995 (inception)
to March 31, 1996, year ended March 31, 1997 and six months ended
September 30, 1996 (unaudited) and 1997 (unaudited)..................... F-4
Statements of Stockholders' Deficiency for the period from April 21, 1995
(inception) to March 31, 1996, year ended March 31, 1997 and six months
ended September 30, 1997 (unaudited).................................... F-5
Statements of Cash Flows for the period from April 21, 1995 (inception)
to March 31, 1996, year ended March 31, 1997 and six months ended
September 30, 1996 (unaudited) and 1997 (unaudited)..................... F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
PT-1 Communications, Inc.:
We have audited the accompanying balance sheets of PT-1 Communications, Inc.
as of March 31, 1996 and 1997 and the related statements of operations,
stockholders' deficiency and cash flows for the period from April 21, 1995
(inception) to March 31, 1996 and for the year ended March 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of PT-1 Communications, Inc.
as of March 31, 1996 and 1997, and the results of its operations and its cash
flows for the period from April 21, 1995 (inception) to March 31, 1996 and for
the year ended March 31, 1997 in conformity with generally accepted accounting
principles.
New York, New York
September 12, 1997, except for
Note 10(c) as to
which the date is
December 30, 1997
F-2
<PAGE>
PT-1 COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31
------------------------ SEPTEMBER 30,
1996 1997 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 693,615 5,577,238 11,545,504
Short-term investments (note 1)...... -- 668,994 2,818,610
Accounts receivable, less allowance
for doubtful accounts of $80,000,
$391,194 and $434,924, respectively
(notes 3 and 5)..................... 962,305 7,540,474 17,966,730
Due from carriers.................... 331,347 269,153 87,036
Inventory............................ 36,200 317,390 387,593
Prepaid expenses..................... 5,804 827,755 208,762
Deferred tax asset................... -- -- 421,000
----------- ----------- -----------
Total current assets............... 2,029,271 15,201,004 33,435,235
Investments (note 1)................... -- 1,472,000 3,905,000
Property and equipment, net (note 2)... 69,376 1,483,823 9,151,554
Capitalized software, net (note 4)..... -- -- 895,833
Deposits............................... 87,155 403,729 584,997
Employee loans receivable (note 5)..... -- 338,528 369,512
Deferred offering costs................ -- -- 335,950
----------- ----------- -----------
Total assets....................... $ 2,185,802 18,899,084 48,678,081
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFI-
CIENCY
Current liabilities:
Accounts payable and accrued
expenses............................ 390,761 1,902,210 3,797,126
Accrued taxes payable................ 605,000 4,374,679 2,571,955
Income taxes payable................. -- -- 2,230,000
Due to carriers...................... 2,251,398 870,259 4,363,742
Notes payable (notes 4 and 7)........ -- 5,000,000 5,520,000
Deferred revenue..................... 1,846,023 20,479,361 35,408,899
----------- ----------- -----------
Total current liabilities.......... 5,093,182 32,626,509 53,891,722
----------- ----------- -----------
Note payable (note 7).................. -- 5,000,000 5,000,000
Deferred tax liability................. -- -- 149,000
----------- ----------- -----------
Total liabilities.................. 5,093,182 37,626,509 59,040,722
----------- ----------- -----------
Stockholders' deficiency:
Preferred stock; no par value.
Authorized 15,000,000 shares;
0 shares issued and outstanding..... -- -- --
Common stock; par value $.01 per
share. Authorized 140,000,000
shares; 60,900,000 shares issued and
outstanding in 1996; 70,000,000
shares issued and 44,947,000 shares
outstanding at March 31, 1997 and
71,050,000 shares issued and
45,995,600 shares outstanding at
September 30, 1997.................. 609,000 700,000 710,500
Additional paid-in capital........... (606,400) (697,387) 1,147,638
Retained earnings (accumulated
deficit)............................ (2,909,980) (3,730,038) 2,779,221
Treasury stock, at cost, 25,053,000
shares in 1997 (note 7)............. -- (15,000,000) (15,000,000)
----------- ----------- -----------
Total stockholders' deficiency..... (2,907,380) (18,727,425) (10,362,641)
----------- ----------- -----------
Total liabilities and stockholders'
deficiency........................ $ 2,185,802 18,899,084 48,678,081
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PT-1 COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
APRIL 21, 1995 ENDED
(INCEPTION) YEAR ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, -----------------------
1996 1997 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................ $11,922,606 169,635,313 57,204,834 187,043,760
Cost of services........ 13,812,202 166,184,501 59,265,460 170,752,512
----------- ----------- ---------- -----------
Gross profit
(loss)............. (1,889,596) 3,450,812 (2,060,626) 16,291,248
----------- ----------- ---------- -----------
Operating expenses:
Selling and marketing
expenses............. 318,070 1,761,650 782,229 1,828,395
General and
administrative
expenses............. 704,429 2,612,894 805,647 4,108,778
Stock based
compensation......... -- -- -- 1,855,525
----------- ----------- ---------- -----------
Total operating
expenses........... 1,022,499 4,374,544 1,587,876 7,792,698
----------- ----------- ---------- -----------
Operating profit
(loss)............. (2,912,095) (923,732) (3,648,502) 8,498,550
Interest income......... 2,115 114,633 19,643 186,459
Interest expense........ -- (10,959) -- (401,535)
Net realized gain on
marketable securities.. -- -- -- 243,785
----------- ----------- ---------- -----------
Earnings (loss)
before income
taxes.............. (2,909,980) (820,058) (3,628,859) 8,527,259
Income tax provision.... -- -- -- 2,018,000
----------- ----------- ---------- -----------
Net earnings (loss)..... $(2,909,980) (820,058) (3,628,859) 6,509,259
=========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PT-1 COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
PERIOD FROM APRIL 21, 1995 (INCEPTION)
TO MARCH 31, 1996, YEAR ENDED MARCH 31, 1997 AND
SIX MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNINGS TREASURY STOCK TOTAL
------------------- PAID-IN (ACCUMULATED ------------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) SHARES AMOUNT DEFICIENCY
---------- -------- ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 21,
1995 (inception)....... -- $ -- $ -- $ -- -- $ -- $ --
Issuance of common stock
(See note 7)........... 60,900,000 609,000 (606,400) -- -- -- 2,600
Net loss................ -- -- -- (2,909,980) -- -- (2,909,980)
---------- -------- ---------- ----------- ----------- ------------ ------------
Balance at March 31,
1996................... 60,900,000 609,000 (606,400) (2,909,980) -- -- (2,907,380)
Issuance of common stock
(See note 7)........... 9,100,000 91,000 (90,987) -- -- -- 13
Purchase of treasury
stock.................. -- -- -- -- (25,053,000) (15,000,000) (15,000,000)
Net loss................ -- -- -- (820,058) -- -- (820,058)
---------- -------- ---------- ----------- ----------- ------------ ------------
Balance at March 31,
1997................... 70,000,000 700,000 (697,387) (3,730,038) (25,053,000) (15,000,000) (18,727,425)
Compensation expense
related to stock
options................ -- -- 855,525 -- -- -- 855,525
Exercise of stock option
(See note 4)........... 1,050,000 10,500 989,500 -- -- -- 1,000,000
Net earnings............ -- -- -- 6,509,259 -- -- 6,509,259
---------- -------- ---------- ----------- ----------- ------------ ------------
Balance at September 30,
1997 (unaudited)....... 71,050,000 $710,500 $1,147,638 $ 2,779,221 (25,053,000) $(15,000,000) $(10,362,641)
========== ======== ========== =========== =========== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PT-1 COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
APRIL 21, 1995 ENDED
(INCEPTION) YEAR ENDED SEPTEMBER 30,
TO MARCH 31, MARCH 31, -----------------------
1996 1997 1996 1997
-------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash provided by operating
activities:
Net earnings (loss)..... $(2,909,980) (820,058) (3,628,859) 6,509,259
Adjustments to reconcile
net earnings (loss) to
net cash provided by
operating activities:
Depreciation and
amortization......... 4,943 75,017 7,956 385,791
Non-cash
compensation......... -- -- -- 1,855,525
Allowance for doubtful
accounts............. 80,000 311,194 18,395 43,730
Increase in accounts
receivable........... (1,042,305) (6,889,363) (2,656,393) (10,469,986)
(Increase) decrease in
due from carriers.... (331,347) 62,194 (207,216) 182,117
Increase in officer
loans receivable..... -- (338,528) (498,649) (30,984)
Increase in
inventory............ (36,200) (281,190) (43,221) (70,203)
(Increase) decrease in
prepaid expenses..... (5,804) (821,951) (28,250) 618,993
Increase in deposits.. (87,155) (316,574) (266,114) (181,268)
Increase in deferred
tax asset............ -- -- -- (421,000)
Increase (decrease) in
accounts payable and
accrued expenses..... 390,761 1,511,449 369,868 1,894,916
Increase (decrease) in
accrued taxes
payable.............. 605,000 3,769,679 1,452,009 (1,802,724)
Increase (decrease) in
due to carriers...... 2,251,398 (1,381,139) (140,578) 3,493,483
Increase in deferred
revenue.............. 1,846,023 18,633,338 10,861,058 14,929,538
Increase in income
taxes payable........ -- -- -- 2,230,000
Increase in deferred
tax liability........ -- -- -- 149,000
----------- ---------- ---------- -----------
Net cash provided by
operating
activities......... 765,334 13,514,068 5,240,096 19,316,187
----------- ---------- ---------- -----------
Cash flows from investing
activities:
(Purchase) sale of
short-term
investments............ -- (2,140,994) (3,036,798) (4,582,616)
Capital expenditures.... (74,319) (1,489,464) (121,919) (7,949,355)
Purchase of capitalized
software............... -- -- -- (350,000)
----------- ---------- ---------- -----------
Net cash used in
investing
activities......... (74,319) (3,630,458) (3,158,717) (12,881,971)
----------- ---------- ---------- -----------
Cash flows from financing
activities:
Proceeds from issuance
of common stock........ 2,600 13 13 --
Payment for treasury
stock.................. -- (5,000,000) -- --
----------- ---------- ---------- -----------
Payments on notes
payable................ (130,000)
Offering costs.......... (335,950)
-----------
Net cash provided by
(used in) financing
activities......... 2,600 (4,999,987) 13 (465,950)
----------- ---------- ---------- -----------
Net increase in cash
and cash
equivalents........ 693,615 4,883,623 2,081,392 5,968,266
Cash and cash equivalents
at beginning of period... -- 693,615 693,615 5,577,238
----------- ---------- ---------- -----------
Cash and cash equivalents
at end of period......... $ 693,615 5,577,238 2,775,007 11,545,504
=========== ========== ========== ===========
Supplemental information:
Cash paid for interest.. $ -- -- -- --
=========== ========== ========== ===========
Cash paid for income
taxes.................. $ -- -- -- $ 100,000
=========== ========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1997 AND SEPTEMBER 30, 1997
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DESCRIPTION OF BUSINESS
PT-1 Communications, Inc. ("PT-1" or the "Company"), formerly PhoneTime,
Inc., was incorporated on April 21, 1995. The Company is engaged in the sale
of international and domestic long-distance telecommunications services
primarily through the marketing of prepaid phone cards, which it manufactures
and distributes on a wholesale basis. PT-1 provides card users access to long-
distance and international service through contractual arrangements with
carriers which comprise the Company's least-cost routing network. In addition,
PT-1 provides international and domestic long-distance services to other
telecommunications carriers on a wholesale basis.
(b) REVENUE RECOGNITION AND DEFERRED REVENUE
Since October 1996, all of the prepaid phone cards sold by the Company have
expiration dates of twelve months. PT-1 records deferred revenue when it sells
the card and recognizes revenue as the ultimate card user utilizes calling
time. Starting April 1, 1996, the Company began to assess a $.25 monthly
service charge per card, effective thirty days after the first use of the
card. The primary costs associated with revenue-producing activities are
carrier costs for transport of traffic generated by use of the prepaid phone
cards and switch administration fees. Costs other than inventory are expensed
as incurred.
Revenue associated with the resale of international and domestic long-
distance services is recognized when the services are provided. For the period
ended March 31, 1996 and 1997, $-0- and $7,084,336, respectively, of resale
revenue was included in telecommunications services revenue.
(c) CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with original maturities of three months or less to
be cash equivalents.
(d) INVESTMENTS
Investments at March 31, 1997 consist of certificates of deposit in varying
principal amounts, maturing through January 1998 and bearing interest at rates
of 4.45% to 5.3%.
At March 31, 1997 and September 30, 1997, certificates of deposit with
carrying values of $1,472,000 and $3,905,000, respectively, collateralize
standby letters of credit to the Company's major service providers. These
letters of credit expire at various times through May 1998, and have been
issued as security against services advanced.
The Company classifies its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." During the six months ended
September 30, 1997, an investment in marketable equity securities classified
as trading was sold and the related realized gain has been reflected in the
statement of operations.
F-7
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(e) PROPERTY AND EQUIPMENT
Property and equipment consist principally of telecommunications equipment,
office equipment, packaging machinery and equipment, furniture and fixtures
and leasehold improvements. Property and equipment are stated at cost with
depreciation provided using the straight-line method over the estimated useful
lives of the related assets. Leasehold improvements are amortized over the
life of the lease or the useful life of the improvement, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Telecommunications equipment...................................... 7-10 years
Office equipment.................................................. 5 years
Machinery and equipment........................................... 15 years
Furniture and fixtures............................................ 10 years
Leasehold improvements............................................ 5 years
</TABLE>
The Company's telecommunications equipment is subject to technological risks
and rapid market changes due to new products and services and changing
customer demand. These changes may result in future adjustments to the
estimated useful lives of these assets.
(f) INVENTORY
Inventory consists of costs of production and packaging of unsold phone
cards and is valued using the average-cost method.
(g) CAPITALIZED SOFTWARE
The Company capitalizes certain computer software license acquisition costs
which are amortized utilizing the straight-line method over four years, the
period for which the Company maintains exclusive rights to such license.
(h) INCOME TAXES
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 and operating loss carryforwards. 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 realized or
settled. 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.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(i) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments,"
requires the determination of fair value for certain of the Company's assets
and liabilities. The Company estimates that the carrying values of its
financial instruments approximate fair value.
(j) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," the Company reviews for
the impairment of long-lived assets and certain identifiable intangibles to be
held and used by the Company whenever events and changes in circumstances
indicate that the carrying value of an asset may not be recoverable.
F-8
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company assesses the recoverability of an asset by determining whether
the amortization of the asset balance over its remaining life can be recovered
through projections of undiscounted future cash flows of the related asset.
The amount of asset impairment, if any, is measured based on projected
discounted future cash flows using a discount rate reflecting the Company's
average cost of funds.
(k) RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
The taxation of prepaid phone cards is evolving and is not specifically
addressed by many of the states in which the Company does business. While the
Company believes it has adequately provided for any such taxes it may
ultimately be required to pay, certain states may enact legislation which
specifically provide for taxation of such cards or may interpret current laws
in a manner resulting in additional tax liabilities.
(l) STOCK-BASED COMPENSATION
The Company accounts for stock based compensation in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which permits entities to
recognize as expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS No. 123 also allows entities
to continue to apply the provisions of the Accounting Principles Board (APB)
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in 1995 and future
years as if the fair value-based method, as defined in SFAS No. 123, had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure required by SFAS No. 123.
As such, compensation expense is generally recorded on the date of grant only
if the current market price of the underlying stock exceeded the exercise
price.
(m) NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common and common equivalent share will be based on
the weighted average number of common shares outstanding during the year, as
adjusted for the stock split which was effected by the Company on December 30,
1997 (see Note 10(c)), and the effects of the application of Securities and
Exchange Commission Staff Accounting Bulletin ("SAB") No. 83. Pursuant to SAB
No. 83, options granted within one year of a Company's initial public offering
which have an exercise price less than the initial public offering price are
treated as outstanding for all periods presented (using the treasury stock
method at the assumed initial public offering price) even though the effect is
to reduce the loss per share. Upon consummation of the Stock Split,
retroactive restatement will be made to share and per share amounts. Net
earnings (loss) per share will be computed and presented once a range of
offering price has been determined in order to properly compute the effects of
SAB No. 83.
(n) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs in 1996 and
1997 amounted to $108,305 and $202,384, respectively.
(o) RECLASSIFICATIONS
Certain reclassifications have been made in the accompanying financial
statements for 1996 and 1995 to conform with the 1997 presentation.
F-9
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) PROPERTY AND EQUIPMENT
Property and equipment consist of the following as of March 31, 1996 and
1997 and September 30, 1997:
<TABLE>
<CAPTION>
MARCH 31
----------------- SEPTEMBER 30,
1996 1997 1997
<S> <C> <C> <C>
Telecommunications equipment................. $ -- 1,174,032 8,150,690
Office equipment............................. 31,059 141,920 688,200
Packaging machinery and equipment............ 19,543 120,396 350,035
Furniture and fixtures....................... 17,906 96,793 195,220
Leasehold improvements....................... 5,811 30,642 128,992
------- --------- ---------
74,319 1,563,783 9,513,137
Less accumulated depreciation................ 4,943 79,960 361,583
------- --------- ---------
$69,376 1,483,823 9,151,554
======= ========= =========
</TABLE>
(3) BUSINESS CONCENTRATIONS
Sales
For the year ended March 31, 1997, prepaid phone card sales to three
distributors represented approximately 34% of net prepaid phone card sales.
Accounts Receivable
The Company's accounts receivable are primarily due from distributors.
Accounts receivable is shown net of an allowance for doubtful accounts of
approximately $80,000, $391,000 and $435,000 at March 31, 1996 and 1997 and
September 30, 1997, respectively. At March 31, 1997, the Company's accounts
receivable is concentrated among distributors primarily in the Northeast, with
two distributors individually representing approximately 35% and 15% of the
net accounts receivable balance. At September 30, 1997, these two distributors
represented approximately 31% and 13% of the net accounts receivable balances.
Accounts receivable related to PhoneTime California, Inc., an exclusive sales
distribution center represented 11% of the Company's net accounts receivable
at September 30, 1997.
(4) ASSET PURCHASE AND SOFTWARE-LICENSING AGREEMENT
On May 9, 1997, PT-1 entered into an asset purchase agreement with
Interactive Telephone Company ("Interactive") and Joseph Pannullo
("Pannullo"), the sole director and stockholder of Interactive, for $600,000.
Interactive is in the business of providing long-distance telecommunications
services to issuers of prepaid debit phone cards.
On May 9, 1997, PT-1 entered into a three-year employment agreement with
Pannullo. In connection with this agreement, the Company granted Pannullo an
option to purchase 1,048,600 shares of stock at an option price of $0.01 per
share. Pannullo exercised his option on May 20, 1997 and the Company has
reflected compensation expense of $1,000,000 during the three months ended
June 30, 1997. Pursuant to the agreement, in the event that Mr. Pannullo's
employment is terminated for cause or as a result of a voluntary termination
(each as defined), in either case within one year of May 9, 1997, the Company
has the right to repurchase the shares at a purchase price or termination
payment equal to the fair market value per share.
On May 9, 1997, PT-1 entered into a software license agreement with Godot
Soft, LLC and Pannullo for a license fee of $1,000,000. The license fee was
paid with $350,000 in cash and the delivery of a $650,000 noninterest-bearing
promissory note payable in ten equal monthly installments commencing 90 days
following the effective date.
F-10
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(5) RELATED PARTY TRANSACTIONS
Through March 31, 1997, PT-1 sold phone cards to a corporation controlled by
the Company's then president and a director on terms identical to those
extended to the Company's customers. For the period from April 21, 1995
(inception) to March 31, 1996 and for the year ended March 31, 1997, these
purchases aggregated approximately $1,050,000 and $0, respectively. At March
31, 1996 and 1997, accounts receivable, net includes approximately $185,000
and $-0-, respectively, that is due from such purchases.
At March 31, 1997 and September 30, 1997, accounts receivable of
approximately $585,000 and $2,011,440, respectively, relate to PhoneTime
California, Inc.
During the year ended March 31, 1997, the Company made loans to two of its
officers and a former employee aggregating $591,542, of which $338,528 and
$369,512 remains outstanding at March 31, 1997 and September 30, 1997,
respectively. These loans bear interest at 8% and have no specified payment
schedule or due dates.
(6) INCOME TAXES
The statutory Federal income tax rate for the period from April 21, 1995
(inception) to March 31, 1996 and for the year ended March 31, 1997 was 35%.
The effective income tax rate was 0% for these periods due to the Company
incurring a net operating loss for which no tax benefit was recorded.
As of March 31, 1997, for Federal income tax purposes, the Company has
unused net operating loss carryforwards of $2,950,000 expiring in 2010. The
availability of the net operating loss carryforwards to offset income taxes in
future years may be restricted if the Company undergoes an ownership change,
which may occur as a result of future sales of Company stock and other events.
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets at March 31, 1996 and 1997 are described
below:
<TABLE>
<CAPTION>
1996 1997
<S> <C> <C>
Net operating loss carryforwards.................. $ 927,500 1,032,000
Accounts receivable principally due to allowance
for doubtful accounts............................ 28,000 136,000
Accrued expenses.................................. 56,000 183,000
Depreciation...................................... -- (61,000)
----------- ----------
Total gross deferred tax assets................. 1,011,500 1,290,000
Less valuation allowance.......................... (1,011,500) (1,290,000)
----------- ----------
Net deferred tax assets......................... $ -- --
=========== ==========
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, and tax planning in making these
assessments. During the period from April 21, 1995 (inception) to March 31,
1996 and the year ended March 31, 1997, the valuation allowance increased by
$1,011,500 and $278,500, respectively.
The deferred tax asset of $421,000 recognized in the financial statements as
of and for the six months ended September 30, 1997, principally relates to the
Company's net operating loss carryforwards. The Company currently believes
that the realization of this amount is more likely than not based on operating
earnings for the period and the Company's projection of future taxable income.
F-11
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) CAPITAL TRANSACTIONS
The Company was initially capitalized with the issuance of 20 shares of
common stock for a capital contribution of $2,600. On April 6, 1996, PT-1's
Board of Directors split the issued and outstanding common stock 4.35-for-one
and on December 30, 1997 the Company declared a stock split of 700,000-for-one
(collectively, the "Stock Split") (See Note 10). Retroactive treatment has
been made in the financial statements to reflect the Stock Split.
Immediately following the 4.35-for-one stock split, two officers of the
Company purchased 9,100,000 shares (adjusted for the 700,000-for-one stock
split) of common stock of the Company for an aggregate price of $13.
On March 26, 1997, the Company repurchased 25,052,632 shares of Common Stock
from Thomas Hickey, a former director and executive officer of the Company
(the "Redemption"), in exchange for (i) a cash payment of $5.0 million and
(ii) a promissory note in the principal amount of $10.0 million (the "Note").
The Note accrues interest at a rate of 8.0% per annum, compounded semi-
annually. The Company must repay $5.0 million of the principal amount of the
Note on or before March 26, 1998 and the remaining outstanding principal and
all accrued but unpaid interest on or prior to March 26, 1999. The Company is
not obligated to pay interest on the Note until it matures or is prepaid. The
Company pledged two-thirds of the shares of Common Stock it redeemed from Mr.
Hickey as collateral for the Note. There is no penalty for prepaying the Note
and the Company intends to prepay the Note with a portion of the proceeds of
the Offering. In connection with the Redemption, Mr. Hickey entered into a one
year non-competition agreement with the Company, and the Company granted Mr.
Hickey certain piggyback registration rights with respect to the shares
retained by Mr. Hickey. Subsequently, the Company and Mr. Hickey renegotiated
the terms of the Redemption and non-competition agreement (See Note 10).
(8) STOCK OPTIONS AND WARRANTS
On May 12, 1997 and during June 1997, the Company granted incentive
stock/stock option compensation awards in connection with three employment
agreements. The incentive awards vest at specified future dates ranging over
18-36 months from the effective dates of the agreements and are valued at
$850,000 in the aggregate. The Company has recorded compensation expense of
$159,791 for the six months ended September 30, 1997 in connection with such
incentive awards.
On May 26, 1997, the Company granted an option to purchase 1,916,600 shares
of common stock in connection with an employment agreement. The option is
exercisable for $3.57 million, the fair market value at the date of grant. On
October 15, 1997, the optionee exercised the option and obtained a loan for
the exercise price from the Company. The loan is with recourse to the
optionee, non-interest bearing for a period of up to eighteen months, bears
interest at a market rate thereafter and matures on the earlier of (i) two
years from the date of the loan, (ii) one year after the closing of the
Offering or (iii) upon a sale of control (as defined) of the Company.
On June 29, 1997, the Company entered into a service agreement (see note
9(b)) with InterExchange, Inc. (InterExchange), a debit card service provider.
In connection with the execution of the InterExchange Agreement, the Company
granted certain warrants for the purchase of shares of Common Stock to four
principals of InterExchange (collectively, the "InterExchange Warrants"). The
InterExchange Warrants are exercisable for shares of Common Stock with an
aggregate fair market value (as defined) equal to (i) $1,000,000, at a nominal
exercise price and (ii) $2.0 million, at an aggregate exercise price equal to
$1,000,000 (collectively, the "Warrant Shares"). InterExchange Warrants with
respect to one-third of the Warrant Shares vest and become exercisable upon
each of: (i) the earlier to occur of the closing of the Offering or March 31,
1998, (ii) January 1, 1999 and
F-12
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(iii) December 1, 1999, in each case if and only if the InterExchange
Agreement has not been terminated on or before such date (other than as a
result of a breach by the Company). The InterExchange Warrants expire upon the
fifth anniversary of their respective vesting dates. In the event of a change
of control (as defined), any unvested InterExchange Warrants at such time
shall immediately vest and become exercisable and the fair market value shall
be fixed as of the date of such change of control. In connection with the
warrants, the Company will record compensation expense of approximately $2.0
million, the difference between the exercise price and market value, over the
vesting period applicable to each portion of the grant. The Company has
recorded compensation expense of $462,576 for the six months ended September
30, 1997 in connection with such warrants.
On September 30, 1997, the Board of Directors adopted, and the shareholders
of the Company approved, the 1997 Stock Incentive Plan (the "Stock Incentive
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 the Internal Revenue 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 Incentive Plan and the
maximum number of shares for which options may be granted to any person is
5,000,000 shares, subject to certain adjustments to reflect changes in the
Company's capitalization. The Stock Incentive Plan is currently administered
by the Company's Board of Directors. Upon the completion of the Offering, the
Stock Incentive 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 will not be
eligible to receive discretionary options under the plan, but are entitled to
receive options as directors.
The exercise price of incentive stock options will be determined by the
Compensation Committee, but may not be less than the fair market value of the
Common Stock on the date of grant 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 Incentive 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 will be 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 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 exercise price of such options may not be less
than fifty percent (50%) of the fair market value of the Common Stock on the
date of grant. 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.
The Compensation Committee has the right at any time and from time to time
to amend or modify the Stock Incentive 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
F-13
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 plan, increase the total number of shares of
Common Stock which may be purchased pursuant to options under the plan by any
person, expand the class of persons eligible to receive grants of options
under the plan, decrease the minimum option price, extend the maximum term of
options granted under the plan, extend the term of the plan or change the
performance criteria on which the granting of options is based. The expiration
date of the Stock Incentive Plan after which no option may be granted
thereunder, is September 30, 2007.
As of September 30, 1997, options to purchase an aggregate of 738,000 shares
of Common Stock were granted under the Stock Incentive Plan and a total of
2,762,000 shares of Common Stock remained available for future grants. The
outstanding options were held by seven individuals and were exercisable at a
weighted average exercise price of $12.25 per share. The Company has recorded
compensation expense of $233,158 for the six months ended September 30, 1997
in connection with such options. Shares subject to options granted under the
plan that have lapsed or terminated may again be subject to options granted
under the plan.
(9) COMMITMENTS AND CONTINGENCIES
(a) LEASE
At March 31, 1997, the Company was committed under a noncancelable operating
lease for the rental of office space for which it is also obligated to pay a
pro rata portion of increases in real property taxes as additional rent.
The Company's future minimum operating lease payments are approximately as
follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31
<S> <C>
1998.............................................................. $ 721,000
1999.............................................................. 916,000
2000.............................................................. 919,000
2001.............................................................. 862,000
2002.............................................................. 785,000
----------
$4,203,000
==========
</TABLE>
Total rent expense for the period from April 21, 1995 (inception) to March
31, 1996 and for the year ended March 31, 1997 was approximately $11,000 and
$76,000, respectively.
(b) PURCHASE COMMITMENTS
On July 3, 1997 PT-1 entered into a products purchase agreement for
approximately $12.7 million of carrier network products which are expected to
be received by March 31, 1998. As of November 30, 1997, approximately $11.3
million had been paid to Nortel pursuant to this agreement.
During 1997, the Company entered into a service agreement with a vendor
under which the Company is committed to paying a minimum monthly service
charge of $500,000 through January 1, 2001, renewable for up to four
consecutive six month periods, thereafter.
(c) EMPLOYMENT CONTRACTS
The Company has employment agreements with certain executive officers and
key management personnel, the terms of which expire at various times through
June 2000. Such agreements provide for minimum salary levels, as well as for
incentive bonuses that are payable if specified management goals are attained.
The aggregate commitment for future salaries at March 31, 1997 and September
30, 1997, excluding bonuses, was approximately $2,300,000 and $2,500,000,
respectively. All agreements contain covenants not to compete.
F-14
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(d) LETTERS OF CREDIT
At March 31, 1997 and September 30, 1997, certificates of deposit with
carrying values of $1,472,000 and $3,905,000, respectively, collateralize
standby letters of credit to the Company's major service providers. These
letters of credit have been issued as security against services advanced.
(e) TAXATION
The taxation of prepaid phone cards is evolving and is not specifically
addressed by many of the states in which the Company does business. While the
Company believes it has adequately provided for any such taxes it may
ultimately be required to pay, certain states may enact legislation which
specifically provide for taxation of such cards or may interpret current laws
in a manner resulting in additional tax liabilities.
(f) REGULATORY
The Company is subject to regulation by various government agencies and
jurisdictions and believes it is in compliance with all applicable laws and
regulations. However, implementation and interpretation of the Telecom Act of
1996 (the Act) is ongoing and subject to litigation by various Federal and
state agencies and courts. As a result, the impact of the Act on the Company
is not yet completely determinable and future interpretations and rulings may
impact the financial position and results of operations of the Company.
(g) LEGAL
In July 1997, the Company was notified by the Federal Trade Commission (FTC)
and the New York Attorney General Office (NYAG) that it was the subject of an
investigation alleging deceptive advertising practices in connection with the
sale of its prepaid telephone cards and that the FTC and NYAG were reviewing
whether the Company properly decremented minutes from its prepaid telephone
cards. The Company does not believe its advertising or other practices are
deceptive or that it is improperly or inaccurately decrementing minutes from
its prepaid telephone cards and is currently cooperating with the FTC and the
NYAG to resolve their allegations and questions. The Company is presently
unable to evaluate the likelihood that a claim will actually be filed, or, if
so, the likelihood of a favorable or unfavorable outcome. In the event a
complaint is filed, the Company will defend such complaint vigorously.
Management does not believe that the outcome, 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.
(10) SUBSEQUENT EVENTS
(a) LETTER OF CREDIT
On October 8, 1997, the Company entered into a $5.0 million revolving credit
facility and a $5.0 million letter of credit facility with Chase Manhattan
Bank, N.A (the "Credit Facility"). Borrowings under the Credit Facility bear
interest at a rate equal to either the adjusted London Interbank Offer Rate
plus 2.25%, the prime rate or a fixed rate to be determined pursuant to the
Credit Facility. Borrowings under the Credit Facility are secured by the
Company's equipment and accounts receivable. The Company may borrow up to 75%
of eligible equipment and accounts receivable. The Credit Agreement expires on
March 31, 1998.
(b) TRANSACTION WITH THOMAS HICKEY
Prior to the Offering, Mr. Hickey raised issues regarding, among other
things, the adequacy of the consideration he received as part of the
Redemption. On November 7, 1997, the Company and Messrs. Hickey (and his
affiliates), Tawfik, Vita, Douglas Barley, CFO, Joseph Panullo, COO, and John
Klusaritz, legal counsel, entered into certain agreements (the "Hickey
Settlement") pursuant to which (i) Mr. Hickey reaffirmed the validity of the
Redemption and agreed to extend the period of his non-competition agreement
for an additional
F-15
<PAGE>
PT-1 COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
three years through March 26, 2001 and (ii) the Company issued an additional
483,980 shares of Common Stock to Mr. Hickey. In addition, as part of the
Hickey Settlement, a comprehensive release was executed in which all parties
released and discharged each other from any and all claims of every kind and
nature whatsoever, including without limitation claims relating to Mr.
Hickey's (and his affiliates') equity interest in the Company, the Redemption
and this Offering.
(c) STOCK SPLIT
On December 30, 1997, the Company declared a stock split of 700,000 for one.
The stock split increased the number of shares outstanding to 45,995,600.
The financial statements give retroactive effect to the above stock split.
(d) EMPLOYMENT CONTRACT
On October 1, 1997, the Company entered into a three-year employment
agreement with one of its key officers providing for base compensation of
$450,000 and an annual discretionary bonus.
F-16
<PAGE>
ANNEX A
GLOSSARY
Access--1) Point at which entry is gained into a circuit or a network
interconnection may be switched or dedicated. 2) Ability to obtain data from a
storage device or peripheral. 3) Type of connection between customer premises
equipment and an interexchange carrier's network.
Access Charge--When the local facilities of the local exchange carrier are
used for the origination or termination of long distance calls, the access
charge is the fee paid by the long distance carrier to the local telephone
companies for the use of local facilities to gain access to, or make
connection with, the originating and terminating telephone subscribers.
Access Line--1) Circuit between a subscriber and a switching center. 2)
Private lines feeding a common control switching arrangement or enhanced
private switched communications service switch from a PBX.
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.
CAP (Competitive Access Provider)--A company that provides its customers
with an alternative to the local telephone company for local transport of
private line, special access and interstate transport of switched access
telecommunications services.
CIC Code--A carrier identification code, sometimes referred to as a
"101XXXX" Code. This seven digit code, beginning with 101 and followed by four
other numbers, is used by callers and local carriers to identify the long
distance carrier responsible for transporting a call.
CLEC (Competitive Local Exchange Carrier)--A CAP that also provides switched
local services, such as local dial tone and Centrex, in competition with the
incumbent local exchange carrier.
Dial Around--A method of long distance calling by which a caller uses the
long distance network of a carrier other than the caller's presubscribed long
distance carrier. The caller uses the alternate carrier's network by dialing
its CIC Code before dialing the long distance number the caller wishes to
reach.
Facilities-Based Carrier--A company that owns, obtains an IRU in or, under
some circumstances, leases its international network facilities (including
undersea fiber optic cables and switching facilities) rather than reselling
private lines or minutes of tele-communications service provided by another
facilities-based carrier.
FCC--Federal Communications Commission.
Hubs--Collection centers located centrally in an area where
telecommunications traffic can be aggregated at a central point for transport
and distribution.
ILECs (Incumbent Local Exchange Carrier)--The local phone companies either a
BOC or an independent (such as GTE), which provides local exchange services.
IRU (Indefeasible Rights of Use)--The rights to use a telecommunications
system, usually an undersea fiber optic 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.
ISR (International Simple Resale)--The use of international leased lines
interconnected to the PSTN at both ends for the provision of switched voice
services to the public, by-passing the current system of accounting rates. In
the United States, however, ISR may involve the interconnection of an
international leased private line to the PSTN at only one end.
A-1
<PAGE>
ISVR (International Simple Voice Resale)--Telecommunications services
consisting of the conveyance of messages which include two-way live speech
which have been or are to be conveyed by means of a (i) PSTN, (ii) an
international private leased circuit and (iii) the equivalent of a PSTN in
another country or territory.
LATAs (Local Access and Transport Areas)--The geographically defined areas
in which LECs are authorized to provide local switched services.
LEC (Local Exchange Carrier)--A company providing local telephone services,
also referred to in the industry as a "local exchange telephone company."
These include the BOCs, GTE and more than 1,000 other independents. The term
includes ILECs and CLECs, that is, Incumbent and Competitive Local Exchange
Carriers.
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.
Points of Presence (POPs)--Physical locations where a long distance carrier
has installed transmission equipment in a service area that serves as, or
relays calls to, a network switching center of that long distance carrier and
connects with the lines of the local telephone company serving the LATA within
which the POP is located.
PSTN (Public Switched Telephone Network)--A telephone network which is
accessible by the public through private lines, wireless systems and pay
phones.
PTT (Postal, Telephone and Telegraph Company)--The dominant carrier or
carriers in each country, often, but not always, government-owned or
protected.
Private Line--A private, dedicated telecommunications line connecting
different end user locations.
RBOC (Regional Bell Operating Company)--The seven telephone companies
established by the 1982 agreement between AT&T and the Department of Justice.
Resale--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
Switch--A sophisticated computer that accepts instructions from a caller in
the form of a telephone number. Like an address on an envelope, the numbers
tell the switch where to route the call. The switch 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. Switches allow telecommunications service providers to connect
calls directly to their destination, while providing advanced features and
recording connection information for future billing.
Traffic--A generic term that includes any and all calls, messages and data
sent and received by means of telecommunications.
Undersea Fiber Optic Cable--Fiber optic cable is the medium of choice for
the telecommunications industry. Fiber is immune to electrical interference
and environment factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass
strands in order to transmit digital information. A strand of fiber optic
cable is as thick as a human hair yet has to have more bandwidth capacity that
a copper wire the size of a telephone pole. For international service, the
fiber optic cable is placed at the bottom of the oceans in order to connect
the various continents.
A-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER
OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial and Other Data........................................ 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 18
Business................................................................. 26
Management............................................................... 39
Certain Transactions..................................................... 46
Principal and Selling Shareholders....................................... 48
Description of Capital Stock............................................. 49
Shares Eligible for Future Sale.......................................... 53
Underwriting............................................................. 55
Legal Matters............................................................ 56
Experts.................................................................. 56
Additional Information................................................... 57
Index to Financial Statements............................................ F-1
Annex A: Glossary........................................................ A-1
</TABLE>
------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PAR-
TICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACT-
ING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO]
Common Stock
---------------
PROSPECTUS
---------------
BT Alex. Brown
Hambrecht & Quist
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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................ $25,665
NASD filing fee..................................................
-------
Nasdaq National Market fee.......................................
-------
Printing expenses................................................ *
Registrar and Transfer Agent's fees and expenses................. *
Accountants' fees and expenses................................... *
Legal fees and expenses (not including Blue Sky)................. *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
---------------------
*To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 722 of the New York Business Corporation Law allows, in general, for
indemnification, in certain circumstances, by a corporation of any person
threatened with or made a party to any action, suit, or proceeding by reason
of the fact that he or she is, or was, a director, officer, employee, or agent
of such corporation. Indemnification is also authorized with respect to a
criminal action or proceeding where the person had no reasonable cause to
believe that his conduct was unlawful.
Under the Company's Restated Certificate of Incorporation, the Company has
agreed to indemnify and advance expenses to each person who is or was a
director or officer of the Corporation, to the fullest extent permitted by the
New York Business Corporation Law against actions that may arise against them
in such capacities. In addition, at the Company's option, it may indemnify any
other person (his testator or intestate) who is or was serving at the request
of the Company as a director or officer of any another corporation of any type
or kind, domestic or foreign, of any partnership, joint venture, trust,
employee benefit plan or other enterprise to the fullest extent permitted by
the New York Business Corporation Law against actions that may arise against
them in such capacities.
The Company intends to obtain directors' and officers' insurance which will
provide for indemnification of certain directors and officers of the Company.
In the Underwriting Agreement, the proposed form of which has been filed as
Exhibit 1.1, the Underwriters will agree to indemnify, under certain
conditions, the Company's officers, directors and controlling persons against
certain liabilities, including liabilities under the Securities Act of 1933.
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 21, 1995, the Company issued 30,450,000 shares of Common Stock to
each of Mr. Samer Tawfik and Mr. Thomas Hickey in connection with the
formation of the Company.
II-1
<PAGE>
On April 6, 1996, the Company issued 6,500,000 and 2,600,000 shares of
Common Stock to Mr. Peter Vita and Mr. Douglas Barley, respectively, for
nominal consideration.
On March 26, 1997, the Company repurchased 25,052,632 shares of Common Stock
from Mr. Hickey for an aggregate purchase price of $15.0 million, of which
$5.0 million was payable in cash and $10.0 million was payable in the form of
a promissory note.
On May 9, 1997, in connection with Mr. Joseph Pannullo's employment
agreement, the Company granted an option to Mr. Pannullo to acquire 1,048,600
shares of Common Stock at a nominal exercise price. Mr. Pannullo exercised his
option on May 20, 1997.
On May 26, 1997, in connection with Mr. Klusaritz's employment agreement,
the Company granted Mr. Klusaritz an option to acquire 1,916,600 shares of
Common Stock at an aggregate exercise price of $3.6 million. Mr. Klusaritz
exercised his option on October 15, 1997.
On June 29, 1997, the Company granted warrants to employees of
InterExchange, Inc. to acquire shares of Common Stock with an aggregate "fair
market value" equal to (i) $1,000,000, at a nominal exercise price and (ii)
$2.0 million, at an aggregate exercise price equal to $1,000,000.
During October 1997, the Company has also granted options under the Stock
Incentive Plan to acquire 738,000 shares of the Company's Common Stock, at a
weighted average exercise price of $12.25 per share.
On November 7, 1997, the Company issued 483,980 shares of Common Stock to
Mr. Hickey in consideration for the extension of Mr. Hickey's non-competition
agreement with the Company and the settlement of certain claims.
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 Underwriting Agreement
*2.1 Share Purchase Agreement, dated as of March 26, 1997,
between the Company, Mr. Thomas Hickey, et al.
*3.1 Amended and Restated Certificate of Incorporation of
PT-1 Communications, Inc.
*3.2 Amended and Restated Bylaws of the Company
*4.1 Form of Common Stock Certificate of the Company
*4.2 Form of Lock-up Agreement
*4.3 Form of Registration Rights Agreement, dated ,
1997, between the Company and certain shareholders
*4.4 Warrants for the purchase of shares of Common Stock
of the Company, dated June 29, 1997, issued to David
L. Turock
*4.5 Warrants for the purchase of shares of Common Stock
of the Company, dated June 29, 1997, issued to Eric
L. Hecht
*4.6 Warrants for the purchase of shares of Common Stock
of the Company, dated June 29, 1997, issued to
Richard A. Robbins
*4.7 Warrants for the purchase of shares of Common Stock
of the Company, dated June 29, 1997, issued to
Bradley D. Turock
*4.8 Warrants for the purchase of shares of Common Stock
of the Company, dated June 29, 1997, held in escrow
*4.9 Escrow Agreement dated June 29, 1997 between John J.
Klusaritz as Escrow Agent on behalf of the Company
and InterExchange, Inc. and
*4.10 Option Agreement dated May 9, 1997, between the
Company and Joseph Pannullo
*4.11 Option Agreement dated May 26, 1997, as amended
between the Company and John J. Klusaritz
*5.1 Opinion of Swidler & Berlin, Chartered
*10.1 PT-1 Communications, Inc. 1997 Stock Incentive Plan
*10.2 Employment Agreement, dated as of October 1, 1997,
between the Company and Samer Tawfik
*10.3 Employment Agreement, dated as of April 6, 1996,
between the Company and Peter M. Vita
*10.4 Employment Agreement, dated as of April 6, 1996,
between the Company and Douglas Barley
*10.5 Employment Agreement, dated as of May 9, 1997,
between the Company and Joseph Pannullo
*10.6 Employment Agreement, dated as of May 26, 1997,
between the Company and John J. Klusaritz
*10.7 Agreement, dated June 29, 1997, between
InterExchange, Inc. and the Company
*10.8 Software License Agreement, dated May 9, 1997,
between the Company and GodotSoft, L.L.C.
*10.9 Settlement Agreement dated as of April 3, 1996
between Samer Tawfik, Thomas J. Hickey, The
Interactive Telephone Company and Joseph Pannullo
*10.10 Headquarters Lease
*10.11 Northern Telecom Support Agreement
*10.12 Northern Telecom Product Purchase Agreement
*10.13 Credit Agreement with Chase Manhattan Bank, N.A.
*10.14 Agreement dated November 7, 1997 among the Company
and Messrs. Tawfik, Hickey, Vita, Barley, Pannullo
and Klusaritz.
</TABLE>
II-3
<PAGE>
ITEM 16(A). EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBERED PAGE
<C> <S> <C>
*11.1 Statement Regarding Computation of Per Share Earnings
*21.1 Subsidiaries of PT-1 Communications, Inc.
23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Swidler & Berlin, Chartered (to be
included in Exhibit 5.1 to this Registration
Statement)
24.1 Power of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment.
ITEM 16(B). FINANCIAL STATEMENT SCHEDULES.
None.
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 NEW YORK, STATE OF NEW
YORK, ON FEBRUARY 12, 1998.
PT-1 COMMUNICATIONS, INC.
/s/ Samer Tawfik
By:
----------------------------------
SAMER TAWFIK
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Samer Tawfik and John J. Klusaritz, and
each of them acting individually, as his attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him in his name, place
and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact and agents, or either of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON FEBRUARY 12, 1998.
SIGNATURE TITLE
/s/ Samer Tawfik Chief Executive Officer and Chairman
- ------------------------------------- of the Board (Principal Executive
SAMER TAWFIK Officer)
/s/ Douglas Barley Chief Financial Officer, Secretary,
- ------------------------------------- Treasurer and Director (Principal
DOUGLAS BARLEY Financial Officer and Principal
Accounting Officer)
/s/ Joseph Pannullo Chief Operating Officer and Director
- -------------------------------------
JOSEPH PANNULLO
/s/ Peter M. Vita President and Director
- -------------------------------------
PETER M. VITA
/s/ John J. Klusaritz Executive Vice President, General
- ------------------------------------- Counsel and Director
JOHN J. KLUSARITZ
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<C> <S>
*1.1 Form of Underwriting Agreement
*2.1 Share Purchase Agreement, dated as of March 26, 1997, between the
Company, Mr. Thomas Hickey, et al.
*3.1 Amended and Restated Certificate of Incorporation of PT-1
Communications, Inc.
*3.2 Amended and Restated Bylaws of the Company
*4.1 Form of Common Stock Certificate of the Company
*4.2 Form of Lock-up Agreement
*4.3 Form of Registration Rights Agreement, dated , 1997, between the
Company and certain shareholders
*4.4 Warrants for the purchase of shares of Common Stock of the Company,
dated June 29, 1997, issued to David L. Turock
*4.5 Warrants for the purchase of shares of Common Stock of the Company,
dated June 29, 1997, issued to Eric L. Hecht
*4.6 Warrants for the purchase of shares of Common Stock of the Company,
dated June 29, 1997, issued to Richard A. Robbins
*4.7 Warrants for the purchase of shares of Common Stock of the Company,
dated June 29, 1997, issued to Bradley D. Turock
*4.8 Warrants for the purchase of shares of Common Stock of the Company,
dated June 29, 1997, held in escrow
*4.9 Escrow Agreement dated June 29, 1997 between John J. Klusaritz as
Escrow Agent on behalf of the Company and InterExchange, Inc. and
*4.10 Option Agreement dated May 9, 1997, between the Company and Joseph
Pannullo
*4.11 Escrow Agreement between the Company and Joseph Pannullo
*4.12 Option Agreement dated May 26, 1997, as amended between the Company
and John J. Klusaritz
*5.1 Opinion of Swidler & Berlin, Chartered
*10.1 PT-1 Communications, Inc. 1997 Stock Incentive Plan
*10.2 Employment Agreement, dated as of October 1, 1997, between the
Company and Samer Tawfik
*10.3 Employment Agreement, dated as of April 6, 1996, between the Company
and Peter M. Vita
*10.4 Employment Agreement, dated as of April 6, 1996, between the Company
and Douglas Barley
*10.5 Employment Agreement, dated as of May 9, 1997, between the Company
and Joseph Pannullo
*10.6 Employment Agreement, dated as of May 26, 1997, between the Company
and John J. Klusaritz
*10.7 Agreement, dated June 29, 1997, between InterExchange, Inc. and the
Company
*10.8 Software License Agreement, dated May 9, 1997, between the Company
and GodotSoft, L.L.C.
*10.9 Settlement Agreement dated as of April 3, 1996 between Samer Tawfik,
Thomas J. Hickey, The Interactive Telephone Company and Joseph
Pannullo
*10.10 Headquarters Lease
*10.11 Northern Telecom Support Agreement
*10.12 Northern Telecom Product Purchase Agreement
*10.13 Credit Agreement with Chase Manhattan Bank, N.A.
*10.14 Agreement dated November 7, 1997 among the Company and Messrs.
Tawfik, Hickey, Vita, Barley, Pannullo and Klusaritz.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
*11.1 Statement Regarding Computation of Per Share Earnings
*21.1 Subsidiaries of PT-1 Communications, Inc.
23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of Swidler & Berlin, Chartered (to be included in Exhibit 5.1 to this Registration Statement)
24.1 Power of Attorney (included on signature page)
*27.1 Financial Data Schedule
</TABLE>
- ---------------------
*To be filed by amendment.
2
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PT-1 Communications, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the registration statement on Form S-1.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
New York, New York
February 11, 1998
