<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 1998
REGISTRATION NO. 333-46197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
URSUS TELECOM CORPORATION
(Exact Name Of Registrant As Specified In Its Charter)
<TABLE>
<S> <C> <C>
FLORIDA 4825 65-0398306
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
440 SAWGRASS CORPORATE PARKWAY
SUITE 112
SUNRISE, FLORIDA 33325
(954) 846-7887
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
LUCA M. GIUSSANI
PRESIDENT AND CEO
URSUS TELECOM CORPORATION
440 SAWGRASS CORPORATE PARKWAY
SUITE 112
SUNRISE, FLORIDA 33325
(954) 846-7887
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
JAMES R. TANENBAUM, ESQ. RALPH V. DE MARTINO, ESQ.
M. ST. JOHN DAUGHERTY, ESQ. NEIL R.E. CARR, ESQ.
STROOCK & STROOCK & LAVAN LLP DE MARTINO FINKELSTEIN ROSEN & VIRGA
200 SOUTH BISCAYNE BOULEVARD, 1818 N STREET, N.W.,
33RD FLOOR SUITE 400
MIAMI, FLORIDA 33131-2385 WASHINGTON, DC 20036-2492
(305) 789-9384 (202) 659-0494
</TABLE>
------------------------
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, as amended ("Securities Act"), 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, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8 OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8, MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 24, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO 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.
<PAGE>
PROSPECTUS
[LOGO]
1,500,000 SHARES
URSUS TELECOM CORPORATION
COMMON STOCK
Ursus Telecom Corporation ("Ursus" or the "Company") is hereby offering (the
"Offering") 1,500,000 shares of common stock, par value $.01 per share (the
"Common Stock"). Prior to the Offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price (the "Offering Price") will be between $9.00 and $11.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the Offering Price. Application has been made for quotation of the
Common Stock on the Nasdaq National Market under the symbol "UTCC."
An additional 200,000 shares of Common Stock are being registered herewith
on behalf of certain shareholders of the Company (the "Registering
Shareholders"). These shares are subject to a holdback agreement with Joseph
Charles & Associates, Inc. (the "Representative") and may not be sold by the
Registering Shareholders without the consent of the Representative until 12
months after the date of this Prospectus. See "Principal and Registering
Shareholders" and "Underwriting." The Company will not receive any of the
proceeds of the sale of shares of Common Stock by the Registering Shareholders.
The Company is paying all costs incurred in the registration of shares of Common
Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1)(2) COMPANY(3)(4)
<S> <C> <C> <C>
Per Share.......................................... $ $ $
Total(3)........................................... $ $ $
</TABLE>
(1) Does not include additional compensation to be paid to the Representative in
the form of: (a) warrants to purchase an aggregate of 150,000 shares of
Common Stock (the "Representative's Warrants") at a price of $ per
share exercisable over four years, commencing one year from the date of this
Prospectus, (b) a 3% non-accountable expense allowance ($50,000 of which has
been advanced) and (c) a consulting agreement for a period of twenty-four
months for an aggregate consideration of $72,000 payable on the closing of
the Offering.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses of the Offering payable by the Company estimated
to be $565,500.
(4) The Company has granted the Underwriters a 45-day option ("Over-Allotment
Option") to purchase up to 225,000 additional shares of Common Stock, on the
same terms and conditions as set forth above, solely to cover
over-allotments, if any. If such 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 being offered, subject to prior sale, when,
as, and if delivered to and accepted by the several Underwriters and subject to
approval of certain legal matters by counsel. The Underwriters reserve the right
to withdraw, cancel or modify the offering and to reject any order in whole or
in part. It is expected that delivery of certificates therefor will be made at
the offices of the Representative, in Boca Raton, Florida or through the
facilities of The Depository Trust Company on or about , 1998.
JOSEPH CHARLES & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE>
[PHOTOGRAPH OF URSUS TELECOM CORPORATION'S SWITCH CENTER IN FLORIDA: OPERATIONS
CONTROL ROOM]
URSUS TELECOM CORPORATION'S FLORIDA SWITCH CENTER
[PHOTOGRAPH OF SWITCH ROOM]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET
PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN
THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL EVENTS OR RESULTS MAY DIFFER SIGNIFICANTLY FROM THE EVENTS
OR RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE SET FORTH IN "RISK
FACTORS" AND IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS." EXCEPT
AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES (I) THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION AND THE REPRESENTATIVE'S WARRANTS ARE NOT
EXERCISED, AND (II) THE CONSUMMATION OF THE SPLIT (THE "STOCK SPLIT") OF FOUR
SHARES OF THE COMPANY'S CLASS A COMMON STOCK INTO 3,692.32 SHARES OF COMMON
STOCK AND ONE SHARE OF SERIES A PREFERRED STOCK, FOUR SHARES OF THE COMPANY'S
CLASS B STOCK INTO 3,692.32 SHARES OF COMMON STOCK AND ONE SHARE OF SERIES A
PREFERRED STOCK, AND OF EACH SHARE OF ITS CLASS C COMMON STOCK INTO 923.08
SHARES OF COMMON STOCK, WHICH WAS APPROVED ON FEBRUARY 12, 1998. TECHNICAL TERMS
AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE "GLOSSARY OF TERMS."
THE COMPANY
Ursus is an international telecommunications company that exploits favorable
market niches by providing competitive and technologically advanced
telecommunications services. The Company focuses on small and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agent support system developed and provided by the Company.
Each agent is supplied near real time data for customer management, usage
analysis and billing from the Company's local and wide area network. Through its
agent network, the Company develops and maintains close relationships with
vendors of telephone systems such as Siemens, Plessey and Alcatel in key markets
in order to promote the Ursus line of telecommunications services, allowing the
Company to offer competitively priced and value added services that compare
favorably to the pricing and service offerings of the local incumbent
telecommunication operators ("ITOs").
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 76% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by providing wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "Business--Purchase of Equity Interest in South African Agent"
and "Business--Formation of French Subsidiary." The Company believes that its
proprietary enterprise software system provides an efficient infrastructure for
back room processing, giving it a strategic advantage over its competitors. The
Company's computerized back office systems handle traditionally labor intensive
processing tasks such as call rating, customer registration, billing and network
management, with a high degree of efficiency and short
3
<PAGE>
turn-around time. Management believes that these efficiencies would facilitate
the rapid and economical consolidation of acquired competitors.
The Company operates a digital, switch-based telecommunications network (the
"Network") from its technical facilities in Sunrise, Florida, and, using a
hybrid network of Internet, Intranet and circuit-based facilities, plans to use
a portion of the Offering proceeds to expand its primary digital switching
platform and secondary network access nodes, thereby expanding its services in
what the Company believes is a reliable, flexible and cost-effective manner. The
Company also plans to exploit its market penetration and technological
sophistication through the application of Internet Protocol ("IP") telephony
technology, particularly for fax transmissions. Faxing represents a large
portion of the overall international telecommunications business, and IP faxing
offers significant cost savings and favorable regulatory treatment. IP telephony
creates the opportunity to bypass the switched telephone network by using
cost-effective packet switched networks such as private Intranets and/or the
public Internet for the delivery of fax and voice communications. To exploit
these opportunities and to further reduce its costs, the Company plans to use a
portion of the Offering proceeds to establish a hybrid network for IP fax and
voice services. The Company believes this application could increase the gross
margins of its existing and future retail business and allow it to accelerate
its growth strategy.
The Company expects that call reorigination will continue to serve as a low
cost and profitable method of opening new markets and expects to continue this
method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dial tone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a viable customer base by effectively
exploiting the difference between the local International Direct Dial ("IDD")
rate and the generally more favorable rates the Company enjoys in the U.S. The
Company has successfully used this strategy to develop foreign markets, thereby
creating a revenue stream with little more than marketing and incremental call
costs. In addition, using IP telephony technology, concurrently with call
reorigination, could significantly improve the profitability of this business
segment, without requiring the substantial investments in switches of a direct
access network. Accordingly, the Company's strategy is to deploy IP telephony
technology where feasible in order to create a hybrid network capable of
carrying significant amounts of customer traffic on a low cost platform with a
modest initial capital investment. This strategy mitigates the risk that the
Company will not attain, in some of its markets, the critical mass of business
required to amortize the fixed costs of a direct access network and affords the
Company the opportunity to develop a market with a relatively small financial
risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its customers,
which include:
- long distance international telephone services
- direct dial access for corporate customers
- dedicated access for high volume users
- calling cards
- abbreviated dialing
- international fax store and forward
4
<PAGE>
- switched Internet services
- itemized and multicurrency billing
- follow me calling
- enhanced call management and reporting services
The Company's growth strategy has increased revenues from $13.2 million to
$20.8 million in the fiscal years ended March 31, 1996 and March 31, 1997,
respectively; and from $15.0 million to $21.0 million in the nine months ended
December 31, 1996 and December 31, 1997, respectively. The Company's pretax
profits have grown from $1.3 million in the fiscal year ended March 31, 1996 to
$2.0 million in the fiscal year ended March 31, 1997, while remaining relatively
flat at $1.4 million for the nine months ended December 31, 1997 compared to the
nine months ended December 31, 1996.
The Company is a Florida corporation that was formed in March 1993. The
Company's principal executive offices are located at 440 Sawgrass Corporate
Parkway, Suite 112, Sunrise, Florida 33325, and its telephone number is (954)
846-7887.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company(1)....... 1,500,000 shares
Common Stock to be outstanding after the
Offering(2)................................ 6,500,000 shares
Use of Proceeds(3)........................... The estimated net proceeds of the Offering of
approximately $12.75 million will be used:
(i) to acquire businesses operating in the
same industry segment as the Company; (ii) to
acquire equity interests in the Company's
existing independent sales agents; (iii) to
expand the Network by acquiring switches and
other equipment and facilities; and (iv) for
general working capital purposes. See "Use of
Proceeds."
Nasdaq National Market Symbol................ "UTCC"
Risk Factors................................. Prospective investors should carefully
consider all of the information set forth in
this Prospectus, and, particularly, should
consider the factors set forth in "Risk
Factors."
</TABLE>
- ------------------------
(1) Does not include (a) 200,000 shares of Common Stock offered for sale by the
Registering Shareholders which are subject to a holdback agreement between
each of the Registering Shareholders and the Representative and are not
being offered on an underwritten basis and may not be sold by the
Registering Shareholders, without the consent of the Representative, until
12 months after the date of this Prospectus, (b) an additional 225,000
shares of Common Stock which may be offered pursuant to the Over-Allotment
Option and (c) an additional 150,000 shares of Common Stock issuable upon
exercise of the Representative's Warrants. See "Principal and Registering
Shareholders" and "Underwriting."
(2) Excludes approximately 634,000 shares of Common Stock subject to options to
be granted to certain of the Company's directors, officers and employees
upon the consummation of the Offering at an exercise price equal to the
Offering Price. See "Management--Stock Incentive Plan" and "Shares Eligible
for Future Sale."
(3) If the Underwriters exercise their Over-Allotment Option in full, the net
proceeds to the Company from the sale of the 225,000 shares of Common Stock
offered pursuant to the Underwriters' Over-Allotment Option are estimated to
be $2,000,000, after deducting the underwriting discount and commissions,
the Underwriters' non-accountable expense allowance and estimated expenses
and assuming an Offering Price of $10.00 per share (the midpoint of the
estimated range for the Offering Price).
6
<PAGE>
SUMMARY FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth certain summary financial information for the
Company for (i) the fiscal years ended March 31, 1995, 1996 and 1997, which have
been derived from the Company's audited financial statements and notes thereto
included elsewhere in this Prospectus, (ii) the fiscal year ended March 31,
1994, which have been derived from unaudited financial statements of the Company
which are not included herein and (iii) the nine months ended December 31, 1996
and 1997, which have been derived from unaudited financial statements of the
Company which are included herein. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The results of
operations for the nine months ended December 31, 1997 are not necessarily
indicative of the results which may be expected for the full year. The following
financial information should be read in conjunction with "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's financial statements and notes thereto
appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND OTHER OPERATING
DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Retail.......................................... $ 848 $ 6,291 $ 13,228 $ 20,523 $ 14,988 $ 18,421
Wholesale....................................... -- -- -- 315 -- 2,608
--------- --------- --------- --------- --------- ---------
Total revenues................................ $ 848 $ 6,291 $ 13,228 $ 20,838 $ 14,988 $ 21,029
Gross profit...................................... $ 344 $ 2,544 $ 5,553 $ 8,643 $ 6,412 $ 7,240
Operating income (loss)........................... $ (814) $ 159 $ 1,369 $ 2,004 $ 1,488 $ 1,414
Net income (loss)................................. $ (813) $ 382 $ 790 $ 1,253 $ 910 $ 890
Pro forma net income (loss) per share--basic and
dilutive (1).................................... $ (.18) $ .08 $ .16 $ .25 $ .18 $ .18
Weighted average shares outstanding (1)........... 4,615 4,869 5,000 5,000 5,000 5,000
OTHER OPERATING DATA (AT END OF PERIOD):
Retail customers (2).............................. 833 4,456 9,791 15,729 14,408 29,048
Wholesale customers (3)........................... -- -- -- 1 -- 3
Number of employees............................... 9 10 12 17 17 21
</TABLE>
<TABLE>
<CAPTION>
AS OF
AS OF MARCH 31, DECEMBER 31, 1997
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C> <C>
AS ADJUSTED
1994 1995 1996 1997 ACTUAL (4)
--------- --------- --------- --------- --------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets............................. $ 381 $ 1,273 $ 2,363 $ 4,566 $ 5,647 $ 18,433
Working capital (deficiency)..................... (129) 150 811 1,658 1,442 14,228
Total assets..................................... 683 1,720 2,797 5,243 7,042 19,657
Total current liabilities........................ 510 1,122 1,552 2,920 4,205 4,205
Long term debt, less current portion............. 729 730 580 425 -- --
Total shareholders' equity (capital
deficiency).................................... (563) (162) 609 1,861 2,771 15,521
</TABLE>
- ------------------------
(1) Pro forma net income (loss) per common share--basic and dilutive is computed
based on the weighted average number of common shares outstanding during
each period and gives retroactive effect to the Stock Split. See Note 13 of
Notes to Financial Statements.
(2) Consists of active Company subscribers that were billed in the final month
of the respective periods.
(3) Consists of wholesale customers that had active accounts with the Company in
the respective periods.
(4) As adjusted to give effect to (i) the Offering, see "Use of Proceeds" (ii)
the underwriter's two year consulting contract which will be prepaid upon
the closing of the Offering and (iii) the deferred offfering costs incurred
by the Company as of December 31, 1997.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMMON STOCK OF THE COMPANY INVOLVES CERTAIN RISKS AND
SUBSTANTIAL DILUTION. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISK FACTORS, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
TECHNICAL TERMS AND ACRONYMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
"GLOSSARY OF TERMS." THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS, WHICH
INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND IN "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
COMPANY RISKS
OPERATING RISKS
Historically, the Company has derived a significant portion of its revenues
by providing call reorigination services. The Company believes that as
deregulation occurs and competition increases in certain international markets,
the pricing advantage of call reorigination relative to conventional
international long distance service will diminish and may disappear in certain
markets. To maintain its existing customer base and attract new business in such
markets, the Company anticipates that it will have to offer direct access
services to certain destinations at prices significantly below the current
prices charged for call reorigination. The Company will seek to satisfy this
requirement in selected target markets by migrating its existing call
reorigination customers and attracting new business through deployment of direct
access and other call-through access methods, including IP telephony. There can
be no assurance that the Company will succeed in such efforts. Failure to
accomplish this objective could have a material adverse effect on the Company's
business, financial condition and results of operations.
In many of the Company's existing and target markets, the Company offers or
intends to offer new services or services that have previously been provided
only by the local ITOs. Accordingly, there can be no assurance that such
operations will generate operating or net income, and the Company's prospects
must therefore be considered in light of the risks, expenses, problems and
delays inherent in establishing a new business in a rapidly changing industry.
The Company's overall gross margins may fluctuate in the future based on its mix
of wholesale (selling minutes to other carriers) and retail (selling directly to
end-user customers) international long distance services and the percentage of
calls using direct access compared to call reorigination, in addition to the
reaction to any significant international long distance rate reductions imposed
by ITOs to counter external competitive threats.
As a strategic response to a changing competitive environment, the Company
may elect from time to time to make certain pricing, service or marketing
decisions or enter into acquisitions, investments and strategic alliances that
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that its industry has
reached a stage of development insofar as the gross profit margins associated
with its early stages have yielded to a more moderated profit margin structure
on an industry-wide basis. Furthermore, the Company's strategic decisions to
reduce its pricing structure in particular markets to gain additional market
share and achieve operating efficiencies may materially adversely affect the
profitability of the Company's operations in such markets. As a result of the
foregoing factors, the Company may in the future experience materially adverse
circumstances that could reduce the price of the Company's Common Stock. See
"-Risks Associated with Expansion by Acquisitions, Strategic Alliances and
Similar Transactions," and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RISKS OF INTERNATIONAL TELECOMMUNICATIONS BUSINESS
The Company's international telecommunications business is subject to
certain risks, such as changes in foreign governmental regulations and
telecommunications standards, licensing requirements, tariffs,
8
<PAGE>
taxes, customs, duties and other trade barriers, as well as political and
economic instability. In addition, the Company's revenues and cost of long
distance services are sensitive to changes in international settlement rates,
changes in the ratios between outgoing and incoming traffic, and the Company's
ability to obtain international transmission facilities. International rates
charged to customers are likely to decrease in the future for a variety of
reasons, including increased competition between existing carriers, entry of new
carriers into niche markets and the consummation of joint ventures among large
international carriers that facilitate targeted pricing and cost reductions. In
addition, the Company's business could be adversely affected by a reversal in
the current trend toward deregulation of government-owned telecommunications
carriers. There can be no assurance that the Company will be able to increase
its traffic volume or reduce its operating costs sufficiently to offset any
resulting rate decreases.
RISKS RELATING TO EMERGING MARKETS
For the nine months ended December 31, 1997, the Company derived
approximately 79% of its revenues from operations in emerging markets, where the
Company's businesses are subject to numerous risks and uncertainties, including
political, economic and legal risks, such as unexpected changes in regulatory
requirements, tariffs, customs, duties and other trade barriers, difficulties in
staffing and managing foreign operations, problems in collecting accounts
receivable, foreign exchange controls which restrict or prohibit repatriation of
funds, technology export and import restrictions or prohibitions, delays from
customs brokers or government agencies, seasonal reductions in business
activity, and potentially adverse tax consequences resulting from operating in
multiple jurisdictions with different tax laws, which could materially adversely
impact the Company's business, financial condition and results of operations.
The political systems of many of the emerging market countries in which the
Company operates or plans to operate are slowly emerging from a legacy of
totalitarian rule. Political conflict and, in some cases, civil unrest and
ethnic strife may continue in some of these countries for a period of time. Many
of the economies of these countries are weak, volatile and reliant on
substantial foreign assistance. Expropriation of private businesses in such
jurisdictions remains a possibility, whether by an outright taking or by
confiscatory tax or other policies. There can be no assurance that the Company's
operations will not be materially and adversely affected by such factors.
Legal systems in emerging market countries frequently have little or no
experience with commercial transactions between private parties. The extent to
which contractual and other obligations will be honored and enforced in emerging
market countries is largely unknown. Accordingly, there can be no assurance that
difficulties in protecting and enforcing rights in emerging market countries
will not have a material adverse effect upon the Company and its operations.
Additionally, the Company's businesses operate in uncertain regulatory
environments. The laws and regulations applicable to the Company's activities in
emerging market countries are in general new and subject to arbitrary change
and, in some cases, incomplete. There can be no assurance that local laws and
regulations will become stable in the future, or that changes thereto will not
materially adversely affect the Company's business, financial condition or
results of operations.
DEPENDENCE ON INDEPENDENT EXCLUSIVE AGENTS
The Company provides its services through a network of independent and
exclusive agents. Its international market penetration primarily reflects the
marketing, sales and customer service activities of these agents, who market the
Company's services on a commission basis. As of December 31, 1997, the Company
had 15 agents located in approximately 27 countries. The use of these agents
exposes the Company to significant risks, including dependence on the continued
viability and financial stability of its agents. In fiscal year 1997, the four
major agents generated approximately 57% of the Company's revenues and these
agents in the aggregate accounted for approximately 64% of the Company's
revenues for the nine months ended December 31, 1997. In particular, the
Company's single South African agent accounted for approximately 28% of revenues
during the nine months ended December 31, 1997. Although the
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Company has not historically experienced significant attrition in agencies,
there can be no assurance that it will not suffer the loss of one or more
significant agents in the future. If one or more of these agents were to suffer
financial problems, terminate its relationship with the Company, or were unable
to satisfy customers, this could create a material adverse effect on the
Company's business, financial condition or results of operations, including, but
not limited to lost revenues, bad debt expense, lost customers, potential
liability under contracts the agents commit the Company to perform, and damage
to the Company's business reputation.
The Company's continuing success depends in substantial part on its ability
to recruit, maintain and motivate its agents. The Company is subject to
competition in the recruiting of agents from other organizations that use agents
to market their products and services, including those that market
telecommunications services. Because the Company enters into exclusive
relationships with its agents, the success of the Company's business within the
exclusive territory largely depends on the effectiveness of the local agent in
conducting its business. If an agent were to become ineffective in conducting
its business, the Company might seek to terminate its relationship with the
agent, and under certain local laws the Company's exclusive arrangements with
such agent might be difficult or expensive to terminate. The Company has entered
into non-compete agreements with its agents prohibiting their competition with
the Company during their engagement and for a period of time after its
termination, however, there can be no assurance that any such non-compete
agreement would be enforceable as a practical matter or under the applicable
laws of the jurisdiction in which an agent operates. See "Use of Proceeds" and
"Business-- Purchase of Equity Interest in South African Agent." However, such
measures entail other risks. See "-Credit Risks," "-Risks Associated with
Expansion by Acquisitions, Strategic Alliances and Similar Transactions" and
"-Foreign Exchange Rate Risks."
COMPETITION
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The Company competes with a variety of international long
distance telecommunications providers in each of its markets, including the
respective ITO in each country in which the Company operates, various
independent providers similar to the Company in size and resources, and, to a
lesser extent, major international carriers and their global alliances. Other
potential competitors include cable television companies, wireless telephone
companies, Internet access providers and large-end users which have dedicated
circuits or private networks. Many of the Company's current or potential
competitors have substantially greater financial, marketing and other resources
than the Company. If the Company's competitors were to devote significant
additional resources to the provision of international long distance
telecommunications services to the Company's target customer base of small and
medium-sized businesses in the Company's targeted geographic markets, then the
Company's business, financial condition and results of operations could be
materially adversely affected. The Company's principal method of competition is
to provide competitive service to its customers at a reasonable price. The
Company believes it is able to provide competitive service to its customers
primarily by providing value-added services, such as detailed billing, and by
utilizing a network of agents who maintain close relationships with vendors of
telephone hardware and who are knowledgeable about the telecommunications
business in their geographic markets, making them better able to respond to
customer needs. The Company maintains competitive pricing by keeping its own
costs down, principally by using its proprietary software to handle back office
billing and record keeping. There can be no assurance that the Company will be
able to compete successfully against new or existing competitors. See "-Risks of
International Telecommunications Business."
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LESSENING OF BARRIERS TO ENTRY IN MARKETS WHERE COMPANY OPERATES
The call reorigination business has a small capital requirement and
regulatory limitations often form the most significant barrier to entry. The
Company anticipates that as the markets in which it operates or will operate
continue to deregulate, the Company will increase its investments in
telecommunications infrastructure and the Company or its relevant agent will
increase marketing expenditures to address increased competition resulting from
decreased regulatory difficulties of entry into those markets, particularly
since the cost of providing telecommunications services is relatively low and
not a significant barrier to entry into the markets where Ursus provides
services. As a result, the Company may experience increased operating costs in
those markets. Additional competitors with greater resources than the Company
could enter these markets and acquire customers of the Company or force the
Company to reduce its prices to maintain its customer base which could
materially adversely affect the Company's business, financial condition and
results of operations.
RAPID CHANGES IN TECHNOLOGY AND CUSTOMER REQUIREMENTS
Rapid and significant technological advancements and introductions of new
products and services utilizing new technologies characterize the
telecommunications industry. As new technologies develop, the Company may be
placed at a competitive disadvantage, and competitive pressures may force the
Company to implement new technologies at substantial cost. In addition,
competitors may implement new technologies before the Company is able to
implement such technologies, allowing those competitors to provide enhanced
services and quality, or services at more competitive costs, compared with that
which the Company is able to provide. There can be no assurance that the Company
will be able to respond to such competitive pressures and implement such
technologies on a timely basis or at an acceptable cost. One or more of the
technologies currently utilized by the Company, or which it may implement in the
future, may not be preferred by its customers or may become obsolete. If the
Company is unable to respond to competitive pressures, implement new
technologies on a timely basis, or penetrate new markets in a timely manner in
response to changing market conditions or customer requirements, or if new or
enhanced services offered by the Company do not achieve a significant degree of
market acceptance, then the Company's business, financial condition and results
of operations could be materially adversely affected. See "--Risks of
International Telecommunications Business" and "--Competition."
RISK OF NETWORK FAILURE
The success of the Company largely depends upon its ability to deliver high
quality, uninterrupted telecommunication services, and on its ability to protect
its software and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster such as hurricanes and similar
events. Any systems or hardware failure that causes interruptions in the
Company's operations could have a material adverse effect on the Company.
Because the Company at the present time operates only one switch, located in
Florida, physical damage to this facility (including damage by hurricane) could
not be remedied by using redundant facilities of the Company located elsewhere,
and could have a material adverse effect on the Company. As the Company expands
and call traffic grows, there will be increased stress on hardware, circuit
capacity and traffic management systems. There can be no assurance that the
Company will not experience system failures. The Company's operations also
depend on its ability to successfully expand and integrate new and emerging
technologies and equipment, which could increase the risk of system failure and
result in further strains. The Company attempts to mitigate customer
inconvenience in the event of a system disruption by routing traffic to other
circuits and switches which may be owned by other carriers and to minimize its
own risk of loss in the event of Network failure by maintaining insurance in
commercially reasonable amounts. However, significant or prolonged system
failures, or difficulties for customers in accessing and maintaining connection
would result in an uninsurable risk, including damage to the Company's
reputation, attrition and financial loss. Any damage to the Company's
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operations center would have a negative impact on the Company and its ability to
maintain its operations and generate accurate call detail reports.
CREDIT RISKS
Many of the foreign countries in which the Company operates do not have
established credit bureaus, thereby making it more difficult to ascertain the
creditworthiness of potential customers. Under the Company's exclusive agency
arrangements, the agent, and not the Company is responsible for analyzing the
creditworthiness of the customer and assumes this credit risk. The Company
believes that using this local platform for its business minimizes its credit
risk, and the Company's bad debt expenses have historically been minimal.
However, the Company has in certain circumstances supported its agency
relationships by bearing some credit losses. Also, there is a credit risk
inherent in the use of independent agents by the Company; because the agent, and
not the ultimate user of the Company's services, is responsible for the payment.
There can be no assurance that, with regard to any particular time period or
periods, particular geographic location or locations or any particular agent or
agents, the Company's bad debt expense will not rise significantly above
historic or anticipated levels. While the Company continually seeks to minimize
bad debt, the Company's experience indicates that a certain portion of past due
receivables will never be collected and that such bad debt is a necessary cost
of conducting business in the telecommunications industry. As the Company
implements its plans to expand its customer base and wholesale business and move
into new territories, whether directly, through arrangements with agents, equity
investments in agents, acquisitions or otherwise, the credit risk to which the
Company is exposed will increase. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH AND IMPLEMENTING EXPANSION STRATEGY
The Company has experienced significant growth in recent periods. The
Company's ability to manage and respond to growth will be critical to its
success. The Company anticipates that future growth will depend on a number of
factors, including the effective and timely development of customer
relationships, the ability to enter new markets and expand in existing markets,
and the recruitment, motivation and retention of qualified agents. Sustaining
growth will require the continuing enhancement of the Company's operational
systems and additional management, operational and financial resources. If the
Company is successful in its growth strategy, there will be additional demands
on its customer support, marketing, distribution and other resources. There can
be no assurance that the Company will be able to manage its expanding operations
effectively or that it will be able to maintain or accelerate its rate of
growth. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
The Company's strategy is to continue its growth by expanding its service
offerings and principal geographic markets in Africa, the Middle East, Latin
America and targeted areas of Europe and Russia, especially in deregulating
markets. To accommodate its growth strategy, the Company will be required to
invest additional capital and resources to enhance its information systems by
replacing or upgrading certain existing systems and integrating new systems.
There can be no assurance that the Company can add services or expand its
geographic markets or that existing regulatory barriers to its current or future
operations will be reduced or eliminated. Even if the Company succeeds in adding
services or expanding into new markets, there can be no assurance that its
administrative, operational, infrastructure and financial resources and systems
will remain adequate. See "--Dependence on Effective Information Systems."
As the Company grows, it may have difficulty accurately forecasting its
telecommunications traffic. Inaccuracies in such forecasts could result in the
Company making investments in insufficient or excessive transmission facilities
and incurring disproportionate fixed expenses, as well as cause it to route
excessive overflow traffic to other carriers. The Company would not be able to
assure that the quality of services
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routed to other carriers would be commensurate with the transmission quality
provided by the Company. Interruptions of or a decline in the quality of the
Company's services resulting from expansion difficulties could have a material
adverse effect on the Company's business, financial condition and results of
operations.
RISKS ASSOCIATED WITH EXPANSION BY ACQUISITIONS, STRATEGIC ALLIANCES AND SIMILAR
TRANSACTIONS
As part of its growth strategy, the Company intends to reduce its exposure
to risks associated with the use of exclusive independent agents in existing and
new markets, by acquiring some or all of the equity interest in, entering into
joint venture arrangements with, or forming strategic alliances with, agents and
other strategic partners whose businesses complement that of the Company. If the
Company's investments in or alliances with third parties do not result in a
controlling interest or are nonexclusive arrangements, the Company may be
subject to additional business and operating risks outside of its management's
control. The Company has not entered into any such arrangements, except with
Central Call and Mondial Telecom, with which the Company has entered into a
memorandum of understanding with respect to the acquisition of customer lists,
and with Orion Telecom in South Africa where the Company will acquire an equity
interest in the South African agent. See "Business--Purchase of Equity Interest
in South African Agent," and "Business--Formation of French Subsidiary." Any
future acquisition, investment, strategic alliance or related effort will be
accompanied by the risks commonly encountered in such transactions or efforts.
Such risks include, among others, the difficulty of identifying appropriate
acquisition candidates or partners, the difficulty of assimilating the
operations of the respective entities, the potential disruption of the Company's
ongoing business, possible costs associated with the development and integration
of such operations, the potential inability of management to maximize the
Company's financial and strategic position by successfully incorporating
licensed or acquired technology into the Company's service offerings, the
failure to maintain uniform standards, controls, procedures and policies, the
impairment of relationships with employees, customers and agents as a result of
changes in management, and higher customer attrition with respect to customers
obtained through acquisitions. There can be no assurance that the Company would
be successful in overcoming these risks or any other problems encountered with
such acquisitions, investments, strategic alliances or related efforts.
Acquisitions also involve other risks, including changes in pricing due to
competition, difficulties in integrating the acquired operations, diversion of
management resources, obtaining any required regulatory approvals, increased
foreign exchange risk and the risks associated with entering new markets. There
can be no assurance that acquisitions, strategic alliances or any other similar
events will result in increased sales or an expanded customer base, give the
Company the presence in new territories that it seeks, or enable the Company to
effectively penetrate its target markets.
Acquisitions by the Company could entail potentially dilutive issuances of
equity securities of the Company, as well as significant transaction expenses
and interest expense, which could have a material adverse effect on the
Company's operating results.
GOVERNMENT REGULATION
The Company is required to file periodic reports with the United States
Department of Commerce, due to the ownership interest of Fincogest, S.A., a
Swiss corporation, in the Company. See "Principal and Registering Shareholders."
The Company has failed to comply with this reporting requirement and is in the
process of preparing these reports for filing with the Department of Commerce.
The international telecommunications industry is subject to international
treaties and agreements, and to laws and regulations that vary from country to
country. Enforcement and interpretation of these laws and regulations can be
unpredictable and are often subject to informal views of government officials
and ministries that regulate telecommunications in each country. In some cases,
such government officials and ministries are subject to influence by ITOs.
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In some countries where the Company operates or plans to operate, local laws
or regulations limit or require prior government approval for the provision of
international telecommunications service in competition with state-authorized
carriers. For example, the Company's provision of services over facilities in
its Network or by purchasing minutes from other carriers for resale to its
customers, or its ownership of facilities may be affected by increased
regulatory requirements in a foreign jurisdiction. Moreover, the Company's use
of transit agreements or arrangements, if any, may be affected by laws or
regulations in either the transited or terminating foreign jurisdiction. There
can be no assurance that future regulatory, judicial, legislative or political
changes will permit the Company to offer to residents of such countries all or
any of its services or will not have a material adverse effect on the Company,
that regulators or third parties will not raise material issues regarding the
Company's compliance with applicable laws or regulations, or that regulatory
decisions will not have a material adverse effect on the Company. If the Company
is unable to provide the services which it presently provides or intends to
provide, or to use its existing or contemplated transmission methods due to its
inability to obtain or retain the requisite governmental approvals for such
services or transmission methods, or for any other reason related to regulatory
compliance or lack thereof, such developments could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company has pursued, and expects to continue to pursue, a strategy of
providing its services to the maximum extent it believes to be permissible under
applicable laws and regulations. To the extent that the interpretation or
enforcement of applicable laws and regulations is uncertain or unclear, the
Company's aggressive strategy may result in the Company's (i) providing services
or using transmission methods that are found to violate local laws or
regulations or (ii) failing to obtain approvals required under such laws or
regulations to which the Company believes that it is subject, or the Company
otherwise discovers that it is in violation of local laws and regulations and
believes that it is subject to enforcement actions by the FCC or the local
authority, it would seek to modify its operations or discontinue operations so
as to comply with such laws and regulations. There can be no assurance, however,
that the Company will not be subject to fines, penalties or other sanctions as a
result of violations even though such violations are corrected. If the Company's
interpretation of applicable laws and regulations proves incorrect, it could
lose, or be unable to obtain, regulatory approvals necessary to provide certain
of its services or to use certain of its transmission methods. The Company also
could have substantial monetary fines and penalties imposed against it.
CALL REORIGINATION The services provided by the Company consist primarily
of call reorigination services. In some countries, use of call reorigination is
restricted or prohibited. If it is demonstrated that the law of a foreign
jurisdiction expressly prohibits call reorigination using uncompleted call
signaling, and that the foreign government attempted but failed to enforce its
laws against U.S. service providers, the FCC may require U.S. carriers to cease
providing call reorigination services using uncompleted call signaling. To date,
the FCC has ordered carriers to cease providing call reorigination using
uncompleted call signaling to customers in the Philippines, and it is expected
that the FCC will take this action with respect to carriers providing call
reorigination using uncompleted call signaling to customers in Saudi Arabia.
Prior to taking such action, the FCC permits countries to submit information to
the FCC regarding the legal status of call reorigination services in their
respective countries. According to FCC records, 30 countries thus far have
submitted such information to the FCC, including the Bahamas, Egypt, Lebanon and
South Africa. Submission of this information does not imply that the FCC
believes that the country's laws expressly prohibit call reorigination using
uncompleted call signaling. Revenues attributable to call reorigination
represented 76% of the Company's revenues during the nine months ended December
31, 1997. A substantial number of countries have prohibited certain forms of
call reorigination as a mechanism to access telecommunications services. Such
actions have caused the Company to cease providing call reorigination services
in the Bahamas and may require it to do so in other jurisdictions in the future.
As of November 20, 1997, reports had been filed with the FCC and/or the ITU that
the laws of 79 countries prohibit call reorigination. There can be no assurance
that certain of the Company's services and transmission methods will not
continue to be or will not become prohibited in certain jurisdictions, and,
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depending on the jurisdictions, services and transmission methods may become
affected, which could result in a material adverse effect on the Company's
business, financial condition and results of operations. To the extent that a
country that has expressly prohibited call reorigination using uncompleted call
signaling is unable to enforce its laws against call reorigination using
uncompleted call signaling, it can request that the FCC enforce such laws in the
United States, by requiring the Company to cease providing call reorigination
services to such country or, in extreme circumstances, by revoking the Company's
authorizations. To date, except as indicated herein, the Company has not been
notified by any regulator or government agency that its provision of services is
not in compliance with applicable regulations.
In South Africa, the Company's agent's future provision of certain services
will be, and its current provision of call reorigination services may be,
subject to the Telecommunications Act of 1996 (the "SA-Telecommunications Act")
and the Post Office Act of 1958. The SA Telecommunications Act permits a party
to provide a range of services other than public switched services under, and in
accordance with, a telecommunications license issued to that party in accordance
with the SA Telecommunications Act. Although the Company believes that South
African law does not prohibit its agent from providing call reorigination
services to customers in South Africa without a license, the telecommunications
regulator in South Africa ("SATRA") has ruled that the provision of call
reorigination services to customers in South Africa without a license violates
the SA Telecommunications Act. Several entities, including the Company's agent,
filed a lawsuit to stay and reverse SATRA's ruling on the basis that SATRA lacks
the authority to issue such a ruling and that the SA Telecommunications Act does
not prohibit the provision of call reorigination services. SATRA has agreed not
to prosecute any person in the call reorigination industry unless the South
African courts rule that it may. It is anticipated that final adjudication of
this lawsuit could take up to four years to occur. If the Company's agent is
determined to be providing a telecommunications service without a required
license, it could be subject to fines, to the termination of its call
reorigination service to customers in South Africa and, potentially, to the
denial of license applications to provide liberalized services. There can be no
guarantee that the courts in South Africa will not rule that call reorigination
is illegal, that they will not do so soon, or that the South African legislature
will not promulgate an explicit prohibition on call reorigination. For the nine
months ended December 31, 1997, South Africa comprised the Company's most
significant single market and accounted for approximately 28% of the Company's
total revenues. Any such adverse legal action could therefore have a material
adverse effect on the Company's business, financial condition and results of
operation. The Company's South African agent was issued an interim "Value Added
Network Service License" by SATRA in early April 1998. This license allows the
Company in conjunction with its Agent to operate a data network system through
which all data and facsimile transmissions can be routed. The Company's South
African agent estimates that approximately 50% of current telecom revenues are
generated by data and facsimile traffic and plans to migrate this revenue
segment over packet switched networks within the next six to twelve months so
that carriage of this traffic will not involve call reorigination.
The Company's interstate and international facilities-based and resale
services are subject to regulation by the Federal Communications Commission
("FCC"), and regulations promulgated by the FCC are subject to change in the
future. See "Business--Government Regulation--United States."
THE FCC'S POLICIES ON TRANSIT AND REFILE. The FCC is currently considering
a 1995 request (the "1995 Request") to limit or prohibit the practice whereby a
carrier routes, through its facilities in a third country, traffic originating
from one country and destined for another country. The FCC has permitted third
country calling where all countries involved consent to the routing arrangements
(referred to as "Transiting"). Under certain arrangements referred to as
"Refiling," the carrier in the destination country does not consent to receiving
traffic from the originating country and does not realize the traffic it
receives from the third country is actually originating from a different
country. While the Company's revenues attributable to Refiling arrangements are
minimal, Refiling may constitute a larger portion of the Company's operations in
the future. The FCC to date has made no pronouncement as to whether Refiling
arrangements are inconsistent with U.S. or International Telecommunications
Union ("ITU") regulations. It is possible that
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the FCC will determine that Refiling violates U.S. and/or international law,
which could have a material adverse effect on the Company's future business,
financial condition and results of operations.
THE FCC'S INTERNATIONAL SETTLEMENTS POLICY. The Company is also required to
conduct its facilities-based international business in compliance with the FCC's
international settlements policy (the "ISP"). The ISP establishes the
permissible arrangements for facilities-based carriers that are based in the
U.S. and their foreign counterparts to compensate each other for terminating
each other's traffic over their respective networks. Several of the Company's
arrangements with foreign carriers are subject to the ISP and it is possible
that the FCC could take the view that one or more of these arrangements do not
comply with the existing ISP rules. The FCC recently enacted certain changes in
its rules designed to permit alternative arrangements outside of its ISP as a
means of encouraging competition and achieving lower, cost-based accounting and
collection rates as more facilities-based competition is permitted in foreign
markets. If the Company enters into a traffic agreement with a foreign carrier
for the provision of telecommunications services that does not comply with the
ISP, it may be required to obtain FCC approval under this alternative
arrangements mechanism. If the FCC, on its own initiative or in response to a
challenge filed by a third party, determines that the Company's foreign carrier
arrangements do not comply with FCC rules, among other measures, it may issue a
cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations. See "--Recent and
Potential FCC Actions." Such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE FCC'S TARIFF REQUIREMENTS FOR INTERNATIONAL LONG DISTANCE SERVICES. The
Company is also required to file with the FCC a tariff containing the rates,
terms and conditions applicable to its international telecommunications
services. The Company is also required to file with the FCC any agreements with
customers containing rates, terms, and conditions for international
telecommunications services, if those rates, terms, or conditions are different
than those contained in the Company's tariff. If the Company charges rates other
than those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, or fails to file with the FCC carrier-to-carrier
agreements, the FCC or a third party could bring an action against the Company,
which could result in a fine, a judgment or other penalties against the Company.
Such actions could have a material adverse effect on the Company's business,
financial condition and results of operations.
RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that has been and may
be taken in the future by the FCC may enhance the intense competition faced by
the Company. In addition to its new policy on alternative arrangements, the FCC
has also established lower ceilings ("benchmarks") for the rates that U.S.
carriers will pay foreign carriers for the termination of international
services. Moreover, the FCC recently changed its rules to implement the WTO
Agreement, in part by allowing U.S. carriers to accept certain exclusive
arrangements with certain foreign carriers. While these rule changes may provide
the Company with more flexibility to respond more rapidly to changes in the
global telecommunications market, they will also provide similar flexibility to
the Company's competitors. The implementation of these changes could have a
material adverse effect on the Company's business, financial condition and
results of operations.
U.S. DOMESTIC LONG DISTANCE SERVICES. The Company currently carries a DE
MINIMIS amount of U.S. domestic long distance traffic, if any, for its
foreign-billed customers. Such traffic generally would be limited to incidental
interstate or intrastate calls made by payphone users in the United States that
are billed in foreign countries but that brought their calling cards to the
United States while traveling. The Company's ability to provide domestic long
distance service in the United States is subject to regulation by the FCC and
relevant state Public Service Commissions ("PSCs") which regulate interstate and
intrastate rates, respectively, ownership of transmission facilities, and the
terms and conditions under which the Company's domestic U.S. services are
provided. In general, neither the FCC nor the relevant state PSCs exercise
direct oversight over prices charged for the Company's services or the Company's
profit levels, but
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either or both may do so in the future. The Company, however, is required by
federal and state law and regulations to file tariffs listing the rates, terms
and conditions of services provided. Any failure to maintain proper federal and
state tariffing or certification or file required reports, or any difficulties
or delays in obtaining required authorizations, could have a material adverse
effect on the Company's business, financial condition and results of operations.
The FCC also imposes some requirements for marketing of telephone services and
for obtaining customer authorization for changes in the customer's primary long
distance carrier. If these requirements are not met, the Company may be subject
to fines and penalties.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company may have to purchase access
services from local exchange carriers ("LECs") or competitive local exchange
carriers ("CLECs"). Access charges represent a significant portion of the
Company's cost of U.S. domestic long distance services and, generally, such
access charges are regulated by the FCC for interstate services and by PSCs for
intrastate services. The FCC has undertaken a comprehensive review of its
regulation of LEC access charges to better account for increasing levels of
local competition. While the resolution of these issues is uncertain, if these
proposed rate structures are adopted, many long distance carriers, including the
Company, could be placed at a significant cost disadvantage to larger
competitors. In addition, the FCC has adopted certain measures to implement the
1996 Telecommunications Act that will impose new regulatory requirements,
including the requirement that the Company contribute some portion of its
telecommunications revenues to a universal service fund designated to fund
affordable telephone service for consumers, schools, libraries and rural
healthcare providers. These contributions will become payable beginning in 1998
for all interexchange carriers but not for providers of solely international
services. The Company believes that it is not subject to universal service
contribution requirements, but there can be no guarantee that the FCC will not
find that the Company is subject to such requirements.
In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of certain U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to the
implementation of such tax software and against which it has no corresponding
customer compensation. While the Company believes that any such liability will
not be significant, there can be no assurance that such tax liability, if any,
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
The FCC issued an order on October 9, 1997, concluding that interexchange
carriers must compensate payphone owners at a rate of $.284 per call for all
calls using their payphones. This compensation method will be effective from
October 7, 1997 through October 7, 1999. After this time period, interexchange
carriers will be required to compensate payphone owners at a market-based rate
minus $0.066 per call. A number of carriers have appealed this FCC order to the
U.S. Court of Appeals for the D.C. Circuit or have sought FCC reconsideration of
this order. Although the Company cannot predict the outcome of the FCC's
proceedings on the Company's business, it is possible that such proceedings
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control (without
public notice), and corporate reorganizations, and assignments of regulatory
authorizations. Such requirements may delay, prevent or deter a change in
control of the Company or the Company's acquisition of another company. The FCC
also imposes certain restrictions on U.S.-licensed telecommunications companies
that are affiliated with foreign telecommunications carriers, especially if the
foreign telecommunications carrier obtains a 25% or greater interest in a
company. If the Company becomes controlled by or under common control with a
foreign telecommunications carrier, or if the Company obtains a greater than 25%
interest in or control over a foreign telecommunications carrier, the FCC could
restrict the Company's ability to provide service on certain international
routes.
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<PAGE>
BAHAMAS. The Company has entered into an operating agreement with the
Bahamas Telephone Company ("Batelco") to provide, among other things,
international telecommunications services to customers in the Bahamas. Recently,
Batelco has taken several actions designed to block the Company's ability to
offer services to customers in the Bahamas. The Company believes these actions
violate the terms of its operating agreement with Batelco. The Company also
believes that Batelco's actions are inconsistent with U.S. policy and is working
with the U.S. government, including the U.S. Embassy in the Bahamas and the FCC
to restore the Company's circuits to full capacity. If Batelco is permitted to
block permanently or over a protracted period of time the Company's provision of
service to customers in the Bahamas, such action could have a material adverse
impact on the Company's business, financial condition and results of operation.
For the nine months ended December 31, 1997, the Company derived approximately
5.6% of its revenues from services it provided in the Bahamas; however, the
Company's revenues from services it provided in the Bahamas increased by
approximately 36% during the nine months ended December 31, 1997 compared to the
nine months ended December 31, 1996. For the month of December 1997, revenues
decreased approximately 34%.
DEPENDENCE ON ARRANGEMENTS WITH CARRIERS
The Company obtains most of its transmission capacity under volume-based
resale arrangements with facilities-based and other carriers, including ITOs,
however, the majority of these services are provided by only two carriers. Under
these arrangements, the Company is subject to the risk of unanticipated price
fluctuations and service restrictions or cancellations. The Company generally
has not experienced sudden or unanticipated price fluctuations, service
restrictions or cancellations imposed by such facilities-based carriers, except
in the Bahamas. See "Government Regulation--Bahamas" above. Although the Company
believes that its arrangements and relationships with such carriers generally
are satisfactory, the deterioration or termination of the Company's arrangements
and relationships, or the Company's inability to enter into new arrangements and
relationships with one or more of such carriers, could have a material adverse
effect upon the Company's cost structure, service quality, network coverage,
results of operations and financial condition.
The Company's growth strategy in new markets is to some extent based on its
ability to enter into operating agreements with domestic and foreign carriers.
In accordance with industry practices, operating agreements entered into by the
Company will be terminable upon short notice. While the Company successfully
negotiates and maintains operating agreements, none of which has been terminated
to date, the trend toward deregulation of telephone communications in many
countries and a significant reduction in outgoing traffic carried by the
Company, among other things, could cause foreign partners to decide to terminate
their operating agreements, or could cause such operating agreements to have
substantially less value to the Company. Termination of these operating
agreements could have a material adverse effect on the Company's business,
results of operations and financial condition.
EXPOSURE TO FRAUD
The telecommunications industry has historically been exposed to fraud
losses. The Company has implemented anti-fraud measures, such as employment
agreements with its employees, limiting and monitoring access to its information
systems and monitoring use of its services in order to minimize losses relating
to fraudulent practices. However, there can be no assurance that the Company
will effectively control fraud when operating in the international
telecommunications arena. Fraud has historically been a more significant problem
for large providers of telecommunications services than it has for the Company,
whose few employees and switching facilities are relatively easier to monitor
than those of the large providers. As the Company continues to grow and hire new
employees and implement its plans to increase the number of switching facilities
that it owns, its exposure to fraud losses will increase. The Company's failure
to control fraud effectively could have a material adverse effect on the
Company's business, financial condition and results of operations.
18
<PAGE>
DISCRETION OF MANAGEMENT AS TO USE OF CERTAIN OFFERING PROCEEDS
Approximately $10,000,000 of the proceeds from this Offering are allocated
for unspecified acquisitions, investments in foreign agencies, joint ventures
and strategic alliances. Identification of candidates for these transactions,
the decision whether to proceed with such transactions and with whom, and the
terms of the transactions, will be in management's discretion. Therefore,
purchasers in this Offering will not have the opportunity to evaluate the
specific merits or risks of any one or more such transactions, some of which may
be significant, but instead will depend on the discretion and judgment of
management in such matters. There can be no assurance that determinations
ultimately made by the Company's management will permit the Company to achieve
its business objectives, or that the decisions made by management will not have
a material adverse effect on the Company's business, financial condition or
results of operations. See "Use of Proceeds."
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
While the Company believes its information systems are sufficient for its
current operations, such systems will require enhancements, replacements and
additional investments to continue their effectiveness in the future,
particularly to enable the Company to manage an expanded Network. There can be
no assurance that the Company will not encounter difficulties in enhancing its
systems or integrating new technology into its systems. The inability of the
Company to implement any required system enhancement, to acquire new systems or
to integrate new technology in a timely and cost effective manner could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Management Information Systems."
RISKS ASSOCIATED WITH THE YEAR 2000
The Company is currently in the process of evaluating whether it will
encounter any problems related to the year 2000. These problems, which have been
widely reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or about 2000. Most of the Company's computer
systems, software and databases are proprietary to the Company and are year 2000
compliant. The Company is in the process of evaluating if carriers and other
third parties with which it contracts for services anticipate any year 2000
difficulties, and if so whether those problems would be of a nature that could
adversely affect the Company. The Company will request that such third parties
advise the Company as to whether or not they anticipate any difficulties in
addressing year 2000 problems and, if so, whether or not the Company would be
adversely affected by any of such problems. Until such time as these parties
respond to the Company, the impact of year 2000 on the Company's business,
results of operations and financial condition cannot be assessed with certainty,
although the Company does not believe year 2000 issues will have a material
adverse impact on it. The Company will continue to monitor the impact on the
Company of issues related to the year 2000.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its senior officers and on its
ability to hire and retain qualified management personnel. The loss of the
services of any of these individuals could materially and adversely affect the
business of the Company and its future prospects. The Company has entered into
employment agreements with certain of its senior officers. The Company has
applied for key person life insurance, of which the Company will be the
beneficiary, on the lives of each of Messrs. Giussani and Chaskin in the amount
of $2 million. The Company's future success will also depend on its ability to
attract and retain additional management, technical, marketing, sales, financial
and other personnel required in connection with the growth and development of
its business. See "Management."
19
<PAGE>
LEGAL PROCEEDINGS INVOLVING THE COMPANY'S CHIEF EXECUTIVE OFFICER
Mr. Luca Giussani, the Company's president and chief executive officer, was
the subject of a criminal proceeding in Italy under Italian law, which was part
of a series of indictments issued against numerous people. Specifically, about
May 1996 Mr. Giussani was charged with transmitting an invoice in 1991 to a
corporation pursuant to an existing consulting contract for consulting services
which it is alleged he did not perform. It was alleged that the invoice was used
to disguise a political contribution made by that corporation which was unlawful
under Italian law. Mr. Giussani was not charged with making an unlawful
political contribution; but rather it is alleged that through the use of this
invoice, Mr. Giussani facilitated the corporation's falsification of corporate
records to disguise the contribution. Mr. Giussani consistently denied any
improper conduct in connection with this matter and believed that he would
ultimately be vindicated. In October 1997, the trial judge dismissed the claim
against Mr. Giussani for lack of evidence. There is currently no criminal
proceeding pending against Mr. Giussani; although he has been advised that the
investigating magistrates are currently contemplating refiling charges against
him and the other former defendants in this case in order to prevent the running
of the applicable statute of limitations. There can be no assurance that Mr.
Giussani will prevail on the merits with respect to any charges brought against
him. See "Management--Certain Legal Proceedings."
FOREIGN CORRUPT PRACTICES ACT
As a result of the Offering, the Company will become subject to the Foreign
Corrupt Practices Act ("FCPA"), which generally prohibits U.S. companies and
their intermediaries from bribing foreign officials for the purpose of obtaining
or keeping business. The Company may be exposed to liability under the FCPA as a
result of past or future actions taken without the Company's knowledge by
agents, strategic partners or other intermediaries. Violations of the FCPA may
also call into question the credibility and integrity of the Company's financial
reporting systems. The Company's focus on certain emerging markets may tend to
increase this risk. Such liability under the FCPA could have a material adverse
effect on the Company's business, financial condition and results of operations.
FOREIGN EXCHANGE RATE RISKS
The Company currently bills primarily in United States Dollars and generally
is paid by customers outside of the United States either in United States
Dollars or in local currency at predetermined exchange rates. Substantially all
of the costs to develop and improve the Company's switching facilities and the
Network have been, and will continue to be, denominated in United States
Dollars. If the United States Dollar appreciates relative to the local currency,
then the Company may suffer a competitive disadvantage because its services will
grow more expensive than those of its competitors, such as the ITOs, that deal
only in the local currency. Any depreciation of the value of the United States
Dollar relative to the local currency may adversely affect the Company by
effectively increasing the cost of the Company's capital expenditures made in
such local currency. As the Company's business develops and expands, the Company
anticipates that in many countries it may bill and receive payment in local
currency at prevailing exchange rates. The Company's focus on emerging markets
may tend to increase the risks that currency fluctuations pose. Although the
Company has minimal operations in the Asian countries affected by recent
substantial currency fluctuations, there can be no assurance that currency
speculation and fluctuation will not affect the Company in Latin America, South
Africa, the Middle East or its other emerging markets. The Company monitors
exposure to currency fluctuations, and may, as appropriate, use certain
financial hedging instruments in the future. However, there can be no assurance
that the use of financial hedging instruments will successfully offset exchange
rate risks, or that such currency fluctuations will not have a material adverse
effect on the Company's business, results of operations and financial condition.
See "-- Risks of International Telecommunications Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
20
<PAGE>
CAPITAL EXPENDITURES
The Company believes that the proceeds of this Offering, combined with other
existing and anticipated sources of liquidity, will be sufficient to fund its
capital requirements for approximately 12 to 18 months after consummation of the
Offering. Certain events could occur that would require the Company to obtain
additional financing. Such events could include faster than expected growth or
lower than anticipated funds generated from operations. In such case, the
Company could require additional capital to continue to expand and upgrade the
Network, fund the acquisition of businesses or investments in joint ventures and
strategic alliances, or to otherwise implement its growth strategy. The Company
may in the near future seek additional equity or debt financing, which could
include a high-yield debt offering, to provide flexibility for potential
acquisitions and network expansion. The exact amount of the Company's future
capital requirements will depend upon many factors, including the cost, timing
and extent of upgrades to and expansion of the Network and existing and new
services, the Company's ability to penetrate new markets, regulatory changes,
the status of competing services, the magnitude of potential acquisitions,
investments and strategic alliances and the Company's results of operations.
Individually or collectively, variances in these and other factors could
materially change the Company's actual capital requirements. If additional
capital is required, there can be no assurance that the Company will be able to
raise such capital, or, if raised, that the terms of such financing will be
favorable to the Company or will not be dilutive to the investments of
purchasers of Common Stock in the Offering. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have fluctuated and may continue
to fluctuate due to various factors, including the timing of investments,
general economic conditions, specific economic conditions in the
telecommunications industry, the effects of governmental regulation and
regulatory changes, user demands, capital expenditures, costs relating to the
expansion of operations, the introduction of new services by the Company or its
competitors, the mix of services sold and the mix of channels through which
those services are sold, changes in prices charged by the Company's competitors,
and other factors outside of the Company's control. Any combination of such
factors, or any one of such factors, may in the future cause fluctuations in
quarterly operating results. Variations in the Company's operating results could
materially affect the price of the Company's Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PROTECTION OF INTELLECTUAL PROPERTY
The Company relies on unpatented proprietary know-how and continuing
technological advancements to maintain its competitive position. Although the
Company has entered into confidentiality and invention agreements with certain
of its employees and consultants, no assurance can be given that such agreements
will be honored or that the Company will be able to effectively protect its
rights to its unpatented trade secrets and know-how. Moreover, no assurance can
be given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets and know-how. See "Business--The Network" and
"Business--Management Information Systems."
The Company has not registered or trademarked "Ursus" and the Company's logo
in any jurisdiction. The Company is filing registrations of its name and logo in
the United States, but there can be no assurance that it will obtain adequate
trademark, service mark or similar protection of its name and logo.
21
<PAGE>
CONTROL BY EXISTING SHAREHOLDERS
Immediately after the Offering, the Company's current shareholders (the
"Existing Shareholders") will beneficially own an aggregate of 76.9% of the
outstanding shares of the Company's Common Stock (or 74.3% if the Underwriters'
Over-Allotment Option is exercised in full) and 100% of the Company's Series A
Preferred Stock. The Series A Preferred Stock has the exclusive rights to elect
two (2) of the five (5) members of the Company's Board of Directors, and one
member less than a numerical majority of any expanded Board. Moreover, the
Common Stock votes cumulatively for the election of Directors, which means that
the Existing Shareholders have the power to elect at least one member of the
Board of Directors so long as they control at least 33.3% of the outstanding
Common Stock (or an even smaller percentage if the size of the Board is
expanded). Accordingly, the Existing Shareholders will retain voting control of
the Company after the consummation of the Offering, with the ability to elect a
majority of the members of the Board of Directors and to approve certain
fundamental corporate transactions, including mergers, consolidations and sales
of assets. As long as the Existing Shareholders are the controlling shareholders
of the Company, third parties will not be able to gain control of the Company
through purchases of Common Stock not beneficially owned or otherwise controlled
by the Existing Shareholders. Accordingly, the price of the Common Stock offered
hereby would not reflect any premium which may be attributable to such ability
to exercise or obtain control over the Company. While each of the Existing
Shareholders has advised the Company that their current intention is to continue
to hold all of the shares of Series A Preferred Stock and substantially all of
the Common Stock beneficially owned following the Offering, there can be no
assurance that any of the Existing Shareholders will not decide to sell all or a
portion of their holdings at some future date after the applicable hold back
period or that in any transfer by any of the Existing Shareholders of a
controlling interest in the Company that any other holders of Common Stock will
be allowed to participate in such transaction or will realize any premium with
respect to their shares of Common Stock. See "Offering Risks--Effects of Certain
Anti-Takeover Provisions," "Principal and Registering Shareholders" and
"Description of Capital Stock--Certain Provisions of the Company's Amended and
Restated Articles of Incorporation, Bylaws and Certain Statutory Provisions."
22
<PAGE>
OFFERING RISKS
ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
The Company has applied for quotation of the Common Stock on the Nasdaq National
Market. However, there can be no assurance that, upon approval of the
application, an active public trading market for the Common Stock will develop
after the Offering or that, if developed, such market will be sustained. The
Offering Price of the Common Stock offered hereby was determined by negotiations
between the Company and the Representative, and may not be indicative of the
price at which the Common Stock will trade after the Offering. Consequently,
there can be no assurance that the market price for the Common Stock will not
fall below the Offering Price. See "Underwriting."
The market price of the Common Stock may experience fluctuations unrelated
to the Company's operating performance. In particular, the price of the Common
Stock may be affected by general market price movements as well as developments
specifically related to the telecommunications industry such as, among other
things, announcements concerning the Company or its competitors, technological
innovations, government regulations, and litigation concerning proprietary
rights or other matters.
DILUTION
Upon completion of the Offering, and assuming no exercise of the
Underwriter's Over-Allotment Option, purchasers of the Common Stock offered
hereby will experience immediate and substantial dilution in net tangible book
value of Common Stock of $7.64 per share, assuming an Offering Price of $10.00
per share (the midpoint of the estimated range of the Offering Price). The
issuance of 634,000 shares of Common Stock subject to options to be granted upon
commencement of the Offering at the Offering Price will result in the purchasers
of the Common Stock offered hereby to experience immediate and substantial
dilution in net tangible book value of common stock of $6.96 per share assuming
an Offering Price of $10.00 per share (the midpoint of the estimated range of
the Offering price). If the Underwriters exercise their Over-Allotment Option in
full, an additional 225,000 shares of Common Stock will be sold, and purchasers
of the Common Stock offered hereby will experience immediate and substantial
dilution in net tangible book value of Common Stock of $6.79 per share, assuming
an Offering price of $10.00 per share (the midpoint of the estimated range of
the Offering Price). And if, as anticipated, the Company uses its stock to make
acquisitions or issues warrants that are attached to a debt offering, additional
dilution will occur. Dilution represents the difference between the price of the
Common Stock sold hereby and the pro forma net tangible book value per share of
the Company after the Offering. See "Dilution."
BENEFITS OF OFFERING TO EXISTING SHAREHOLDERS
This Offering will provide substantial benefits to Existing Shareholders of
the Company. First, the Existing Shareholders of the Company may benefit from
the creation of a liquid trading market for their shares of Common Stock and
through an increase in the market value of their shares. Following the Offering,
shares are expected to trade in a regular public trading market (the Nasdaq
National Market). Although the Common Stock held by the Existing Shareholders of
the Company is subject to a holdback agreement with the Representative and may
not be sold without the prior written consent of the Representative, upon
expiration of the holdback period, which is 12 months from the date of
Prospectus, the Existing Shareholders will be able to sell their shares into the
public market. Second, the anticipated Offering Price of $10.00 per share is
substantially higher than the $0.51 net tangible book value per share of the
shares held by the Existing Shareholders. At the effective time of the Offering
at the Offering Price of $10.00 per share, the aggregate market value of the
shares of Common Stock owned by Existing Shareholders would be $50,000,000. The
Company's management beneficially owns 4,825,000 of the outstanding shares of
Common Stock, and management's shares will have an aggregate market value of
23
<PAGE>
$48,250,000 based on the Offering Price of $10.00 per share; an increase of
$45,789,250 over such shares aggregate book value of $2,460,750 at December 31,
1997. See "Dilution" and "Capitalization."
SHARES ELIGIBLE AVAILABLE FOR FUTURE SALE
All of the currently outstanding shares of Common Stock are beneficially
owned or otherwise controlled by the Existing Shareholders, either directly or
indirectly. The 1,500,000 shares of Common Stock sold in the Offering will be
freely tradable by persons other than "affiliates" of the Company, as that term
is defined in Rule 144 ("Rule 144") under the Securities Act of 1933, as amended
(the "Securities Act"), without restriction under the Securities Act. Generally,
Rule 144 permits unaffiliated stockholders to resell, after satisfying a one
year holding period, into the public market within any three month period, a
number of shares which does not exceed the greater of 1% of the shares
outstanding or the average weekly trading volume during the four calendar weeks
preceding the sale, and allows affiliates to resell such securities after
satisfying a two-year holding period and subject to the foregoing volume
limitations. After completion of the Offering, the Existing Shareholders will
beneficially own or otherwise control an aggregate of 5,000,000 shares of the
Common Stock and 1,000 shares of Series A Preferred Stock. Each of the Existing
Shareholders has agreed not to sell any shares they beneficially own, and not to
permit any sales of any shares they otherwise control, for 12 months following
completion of the Offering, without the prior written consent of the
Representative. However, upon expiration of these agreements, the Existing
Shareholders will be free to sell any Common Stock held by them, subject to the
rules and regulations promulgated under the Securities Act. Furthermore, the
Company intends to register within 90 days of the date of the Offering
approximately 1,000,000 shares of Common Stock reserved for issuance pursuant to
the Company's stock option plan, including options to purchase 634,000 shares at
the Offering Price to be granted upon commencement of the Offering. The
Representative has permitted the Registering Shareholders to register their sale
of 200,000 shares of Common Stock, which shares may not be sold without the
consent of the Representative until 12 months after the date of this Prospectus.
Any future sales of a substantial number of shares of Common Stock, or the
perception that such sales could occur, could have a material adverse effect on
the prevailing market price of the Common Stock and could impair the Company's
future ability to raise capital through an offering of its equity or convertible
securities. See "Management-Stock Incentive Plan" and "Shares Eligible for
Future Sale."
EFFECTS OF CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Bylaws and Florida law could delay or frustrate the removal of
incumbent directors and could make difficult a merger, tender offer or proxy
contest involving the Company, even if such events could be viewed as beneficial
by the Company's shareholders. For example, the Amended and Restated Articles of
Incorporation permit cumulative voting for directors, and the 1,000 shares of
outstanding Series A Preferred Stock have the right to elect one less than a
majority of the Board of Directors. In addition, the Board of Directors has the
ability to issue "blank check" preferred stock without shareholder approval.
Although the Board has no present plan to issue additional shares of preferred
stock, the rights of the holders of common stock may be materially limited or
qualified by the issuance of additional preferred stock in the future. See
"Description of Capital Stock" and "Company Risks--Control by Existing
Shareholders." The Amended and Restated Articles of Incorporation require a
66 2/3% vote of shareholders to amend certain provisions of the Amended and
Restated Articles of Incorporation and provide for a staggered Board of
Directors.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "plans," "anticipates,"
"intends," "expects," and words of similar import, constitute
24
<PAGE>
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company or the international long
distance telecommunications industry to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions; prospects for the international long
distance telecommunications industry; competition; changes in business strategy
or development plans; the loss of key personnel; the availability of capital;
and other factors referenced in this Prospectus, including, without limitation,
under the captions "Prospectus Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business." Given these uncertainties, prospective investors are cautioned not
to place undue reliance on such forward-looking statements. The Company
disclaims any obligation to update any such factors or to publicly announce the
results of any revisions to any of the forward-looking statements contained
herein to reflect future events or developments.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,500,000 shares of
Common Stock offered hereby, based upon an Offering Price of $10.00 per share
(the midpoint of the estimated range for the Offering Price), and after
deducting all underwriting discounts and commissions, and all other estimated
Offering expenses payable by the Company, will be approximately $12.75 million
($14.75 million if the Underwriter's Over-Allotment Option is exercised in
full). The Company anticipates that it will use these net proceeds as follows:
(a) Approximately $5 million for strategic acquisitions, including
competitors and independent agents, to open new and expand existing markets.
(b) Approximately $5 million to (i) acquire equity interests in the
Company's exclusive independent agents in select markets, including South
Africa, Egypt, Lebanon, Argentina and Peru and (ii) create agents or
subsidiaries in France, Germany and possibly Brazil. The Company has entered
into agreements with its French and South African agents to conclude such
arrangements. See "Business--Purchase of Equity Interest in South African
Agent" and "Business--Formation of French Subsidiary."
(c) Approximately $2 million for telecommunications infrastructure
facilities, including switches and other equipment.
(d) Approximately $0.75 million for general working capital purposes.
The Company retains broad discretion in allocating the proceeds of this
Offering, and the estimates given above, in particular, the allocation of the
$10 million between purchasing complementary businesses and investing in the
Company's agents will likely change in response to opportunities for investments
and acquisitions. Although the Company is holding ongoing discussions with
various parties and agencies regarding possible acquisitions or investments, the
Company does not have at present any firm commitments therefor, other than the
agreements to form a new joint venture with the Company's French agents and to
purchase a minority interest in its South African agent which will require
aggregate investments by the Company of approximately $900,000 of the net
proceeds of this Offering. See "Business--Purchase of Equity Interest in South
African Agent" and "Business--Formation of French Subsidiary."
Pending their use, the Company will invest the net proceeds of this Offering
in short-term, investment grade, interest bearing securities and deposit
accounts. The Company projects that the net proceeds of this Offering will be
adequate to fund its anticipated capital requirements for approximately 12 to 18
months after the consummation of this Offering.
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<PAGE>
CAPITALIZATION
The following table shows the capitalization of the Company as of December
31, 1997 and pro forma as adjusted to reflect the Stock Split (See Note 14 of
Notes to Financial Statement) and the sale of the 1,500,000 shares of Common
Stock offered hereby at an Offering Price of $10.00 per share (the midpoint of
the range of the estimated Offering Price), after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company, and the application of the estimated net proceeds of the Offering as
described under "Use of Proceeds." This table should be read in conjunction with
the Company's financial statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
DEBT:
Loans payable............................................................ $ 85 $ 85
Total debt............................................................. 85 85
SHAREHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 1,000,000 shares authorized; 1,000
shares issued and outstanding, pro forma as adjusted................... -- --
Common Stock, $.01 par value; 20,000,000 shares authorized; 6,500,000
shares issued and outstanding, pro forma as adjusted (1)............... -- 65
Common Stock--Class A: $50 par value; 500 shares authorized, issued and
outstanding............................................................ 25 --
Common Stock--Class B: $50 par value; 15,500 shares authorized, 3,500
issued and outstanding................................................. 175 --
Common Stock--Class C: $50 par value; 4,000 shares authorized, 1,416.67
shares issued and outstanding, net of discount of $2,084............... 69 --
Additional paid-in capital............................................... -- 12,954
Retained earnings........................................................ 2,502 2,502
--------- -----------
Total shareholders' equity............................................. 2,771 15,521
--------- -----------
Total capitalization................................................. $ 2,856 $ 15,606
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Excludes 634,000 shares of Common Stock subject to options to be granted
upon commencement of the Offering. See "Management-Stock Incentive Plan."
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<PAGE>
DIVIDEND POLICY
The Company has not paid any cash dividends to its shareholders since
inception and does not anticipate paying any cash dividends in the foreseeable
future. Any determination to pay dividends will depend on the Company's
financial condition, capital requirements, results of operations, contractual
limitations and any other factors deemed relevant by the Board of Directors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
The net tangible book value of the Common Stock as of December 31, 1997 was
approximately $2.6 million, or $0.51 per share of Common Stock. "Net tangible
book value" per share represents the amount of the Company's shareholders'
equity, less intangible assets, divided by the number of shares of Common Stock
outstanding. Dilution per share represents the difference between the amount per
share paid by purchasers of shares of Common Stock in the Offering made hereby
and the pro forma net tangible book value per share of Common Stock immediately
after completion of the Offering. After (i) giving effect to the sale of
1,500,000 shares of Common Stock offered hereby at an assumed Offering Price of
$10.00 per share (the midpoint of the estimated range of the Offering Price),
(ii) deducting the underwriting discounts and commissions, non-accountable
expense allowance, and consulting fee and estimated offering expenses payable by
the Company, the pro forma net tangible book value of the Company as of December
31, 1997 would have been approximately $15.3 million, or $2.36 per share. This
represents an immediate increase in pro forma net tangible book value to the
Existing Shareholders of $1.85 and an immediate dilution of $7.64 to new public
investors purchasing Common Stock in the Offering, as illustrated in the
following table:
<TABLE>
<S> <C>
Assumed offering price per share.................................... $ 10.00
Net tangible book value per share at December 31, 1997............ 0.51
Increase in net tangible book value per share attributable to new
public investors................................................ 1.85
---------
Pro forma net tangible book value per share after the Offering...... 2.36
---------
Dilution per share to new public investors.......................... $ 7.64
---------
---------
</TABLE>
The following table sets forth on a pro forma basis giving effect to the
Offering as of December 31, 1997 the difference between Existing Shareholders
and the purchasers of shares in the Offering with respect to the number of
shares purchased from the Company, the total consideration paid and the average
price paid per share at an assumed Offering Price of $10.00 per share (the
midpoint of the estimated range of the Offering Price):
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
----------------------- -------------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing Shareholders.................... 5,000,000(1) 77%(1) $ 268,750(2) 2%(2) $ 0.05
New public investors..................... 1,500,000 23% 15,000,000 98% 10.00
---------- --- ------------- ---
Total.................................. 6,500,000 100% $ 15,268,750 100%
---------- --- ------------- ---
---------- --- ------------- ---
</TABLE>
- ------------------------
(1) The effect of the 634,000 shares of Common Stock subject to options to be
granted upon the commencement of the Offering at the Offering Price will be
an increase in the number of shares held by the existing shareholders to
5,634,000 or 79% of the total number of shares of Common Stock to be
outstanding after this Offering while the new investors will own 21% of the
total shares of Common Stock to be outstanding.
(2) No portion of the initial purchase price is allocated to the 1,000
outstanding shares of Series A Preferred Stock.
27
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain selected financial information for
the Company for (i) the fiscal years ended March 31, 1995, 1996 and 1997, which
have been derived from the Company's audited financial statements and notes
thereto included elsewhere in this Prospectus, (ii) the fiscal year ended March
31, 1994 which has been derived from unaudited financial statements of the
Company which are not included herein, and (iii) the nine months ended December
31, 1996 and 1997, which have been derived from unaudited financial statements
which are included herein. The information presented as "Other Operating Data"
and for EBITDA is not audited. In the opinion of management, the unaudited
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments, which consist only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and the results of operations for these periods. The results of
operations for the nine months ended December 31, 1997 are not necessarily
indicative of the results which may be expected for the full year. The following
financial information should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's financial statements and notes thereto appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ --------------------
1994 1995 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT FOR PER SHARE AND OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Retail.......................................... $ 848 $ 6,291 $ 13,228 $ 20,523 $ 14,988 $ 18,421
Wholesale....................................... -- -- -- 315 -- 2,608
--------- --------- --------- --------- --------- ---------
Total revenues.............................. $ 848 $ 6,291 $ 13,228 $ 20,838 $ 14,988 $ 21,029
Gross profit...................................... $ 344 $ 2,544 $ 5,553 $ 8,643 $ 6,412 $ 7,240
Operating income (loss)........................... $ (814) $ 159 $ 1,369 $ 2,004 $ 1,488 $ 1,414
Net income (loss)................................. $ (813) $ 382 $ 790 $ 1,253 $ 910 $ 890
Pro forma net income (loss) per share--basic and
dilutive (1).................................... $ (.18) $ .08 $ .16 $ .25 $ .18 $ .18
Weighted average shares outstanding (1)........... 4,615 4,869 5,000 5,000 5,000 5,000
OTHER OPERATING DATA (AT END OF PERIOD):
Retail customers(2)............................... 833 4,456 9,791 15,729 14,408 29,048
Wholesale customers (3)........................... -- -- -- 1 -- 3
Number of employees............................... 9 10 12 17 17 21
OTHER FINANCIAL DATA:
EBITDA (4)........................................ $ (771) $ 231 $ 1,463 $ 2,140 $ 1,573 $ 1,558
Net cash provided by (used in) operating
activities...................................... $ (497) $ 229 $ 672 $ 858 $ 680 $ 959
Net cash (used in) investing activities........... $ (338) $ (173) $ (222) $ (439) $ (284) $ (492)
Net cash (used in) provided by financing
activities...................................... $ 995 $ (40) $ (150) $ (155) $ (130) $ (529)
Capital expenditures.............................. $ 330 $ 143 $ 93 $ 352 $ 205 $ 321
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
AS OF MARCH 31, --------------------------
------------------------------------------ AS ADJUSTED
1994 1995 1996 1997 ACTUAL (5)
--------- --------- --------- --------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets......................... $ 381 $ 1,273 $ 2,363 $ 4,566 $ 5,647 $ 18,433
Working capital (deficiency)................. (129) 150 811 1,658 1,442 14,228
Total assets................................. 683 1,720 2,797 5,243 7,042 19,657
Total current liabilities.................... 510 1,122 1,552 2,920 4,205 4,205
Long term debt, less current portion......... 729 730 580 425 -- --
Total shareholders' equity (capital
deficiency)................................ (563) (162) 609 1,861 2,771 15,521
</TABLE>
- ------------------------
(1) Pro forma net income (loss) per common share--basic and dilutive is computed
based on the weighted average number of common shares outstanding during
each period and gives retroactive effect to the Stock Split. See Note 14 of
Notes to Financial Statements.
(2) Consists of active Company subscribers that were billed in the final month
of the respective periods.
(3) Consists of wholesale customers that had active accounts with the Company in
the respective periods.
(4) EBITDA represents net income (loss) plus net interest expense (income),
income taxes, depreciation and amortization. EBITDA is not a measurement of
financial performance under generally accepted accounting principles and
should not be construed as a substitute for net income (loss), as a measure
of performance, or cash flow as a measure of liquidity. It is included
herein because it is a measure commonly used by securities analysts.
(5) As adjusted to give effect to (i) the Offering, see "Use of Proceeds" (ii)
the underwriter's two year consulting contract which will be prepaid upon
the closing of the Offering and (iii) the deferred offering costs incurred
by the Company as of December 31, 1997.
29
<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 AND THE RELATED NOTES AND OTHER INFORMATION REGARDING THE COMPANY
INCLUDED ELSEWHERE IN THE PROSPECTUS. THIS DISCUSSION CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL EVENTS OR RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED EVENTS OR RESULTS AS A RESULT OF
CERTAIN FACTORS, INCLUDING, BUT NOT LIMITED TO THE "RISK FACTORS" DISCUSSED
ELSEWHERE IN THE PROSPECTUS.
OVERVIEW
The Company is a provider of international telecommunications services. The
Company offers a broad range of discounted international and enhanced
telecommunication services, including U.S. originated long distance service and
direct-dial international service, typically to small and medium-sized
businesses and travelers. The Company's primary service is call reorigination,
which accounted for approximately 76% of its revenues for the nine months ended
December 31, 1997. The Company also sells services to other carriers on a
wholesale basis. The Company's retail customer base, which includes corporations
and individuals, is primarily located in South Africa, Latin America, the Middle
East (Lebanon and Egypt), Russia and France. The Company operates a
switched-based digital telecommunications network. The Company installed its
first switch in Sunrise, Florida, which became fully operational in October
1993. Revenues were first earned in November 1993. The Company has acquired an
additional switch, which was installed in Paris, France during the quarter ended
March 31, 1998 and which became operational on April 1, 1998. From November 1993
until the current time, the Company has grown by marketing its services through
a worldwide network of independent agents which service in the aggregate
approximately 29,000 registered Company subscribers as of December 31, 1997.
Usage of the Company's services has increased from 552,374 minutes in the fiscal
year ended March 31, 1994 to 22,787,792 minutes in the nine months ended
December 31, 1997.
The Company's management believes that the funds raised by the Offering will
allow the Company to expand its customer base and the number of markets it
penetrates by:
a) acquiring competitors using a portion of the proceeds of the
Offering as the equity component of the purchase price for strategic
acquisitions, and using debt as the other component of the purchase price.
The Company believes such leveraged acquisitions would add additional annual
revenues to its business. Deregulation and increased competition in the
telecommunications industry have created a strong motivation to gain market
share rapidly in selective markets through acquisitions.
b) acquiring equity interests in the Company's exclusive agents in
selected markets to further cement the contractual relationships with these
agents and to expand the Company's business in markets offering favorable
opportunities and returns.
c) deploying new technologies such as IP telephony technology to bypass
today's switched telephone network by using cost-effective packet switched
networks and/or the public Internet for the delivery of fax and some voice
communications. The Company intends to deploy a number of fax servers in
selected countries to exploit the opportunities provided by IP telephony
technology. This strategy will allow for more aggressive market penetration
in selected markets, particularly in regulated markets, and a possible
reduction in transmission costs.
d) purchasing telecommunications equipment, including switches, using
financing arrangements in order to expand the Company's wholesale business
and its direct access Network, particularly where demand by existing
customers warrants the capital investment required to migrate such customers
from a call reorigination to a direct access method.
30
<PAGE>
REVENUE
The geographic origin of the Company's revenues is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
--------------------------------- ----------------------
1995 1996 1997 1996 1997
--------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Africa...................... $ 369,087 $1,403,094 $3,899,701 $2,596,455 $6,057,730
Europe...................... 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America............... 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East................. 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other....................... 803,375 1,397,802 1,363,852 966,441 1,395,126
United States............... -- -- 315,407 -- 2,011,988
--------- ---------- ---------- ---------- ----------
$6,290,512 $13,228,074 $20,838,427 $14,987,729 $21,029,113
--------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ----------
</TABLE>
The Company's subscriber base has grown as follows:
<TABLE>
<CAPTION>
AS OF: NUMBER OF SUBSCRIBERS
- ------------------------------------------------------------------------------------------- ---------------------
<S> <C>
December 31, 1997.......................................................................... 29,048
March 31, 1997............................................................................. 15,729
March 31, 1996............................................................................. 9,791
March 31, 1995............................................................................. 4,456
</TABLE>
The number of the Company's independent agents has varied as follows:
<TABLE>
<CAPTION>
AS OF: NUMBER OF INDEPENDENT AGENCY AGREEMENTS
- ------------------------------------------------------------------------- ---------------------------------------------
<S> <C>
December 31, 1997........................................................ 15
March 31, 1997........................................................... 17
March 31, 1996........................................................... 15
March 31, 1995........................................................... 11
</TABLE>
The percentage of retail (minutes sold to retail end users) and wholesale
(minutes sold to other telecommunication carriers) revenues has been as follows:
<TABLE>
<CAPTION>
PERIOD ENDED RETAIL % WHOLESALE %
- ------------------------------------------------------------------------------------------ ----------- ---------------
<S> <C> <C>
Nine Months Ended December 31, 1997....................................................... 87.6% 12.4%
Year Ended March 31 1997.................................................................. 98.5% 1.5%
Year Ended March 31, 1996................................................................. 100% --
Year Ended March 31, 1995................................................................. 100% --
</TABLE>
The Company expects that wholesale revenues will increase in the near term,
and may become a more significant portion of the Company's total revenue. The
Company generates retail revenues primarily through its independent agents. No
single Company subscriber represents 1% or more of the Company's revenue. Agency
agreements generally are exclusive and typically have an initial term of five
years with two additional three-year renewal periods. The four largest
independent agents account for approximately 64% of the Company's revenue for
the nine months ended December 31, 1997. Any material disruption in or
termination of these agreements could have a material adverse effect on the
Company's operations.
The Company believes its retail services are priced below those of the ITOs
in each country in which the Company offers its services. Prices for
telecommunications services in many of the Company's core markets have declined
as a result of deregulation and increased competition. The Company believes that
worldwide deregulation and increased competition are likely to continue to
reduce the Company's retail revenues per billable minute. The Company believes,
however, that any decrease in retail revenues per
31
<PAGE>
minute will be at least partially offset by an increase in billable minutes by
the Company's customers, and by decreased cost per billable minute as a result
of the deployment of direct access facilities, the application of IP telephony
technology particularly for fax transmissions and the Company's ability to
exploit purchasing discounts based on increased traffic volumes.
COST OF GOOD SOLD AND GROSS MARGIN
The most significant portion of the Company's cost of telecommunications
services are transmission and termination costs, which vary based on the number
of minutes used. The Company purchases switched minutes from other carriers. The
Company has historically purchased a portion of the minutes subject to fixed
volume commitments. Carriers have recently reserved the right to terminate these
agreements upon short notice. The Company has historically been able to arrange
favorable volume purchase arrangements based upon its high usage and excellent
credit history, and these arrangements continue under more recent terminable
agreements.
During the last year, the Company's segment of the international
telecommunications industry has experienced a general tightening of gross
margins due to declining retail and wholesale prices. The Company's own gross
margin results, particularly for the nine months ended December 31, 1997, have
reflected this trend. Factors impacting the Company's lower gross margin
compared to earlier periods include declining retail prices, development of the
wholesale business with lower profit margins (averaging approximately 5% to
10%), and increased incremental costs associated with the Company's call
reorigination customers. The reduction in retail prices reflects increased
competition arising from deregulation as well as the Company's strategic
decision to gain market share and increase revenue through more competitive
pricing. By increasing total minutes purchased through aggressive retail
expansion and development of a wholesale business, the Company expects to reduce
the rates it pays for switched minutes through volume discounts and other
mechanisms. The benefits of such cost reductions have a slower impact on the
Company's operating results compared to the more immediate revenue reductions
resulting from price discounting. The Company expects that deregulation and
increasing competition will continue to reduce revenues per minute thereby
reducing profit margins, particularly for the Company's call reorigination
business, which results in high variable costs, including non-billable access
costs.
The Company's costs of providing telecommunications services to customers
consist largely of: (i) variable costs associated with origination, transmission
and termination of voice and data telecommunications services over other
carriers' facilities, and (ii) costs associated with owning or leasing and
maintaining switching facilities and circuits. Currently, the variable portion
of the Company's cost of revenue predominate, based on the large proportion of
call reorigination customers and the number of minutes of use transmitted and
terminated over other carrier's facilities. Thus, the Company's existing gross
profitability primarily reflects the difference between revenues and the cost of
transmission and termination over other carrier's facilities. Therefore, the
Company seeks to lower the variable portion of its cost of services by
eventually originating, transporting and terminating a higher portion of its
traffic over its own Network or via media such as the Internet and private data
networks, and by increasing its purchasing power and volume discounts through
the increase of the number of minutes it purchases for other carriers.
The Company realizes higher gross margins from its retail services than from
its growing wholesale services. However, wholesale services provide a source of
additional revenues and add significant minutes originating and terminating on
the Company's Network, enhancing the Company's purchasing power for switched
minutes and enabling it to take advantage of volume discounts.
The Company seeks to reduce its cost of revenues by expanding and upgrading
the Network, adding to the Network more owned and leased facilities, and
increasing the traffic volume carried by these facilities, so that the
percentage of the Company's revenues based on variable costs, including higher
access costs from call reorigination, will decline as revenues based on a fixed
cost structure increase, thereby allowing
32
<PAGE>
the Company to spread the fixed costs over increasing traffic volumes;
negotiating lower cost of transmission over the facilities owned and operated by
other carriers, principally through increased purchasing volumes; and expanding
the Company's least cost routing choices and capabilities.
The Company's overall gross margins may, however, fluctuate in the future
based on its mix of wholesale and retail international long distance services
and the percentage of calls using direct access and/ or call-through compared to
call reorigination.
OPERATING EXPENSES
Operating expenses include: commissions, selling expenses, general and
administrative expenses and depreciation and amortization expenses.
The Company pays commission expense to its network of independent agents
pursuant to long-term agency agreements. The Company's decision to use
independent agents has been driven by the low initial fixed costs associated
with this distribution channel, and the agents' familiarity with local business
and marketing practices. The percentage of retail revenue paid for commissions
has been as follows:
<TABLE>
<S> <C>
Nine Months Ended December 31, 1997................................................. 17.4%
Nine Months Ended December 31, 1996................................................. 18.5%
Year Ended March 31, 1997........................................................... 18.4%
Year Ended March 31, 1996........................................................... 18.4%
Year Ended March 31, 1995........................................................... 19.5%
</TABLE>
Because the Company's contracts with its agents generally are long-term, the
Company expects these costs to remain stable as a percentage of revenue. The
Company has not paid commissions to generate wholesale sales. The aggregate
sales commissions paid by the Company have increased over the past three years
as its business has expanded. The Company anticipates that in the future
revenues from direct access (which carries lower commission rates) and
especially wholesale services (which involve minimal or no commissions) will
increase relative to its existing services, and therefore commissions will
decline as a percentage of revenues.
Selling expenses (exclusive of commissions) consist of selling and marketing
costs, including salaries and benefits, associated with attracting and servicing
independent agents. The Company performs standard due diligence prior to signing
agency agreements and then expends significant time training the agents in the
Company's practices and procedures.
The Company's general and administrative expenses consist of salaries and
benefits and corporate overhead. Included in salaries through December 31, 1997
is a bonus of $0.45 million paid to two officers of the Company. See Note to
Financial Statements--Note 9--Commitments. These arrangements have been
terminated and replaced with new employment agreements. See
"Management--Employment Agreements." Bad debt expense has never exceeded 0.5% of
total revenue. In addition, the cost of collecting accounts receivable is
minimal. The Company has achieved these results because of its ability to
attract, train and retain high quality independent agents and because the
independent agents contractually assume the risk of credit loss and the cost of
collection on the underlying sales. The Company's financial results may reflect
higher levels of bad debt losses as its wholesale and other lines of business
expand and as it makes equity investments in its independent agents. The Company
expects that general and administrative expenses may increase as a percentage of
revenues in the near term as the Company incurs additional costs associated with
its development and expansion, expansion of its marketing and sales
organization, and introduction of new telecommunications services.
In addition to the Company's efforts to reduce its cost of goods sold by
migrating customers to direct access by deploying IP telephony technology and
maximizing volume discounts, the Company also actively manages and seeks to
reduce its selling, general and administrative expenses. As part of this focus,
the
33
<PAGE>
Company uses its network of exclusive independent agents to bear much of the
marketing expenses that its competitors may bear directly. Furthermore, the
Company's strategy of using its competitors' infrastructure to carry its
telecommunications traffic also controls the Company's fixed costs. The Company
aggressively manages its back office systems, by developing and implementing
efficient computerized systems in order to maximize selling, general and
administrative expenses ("SG&A") efficiency (e.g., revenue and EBITDA per Dollar
of SG&A) and maximize the Company's existing productivity per employee.
Depreciation and amortization expense consists primarily of the expenses
associated with the Company's investments in equipment, and will continue to
increase substantially as the Company installs additional switches and other
fixed facilities. The Company expects these increased costs will be amortized
over an increased revenue base, resulting in stable percentage costs.
Other income (expense) consists primarily of interest expense on long-term
debt and interest income earned in connection with advances to officers and
consultants and short-term investments.
SUMMARY OF OPERATING RESULTS
(STATED AS A PERCENTAGE OF REVENUES)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
YEAR ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................................... 59.6 58.0 58.5 57.2 65.6
Gross profit............................................. 40.4 42.0 41.5 42.8 34.4
Operating expenses:
Commission............................................. 19.5 18.4 18.1 18.5 15.2
Selling, general and administrative (exclusive of
bonuses paid to officers)............................ 16.9 10.0 10.8 11.4 9.7
Bonuses paid to officers............................... 0.4 2.5 2.4 2.4 2.1
Depreciation and amortization.......................... 1.1 0.7 0.6 0.6 0.6
Total operating expenses................................. 37.9 31.6 31.9 32.9 27.7
Operating income......................................... 2.5 10.3 9.6 9.9 6.7
Other expense (Income)................................... 1.0 0.4 0.1 0.2 (0.1)
Income before income taxes............................... 1.6 9.9 9.6 9.8 6.8
Income tax expense (benefit)............................. (4.5) 4.0 3.5 3.7 2.5
Net income............................................... 6.1 6.0 6.0 6.1 4.3
</TABLE>
NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 31,
1996
REVENUES. Revenues increased $6.0 million (40.3%) from $15.0 million in the
nine months ended December 31, 1996 to $21.0 million in the nine months ended
December 31, 1997. The increase in revenues reflects increased billed retail
customer minutes, particularly in the South African and Middle Eastern markets.
In addition, the Company earned $2.6 million of wholesale revenue in the current
period, with no comparable prior period wholesale revenues.
COST OF REVENUES. Cost of revenues increased by $5.2 million (60.8%) from
$8.6 million in 1996 to $13.8 million in 1997. The increase in cost of revenues
primarily reflects an increase in sales volume, based on number of minutes sold.
Costs of revenues as a percentage of sales increased from 57.2% to 65.6%,
because selling prices per minute decreased faster than costs per minute. This
increase in the Company's costs as a percentage of revenues primarily reflects
declining retail prices, the growth of the less profitable wholesale business,
and increasing incremental non-billable access costs associated with the
Company's call
34
<PAGE>
reorigination business. As discussed in "Costs of Goods Sold and Gross Margin"
above, retail price reductions tend to reduce gross revenues before the benefits
of the negotiated volume-based rate reductions by carriers can be realized, a
fact which resulted in a decline in the gross profit margin in the retail
segment of revenues from 42.8% for the nine months ended December 31, 1996 to
38.2% for the nine months ended December 31, 1997. The Company's margins in the
first nine months of the fiscal year ended March 31, 1998 reflected this trend,
despite the increased costs of revenues being in part mitigated by the
settlement of a dispute regarding a purchase contract from a supplying carrier.
The effect of such settlement was a one-time savings in cost of revenues equal
to 3.1% of total revenues.
GROSS PROFITS. Gross profit increased $0.8 million (12.9%) from $6.4
million in 1996 to $7.2 million in 1997. As a percentage of revenue, gross
profit decreased 8.4% from 42.8% in 1996 to 34.4% in 1997. Gross profit margin
decreased because sales price per minute decreased faster than cost price per
minute, and the Company began its wholesale carrier business which operates on
much lower gross profit margins of 7.5% as compared to 38.2% for the retail
segment. The reduction in prices reflects price competition from deregulation as
well as the Company's strategic decision to gain market share and increase
revenue through more competitive pricing. By increasing total minutes purchased
not only through aggressive retail expansion, but also through expansion of its
wholesale business, the Company eventually expects to reduce the rates it pays
for switched minutes through volume discounts and other mechanisms.
OPERATING EXPENSES. Operating expenses increased $0.9 million from $4.9
million in 1996 to $5.8 million in 1997. The increase was due to an increase in
commission expense of $0.4 million (reflecting increased gross revenues in spite
of a 1.10% decrease in total commission paid to agents as a percentage of retail
revenues), and increases in salaries and wages of $0.4 million and a general
SG&A expenses increase of $0.1 million. Operating expenses as a percentage of
revenues decreased by 5.2%, primarily because additional selling, general and
administrative expenses were more than offset by increased revenues in the
period and the Company's overhead expenses were absorbed by a larger base of
revenues.
Depreciation and amortization expense increased approximately $47,000 from
approximately $86,000 in 1996 to approximately $133,000 in 1997 as a result of
switch upgrades, the purchase of additional computer equipment and software, and
leasehold improvements.
INTEREST EXPENSE. Interest was approximately $30,000 in 1996 and $20,000 in
1997, reflecting a reduction in the Company's outstanding long-term debt.
OPERATING INCOME. Operating income decreased $0.1 million from $1.5 million
in 1996 to $1.4 million in 1997 primarily as a result of decreased gross margin
rates due to the increase in cost of revenues from 57.2% to 65.6% of revenues,
this despite the fact that SG&A as a percentage of revenues decreased by 2.0%.
Other operating expenses did not change significantly.
NET INCOME. As a result of all of the foregoing factors, and in particular
because of the Company's strategic decision to increase its gross revenues
through price reductions, the Company's net income remained unchanged at $0.9
million.
YEAR ENDED MARCH 31, 1997 COMPARED TO MARCH 31, 1996
REVENUES. Revenues increased $7.6 million (57.6%), from $13.2 in 1996 to
$20.8 million in 1997. The increase in revenues primarily resulted from an
increase in billed customer minutes from retail sales, principally in the
international call reorigination business. This increase reflects the Company's
increased market penetration, especially in the South African, Russian and
Middle Eastern markets. The total number of independent agents increased from 15
to 17. In addition, the Company earned wholesale revenues of $0.3 million in
1997 with no corresponding amount in 1996.
COST OF REVENUES. Cost of revenues increased $4.5 million (58.9%) from $7.7
million in 1996 to $12.2 million in 1997, principally reflecting the increased
amount of traffic being handled by the Company. The
35
<PAGE>
slight (0.5%) increase in cost of revenues as a percentage of revenues reflects
the Company's wholesale revenues in the period (with a lower profit margin than
retail revenues) of $0.3 million, with no corresponding amount in the prior
period.
GROSS PROFIT. Gross profit increased $3.1 million (55.6%) from $5.5 million
in 1996 to $8.6 million in 1997 reflecting the increase in number of minutes
billed. As a percentage of revenue, gross profit decreased from 42.0% in 1996 to
41.5% in 1997. The gross profit margin on the retail segment of the business was
41.4% compared to 42% for the previous year, while wholesale revenues generated
a 48% gross profit margin, which was unusually high due to a one-time favorable
rate arbitrage opportunity on a route to Thailand.
OPERATING EXPENSES. Operating expenses increased $2.4 million (58.7%) from
$4.2 million to $6.6 million. This increase was due to an increase in commission
costs of $1.3 million attributable to the increased sales volume generated by
the Company's independent agents. Bonuses paid to officers pursuant to their
employment agreements, additional consulting and travel expenses related to
maintaining and improving agency relations, additional legal and professional
fees and travel expenses related to the attempt by the Company to secure
expansion financing and negotiate strategic alliances resulted in increased
costs of $0.5 million. In addition, the Company increased staffing levels from
12 to 17 and secured additional office facilities at its headquarters in
Sunrise, Florida resulting in increased costs of $0.2 million. The growth in
other categories of operating expenses of $0.4 million related primarily to the
Company's increased level of activity.
Depreciation and amortization expense increased approximately $30,000 as a
result of switch upgrades, the purchase of additional computer equipment and
software, and leasehold improvements incurred in connection with the office
expansion.
As a percentage of revenue, operating expenses increased slightly to 31.9%
in 1997 from 31.6% in 1996, as additional revenue offset the additional costs
and expenses.
OPERATING INCOME. Operating income increased by $0.6 million (46.4%) from
$1.4 million in 1996 to $2.0 million in 1997. As a percentage of revenue,
operating income decreased by 0.7% to 9.6% in 1997 from 10.3% in 1996, primarily
reflecting a 0.5% reduction created by the impact of the commencement of the
lower margin wholesale business in 1997.
INTEREST EXPENSE. Interest expense decreased to approximately $40,000 from
approximately $60,000, reflecting reductions in long-term debt.
NET INCOME. As a result of these factors, and principally reflecting the
growth in the Company's minutes billed to customers, net income increased to
$1.3 million from $0.8 million in 1996.
YEAR ENDED MARCH 31, 1996 COMPARED TO MARCH 31, 1995
REVENUES. Revenues increased $6.9 million (110.3%) from $6.3 million in
1995 to $13.2 million in 1996, primarily from an increase in billed customer
minutes from international call reorigination. The Company also opened new
markets by entering into four new independent agency agreements in the period,
and increased its market penetration within existing markets.
COST OF REVENUES. Cost of revenues increased $4.0 million from $3.7 million
in 1995 to $7.7 million in 1996, primarily as a result of the increase in
traffic volume. Cost of revenues as a percentage of revenues decreased from
59.6% to 58.0%, reflecting the negotiation of volume discounts and other
favorable carrier agreements.
GROSS PROFITS. Gross profits increased $3.0 million (118.3%) from $2.5
million in 1995 to $5.6 million in 1996. As a percentage of revenue, gross
profit increased to 42.0% in 1996 from 40.4% in 1995 due to favorable
negotiations of the cost of switched minutes provided by carriers.
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OPERATING EXPENSES. Operating expenses increased $1.8 million (75.4%) from
$2.4 million in 1995 to $4.2 million in 1996. As a percentage of revenues,
overall operating expenses decreased from 37.9% in 1995 to 31.6% in 1996,
primarily because increased selling, general and administrative expenses were
more than offset by increased revenues in the period, and the Company's overhead
expenses were absorbed by a larger base of revenues. Commissions increased by
$1.2 million from 1995 to 1996 as a direct result of increased revenues.
Commissions as a percentage of revenue decreased from 19.5% in 1995 to 18.4% in
1996, primarily because of commission adjustments with the agents. Officers'
salaries and bonuses increased $0.2 million from $0.4 million in 1995 to $0.7
million in 1996 primarily as a result of the provisions, in effect until
December 31, 1997, contained in the officers' contracts that provided for bonus
payments as a fraction of the Company's income before taxes. These agreements
have been terminated and replaced by new contracts with these officers effective
January 1, 1998. See "Management-Employment Agreements." Other expenses
increased $0.3 million, primarily as a result of increases in employment and
payments under a consulting agreement.
Depreciation and amortization expense increased approximately $20,000 from
approximately $70,000 in 1995 to approximately $90,000 in 1996, primarily due to
capital expenditures for switch equipment and computer equipment.
INTEREST EXPENSE. Interest expense was approximately $60,000 in 1995 and
1996. Average long-term debt outstanding, and the interest rate charged during
the two periods did not change significantly.
OPERATING INCOME. Operating income increased by $1.2 million, from $0.2
million in 1995 to $1.4 million in 1996, as a result of increased sales and the
resultant increased gross profit. In addition the Company's operating expenses
declined from 37.9% to 31.6% of total revenues from 1995 to 1996 as a result of
a decrease in the commission pay-out to agents and a decrease in SG&A of 6.5% in
relation to total revenues.
NET INCOME. Net income increased $0.4 million (107%) from $0.4 million in
1995 to $0.8 million in 1996 as a result of increased levels of operating income
and the elimination of the Company's deferred tax asset valuation allowance in
1995 resulting in an increased income in 1995 of $0.3 million. Had this tax
benefit not been realized in 1995, net income in 1996 would have increased by
$0.7 million over 1995 amounts.
LIQUIDITY AND CAPITAL RESOURCES
The Company's capital requirements consist of capital expenditures in
connection with the acquisition and maintenance of switching capacity and
working capital requirements. Historically, the Company's capital requirements
have been met primarily through funds provided by operations, term loans funded
or guaranteed by its majority shareholder and capital leases.
Subsequent to December 31, 1997, the Company repaid an outstanding term loan
of $85,000 from Citibank-Zurich and terminated its loan agreement. On February
9, 1998, the Company acquired a switch under a capital lease. The switch has a
capitalized cost of $335,280. On March 17, 1998, the Company acquired equipment
under a capital lease. The equipment has a capitalized cost of $33,372. See
"Notes to Financial Statements--Note 14--Subsequent Events."
Following completion of the Offering, the Company may seek to obtain a
stand-by credit facility for working capital needs, capital leasing requirements
and/or other unanticipated financing needs.
Net cash provided by operating activities was $0.2 million in 1995, $0.7
million in 1996 and $0.9 million in 1997. The net cash provided by operating
activities in 1996 and 1997 mainly reflects net earnings offset by an increase
in accounts receivable relative to accounts payable to carriers. For the nine
months ended December 31, 1997 compared to the same period in 1996, net cash
provided by operating activities increased by approximately $0.3 million
reflecting net earnings being offset by an increase in accounts
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receivable resulting primarily from longer payment cycles from the Company's
agents, relative to the Company's accounts payable to carriers. In addition, an
income tax receivable which represented an overestimation of actual tax payments
in prior periods was applied against estimated tax payments for the current
period.
Net cash used in investing activities was $0.2 million in 1995, $0.2 million
in 1996, and $0.4 million in 1997. The net cash used in investing activities in
1995, 1996, and 1997 principally reflects an increase in equipment purchases.
Net cash used in investing activities for the nine months ended December 31,
1997 was $0.5 million principally reflecting an increase in equipment purchases
and a deposit towards the purchase of an equity stake in the South African
agency and partially offset by repayments of loans by related parties.
Net cash used in financing activities was approximately $40,000 in 1995,
$150,000 in 1996, and $155,000 in 1997. The activities consisted of debt
repayment, primarily to the Company's bank for long-term financing obtained in
1993 and 1994. Net cash used in financing activities for the nine months ended
December 31, 1997 was approximately $529,000 reflecting debt repayment and
deferred costs related to the Offering.
The Company expects that the net proceeds from the Offering, together with
internally generated funds, will provide sufficient funds for the Company to
expand its business as planned and to fund anticipated growth for the next 12 to
18 months. However, the amount of the Company's future capital requirements will
depend upon many factors, including performance of the Company's business, the
rate and manner in which it expands, staffing levels and customer growth, as
well as other factors not within the Company's control, including competitive
conditions and regulatory or other government actions. If the Company's plans or
assumptions change or prove to be inaccurate or the net proceeds of the
Offering, together with internally generated funds or other financing, prove to
be insufficient to fund the Company's growth and operations, then some or all of
the Company's development and expansion plans could be delayed or abandoned, or
the Company may be required to seek additional funds earlier than anticipated.
In order to provide flexibility for potential acquisition and network expansion
opportunities, the Company may seek in the near future to enter into a financing
arrangement. Other future sources of capital for the Company could include
public and private debt, including a high yield debt offering, and equity
financing. There can be no assurance that any such sources of financing would be
available to the Company in the future or, if available, that they could be
obtained on terms acceptable to the Company. While such a financing may provide
the Company additional capital resources that may be used to implement its
business plan, the incurrence of indebtedness could impose risks, covenants and
restrictions on the Company that may affect the Company in a number of ways,
including the following: (i) a significant portion of the Company's cash flow
from operations may be required for the repayment of interest and principal
payments arising from the financing, with such cash flow not being available for
other purposes; (ii) such a financing could impose covenants and restrictions on
the Company that may limit its flexibility in planning for, or reacting to,
changes in its business or that could restrict its ability to redeem stock,
incur additional indebtedness, sell assets and consummate mergers,
consolidations, investments and acquisitions; and (iii) the Company's degree of
indebtedness and leverage may render it more vulnerable to a downturn in its
business or in the telecommunications industry or the economy generally.
SEASONALITY
The Company has historically experienced, and expects to continue to
experience, a decrease in the use of its services in the months of August and
December due to the closing of many businesses for holidays in Europe and the
United States during those months.
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IMPACT OF YEAR 2000
The Company is currently in the process of evaluating whether it will
encounter any problems related to the year 2000. These problems, which have been
widely reported in the media, could cause malfunctions in certain software and
databases with respect to dates on or about 2000. Most of the Company's computer
systems, software and databases are proprietary to the Company and are year 2000
compliant. The Company is in the process of evaluating if carriers and other
third parties with which it contracts for services anticipate any year 2000
difficulties, and if so whether those problems would be of a nature that could
adversely affect the Company. The Company will request that such third parties
advise the Company as to whether or not they anticipate any difficulties in
addressing year 2000 problems and, if so, whether or not the Company would be
adversely affected by any of such problems. The Company will continue to monitor
the impact on the Company of issues related to the year 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "COMPREHENSIVE INCOME:
FINANCIAL STATEMENT PRESENTATION" which requires that all items that are
required to be recognized under the accounting standards as components of
comprehensive income be reported in a financial statement that is displayed as
prominently as other financial statements. Statement No. 130 is effective for
the Company's fiscal year ending March 31, 1999. The adoption of Statement No.
130 is not expected to materially affect the Company's financial statements.
In June 1997, the FASB issued Statement No. 131, "DISCLOSURES ABOUT SEGMENTS
OF AN ENTERPRISE AND RELATED INFORMATION" which requires a company to disclose
segment profit or loss and segment assets. Statement No. 131 is effective for
the Company's fiscal year ending March 31, 1999. The adoption of Statement No.
131 will require the Company to upgrade its accounting systems in order to
accumulate segment information.
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THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
THE MARKET AND TRENDS
The international telecommunications industry provides voice and data
transmission from one national telephone network to another. The industry has
experienced dramatic changes during the past decade resulting in significant
growth in the use of services and enhancements to technology. The industry is
expecting similar growth in revenue and traffic volume in the foreseeable
future. According to the ITU, the international telecommunications industry
accounted for $61.3 billion in revenues and 70 billion minutes of use in 1996,
increasing from $23.9 billion in revenues and 19.1 billion minutes of use in
1987, which represent compound annual growth rates of 11% and 15.5%,
respectively. The ITU projects that revenues will approach $82.2 billion by the
year 2000 with the volume of traffic expanding to 114 billion minutes of use,
representing compound annual growth rates of 7.6% and 13%, respectively, from
1996. The market for telecommunications services is highly concentrated, with
Europe and the United States accounting for approximately 41.4% and 32.3%,
respectively, of the industry's worldwide international minutes of use in 1996,
while Asia represented 17%, Latin America 5.1% and Africa 1.9%. AT&T, Deutsche
Telecom, MCI WorldCom, France Telecom and British Telecom originated
approximately 37.4% of the aggregate international long distance traffic minutes
in 1996.
The industry is being shaped by the following trends: deregulation and
privatization of telecommunications markets worldwide; diversification of
services through technological innovation; globalization of major carriers
though market expansion, consolidation and strategic alliances; greater consumer
demand; increases in international business travel; privatization of ITOs;
growth of computerized transmission of voice and data information; and the
introduction of IP telephony technology. These trends have sharply increased the
use of, and reliance upon, telecommunications services throughout the world. The
Company believes that despite these trends, a high percentage of the world's
businesses and residential consumers continue to be subject to high prices and
poor quality of service. Demand for improved service and lower prices have
spurred deregulation and created opportunities for private industry to compete
in previously closed or restricted sectors of the international market.
Increased competition, in turn, has spurred a broadening of products and
services, and new technologies have contributed to improved quality and
increased transmission capacity and speed.
Significant legislation and agreements adopted since the beginning of 1996
are expected to lead to further liberalization of the majority of the world's
telecommunication markets. These agreements or directives include:
- THE U.S. TELECOMMUNICATIONS ACT, signed in February 1996, establishes
parameters for the implementation of full competition in the U.S. national
long distance market.
- THE EU FULL COMPETITION DIRECTIVE, adopted in March 1996, abolishes
exclusive rights for the provision of Voice Telephony services throughout
the EU and the PSTNs of any member country of the EU by January 1, 1998,
subject to extension by an EU member country.
- THE WORLD TRADE ORGANIZATION AGREEMENT, signed in February 1997 (the "WTO
Agreement"), creates a framework under which 69 countries including the
United States have committed to liberalize their telecommunications laws
in order to permit increased competition and, in most cases, foreign
ownership in their telecommunications markets, beginning in 1998. The WTO
Agreement could provide the Company with significant opportunities to
compete in markets that were not previously accessible. In some countries,
for example, the Company would be allowed under the agreement to own
facilities or to interconnect to the public switched network on reasonable
and non-discriminatory terms. There can be no assurance, however, that the
pro-competitive effects of the WTO Agreement will not have a material
adverse effect on the Company's business, financial condition and results
of operations or that members of the WTO will implement the terms of the
WTO Agreement.
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By eroding the traditional monopolies held by ITOs, many of which are wholly
or partially government owned, deregulation is providing the U.S.-based
providers opportunities to negotiate more favorable agreements with both
traditional ITOs and alternative emerging foreign providers. In addition,
deregulation in certain foreign countries is enabling U.S.-based providers to
establish local switching and transmission facilities in order to terminate
their own traffic and begin to carry international long distance traffic
originated in those countries.
In order to succeed in the changing telecommunications market, small- and
medium-sized carriers (including the Company) must offer their customers a full
range of services. To date, most carriers do not have the critical mass of
customers to receive large volume discounts on international traffic from the
larger facilities-based carriers such at AT&T, MCI WorldCom and Sprint. In
addition, small- and medium-sized carriers have only a limited ability to invest
in international facilities. Alternative international carriers such as the
Company are beginning to capitalize on the demand for less expensive
international transmission facilities by taking advantage of increasing traffic
volumes to obtain volume discounts on international routes (resale traffic)
and/or by potentially investing in facilities when volume on particular routes
justify such investments.
ACCESS TO CARRIER SERVICES
International switched long distance services are provided through switching
and transmission facilities that automatically route calls to circuits based
upon a predetermined set of routing criteria. In the U.S., an international long
distance call typically originates on a LEC's network and is switched to a
caller's domestic long distance carrier. The domestic long distance provider
then carries the call to its own or another carrier's international gateway
switch. From there it is carried to a corresponding gateway switch operated in
the country of destination by the ITO of that country and then is routed to the
party being called though that country's domestic telephone network.
International long distance providers can generally be categorized by the
extent, if any, of their ownership and use of their own switches and
transmission facilities. The largest U.S. carriers, AT&T, Sprint, and MCI
WorldCom, primarily utilize owned transmission facilities and generally use
other long distance providers to carry their overflow traffic. Only the largest
U.S. carriers have operating agreements and own transmission facilities that
carry traffic to almost any country. A significantly larger group of
international long distance providers own and operate their own switches but
either rely solely on resale agreements with other long distance carriers to
terminate their traffic or use a combination of resale agreements and leased or
owned facilities in order to terminate their traffic.
SWITCHED RESALE ARRANGEMENTS. A switched resale arrangement typically
involves the wholesale purchase of termination services by one long distance
provider from another on a variable, per minute basis. Such resale, which
was first permitted with the deregulation of the U.S. market, enabled
alternative international providers to rely at least in part on transmission
services acquired on a wholesale basis from other long distance providers. A
single international call may pass through the facilities of multiple long
distance resellers before it reaches the foreign facilities-based carrier
that ultimately terminates the call. Resale arrangements set per minute
prices for different routes, which may be guaranteed for a set time period
or subject to fluctuation following notice to the user.
TRANSIT ARRANGEMENTS. In addition to utilizing an operating agreement to
terminate traffic delivered from one country directly to another, an
international long distance provider may enter into transit arrangements
pursuant to which a long distance provider in an intermediate country
carries the traffic to the country of destination.
ALTERNATIVE TRANSIT/TERMINATION ARRANGEMENTS. As the international long
distance market began to deregulate, long distance providers developed
alternative transit/termination arrangements in an effort to decrease their
costs of terminating international traffic. Some of the more significant of
these arrangements include refiling, ISR and ownership of switching
facilities in foreign countries. Refiling
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of traffic, which takes advantage of disparities in settlement rates between
different countries, allows traffic to a destination country to be treated
as if it originated in another country having lower settlement rates than
the destination country, thereby resulting in a lower overall termination
costs. 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 identity of the originating carrier.
ISR allows a long distance provider to bypass completely the accounting
rates system by connecting an international leased private line to the PSTN
of a foreign country or directly to premises of a customer or foreign
partner. Applicable regulatory authorities currently only sanction ISR on a
limited number of routes, but it is increasing in use and is expected to
expand significantly as deregulation continues. Deregulation also has made
it possible for U.S. based long distance providers to establish their own
switching facilities in certain foreign countries, enabling them to directly
terminate traffic.
OPERATING AGREEMENTS. Under traditional operating agreements,
international long distance traffic is exchanged under bilateral agreements
between international long distance providers that have rights in facilities
in different countries. Operating agreements provide for the termination of
traffic in, and return traffic from, the international long distance
providers' respective countries at a negotiated "accounting rate." Under a
traditional operating agreement, the international long distance provider
that originates more traffic compensates the long distance provider in the
other country by paying an amount determined by multiplying the net traffic
imbalance by the latter's share of the accounting rate.
By negotiating resale agreements with carriers who have entered into
operating agreements, the Company can take advantage of such carrier's
economic incentive to increase outgoing traffic to a particular country. The
resold call volume increases the market share for that carrier to a
particular country, thereby increasing such carrier's proportionate return
traffic from the correspondent under the accounting rate process.
Under a typical operating agreement each carrier has a right in its
portion of the transmission facilities between two countries. A carrier
acquires ownership rights in a digital fiber-optic cable by purchasing
direct ownership in a particular cable (usually prior to the time the cable
is placed in service), by acquiring an "Indefeasible Right of Use" ("IRU")
in a previously installed cable, or by leasing or obtaining capacity from
another long distance provider that either has direct ownership or IRU
rights in the cable. If 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 or resale
arrangements with other long distance providers. However, leased capacity
and acquisition of IRU rights require a company to make a substantial
initial investment of its capital based on the amount of the capacity being
acquired.
In deregulated countries such as the United States and most EU member
states, carriers may establish switching facilities, own or lease fiber-optic
cable, enter into operating agreements with foreign carriers and, accordingly,
provide direct access or call-through service. In markets that have not
deregulated or are slow to implement deregulation, such as most emerging markets
countries, international long distance carriers have used advances in technology
to develop innovative alternative access methods, such as call reorigination. As
countries deregulate, the demand for alternative access methods typically
decreases as carriers are permitted to offer a wider range of services.
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COMPETITION
The international telecommunications industry is highly competitive. The
Company's success depends upon its ability to compete with a variety of other
telecommunications providers in each of its markets, including the ITOs in each
country in which the Company operates and global alliances among some of the
world's largest telecommunications carriers. Other potential competitors include
cable television companies, wireless telephone companies, electric and other
utilities with rights of way, railways, microwave carriers and large end users,
which have private networks. The intensity of such competition has recently
increased and the Company believes that such competition will continue to
intensify as the number of new market entrants increases. Many of the Company's
current or potential competitors have substantially greater financial, marketing
and other resources than the Company.
Competition for customers in the telecommunications industry is primarily
based on price and, to a lesser extent, on the type and quality of services
offered. The Company prices its services primarily by offering discounts to the
prices charged by the local ITOs. The Company has no control over the prices set
by the local ITOs or by its competitors, and some of the Company's competitors
may be able to use their financial resources and/or market position to cause
severe price competition in the countries in which the Company operates.
Although the Company does not believe that there is an economic incentive for
its competitors to pursue such a pricing strategy or that its competitors are
likely to engage in such a course of action, there can be no assurance that
severe price competition will not occur. Additionally, intensified competition
in certain of the Company's markets will force the Company to continue to reduce
its prices. For example, the Company on a number of occasions reduced certain
rates which it charges to non-wholesale customers in response to pricing
reductions enacted by certain ITOs. Such price reductions may reduce the
Company's revenue and margins. The Company has experienced, and expects to
continue to experience, declining revenue per billable minute in a number of its
markets, in part as a result of increasing worldwide competition within the
telecommunications industry.
The Company believes that the ITOs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. The Company believes that, at least in the short-term, the ITOs will not
concentrate on marketing their services to the Company's small-and medium-sized
business customer base. The Company could, however, be denied regulatory
approval in certain jurisdictions in which its services would otherwise be
permitted, thereby requiring the Company to seek judicial or other legal
enforcement of its right to provide services.
In response to deregulation, additional competitors of various sizes are
beginning to emerge, particularly in the European Union. The Company's services
are currently marketed to small-and medium-sized businesses and thus the Company
generally does not directly compete with mega-carrier alliances, which generally
target larger multinational corporate customers. In addition, many smaller
carriers have emerged, most of which specialize in offering intercontinental
telephone services utilizing dial up access methods. The Company believes that
competition will continue to intensify as the number of new service providers
increases due to the overall growth in the industry and the global trend toward
deregulation. In February 1997, the WTO announced that 69 countries, including
the United States, South Africa and all of the EU member states, entered into
the WTO Agreement, which is expected to result in greater competition from new
market entrants and existing telecommunications service providers in such
markets. See "Business--Government Regulation."
The Company's principal competitors are the local ITOs and a number of other
alternative reorigination or direct access providers such as IDT, Viatel, Access
Authority, Justice, Telegroup, USA Global Link, USFI, Inc., Kallback and RSL
Communications.
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BUSINESS
Ursus is an international telecommunications company that exploits favorable
market niches by providing competitive and technologically advanced
telecommunications services. The Company focuses on small-and medium-sized
businesses located in emerging or deregulating markets, including South Africa,
Latin America, the Middle East (primarily Lebanon and Egypt), Russia and France.
The Company serves these markets through a network of independent exclusive
agents. The Company believes that it derives a significant competitive advantage
from this exclusive agent network. Each agent provides marketing, customer
support, billing and collections, in local language and time, utilizing a
proprietary turn-key agency support system developed and provided by the
Company. Each agent is supplied near real time data for customer management,
usage analysis, and billing from the Company's local and wide area network.
Through its agent network, the Company develops and maintains close
relationships with vendors of telephone systems such as Siemens, Plessey and
Alcatel in key markets in order to promote the Ursus line of telecommunications
services, allowing the Company to offer competitively priced and value added
services that compare favorably to the pricing and service offerings of the
ITOs.
Ursus has traditionally entered a particular market using call
reorigination, a system that provides the Company's overseas customers the
opportunity to access a U.S.-based switching center by means of a manual or
transparent automated dialing procedure, or other methods that provide a U.S.
dial tone to its foreign customers. Call reorigination provides a customer with
the convenience and rate economies provided by a U.S. dial tone, as opposed to
locally imposed international rates, which may be substantially higher. The
Company derives approximately 76% of its revenues from call reorigination. In
order to remain price competitive and to mitigate the high proportion of
variable costs per minute associated with call reorigination, the Company plans
to expand its direct access services by locating switching platforms at network
centers of major telecommunications providers, such as MCI WorldCom, Cable and
Wireless and France Telecom, and by deploying smaller network access nodes in
less populated service areas. This network topology, which the Company will
first use in France, provides subscribers with direct access service for voice
and fax. Ultimately, where regulatory conditions are favorable and calling
volumes are adequate to cover the associated fixed costs, the Company intends to
migrate some of its customers from call reorigination to direct access service.
Ursus plans to expand by increasing sales to existing customers; by
expanding the business generated by its existing agents; by selling wholesale
services to other carriers; and through selected acquisitions. Except as
disclosed herein, Ursus is not currently engaged in any negotiations to acquire
any business. See "--Purchase of Equity Interest in South African Agent" and
"--Formation of French Subsidiary." The Company believes that its proprietary
enterprise software system provides an efficient infrastructure for back room
processing, thereby giving it a strategic advantage over its competitors. The
Company's computerized back office systems handle traditionally labor intensive
processing tasks such as call rating, customer registration, billing and network
management with a high degree of efficiency and short turn-around time.
Management believes that these efficiencies would facilitate the rapid and
economical consolidation of acquired competitors.
The Company operates the Network from its technical facilities in Sunrise,
Florida, using a hybrid network of Internet, Intranet and circuit based
facilities, and plans to use a portion of the Offering proceeds to expand its
primary digital switching platform and secondary network access nodes, thereby
expanding its services in a reliable, flexible and cost effective manner. The
Company also plans to exploit its market penetration and technological
sophistication through the application of IP telephony technology, particularly
for fax transmissions. Faxing represents a large portion of the overall
international telecommunications business, and IP faxing offers significant cost
savings and favorable regulatory treatment. IP telephony technology creates the
opportunity to bypass the switched telephone network by using cost-effective
packet switched networks such as private Intranets and/or the public Internet
for the delivery of fax and voice communications. To exploit these opportunities
and to further reduce its costs, the Company plans to use a portion of the
Offering proceeds to establish a hybrid network for IP fax and voice
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services. The Company believes that this application could increase the gross
margins of its existing and future retail business and allow it to accelerate
its growth strategy.
The Company expects that call reorigination will continue to serve as a low
cost and profitable method of opening new markets and expects to continue this
method of business development in certain regulated markets in Africa, the
Middle East, Europe and Asia. Reoriginating a U.S. dialtone requires little
investment in equipment and limited capital deployment in a foreign territory,
thus allowing the Company to develop a customer base by effectively exploiting
the difference between the local IDD rate and the generally more favorable rates
the Company enjoys in the U.S. The Company has successfully used this strategy
to develop foreign markets and has thereby created a revenue stream with little
more than marketing and incremental call costs. In addition, using IP telephony
technology, concurrently with call reorigination, could significantly improve
the profitability of this business segment, without requiring the substantial
investments in switches of a direct access network. Accordingly, the Company's
strategy is to deploy IP telephony technology where feasible in order to create
a hybrid network capable of carrying significant amounts of customer traffic on
a low cost platform with a modest initial capital investment. This strategy
mitigates the risk that the Company will not attain, in some of its markets, the
critical mass of business required to amortize the fixed costs of a direct
access network and affords the Company the opportunity to develop a market with
a relatively small financial risk.
In summary, the Company intends to become a significant provider of
international telecommunications services within the emerging and deregulating
markets. The Company intends to maximize its profit potential by leveraging its
existing infrastructure, market penetration, expanding customer base and growing
U.S. wholesale business. By using its independent agent network, efficient back
office systems, and favorable vendor relationships with some of the major U.S.
telecommunications carriers, the Company believes it can gain strategic
advantages while capitalizing on the opportunities presented by deregulation and
technological advances in the global telecommunications industry.
Ursus provides an array of basic and value added services to its customers,
which include:
- long distance international telephone services
- direct dial access for corporate customers
- dedicated access for high volume users
- calling cards
- abbreviated dialing
- international fax store and forward
- switched Internet services
- itemized and multicurrency billing
- follow me calling
- enhanced call management and reporting services
The Company's strategy of profitable growth has increased revenues from
$13.2 million to $20.8 million in the fiscal years ended March 31, 1996 and
March 31, 1997, respectively; and from $15.0 million to $21.0 million in the
nine months ended December 31, 1996 and December 31, 1997, respectively. The
Company's pretax profits have grown from $1.3 million in the fiscal year ended
March 31, 1996 to $2.0 million in the fiscal year ended March 31, 1997, while
remaining relatively flat at $1.4 million for the nine months ended December 31,
1997 compared to the nine months ended December 31, 1996. For the nine months
ended December 31, 1997, approximately 45% of revenues were generated in Africa
and the Middle East, 24% in Latin America, 14% in Europe and Russia and the
remainder derived from the rest of the world and U.S. wholesale reselling
activities.
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THE COMPANY'S SERVICES
The Company's principal services include:
- Ursus ComNet - enables virtual private network calling to members of a
closed user group subject only to regulatory limitations.
- Ursus ComPlus Gold - provides dedicated access via a leased line from the
customer to the Ursus Telecom Network, permitting calling without dialing
access or location codes.
- Ursus ComPlus - provides a paid (local) access or toll-free number
programmed to dial an existing phone number or system, generally in
another country, without the need for special circuits or modifications.
This service also provides "anywhere to anywhere" international call
reorigination access through manual, automatic, X.25 or data network call
reorigination. These services are also offered with ITFS access, subject
to pricing considerations.
- Ursus FaxNet - this service allows subscribers to send faxes to a local
fax server which then uses the Internet and other proprietary data
networks to route the fax to the most economical corresponding fax server
for delivery. This technology promises to become a significant part of the
overall Ursus Network and will be deployed in strategic cities throughout
selected markets when trials are completed in the first quarter of the
fiscal year ended March 31, 1999. The Company is currently deploying a
network of Internet Fax Servers in several countries including Lebanon,
Ecuador, Argentina and South Africa. Further deployments are expected by
mid-to late fiscal year 1998 in certain other countries in Latin America,
Africa, the Middle East and Europe, and the Company plans to expand its
network of Internet-based telephony to more than 20 locations by March 31,
1999.
- Ursus ComPlus Travel - provides calling card access from over 56 countries
utilizing the Company's ITFS numbers. In addition, the Company utilizes
the USA DIRECT Home Country Direct numbers of AT&T from over 136 countries
to provide a premium calling card service. By arrangement with AT&T, AT&T
connects its USA DIRECT numbers via a code to the Ursus switch in Sunrise,
Florida where the customer may dial over the Ursus Network while
traveling.
THE NETWORK
The Network uses a high capacity, programmable switching platform designed
to deploy network-based intelligent services quickly and cost effectively. The
switches are modular and scaleable and incorporate advanced technologies such as
hierarchical call control and network management software. This type of switches
can also provide a bridge between various protocols and standards. As the
Network continues to evolve, the installed base of switches could be upgraded
easily to create a cost-effective, scaleable switching point in a software
intelligence-based network. The Network's "intelligent switches" incorporate
proprietary software to achieve least cost routing ("LCR"), the process by which
the Company optimizes the routing of calls over the Network to every directly
dialable country in the world. LCR allows calls that are not routed over the
Network to be routed directly from the Company's switch through the
infrastructure of contracting carriers to their destinations at the lowest
available rates. These switching capabilities also enable the Company to
efficiently perform billing functions and account activation and to provide
value-added services. The Company relies upon Symmetrical Optical Network
("SONET") fiber optic facilities to multiple carriers to provide redundancy in
the event of technical difficulties in the Network. The Company maintains
redundant switching facilities in Sunrise, Florida to provide protection for its
switching operations. The Company's strategy is to monitor its anticipated
traffic volume on a regular basis and to increase carrier trunking capacity
before reaching the capacity limitations of such circuits.
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The Company's customers access its services either through "dial up access"
or "direct access." Dial up access is obtained via: (i) paid access, which
requires the customer to pay the local PTO for the cost of a local call, where
appropriate, in order to access the Company's services (at December 31, 1997,
approximately 8.6% of the Company's revenues); (ii) call reorigination, which
enables the customer to receive a return call providing a dial tone originated
from the Company's Sunrise, Florida switching center by ITFS (at December, 1997,
approximately 76% of the Company's revenues); (iii) Home Country Direct, which
accesses the Sunrise, Florida switching center by direct dial (at December 31,
1997, approximately 5.6% of the Company's revenues); or (iv) Dedicated Access
(Direct Access) from wholesale carrier customers in North America (at December
31, 1997, approximately 9.6% of the Company's revenues). Direct access allows
accessing a network by using a permanent point-to-point circuit typically leased
from a facilities-based carrier. The advantages of direct access include
simplified premises-to-anywhere calling, faster call set-up times and
potentially lower access and transmission costs, provided there is an adequate
level of traffic over the circuit to generate economies of scale. Paid access
accounted for approximately 61% of the Company's French and Russian revenue for
the nine-month period ended December 31, 1997 and approximately 8.6% of the
Company's overall revenues for this period. Call reorigination accounted for the
remaining 39% of revenues in France and Russia and 76% of overall Company
revenues for this period.
To reduce the variable telecommunications costs and improve usage, the
Company is, where regulations permit, in the process of changing its customer
base from call reorigination and ITFS access to paid access, and, ultimately to
direct access. Until regulations permit, all customers outside of the Europe/
Russia area are expected to continue to access the Company's services through
call reorigination or ITFS numbers. The exception to this rule is the Bahamas,
where the Company's subscriber base utilizes a Home Country Direct number
provided by Batelco, the local Bahamian PTO, under a bilateral correspondent
agreement. See "Risk Factors--Government Regulation."
Currently, the Company's Network is primarily used to originate and
terminate international long distance traffic for its own subscribed customer
base. The Company intends to further leverage its Network and foreign presence
to take advantage of anticipated settlement agreement obsolescence by offering
other carriers and ITOs an alternative to the traditional settlement process for
origination and termination of long distance traffic. This process is known as
"Refiling." The FCC issued directives in December 1996 encouraging circumvention
of settlements in the historic sense where possible. This change is likely to
create new opportunities with ITO partners in emerging markets. See
"--Government Regulation."
The economic benefits to the Company of owning and operating its own direct
access Network arise from reduced variable transmission costs. Calls not routed
through the Network generate significantly higher variable costs because they
are connected using relatively expensive ITFS numbers or call reorigination. In
contrast, because the Network has significant fixed costs associated with its
operations, consisting primarily of leased line rental charges, local
connectivity and facility/network management costs, calls routed through the
Network have lower variable costs than off-network traffic. However, for the
foreseeable future, Ursus will, for economic reasons, piggyback on the networks
of major global operators. Consequently, it will only install its own fixed
facilities when existing traffic on a carrier route is adequate to offset the
costs of installation.
The Company plans, however, to deploy a network of IP telephony fax servers
in selected countries by the end of 1998. To avoid the high fixed costs of a
switched telephone network the Company plans to develop a hybrid network of IP
telephony technology for the delivery of fax and eventually voice transmissions.
TECHNOLOGY
Deregulation of telecommunications markets throughout the world has
coincided with substantial technological innovation. The proliferation of
digital fiber-optic cable in and between major markets has
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significantly increased transmission capacity, speed and flexibility.
Improvements in computer software and processing technology have enabled
telecommunications providers to offer a broad range of enhanced voice and data
services. Advances in technology also have created multiple ways for
telecommunications carriers to provide customer access to their networks and
services. These include customer-paid local access, international and national
toll-free access, direct digital access through a dedicated line, equal access
through automated routing from the PSTN (as defined), IP telephony and call
reorigination. The type of access offered depends on the proximity of switching
facilities to the customer, customer needs, and the regulatory environment.
Overall, these changes have resulted in a trend towards bypassing traditional
international long distance operating agreements as international long distance
companies seek to operate more efficiently. As countries deregulate, the demand
for alternative access methods typically decreases because carriers are
permitted to offer a wider range of facilities-based services on a transparent
basis. The most common form of traditional alternative international access,
call reorigination, avoids high international rates offered by the ITO in a
particular regulated country by providing a dial tone from a deregulated
country, typically the United States. Technical innovations, ranging from
inexpensive dialers to sophisticated in-country switching platforms, have
enabled telecommunications carriers such as the Company to offer a "transparent"
form of call reorigination, thereby avoiding complicated end-customer usage
procedures. To place a call using traditional call reorigination, a user dials a
unique phone number to an international carrier's switching center and then
hangs up after it rings or alternatively, if using a transparent processing
method, a dialer automatically performs these dialing functions. The user then
receives an automated call reorigination providing a dial tone from the U.S.,
which enables the user to complete the call. For the nine months ended December
31, 1997, the Company derived approximately 76% of its revenues and operating
income from international call reorigination services.
The Company's research and development efforts have been nominal and have
focused almost exclusively upon refining and upgrading its back office computer
systems. The Company has neither the resources nor the expertise to derive any
significant advantages from research or development into telecommunications
equipment and prefers to use the equipment developed by others. By devoting its
resources to its computer systems and back office procedures, the Company
believes that it has developed an efficient and flexible operating system,
minimized its payroll and maximized the efficiency of its back office
operations. See "--Management Information Systems."
MANAGEMENT INFORMATION SYSTEMS
The Company has made significant investments developing and implementing
sophisticated information systems which enable the Company to: (i) monitor and
respond to customer needs by developing new and customized services; (ii) manage
LCR; (iii) provide customized billing information; (iv) provide high quality
customer service; (v) detect and minimize fraud; (vi) verify payables to
suppliers; and (vii) rapidly integrate new customers. The Company believes that
its network intelligence, billing and financial reporting systems enhances its
ability to competitively meet the increasingly complex and demanding
requirements of the international long distance markets. The Company
continuously provides enhancements and ongoing development to maintain its state
of the art of its switching, billing and information service platforms.
The Company currently has a turnaround time of approximately 24 hours for
new account entry. The Company's billing system provides multi-currency billing,
itemized call detail, city level detail for destination reporting and electronic
output for select accounts. Customers are provided with several payment options,
including automated credit card processing and automated direct debiting.
The Company has developed proprietary software to provide telecommunications
services and render customer support. In contrast to most traditional
telecommunications companies, the software used to support the Company's
enterprise resides outside of the switches and "canned" closed systems and,
therefore, does not currently rely on third party manufacturers for upgrades.
The Company believes its software configuration facilitates the rapid
development and deployment of new services and provides the
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Company with a competitive advantage. The Company's Sunrise, Florida central
switch has a call detail recording function which enables the Company to: (i)
achieve accurate and rapid collection of call records; (ii) detect fraud and
unauthorized usage; and (iii) permit rapid call detail record analysis and
rating.
The Company also uses its proprietary software in analyzing traffic patterns
and determining network usage, busy hour percentage, originating traffic by
switching center, terminating traffic by supplier and originating traffic by
customer. This data is utilized to optimize LCR, which may result in call
traffic being transmitted over the Company's transmission facilities, other
carriers' transmission facilities or a combination of such facilities. If
traffic cannot be handled over the least cost route due to overflow, the LCR
system is designed to transmit the traffic over the next available least cost
route.
The Company develops its software in-house utilizing its own staff of
programmers.
INTERNET PROTOCOL (IP) TELEPHONY
Virtually all of today's voice and fax traffic is carried over the Public
Switched Telephone Network ("PSTN"). Phone switches either owned by the ITOs or
other enterprise common carriers and resellers allow ordinary telephones and fax
machines to reach one another anywhere in the world. The advent of IP telephony
has created the opportunity to bypass today's switched telephone network and use
cost-effective packet switched networks (Intranet) and/or the public Internet
for the delivery of voice and fax communications. Prior to 1995, the market for
IP telephony products was virtually nonexistent. It was commonly believed that
quality voice communications across the Internet/Intranet was impossible. This
situation dramatically changed with the introduction of a new class of products
which significantly enhanced voice transmissions over the Internet/Intranet. As
a class of products, this is referred to as IP telephony. As companies realized
that quality IP telephony communication was possible, they quickly joined the
race to capitalize on the opportunity. Desktop software offering computer-to
computer communication flourished due in part to the explosive growth of the
Internet. The current generation of IP telephony applications allows users to
make calls using a standard telephone and a centralized Internet/Intranet
substituting for the PSTN. This centralized IP connection is accomplished via IP
telephony gateway servers. The principle behind such a system is similar to IP
telephony desktop applications, but rather than using the microphone and
speakers connected to multimedia PCs, users speak into a standard telephone
connected to a PBX (as defined). To place a call, the caller would dial the
number of the party they are calling, just like making a call-through the PSTN.
The PBX would then route the call-through the IP telephony gateway via a
programmed trunk interface and the gateway contacts another gateway at the
called site. Several companies have developed and are currently using this
technology. Furthermore, developments in hardware, software and networks are
expected to continue to improve the quality and viability of IP telephony. In
time, packet-switched networks may become less expensive to operate than
circuit-switched networks, primarily because carriers can compress voice traffic
and thereby can place more calls on a single line.
AGREEMENTS WITH INDEPENDENT AGENTS
From its inception in 1993 to the present, the Company's sales and marketing
efforts have been conducted through exclusive independent agents in each of its
markets. Each of these independent agents operate in accordance with a model of
practices and procedures developed by the Company, and settle all customer
invoices (net of the agency's commission share) directly with the Company within
a prescribed period, generally less than 40 days. Upon consummation of the
Offering, the Company may reduce its reliance upon its existing independent
agents by expanding its business through strategic acquisitions or may make
equity investments in certain independent agents. In addition, the Company may
in the future start to enroll non-exclusive independent agents to cover new
territories.
Each prospective agent is required to submit a business plan and demonstrate
the financial resources and commitment required to carry out its marketing and
customer service plan approved by the Company prior to its appointment. Each
agent is licensed by and required to do business in the name of the
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Company and execute subscriber agreements with end users on behalf of and for
the benefit of the Company.
The Company knows of no competitor that operates in this manner and
attributes this program with its successful market penetration, high degree of
customer satisfaction and rapid collections cycle. Most of the costs of
marketing, sales and customer service are paid from the commissions retained by
each of the agents.
The Company's agreements with its independent exclusive agents typically
provide for a five-year term with an optional renewal for two additional terms
of three years and a two-year non-compete clause effective upon termination of
the agreement. Furthermore, the agreements require the agents to offer the
Company's services at rates prescribed by the Company and to abide by the
Company's marketing and sales policies and rules. Agent compensation is paid
directly by the Company and is based exclusively upon payment for the Company's
services by customer funds the agents obtain for the Company. The commission
paid to agents ranges between 15 to 19% of revenues received by the Company and
varies depending on individual contracts, the exclusivity of the agency and the
type of service sold. Commissions are paid each month based on payments received
during the prior month from receivables collected by the agent. For the nine
months ended December 31, 1997, approximately 64% of the Company's revenues were
attributable to the most significant four independent agents. Agents settle
their accounts with the Company in U.S. Dollars and therefore bear the risk of
fluctuations in the exchange rates between the local currency and the U.S.
Dollar. Agents are held accountable for customer collections and are responsible
for bad debt attributable to customers they enroll. The Company may record
additional bad debt expense, however, based on increases in wholesale business,
consummation of acquisitions and equity investments in the agents.
For the nine months ended December 31, 1997, the Company derived
approximately 87% of its revenues from customers enrolled by agents who are
contractually prohibited from offering competitive telecommunications services
to their customers during the term of their contract.
In mid-1997 the Company initiated discussions with certain of its exclusive
agents with regard to the acquisition of an equity interest in their agencies.
The Company believes that it would be beneficial to have an ownership interest
in its key marketing and customer service organizations while maintaining the
benefits derived from the local expertise of the exclusive agent, as well as the
productivity derived from local ownership and profit making. The Company
believes that this strategy will provide the Company with the benefits derived
from direct ownership of the local sales organization while retaining the
benefits of the existing entrepreneurial structure. Other than with respect to
pending agreements in France and South Africa, the Company has no agreement to
purchase an interest in any of its agents. See "--Purchase of Equity Interest in
South African Agent."
CUSTOMER BASE
The Company's target customers are small and medium-sized businesses with
significant international telephone usage (i.e., generally in excess of $500 in
international phone calls per month). The Company also provides its services to
a growing base of individual retail customers. The corporate market includes
manufacturers, distributors, trading companies, financial institutions, and
import-export companies, for which long distance telecommunications service
represents a significant business expense, and such customers are therefore
focused on value and quality. It is estimated that small and medium-sized
businesses account for the majority of all businesses, and the Company believes
that in most markets they account for a significant percentage of the
international long distance traffic originated in those markets. For example,
the EU estimates that in 1996 there were 15 million small and medium-sized
businesses in the EU and that these businesses accounted for more than one half
of all jobs in the EU in 1996, almost half of all business revenue and about $30
billion per year in total telecommunications revenue.
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The Company believes that small- and medium-sized businesses have generally
been underserved by the major global telecommunications carriers and the ITOs,
which have focused on offering their lowest rates and best services primarily to
higher volume multinational business customers. The Company offers these small-
and medium-sized companies significantly discounted international calling rates
compared to the standard rates charged by the major carriers and ITOs.
The Company also plans to offer international termination services to other
carriers, including resellers, on a wholesale basis, as a "carriers' carrier."
The Company's carrier customers as a group currently provide the Company with a
relatively stable customer base and thereby assist the Company in projecting
potential utilization of its network facilities. In addition, the potentially
significant levels of traffic volume that could be generated by such carrier
customers may enable the Company to obtain larger usage discounts based on
potential volume commitments. The Company believes that revenues from its
carrier customers will represent a growing portion of the Company's overall
revenues in the future.
The Company also targets residential customers with high international
calling patterns such as ethnic communities and plans to increase the marketing
of prepaid calling cards.
Currently, no end retail customer of the Company individually accounts for
more than 1% of the Company's revenue.
The largest wholesale customer accounted for approximately 9.6% of the
Company's revenue as of December 31, 1997.
PRINCIPAL MARKETS FOR THE COMPANY'S SERVICES
The worldwide international long distance public switched telecommunications
market generated an estimated $61.3 billion in revenue and 70 billion minutes in
traffic in 1996 with minutes of use projected to grow at a rate of 13% per annum
through the year 2000. The Company currently has approximately a 0.03% share of
this global market.
GEOGRAPHIC ORIGIN OF REVENUES
The geographic origin of the Company's revenues is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER
YEAR ENDED MARCH 31, 31,
------------------------------------------ ----------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
Africa..................... $ 369,087 $ 1,403,094 $ 3,899,701 $ 2,596,455 $ 6,057,730
Europe..................... 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America.............. 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East................ 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other...................... 803,375 1,397,802 1,363,852 966,441 1,395,126
United States.............. -- -- 315,407 -- 2,011,988
------------ ------------- ------------- ------------- -------------
$ 6,290,512 $ 13,228,074 $ 20,838,427 $ 14,987,729 $ 21,029,113
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
GEOGRAPHIC MARKETS
LATIN AMERICA. Historically, the Company derived significant portions of
its telecommunications revenue from Latin America, principally from Argentina
and Peru. Since most Latin American countries currently restrict competition to
a limited number of specific services, the Company has developed a two-stage
market penetration strategy to capitalize on current and future opportunities in
Latin America. The first step is to take advantage of current market conditions
and, within the parameters of the Company's product line, i.e., using the call
reorigination access method, to provide the fullest range of services
permissible under local regulations. During the fiscal year ended March 31,
1997, Argentina with sales of
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$3.7 million represented 51% of the Company's total Latin American business
followed by Peru with a 23% share. For the first nine months of fiscal year
ended March 31, 1998, Argentina represented approximately 49% of the Company's
total Latin American business with Peru representing approximately 23%. The
Company enjoys a top 10 market share among call reorigination companies
operating in Argentina and Peru.
MIDDLE EAST AND AFRICA. The Company is currently a significant operator in
certain emerging markets in the Middle East and Africa. The Company is a market
leader for alternative access call reorigination in both Lebanon and South
Africa. It is anticipated that African revenues will more than double over the
next twelve months, not including the high growth markets of Lebanon and Egypt
which together produce up to $20,000 of revenue per day. Lebanon grew from $1.4
million in sales in the fiscal year ended March 31, 1996 to $3.2 million in the
fiscal year ended March 31, 1997 and posted $3.1 million in sales for the nine
months ended December 31, 1997.
The South African territory grew from sales of $2.6 million for the nine
months ended December 31, 1996 to sales of $5.9 million for the nine months
ended December 31, 1997. The Company has expanded its customer base from
Johannesburg, South Africa, to Cape Town and Durban, and other South African
urban centers. This territory is currently generating between $30,000 and
$40,000 per day in revenues. The South African agent currently manufactures its
own proprietary network interface dialer in South Africa. In places such as
South Africa, the Company and its independent agents maintain close
relationships with vendors of internal phone equipment ("PBX") such as Siemens,
Plessey and Alcatel. These vendors are integrating and configuring their
customer's PBX equipment to utilize Ursus as a possible alternative
international telecommunications carrier, and the Company maintains a close
relationship with the vendors for both pre-sale and retrofit applications.
On August 12, 1997, the Company entered into an agreement with its
independent agent in South Africa, by which the Company will acquire a 8.59%
equity interest in the agent for $377,141.
EU AND RUSSIA. The EU and Russian markets will be a major focus as the
Company pursues its strategy of locating switches at the network center of major
switched-based suppliers in Europe.
FRANCE. The Company's current customers in France (centered in the Paris
region) include small and medium-sized businesses and retail individuals. Since
installing the Paris switch in March 1998, the Company began to migrate its
customers in France from the call reorigination access method currrently used to
international long distance services utilizing direct access over leased lines
and restricted dial-in for customers in closed-user groups. The Company will
provide direct access service via a leased line connection between the
customer's phone system and the Company's switch in Paris. Following
deregulation, the Company may offer long distance services, which are presently
restricted to closed user groups, with prefix dialing and value-added services.
The services currently provided by the Company in France do not require a
license. In accordance with the telecommunications laws passed in France in July
1996, the process of liberalizing the telecommunications market is regulated by
a new government authority, and the telecommunications market in France was
liberalized on January 1, 1998 along with the markets of most other EU member
states. In accordance with the standard terms and conditions and price lists for
interconnection with France Telecom, duly approved by the French
Telecommunications Authority on April 9, 1997, new operators can interconnect
with France Telecom's PSTN starting on January 1, 1998.
Recently, the Company entered into a joint venture with Central Call and
Mondial Telecom, its French agents, pursuant to which Ursus Telecom France was
organized. The Company owns a majority interest in Ursus Telecom France, and the
remaining shares being held equally by Central Call and Mondial Telecom. Central
Call and Mondial Telecom have the right to require the Company to purchase their
interests in Ursus Telecom France under certain conditions. The primary
objective of the joint venture is to provide switch-based direct access services
in France, primarily from the Paris-Metropolitan area.
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RUSSIA. The Company has been active in the Russian market (centered in the
Moscow region) for over 24 months, with direct dial up access having replaced
call reorigination for approximately 18 months. Traffic has grown to
approximately $7,000 to $9,000 per business day with the majority of calling
derived from the direct dial up access lines from Moscow. Overall, Russia
generated sales for the Company of approximately $2.5 million in the fiscal year
ended March 31, 1997 from approximately $700,000 in the fiscal year ended March
31, 1996 and posted sales of approximately $1.8 million for the nine months
ended December 31, 1997.
The Company hopes to expand its Russian business by capitalizing upon the
technologically advanced services it offers which compare favorably to the
relatively undeveloped services offered by the Russian ITO. For the nine months
ended December 31, 1997, approximately 14.3% of the Company's telecommunication
revenue originated from Europe, with approximately 60% of that revenue
attributable to calls originating via call through access from Russia.
Minutes of total outgoing international traffic in Russia have dramatically
increased from 287 million minutes in 1995 to 851 million minutes in 1996.
Historically, about 50% of all international traffic and about 40% of long
distance traffic within the Russian Federation originated in Moscow and some 30%
of international traffic and about 25% of long distance traffic originated in
St. Petersburg. Penetration levels for aggregate telecommunications services in
these two cities equal about 46% for Moscow and about 36% for St. Petersburg.
Other Russian urban areas with low penetration are less likely in the near
future to generate any large international traffic, because there is a much
lower business demand and a smaller number of wealthy individuals supporting a
market. The overall growth in long-distance and international traffic over the
past several years in the Russian Federation did not, however, significantly
change the network usage level, which means that Russia still generates one of
the lowest levels of per-line international and long distance traffic in the
world. This is in large part due to the fact that international and long
distance tariffs in Russia have been increasing very rapidly in real terms.
Despite the recent changes in the Russian telecommunications industry, and
recent significant investments in local telecommunications infrastructure, the
level of telecommunications service generally available from most public
operators in Moscow remains below that available in cities of Western Europe and
the United States. Outside Moscow (and, to a lesser extent St. Petersburg), most
standard Russian telecommunications equipment is obsolete. For example, many of
the telephone exchanges are electromechanical and most telephones still use
pulse dialing.
The telecommunications market in Russia currently includes a number of
operators that compete in different offering segments--local, inner-city,
international data and cellular services. Growth in the Russian
telecommunications industry has been principally driven by businesses in Moscow
requiring international and domestic long distance voice and data services and
by consumers using mobile telephony. This growth has been most significant as
multinational corporations have established a presence in Moscow and Russian
businesses have begun to expand. The service sector, which includes operations
in distribution, financial services and professional services and tends to be
the most telecommunications intensive sector of the economy, is growing rapidly
particularly in Moscow. Since moving to a more market-oriented economy, the
economic conditions in the outlying regions in Russia have also generally
improved. The telecommunications industry in the outlying regions has also
experienced recent growth, principally as a result of growth in the industrial
sector as well as the establishment of satellite offices in the regions by
multinational corporations and growing Russian businesses.
EXPANSION PLANS
Pursuant to its formation of a joint venture with its French agents, the
Company recently installed a switch in Paris with inter-connectivity to some of
the major carriers operating in the Paris marketplace. During the next twelve
months, the Company plans to install additional switches in Europe, upgrade its
switch in Sunrise, Florida and open POPs (as defined) in up to 3-5 cities in
Western Europe in order to
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expand its accessibility outside of the switch locations. Expanding the Network
in Europe to include additional major European business centers should
ultimately reduce transmission costs and increase the addressable market of the
European portion of the Network.
Expansion plans in Russia include the planned installation of a switch to
service larger corporate customers that require direct connections to the
Network via digital dedicated subscriber facilities. The switch will be
integrated with the Company's existing facilities that currently back-haul all
traffic originated on direct dial up access from Moscow to Sunrise, Florida.
The Company expects to use a significant portion of the Offering proceeds to
expand and proliferate its Network and its services on a more rapid basis by
deploying additional switches and POPs and installing fixed facilities to
interconnect POPs and nodes, in addition to deploying its IP telephony based fax
and voice services.
The Company intends to enter additional markets and expand its operations
through acquisitions, joint ventures, strategic alliances and the establishment
of new operations. The Company will consider acquisitions of certain competitors
which have a high quality customer base and which would, upon consolidation with
the Company's operations, become profitable. In addition the Company may acquire
equity interests in its existing agents and may pursue partnership arrangements
in emerging and maturing markets with existing sales organizations and other
non-defined telecommunications entities.
PURCHASE OF EQUITY INTEREST IN SOUTH AFRICAN AGENT
On August 12, 1997, the Company entered into an agreement with its largest
independent agent, located in South Africa, to acquire an equity interest in the
agent. The agreement provides for the Company to make deposits on the purchase
price in an amount equal to 9% of the revenues that this agent generates for the
Company for the period from August 1, 1997 through January 31, 1998. The
percentage ownership in the agent that the Company will acquire will be based on
a formula that values the agent at approximately six times its average monthly
revenues for the months of October, November and December 1997. At December 31,
1997, deposits of $321,059 have been made under this agreement and are included
in other assets on the Company's balance sheet. Based on this valuation formula,
the agent has been valued at $4,390,130. Based on the revenues generated for the
Company by the independent agent for the period from August 1, 1997 through
January 31, 1998, the Company will purchase an equity interest of 8.59% in the
agent for $377,141. However, the South African agent retains an option for a
limited period of time to cancel the arrangement under certain circumstances
provided the Agent reimburses in full the prepaid deposits made to the Agent by
the Company.
FORMATION OF FRENCH SUBSIDIARY
On November 20, 1997, the Company entered into a letter of intent with
respect to a proposed joint venture with Central Call and Mondial Telecom, its
French agents. Pursuant to the letter of intent, as amended, the Company
organized Ursus Telecom France, a limited liability company, capitalized at
FF50,000 or approximately $8,300. The Company holds 50% plus two shares of the
Ursus Telecom France. The remaining shares are held equally by Central Call and
Mondial Telecom. The results of Ursus Telecom France will be consolidated with
those of the Company as a subsidiary.
The letter of intent calls for the Company to pay within six months after
the completion of its initial public offering, a cash sum that equals three and
one-half times the average monthly traffic revenues contributed to the venture
by Central Call and Mondial Telecom over the months of February, March and April
1998. This payment is considered an advance towards the share purchase program
as described below. The letter of intent requires that Ursus Telecom France
commence operations by January 31, 1998. Ursus Telecom France effectively
commenced operations on March 1, 1998. The letter of intent was amended on April
17, 1998 to reflect the effective commencement of operations, and to adjust the
valuation months to March, April and May, 1998.
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Central Call and Mondial Telecom have the right to require that the Company
purchase the shares held in the joint venture by Central Call and Mondial
Telecom in any one of the following three manners: (a) in three installments of
33.3% each on the first, second and third anniversary of this Offering, (b) in
two installments, the first of 66.66% on the second anniversary of this Offering
and the remaining 33.33% on the third anniversary or (c) in one installment on
the third anniversary of this Offering. A purchase of shares by the Company from
Central Call or Mondial Telecom, if any, will be accounted for as a purchase.
The valuation for these subsequent share purchases will depend on whether
the Company pays in cash or issues its stock as payment. The cash purchase price
would value the joint venture at 5.5 times average monthly revenues; and the
stock price would be based on an enterprise value of 8 times average monthly
revenues. These enterprise values would be multiplied by the percentage interest
being acquired to determine the purchase price. The Company reserves the option
to choose among one of the two available payment and valuation methods after
consultation with Central Call and Mondial Telecom.
As of March 26, 1998, the Company has contributed to Ursus Telecom France a
telecommunications switch at its cost of $112,128 and has made capital
contributions and cash advances of approximately $47,000.
GOVERNMENT REGULATION
OVERVIEW
The Company's provision of international and national long distance
telecommunications services is heavily regulated. Also, local laws and
regulations differ significantly among the jurisdictions in which the Company
operates, and, within such jurisdictions, the interpretation and enforcement of
such laws and regulations can be unpredictable. Many of the countries in which
the Company provides, or intends to provide, services prohibit, limit or
otherwise regulate the services which the Company can provide, or intends to
provide, and the transmission methods by which it can provide such services.
The Company provides a substantial portion of its customers with access to
its services through the use of call reorigination. Revenues attributable to
call reorigination represented 76% of the Company's revenues during the nine
months ended December 31, 1997 and are expected to continue to represent a
substantial but decreasing portion of the Company's revenues in the medium to
long-term. A substantial number of countries have prohibited certain forms of
call reorigination as a mechanism to access telecommunications services. This
has caused the Company to cease providing call reorigination services in the
Bahamas and may require it to do so in other jurisdictions in the future. As of
November 20, 1997, reports had been filed with the FCC and/or the ITU that the
laws of 79 countries prohibit call reorigination. While the Company provides
call reorigination services in some of those countries, the only country on such
list that accounts for a material share of the Company's total revenues is South
Africa which accounted for about approximately 28% of the Company's revenues for
the nine months ended December 31, 1997. To the extent that a country that has
expressly prohibited call reorigination using uncompleted call signaling is
unable to enforce its laws against call reorigination using uncompleted call
signaling, it can request that the FCC enforce such laws in the United States,
by e.g., requiring the Company to cease providing call reorigination services to
such country or, in extreme circumstances, by revoking the Company's
authorizations.
A SUMMARY DISCUSSION OF THE REGULATORY FRAMEWORKS IN CERTAIN GEOGRAPHIC
REGIONS IN WHICH THE COMPANY OPERATES OR HAS TARGETED FOR PENETRATION IS SET
FORTH BELOW. THIS DISCUSSION IS INTENDED TO PROVIDE A GENERAL OUTLINE OF THE
MORE RELEVANT REGULATIONS AND CURRENT REGULATORY POSTURE OF THE VARIOUS
JURISDICTIONS AND IS NOT INTENDED AS A COMPREHENSIVE DISCUSSION OF SUCH
REGULATIONS OR REGULATORY POSTURE.
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UNITED STATES
The Company's provision of international service to, from, and through the
United States is subject to regulation by the FCC. Section 214 of the
Communications Act requires a company to obtain authorization from, the FCC to
resell international telecommunications services of other US carriers or to own
or lease and operate international telecommunicating facilities. The FCC has
authorized the Company pursuant to the Section 214 to provide international
telecommunications services, to resell public switched international
telecommunications services of other U.S. carriers and to own or lease
international facilities. The Section 214 authorization requires, among other
things, that services be provided in a manner consistent with the laws of
countries in which the Company operates. As described above, the Company's
regulatory strategy could result in the Company's providing services that
ultimately may be considered to be provided in a manner that is inconsistent
with local law. If the FCC finds that the Company has violated the terms of its
Section 214 authorization, it could impose a variety of sanctions on the
Company, including fines, additional conditions on the Section 214
authorization, cease and desist or show cause orders, or, in extreme
circumstances, the revocation of the Section 214 authorization, the latter of
which is usually imposed only in the case of serious violations.
In particular, if it is demonstrated that the law of a foreign jurisdiction
expressly prohibits call reorigination, i.e. call re-origination, using
uncompleted call signaling, and that the foreign government attempted but failed
to enforce its laws against U.S. service providers, the FCC may require U.S.
carriers to cease providing call reorigination services using uncompleted call
signaling. To date, the FCC has only ordered carriers to cease providing call
reorigination using uncompleted call signaling only to customers in the
Philippines, although it is expected that the FCC will take this action with
respect to carriers providing call reorigination using uncompleted call
signaling to customers in Saudi Arabia. Prior to taking such action, the FCC
permits countries to submit information to the FCC regarding the legal status of
call reorigination services in their respective countries. According to FCC
records, 30 countries thus far have submitted such information to the FCC,
including the Bahamas, Egypt, Lebanon and South Africa. Submission of this
information does not imply that the FCC believes that the country's laws
expressly prohibit call reorigination using uncompleted call signaling.
The Company is required to file with the FCC a tariff containing the rates,
terms and conditions applicable to its international telecommunications
services. The Company is also required to file with the FCC any agreements with
customers containing rates, terms, and conditions for international
telecommunications services, if those rates, terms, or conditions are different
than those contained in the Company's tariff. If the Company charges rates other
than those set forth in, or otherwise violates, its tariff or a customer
agreement filed with the FCC, the FCC or a third party could bring an action
against the Company, which could result in a fine, a judgment or other penalties
against the Company.
EUROPE
In Europe, regulation of the telecommunications industry is governed at a
supra-national level by the EU, which is responsible for creating pan-European
policies and, through legislation, has developed a regulatory framework to
establish an open, competitive telecommunications market. In 1990, the EU issued
the Services Directive requiring each EU member state to abolish existing
monopolies in telecommunications services, with the exception of voice
telephony. The intended effect of the Services Directive was to permit the
competitive provision of all services other than voice telephony, including
value-added services and voice services to CUGs. However, local implementation
of the Services Directive through the adoption of national legislation has
resulted in differing interpretations of the definition of prohibited voice
telephony and permitted value-added and CUG services. Voice services accessed by
customers through leased lines are permissible in all EU member states. The
European Commission has generally taken a narrow view of the services classified
as voice telephony, declaring that voice services may not be reserved to the
ITOs if (i) dedicated customer access is used to provide the service, (ii) the
service confers
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new value-added benefits on users (such as alternative billing methods) or (iii)
calling is limited by a service provider to a group having legal, economic or
professional ties.
In March 1996, the EU adopted the Full Competition Directive containing two
key provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligation of EU member states to abolish the ITOs monopolies in
voice telephony by 1998 and to institute mechanisms to prevent the ITOs from
acting anti-competitively toward new market entrants. To date, Sweden, Finland,
Denmark, the Netherlands and the United Kingdom have liberalized
facilities-based services to all routes. Certain EU countries may delay the
abolition of the voice telephony monopoly based on exemptions established in the
Full Competition Directive. These countries include Spain (December 1998),
Portugal and Ireland (January 1, 2000) and Greece (2003).
FRANCE
The Company currently provides call reorigination services to customers in
France. The Company is permitted to provide call reorigination in France without
a license. Although it does not currently provide such services, under current
law, the Company may lease circuits and provide switched voice services to CUGs
in France without a license. The Company anticipates that it will migrate its
customers to forms of call-through other than call reorigination after March 1,
1998 and has recently entered into a joint venture agreement with Central Call
and Mondial Telecom to provide switch-based direct access services in France.
The Company anticipates providing a range of enhanced telecommunications
services and switched voice services to business users by routing traffic via
the international switched networks of competitors to the ITO.
A new telecommunications law, passed in 1996 to implement the Full
Compensation Directive in France, establishes a licensing regime and an
independent regulator and imposes various interconnection and other requirements
designed to facilitate competition. The Company intends to expand its services
to include, for example, direct access and facilities-based services in France.
If it decides to provide switched voice services to the public, including direct
access and/or call-through services, or to own facilities, the Company will have
to apply for a license from the Minister of Telecommunications.
GERMANY
The regulation of the telecommunications industry in Germany is governed by
the Telekommunikations-Gesetz, the Telecommunications Act of 1996 ("TKG"),
which, with respect to most of its provisions, became effective in August 1996.
Under the TKG, a license ("TKG License") is generally required by any person
that (i) operates transmission facilities for the provision of
telecommunications services to the public; or (ii) offers voice telephony
services to the public through telecommunications networks operated by such
provider. While TKG represents the final phase of the reform of the German
telecommunications industry, the law protected the monopoly rights of Deutsche
Telecom over the provision of the voice telephony until January 1, 1998. The
Company currently does not provide services to customers in Germany, but is
contemplating opportunities in entering this market, which, after the U.S.,
makes up for the largest single telecommunication market in the world.
LATIN AMERICA
The Company currently provides call reorigination to customers in certain
Latin American countries, including Argentina, Peru, Ecuador, Uruguay and
Colombia. The Company is subject to a different regulatory regime in each
country in Latin America in which it conducts business. Local regulations
determine whether the Company can obtain authorization to offer the transmission
of voice and voice band data directly or through call reorigination, or for the
provision of value-added services, such as
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voicemail and data transmission. Regulations governing the latter are generally
more permissible than those covering voice telephony.
Some countries in Latin America oppose the provision of call reorigination.
In Brazil, call reorigination is currently permissible. In Colombia, the
Ministry of Communications has stated that call reorigination access is
prohibited and has so notified the FCC. The Company does not believe that the
Ministry of Communications has the requisite authority to regulate in this area,
which authority is the subject of litigation brought by a third party in the
Colombian courts. At present, regulations appear to permit call reorigination
access in Argentina. However, the regulatory agency in Argentina has changed its
position regarding call reorigination access on several occasions in the past,
and this issue is the subject of an ongoing legal dispute.
Various countries in Latin America have taken initial steps towards
deregulation in the telecommunications market during the last few years. In
addition, various Latin American countries have completely or partially
privatized their national carriers, including Argentina, Chile, Mexico, Peru and
Venezuela. Certain countries have competitive local and/or long distance
sectors, most notably Chile, which has competitive operators in all sectors.
Colombia is scheduled to grant several new concessions for national and
international long distance service providers in addition to its ITO by the end
of 1998. Venezuela has also legalized value-added services such as voicemail and
data transmission and has targeted January 1, 2000 as the date for full
deregulation. Brazil is in the process of opening its telecommunications market
to competition and privatizing its ITO, pursuant to its new law adopted in July
1997. Brazil established an independent regulator in October 1997, and
value-added and private network services, are already open to competition. In
Mexico, the former ITO has been privatized, its exclusive long distance
concession expired in August 1996 and it has been obligated to interconnect with
the networks of competitors since January 1997. Competition in Mexico has been
initiated and an independent regulator has been established. Three countries in
the region, Chile, Mexico and the Dominican Republic, have opened their long
distance telecommunications markets to competition.
SOUTH AFRICA
The telecommunications industry in South Africa is regulated under the Post
Office Act of 1958 (the "SA Post Office Act") and the SA Telecommunications Act.
Telkom SA Limited ("Telkom"), the state-owned ITO, has a statutory monopoly on
the construction, maintenance and use of any telecommunications lines, as well
as on the provision of public switched telecommunications services. The
government of South Africa has indicated that this monopoly will be phased out
over five to six years. Notwithstanding this monopoly, the SA Telecommunications
Act permits a party to provide a range of services other than public switched
services under, and in accordance with, a telecommunications license can be
issued to that party in accordance with the SA Telecommunications Act.
The SA Telecommunications Act established a new telecommunications
regulatory authority called SATRA, whose functions include the granting of
telecommunications licenses, applications for which are solicited by the South
African Minister of Telecommunications pursuant to the SA Telecommunications
Act. As an independent regulatory authority, SATRA is subject to common law
provisions and provisions in the SA Telecommunications Act that limit its
ability to act outside of its granted authority and without affording parties
due process. SATRA's members are appointed by the President on the advice of
Parliament's standing committees on communications. Although the SA
Telecommunications Act states that SATRA should be independent and impartial in
the performance of its functions, it must act in accordance with policy
directions issued by the South African Minister of Telecommunications.
The Company seeks to take advantage of gradual deregulation of the South
African telecommunications industry by offering permitted services to customers
in South Africa. Currently, the Company provides call reorigination services to
customers in South Africa and may, in the future, seek any necessary licenses to
provide liberalized services such as value added services. In August 1997, SATRA
issued a ruling
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that call reorigination operations are an offense under the SA
Telecommunications Act. Several entities, including the Company's South African
agent, filed a lawsuit to stay and reverse SATRA's ruling on the basis that
SATRA lacks the authority to issue such a ruling and that the SA
Telecommunications Act does not prohibit the provision of call reorigination
services. SATRA has agreed not to prosecute any person in the call reorigination
industry unless the South African courts rule that it may. It is anticipated
that final adjudication of this lawsuit could take up to four years to occur,
however, the South African courts may rule sooner or the South African
legislature may promulgate an explicit prohibition on call reorigination.
Although the Company believes that South African law does not prohibit the
Company or it's agent from providing call reorigination services to customers in
South Africa without a license, if the Company's agent is determined to be
providing a telecommunications service without a license, it could be subject to
fines, to the termination of its call reorigination service to customers in
South Africa and, potentially, to the denial of license applications to provide
liberalized services.
The Company's South African agent was issued an interim "Value Added Network
Service License" by SATRA in early April 1998. This license allows the Company
in conjunction with its Agent to operate a data network system through which all
data and facsimile transmissions can be routed. The Company's South African
agent estimates that approximately 50% of current telecom revenues are generated
by data and facsimile traffic and plans to migrate this revenue segment over
packet switched networks within the next six to twelve months so that carriage
of this traffic will not involve call reorigination.
RUSSIA
The provision of telecommunications services in the Russian Federation falls
within federal jurisdiction. The principal legal act regulating
telecommunications in the Russian Federation is the Federal Law on
Communications (the "Communications Law"), enacted on February 16, 1995, which
establishes the legal basis for all activities in the telecommunications sector
and provides, among other things, for licensing to provide communications
services, the requirement to obtain a radio frequency allocation, certification
of equipment, and fair competition and freedom of pricing.
The Ministry of Communications ("MOC") and the Federal Agency of
Governmental Communications and Information under the President of the Russian
Federation are the federal organizations which have executive power over the
telecommunications industry. The MOC is responsible for allocating federal
budget resources in the telecommunications industry and has supervisory
responsibility for the technical condition and development of all types of
communications.
The Communications Law requires that any person providing telecommunications
services must, in theory, obtain a license prior to commencing such services.
Licenses to provide telecommunications services are issued by the MOC. Under the
applicable Licensing Regulations, licenses for rendering telecommunications
services may be issued and renewed for periods ranging from 3 to 10 years and
several licenses may be issued to one person. Licenses may be revoked or
suspended by the MOC for failure to comply with terms and conditions of the
license.
The Communications Law requires the federal regulatory agencies to encourage
and promote fair competition in the provision of communication services and
prohibits abuse of a dominant position to hinder, limit or distort competition.
The Communications Law also provides that tariffs for communication services may
be established on a contractual basis between the provider and the user of
telecommunications services.
Russian telecommunications companies are subject to the same system of
taxation as Russian companies in general, including profit tax and VAT on
services.
Current Russian legislation governing foreign investment activities does not
prohibit or restrict foreign investment in the telecommunications industry.
However, on February 28, 1997, the State Duma, the lower house of parliament
approved on the first reading draft foreign investment legislation which
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would restrict any significant future foreign investment in numerous sectors of
the Russian economy, including telephone and radio communications. It is
unlikely that such restrictive legislation will be enacted, unless the political
climate changes dramatically. More likely is the emergence of limited
restrictions on foreign investment in strategic industries, which could result
in foreign ownership limitations in industries such as telecommunications, which
limitations are not uncommon in many countries. The draft legislation has been
referred to the Russian government for commitment. For such draft legislation to
become Federal Law, it must be passed by a majority vote of the State Duma at
another two readings, approved by a majority of the Federation Council, the
upper house of parliament, and signed by the President of the Russian
Federation. Rejection of such legislation by the Federation Council could be
overridden by a two-thirds majority of the State Duma. Rejection of such
legislation by the President could be overridden by a two-thirds majority of
each of the Federation Council and the State Duma.
In addition, a lack of consensus exists over the manner and scope of
government control over the telecommunications industry. Because the
telecommunications industry is widely viewed as strategically important to
Russia, there can be no assurance that recent government policy liberalizing
control over the telecommunications industry will continue. Russia is not a
member of the WTO, but, if it seeks to become a member, it may be required to
take further steps to liberalize the telecommunications market as a condition of
accession.
MIDDLE EAST
The Company's ability to provide services in the Middle East depends on the
regulatory environment in each particular country. In Lebanon, for example, the
telecommunications industry is regulated by the Ministry of Posts and
Telecommunications ("MPT"), which also operates the ITO--the General Directorate
of Telecommunications (the "GDT"). The GDT currently has a monopoly on the
provision of wireline telecommunications services in Lebanon. In Egypt, the
Ministry of Transport, Communications and Civil Aviation regulates the
telecommunications industry and Telecom Egypt, formerly known as the Arab
Republic of Egypt National Telecommunications Organization ("ARENTO"), is the
ITO. Although Telecom Egypt currently has a monopoly on the provision of voice
services, several U.S. carriers are permitted to sell pre-paid phone cards and
calling card services. Egypt has announced that it will permit limited
competition to Telecom Egypt in the near future.
INTERNET TELEPHONY
The introduction of Internet telephony is a recent market development. To
the Company's knowledge, there currently are no domestic and few foreign laws or
regulations that prohibit voice communications over the Internet. The FCC is
currently considering whether or not to impose surcharges or additional
regulation upon providers of Internet telephony. In addition, several efforts
have been made to enact U.S. federal legislation that would either regulate or
exempt from regulation services provided over the Internet. State public utility
commissions also may retain intrastate jurisdiction and could initiate
proceedings to regulate the intrastate aspects of Internet telephony. A number
of countries that currently prohibit voice telephony competition with the ITOs
also have prohibited Internet telephony. Several other countries permit but
regulate Internet telephony. If foreign governments, Congress, the FCC, or state
utility commissions prohibit or regulate Internet telephony, there can be no
assurance that any such regulations will not materially affect the Company's
business, financial condition or results of operation.
VAT
The EU imposes value-added taxes ("VAT") upon the sale of goods and services
within the EU. The rate of VAT varies among EU members, but ranges from 15% to
25% of the sales of goods and services. Under VAT rules, businesses are required
to collect VAT from their customers upon the sale to such customers of goods and
services and remit such amounts to the VAT authorities. In this regard it is
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expected that non-EU based telecommunications providers will be required to
appoint a VAT agent and register for VAT in every EU member state in which it
has individual customers.
France and Germany have adopted rules that, as of January 1, 1997, deem
telecommunications services provided by non-EU based companies to be provided
where the customer is located, thereby subjecting the telecommunications
services provided to customers in the EU by non-EU based companies to VAT. The
German and French rules impose VAT on both the residential and business
customers of non-EU based telecommunications companies. In the case of sales to
non-VAT registered customers, German and French rules require that the non-EU
based telecommunications carrier collect and remit the VAT. In the case of sales
by such providers to German VAT-registered customers, the German rules generally
require that such customers collect and remit the VAT. Under the so-called
"Nullregelung" doctrine, however, certain business customers that are required
to charge VAT on goods and services provided to their customers (generally,
companies other than banks and insurance companies) are entitled to an exemption
from VAT on telecommunications services. In the case of sales by such providers
to French VAT-registered customers, the French rules require that such business
customers collect and remit the VAT.
The EU has adopted a proposed amendment to the Sixth Directive that, if
adopted in present form, would require all EU members to adopt legislation to
impose VAT on non-EU based telecommunications services provided to customers in
the EU by non-EU based companies, beginning as early as December 31, 1998. Under
the proposed amendment, non-EU based telecommunications companies would be
required to collect and remit VAT on telecommunications services provided to EU
businesses as well as to individuals.
The Company's independent agents historically have collected, and will
continue to collect, VAT on services where it is offered in a VAT country. The
Company believes that whatever potential negative impact the amendment will have
on its operations as a result of the imposition of VAT on traditional call
reorigination, such impact will be partially mitigated by the customer migration
towards and the higher gross margins associated with direct access services.
EMPLOYEES
As of December 31, 1997, the Company had 21 full-time employees. None of the
Company's employees are covered by a collective bargaining agreement. Management
believes that the Company's relationship with its employees is satisfactory.
TRADEMARKS
The Company has traditionally relied upon the common law protection of its
trade name afforded under various local laws, including the United States.
However, the Company intends to file for trademark protection of its Ursus name
in the United States. It is possible that prior registration and/or uses of the
mark or a confusingly similar mark may exist in one or more of such countries,
in which case the Company might be precluded from registering and/or using the
Ursus mark and/or logo in such countries.
PROPERTIES
The Company currently occupies approximately 8,087 square feet of office
space in Sunrise, Florida, which serves as the Company's principal executive
office. The lease has an annual rental obligation of approximately $158,000 and
expires on April 30, 2003. The Company believes that such offices are adequate
for its current purposes.
LEGAL PROCEEDINGS
Although the Company is party to litigation in the ordinary course of
business, there are no legal proceedings pending or to the knowledge of the
Company, threatened, that, if determined adversely to the Company, would have a
material adverse effect on the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding those persons
who are currently or will be directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Luca M. Giussani................................... 42 President, Chief Executive Officer and Director
Jeffrey R. Chaskin................................. 44 Executive Vice President, Chief Operating Officer
and Director
Johannes S. Seefried............................... 39 Chief Financial and Chief Accounting Officer and
Director
Gregory J. Koutoulas............................... 49 Vice President, Controller and Secretary
Richard C. McEwan.................................. 43 Vice President
William Newport.................................... 63 Director, Chairman of the Board of Directors
Kenneth L. Garrett................................. 55 Director
</TABLE>
Luca M. Giussani, a co-founder of the Company, has served as President,
Chief Executive Officer and Director of the Company since its inception. Mr.
Giussani currently works full time for the Company in the United States. Prior
to co-founding the Company with Mr. Chaskin, Mr. Giussani served as an advisor
to a number of developing countries for the restructuring of their foreign debt,
as well as a consultant to several public sector Italian contractors
specializing in the construction of power plants. Prior to 1993, Mr. Giussani
was an officer of Orient & China S.P.A., a trading company specializing in
transactions with China, and in the following concerns that provided consulting
services to Italian contractors: Intraco P.E.F., Balzar Trading Ltd. and Ursus
Finance Ltd.
Jeffrey R. Chaskin is a co-founder of the Company and has been its Chief
Operating Officer and a Director since its inception. Mr. Chaskin has had a key
role in the development of various telecommunications companies, and has
consulted to the industry since 1981 including consulting regarding call center
and switched network operations for CIL, Federal Express, CBN, ASCI and others.
Johannes S. Seefried has been Chief Financial Officer of the Company since
February 1997, and its Chief Accounting Officer and a Director since February
1998. Prior to 1994, Mr. Seefried held executive positions in corporate finance
and securities sales with commercial and investment banking organizations, both
in the United States and Europe. From 1990 to 1993, Mr. Seefried was employed by
Banco Santander, a commercial and investment banking group. Mr. Seefried's
primary responsibilities at the Santander Group included serving as a Vice
President of corporate business development, including mergers & acquisitions.
From 1994 to 1996, Mr. Seefried served as Managing Partner of Seefried
Forstverwaltung, a privately-owned forestry and property management company. Mr.
Seefried is a graduate of the Stanford Graduate School of Business, 1994, and
the School of Foreign Service at Georgetown University, 1983.
Gregory J. Koutoulas has been Vice President of Finance and Secretary of the
Company since April 1995 and Controller since November 1994. From 1990 to 1994
Mr. Koutoulas served as Controller of F.A.S.T., INC., a wholesale distributor of
health and beauty aids. Prior to his position with F.A.S.T., INC., from 1987 to
1989, Mr. Koutoulas was employed by Bertram Yacht, a manufacturer of luxury
yachts, as Manager of Financial Analysis and Cost Accounting. Mr. Koutoulas
received a B.S. in Economics with a concentration in Accounting from Purdue
University in 1971 and is a licensed Certified Public Accountant.
Richard C. McEwan has been Vice President of Agency Relations since
September 1, 1997. Prior to joining the Company on a full-time basis, Mr. McEwan
was a consultant to the Company since its inception after leaving Gateway USA
where he served as its Director of International Development since 1990. From
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1988 to 1990 Mr. McEwan was co-founder and Executive Vice President of Gateway
Asia-Taiwan, the first overseas agency of Gateway USA providing call
reorigination services. Mr. McEwan also provides consulting services to the
Company's agent in the Bahamas. Mr. McEwan received a B.A. from Brigham Young
University in 1980 and a Masters of International Management from the American
Graduate School of International Management (Thunderbird) in 1982.
William M. Newport became a Director and Chairman of the Board of Directors
of the Company in February 1998. Mr. Newport was Chief Executive Officer of
AT&T's cellular business from 1981 to 1983. In 1983, Mr. Newport joined the Bell
Atlantic Corporation when it was formed as a result of the AT&T divestiture and
retired in December 1992 from the Bell Atlantic Group as a Vice President for
Strategic Planning, after a 36-year career in the telecommunications industry.
Mr. Newport served as a director of Integrated Micro Products, a manufacturer of
fault tolerant computers for telecommunications equipment vendors, from 1994 to
1996, and currently serves as a director of the Corporation for National
Research Initiatives, a non-profit information technology research and
development company, Authentix Networks, Inc., a wireless roaming fraud
prevention and detection service provider, Ovum Holdings plc., a
telecommunications consulting firm, and Condor Technology Solutions, a publicly
traded company that provides information technology services, such as
information systems development, networking, desk top computing systems and
design installations. Mr. Newport holds degrees in Electrical Engineering from
Purdue University and in Management from the Sloan School of Management at
M.I.T.
Kenneth L. Garrett became a director of the Company in April 1998. From 1994
to 1998, Mr. Garrett was President of KLG Associates, Inc., a telecommunications
consulting firm specializing in the design and operations of networks, and was a
member of the executive committee of Tri State Investment Group, a venture
capital group based in North Carolina. From 1989 to 1994, Mr. Garrett was a
Senior Vice President in charge of AT&T's Network Services Division, and from
1964 to 1989, he worked in a number of capacities in operations, sales and
marketing within the AT&T organization. Also, from 1971 to 1973, Mr. Garrett
worked as district plant manager at Pacific Bell Telephone Company in San
Francisco. Mr. Garrett holds degrees in Chemical Engineering from Iowa State
University and in Management from the Sloan School of Management at M.I.T.
Effective immediately before this Offering, the directors will be divided
into three classes, denominated Class I, Class II and Class III, with the terms
of office expiring at the 1999, 2000 and 2001 annual meeting of shareholders,
respectively. The directors have initially been divided into classes as follows:
Class I: Mr. Giussani and Mr. Chaskin, Class II: Mr. Seefried and Mr. Newport
and Class III: Mr. Garrett. At each annual meeting following such initial
classification and election, directors elected to succeed those directors whose
terms expire will be elected for a term to expire at the third succeeding annual
meeting of shareholders after their election. All officers are appointed by and
serve, subject to the terms of their employment agreements, if any, at the
discretion of the Board of Directors.
CERTAIN LEGAL PROCEEDINGS
Mr. Luca Giussani, the Company's president and chief executive officer, was
the subject of a criminal proceeding in Italy under Italian law, which was part
of a series of indictments issued against numerous people. Specifically, about
May 1996 Mr. Giussani was charged with transmitting an invoice in 1991 to a
corporation pursuant to an existing consulting contract for consulting services
which it is alleged he did not perform. It was alleged that the invoice was used
to disguise a political contribution made by that corporation which was unlawful
under Italian law. Mr. Giussani was not charged with making an unlawful
political contribution; but rather it is alleged that through the use of this
invoice, Mr. Giussani facilitated the corporation's falsification of corporate
records to disguise the contribution. Mr. Giussani consistently denied any
improper conduct in connection with this matter and believed that he would
ultimately be vindicated. In October 1997, the trial judge dismissed the claim
against Mr. Giussani for lack of evidence. There is currently no criminal
proceeding pending against Mr. Giussani; although he has been advised that the
investigating magistrates are currently contemplating refiling charges against
him and the other former
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defendants in this case in order to prevent the running of the applicable
statute of limitations. Mr. Giussani is confident that he will prevail on the
merits with respect to any charges brought against him. The Company does not
believe that the outcome of the proceedings, even assuming Mr. Giussani were
convicted, would have a material adverse impact on the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three standing committees: the
Executive Committee, the Compensation Committee and the Audit Committee. Luca
Giussani, Jeffrey Chaskin and Johannes S. Seefried serve on the Executive
Committee. The Executive Committee is authorized to exercise the powers of the
Board of Directors between meetings. However, the Executive Committee may not
(i) amend the Articles of Incorporation or the Bylaws of the Company, (ii) adopt
an agreement of merger or consolidation, (iii) recommend to the shareholders the
sale, lease, or exchange of all or substantially all of the Company's property
and assets, (iv) recommend to the shareholders a dissolution of the Company or
revoke a dissolution, (v) elect a director, or (vi) declare a dividend or
authorize the issuance of stock. William Newport and Kenneth L. Garrett serve on
the Compensation Committee. The Compensation Committee is responsible for
recommending to the Board of Directors the Company's executive compensation
policies for senior officers and administering the 1998 Stock Incentive Plan (as
defined). See "-- Stock Incentive Plan." Johannes S. Seefried, William Newport
and Kenneth L. Garrett serve on the Audit Committee. The Audit Committee is
responsible for recommending independent auditors, reviewing the audit plan, the
adequacy of internal controls, the audit report and the management letter, and
performing such other duties as the Board of Directors may from time to time
prescribe.
COMPENSATION OF DIRECTORS
Following the Offering, the Company intends to pay each non-employee
director compensation of $2,000 for each meeting of the Board of Directors that
he attends and $500 for a conference telephone meeting with members of the
Board. Outside members of the Board will also be granted between 5,000 and
15,000 non-qualified options under the Stock Incentive Plan as described below
for each year of service on the Board. Upon consummation of the Offering, Mr.
Newport will receive 15,000, and Mr. Garrett will receive 10,000, non-qualified
options at the Offering Price. The Company will reimburse each director for
ordinary and necessary travel expenses related to such director's attendance at
Board of Directors and committee meetings.
EXECUTIVE COMPENSATION
The Summary Compensation Table below provides certain summary information
concerning compensation paid or accrued during the fiscal year ended March 31,
1997, 1996 and 1995 by the Company to or on behalf of the Chief Executive
Officer and the three other executive officers of the Company.
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------------------
<S> <C> <C> <C> <C>
NAME AND OTHER ANNUAL
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
- ------------------------------------------------------------------ --------- ---------- ---------- -------------
Luca M. Giussani.................................................. 1997 $ 170,000 $ 251,405 $ 8,200(1)
President and Chief Executive 1996 $ 170,000 $ 164,326 $ 4,704(1)
Officer 1995 $ 128,804 $ 12,300 $ 16,805(3)
Jeffrey R. Chaskin (2)............................................ 1997 $ 170,000 $ 251,405 $ 4,583(1)
Executive Vice President and 1996 $ 170,000 $ 164,326 $ 3,057(1)
Chief Operating Officer 1995 $ 170,000 $ 12,300 --
Johannes S. Seefried (4).......................................... 1997 $ 61,981 -- --
Chief Financial and Accounting
Officer
Richard McEwan (5)................................................ 1997 -- -- $ 50,000(6)
Vice President of Agency 1996 $ 50,000(7)
Relations 1995 $ 67,885(7)
</TABLE>
- ------------------------
(1) Consists of the use of a Company automobile.
(2) Does not include compensation paid to Mr. Chaskin's wife, Joanne M. Canter,
an employee of the Company. Ms. Canter's salary for 1995, 1996 and 1997 was
$18,692, $18,000 and $16,615, respectively.
(3) Consists of moving expenses.
(4) Mr. Seefried joined the Company on July 8, 1996. His base salary at
September 30, 1997 was $125,000.
(5) Mr. McEwan joined the Company on September 1, 1997. His base salary at
December 31, 1997 was $130,000.
(6) Consulting fees paid from April 1, 1997 to August 30, 1997.
(7) Consulting fees.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements, effective on January 1,
1998, with each of Luca Giussani, Jeffrey Chaskin, Johannes S. Seefried and
Richard McEwan for terms ranging from two to five years.
The employment agreements with each of Messrs. Giussani and Chaskin,
respectively, the Company's Chief Executive and Chief Operating Officers,
provide for each to receive:
(i) base annual salary of $225,000 in 1998, $250,000 in 1999, $275,000 in
2000, $300,000 in 2001 and $325,000 in 2002;
(ii) minimum bonuses payable at the beginning of each calendar year,
commencing in January 1998, of $45,000; in addition, each executive will
receive additional bonuses, depending upon the Company's operating
results, of $45,000 for each $1 million of earnings before interest,
taxes, depreciation, amortization and such bonuses ("EBITDAB") up and
including to an "EBITDAB" of $4 million, as generated by the Company
during any fiscal year beginning on April 1, 1998 (such bonuses to be
prorated for EBITDAB of a fraction of $1 million and paid monthly,
subject to continuing adjustment for each quarterly and fiscal year's
EBITDAB);
(iii) bonuses commencing with the Company's fiscal year beginning on April
1, 1998, determined as a percentage of the executive's base annual pay
depending upon the Company's EBITDAB, these
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<PAGE>
bonuses begin to be payable at 20% of base annual pay for EBITDAB of at
least $4 million, and increase in increments of 5% of base annual pay for
each $1 million of additional EBITDAB above an EBITDAB of $4 million
(such bonuses to be prorated for EBITDAB of a fraction of $1 million and
paid quarterly subject to continuing adjustment for each fiscal year's
EBITDAB) provided that aggregate bonuses as described in (ii), above and
this section (iii) shall not exceed 200% of the annual base pay;
(iv) in the event of a termination without cause, or termination by the
executive for good reason, compensation for the balance of the remaining
term of the agreement, but for not less than one year; or in the event of
termination of the executive following a change in control, a payment of
three years' base includible compensation, equal to the maximum tax
deduction that the Company can receive under applicable "golden
parachute" regulations;
(v) confidentiality provisions and a non-compete agreement within the State
of Florida for one year after any termination of employment; and
(vi) 10-year options to purchase 150,000 shares of Common Stock at the
Offering Price, 75,000 of which vest upon consummation of this Offering
and the balance in January 1999 or upon a change in control of the
Company. Mr. Giussani's options will be non-qualified. Options to
purchase $200,000 worth of Common Stock issued to Mr. Chaskin will be
tax-qualified and remainder will be non-qualified.
The agreements provide that the bonuses already paid to Messrs. Giussani and
Chaskin through December 1997 comprise the entire bonus to which each is
entitled in respect of the 1998 fiscal year. Both Mr. Giussani and Mr. Chaskin
have waived any other claims for compensation from the Company accruing prior to
January 1, 1998.
The Company has entered into an employment agreement with Johannes Seefried,
its Chief Financial and Accounting Officer, providing for terms similar to those
in the employment agreements with Messrs. Giussani and Chaskin described above,
except that:
(i) the term of the agreement is for two years from January 1, 1998;
(ii) the base annual salary is $170,000 in 1998 and $200,000 in 1999;
(iii) a guaranteed bonus of $50,000 is payable at the commencement of the
agreement and a bonus of $75,000 is payable upon consummation of this
Offering, in addition to bonuses payable as a percentage of base annual
pay depending on the EBITDAB of $4 million or more realized by the
Company in any fiscal year beginning on or after April 1, 1998 and during
the term of the agreement; all in accordance with the formula set forth
in paragraph (iii), above with respect to Messrs. Giussani and Chaskin;
and
(iv) 10-year options to purchase 100,000 shares of Common Stock at the
Offering Price, 50,000 of which vest upon consummation of this Offering
and the balance in January 1999 or upon a change in control of the
Company. Options to purchase $200,000 worth of Common Stock will be
tax-qualified, the remaining options will be non-qualified.
On September 1, 1997, the Company entered into a two-year employment
agreement with Richard McEwan, its Vice President of Agent Relations. The
agreement automatically renews for successive one-year terms unless either party
provides written notice of non-renewal. Mr. McEwan was paid a starting bonus of
$40,000 upon joining the Company and will receive a base annual salary of
$130,000. Mr. McEwan is also eligible to receive bonuses each December at the
discretion of the Board of Directors. Upon adoption by the Company of a stock
incentive plan, Mr. McEwan is entitled to receive incentive stock options to
purchase a number of shares equal to two percent of the Company's Common Stock
outstanding as of the date of the agreement, at an option price and subject to a
vesting schedule to be determined by the Company and its Board of Directors at
their sole discretion. The agreement permits
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<PAGE>
Mr. McEwan to continue to perform services for the Company's independent agent
in the Bahamas, provided that doing so does not create a conflict of interest or
unreasonably interferes with the performance of his duties under his employment
agreement. Pursuant to that arrangement, Mr. McEwan provides "back office"
support services to that agent in return for consulting fees equal to
approximately 30% of the amount of agency fees that the Bahamas agent collects
from the Company. These fees, which amounted to approximately $30,000 in 1996
and $50,000 in 1997 are paid directly to a trust of which Mr. McEwan is a
trustee, and from which he received a $1,000 monthly trustee's fee through
September 1997, after which that fee ceased being paid. The beneficiaries of the
trust include various charitable endeavors, but also include the children of Mr.
McEwan.
STOCK INCENTIVE PLAN
The Company's Board of Directors and shareholders adopted the "1998 Stock
Incentive Plan" (the "Stock Incentive Plan" or the "Plan") in February 1998. The
Compensation Committee will administer the Plan, except that prior to the
Offering the Plan will be administered by the Board of Directors. All employees
and directors of and consultants to the Company are eligible to receive
"Incentive Awards" under the Stock Incentive Plan. The Stock Incentive Plan
allows the Company to issue Incentive Awards of stock options (including
incentive stock options and non-qualified stock options), restricted stock and
stock appreciation rights.
A total of 1,000,000 shares of Common Stock are authorized for issuance
under the Stock Incentive Plan. Not more than 200,000 shares of Common Stock may
be the subject of incentives granted to any individual during any calendar year
under the Stock Incentive Plan. On the effective date of their respective
employment agreements, the Company will grant its Chief Executive, Chief
Operating and Chief Financial Officers 10-year stock options exercisable at the
Offering Price covering 150,000, 150,000 and 100,000 shares of Common Stock,
respectively. Half of these options vest upon issuance, and the balance vest on
January 1, 1999 or upon a change in control of the Company. In addition, the
compensation committee in a Board of Directors meeting held on April 8, 1998
granted to Mr. McEwan 10-year stock options exercisable at the Offering Price,
covering 100,000 shares of Common Stock, and granted to a number of employees
10-year stock options exercisable at the Offering Price covering a total of
109,000 shares. Half of Mr. McEwan's options vest one year after the effective
date of the Offering, and the other half vest on August 31, 1999 with exercising
schedules spread over a three-year period effective one year after the effective
date of the Offering. The 109,000 options granted to employees vest one year
after the Offering, and can only be exercised 18 months after the Offering.
The exercise price of an incentive stock option and a non-qualified stock
option is fixed by the Compensation Committee at the date of grant; however, the
exercise price under an incentive stock option must be at least equal to the
fair market value of the Common Stock at the date of grant, and 110% of the fair
market value of the Common Stock at the date of grant for any incentive stock
option granted to an optionee that owns more than 10% of the Common Stock of the
Company.
Stock options are exercisable for the duration determined by the
Compensation Committee, but in no event more than ten years after the date of
grant. The Compensation Committee may fix the vesting schedule and duration of
options on the date of grant (in the case of qualified options, the term cannot
exceed ten years from the date of grant or five years for options granted to an
optionee that owns more than 10% of the Common Stock of the Company). The
aggregate fair market value (determined at the time the option is granted) of
the Common Stock with respect to which incentive stock options are exercisable
for the first time by a participant during any calendar year (under all stock
option plans of the Company) shall not exceed $100,000; to the extent this
limitation is exceeded, such excess options shall be treated as non-qualified
stock options for purposes of the Stock Incentive Plan and the Code.
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At the time a stock option is granted, the Compensation Committee may, in
its sole discretion, designate whether the stock option is to be considered an
incentive stock option or non-qualified stock option. Stock options with no such
designation shall be deemed non-qualified stock options.
Payment of the purchase price for shares acquired upon the exercise of
options may be made by any one or more of the following methods: in cash, by
check, by delivery to the Company of shares of Common Stock already owned by the
option holder, or by such other method as the Compensation Committee may permit
from time to time. However, a holder may not use previously owned shares of
Common Stock to pay the purchase price under an option, unless the holder has
beneficially owned such shares for at least six months.
Stock options become immediately vested and exercisable in full upon the
occurrence of such special circumstances as in the opinion of the Board of
Directors merit special consideration.
Stock options terminate at the end of the 90th day following the holder's
termination of employment or service. This period is extended to one year in the
case of the disability or death of the holder and, in the case of death, the
stock option is exercisable by the holder's estate. The Board of Directors may
extend the post-termination exercise period for any individual, but not beyond
the expiration of the original term of the option.
An option grant may, in the discretion of the Compensation Committee,
include a reload option right that entitles the holder, upon exercise of the
original option and payment of an exercise price for the option in shares, to
purchase at the fair market value per share at the time of exercise the number
of shares used to pay the option exercise price. A reload option may, in the
Compensation Committee's discretion, permit the holder upon exercise of the
option to purchase the number of shares equal to the number of shares issued
upon exercise of the original option. Any reload option will be subject to the
same expiration date and exercisable at the same time as the original option
with respect to which it is granted.
The Compensation Committee may grant stock appreciation rights, either
independently or in connection with the grant of a stock option. Stock
appreciation rights granted in connection with an option may fall into one of
two categories: "Conjunctive Rights" or "Alternative Rights." Conjunctive Rights
will, upon exercise of the related stock option, entitle the holder to receive
payment of an amount equal to the product obtained by multiplying (a) the spread
between the fair market value per share at the time of exercise and the per
share option exercise price, and (b) the number of shares in respect of which
the related option is exercised. Alternative Rights will, upon surrender of the
related option with respect to the number of shares as to which such rights are
then exercised, entitle the holder to receive payment of an amount equal to the
product obtained by multiplying (i) the spread between the fair market value per
share at the time of exercise and the per share option exercise price, and (ii)
the number of shares in respect of which the rights are exercised. The duration
of stock appreciation rights granted in connection with a stock option will be
coterminous with the duration of the stock option.
Stock appreciation rights granted independently will, upon their exercise,
entitle the holder to receive payment of an amount equal to the product obtained
by multiplying (a) the excess of the fair market value per share on the date of
exercise of the stock appreciation rights over the fair market value per share
on the date of grant of the stock appreciation rights, and (b) the number of
shares in respect of which the stock appreciation rights are exercised. Stock
appreciation rights granted independently of any stock option will be
exercisable for a duration determined by the Compensation Committee, but in no
event more than ten years from the date of grant.
The Compensation Committee may also grant restricted stock awards under the
Plan. Restricted stock awards will not be transferable until the restrictions
are satisfied, removed or expire, and will bear a legend to that effect. The
Compensation Committee may impose such other conditions as it deems advisable on
any restricted shares granted to or purchased pursuant to a restricted stock
award made under the Plan.
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Awards granted under the Plan contain anti-dilution provisions which will
automatically adjust the number of shares subject to the award in the event of a
stock dividend, split-up, conversion, exchange, reclassification or
substitution. In the event of any other change in the corporate structure or
outstanding shares of Common Stock, the Compensation Committee may make such
equitable adjustments to the number of shares and the class of shares available
under the Stock Incentive Plan or to any outstanding award as it shall deem
appropriate to prevent dilution or enlargement of rights.
The Company shall obtain such consideration for granting options under the
Stock Incentive Plan as the Compensation Committee in its discretion may
request.
Each award may be subject to provisions to assure that any exercise or
disposition of Common Stock will not violate federal and state securities laws.
No award may be granted under the Stock Incentive Plan after the day
preceding the tenth anniversary of the adoption of the Stock Incentive Plan.
The Board of Directors or the Compensation Committee may at any time
withdraw or amend the Stock Incentive Plan and may, with the consent of the
affected holder of an outstanding award, at any time withdraw or amend the terms
and conditions of outstanding awards. Any amendment which would increase the
number of shares issuable pursuant to the Stock Incentive Plan or to any
individual thereunder or change the class of individuals to whom options may be
granted shall be subject to the approval of the shareholders of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors established a compensation committee in April 1998.
Prior to such time, decisions concerning executive compensation were made by the
Board of Directors, including Messrs. Giussani, Chaskin and Seefried, all of
whom were and continue to be executive officers of the Company and participated
in deliberations of the Board of Directors regarding executive officer
compensation. See "--Committees of the Board of Directors."
None of the executive officers of the Company currently serve on the
compensation committee of another entity or any other committee of the board of
directors of another entity performing similar functions.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
LOANS AND ADVANCES TO EXECUTIVE OFFICERS
Between December 26, 1995 and July 15, 1997, the Company loaned an aggregate
of $127,000 to Luca Giussani, its Chief Executive Officer. The loans were
evidenced by unsecured notes bearing interest at 7.65% per annum. In addition,
the Company made cash advances totaling $4,749 on behalf of Mr. Giussani during
this period. At December 31, 1997, Mr. Giussani had an outstanding balance to
the Company of $387.
During fiscal 1995, 416.67 Class C shares were issued to Jeffrey Chaskin,
the Company's Chief Operating Officer, in exchange for a $18,750 promissory note
bearing interest at 7.65% per annum, due March 1, 1997. Mr. Chaskin's 541.67
Class C shares were pledged as security for the note. On February 21, 1997, this
loan was converted to an unsecured note bearing interest at 7.65% per annum,
payable by February 21, 1998. Mr. Chaskin repaid the loan in full on December
19, 1997.
BONUSES PAID TO EXECUTIVE OFFICERS
Pursuant to the employment agreements effective January 1, 1998, all
bonuses, including any advance payments, paid to Messrs. Giussani and Chaskin
through December 1997 comprise the entire bonus to which each is entitled in
respect of the 1998 fiscal year. They also waive any other claims for
compensation
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from the Company accruing prior to January 1, 1998. Messrs. Giussani and Chaskin
each received $225,779 in bonuses under these agreements for the nine months
ended December 31, 1997. See "Management-- Employment Agreements."
TERM LOANS AND GUARANTEE BY CHIEF EXECUTIVE OFFICER
During 1993, the Company entered into two term loan agreements with
Citibank-Zurich providing for an aggregate loan amount of $730,000. The due
dates of the two loans were May 20, 1996 and November 11, 1996, respectively.
During 1995 and through April 1996, the Company repaid a total of $250,000 on
the term loans. In June 1996, the Company replaced the two existing term loans
with a new term loan with the same lender in the amount of $500,000 due August
31, 1998. Subsequent to December 31, 1997 the Company repaid the remaining
balance of $85,000 and terminated the loan agreement.
Luca Giussani, the Company's Chief Executive Officer provided security for
these term loans by pledging money-market accounts equal to 100% of the
outstanding loan balances.
AGREEMENTS WITH RISPOLI
On November 1, 1995, the Company entered into a one-year consulting
agreement with Ben Rispoli, a minority shareholder of the Company. The agreement
automatically renews for successive one-year terms unless either party provides
written notice of non-renewal. Pursuant to the agreement Mr. Rispoli will
provide consulting services to assist the Company's marketing efforts for a
monthly retainer of $11,250, plus reimbursement of reasonable travel expenses.
On January 20, 1998, Messrs. Giussani, Rispoli and the Company entered into
an agreement (the "January Agreement"). The January Agreement resolved the
matter of Mr. Rispoli's beneficial interest in the Company's securities held in
a fiduciary capacity by Fincogest, S.A. ("Fincogest"). Fincogest is a nominee
Swiss entity that holds record title for the Company's securities beneficially
owned by Mr. Giussani as well as Mr. Rispoli. Mr. Rispoli had a beneficial
interest in the securities held by Fincogest since the Company's inception. The
January Agreement resolves that Mr. Rispoli beneficially owns 8.3% of the Common
Stock held by Fincogest, and that Mr. Giussani beneficially owns the remaining
91.7% of the Common Stock and all of the Series A Preferred Stock. The January
Agreement also extends Mr. Rispoli's consulting agreement to December 31, 1998
and provides that the consulting agreement cannot be terminated except for
"cause" and modifies the agreement to include an additional payment of $15,000
upon consummation of an initial public offering of the Company's securities
during the term of the consulting agreement.
Between December 21, 1995 and June 26, 1996, the Company loaned $65,000 in
the aggregate to Ben Rispoli. The notes are unsecured and bear interest at the
rate of 7.65% per annum. Beginning in September of 1997, the consultant's
monthly retainer is being offset by the Company against the consultant's
outstanding loan balance and accrued interest. At December 31, 1997 the
outstanding loan balance and accrued interest was $28,894. At March 31, 1998,
all amounts due to the Company by the consultant have been offset against the
consultant's retainer.
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PRINCIPAL AND REGISTERING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of the date of this Prospectus, and as adjusted
to reflect the sale of the shares of Common Stock in the Offering, of (i) each
person known by the Company to own beneficially five percent or more of the
outstanding Common Stock immediately prior to the Offering; (ii) the Registering
Shareholders; (iii) each of the Company's directors; (iv) each of the executive
officers named in the Summary Compensation Table; and (v) all directors and
executive officers of the Company as a group. The address of each person listed
below is 440 Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325,
unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES SHARES BENEFICIALLY
OWNED TO BE OWNED AFTER THE
BEFORE THE OFFERING(1) SOLD IN OFFERING(1)
----------------------- THE -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERING(2) NUMBER PERCENT
- ------------------------------------ ---------- ----------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Luca M. Giussani (2)(3)(4).......... 4,200,000(6) 80.6% -- 4,200,000(6) 62.5%
Ben Christian Rispoli (3)........... 375,000 7.2% -- 375,000 5.6%
Jeffrey R. Chaskin (2).............. 575,000(6) 11.0% -- 575,000(6) 8.6%
Johannes S. Seefried................ 50,000(7) (9) -- 50,000(7) (9)
Gregory J. Koutoulas (11)........... -- -- -- -- --
Richard McEwan (5).................. -- -- -- -- --
William Newport..................... 7,500(8) (9) -- 7,500(8) (9)
Kenneth L. Garrett.................. 5,000 10) (9) -- 5,000 10) (9)
All Executive Officers
and Directors as a Group
(7 Persons)....................... 4,837,500 10) 100.0% -- 4,837,500 10) 72.0%
</TABLE>
- ------------------------
(1) The number of shares beneficially owned before the Offering is based on
5,000,000 shares of Common Stock outstanding prior to the Offering. The
number of shares beneficially owned after the Offering is based on 6,500,000
shares of Common Stock outstanding and gives effect to options exercisable
within the next sixty days. Beneficial ownership is determined in accordance
with the rules of the Commission and generally includes voting or investment
power with respect to securities. Subject to applicable community property
laws, each person named in the table has sole voting and investment power
with respect to all shares of Common Stock beneficially owned.
(2) The shares of Common Stock owned by the Registering Shareholders and
registered in this Offering are subject to a holdback agreement with the
Representative and may not be sold without the Representative's consent
until 12 months after the date of the Prospectus.
(3) Held by Fincogest S.A., a Swiss nominee entity, whose holdings of Common
Stock are beneficially owned by Mr. Giussani (91.7%) and Ben Christian
Rispoli (8.3%). Each of Mr. Giussani and Mr. Rispoli has sole voting and
investment power with respect to his shares of Common Stock.
(4) Fincogest, S.A. also owns 100% of the outstanding shares of Series A
Preferred Stock of the Company, all of which are beneficially owned by Mr.
Giussani, who holds sole voting and investment power with respect to the
Series A Preferred Stock.
(5) Excludes 10-year options to purchase 100,000 shares of Common Stock to be
granted to Mr. McEwan, one-half vesting 1 year after the Offering, and
one-half vesting on August 31, 1999.
(6) Includes 10-year options to purchase 75,000 share of Common Stock that vest
at the time of the Offering.
(7) Includes 10-year options to purchase 50,000 shares of Common Stock that vest
at the time of the Offering.
(8) Includes 10-year options to purchase 7,500 shares of Common Stock that vest
at the time of the Offering.
(9) Less than 1%.
(10) Includes 10-year options to purchase 5,000 shares of Common Stock that vest
at the time of the Offering.
(11) Excludes 10-year options to purchase 20,000 shares of Common Stock that
vest 1 year after the Offering.
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DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company is subject to
the Florida Business Corporation Act ("FBCA") and to provisions contained in the
Company's Amended and Restated Articles of Incorporation and Bylaws, copies of
which have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. The Amended and Restated Articles of Incorporation will
be adopted prior to the date of this Prospectus. Reference is made to such
exhibits for a detailed description of the provisions thereof summarized below.
Upon completion of this Offering, the authorized capital stock of the
Company will consist of 1,000,000 shares of Preferred Stock, $.01 par value per
share (the "Preferred Stock"), of which 1,000 shares of Series A Preferred Stock
will be issued and outstanding, and 20,000,000 shares of Common Stock, $.01 par
value per share, 6,500,000 shares of which will be issued and outstanding
(6,725,000 shares if the Underwriters' Over-Allotment Option is exercised in
full).
COMMON STOCK
Subject to prior rights of any Preferred Stock then outstanding and to
contractual limitations, if any, holders of outstanding shares of Common Stock
will be entitled to receive dividends out of assets legally available therefor,
as declared by the Board of Directors and paid by the Company.
In the event of any liquidation, dissolution or winding-up of the Company,
holders of Common Stock will be entitled to share equally and ratably in all
assets available for distribution after payment of creditors, holders of any
series of Preferred Stock outstanding at the time, and any other debts,
liabilities and preferences. Since the Company's Board of Directors has the
authority to fix the rights and preferences of, and to issue, the Company's
authorized but unissued Preferred Stock without approval of the holders of its
Common Stock, the rights of such holders may be materially limited or qualified
by the issuance of the Preferred Stock. See "--Preferred Stock."
The holders of Common Stock will be entitled to vote cumulatively for the
election of those members of the Board of Directors which may be elected by the
holders of such stock.
The Common Stock presently outstanding is, and the shares of Common Stock
offered and sold hereby will be, fully paid and non-assessable.
PREFERRED STOCK
The Board of Directors has the authority to issue Preferred Stock from time
to time in one or more series, without shareholder approval, and with respect to
each series to determine (subject to limitations prescribed by law): (1) the
number of shares constituting such series, (2) the dividend rate on the shares
of each series, whether such dividends shall be cumulative and the relation of
such dividends to the dividends payable on any other class of stock, (3) whether
the shares of each series shall be redeemable and the terms of any redemption
thereof, (4) whether the shares shall be convertible into Common Stock or other
securities and the terms of any conversion privileges, (5) the amount per share
payable on each series or other rights of holders of such shares on liquidation
or dissolution of the Company, (6) the voting rights, if any, for shares of each
series, (7) the provision of a sinking fund, if any, for each series and (8)
generally any other rights and privileges not in conflict with the Amended and
Restated Articles of Incorporation for each series and any qualifications,
limitations or restrictions thereof.
SERIES A PREFERRED STOCK. Upon consummation of the Offering, the Company
will have authorized one class of Series A Preferred Stock, consisting of 1,000
shares, all of which will be issued and outstanding and owned by the Company's
principal shareholder. The Series A Preferred Stock will have the exclusive
right to elect one less than a majority of the members of the Board of
Directors, and is entitled to a $1.00 per share liquidation preference over the
Common Stock. Other than with respect to payment of this liquidation preference,
the Series A Preferred Stock will not share in liquidation payments. The Series
A
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Preferred Stock will not participate in dividends and will not be redeemable or
convertible into Common Stock. The holders of 66 2/3 of the outstanding Series A
Preferred Stock must consent to the creation or issuance of any class or series
of Preferred Stock that has greater or equal voting rights with respect to
election of Directors as the Series A Preferred Stock.
OPTIONS
Prior to the date of this Prospectus, the Company has granted options to
purchase up to 634,000 shares of Common Stock, at exercise prices equal to the
Offering Price, pursuant to the provisions of the Company's Stock Incentive
Plan. See "Management--Stock Incentive Plan." The Compensation Committee of the
Board of Directors may authorize the issuance of additional options under the
Stock Incentive Plan after consummation of this Offering. The Company intends to
file a registration statement on Form S-8 under the Securities Act to register
these shares. See "Shares Eligible for Future Sale."
REPRESENTATIVE'S WARRANTS
At the closing of this Offering, the Company will sell to the Representative
for an aggregate purchase price of $150, the Representative's Warrants to
purchase 150,000 shares of Common Stock at a price equal to 160% of the Offering
Price.
The Representative's Warrants will contain anti-dilution provisions for
stock splits, stock dividends, recombinations and reorganizations, a one-time
demand registration provision (at the Company's expense) and piggyback
registration rights (which registration rights will expire five (5) years from
the date of this Prospectus). See "Underwriting."
VOTING RIGHTS
Shareholders are entitled to one vote for each share of Common Stock held of
record. Holders of Common Stock will vote cumulatively for the election of
Directors. The holders of Series A Preferred Stock, voting as a separate class,
will be entitled to elect two (2) of the five (5) members of the Board of
Directors, and one less than a numerical majority of any expanded Board of
Directors.
CERTAIN PROVISIONS OF THE COMPANY'S AMENDED AND RESTATED ARTICLES OF
INCORPORATION, BYLAWS AND CERTAIN STATUTORY PROVISIONS
Certain provisions in the Amended and Restated Articles of Incorporation,
the Bylaws and the FBCA that will come into effect immediately prior to the
Offering could have the effect of delaying, deferring or preventing changes in
control of the Company.
The Company's Amended and Restated Articles of Incorporation will contain
certain provisions that could discourage potential takeover attempts and impede
attempts by shareholders to change management. The Amended and Restated Articles
of Incorporation will provide for a classified Board of Directors consisting of
three classes as nearly equal in size as practicable. Each class will hold
office until the third annual meeting for election of directors following the
election of such class; provided, however, that the initial terms of the
directors in the first, second and third classes of the Board of Directors will
expire in 1998, 1999 and 2000, respectively. The Company's Amended and Restated
Articles of Incorporation provide that no director may be removed except for
cause and by the vote of not less than 66 2/3% of the total outstanding voting
power of the securities of the Company which are then entitled to vote in the
election of directors. The Amended and Restated Articles of Incorporation will
permit the Board of Directors to create new directorships, and the Company's
Bylaws permit the Board of Directors to elect new directors to serve the full
term of the class of directors in which the new directorship was created. The
Bylaws also provide that the Board of Directors (or its remaining members, even
if less than a quorum) is empowered to fill vacancies on the Board of Directors
occurring for any reason for the remainder of the term of the class of directors
in which the vacancy occurred. A vote of not less than 66 2/3% of the total
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outstanding voting power of the securities of the Company then entitled to vote
in the election of directors is required to amend the foregoing provisions of
the Amended and Restated Articles of Incorporation.
The Company is subject to Sections 607.0901 and 607.0902 of the Florida
Business Corporation Act. In general, Section 607.0901 restricts the ability of
a greater than 10% shareholder of a company to engage in a wide range of
specified transactions (including mergers, asset sales, and other affiliated
transactions) between such company and such shareholder or a person or entity
controlled by or controlling such shareholder. The statute provides that such a
transaction must be approved by the affirmative vote of the holders of
two-thirds of such company's voting shares, unless it is approved by a majority
of the disinterested directors. Section 607.0902 restricts the ability of a
third party to effect an unsolicited change in control of a company. In general,
the statute provides that shares acquired in a transaction which effects a
certain threshold change in the ownership of a company's voting shares (a
"control share acquisition") have the same voting rights as shares held by the
acquiring person prior to the acquisition only to the extent granted by a
resolution adopted by shareholders in a prescribed manner. These statutory
provisions may have an anti-takeover effect by deterring unsolicited offers or
delaying changes in control or management of the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Company's Amended and Restated Articles of
Incorporation will provide that, to the full extent permitted by the FBCA,
directors shall not be personally liable to the Company or its shareholders for
damages for breach of any duty owed to the Company or its shareholders.
The Company's Amended and Restated Articles of Incorporation and Bylaws will
provide that the Company shall indemnify its directors and officers to the
fullest extent permitted by the FBCA.
The Company maintains directors' and officers' liability insurance which is
intended to provide the Company's directors and officers protection from
personal liability in addition to the protection provided by the Company's
Amended and Restated Articles of Incorporation and Bylaws as described above.
TRANSFER AGENT
The transfer agent for the Common Stock is Continental Stock Transfer &
Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
DESCRIPTION
Upon completion of the Offering, the Company will have outstanding 6,500,000
shares of Common Stock (assuming no exercise of the Over-Allotment Option). The
1,500,000 shares of Common Stock to be sold in the Offering, and any of the
225,000 shares that may be sold upon exercise of the Underwriters'
Over-Allotment Option, will be freely tradable by persons other than
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act, without restriction or registration under the Securities Act.
The remaining 5,000,000 outstanding shares (all such shares being referred to
herein as the "Existing Shareholders Shares") will be held by the Company's
Existing Shareholders. The Existing Shareholders Shares may not be sold unless
they are registered under the Securities Act or sold pursuant to an applicable
exemption from registration, including an exemption pursuant to Rule 144 under
the Securities Act. The Registering Shareholders are registering 200,000 of the
Existing Shareholders Shares (120,000 shares beneficially owned by Mr. Giussani
and 80,000 shares owned by Mr. Chaskin) pursuant to the registration statement
of which this prospectus forms a part, but such shares are subject to a holdback
agreement with the Representative and may not be sold or otherwise disposed of
without the Representative's consent until after 12 months after the date of the
Prospectus.
As currently in effect, Rule 144 generally permits the public sale in
ordinary trading transactions of "restricted securities" and of securities owned
by "affiliates" beginning 90 days after the date of this Prospectus if the other
restrictions enumerated in Rule 144 are met. Restricted securities are
securities acquired directly or indirectly from an issuer or an affiliate of the
issuer in a transaction not involving a public offering. In general, under Rule
144, if a period of at least one year has elapsed since the date the restricted
securities were acquired from the Company or an affiliate of the Company, as
applicable, then the holder of such restricted securities (including an
affiliate) is entitled, subject to certain conditions, to sell in broker's
transactions or to market makers within any three-month period a number of
shares which does not exceed the greater of (i) 1% of the Company's then
outstanding shares of Common Stock or (ii) the share's average weekly trading
volume during the four calendar weeks preceding the date the Notice of Sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
manner-of-sale provisions and requirements as to notice and the availability of
current public information about the Company. Affiliates may sell shares not
constituting restricted securities in accordance with the foregoing limitations
and requirements but without regard to the one-year period. However, a person
who is not and has not been an affiliate of the Company at any time during the
90 days preceding the sale of the shares, and who has beneficially owned
restricted securities for at least two years, is entitled to sell such shares
without regard to the volume limitation and other conditions of Rule 144.
The Company has reserved 1,000,000 shares of its Common Stock for issuance
under the Stock Incentive Plan. All of the shares issued as the result of any
grants under the foregoing plan shall also be restricted securities unless the
Company files a registration statement on Form S-8 under the Securities Act
relating to the issuance of such shares. The Company currently intends to
register the shares of Common Stock reserved for issuance under the Stock
Incentive Plan. Subject to compliance with Rule 144 by affiliates of the
Company, any shares issued upon exercise of options granted under the Stock
Incentive Plan will become freely tradable at the effective date of the
registration statement on Form S-8. However, such shares will not be
transferable without the consent of the Representative for 12 months after the
date of this Prospectus.
Prior to the Offering, there has been no public market for the Common Stock,
and no prediction can be made as to the effect, if any, that sales of shares or
the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of substantial amounts of Common Stock in
the public market following the Offering, or the perception that such sales
could occur, could adversely affect the market prices of the Common Stock
prevailing from time to time and could impair the Company's ability to raise
capital through an offering of its equity securities.
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SALES BY REGISTERING SHAREHOLDERS
The Company has been advised by the Registering Shareholders that such
holders may, from time to time, sell some or all of the shares registered for
such shareholders, following the expiration of the 12 month holdback period to
which their shares are subject. See "Principal and Registering Shareholders."
The Company is not aware of any current intention or agreement, written or oral,
on the part of the Registering Shareholders to sell any of their shares of
Common Stock through underwriters, brokers, dealers or agents.
The Registering Shareholders (after expiration of the holdback period), may
sell the shares of Common Stock to one or more underwriters for public offering
and sale by them, to investors directly or to agents that solicit or receive
offers on behalf of Registering Shareholders, or to dealers or through a
combination of any such method of sale.
The shares of Common Stock may be distributed in one or more transactions
from time to time at a fixed price or prices (which may be changed from time to
time) in market prices prevailing at the time of sale, at prices based upon such
prevailing market prices or at negotiated prices. The Registering Shareholders
also may, from time to time, authorize agents to act on a best efforts or other
basis to solicit or receive offers to purchase shares of Common Stock.
Any underwriting commission paid by the Company or Registering Shareholders
to underwriters or agents in connection with the offering of the shares of
Common Stock, and any discounts, concessions or commissions allowed by
underwriters to participating dealers, will be set forth in a Prospectus.
Underwriters, dealers and agents participating in the distribution of shares of
Common Stock (including agents only soliciting or receiving offers to purchase
shares on behalf of the Company) may be deemed to be underwriters, and any
discounts or commissions received by them and any profit realized by them on
resale of the shares may be deemed to be underwriting discounts and commissions
under the Securities Act.
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UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Company has agreed to sell to the Underwriters named below, for whom Joseph
Charles & Associates, Inc. is acting as Representative, and the Underwriters
have agreed, severally, to purchase from the Company the number of shares of
Common Stock set forth opposite their respective names.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITERS TO BE PURCHASED
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Joseph Charles & Associates, Inc. ..........................................
----------------
Total.....................................................................
----------------
</TABLE>
The shares of Common Stock are being sold on a firm commitment basis. The
Underwriting Agreement provides, however, that the obligations of the
Underwriters are subject to certain conditions precedent. The Underwriters are
committed to purchase all of the shares offered hereby, if any are purchased.
The Representative has informed the Company that it does not expect sales of any
shares to be made to any account over which the Underwriters have discretionary
authority.
The Representative has advised the Company that the Underwriters propose to
offer the shares of Common Stock directly to the public at the Offering Price
set forth on the cover page of this Prospectus, and to selected dealers at that
price, less a concession of not more than $ per share. The Underwriters
may allow a discount of not more than $ per share on sales to certain
other dealers. After the Offering, the price to the public of the shares may be
changed.
The Company has granted the Representative an option, exercisable during the
45-day period following the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the Offering Price, less the underwriting
discounts and commissions. The Representative may exercise such option only for
the purpose of covering any over-allotments incurred in connection with the sale
of the shares offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including liabilities under the Securities
Act, or to contribute to payments that the Underwriters may be required to make
in respect thereof.
The Company has agreed to pay the Representative a non-accountable expense
allowance of 3% of the gross proceeds from the sale of the shares of Common
Stock by the Company, against which $50,000 has heretofore been paid. In
addition to the Underwriter's discounts and commissions and the non-accountable
expense allowance, the Company is required to pay the costs of qualifying the
shares of Common Stock under federal and state securities laws, together with
legal and accounting fees, printing, road show and other costs in connection
with the Offering.
The Company has agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospectus for a fee
of $3,000 per month which shall be paid in full at the closing of the Offering.
The Company has also agreed, for a period of two (2) years from the date of
this Prospectus, at the option of the Representative, to nominate a designee of
the Representative as a non-voting advisor to the Company's Board of Directors,
this designee will be entitled to 10-year options to purchase 4,000 shares of
Common Stock at its fair market value at the time of grant for each year of
service in such capacity, and to compensation of $2,000 per meeting attended in
person, $500 per meeting attended by conference call and
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reimbursement of expenses for attendance at Board Meetings. The Representative
has not yet exercised its right to designate such a person.
At the closing of this Offering, the Company will sell and deliver to the
Representative for an aggregate purchase price of $150, the Representative's
Warrants to purchase 150,000 shares of Common Stock at a price equal to 160% of
the Offering Price.
The Representative's Warrants will contain anti-dilution provisions for
stock splits, stock dividends, recombinations and reorganizations, a one-time
demand registration provision (at the Company's expense) and piggyback
registration rights (which registration rights will expire five (5) years from
the date of this Prospectus). The Representative's Warrants will be exercisable
during the four (4) year period commencing one (1) year after the date of this
Prospectus. To the extent that the Representative's Warrants are exercised,
dilution of the interests of the Company's shareholders will occur. Further, the
terms on which the Company will be able to obtain additional equity capital may
be adversely affected, since the holders of the Representative's Warrants can be
expected to exercise them at any time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Representative's Warrants. Any profit realized by the
Representative on the sale of the Representative's Warrants or the underlying
shares of Common Stock may be deemed additional underwriting compensation.
Except in connection with acquisitions, the issuance of up to 1,000,000
shares of Common Stock issuable under the Stock Incentive Plan, or, with the
consent of the Representative, warrants issued in connection with a
debt-offering to fund acquisition the Company has agreed, for a period of twelve
(12) months from the closing of this Offering, that it will not issue, sell or
purchase any shares of Common Stock or Preferred Stock or issue warrants or
options or other equity securities of the Company without the prior written
consent of the Representative. In addition, the officers, directors and
principal shareholders of the Company have agreed that they will not offer,
sell, contract to sell, transfer, assign, contract to assign, gift, grant any
option or warrant to purchase, or right to acquire, announce an intention to
sell, pledge, exchange, contract to exchange or otherwise dispose of or contract
to dispose of, directly or indirectly any shares of Common Stock or Preferred
Stock of the Company owned by them for a period of at least twelve (12) months
from the closing of this Offering without the prior written consent of the
Representative except for transfers among existing shareholders and gifts to
their children or trusts for their children provided such persons agree to be
bound by the foregoing restrictions. The Representative may, in its discretion,
and without notice to the public, waive such restrictions and permit holders
otherwise agreeing to restrict their shares to sell any or all of their shares.
See "Shares Eligible for Future Sale."
Prior to the Offering there has been no public trading market for the Common
Stock. Consequently, the Offering Price of the shares of Common Stock has been
determined by negotiation between the Company and the Representative. Among the
factors considered in determining the Offering Price of the shares of Common
Stock were the Company's financial condition and prospects, market prices of
similar securities of comparable publicly traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities market.
Certain persons participating in the Offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchases, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the
Representatives to reclaim a selling concession from a syndicate member in
connection with the offering when Common Stock sold by the syndicate member are
purchased in
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syndicate covering transactions. Such transactions may be effected on the Nasdaq
Stock Market, in the over-the-counter market, or otherwise. Such stabilizing, if
commenced, may be discontinued at any time.
LEGAL MATTERS
Stroock & Stroock & Lavan LLP, Miami, Florida, will pass upon the validity
of the Common Stock offered hereby for the Company. De Martino Finkelstein Rosen
& Virga, Washington, D.C., will pass upon certain legal matters in connection
with the Offering for the Representative.
EXPERTS
The financial statements of Ursus Telecom Corporation at March 31, 1997 and
1996 and for each of the three years in the period ended March 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent certified public accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with the
Commission a Registration Statement on Form S-1 under the Securities Act, of
which this Prospectus forms a part, with respect to the Common Stock offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement for further
information with respect to the Company and the Common Stock offered hereby.
Statements contained herein concerning the provisions of documents are
necessarily summaries of such documents and when any such document is an exhibit
to the Registration Statement, each such statement is qualified in its entirety
by reference to the copy of such document filed with the Commission.
The Registration Statement, including exhibits and schedules thereto may be
inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
Commission's Regional Offices located at Seven World Trade Center, Suite 1300,
New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials may also be obtained at
prescribed rates from the Public Reference Section of the Commission,
Washington, D.C. 20549. In addition, registration statements and certain other
filings made by the Commission through its Electronic Data Gathering and
Retrieval ("EDGAR") systems are publicly available through the Commission's site
on the Internet's World Wide Web, located at http://www.sec.gov.
REPORTS TO SHAREHOLDERS
After the Offering, the Company intends to furnish its shareholders with
annual reports containing audited financial statements and a report thereon by
independent certified public accountants and with quarterly reports for the
first three quarters of each fiscal year containing unaudited summary financial
information.
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GLOSSARY OF TERMS
ACCOUNTING OR SETTLEMENT RATE--The per minute rate negotiated between
carriers in different countries for termination of international long distance
traffic in, and return traffic to, the carriers' respective countries.
CALL REORIGINATION (ALSO KNOWN AS "CALLBACK")-- A form of dial up access
that allows a user to access a telecommunications company's network by placing a
telephone call, hanging up, and waiting for an automated call reorigination. The
call reorigination then provides the user with a dial tone which enables the
user to initiate and complete a call.
CAGR--Compound Annual Growth Rate.
CALL-THROUGH--The provision of international long distance service through
conventional long distance or "transparent" call reorigination.
CLEC--Competitive Local Exchange Carrier.
CUG (CLOSED USER GROUP)--A group of specified users, such as employees of a
company, permitted by applicable regulations to access a private voice or data
network, which access would otherwise be denied to them as individuals.
DIRECT ACCESS--A means of accessing a network through the use of a permanent
point-to-point circuit typically leased from a facilities-based carrier. The
advantages of direct access include simplified premises-to-anywhere calling,
faster call set-up times and potentially lower access and transmission costs
(provided there is sufficient traffic over the circuit to generate economies of
scale).
DIAL-UP ACCESS--A form of service whereby access to a network is obtained by
dialing an international toll-free number or a local access number.
EUROPEAN UNION OR EU--Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and
the United Kingdom.
FACILITIES-BASED CARRIER--A carrier which transmits a significant portion of
its traffic over owned transmission facilities.
FCPA--Foreign Corrupt Practices Act.
FIBER-OPTIC--A transmission medium consisting of high-grade glass fiber
through which light beams are transmitted carrying a high volume of
telecommunications traffic.
IPLC (INTERNATIONAL PRIVATE LINE CIRCUITS)--Point-to-point permanent
connections which can carry voice and data. IPLCs are owned and maintained by
ITOs or third party resellers.
INTERNET PROTOCOL (IP)--A class of product that uses data and/or voice
transmission over the Internet/ Intranet.
IDD--International Direct Dial.
ISDN (INTEGRATED SERVICE DIGITAL NETWORK)--A hybrid digital network capable
of providing transmission speeds of up to 128 kilobits per second for both voice
and data.
ISP--International Settlements Policy. The ISP establishes the permissible
arrangements between facilities-based carriers based in the U.S. and their
foreign counterparts for terminating each other's traffic over their respective
networks.
IRU--Indefeasible Right of Use.
ISR (INTERNATIONAL SIMPLE RESALE)--The use of international leased lines for
the resale of switched telephony services to the public, by passing the current
system of accounting rates.
ITO (INCUMBENT TELECOMMUNICATIONS OPERATOR)--The dominant carrier or
carriers in each country, often, but not always, government-owned or protected
(alternatively referred to as the Postal, Telephone and Telegraph Company, or
PTT).
ITU--International Telecommunications Union--International
Telecommunications Association headquartered in Geneva, Switzerland.
LCR--Least Cost Routing.
80
<PAGE>
LEC (LOCAL EXCHANGE CARRIER)--Companies from which the Company and other
long distance providers must purchase "access services" to originate and
terminate calls in the U.S.
LOCAL CONNECTIVITY--Physical circuits connecting the switching facilities of
a telecommunications services provider to the interexchange and transmission
facilities of a facilities-based carrier.
LOCAL EXCHANGE--A geographic area determined by the appropriate regulatory
authority in which calls generally are transmitted without toll charges to the
calling or called party.
NODE--A specially configured multiplexer which provides the interface
between the local PSTN where the node is located and a switch. A node collects
and concentrates call traffic from its local area and transfers it to a switch
via private line for call processing. Nodes permit a carrier to extend its
network into new geographic locations by accessing the local PSTN without
requiring the deployment of a switch.
OPERATING AGREEMENTS--An agreement that provides for the exchange of
international long distance traffic between correspondent international long
distance providers that own facilities in different countries. These agreements
provide for the termination of traffic in, and return traffic from, the
international long distance providers' respective countries at a negotiated
"accounting rate." Under a traditional operating agreement, the international
long distance provider that originates more traffic compensates the
corresponding long distance provider in the other country by paying an amount
determined by multiplying the net traffic imbalance by the latter's share of the
accounting rate.
PBX (PUBLIC BRANCH EXCHANGE)--Switching equipment that allows connection of
a private extension telephone to the PSTN or to a Private Line.
POPS--Points of Presence. An interlinked group of modems, routers and other
computer equipment, located in a particular city or metropolitan area, that
allows a nearby subscriber to access the Network through a local telephone call.
PSCS--Public Service Commissions.
PRIVATE LINE--A dedicated telecommunications connection between end user
locations.
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK)--A telephone network which is
accessible by the public through private lines, wireless systems and pay phones.
REFILE--Traffic originating from one country (original country) and destined
to another country (receiving country) is routed through a third country without
the knowledge of the receiving country. The receiving country has only
identified the third country and assumes the traffic originated from the third
country only.
RESALE--Resale by a provider of telecommunications services of services sold
to it by other providers or carriers on a wholesale basis.
SWITCHING FACILITY--A device that opens or closes circuits or selects the
paths or circuits to be used for transmission of information. Switching is a
process of interconnecting circuits to form a transmission path between users.
TRANSIT--Traffic originating from one country and destined to another
country is routed through a third country with the full knowledge and consent of
all countries and carriers concerned.
TRANSPARENT CALL REORIGINATION--Technical innovations have enabled
telecommunications carriers to offer a "transparent" form of call reorigination
without the usual "hang up" and "callback" whereby the call is automatically and
swiftly processed by a programmed switch.
VALUE-ADDED TAX (VAT)--A consumption tax levied on end-consumers of goods
and services in applicable jurisdictions.
VOICE TELEPHONY--A term used by the EU, defined as the commercial provision
for the public of the direct transport and switching of speech in real-time
between public switched network termination points, enabling any user to use
equipment connected to such a network termination point in order to communicate
with another termination points.
WTO--World Trade Organization (based in Geneva, Switzerland).
81
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Certified Public Accountants......................................................... F-2
Balance Sheets as of March 31, 1996 and 1997 and December 31, 1997 (unaudited)............................. F-3
Statements of Income for the fiscal years ended March 31, 1995, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997 (unaudited)................................................................... F-4
Statement of Shareholders' Equity (Capital Deficiency) for the fiscal years ended March 31, 1995, 1996 and
1997 and the nine months ended December 31, 1996 and 1997 (unaudited).................................... F-5
Statements of Cash Flows for the fiscal years ended March 31, 1995, 1996 and 1997 and the nine months ended
December 31, 1996 and 1997 (unaudited)................................................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Ursus Telecom Corporation
We have audited the accompanying balance sheets of Ursus Telecom Corporation as
of March 31, 1996 and 1997, and the related statements of income, shareholders'
equity (capital deficiency) and cash flows for each of the three years in the
period 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 Ursus Telecom Corporation at
March 31, 1996 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1997 in conformity
with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Miami, Florida
August 15, 1997
F-2
<PAGE>
URSUS TELECOM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
MARCH 31 DECEMBER 31,
-------------------- DECEMBER 31, 1997
1996 1997 1997 (NOTE 2)
--------- --------- ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 476,916 $ 740,765 $ 679,148
Accounts receivable, net................................... 1,735,437 3,378,886 4,791,042
Advances and notes receivable--related parties............. 122,668 185,694 33,851
Prepaid expenses........................................... 18,415 51,570 53,768
Other current assets....................................... -- 38,716 41,293
Income taxes receivable.................................... -- 161,430 --
Deferred taxes............................................. 9,652 9,076 47,414
--------- --------- ------------
Total current assets................................... 2,363,088 4,566,137 5,646,516
Equipment, net............................................... 360,733 587,368 786,112
Deferred taxes............................................... 33,328 17,373 7,430
Deposit on acquisition....................................... -- -- 321,059
Deferred costs of public offering............................ -- -- 207,531
Other assets, net............................................ 39,734 72,508 73,751
--------- --------- ------------
Total assets........................................... $2,796,883 $5,243,386 $7,042,399
--------- --------- ------------
--------- --------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $1,446,194 2,714,789 $3,834,940
Accrued expenses........................................... 22,783 38,660 70,991
Current portion of long-term debt.......................... -- -- 85,000
Customer advances.......................................... -- -- 30,000
Income taxes payable....................................... 26,278 74,146 39,782
Commissions payable........................................ 28,654 85,516 75,321
Deferred revenue........................................... 9,314 7,006 68,510
Deferred promotional discounts............................. 18,567 -- --
--------- --------- ------------
Total current liabilities.............................. 1,551,790 2,920,117 4,204,544
Deferred taxes............................................... 56,164 36,834 67,186
Long-term debt............................................... 580,000 425,000 --
Shareholders' equity:
Preferred stock $.01 par value, 1,000,000 shares
authorized;
1,000 shares outstanding on a pro forma basis............ -- -- -- $ 10
Common stock, $.01 par value; 20,000,000 shares authorized;
5,000,000 issued and outstanding on a pro forma basis.... -- -- -- 50,000
Common stock--Class A: $50 par value; 500 shares
authorized, issued and outstanding....................... 25,000 25,000 25,000 --
Common stock--Class B: $50 par value; 15,500 shares
authorized, 3,500 shares issued and outstanding.......... 175,000 175,000 175,000 --
Common stock--Class C: $50 par value; 4,000 shares
authorized, 1,416.67 shares issued and outstanding, net
of discount of $2,084.................................... 68,750 68,750 68,750 --
Stock subscription receivable.............................. (18,750) (18,750) -- --
Additional paid in capital................................. -- -- -- 218,740
Retained earnings.......................................... 358,929 1,611,435 2,501,919 2,501,919
--------- --------- ------------ -------------
Total shareholders' equity............................. 608,929 1,861,435 2,770,669 $ 2,770,669
--------- --------- ------------
Total liabilities and shareholders' equity............. $2,796,883 $5,243,386 $7,042,399
--------- --------- ------------
--------- --------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Revenues:
Retail.............................. $ 6,290,512 $ 13,228,074 $ 20,523,019 $ 14,987,729 $ 18,420,864
Wholesale........................... -- -- 315,408 -- 2,608,249
------------ ------------- ------------- ------------- -------------
Total revenues.................. 6,290,512 13,228,074 20,838,427 14,987,729 21,029,113
Cost of revenues:
Retail.............................. 3,746,542 7,675,370 12,031,794 8,575,407 11,376,834
Wholesale........................... -- -- 163,878 -- 2,411,921
------------ ------------- ------------- ------------- -------------
Total cost of revenues................ 3,746,542 7,675,370 12,195,672 8,575,407 13,788,755
------------ ------------- ------------- ------------- -------------
Gross profit.......................... 2,543,970 5,552,704 8,642,755 6,412,322 7,240,358
Operating expenses:
Commissions......................... 1,224,975 2,429,830 3,766,235 2,766,212 3,202,016
Selling, general and administrative
expenses.......................... 1,088,184 1,659,591 2,746,379 2,071,075 2,490,506
Depreciation and amortization....... 72,285 94,415 126,292 86,556 133,429
------------ ------------- ------------- ------------- -------------
Total operating expenses........ 2,385,444 4,183,836 6,638,906 4,923,843 5,825,951
------------ ------------- ------------- ------------- -------------
Operating income...................... 158,526 1,368,868 2,003,849 1,488,479 1,414,407
Other income (expense):
Interest expense.................... (61,221) (59,353) (39,363) (30,164) (19,691)
Interest income..................... 1,099 5,089 16,271 9,136 22,443
Gain (loss) on sale of equipment.... -- -- 9,644 (1,922) 10,584
------------ ------------- ------------- ------------- -------------
(60,122) (54,264) (13,448) (22,950) 13,336
------------ ------------- ------------- ------------- -------------
Income before provision (benefit) for
income taxes........................ 98,404 1,314,604 1,990,401 1,465,529 1,427,743
Provision (benefit) for income
taxes............................. (283,631) 524,553 737,895 555,881 537,259
------------ ------------- ------------- ------------- -------------
Net income............................ $ 382,035 $ 790,051 $ 1,252,506 $ 909,648 $ 890,484
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro Forma net income per common
share-basic and dilutive............ $ .08 $ .16 $ .25 $ .18 $ .18
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
Pro Forma weighted average shares
outstanding......................... 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK STOCK EARNING
-------------------------------- SUBSCRIPTION (ACCUMULATED
CLASS A CLASS B CLASS C RECEIVABLE DEFICIT) TOTAL
--------- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1994...................... $ 25,000 $ 175,000 $ 50,000 $ -- $ (813,157) $ (563,157)
Issuance of common stock.................... -- -- 18,750 (18,750) -- --
Net income.................................. -- -- -- -- 382,035 382,035
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1995..................... 25,000 175,000 68,750 (18,750) (431,122) (181,122)
Net income.................................. -- -- -- -- 790,051 790,051
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1996..................... 25,000 175,000 68,750 (18,750) 358,929 608,929
Net income.................................. -- -- -- -- 1,252,506 1,252,506
--------- ---------- --------- ------------ ------------ ------------
Balance at March 31, 1997..................... 25,000 175,000 68,750 (18,750) 1,611,435 1,861,435
Collection of stock subscription
receivable................................ -- -- -- 18,750 -- 18,750
Net income (unaudited)...................... -- -- -- -- 890,484 890,484
--------- ---------- --------- ------------ ------------ ------------
Balance at December 31, 1997 (unaudited)...... $ 25,000 $ 175,000 $ 68,750 $ -- $2,501,919 $ 2,770,669
--------- ---------- --------- ------------ ------------ ------------
--------- ---------- --------- ------------ ------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
URSUS TELECOM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
-------------------------------- ------------------------
1995 1996 1997 1996 1997
--------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
----------- -----------
OPERATING ACTIVITIES
Net income........................................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 72,285 94,415 126,292 86,556 133,429
(Gain) loss on sale of equipment................. -- (9,644) 1,922 (10,584)
Deferred income taxes............................ (283,631) 296,815 (2,799) (3,992) 1,957
Changes in operating assets and liabilities:
Accounts receivable............................ (586,134) (933,681) (1,643,449) (949,263) (1,412,156)
Income taxes receivable........................ -- -- (161,430) (9,663) 161,430
Prepaid expenses............................... (8,859) (4,499) (33,155) (86,685) (2,198)
Other current assets........................... -- -- (38,716) (12,000) (2,577)
Accounts payable............................... 666,554 482,538 1,268,595 631,963 1,120,151
Accrued expenses............................... (34,565) (20,473) 15,877 55,452 32,331
Advances from customers........................ -- -- -- -- 30,000
Income taxes payable........................... 18,053 8,225 47,868 36,076 (34,364)
Commissions payable............................ 22,156 (2,435) 56,862 38,884 (10,195)
Deferred revenue............................... -- 9,314 (2,308) -- 61,504
Deferred discounts............................. (18,635) (47,798) (18,567) (18,567) --
--------- --------- ---------- ----------- -----------
Net cash provided by operating activities............ 229,259 672,472 857,932 680,331 959,212
INVESTING ACTIVITIES
Deposit on acquisition............................... -- -- -- -- (321,059)
Purchase of equipment................................ (143,389) (93,646) (352,081) (204,751) (320,690)
Sale of equipment.................................... -- -- 10,000 10,000 --
Advances to related parties.......................... -- (122,668) (63,026) (65,393) 151,843
Increase in other assets............................. (29,125) (6,152) (33,976) (23,955) (2,142)
--------- --------- ---------- ----------- -----------
Net cash used in investing activities................ (172,514) (222,466) (439,083) (284,099) (492,048)
FINANCING ACTIVITIES
Deferred costs of public offering.................... -- -- -- -- (207,531)
Increase in long-term debt........................... 21,000 -- -- -- --
Repayments of long-term debt......................... (20,000) (150,000) (155,000) (130,000) (340,000)
Collection of stock subscription receivable.......... -- -- -- -- 18,750
Advances repaid to officer........................... (40,832) -- -- -- --
--------- --------- ---------- ----------- -----------
Net cash used in financing activities................ (39,832) (150,000) (155,000) (130,000) (528,781)
--------- --------- ---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................................ 16,913 300,006 263,849 266,232 (61,617)
Cash and cash equivalents at beginning of period..... 159,997 176,910 476,916 476,916 740,765
--------- --------- ---------- ----------- -----------
Cash and cash equivalents at end of period........... $ 176,910 $ 476,916 $ 740,765 $ 743,148 $ 679,148
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
SUPPLEMENTAL CASH FLOW AND NON-CASH FLOW INFORMATION
Cash paid for interest......................... $ 64,582 $ 58,670 $ 38,838 $ 30,164 $ 22,224
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Cash paid for income taxes..................... $ -- $ 201,460 $ 854,256 $ 433,574 $ 408,236
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Trade-in allowance for used equipment.......... $ -- $ -- $ 60,000 $ -- $ 67,500
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
Stock issued for note receivable............... $ 18,750 $ -- $ -- $ -- $ --
--------- --------- ---------- ----------- -----------
--------- --------- ---------- ----------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
1. NATURE OF OPERATIONS
Ursus Telecom Corporation (the "Company") was incorporated in Florida on
March 23, 1993. The Company is a provider of international telecommunications
services. The Company's revenues are derived from the sale of telecommunications
services to retail customers, who are typically small-to medium-sized businesses
and travelers; and to wholesale customers, who are typically telecommunications
carriers. The Company's retail customers are principally located in South
Africa, Latin America, the Middle East (primarily Lebanon and Egypt), Russia and
France, while the wholesale customers are located in the United States. In both
the retail and wholesale aspects of its business, the Company extends credit to
its customers on an unsecured basis with the risk of loss limited to outstanding
amounts.
The Company markets its services through a worldwide network of independent
agents. The Company extends credit to its sales agents on an unsecured basis
with the risk of loss limited to outstanding amounts, less commissions payable
to its agents. The Company has entered into exclusive agency agreements with all
of its current agents. The initial term of the agreements has generally been for
a period of five years. Provided that agents are not in default, agents
generally have the option of renewing their agreements for two additional terms
of three years each by notifying the Company at least six months prior to the
agreement's expiration date. See Note 10 -- Significant Customers, and Note 11
- -- Concentrations of Credit Risk.
The Company has historically experienced and expects to continue to
experience, a decrease in the use of its services in the months of August and
December due to the closing of many businesses for holiday in Europe and the
United States during those months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements as of December 31,
1997 and for each of the nine month periods ended December 31, 1996 and 1997
include all adjustments which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position and results of operations
and cash flows for the periods presented. All such adjustments are of a normal
recurring nature. The results of the Company's operations for the nine months
ended December 31, 1996 and 1997 are not necessarily indicative of the results
of operations for a full fiscal year.
PRO FORMA BALANCE SHEET INFORMATION
Pro forma shareholders' equity reflects the stock split and recapitalization
which has been approved by the Company's Board of Directors and was effective
upon the filing of the Amended and Restated Articles of Incorporation on
February 12, 1998 with the appropriate state agency. The filing is expected to
occur on or before the effective date of the proposed initial public offering of
the Company's common stock. See Note 13.
PRO FORMA NET INCOME PER SHARE
After the effectiveness of the stock split and recapitalization described
above, the Company has a single class of common stock with 5 million shares
outstanding and a single class of preferred stock with
F-7
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1,000 shares outstanding. The preferred shares are not convertible into shares
of Common Stock and do not provide for dividends.
Pro forma basic net income per share included on the accompanying statements
of income reflect pro forma weighted average common shares outstanding for all
periods presented assuming the stock split and recapitalization occurred at the
beginning of the earliest year presented.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128 "Earnings Per Share" effective
for periods ending after December 15, 1997. SFAS No. 128 requires a dual
presentation, for complex capital structures, of basic and diluted earnings per
share ("EPS") on the face of the income statement, and requires a reconciliation
of basic EPS factors to diluted EPS factors. The Company adopted SFAS No. 128 in
December 1997 with no material impact to the Company's EPS calculation or
disclosure information.
Following is a reconciliation of amounts used in the per share computations:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net income--numerator basic
computation..................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
Effect of dilutive
securities--None -- -- -- -- --
--------- --------- --------- --------- ---------
Net income as adjusted for assumed
conversion--numerator diluted
computation..................... $ 382,035 $ 790,051 $1,252,506 $ 909,648 $ 890,484
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares--
denominator basic computation... 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
Effect of dilutive
securities--None -- -- -- -- --
--------- --------- --------- --------- ---------
Weighted average shares,
as adjusted--denominator........ 4,869,335 5,000,000 5,000,000 5,000,000 5,000,000
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share:
Basic......................... $ 0.08 $ 0.16 $ 0.25 $ 0.18 $ 0.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted....................... $ 0.08 $ 0.16 $ 0.25 $ 0.18 $ 0.18
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents.
F-8
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EQUIPMENT
Equipment is stated at cost. Depreciation is computed using the
straight-line method for financial reporting purposes over useful lives ranging
from three to seven years. Amortization of leasehold improvements is provided
using the straight-line method over the shorter of the estimated useful lives of
the assets or the lease term.
SOFTWARE DEVELOPMENT COSTS
The internal costs incurred to develop or improve software used in the
Company's telecommunication switching activities and selling and administrative
activities is expensed as incurred. Purchased software is included in equipment
and is depreciated using the straight-line method.
ORGANIZATION COSTS
Organization costs have been capitalized and are being amortized on a
straight-line basis over a five year period.
REVENUE RECOGNITION
Revenues from retail telecommunication services are recognized when customer
calls are completed. Revenues from wholesale telecommunication services are
recognized when the wholesale carrier's customers' calls are completed. Unbilled
revenue represents calls that are completed but not invoiced at the balance
sheet date. Revenue from the sale of calling cards is deferred and recognized
when calling card calls are completed or when the cards expire.
COST OF REVENUES
Cost of revenues is based on the direct costs of fixed facilities and the
variable cost of transmitting and terminating traffic on other carriers'
facilities.
COMMISSIONS
Commissions paid to sales agents are based on the traffic generated in their
respective territories and are expensed in the period when associated call
revenues are recognized.
DEFERRED PROMOTIONAL DISCOUNTS
The Company amortizes the benefits of lump sum promotional incentives
received, on a straight-line basis, over the periods of the associated
contracts. When a contract's annual minimum commitment is reached prior to the
end of the contract year, the remainder of the annual discount is recognized.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company adopted the provisions of SFAS No. 121,
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS. SFAS 121 requires impairment
losses to be recorded on long-lived assets when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by
F-9
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
those assets are less than the assets' carrying amount. The Company, based on
current circumstances, does not believe that any long-lived assets are impaired
at December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and long term debt approximate fair value due
to the short maturity of these items.
NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
COMPREHENSIVE INCOME: FINANCIAL STATEMENT PRESENTATION which requires that all
items that are required to be recognized under the accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed as prominently as other financial statements. Statement No. 130 is
effective for the Company's fiscal year ending March 31, 1999. The adoption of
Statement No. 130 is not expected to have a material effect on the Company's
financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION which
requires a Company to disclose segment profit or loss and segment assets.
Statement No. 131 is effective for the Company's fiscal year ending March 31,
1998. The adoption of Statement No. 131 will require the Company to upgrade its
accounting system in order to accumulate additional segment information.
3. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
-------------------------- DECEMBER 31,
1996 1997 1997
------------ ------------ ------------
<S> <C> <C> <C>
Billed Services.................................... $ 985,221 $ 2,281,835 $3,320,087
Unbilled Services.................................. 761,597 1,112,051 1,566,801
Allowance for doubtful accounts.................... (11,381) (15,000) (95,846)
------------ ------------ ------------
$ 1,735,437 $ 3,378,886 $4,791,042
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-10
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
4. EQUIPMENT
Equipment consists of the following:
<TABLE>
<CAPTION>
ESTIMATED MARCH 31,
USEFUL ------------------------ DECEMBER 31,
LIVES 1996 1997 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Switch equipment....................... 7 years $ 380,631 $ 459,607 $ 504,645
Furniture and fixtures................. 5 years 55,198 65,519 83,539
Computer equipment..................... 3 years 82,879 187,581 360,834
Computer software...................... 3 years 37,211 66,260 85,384
Office equipment....................... 5 years 11,070 20,862 20,862
Leasehold improvements................. 7 years -- 61,478 100,206
----------- ----------- ------------
566,989 861,307 1,155,470
Less accumulated depreciation and
amortization......................... (206,256) (273,939) (369,358)
----------- ----------- ------------
$ 360,733 $ 587,368 $ 786,112
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Term loan, originally payable May 20, 1996............. $ 330,000 $ -- $ --
Term loan, originally payable November 11, 1996........ 250,000 -- --
Term loan, payable August 31, 1998..................... -- 425,000 85,000
---------- ---------- ------------
$ 580,000 $ 425,000 $ 85,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
During 1993, the Company entered into two term loan agreements with its bank
aggregating $730,000. The due dates of the loans were May 20, 1996 and November
11, 1996, respectively. Subsequent to March 31, 1996, the Company repaid $80,000
on the term loan which was originally due on May 20, 1996 and, at the same time,
replaced the two existing term loans with a new term loan with the same lender
in the amount of $500,000. As a result, the two original term loans have been
shown as long-term debt in the accompanying balance sheet at March 31, 1996. The
due date of the full amount of the new loan, $425,000 at March 31, 1997, is
currently August 31, 1998. The loan is secured by money-market accounts pledged
by an officer. The note provides for selection of interest periods of one, two,
three, six, nine or twelve months at the option of the Company. The Company has
elected to pay interest monthly and is charged at a rate of 1.25% over the
bank's cost of funds subject to a cap of a 1.75% spread between the loan rate
and the rate earned on the money-market account pledged against the loan. The
rate in effect at December 31, 1997 was 8.75% (8.437% and 8.3125% at March 31,
1997 and 1996, respectively). See Note 14 -- Subsequent Events.
F-11
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
6. SHAREHOLDERS' EQUITY
The Company has been authorized to issue three classes of common stock at a
par value of $50. Class A, Class B and Class C shares have the same dividend and
liquidation rights. Class A shares carry the sole right to elect the first three
directors of the Company, Class B shares are identical to Class A shares except
for the right to elect the first three directors, and Class C shares are
nonvoting for all purposes.
The Company has presently authorized one class of Series A Preferred Stock,
consisting of 1,000 shares, all of which are issued and outstanding and owned by
the Company's principal shareholder. The Series A Preferred Stock has the
exclusive right to elect one less than a majority of the members of the Board of
Directors, and is entitled to a $1.00 per share liquidation preference over the
Common Stock. Other than with respect to payment of this liquidation preference,
the Series A Preferred Stock does not share in liquidation payments. The Series
A Preferred Stock does not participate in dividends and it is not redeemable or
convertible into Common Stock. The holders of 66 2/3 of the outstanding shares
of Series A Preferred Stock must consent to the creation or issuance of any
class or series of Preferred Stock that has greater or equal voting right with
respect to the election of Directors as the Series A Preferred Stock.
On October 30, 1996, by unanimous written consent of the Board of Directors,
distribution of the Company's retained earnings was restricted through April 1,
1997.
7. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred income tax assets and liabilities are determined based
upon differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
----------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
----------- ---------- ---------- ---------- ----------
Current......................... $ -- $ 227,738 $ 740,694 $ 559,873 $ 535,302
Deferred........................ (283,631) 296,815 (2,799) (3,992) 1,957
----------- ---------- ---------- ---------- ----------
Total..................... $ (283,631) $ 524,553 $ 737,895 $ 555,881 $ 537,259
----------- ---------- ---------- ---------- ----------
----------- ---------- ---------- ---------- ----------
</TABLE>
F-12
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred income taxes are as follows:
<TABLE>
<CAPTION>
MARCH 31,
---------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for bad debts................................. $ 4,552 $ -- $ 38,338
Accrued expenses........................................ 5,100 9,076 9,076
Amortization............................................ 33,328 17,373 7,430
---------- ---------- ------------
Total deferred tax assets......................... 42,980 26,449 54,844
Deferred tax liabilities:
Depreciation............................................ (56,164) (36,834) (67,186)
---------- ---------- ------------
Total deferred tax liabilities.................... (56,164) (36,834) (67,186)
---------- ---------- ------------
Total net deferred tax liabilities................ $ (13,184) $ (10,385) $ (12,342)
---------- ---------- ------------
---------- ---------- ------------
</TABLE>
F-13
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
7. INCOME TAXES (CONTINUED)
The reconciliation of the effective income tax expense (benefit) to federal
statutory rates is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
Tax at federal statutory rate............. 34.00% 34.00% 34.00% 34.00% 34.00%
State taxes, net of federal benefit....... 3.81 5.65 3.66 3.57 3.66
Nondeductible items....................... 1.65 .27 .24 .15 .01
Change in valuation allowance............. (330.13) -- -- -- --
Other..................................... 2.44 (.02) (.83) (.49) (.04)
--------- --------- --------- --------- ---------
(288.23)% 39.90% 37.07% 37.23% 37.63%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
SFAS No. 109, ACCOUNTING FOR INCOME TAXES, requires a valuation allowance to
reduce the deferred tax assets reported if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. During 1995, the Company's deferred tax asset
valuation allowance was reduced by $324,859 and thereby eliminated.
8. RELATED PARTY TRANSACTIONS
Advances and notes receivable--related parties consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
---------------------- -----------------
1996 1997 1997
---------- ---------- -----------------
<S> <C> <C> <C>
Note receivable--officer, unsecured, due on
demand, bearing interest at 7.65% per annum (see
Note 14)........................................ $ 60,000 $ 117,000 $ --
Notes Receivable--Minority shareholder............ 40,000 65,000 28,895
Cash advances--officer............................ -- -- 387
Advances receivable--affiliate, unsecured,
non-interest bearing............................ 22,668 3,694 4,569
---------- ---------- -------
$ 122,668 $ 185,694 $ 33,851
---------- ---------- -------
---------- ---------- -------
</TABLE>
During fiscal 1995, 416.67 shares of Class C shares were issued to an
officer in exchange for a $18,750 promissory note bearing interest at 7.65%, due
March 1, 1997, and accordingly, this stock subscription receivable is reflected
as a deduction from shareholders' equity at March 31, 1996 and 1997. On December
19, 1997, an officer/minority shareholder repaid a loan of $18,750.
Bonuses payable to executive officers of $24,601 were included in accrued
expenses at March 31, 1995.
Between December 21, 1995 and June 26, 1996 the Company loaned $65,000 in
the aggregate to a minority shareholder. The notes are unsecured and bear
interest at the rate of 7.65% per annum.
On December 23, 1997, the Company's Chief Executive Officer repaid the
Company $138,608. The amount repaid consisted of a note for $127,000 plus
accrued interest and cash advances totaling $11,608.
F-14
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
9. COMMITMENTS
In addition to its facility, the Company leases equipment and vehicles. The
approximate annual minimum lease payments under the non-cancelable operating
leases, including the facility lease, existing as of December 31, 1997 are:
<TABLE>
<S> <C>
1998.............................................. $ 100,012
1999.............................................. 197,000
2000.............................................. 191,019
2001.............................................. 176,131
2002.............................................. 173,327
Thereafter........................................ 102,361
---------
$ 939,850
---------
---------
</TABLE>
On October 27, 1997, the Company amended the terms of its office lease to
extend it through April 30, 2003 at an aggregate monthly base rent of $13,292
per month, subject to a 3% base rent adjustment each year.
The Company has entered into various contracts which require it to purchase
telecommunications services. The approximate minimum purchase commitments under
these contracts as of December 31, 1997 is $978,900 (approximately $481,700 in
fiscal 1998 and $497,200 in fiscal 1999).
On March 1, 1993, the Company entered into a ten-year employment agreement
with a minority shareholder/chief operating officer that provides for an annual
base salary of $170,000 plus a bonus equal to 10% of the Company's pre-tax
profits. On July 1, 1994, the Company entered into a ten-year employment
agreement with its chief executive officer that provides for an annual base
salary of $170,000 plus a bonus equal to 10% of the Company's pre-tax profits.
For the nine months ended December 31, 1997 bonuses of $451,557 ($366,383
nine months ended December 31, 1996, $501,350--year ended March 31, 1997,
$328,651--year ended March 31, 1996, and $24,042--year ended March 31, 1995)
were paid under the employment agreements. See Note 14.
On November 1, 1995, the Company entered into a one-year consulting
agreement with a minority shareholder of the Company. The agreement
automatically renews for successive one year terms unless either party provided
written notice of nonrenewal. The agreement provides for a monthly retainer of
$11,250 plus reimbursement of reasonable travel expenses. See Note 14.
On September 1, 1997, the Company entered into an employment agreement with
its Vice President of Agent Relations for a two-year period providing a base
annual salary of $130,000 and a $40,000 one-time sign-up bonus.
F-15
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
10. SIGNIFICANT CUSTOMERS
The Company has had a number of significant independent agents. Net revenues
from the significant independent agents were in the following percentages of
total net revenues:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED DECEMBER 31,
YEAR ENDED MARCH 31,
------------------------------- --------------------
1995 1996 1997 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Customer 1....................................... 19% -- -- -- --
Customer 2....................................... 21% 12% -- -- --
Customer 3....................................... 12% 16% 11% 18% 12%
Customer 4....................................... 11% -- -- -- --
Customer 5....................................... -- 11% 15% 15% 15%
Customer 6....................................... --....... 11% 19% 17% 28%
Customer 7....................................... -- -- 12% 13% --
Customer 8....................................... -- -- -- -- 10%
</TABLE>
Accounts receivable as a percentage of total accounts receivable due from
the significant independent agents noted above were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1995 1996 1997 1997
----- ------------- --------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Customer 1...................................... -- -- -- --
Customer 2...................................... -- 8% -- --
Customer 3...................................... -- 8% 9% --
Customer 4...................................... -- -- -- --
Customer 5...................................... -- 15% 21% 23%
Customer 6...................................... -- 23% 28% 20%
Customer 7...................................... -- -- 10% 10%
Customer 8...................................... -- -- -- 18%
</TABLE>
11. BUSINESS RISKS
RISKS AND UNCERTAINTIES. The Company's operating results and financial
condition may vary in the future depending on a number of factors. The following
factors may have a material adverse effect upon the Company's business, results
of operations and financial condition.
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of certain assets and
liabilities at the date of the financial statements and the reported amounts of
certain revenue and expenses during the reporting period. Accordingly, actual
results could differ from those estimates.
RELIANCE UPON INDEPENDENT AGENTS. The Company provides telecommunications
services to customers obtained by independent sales agents that operate under
exclusive agent agreements. Although the
F-16
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
11. BUSINESS RISKS (CONTINUED)
Company believes that alternate agents could be found, loss of an agent in one
of the Company's primary geographical areas would have a negative effect on the
Company's operating results (see Note 10).
LAWS AND REGULATION. A substantial portion of the Company's customers are
located in emerging markets with various political, economic, regulatory,
customs and other trade factors. The Company is also subject to various laws and
regulations of the U.S. Department of Commerce, the U.S. Federal Communications
Commission (FCC) and various state Public Service Commissions. Changes in
enforcement or interpretation of local laws and regulations are unpredictable
and could lead to the Company's inability to retain the appropriate approvals to
continue operations in certain markets.
SOUTH AFRICA REGULATION. The telecommunications regulatory authority in
South Africa has ruled that the Company's services are illegal in that country.
The Company's agent, as well as agents for certain of the Company's competitors,
have filed a lawsuit to stay and reverse the ruling and the regulatory authority
has agreed not to prosecute any of the agents in the industry pending final
rulings by the South African courts. The Company is unable to predict the
ultimate outcome of that decision. The Company's customers in South Africa
represented approximately 18.7% of the Company's revenues in fiscal 1997.
SERVICES IN THE BAHAMAS. Additionally, during fiscal 1998 the Bahamas
Telephone Company (Batelco), which is owned and operated by the local
governmental authority, has taken certain actions to block the Company's ability
to offer services to customers in that country. The Company is currently working
with the FCC and the U.S. Embassy in the Bahamas to restore the Company's
ability to provide services although the Company is unable to predict the
ultimate outcome of this matter. The Company's customers in the Bahamas
represented approximately 5.8% of the Company's revenues in fiscal 1997.
UNINSURED CASH BALANCES. At December 31, 1997, the Company had $572,152
($632,508--March 31, 1997, $334,060--March 31, 1996 and $475,658--March 31,
1995) in cash and cash equivalents that were not federally insured.
RELIANCE ON SUPPLIERS. A majority of the Company's transmission and
switching facilities are provided by two telecommunications carriers.
Approximately $3,744,000 was owed to these companies at December 31, 1997
($2,590,000--March 31, 1997 and $1,433,000--March 31, 1996). Under the terms of
the supplier agreements, the Company purchases long distance service at certain
per-minute rates, which vary based on the time, distance and type of call.
Although management believes that alternative carriers could be found in a
timely manner, disruption of these services for more than a brief period of time
would have a negative effect on the Company's operating results.
12. BUSINESS SEGMENT INFORMATION
The Company operates in a single industry segment. For the nine months ended
December 31, 1996 and 1997 and for the years ended March 31, 1995, 1996 and
1997, substantially all of the Company's
F-17
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
12. BUSINESS SEGMENT INFORMATION (CONTINUED)
revenues were derived from traffic transmitted through switch facilities located
in Sunrise, Florida. The geographic origin of the traffic is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------------------ ----------------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Africa................................ $ 369,087 $ 1,403,094 $ 3,899,701 $ 2,596,455 $ 6,057,730
Europe................................ 316,903 1,988,030 4,252,104 3,278,474 3,013,155
Latin America......................... 4,387,351 6,337,284 7,265,473 5,420,058 5,050,602
Middle East........................... 413,796 2,101,864 3,741,890 2,726,301 3,500,512
Other................................. 803,375 1,397,802 1,363,852 966,441 1,395,126
United States......................... -- -- 315,407 -- 2,011,988
------------ ------------- ------------- ------------- -------------
Total Revenues.................. $ 6,290,512 $ 13,228,074 $ 20,838,427 $ 14,987,729 $ 21,029,113
------------ ------------- ------------- ------------- -------------
------------ ------------- ------------- ------------- -------------
</TABLE>
All of the Company's physical assets are located in the United States.
Accounts receivable are primarily due from customers in the United States and
independent agents in various geographical areas, as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------------- ------------
1995 1996 1997 1997
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Africa..................................................... $ 149,262 $ 382,595 $ 887,774 $1,080,297
Europe..................................................... 100,105 426,294 694,461 896,014
Latin America.............................................. 445,722 572,903 798,428 785,443
Middle East................................................ 38,353 276,433 633,799 1,093,080
Other...................................................... 68,314 88,593 109,481 133,193
United States.............................................. -- -- 269,943 898,861
Less: Allowance for doubtful accounts...................... (11,381) (15,000) (95,846)
---------- ------------ ------------ ------------
Total Accounts Receivable.............................. $ 801,756 $ 1,735,437 $ 3,378,886 $4,791,042
---------- ------------ ------------ ------------
---------- ------------ ------------ ------------
</TABLE>
13. ACQUISITION OF AGENT
On August 12, 1997, the Company entered into an agreement with its largest
independent agent (in South Africa) to acquire an approximate 9% interest in the
agent for approximately $373,000. At December 31, 1997, $321,059 has been paid
and is included in other assets.
14. SUBSEQUENT EVENTS
Subsequent to December 31, 1997, the Company repaid the outstanding balance
of $85,000 on a consolidated term loan originally due on August 31, 1998. This
loan agreement, as set out in full in Note 5, was terminated at that time.
On January 1, 1998, with an additional amendment on February 9, 1998, the
Company entered into a two-year employment agreement with its Chief Financial
and Accounting Officer providing for a base
F-18
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
salary of $170,000 in calendar year 1998 and $200,000 in calendar year 1999. The
Company paid a $50,000 bonus upon signing of the agreement and will pay a
$75,000 bonus upon the successful completion of an initial public offering of
the Company's Common Stock. The agreement further provides for additional
bonuses based upon the Company's operating results, as defined therein.
On January 6, 1998, the Company entered into a joint venture agreement to
form Ursus Telecom France, a limited liability company incorporated in France.
Under the terms of the joint venture agreement, the Company contributed a switch
at historical net book value of $112,000 and the joint venture partners will
contribute their existing customer base into the venture. Under the terms of the
agreement, the joint venture partners have the option to require the Company to
purchase the outstanding interest at the earliest one year after the closing
date of the initial public offering, based upon a multiple of average monthly
revenues of Ursus Telecom France, as defined therein.
On January 20, 1998, the Company entered into an agreement with a minority
shareholder of the Company, extending his consulting agreement (see Note 9) to
December 31, 1998 and modifying the agreement to include an additional payment
of $15,000 upon consummation of an initial public offering of the Company's
securities during the term of the consulting agreement.
On February 6, 1998, the Board of Directors and shareholders approved (i)
the filing of amended and restated Articles of Incorporation that would provide
for, among other things, the authorization of 20,000,000 shares of Common Stock
and 1,000,000 shares of Preferred Stock, (ii) a 932.08 for 1 stock split of the
issued and outstanding Class C Common Stock, (iii) the reclassification and
split of every four shares of outstanding Class A and Class B common stock into
3,692.32 shares of Common Stock and 1 share of preferred stock, (iv) an option
plan reserving for issuance up to 1,000,000 shares of Common Stock options and
other stock awards, and (v) the granting of 150,000 warrants for the purchase of
Common Stock to the Company's underwriters. The stock split and reclassification
became effective on February 12, 1998. The issuance of the warrants and stock
option plan will become effective upon the effective date of the Company's
proposed initial public offering.
On February 9, 1998, the Company amended its January 1, 1998 employment
agreements with its Chief Executive Officer and Chief Operating Officer whereby
for a term of five calendar years they will each receive a base salary of
$225,000 with increases of $25,000 in each of years 2 through 5 of the
agreements and a guaranteed bonus of $45,000 per calendar year, additionally,
the agreements provide for additional bonuses at a rate of 4.5% of earnings
before interest, taxes, depreciation, amortization and such bonuses ("EBITDAB")
greater than $1 million, as defined, up to $4 million. The agreements provide
for additional bonuses of 20% of base salary for achievement of $4 million
EBITDAB and up to 5% of base for each $1 million of EBITDAB in excess of $4
million on a pro rata basis.
F-19
<PAGE>
URSUS TELECOM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE NINE MONTHS ENDED
DECEMBER 31, 1996 AND 1997 IS UNAUDITED)
14. SUBSEQUENT EVENTS (CONTINUED)
On February 24, 1998, the Company entered into an agreement to acquire a
switch under a capital lease. The asset has a capitalized cost of $335,280. The
following is an analysis of the minimum future lease payments:
<TABLE>
<S> <C>
1998.............................................................. $ 23,401
1999.............................................................. 79,655
2000.............................................................. 79,655
2001.............................................................. 79,655
2002.............................................................. 79,655
2003.............................................................. 73,017
Imputed interest.................................................. (112,963)
---------
Present Value of Lease Obligation............................... $ 302,075
---------
---------
</TABLE>
On March 17, 1998, the Company entered into an agreement to acquire
equipment under a capital lease. The asset has a capitalized cost of $33,372.
The following is an analysis of the minimum future lease payments:
<TABLE>
<S> <C>
1998............................................................... $ 2,982
1999............................................................... 8,400
2000............................................................... 8,400
2001............................................................... 8,400
2002............................................................... 8,400
2003............................................................... 8,400
Imputed interest................................................... (14,909)
---------
Present Value of Lease Obligation................................ $ 30,073
---------
---------
</TABLE>
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR
AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Summary Financial Data.................................................... 7
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 25
Capitalization............................................................ 26
Dividend Policy........................................................... 27
Dilution.................................................................. 27
Selected Financial Data................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 30
The International Telecommunications Industry............................. 40
Business.................................................................. 44
Management................................................................ 62
Certain Relationships and Related Party Transactions...................... 69
Principal and Registering Shareholders.................................... 71
Description of Capital Stock.............................................. 72
Shares Eligible for Future Sale........................................... 75
Underwriting.............................................................. 77
Legal Matters............................................................. 79
Experts................................................................... 79
Additional Information.................................................... 79
Reports to Shareholders................................................... 79
Glossary of Terms......................................................... 80
Index to Financial Statements............................................. F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,500,000 SHARES
[LOGO]
URSUS TELECOM CORPORATION
COMMON STOCK
--------------
PROSPECTUS
--------------
JOSEPH CHARLES &
ASSOCIATES, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The Registrant estimates that expenses payable by it in connection with the
offering described in this Registration Statement (other than the underwriting
discount and commissions) will be approximately as follows:
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 6,831
Legal fees and expenses........................................... 300,000
Accounting fees and expenses...................................... 100,000
Printing and engraving............................................ 50,000
Nasdaq listing application fee.................................... 66,875
Blue sky qualification fees and expenses.......................... 10,000
NASD Fee.......................................................... 2,816
Transfer Agent's Fees............................................. 500
Miscellaneous..................................................... 28,478
---------
Total............................................................. $ 565,500
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Articles of Incorporation indemnifies, to the fullest
extent permitted by the Law of the State of Florida, the directors of the
Registrant.
Every person (and the heirs, executors and administrators of such person)
who is or was a director, officer, employee or agent of the Corporation or of
any other company, including another corporation, partnership, joint venture,
trust or other enterprise on which such person serves or served at the request
of the Corporation shall be indemnified by the Corporation against all
judgments, payments in settlement (whether or not approved by court), fines,
penalties and other reasonable costs and expenses (including attorneys' fees and
costs) imposed upon or incurred by such person in connection with or resulting
from any action, suit, proceeding, investigation or claim, civil, criminal,
administrative, legislative or other (including any criminal action, suit or
proceeding in which such person enters a plea of guilty or NOLO CONTENDERE or
its equivalent), or any appeal relating thereto which is brought or threatened
either by or in the right of the Corporation or such other company (herein
called a "Derivative Action") or by any other person, governmental authority or
instrumentality (herein called a "Third-Party Action") and in which such person
is made a party or is otherwise involved by reason of his being or having been
such director, officer, employee or agent or by reason of any action or omission
or alleged action or omission by such person in his capacity as such director,
officer, employee or agent if either (i) such person is wholly successful, on
the merits or otherwise, in defending such derivative or third-party action or
(ii) in the judgment of a court of competent jurisdiction or, in the absence of
such a determination, in the judgment of a majority of a quorum of the Board of
Directors (which quorum shall not include any director who is a party to or is
otherwise involved in such action), or, in the absence of such a disinterested
quorum, in the opinion of independent legal counsel (iii) in the case of a
Derivative Action, such person acted without negligence or misconduct in the
performance of his duty to the Corporation or such other company or (iv) in the
case of a Third-Party Action, such person acted in good faith in what he
reasonably believed to be the best interests of the Corporation or such other
company, and in addition, in any criminal action, had no reasonable cause to
believe that his action was unlawful; provided that, in the case of a Derivative
II-1
<PAGE>
Action, such indemnification shall not be made in respect of any payment to the
Corporation or such other company or any shareholder thereof in satisfaction of
judgment or in settlement unless either (x) a court of competent jurisdiction
has approved such settlement, if any, and the reimbursement of such payment or
(y) if the court in which such action has been instituted lacks jurisdiction to
grant such approval or such action is settled before the institution of judicial
proceedings, in the opinion of independent legal counsel the applicable standard
of conduct specified hereinbefore has been met, such action was without
substantial merit, such settlement was in the best interests of the Corporation
or such other company and the reimbursement of such payment is permissible under
applicable law. In case such person is successful on the merits or otherwise in
defending part of such action, or in the judgment of such a court or such quorum
of the Board of Directors or in the opinion of such counsel has met the
applicable standard of conduct specified in the preceding sentence with respect
to part of such action, he(she) shall be indemnified by the Corporation against
the judgments, settlements, payments, fines, penalties, and other costs and
expenses attributable to such part of such action.
The foregoing rights of indemnification shall be in addition to any rights
which any such director, officer, employee or agent may otherwise be entitled
any agreement or vote of shareholders or at law or in equity or otherwise.
In any case in which, in the judgment of a majority of such a disinterested
quorum of the Board of Directors, any such director, officer or employee will be
entitled to indemnification under the foregoing provisions of this Article, such
amounts as they deem necessary to cover the reasonable costs and expenses
incurred by such person in connection with the action, suit, proceeding,
investigation or claim prior to final disposition thereof may be advanced to
such person upon receipt of an undertaking by or on behalf of such person to
repay such amounts if it is ultimately determined that he(she) is not so
entitled to indemnification.
The amendment or repeal of, or adoption of any provision inconsistent with,
this Article SIXTH will require the affirmative vote of the holders of at least
66 2/3% of the Common Stock and all series of voting Preferred Stock, voting
together as a single class. Any amendment or repeal of, or adoption of any
provision inconsistent with, this Article SIXTH will not adversely affect any
right or protection existing hereunder prior to such amendment, repeal, or
adoption.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
There have been no recent sales of unregistered securities of the
Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibits:
<TABLE>
<C> <C> <S>
1.1* -- Form of Underwriting Agreement
3.1+ -- Articles of Incorporation of the Registrant
3.2+ -- Form of Amended and Restated Articles of Incorporation of the Registrant
3.3+ -- Bylaws of the Registrant
3.4+ -- Form of Amended and Restated Bylaws of Registrant
4.1* -- Specimen of Certificate for Common Stock
5.1+ -- Opinion of Stroock & Stroock & Lavan LLP
10.1+ -- Employment Agreement between the Registrant and Luca M. Giussani
10.2+ -- Amendment to Employment Agreement with Luca M. Giussani
10.3+ -- Employment Agreement between the Registrant and Jeffrey R. Chaskin
10.4+ -- Amendment to Employment Agreement with Jeffrey R. Chaskin
10.5+ -- Employment Agreement between the Registrant and Johannes S. Seefried
10.6+ -- Amendment to Employment Agreement with Johannes S. Seefried
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <C> <S>
10.7+ -- Employment Agreement between the Registrant and Richard C. McEwan
10.8+ -- Lease Agreement
10.9+ -- Form of 1998 Stock Incentive Plan
10.10* -- Form of Financial Consulting Agreement
10.11+ -- Form of Agency Agreement
10.12+ -- Agreement regarding formation of Ursus Telecom France
10.13+ -- Agreement regarding purchase of interest in South African Agency
10.14+ -- Agreement dated January 20, 1998 among Messrs. Giussani, Rispoli and the
Company
10.15* -- Form of Representative's Warrant
10.16* -- Form of Lock Up Letter
21.1* -- List of Subsidiaries
23.1* -- Consent of Ernst & Young LLP
23.2+ -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
24.1+ -- Power of Attorney
27+ -- Financial Data Schedule
99.1+ -- Consent of Kenneth L. Garrett
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offer or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a) (3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
(b) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreement, certificates
in such denominations and registered in such names as required by the
underwriter to permit prompt delivery to each purchaser.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(d) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 of 1933 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 of 1933, 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, as amended, the
Registrant has duly caused this Amendment No. 3 to this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Sunrise, State of Florida, on the 24th day of April, 1998.
URSUS TELECOM CORPORATION
BY: /S/ LUCA M. GIUSSANI
-----------------------------------------
Luca M. Giussani
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 3 to this Registration Statement was signed by the following
persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY IN WHICH SIGNED DATE
- ------------------------------ --------------------------- -------------------
/s/ LUCA M. GIUSSANI Chief Executive Officer and
- ------------------------------ Director April 24, 1998
Luca M. Giussani
/s/ JEFFREY R. CHASKIN Principal Executive Officer
- ------------------------------ and Director April 24, 1998
Jeffrey R. Chaskin
/s/ JOHANNES S. SEEFRIED Principal Financial and
- ------------------------------ Accounting Officer and April 24, 1998
Johannes S. Seefried Director
Director
- ------------------------------
William M. Newport
Director
- ------------------------------
Kenneth L. Garrett
*By: -------------------------
Luca M. Giussani, as
Attorney-in-Fact
and agent pursuant to
Power of Attorney
previously filed.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------- -------------------------------------------------------------------------------------- ---------------
<S> <C> <C> <C>
1.1* -- Form of Underwriting Agreement
3.1+ -- Articles of Incorporation of the Registrant
3.2+ -- Form of Amended and Restated Articles of Incorporation of the Registrant
3.3+ -- Bylaws of the Registrant
3.4+ -- Form of Amended and Restated Bylaws of Registrant
4.1* -- Specimen of Certificate for Common Stock
5.1+ -- Opinion of Stroock & Stroock & Lavan LLP
10.1+ -- Employment Agreement between the Registrant and Luca M. Giussani
10.2+ -- Amendment to Employment Agreement with Luca M. Giussani
10.3+ -- Employment Agreement between the Registrant and Jeffrey R. Chaskin
10.4+ -- Amendment to Employment Agreement with Jeffrey R. Chaskin
10.5+ -- Employment Agreement between the Registrant and Johannes S. Seefried
10.6+ -- Amendment to Employment Agreement with Johannes S. Seefried
10.7+ -- Employment Agreement between the Registrant and Richard C. McEwan
10.8+ -- Lease Agreement
10.9+ -- Form of 1998 Stock Incentive Plan
10.10* -- Form of Financial Consulting Agreement
10.11+ -- Form of Agency Agreement
10.12+ -- Agreement regarding formation of Ursus Telecom France
10.13+ -- Agreement regarding purchase of interest in South African Agency
10.14+ -- Agreement dated January 20, 1998 among Messrs. Giussani, Rispoli and the Company
10.15* -- Form of Representative's Warrant
10.16* -- Form of Lock Up Letter
21.1* -- List of Subsidiaries
23.1* -- Consent of Ernst & Young LLP
23.2+ -- Consent of Stroock & Stroock & Lavan LLP (contained in 5.1)
24.1+ -- Power of Attorney
27+ -- Financial Data Schedule
99.1+ -- Consent of Kenneth L. Garrett
</TABLE>
- ------------------------
+ Previously filed.
* Filed herewith.
<PAGE>
EXHIBIT 1.1
URSUS TELECOM CORPORATION
440 SAWGRASS CORPORATE PARKWAY
SUITE 112
SUNRISE, FLORIDA 33325
UNDERWRITING AGREEMENT
_______________, 1998
Joseph Charles & Associates, Inc.
As Representative of the Several Underwriters
Named in Schedule I hereto
2500 N. Military Trail
Suite 300
Boca Raton, Florida 33431
Ladies and Gentlemen:
Ursus Telecom Corporation, a Florida corporation (the "Company"),
proposes to issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") pursuant to this Underwriting Agreement (the "Agreement"), an
aggregate of 1,500,000 shares of common stock, $.01 par value per share (the
"Shares"). In addition, the Company proposes to grant to the Underwriters the
option referred to in Section 2(b) to purchase all or any part of an aggregate
of 225,000 additional Shares to be offered by the Company (the "Option Shares").
The aggregate of 1,725,000 Shares, together with all or any part of the
Option Shares which the Underwriters have the option to purchase are herein
called the "Shares" or "Securities." The common stock of the Company to be
outstanding after giving effect to the sale of the Shares is herein called the
"Common Stock." The Common Stock is more fully described in the Registration
Statement and the Prospectus.
The Registration Statement (hereinafter defined) also covers the
registration of an aggregate of 200,000 shares of Common Stock of the Company
("Registering Shareholders' Shares") on behalf of Fincogest, S.A., Luca M.
Giussani and Jeffrey R. Chaskin ("Registering Shareholders"), which shares are
the subject of an agreement with the Representative pursuant to which each such
Registering Shareholder has agreed not to offer, sell, contract to sell,
transfer, assign, contract to assign, gift, grant any option or warrant to
purchase or right to acquire, announce his intention to sell, pledge, exchange,
contract to exchange, or otherwise dispose of, directly or indirectly, any of
the Registering Shareholders' Shares without the consent of the Representative
for a period of twelve (12) months from the effective date (the "Effective
Date") of the Registration Statement (hereinafter defined); except that during
such period the Registering Shareholders may make transfers among Existing
Shareholders and gifts to their children or trusts established for their
children provided that any such person or organization agrees to be bound by the
foregoing
<PAGE>
restrictions on the disposition of such shares. The Registering Shareholders'
Shares are not included in the Shares to be sold to the Underwriters as set
forth on Schedule I.
You have advised the Company that you desire to purchase the Shares,
and that you have been authorized to execute this Agreement as representative of
the Underwriters (the "Representative"). The Company confirms the agreements
made by it with respect to the purchase of the Shares by you, as follows:
1. REPRESENTATIONS AND WARRANTIES.
(a) The Company represents and warrants to each Underwriter, and
agrees with each Underwriter that:
(i) A registration statement (File No. 333-46197) on Form S-1
relating to the public offering of the Shares and the Registering Shareholders'
Shares, including a preliminary form of prospectus, copies of which have
heretofore been delivered to you, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission under the Act. "Preliminary Prospectus" shall mean each prospectus
filed pursuant to Rule 430A of the Rules and Regulations. The registration
statement (including all financial schedules and exhibits) as amended at the
time it becomes effective and the final prospectus included therein are
respectively referred to as the "Registration Statement" and the "Prospectus,"
except that (i) if the prospectus first filed by the Company pursuant to Rule
424(b) or Rule 430A of the Rules and Regulations or otherwise utilized and not
required to be so filed shall differ from said prospectus as then amended, the
term "Prospectus" shall mean the prospectus first filed pursuant to Rule 424(b)
or Rule 430A or so utilized from and after the date on which it shall have been
filed or utilized, and (ii) if such registration statement or prospectus is
amended or such prospectus is supplemented, after the effective date of such
registration statement and prior to the Option Closing Date (as defined in
Section 2(b)), the term "Registration Statement" shall include such registration
statement as so amended and any registration statement filed pursuant to Rule
462(b) of the Rules and Regulations, and the term "Prospectus" shall include the
prospectus as so amended or supplemented, or both, as the case may be.
(ii) At the time the Registration Statement becomes effective
and at all times subsequent thereto up to the Option Closing Date (hereinafter
defined), (i) the Registration Statement and Prospectus will in all material
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made; provided, however,
that the Company makes no representation, warranty or agreement as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by you or on behalf of any Underwriter through you
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, the
material set forth under the heading "Underwriting" and the identity of
2
<PAGE>
counsel to the Underwriters under the heading "Legal Matters" constitute the
only information furnished in writing by you, or by any Underwriter through you,
for inclusion in the Registration Statement and Prospectus, as the case may be.
The Registering Shareholders' Shares have been duly authorized, validly issued
and are fully paid and non-assessable; the Registering Shareholders' Shares have
been duly authorized and issued in compliance with or under an exemption from
registration under the Act and applicable state securities laws and have not
been issued in violation of the pre-emptive rights of any stockholder. There are
no options, warrants, calls, convertible securities or commitments of any kind
whatsoever relating to the Registering Shareholder's Shares.
(iii) The Company, including each subsidiary thereof, has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, with full power and
authority (corporate and other) to own its properties and conduct its business
as described in the Registration Statement and the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify would not have a material adverse effect on the Company's business,
properties or financial condition.
(iv) The authorized capital stock of the Company as of the date
of the Prospectus was as set forth under "Capitalization" in the Prospectus. The
shares of issued and outstanding capital stock of the Company set forth
thereunder have been duly authorized, validly issued and are fully paid and
non-assessable; the outstanding securities of the Company, including without
limitation thereto, the Shares and shares of Series A Preferred Stock, $.01 par
value per share ("Series A Preferred Stock"), of the Company have been duly
authorized and issued in compliance with or under an exemption from registration
under the Act and applicable state securities laws and have not been issued in
violation of the preemptive or similar rights of any stockholder and the
stockholders of the Company do not have any preemptive rights or other rights to
subscribe for or to purchase any of the Shares subject hereof; except for the
transfer restrictions regarding "affiliates" contained in Rule 144 promulgated
under the Act and restrictions provided for in this Agreement, there are no
restrictions upon the voting or transfer of, any of the Shares or Series A
Preferred Stock; except as set forth in the Prospectus, no options, warrants or
other rights to purchase, agreements or other obligations to issue, or
agreements or other rights to convert any obligation into, any shares of capital
stock of the Company have been granted or entered into by the Company. The
Shares, the Series A Preferred Stock and Representative's Warrants (as that term
is defined in Section 12 herein, the "Representative's Warrants") conform in all
material respects to all statements relating thereto contained in the
Registration Statement and Prospectus.
(v) The Shares are duly authorized and, when issued, delivered
and paid for pursuant to this Agreement, will be duly authorized, validly
issued, fully paid and nonassessable and free of preemptive rights of any
security holder of the Company. The certificates evidencing the Shares are and
will be in valid and proper legal form. The Representative's Warrants will be
exercisable for shares of Common Stock of the Company in accordance with the
terms of the Representative's Warrants and at the prices provided for therein.
The shares of Common Stock underlying the Representative's Warrants have been
duly authorized and reserved for issuance upon such exercise, and such shares,
when issued upon such exercise in accordance with the terms of the
Representative's Warrants and when the price is paid, shall be fully paid and
non-assessable.
3
<PAGE>
Neither the filing of the Registration Statement nor the issuance, offering or
sale of any of the Shares or Representative's Warrants as contemplated in this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any securities of the Company,
except as described in the Registration Statement.
(vi) This Agreement and the Representative's Warrants have been
duly and validly authorized, executed and delivered by the Company, and assuming
due execution by the other party or parties hereto and thereto, constitute valid
and binding obligations of the Company enforceable against the Company, in
accordance with their respective terms, except as rights to indemnity and
contribution hereunder may be limited by applicable law and except as
enforceability may be limited by bankruptcy, insolvency or other laws affecting
the rights of creditors generally or by general equitable principles of law. The
Company has full power and authority to authorize, issue and sell the Securities
to be sold by it hereunder on the terms and conditions set forth herein, and no
consent, approval, authorization or other order of any governmental authority is
required in connection with such authorization, execution and delivery or with
the authorization, issue and sale of the Securities, the Representative's
Warrants or the Securities underlying the Representative's Warrants, except such
as may be required under the Act, state securities laws, or the by-laws and
rules of the National Association of Securities Dealers, Inc. ("NASD").
(vii) Except as described in the Prospectus, the Company is not
in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement, and the Representative's Warrants will not conflict with, or result
in a breach of, any of the terms or provisions of, or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance pursuant to the terms of, any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to which the Company is a party
or by which the Company may be bound or to which any of the property or assets
of the Company are subject, which would have a material adverse effect on the
business, properties or financial condition of the Company, nor will such action
result in any violation of the provisions of any statute or any order, rule or
regulation applicable to the Company of any court or of any regulatory authority
or other governmental body having jurisdiction over the Company.
(viii) The Company owns no real property and, subject to the
qualifications stated in the Registration Statement and the Prospectus, the
Company has good and valid title to all properties and assets described in the
Registration Statement and the Prospectus as owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the leases and
subleases under which the Company is the lessor or sublessor of properties or
assets or under which the Company holds properties or assets as lessee or
sublessee as described in the Registration Statement and the Prospectus are in
full force and effect, and, except as described in the Registration Statement
and the Prospectus, the Company is not in default in any respect with respect to
any of the terms or provisions of any of such leases or subleases, and no claim
has been asserted by anyone adverse to rights of the Company as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company to continued
possession of the leased or subleased premises or assets under any such lease or
sublease except as described or
4
<PAGE>
referred to in the Registration Statement and the Prospectus; and the Company
owns or leases all such properties described in the Registration Statement and
the Prospectus as are necessary to its operations as now conducted and, except
as otherwise stated in the Registration Statement and the Prospectus, as
proposed to be conducted as set forth in the Registration Statement and the
Prospectus.
(ix) Ernst & Young, L.L.P., who have given their report on
certain financial statements filed and to be filed with the Commission as a part
of the Registration Statement, which are included in the Prospectus, are with
respect to the Company independent public accountants as required by the Act and
the Rules and Regulations.
(x) The financial statements, related notes and schedules set
forth in the Registration Statement and the Prospectus present fairly the
financial position and results of operations and changes in financial position
of the Company on the basis stated in the Registration Statement and the
Prospectus, at the respective dates and for the respective periods to which they
apply. Said statements and schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a basis
which is consistent during the periods involved.
(xi) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, except as set forth
in or contemplated by the Registration Statement and the Prospectus, the Company
has not incurred any material liabilities or obligations, direct or contingent,
not in the ordinary course of business, or entered into any transaction not in
the ordinary course of business, which is material to the business of the
Company, and there has not been any change in the capital stock (except the
Stock Split as described in the Registration Statement ) of, or any incurrence
of long-term debt by, the Company or any issuance of options, warrants or other
rights to purchase the capital stock of the Company or any adverse change or any
development involving, so far as the Company can now reasonably foresee, a
prospective adverse change in the condition (financial or other), net worth,
results of operations, business, key personnel or properties of it which would
be material to the business or financial condition of the Company, and the
Company has not become party to, and neither the business nor the property of
the Company has become the subject of, any material litigation whether or not in
the ordinary course of business.
(xii) Except as set forth in the Prospectus, there is not now
pending nor, to the knowledge of the Company, threatened, any action, suit or
proceeding (including those related to environmental matters or discrimination
on the basis of age, sex, religion or race) to which the Company is a party
before or by any court or governmental agency or body, which, if adversely
determined, would result in any material adverse change in the condition
(financial or other), business prospects, net worth or properties of the
Company; and, except as set forth in the Prospectus, no labor disputes involving
the employees of the Company exist which, if adversely determined, would result
in any material adverse change in the condition (financial or otherwise),
business prospects, net worth or property of the Company.
(xiii) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state and foreign income and franchise tax returns
and has paid all taxes shown
5
<PAGE>
as due thereon; and there is no tax deficiency which has been or to the
knowledge of the Company might be asserted against the Company which has not
been adequately reserved for on the Company's balance sheet.
(xiv) The Company has all necessary consents, approvals,
licenses, permits, franchises and authorizations of and from all United States
and foreign, federal, state or provincial, local and other governmental or other
regulatory authorities ("Licenses") currently required for the conduct of its
business or the ownership of its property as described in the Registration
Statement and the Prospectus and is in all material respects complying therewith
and owns or possesses adequate rights to use all material patents, patent
applications, trademarks, service marks, copyrights and licenses necessary for
the conduct of such business and has not received any notice of conflict with
the asserted rights of others in respect thereof. Except as described in the
Prospectus, none of the activities or business of the Company is in violation
of, or causes the Company to violate in any material respect any law, rule,
regulation or order of the United States, any state, county or locality, or of
any agency or locality, or of any foreign jurisdiction or subdivision thereof.
The Company has fulfilled and performed all its material obligations with
respect to such Licenses and no event has occurred that allows, or after notice
or lapse of time or both would allow, revocation or termination thereof or
results in any other material impairment of the rights of the holder of any such
License, except where any of the foregoing would not have individually or in the
aggregate a material adverse effect upon the condition (financial or otherwise),
business prospects, net worth or properties of the Company and subject in each
case to such qualification as may be set forth in the Registration Statement and
the Prospectus; and, except as described in the Registration Statement and the
Prospectus, none of such Licenses contains any restriction or conditions that is
materially burdensome to the Company. Without limiting the generality of this
paragraph 1(a)(xiv);
(A) The Company holds all telecommunications regulatory
licenses, permits, authorizations, consents and approvals (the
"Telecommunications Licenses") required from the Federal Communications
Commission (the "FCC") for the Company to conduct its business in the
manner described in or contemplated by the Registration Statement and
the Prospectus, except as would not have, individually or in the
aggregate, a material adverse effect upon the condition (financial or
otherwise), business prospects, net worth or properties of the Company;
the Telecommunications Licenses have been duly and validly issued and
are in full force and effect, except where the failure to be in full
force and effect would not have, individually or in the aggregate, a
material adverse effect upon the condition (financial or otherwise),
business prospects, net worth or properties of the Company; no
proceedings to revoke or restrict the Telecommunications Licenses are
pending or, to our knowledge, threatened; the Company is not in
material violation of any of the terms and conditions of any of the
Telecommunications Licenses, is not in material violation of the
Communications Act of 1934, as amended (the "Communications Act"), and
is not in material violation of any FCC rules and regulations; and the
Company has in effect with the FCC all international and domestic
service tariffs necessary to conduct its business in the manner
described in or contemplated by the Registration Statement and the
Prospectus;
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(B) The Company has obtained all state Telecommunications
Licenses and filed all tariffs required for the provision of
telecommunications services in any state to conduct their business in
the manner described in or contemplated by the Registration Statement
and the Prospectus, except where the failure to do so would not have,
individually or in the aggregate, a material adverse effect upon the
condition (financial or otherwise), business prospects, net worth or
properties of the Company;
(C) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC or any state public
utility commission or similar state agency ("PUC") against the Company
or any action, proceeding or, to the Company's knowledge, investigation
pending before the FCC or any state PUC, or, to the best of the
Company's knowledge, threatened by the FCC or any state PUC against the
Company which, if the subject of any unfavorable decision, ruling or
finding, would have a material adverse effect upon the condition
(financial or otherwise), business prospects, net worth or properties
of the Company;
(D) No license, permit, consent, approval, order or
authorization of, or filing with, the FCC or with any state PUC on the
part of the Company is required in connection with the issuance or sale
of the Shares;
(E) Neither the issuance and sale of the Shares nor the
performance by the Company of its obligations hereunder will result in
a violation in any material respect of the Communications Act or any
applicable FCC rules or regulations, or any order, writ, judgment,
injunction, decree or award of the FCC binding on the Company; and
(F) Except as disclosed in the Registration Statement, the
Company is not in non-compliance in the provision of international
call-back service with the laws of any foreign jurisdiction.
(xv) The Company has not, directly or indirectly, at any time
(A) made any contributions to any candidate for foreign political office, or if
made, failed to disclose fully any such contribution made in violation of law,
or (B) made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments or contributions required or allowed by applicable law. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(xvi) On the Closing Dates (as defined in Section 2(c)), all
transfer or other taxes (including franchise, capital stock or other tax, other
than income taxes imposed by any jurisdiction), if any, which are required to be
paid in connection with the sale and transfer of the Shares to the Underwriters
hereunder will have been fully paid or provided for by the Company, and all laws
imposing such taxes will have been fully complied with.
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(xvii) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to the
Registration Statement have been so filed.
(xviii) The Company has not taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Shares, or to facilitate the
sale or resale of the Securities.
(xix) Except for Ursus Telecom France (a majority-owned
subsidiary of the Company), the Company has no active subsidiaries.
(xx) Except for this Agreement and other agreements with the
Representative, the Company has not entered into any agreement pursuant to which
any person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
(xxi) The Shares have been approved for listing on the Nasdaq
National Market.
(xxii) Except for such rights which have been waived or
satisfied and except as set forth in the Registration Statement or the
Prospectus, no holder of securities of the Company has any rights to the
registration of securities of the Company because of the filing of the
Registration Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(xxiii) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration as an
investment company under the Investment Company Act of 1940.
(xxiv) The Company (A) is in material compliance with any and
all applicable foreign, federal, state and local laws and regulations relating
to the protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants ("Environmental Laws"),
(B) has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its business and (C) is in material
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals will not have a material adverse effect
on the Company.
(xxv) The Company maintains a system of internal accounting
controls that, taken as a whole, are sufficient to provide reasonable assurance
that (A) transactions are executed in accordance with management's general or
specific authorizations; (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (C) access to assets
is permitted only in accordance with management's general or specific
authorization; and (D) the
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recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(xxvi) The Stock Split (as defined in the Registration
Statement) will be, prior to the public offering of the Shares contemplated
hereby, consummated in the manner described in the Prospectus and in compliance
with applicable state law.
(b) Luca M. Giussani and Jeffrey R. Chaskin represent and
warrant to each Underwriter, and agree with each Underwriter, severally and not
jointly, that:
(i) Messrs. Giussani and Chaskin have furnished all information
with respect to themselves of a type referred to in Item 507 of Regulation S-K
under the Act so as to permit the Registration Statement or any post-effective
amendment thereto to become effective at the earliest possible time;
(ii) The information pertaining to Messrs. Giussani and Chaskin
under the caption "Principal and Registering Shareholders" in the Prospectus,
does not and, on the Effective Date and at all times up to and including the
First Closing Date and the Option Closing Date, will not contain an untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading; and
(iii) There are no options, warrants, calls, convertible
securities or commitments of any kind whatsoever relating to the Registering
Shareholder's Shares. The Registering Shareholders are the sole legal and
beneficial owners of the number of shares being registered pursuant to the
Registration Statement on behalf of such Registering Shareholders.
(iv) Nothing has come to the attention of Mr. Giussani or Mr.
Chaskin to cause them to have reason to believe that the representations and
warranties of the Company contained in Section 1(a) of this agreement are not
true and correct.
2. PURCHASE, DELIVERY AND SALE OF THE SHARES.
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties and agreements herein contained,
the Company agrees to issue and sell to the Underwriters, and the Underwriters
agree, severally and not jointly, to buy from the Company at $_____ per Share at
the place and time hereinafter specified, the number of Shares set forth
opposite each Underwriter's name in Schedule I hereto (the "Firm Shares").
Delivery of the Firm Shares against payment therefor shall take
place at the offices of Joseph Charles & Associates, Inc., 2500 N. Military
Trail, Suite 300, Boca Raton, Florida 33431 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m. Eastern
Standard Time on ______________, 1998, or at such other time and date, not later
than five (5) business days thereafter, as you may designate, such time and date
of payment and delivery for the Firm Shares being herein called the "First
Closing Date." Time shall be of the essence and delivery at the time and place
specified in this subsection (a) is a further condition to the obligations of
the Underwriters hereunder.
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(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants the Representative an option to
purchase all or any part of Option Shares at the same price per Share as the
Representative pays for the Firm Shares being sold pursuant to the provisions of
subsection (a) of this Section 2. This option may be exercised on one occasion
within 45-days after the Effective Date upon notice by you to the Company
advising it as to the amount of Option Shares as to which the option is being
exercised, the names and denominations in which the certificates for such Option
Shares are to be registered and the time and date when such certificates are to
be delivered. Such time and date shall be determined by you but shall not be
earlier than three (3) and not later than five (5) full business days after the
exercise of said option, nor in any event prior to the First Closing Date, and
such time and date is referred to herein as the "Option Closing Date." Delivery
of the Option Shares against payment therefor shall take place at the offices of
Joseph Charles & Associates, Inc., 2500 N. Military Trail, Suite 300, Boca
Raton, Florida 33431, or as otherwise may be agreed in writing. Time shall be of
the essence and delivery at the time and place specified in this subsection (b)
is a further condition to the obligations of the Underwriters hereunder.
The Option granted hereunder may be exercised only to cover
over-allotments in the sale of Firm Shares referred to in subsection (a) above.
(c) The Company will make one or more certificates for the Shares
to be purchased by the Representative hereunder, in definitive form, available
to you for checking and packaging at the office of Joseph Charles & Associates,
Inc., 2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431 at least one
full business day prior to the First Closing Date or the Option Closing Date
(which are collectively referred to herein as the "Closing Dates" and
individually as a "Closing Date"), as the case may be. The certificates shall be
registered in such name or names and in such denomination or denominations as
you may request in writing, at least two full business days prior to the
relevant Closing Date. Time shall be of the essence and the availability of the
certificates at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company to you
for the several accounts of the Underwriters against payment of the purchase
price by you, by wire transfer of same-day funds, payable to the order of the
Company.
In addition, in the event the Representative exercises the option
to purchase from the Company all or any portion of the Option Shares pursuant to
the provisions of subsection (b) above, payment for such Option Shares shall be
made to or upon the order of the Company by you, for the several accounts of the
Underwriters, by wire transfer of same day funds to the Company, at the offices
of Joseph Charles & Associates, Inc. at the time and date of delivery of such
Option Shares as required by the provisions of subsection (b) above, against
receipt of the certificates for such Option Shares by you, for the several
accounts of the Underwriters registered in such names and in such denominations
as you may request.
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It is understood that the Underwriters propose to offer the Shares
to be purchased hereunder to the public upon the terms and conditions set forth
in the Registration Statement, after the Registration Statement becomes
effective ("Effective Date").
3. COVENANTS OF THE COMPANY.
The Company covenants and agrees with each Underwriter that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective and, upon notification from the Commission that
the Registration Statement has become effective, will so advise the
Representative and will not at any time, whether before or after the Effective
Date, file any amendment to the Registration Statement or supplement to the
Prospectus of which the Representative shall not previously have been advised
and furnished with a copy or to which the Representative or counsel to the
Representative shall have reasonably objected in writing or which is not in
compliance with the Act and the Rules and Regulations. At any time prior to the
later of (A) the completion by the Underwriters of the distribution of the
Shares contemplated hereby (but in no event more than nine months after the
Effective Date) and (B) 25 days after the Effective Date, the Company will
prepare and file with the Commission, promptly upon your request, any amendments
or supplements to the Registration Statement or Prospectus which, in the
Representative's reasonable opinion, may be necessary or advisable in connection
with the distribution of the Shares.
Promptly after the Representative or the Company is advised thereof,
the Representative will advise the Company or the Company will advise the
Representative, as the case may be, and confirm the advice in writing, of the
receipt of any comments of the Commission, of the effectiveness of any
post-effective amendment to the Registration Statement, of the filing of any
supplement to the Prospectus or any amended Prospectus, of any request made by
the Commission for amendment of the Registration Statement or for supplementing
of the Prospectus or for additional information with respect thereto, of the
issuance by the Commission or any state or regulatory body of any stop orders or
other order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the suspension of the qualification of the Shares for offering
in any jurisdiction, or the institution of any proceedings for any of such
purposes, and will use its best efforts to prevent the issuance of any such
order and, if issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company authorizes
the Underwriters and dealers to use the Prospectus in connection with the sale
of the Shares for such period not to exceed nine months from the Effective Date
as in the reasonable opinion of counsel for the Representative the use thereof
is required to comply with the applicable provisions of the Act and the Rules
and Regulations. In case of the happening, at any time within such period as a
Prospectus is required under the Act to be delivered in connection with sales by
an underwriter or dealer, of any event of which the Company has knowledge and
which materially affects the Company or the Securities, or which in the opinion
of counsel for the Company or counsel for the Underwriters should be set forth
in an amendment to the Registration Statement or a supplement to the Prospectus
in order to make the
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statements therein not then misleading, in light of the circumstances existing
at the time the Prospectus is required to be delivered to a purchaser of the
Shares, or in case it shall be necessary to amend or supplement the Prospectus
to comply with the Act or with the Rules and Regulations, the Company will
notify you promptly and forthwith prepare and furnish to you copies of such
amended Prospectus or of such supplement to be attached to the Prospectus, in
such quantities as the Representative may reasonably request, in order that the
Prospectus, as so amended or supplemented, will not contain any untrue statement
of a material fact or omit to state any material facts necessary in order to
make the statements in the Prospectus, in the light of the circumstances under
which they are made, not misleading. The preparation and furnishing of any such
amendment or supplement to the Registration Statement or amended Prospectus or
supplement to be attached to the Prospectus shall be without expense to the
Underwriters, except that in case the Underwriters are required, in connection
with the sale of the Shares, to deliver a Prospectus nine months or more after
the Effective Date, the Company will upon request of and at your expense, amend
or supplement the Registration Statement and Prospectus and furnish the
Underwriters with reasonable quantities of prospectuses complying with Section
10(a)(3) of the Act.
(b) The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations thereunder in connection with the offering and
issuance of the Shares. The Company will use its best efforts to qualify or
register the Securities for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may have designated in writing prior to the
execution hereof and will make such applications and furnish such information to
counsel for the Representative as may be required for that purpose and to comply
with such laws, provided that the Company shall not be required to qualify as a
foreign corporation or a dealer in securities or to execute a general consent to
service of process in any jurisdiction. The Company will, from time to time,
prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as you may reasonably
require for the distribution of the Shares. Legal fees for such qualifications
shall be itemized based on the time expended and costs incurred, shall be
reasonable and shall not in any event exceed $10,000 exclusive of filing fees.
(c) The Company will instruct its transfer agent to provide you
with copies of the Depository Trust Company stock transfer sheets on a weekly
basis for a period of three months from the First Closing Date and on a monthly
basis thereafter for nine additional months.
(d) The Company will use its best efforts to cause a registration
statement under the Exchange Act to be declared effective on the Effective Date.
(e) For so long as the Company is a reporting company under either
Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five (5) years from
the date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such fiscal
year, together with statements of income, stockholders' equity and cash flows of
the Company and any subsidiaries as at the end of such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as they are available, a copy of all
reports
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(financial or other) mailed to security holders; (iii) as soon as they are
available, a copy of all non-confidential reports and financial statements
furnished to or filed with the Commission; and (iv) such other information of a
public nature as you may from time to time reasonably request.
(f) The financial statements referred to in subsection (e) above
will be on a consolidated basis to the extent the accounts of the Company and
its subsidiary or subsidiaries are consolidated in reports furnished to its
stockholders generally.
(g) The Company will deliver to you at or before the First Closing
Date two (2) signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon your order, from time to time until the
Effective Date as many copies of any Preliminary Prospectus filed with the
Commission prior to the Effective Date as the Underwriters may reasonably
request. The Company will deliver to you on the Effective Date and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do so, but in no
event later than 90 days after the end of 12 months after its current fiscal
quarter, an earnings statement (which need not be audited) covering a period of
at least 12 consecutive months beginning after the Effective Date which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the
Shares substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will report the use of the proceeds from the sale of the Shares
as may be required pursuant to Rule 463 of the Rules and Regulations.
(j) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration Statement,
preliminary Prospectus or Prospectus and take any other action, which in the
opinion of De Martino Finkelstein Rosen & Virga, counsel to the Representative,
may be reasonably necessary or advisable in connection with the distribution of
the Shares and will use its best efforts to cause the same to become effective
as promptly as possible.
(k) Prior to the Effective Date, the Company will cause all of the
Company's directors, executive officers and 5% stockholders of the Company to
enter into a written agreement with the Representative, which, among other
things, shall provide that for a period of twelve (12) months following the
Effective Date, such persons will not offer, sell, contract to sell, transfer,
assign, gift, grant any option or warrant to purchase or right to acquire, any
of the shares of Common Stock or Preferred Stock of the Company (including
preferred stock, warrants, options or other securities convertible into Common
Stock which may be deemed to be beneficially owned by such person in accordance
with the rules of the Commission) owned by them on the Effective Date, or
subsequently acquired by the exercise of any options or warrants or conversion
of any convertible security of the Company held by them on the Effective Date
directly or indirectly,
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except with the Representative's prior written consent, which consent may be
unreasonably withheld, and such stockholders will permit all certificates
evidencing those shares to be stamped with an appropriate restrictive legend,
and will cause the transfer agent for the Company to note such restrictions on
the transfer books and records of the Company; except that, during such twelve
(12) month period, such stockholders may make transfers among Existing
Shareholders (as defined in the Registration Statement) and gifts to their
children or trusts established for their children provided that any such person
or organization agrees to be bound by the foregoing restrictions on the
disposition of the securities.
(l) The Company shall, upon the initial filing of the Registration
Statement, make all filings required to obtain approval for the quotation of the
Shares on the Nasdaq National Market System and will use its best efforts to
effect and maintain the aforesaid approval for at least three (3) years from the
date of this Agreement. Within ten (10) days after the Effective Date, the
Company shall cause the Company to be listed in the Moody's OTC Industrial
Manual or S&P Manual and cause such listing to be maintained for three (3) years
from the date of this Agreement.
(m) The Company represents that it has not taken, and agrees that
it will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Shares, or to facilitate the
sale or resale of the Securities.
(n) During the period of the offering, and for a period of twelve
(12) months from the later of the First Closing or Option Closing Date, the
Company will not sell or otherwise dispose of any Shares of Common Stock or
Preferred Stock or issue warrants or options or other equity securities of the
Company (except for: (i) up to 1,000,000 shares pursuant to the Company's Stock
Incentive Plan; (ii) shares of Common Stock issuable upon exercise of options
outstanding on the Closing Dates or (iii) shares of Common Stock or securities
exchangeable or exercisable for, or any securities convertible into, Common
Stock in connection with an acquisition provided that the holder of any such
Common Stock or securities executes an agreement identical to the agreement
required by Section 3(k)) or purchase any securities of the Company without the
Representative's prior written consent; provided that with the prior written
consent of the Representative, which consent shall not be unreasonably withheld,
the Company may issue warrants to purchase Common Stock in connection with the
issuance by the Company of non-convertible debt instruments the proceeds of
which are used by the Company exclusively for the purpose of acquisitions and
provided, further, that: (1) the aggregate number of all such warrants issued in
connection with all such non-convertible debt offerings does not exceed warrants
to purchase 8% of the total issued and outstanding shares of Common Stock of the
Company on the Effective Date (after giving effect to the sale of the Shares and
to the exercise of any options, warrants or other convertible securities issued
and outstanding on the Effective Date); and (2) the exercise price of any such
warrants shall be not less than 110% of the Current Market Price of a share of
Common Stock of the Company on the closing date of any such high yield debt
offering. For purposes of this Section 3(n), the term "Current Market Price"
shall mean the closing price of a share of Common Stock on the trading date
immediately preceding the date in question. The closing price shall be the last
reported sales price on the principal national securities exchange (including
for purposes hereof, the Nasdaq National Market System) on which the Common
Stock is listed or admitted to trading, or if the Common Stock is not admitted
to trading on any national
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securities exchange, the highest reported bid price for the Common Stock as
furnished by the National Association of Securities Dealers, Inc., through the
Nasdaq Stock Market, Inc. or a similar organization. If on any such date the
Common Stock is not listed or admitted to trading on any national securities
exchange and is not quoted by The National Stock Market, Inc., or any similar
organization, the Current Market Price shall mean the fair value of a share of
Common Stock as determined in good faith by the Board of Directors of the
Company.
(o) The Company shall retain a public relations firm reasonably
acceptable to the Representative, and shall continue to retain such firm, or any
alternate firm acceptable to the Representative, for a minimum period of one (1)
year following the later of the First Closing or Option Closing Date.
(p) The Company will reserve and keep available that maximum number
of its authorized but unissued securities which are issuable upon exercise of
the Representative's Warrants outstanding from time to time.
(q) The Company shall deliver to the Representative, at the
Company's expense, five (5) bound volumes containing the Registration Statement
and all exhibits filed therewith, and all amendments thereto, and all other
material correspondence, filings, certificates and other documents filed and/or
delivered in connection with this offering. The Company shall use its best
efforts to deliver such volumes within one hundred eighty (180) days of the
First Closing Date.
(r) The Company shall deliver to the Representative an executed
financial consulting agreement in form and substance reasonably acceptable to
the Representative whereby the Representative agrees to act as a financial
consultant for a period of twenty-four (24) months from the First Closing Date
for a fee of $3,000 per month payable in advance at the First Closing Date.
(s) For a period of two (2) years from the First Closing Date, the
Representative shall have the right to designate a consultant to the Board of
Directors which consultant shall have the right to attend all Board of Directors
and Board of Directors committee meetings and to receive copies of all written
consents to action prior to execution thereof and such other notices and
materials as may be forwarded to other outside members of the Board provided
such consultant shall execute a confidentiality agreement in form and substance
acceptable to the Representative and the Company. The consultant shall be
compensated on the same basis as outside members of the Board including
reimbursement of travel and hotel expenses except that such consultant shall
receive ten-year options to purchase only 4,000 shares of Common Stock of the
Company exercisable at the fair market value thereof on the date of grant for
each year of service.
(t) The Company shall have acquired Directors' and Officers'
Liability Insurance (provided that such insurance can be obtained at a
reasonable cost as determined by the Company and the Representative) from an
insurer and in an amount reasonably satisfactory to the Representative.
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(u) The Company shall purchase and maintain a keyman life insurance
policy in the face amount of $2,000,000 on the life of each of Mr. Luca M.
Giussani and Mr. Jeffrey R. Chaskin for a period of three (3) years from the
date of the Prospectus.
4. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the Underwriters to purchase and pay for the Shares
which they have agreed to purchase hereunder are subject to the accuracy (as of
the date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 4:30 p.m., Eastern Standard
time, on the date of this Agreement, or at such later time or on such later date
as to which you may agree in writing; on the Closing Dates, no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceedings for that or any similar purpose shall have been
instituted or shall be pending or, to the knowledge of any Underwriter or to the
knowledge of the Company, shall be contemplated by the Commission; any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of De Martino Finkelstein Rosen &
Virga, counsel to the Representative; and no stop order shall be in effect
denying or suspending effectiveness of the Registration Statement nor shall any
stop order proceedings with respect thereto be instituted or pending or
threatened under the Act.
(b) (i) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Stroock & Stroock & Lavan LLP,
counsel for the Company, in form and substance reasonably satisfactory to
counsel for the Representative, to the effect that:
(A) The Company, and each subsidiary thereof, has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the state of its incorporation and is duly qualified or licensed to do
business as a foreign corporation in good standing in each other jurisdiction in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where failure to so qualify will not have a
material adverse effect in the business, properties or financial condition of
the Company. The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and the Prospectus and to enter into and perform its obligations under
this Agreement and the Representative's Warrants;
(B) The authorized capitalization of the Company as of the
date of the Prospectus was as set forth under "Capitalization" in the
Registration Statement and the Prospectus; all of the shares of the Company's
outstanding stock requiring authorization for issuance by the Company's Board of
Directors has been duly authorized and validly issued, are fully paid and
non-assessable and conform in all material respects to the description thereof
contained in the Prospectus; the outstanding shares of Common Stock and Series A
Preferred Stock of the Company have been duly authorized and issued in
compliance with or under an exemption from registration under the Act and
applicable state securities laws and have not been issued in violation of the
preemptive rights of any stockholder and the stockholders of the Company do not
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have any preemptive rights or other rights to subscribe for or to purchase any
of the Shares; except for the transfer restrictions regarding "affiliates"
contained in Rule 144 promulgated under the Act and restrictions provided for in
this Agreement, to the knowledge of such counsel, there are no restrictions upon
the voting or transfer of any of the Shares, the Common Stock, Series A
Preferred Stock and the Representative's Warrants and such Securities conform in
all material respects to the respective descriptions thereof contained in the
Prospectus; except as set forth in the Prospectus, no options, warrants or other
rights to purchase, agreements or other obligations to issue, or agreements or
other rights to convert any obligation into, any share of capital stock of the
Company have been granted or entered into by the Company; the Shares to be
issued as contemplated in the Registration Statement and this Agreement have
been duly authorized and, when paid, will be validly issued, fully paid and
non-assessable and free of preemptive rights contained in the Company's articles
of incorporation or By-laws, or any other document, instrument or agreement
known to counsel; a sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Representative's Warrants; neither
the filing of the Registration Statement nor the offering or sale of the
Securities as contemplated by this Agreement gives rise to any registration
rights or other rights, other than those contemplated by the Representative's
Warrants or which have been waived or satisfied, for or relating to the
registration of the Securities. The Company has no subsidiaries;
(C) This Agreement and the Representative's Warrants
(sometimes hereinafter collectively referred to as the "Representative
Agreements") have been duly and validly authorized, executed and delivered by
the Company, and assuming due execution and delivery of this Agreement by the
Representative, all of such agreements are, or when duly executed will be, the
valid and legally binding obligations of the Company, except as enforceability
may be limited by bankruptcy, insolvency, moratorium or other laws affecting the
rights of creditors, or by general equitable principles and except as rights to
underwriting and contribution hereunder may be limited by applicable securities
laws or public policy;
(D) The certificates evidencing the Shares are in valid and
proper legal form; the Representative's Warrants will be exercisable for shares
of Common Stock of the Company in accordance with the terms of the
Representative's Warrants and at the prices provided therein; the shares of
Common Stock of the Company issuable upon exercise of the Representative's
Warrants have been duly authorized and reserved for issuance upon such exercise,
and such shares, when issued upon such exercise in accordance with the terms of
the Representative's Warrants and when the price is paid shall be fully paid and
non-assessable;
(E) Such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which are required to
be described or referred to in the Registration Statement which are not so
described or referred to;
(F) The execution and delivery of this Agreement and the
Representative's Warrants and the incurrence of the obligations of the Company
herein and therein set forth and the consummation of the transactions herein or
therein contemplated will not result in a violation of or default under the
certificate or articles of incorporation or bylaws of the Company, or any
obligation, agreement, covenant or condition contained in any material bond,
debenture, note or other evidence of indebtedness or in any of the contracts,
indentures, mortgages, loan
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agreements, leases, joint ventures or other agreements or instruments to which
the Company is a party, except where such violation or default would not have a
material adverse effect on the Company or result in a violation of, or
constitute a default under, the certificate or articles of incorporation or
by-laws of the Company;
(G) The Registration Statement has become effective under
the Act, and to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement is in effect, no proceedings for
that purpose have been instituted or are pending before, or threatened by, the
Commission and the Registration Statement and the Prospectus (except, in the
case of both the Registration Statement and any Amendment thereto, and the
Prospectus and any supplement thereto for the financial statements and notes and
schedules thereto, and other financial information or statistical data contained
therein, or omitted therefrom, as to which such counsel need express no opinion)
comply as to form in all material respects with the applicable requirements of
the Act and the Rules and Regulations;
(H) All descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts, plans,
options and other documents are accurate and fairly present the information
required to be shown, and such counsel is familiar with all contracts and other
documents referred to in the Registration Statement and the Prospectus and any
such amendment or supplement, or filed as exhibits to the Registration
Statement, and such counsel does not know of any contracts or documents of a
character required to be summarized or described therein or to be filed as
exhibits thereto which are not so summarized, described or filed;
(I) The Underwriting Agreement and the Representative's
Warrants have been duly and validly authorized, executed and delivered by the
Company, and assuming due execution by the other party or parties hereto and
thereto, constitute valid and binding obligations of the Company enforceable
against the Company, in accordance with their respective terms, except as rights
to indemnity and contribution hereunder may be limited by applicable law and
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles
of law. The Company has full power and authority to authorize, issue and sell
the Securities to be sold by it thereunder on the terms and conditions set forth
therein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities, the Representative's Warrants or the Securities underlying the
Representative's Warrants, except such as may be required under the Act, state
securities laws (as to which such counsel need express no opinion), or the
by-laws and rules of the National Association of Securities Dealers, Inc.
("NASD").
(J) To the extent that the statements contained in the
Prospectus under the headings "Business - Trademarks," "Business - Legal
Proceedings," "Management - Employment Agreements," "Management - Stock
Incentive Plan," "Certain Relationships and Related Party Transactions,"
"Description of Capital Stock," "Shares Eligible For Future Sale" and "Legal
Matters" refer to opinions of such counsel on matters of law or purport to
summarize the status of litigation or purport to summarize the provisions of
statutes, regulations, contracts, agreements or other documents, such statements
have been reviewed by such counsel and
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accurately reflect the status of any such litigation, such provisions purported
to be summarized and any such opinions of such counsel;
(K) The Common Stock has been approved for listing on the
Nasdaq National Market;
(L) The Company is not, and immediately after receipt of
payment for the Shares will not be, an "investment company" within the meaning
of the Investment Company Act of 1940, as amended;
(M) Except as disclosed in the Prospectus, to the knowledge
of such counsel, there are no persons with registration or other similar rights
to have any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement;
(N) To such counsel's knowledge, the Company is not in
default in the performance and observance of any obligation, agreement, covenant
or condition contained in any material existing instrument, except for such
violations or defaults as would not, individually or in the aggregate, result in
a material adverse change in the financial condition or results of operations of
the Company or is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree known to such
counsel applicable to the Company; and
Such counsel has participated in conferences with officers, directors,
employees and representatives of the Company in connection with the preparation
of the Registration Statement and the Prospectus and nothing has come to the
attention of such counsel that caused such counsel to believe that the
Registration Statement or any amendment thereto at the time it became effective
contained any untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading or that the Prospectus or any supplement thereto contains
any untrue statement of a material fact or omits to state a material fact
necessary in order to make statements therein in light of the circumstances
under which they were made not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes and schedules thereto
and other financial information and statistical data contained therein, as to
which such counsel need express no opinion).
In rendering such opinions such counsel may rely as to matters of fact
upon certificates of responsible officers of the Company provided the extent of
such reliance is specified in such opinion.
(ii) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Swidler & Berlin, Chartered,
telecommunications regulatory counsel for the Company, in form and substance
reasonably satisfactory to counsel for the Representative, to the effect that:
(A) The Company has been granted Section 214 authority by
the Federal Communications Commission ("FCC") to provide international switched
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telecommunications services through the resale of international switched voice
and private line services and/or by using its own facilities and has on file
with the FCC tariffs applicable to its domestic and international services and
has such other FCC authorizations as may be required for the Company to conduct
its business in the manner described in the Prospectus ("Telecommunications
License"). To counsel's knowledge after reasonable inquiry, the FCC
Telecommunications License currently held by the Company has been duly and
validly issued and is in full force and effect, and no proceedings to revoke or
restrict such FCC Telecommunications License is pending or threatened. To
counsel's knowledge after reasonable inquiry, the Company is not in violation of
any of the terms and conditions of its FCC Telecommunications License, is not in
violation of the Communications Act of 1934, as amended ("Communications Act"),
and is not in violation of any FCC rules and regulations, except to the extent
that such violation is disclosed in the Registration Statement and would not
have a material adverse effect upon the condition (financial or otherwise),
business prospects, net worth or properties of the Company. The Company has in
effect with the FCC all international switched, international private line
and/or United States domestic interexchange service tariffs necessary to conduct
its business in the manner described in the Prospectus;
(B) To the extent they constitute a summary of legal
matters, documents or proceedings referred to therein, the statements in the
Prospectus under the captions "Risk Factors - Government Regulation" and
"Business - Government Regulation" solely to the extent they concern FCC
regulation of the Company's services are accurate in all material respects and
fairly summarize in all material respects all matters referred to therein, and
there are no material omissions under such captions with respect to such legal
matters, documents and proceedings;
(C) The Company has obtained all state Telecommunications
Licenses and filed all tariffs required for the provision of telecommunications
services in any state to conduct its business in the manner described in or
contemplated by the Prospectus except where the failure to obtain such licenses
and/or file such tariffs would not have, individually or in the aggregate, a
material adverse effect upon the condition (financial or otherwise), business
prospects, net worth or properties of the Company;
(D) There is no outstanding adverse judgment, injunction,
decree or order that has been issued by the FCC against the Company or any
action, proceeding or investigation pending before the FCC or, to such counsel's
knowledge, threatened by the FCC against the Company or otherwise which, if the
subject of an unfavorable decision, ruling or finding, would have a material
adverse effect upon the condition (financial or otherwise), business prospects,
net worth or properties of the Company;
(E) To such counsel's knowledge, there is no outstanding
adverse judgment, injunction, decree or order that has been issued by any state
public utility commission ("PUC") against the Company or any action, proceeding
or investigation pending before or threatened by any state PUC against the
Company which, if the subject of an unfavorable decision, ruling or finding,
would have a material adverse effect upon the condition (financial or
otherwise), business prospects, net worth or properties of the Company;
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(F) No authorization of, or filing with, the FCC or with any
state PUC on the part of the Company is required in connection with the issuance
or sale of the Shares;
(G) Neither the issuance and sale of the Common Stock nor
the performance by the Company of its obligations under this Agreement will
result in a violation of the Communications Act, or any applicable rules or the
regulations promulgated under the Communications Act, or, to counsel's
knowledge, any order, writ, judgment, injunction, decree or award of the FCC
binding on the Company; and
(H) The Telecommunications License requires the Company to
provide any international call-back service using uncompleted call signaling in
a manner that is consistent with the laws of the countries in which they
operate. Although we do not provide legal services to the Company regarding the
application or interpretation of any non-U.S. law and although we have performed
no due diligence in this regard other than discussing with management of the
Company the Company's operations and compliance with applicable FCC requirements
and reviewing any portions of the opinions of local counsel of [South Africa,
France, Russia, Bahamas, Argentina, Peru, Ecuador, Uruguay, Columbia, Lebanon
and Egypt] specifically regarding the provision of international call-back
service in certain jurisdictions in which the Company operates, we are not aware
of any non-compliance in the provision of international call-back service by the
Company with the laws of any of these foreign jurisdictions in which the Company
operates that would constitute a violation of the Telecommunications License and
have a material adverse effect upon the condition (financial or otherwise),
business prospects, net worth or properties of the Company, taken as a whole,
except as described in the Prospectus under the captions "Risk Factors -
Government Regulation" and "Business - Government Regulation."
(iii) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of ___________, ____________,
____________, ____________, and _________, special regulatory counsel for the
Company in each jurisdiction referred to above, in form and substance reasonably
satisfactory to counsel for the Representative.
In rendering such opinions, such counsel may rely upon certificates of
any officer of the Company or public officials as to matters of fact; and in
rendering such opinion may rely as to (i) all matters of law other than the law
of the United States, the State of Florida or the District of Columbia, upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled to so
rely.
(c) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus, and other related
matters shall be reasonably satisfactory to or approved by De Martino
Finkelstein Rosen & Virga, counsel to the Representative.
(d) You shall have received a "cold comfort" letter on and as of
the time of the execution of this Agreement and again on and as of the First
Closing Date, in each instance describing procedures carried out to a date
within five (5) days of the date of the letter, from Ernst & Young L.L.P.,
independent public accountants for the Company, with respect to the financial
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statements and certain financial information contained in the Registration
Statement and Prospectus and substantially in the form approved by you.
(e) At each of the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of such Closing Date, and the Company
shall have performed all of its obligations hereunder and satisfied all the
conditions on its part to be satisfied at or prior to such Closing Date; (ii)
the Registration Statement and the Prospectus and any amendments or supplements
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations, and shall in all material
respects conform to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statements of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading in light of the circumstances under which they were made; (iii)
there shall have been, since the respective dates as of which information is
given, no material adverse change in the business, properties, condition
(financial or otherwise), results of operations, capital stock, long-term or
short-term debt or general affairs of the Company from that set forth in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and Prospectus indicate might occur after the Effective Date and the
Company shall not have incurred any material liabilities nor entered into any
agreement not in the ordinary course of business other than as referred to in
the Registration Statement and Prospectus; and (iv) except as set forth in the
Prospectus, no action, suit or proceeding at law shall be pending or threatened
against the Company which would be required to be disclosed in the Registration
Statement, and no proceedings shall be pending or threatened against the Company
before or by any commission, board or administrative agency in the United States
or elsewhere, wherein an unfavorable decision, ruling or finding would
materially and adversely affect the business, property, condition (financial or
otherwise) or results of operations. In addition, you shall have received, at
the First Closing Date, a certificate signed by the President and the principal
financial or accounting officer of the Company, dated as of the First Closing
Date, evidencing compliance with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b)
hereof, the obligations of the Representative to purchase and pay for the Option
Shares referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, no stop order suspending the effectiveness thereof shall
have been issued, and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any reasonable request on the part
of the Commission for additional information shall have been complied with to
the reasonable satisfaction of De Martino Finkelstein Rosen & Virga, counsel to
the Representative.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinions of (A) Stroock & Stroock & Lavan LLP, counsel for the
Company, (B) Swidler & Berlin, Chartered, telecommunications regulatory counsel
for the Company, and (C) each of the
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Company's special regulatory counsel referred to in Section 4(b)(iii) above,
dated as of the Option Closing Date, in form and substance reasonably
satisfactory to De Martino Finkelstein Rosen & Virga, counsel to the
Representative, which opinions shall be substantially the same in scope and
substance as the opinion furnished to you at the First Closing Date pursuant to
Section 4(b) hereof, except that such opinions, where appropriate, shall cover
the Option Shares rather than the Firm Shares. If the First Closing Date is the
same as the Option Closing Date, such opinions may be combined.
(iii) At the Option Closing Date, there shall have been
delivered to you a certificate of the President and the Chairman of the Board of
Directors of the Company dated the Option Closing Date, in form and substance
reasonably satisfactory to De Martino Finkelstein Rosen & Virga, counsel to the
Representative, substantially the same in scope and substance as the
certificates furnished to you at the First Closing Date pursuant to Section 4(e)
hereof.
(iv) At the Option Closing Date, there shall have been
delivered to you a letter in form and substance satisfactory to you from Ernst &
Young L.L.P., dated the Option Closing Date and addressed to you, confirming the
information in their letter referred to in Section 4(d) hereof as of the date
thereof and stating that, without any additional investigation required, nothing
has come to their attention during the period from the ending date of their
review referred to in said letter to a date not more than five (5) days prior to
the Option Closing Date which would require any change in said letter if it were
required to be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Shares shall be
reasonably satisfactory in form and substance to you, and you and De Martino
Finkelstein Rosen & Virga, counsel to the Representative, shall have been
furnished with all such documents and certificates as you may request in
connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of the
Company or of its compliance with any of the covenants or conditions contained
therein.
(g) Each of Fincogest, S.A., and Messrs. Giussani and Chaskin will
enter into a written agreement with the Representative which, among other
things, shall provide that, for a period of twelve (12) months following the
Effective Date, they will not offer, sell, contract to sell, transfer, assign,
gift, grant any option or warrant to purchase or right to acquire, announce his
intention to sell, pledge, exchange, contract to exchange, or otherwise dispose
of, directly or indirectly, any of the Registering Shareholders' Shares without
the prior written consent of the Representative, which consent may be
unreasonably withheld, except that during such period the Registering
Shareholders may make transfers among Existing Shareholders (as defined in the
Registration Statement) and gifts to their respective children or trusts
established for their children provided that any such person or organization
agrees to be bound by the foregoing restrictions on the disposition of such
Shares.
(h) If any of the conditions herein provided for in this Section
shall not have been completely fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriters under this Agreement may be
canceled at, or at any time prior to, each Closing Date by your notifying the
Company of such cancellation in writing or by telegram at or prior to the
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applicable Closing Date. Any such cancellation shall be without liability of any
Underwriter to the Company, except as otherwise provided herein.
5. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligation of the Company to sell and deliver the Shares is subject
to the following conditions:
(a) The Registration Statement shall have become effective not
later than 4:30 p.m. Eastern Standard Time, on the date of this Agreement, or on
such later date or time as you and the Company may agree in writing.
(b) On the Closing Dates, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the Act
or any proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company, provided for in
this Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Option Shares on exercise of
the option provided for in Section 2(b) hereof shall be affected.
6. INDEMNIFICATION.
(a) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless the Representative and each Underwriter, their
shareholders, partners, directors, officers, employees, and counsel, and each
person, if any, who controls the Representative and each Underwriter within the
meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which the
Representative and each Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statements or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained herein, or (iv) any act
or failure to act or any alleged act or failure to act by the Representative or
any Underwriter in connection with, or relating in any manner to, the Common
Stock or the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out of or
based upon any matter covered by clause (i) or (ii) above, provided that the
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Company shall not be liable under this clause (iv) to the extent that a court of
competent jurisdiction shall have determined by a final judgment that such loss,
claim, damage, liability or action resulted directly from any such acts or
failures to act undertaken or omitted to be taken by the Representative or such
Underwriter through its bad faith or willful misconduct; and to reimburse the
Representative or each Underwriter and each such controlling person for any and
all expenses (including the fees and disbursements of counsel chosen by Joseph
Charles & Associates, Inc.) as such expenses are reasonably incurred by the
Representative or such Underwriter or such controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action; provided, however, that the foregoing
indemnity agreement shall not apply to any loss, claim, damage, liability or
expense to the extent, but only to the extent, arising out of or based upon any
untrue statement or alleged untrue statement or omission or alleged omission
made in reliance upon and in conformity with written information furnished to
the Company by the Representative expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto); and provided, further, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit of
the Representative or any Underwriter from whom the person asserting any loss,
claim, damage, liability or expense purchased Shares, or any person controlling
the Representative or such Underwriter, if copies of the Prospectus were timely
delivered to the Representative or the Underwriter pursuant to the provision
hereunder and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of the Representative or such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
loss, claim, damage, liability or expense; and provided, further, that the
Company may agree, and without limiting the rights of the Representative or the
Underwriters under this Agreement, as to the respective amounts of such
liability for which it shall be responsible. The indemnity agreement set forth
in this Section 6(a) shall be in addition to any liabilities that the Company
may otherwise have.
(b) Indemnification of the Company and each Director and Officer of
the Company. The Representative and each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, each of its shareholders,
partners, directors, and counsel, and each of its officers who signed the
Registration Statement, each person, if any, who controls the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any loss, claim, damage, liability or expense, as incurred to which the
Company, or any director, officer or controlling person of the Company may
become subject, under the Securities Act, the Exchange Act, or other federal or
state statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration Statement, any preliminary prospectus, the Prospectus (or
any
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amendment or supplement thereto), in reliance upon and in conformity with
written information furnished to the Company by the Representative expressly for
use therein; and to reimburse the Company, or any director, officer or
controlling person, for any legal and other expense reasonably incurred by the
Company, or any director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. The Company hereby acknowledges that the
only information that the Representative and the Underwriters have furnished to
the Company expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth (A) as the paragraph on the inside front cover page of the
Prospectus concerning stabilization by the Underwriters; (B) information under
the caption "Underwriting" in the Prospectus; and (C) information under the
heading "Legal Matters." The indemnity agreement set forth in this Section 6(b)
shall be in addition to any liabilities that the Representative and each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 6 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 6, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 6 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the provisions to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for the
expenses of more than one separate counsel (together with local counsel),
approved by the indemnifying party (Joseph Charles & Associates, Inc. in the
case of Section 6(b) and Section 7), representing the indemnified parties who
are parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
26
<PAGE>
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 6 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
6(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
7. CONTRIBUTION.
If the indemnification provided for in Section 6 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand, and the Underwriters, on the other hand, from the
offering of the Shares pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand, and the Underwriters, on the other hand, in connection with the statements
or omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received by
the Company on the one hand, and the Underwriters, on the other hand, in
connection with the offering of the Shares pursuant to this Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of the Shares pursuant to this Agreement (before deducting
expenses) received by the Company, and the total underwriting discount received
by the Underwriters, in each case as set forth on the front cover page of the
Prospectus bear to the aggregate initial public offering price of the Shares as
set forth on such cover. The relative fault of the Company on the one hand, and
the Underwriters, on the other hand, shall be determined by reference to, among
other things, whether any such untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact or any such
inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company on the one hand, or the Underwriters, on the
other hand,
27
<PAGE>
and the parties relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 6(c), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 6(c) with respect to notice of commencement of any action shall apply if
a claim for contribution is to be made under this Section 7; provided, however,
that no additional notice shall be required with respect to any action for which
notice has been given under Section 6(c) for purposes of indemnification.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Shares underwritten by it
and distributed to the public. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters obligations to contribute pursuant to this
Section 7 are several, and not joint, in proportion to their respective
underwriting commitments as set forth opposite their names in Schedule I. For
purposes of this Section 7, each officer and employee of an Underwriter and each
person, if any, who controls an Underwriter within the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as such
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company with the meaning of the Securities Act and the Exchange Act shall have
the same rights to contribution as the Company.
8. COSTS AND EXPENSES.
(a) Whether or not this Agreement becomes effective or the sale of
the Shares to the Underwriters is consummated, the Company will pay all costs
and expenses incident to the performance of this Agreement by the Company,
including but not limited to the fees and expenses of counsel to the Company and
of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Shares contemplated hereby; all expenses, including reasonable
fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to the Representative, in connection with the
qualification of the Shares under the State Securities or Blue Sky Laws which
you shall designate; the cost of printing and furnishing to you copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement,
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<PAGE>
the Agreement Among Underwriters and related agreements, and the Blue Sky
Memorandum; the cost of printing the certificates representing the Securities,
the expenses of Company due diligence meetings and presentations (but not of any
Representative or Representative's counsel in connection therewith), the expense
of placing one or more "tombstone" advertisements as directed by you; and the
cost of preparing bound volumes of all public offering documents. All "road
show" expenses incurred by the Representative shall be borne by the Company. The
Company shall pay any and all taxes (including any transfer, franchise, capital
stock or other tax imposed by any jurisdiction) on sales to the Representative
and the Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to you the balance of a non-accountable expense allowance
3.0% of the gross proceeds of the offering, of which $50,000 has been paid. In
the event the over-allotment option is exercised in part or in full, the Company
shall pay to you at the Option Closing Date an additional amount equal to 3.0%
of the gross proceeds received upon exercise of the over-allotment option. In
the event the transactions contemplated hereby are not consummated for any
reason, the Company shall be liable for your actual accountable out-of-pocket
expenses (with credit given to the amount heretofore paid), including legal
fees, provided however, that any portion of the $50,000 paid by the Company that
has not been utilized by you in connection with the offering on an accountable
basis shall be refunded by you to the Company; and further provided that if the
contemplated transactions are not consummated by reason of breach by the Company
of this Agreement or of any representation, warranty, covenant or condition
contained herein, the Company shall be liable for your accountable out-of-pocket
expenses.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless each Underwriter, and the Underwriters
agree to indemnify and hold harmless, severally and not jointly, the Company
from and against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which the indemnified party may become subject insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Option Closing Date, as the case
may be, any one or more of the several Underwriters fail or refuse to purchase
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriters agreed but failed
or refused to purchase does not exceed 10% of the aggregate number of the Shares
to be purchased on such date, the other Underwriters shall be obligated,
29
<PAGE>
severally, in the proportions that the number of Firm Shares set forth opposite
their respective names on Schedule I bears to the aggregate number of Firm
Shares set forth opposite the names of all such non-defaulting Underwriters, or
in such other proportions as may be specified by the Representative with the
consent of the non-defaulting Underwriters, to purchase the Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
on such date. If, on the First Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares and the aggregate number of Shares with respect to which such
default occurs exceeds 10% of the aggregate number of Shares to be purchased on
such date, and arrangements satisfactory to the Representative and the Company
for the purchase of such Shares are not made within 48 hours after such default,
this Agreement shall terminate without liability of any party to any other party
except that the provisions of Section 6, Section 7 and Section 8 shall at all
times be effective and shall survive such termination. In any such case either
the Representative or the Company shall have the right to postpone the First
Closing Date or the Option Closing Date, as the case may be, but in no event for
longer than seven days in order that the required changes, if any, to the
Registration Statement and the Prospectus or any other document or arrangements
may be effected.
As used in this Agreement, the term Underwriter shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
9. Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. EFFECTIVE DATE.
The Agreement shall become effective upon its execution, except that
you may, at your option, delay its effectiveness until the earlier to occur of
10:00 A.M., Eastern Standard time on the first full business day following the
Effective Date as the Representative in its discretion shall first commence the
initial public offering by the Representative of any of the Shares. This
Agreement may be terminated by you at any time before it becomes effective as
provided above, except that Sections 6, 7, 8, 13, 14, 15 and 16 shall remain in
effect notwithstanding such termination. The time of the initial public offering
shall mean the time of release by you of the first newspaper advertisement with
respect to the Shares, or the time when the Shares are first generally offered
by you to dealers by letter or telecopier, whichever shall first occur.
11. TERMINATION.
(a) This Agreement, except for Sections 6, 7, 8, 13, 14, 15 and 16,
may be terminated at any time prior to the First Closing Date, and the option
referred to in Section 2(b), if exercised, may be canceled, at any time prior to
the Option Closing Date, by the Representative if in the Representative's
judgment it is impracticable to offer for sale or to enforce contracts made by
you for the resale of the Shares agreed to be purchased hereunder, by reason of
(i) the Company having sustained a material loss, whether or not insured, by
reason of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree, (ii) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited, (iii) material governmental restrictions having been
imposed on trading in securities generally which are not in force and effect on
the date hereof, (iv) a banking
30
<PAGE>
moratorium having been declared by federal or New York State authorities, (v) an
outbreak of major international hostilities or other national or international
calamity having occurred, (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed likely by you to have a material adverse impact on
the business, financial condition or financial statements of the Company, (vii)
any material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement, or (viii) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If the Representative elects to prevent this Agreement from
becoming effective or to terminate this Agreement as provided in this Section 11
or in Section 10, the Company shall be promptly notified by you, by telephone or
facsimile transmission, confirmed by letter.
12. REPRESENTATIVE'S WARRANTS.
On the First Closing Date, the Company will issue to you, for a
consideration of $150 and upon the terms and conditions set forth in the form of
Representative's Warrants annexed as an exhibit to the Registration Statement,
the Representative's Warrants to purchase 150,000 Shares. In the event of
conflict in the terms of this Agreement and the Representative's Warrants, the
language of the Representative's Warrants shall control.
13. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY.
The respective indemnities, agreements, representations, warranties and
other statements of the Company and the Representative, set forth in or made
pursuant to this Agreement will remain in full force and effect regardless of
any investigation made by or on behalf of the Underwriters, the Company or any
of its officers or directors or any controlling persons and will survive
delivery of and payment for the Shares and the termination of this Agreement.
14. NOTICE.
All communications hereunder will be in writing and, except as
otherwise expressly provided herein, if sent to any Underwriter, will be mailed,
delivered or telecopied and confirmed to it at Joseph Charles & Associates,
Inc., 2500 N. Military Trail, Suite 300, Boca Raton, Florida 33431, with a copy
sent to Ralph V. De Martino, Esq., at De Martino Finkelstein Rosen & Virga, 1818
N Street, N.W., Suite 400, Washington, D.C. 20036-2492, or if sent to the
Company, will be mailed, delivered, or facsimiled and confirmed to Mr. Luca M.
Giussani, President and Chief Executive Officer, Ursus Telecom Corporation, 440
Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325, with a copy sent
to James R. Tannenbaum, Esq., Stroock & Stroock & Lavan LLP, 180 Maiden Lane,
New York, New York 10038, if sent to Luca M. Giussani, will be mailed,
delivered, or facsimiled and confirmed to Mr. Luca M. Giussani, _______________,
31
<PAGE>
_______________, _______________, if sent to Jeffrey R. Chaskin, will be mailed,
delivered, or facsimiled and confirmed to Mr. Jeffrey R. Chaskin,
_______________, _______________, _______________.
15. PARTIES IN INTEREST.
The Agreement herein set forth is made solely for the benefit of the
Representative, the Underwriters, the Company and, to the extent expressed, any
person controlling the Company, or the Representative or any Underwriter, and
directors of the Company, nominees for directors of the Company (if any) named
in the Prospectus, the officers of the Company who have signed the Registration
Statement, and their respective executors, administrators, successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" shall not include any
purchaser, as such purchaser, from any Underwriter of the Shares.
16. APPLICABLE LAW.
This Agreement will be governed by, and construed in accordance with,
the laws of the State of Florida applicable to agreements made and to be
entirely performed within Florida.
[THE REMAINDER OF THIS PAGE IS LEFT INTENTIONALLY BLANK.]
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Underwriting Agreement, whereupon it will
become a binding agreement between the Company and the Underwriters in
accordance with its terms.
Very truly yours,
URSUS TELECOM CORPORATION
Dated: __________________, 1998 By:
-------------------------------
Luca M. Giussani
Chief Executive Officer
and President
LUCA M. GIUSSANI
Dated: __________________, 1998 Signed:
---------------------------
JEFFREY R. CHASKIN
Dated: __________________, 1998 Signed:
--------------------------
The foregoing Underwriting Agreement
is hereby confirmed and accepted
as of the date first above written.
JOSEPH CHARLES & ASSOCIATES, INC.
By:
-------------------------------------
Authorized Officer
Dated:__________________________, 1998
33
<PAGE>
SCHEDULE I
Underwriting Agreement dated ______________, 1998
UNDERWRITER NUMBER OF FIRM SHARES TO BE PURCHASED
- ----------- -------------------------------------
Total ___________
___________
34
<PAGE>
Exhibit 4.1
ursus telecom corporation
UTC COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
CUSIP 917287 10 4
This Certifies that fully-paid and non-assessable shares of THE COMMON
STOCK PAR VALUE OF .01 DOLLARS OF Ursus Telecom Corporation (hereinafter the
"Corporation") is the registered owner of transferable on the books of
the Corporation in person or by duly authorized attorney, upon surrender of
this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated
Corporate Secretary
President and Chief Executive Officer
Countersigned and Registered:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
Transfer Agent
and Registrar
By
Authorized OFFICER
<PAGE>
urusus telecom corporation
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian (Cust) (Minor)
under Uniform Gifts to Minors Act
(State)
Additional abbreviations may also be used though not in the above list.
For value Received hereby sell, assign and transfer unto
- --------------------------------------------------------------------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------------------------------------------------
(Please print or typewrite name and address, including zip code, of assignee)
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
- --------------------------------------------------------------------------------
shares of the capital stock represented by the within Certificate, and
do hereby irrevocably constitute and appoint _______________, Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
Page 2
<PAGE>
- --------------------------------------------
Signature(s) Guaranteed:
The signature(s) should be guaranteed by an eligible guarantor institution
(Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with
membership in an approved signature guarantee Medallion Program), pursuant to
S.E.C. Rule 17Ad-15.
Page 3
<PAGE>
EXHIBIT 10.10
FINANCIAL CONSULTING AGREEMENT
THIS AGREEMENT made this____________day of____________, 1998, by and
between Joseph Charles & Associates, Inc. ("Consultant") and Ursus Telecom
Corporation, a Florida corporation ("Client").
WHEREAS, Client desires to obtain Consultant's services in connection
with Client's business and financial affairs, and Consultant is willing to
render such services as hereinafter more fully set forth.
NOW, THEREFORE, the parties hereby agree as follows:
1. Client hereby engages and retains Consultant and Consultant hereby
agrees to use its best efforts to render to Client the consulting services
hereinafter described for a period of twenty-four months (24) commencing as of,
and conditioned upon, the closing of the underwriting contemplated in the
Registration Statement on Form S-1 (File No. 333-46197) declared effective by
the Securities and Exchange Commission on________________, 1998.
2. Consultant's services hereunder shall consist of consultations with
Client concerning the management and operations and the financing of Client's
business as Client may from time to time require during the term of this
Agreement. Such services may include, at the request of the Client, written
reports; review, analysis and reports on proposed investment opportunities and
short-term and long-term investment policies; assistance in the Client's general
relationship with the financial community, including brokers, financial
analysts, investment bankers and institutions; and assistance in obtaining
financial management, technical and advisory services and financial and
corporate public relations. Client agrees that Consultant shall not be precluded
during the term of this Agreement from providing other consulting services or
engaging in any other business activities whether or not such consulting
services or business activities are pursued for gain, profit or other pecuniary
advantage and whether or not such consulting activities are in direct or
indirect competition with the business activities of Client.
3. The fees payable to Consultant under this Agreement do not include
any services Consultant might perform as finder, or person otherwise responsible
for the public or private placement of future financing for Client. Consultant
will be paid additional compensation on terms and conditions mutually
satisfactory to Client pursuant to a separate written agreement between the
parties with respect to any such transaction which is consummated as to which
Consultant is a finder or originator.
4. Client agrees to pay to Consultant for its services hereunder the
sum of $3,000.00 per month during the term of this Agreement. Client agrees that
the entire sum due to Consultant hereunder, $72,000.00, shall be paid in full
upon execution hereof.
<PAGE>
5. Consultant shall be entitled to reimbursement by Client for such
reasonable out-of-pocket expenses for travel, accommodation and other related
expenses as Consultant may incur in performing services under this Agreement.
6. All final decisions with respect to consultations or services
rendered by Consultant pursuant to this Agreement shall be those of Client, and
there shall be no liability on the part of the Consultant in respect thereof.
This Agreement and the Underwriting Agreement dated____________, 1998 contain
the entire agreement of the parties hereto with respect to the subject matter
hereof, and there are no representations or warranties other than as shall be
herein or therein set forth. No waiver or modification hereof shall be valid
unless in writing. No waiver of any term, provision or condition of this
Agreement, in any one or more instance, shall constitute a waiver of any other
provision hereof, whether or not similar, nor shall such waiver constitute a
continuing waiver.
7. This Agreement shall be governed, construed and enforced in
accordance with the laws of the State of Florida.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
signed as of the day and year first above written.
URSUS TELECOM CORPORATION
By:
----------------------------
Luca M. Giussani
JOSEPH CHARLES & ASSOCIATES, INC.
By:
----------------------------
Authorized Officer
2
<PAGE>
EXHIBIT 10.15
URSUS TELECOM CORPORATION
Representative's Warrant
No. __ 150,000 Shares of Common Stock
THIS CERTIFIES that, for receipt in hand of $150 and other value
received, Joseph Charles & Associates, Inc., 2500 N. Military Trail, Suite 300,
Boca Raton, Florida 33431 (the "Holder"), is entitled to subscribe for and
purchase from Ursus Telecom Corporation, a Florida corporation (the "Company"),
upon the terms and conditions set forth herein, at any time or from time to time
from and after _______________, 1998 and before 5:00 p.m. Eastern Standard Time
on _______________, 2003 (the "Exercise Period"), 150,000 shares of Common
Stock, $.01 par value per share (the "Common Shares"), of the Company (as
adjusted, the "Underlying Shares") at an aggregate exercise price of $_____ per
Common Share, subject to adjustment as provided herein (the "Exercise Price").
The Underlying Shares are sometimes collectively referred to herein as the
"Underlying Securities."
This Representative's Warrant is the warrant or one of the warrants
(collectively, including any warrants issued upon the exercise or transfer of
any such warrants in whole or in part, the "Representative Warrants") issued
pursuant to the Underwriting Agreement, dated _______________, 1998 (the
"Underwriting Agreement"), between the Company and Joseph Charles & Associates,
Inc., as Representative of the several Underwriters. As used herein the term
"this Representative's Warrant" shall mean and include this Representative's
Warrant and any Representative's Warrant or Representative's Warrants hereafter
issued as a consequence of the exercise or transfer of this Representative's
Warrant in whole or in part. This Representative's Warrant may not be sold,
transferred, assigned or hypothecated until _______________, 1999, except that
it may be transferred, in whole or in part, to (i) one or more officers or
partners of the Holder (or the officers or partners of any such partner); (ii)
any other underwriting firm or member of the selling group (or the officers or
partners of any such firm) which participated in the public offering of
1,500,000 Common Shares of the Company pursuant to a Registration Statement
(Registration Number 333-46197) on Form S-1 under the Securities Act of 1933, as
amended (the "Act"); (iii) a successor to the Holder, or the officers or
partners of such successor; (iv) a purchaser of substantially all of the assets
of the Holder; or (v) by operation of law; and the term the "Holder" as used
herein shall include any transferee to whom this Representative's Warrant has
been transferred in accordance with the above.
1. This Representative's Warrant may be exercised during the Exercise
Period, as to the whole or any lesser number of whole Underlying Shares, by the
surrender of this Representative's Warrant (with the election at the end hereof
duly executed) to the Company at its office at Ursus Telecom Corporation, 440
Sawgrass Corporate Parkway, Suite 112, Sunrise, Florida 33325, or at such other
place as is designated in writing by the Company, together with a certified or
bank
<PAGE>
cashier's check payable to the order of the Company in an amount equal to
the Exercise Price multiplied by the number of Underlying Shares for which this
Representative's Warrant is being exercised. This Representative's Warrant may
only be exercised for a proportionate amount of Underlying Shares in amounts of
not less than 100 Common Shares (unless less than an aggregate of 100 Common
Shares are then purchasable under this Representative's Warrant by the Holder).
2. Upon each exercise of the Holder's rights to purchase Common Shares,
the Holder shall be deemed to be the holder of record of the Underlying Shares
issuable upon such exercise, notwithstanding that the transfer books of the
Company shall then be closed or certificates representing such Underlying Shares
shall not then have been actually delivered to the Holder. Promptly after each
such exercise of this Representative's Warrant, the Company shall issue and
deliver, or shall cause the transfer agent for the Common Shares to issue and
deliver, to the Holder a certificate or certificates for the Underlying Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. The Company has reserved, deposited and will at all times maintain
with the transfer agent for the Common Shares a number of Underlying Shares
sufficient for issuance and delivery upon exercise of the Representative's
Warrants. In the event that the Company fails promptly to issue and deliver or
cause the issuance and delivery of certificates for Common Shares in accordance
with the second sentence of this Section, the Representative is hereby
irrevocably designated the Company's agent to so instruct the transfer agent for
the Common Shares to issue and deliver such certificates and to take any other
actions either of them deem necessary or appropriate in connection with such
issuance and delivery. If this Representative's Warrant should be exercised in
part only, the Company shall, upon surrender of this Representative's Warrant
for cancellation, execute and deliver a new Representative's Warrant evidencing
the right of the Holder to purchase the balance of the Underlying Shares (or
portions thereof) subject to purchase hereunder.
3. Any Representative's Warrants issued upon the transfer or exercise
in part of this Representative's Warrant shall be numbered and shall be
registered in a Representative's Warrant Register as they are issued. The
Company shall be entitled to treat the registered holder of any Representative's
Warrant on the Representative's Warrant Register as the owner in fact thereof
for all purposes and shall not be bound to recognize any equitable or other
claim to or interest in such Representative's Warrant on the part of any other
person, and shall not be liable for any registration or transfer of
Representative's Warrants which are registered or to be registered in the name
of a fiduciary or the nominee of a fiduciary unless made with the actual
knowledge that a fiduciary or the nominee is committing a breach of trust in
requesting such registration or transfer, or with the knowledge of such facts
that its participation therein amounts to bad faith. This Representative's
Warrant shall be transferable only on the books of the Company upon delivery
thereof duly endorsed by the Holder or by his duly authorized attorney or
representative, or accompanied by proper evidence of succession, assignment, or
authority to transfer. In all cases of transfer by an attorney, executor,
administrator, guardian, or other legal representative, duly authenticated
evidence of his or its authority shall be produced. Upon any registration of
transfer, the Company shall deliver a new Representative's Warrant or
Representative's Warrants to the person entitled thereto. This Representative's
Warrant may be exchanged, at the option of the Holder thereof, for another
Representative's Warrant, or other Representative's Warrant of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of Underlying Shares (or
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portions thereof), upon surrender to the Company or its duly authorized agent.
Notwithstanding the foregoing, the Company shall have no obligation to cause
Representative's Warrants to be transferred on its books to any person if, in
the opinion of counsel to the Company, such transfer does not comply with the
provisions of the Act, and the rules and regulations thereunder.
4. The Company shall at all times reserve and keep available for
issuance upon the exercise of the Representative's Warrants and on deposit with
the transfer agent for the Common Shares a number of its authorized and unissued
Common Shares that will be sufficient to permit the exercise in full of the
Representative's Warrants. The Company covenants that all Common Shares issuable
upon exercise of this Representative's Warrant, upon receipt by the Company of
the full payment therefor, shall be validly issued, fully paid, nonassessable,
and free of preemptive rights.
5. (a) In case the Company shall at any time after the date hereof (i)
declare a dividend on the outstanding Common Shares payable in shares of its
capital stock, (ii) subdivide the outstanding Common Shares, (iii) combine the
outstanding Common Shares into a smaller number of shares, or (iv) issue any
shares of its capital stock by reclassification of the Common Shares (including
any such reclassification in connection with a consolidation or merger in which
the Company is the continuing corporation), then, in each case, the Exercise
Price, and the number of Underlying Shares issuable upon exercise of the
Representative's Warrants in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination, or
reclassification, shall be proportionately adjusted so that the holders of the
Representative's Warrants after such time shall be entitled to receive the
aggregate number and kind of shares which, if such Representative's Warrants had
been exercised immediately prior to such time, such holders would have owned
upon such exercise and been entitled to receive by virtue of such dividend,
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) All calculations under this Section 5 shall be made to the
nearest cent or to the nearest one-thousandth of a share, as the case may be.
(c) In any case in which this Section 5 shall require that an
adjustment in the number of Underlying Shares be made effective as of a record
date for a specified event the Company may elect to defer, until the occurrence
of such event, issuing to the Holder, if the Holder exercised this
Representative's Warrant after such record date, the Common Shares, if any,
issuable upon such exercise over and above the number of Underlying Shares, if
any, issuable upon such exercise on the basis of the number of Underlying Shares
in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall
deliver to the Holder a due bill or other appropriate instrument evidencing the
Holder's right to receive such additional shares upon the occurrence of the
event requiring such adjustment.
(d) Whenever there shall be an adjustment as provided in this
Section 5, the Company shall promptly cause written notice thereof to be sent by
registered mail, postage prepaid, to the Holder, at its address as it shall
appear in the Representative's Warrant Register, which notice shall be
accompanied by an officer's certificate setting forth the number of Underlying
Shares
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issuable pursuant to such Representative's Warrants and the Exercise Price,
after such adjustment and setting forth a brief statement of the facts requiring
such adjustment and the computation thereof, which officer's certificate shall
be conclusive evidence of the correctness of any such adjustment absent manifest
error.
(e) The Company shall not be required to issue fractions of Common
Shares or other capital stock of the Company upon the exercise of this
Representative's Warrant. If any fraction of a share would be issuable on the
exercise of this Representative's Warrant (or specified portions thereof), the
Company shall purchase such fraction for an amount in cash equal to the same
fraction of the Current Market Price (as hereinafter defined) of such Common
Share on the date of exercise of this Representative's Warrant.
(f) The "Current Market Price" per Common Share on any date shall be
defined as the average of the daily closing prices for the 30 consecutive
trading days immediately preceding the date in question. The closing price for
each day shall be the last reported sales price regular way or, in case no such
reported sale takes place on such day, the closing bid price regular way, in
either case on the principal national securities exchange (including, for
purposes hereof, the Nasdaq National Market System) on which the Common Shares
are listed or admitted to trading or, if the Common Shares are not listed or
admitted to trading on any national securities exchange, the highest reported
bid price for the Common Shares as furnished by the National Association of
Securities Dealers, Inc. through The Nasdaq Stock Market, Inc. or a similar
organization if The Nasdaq Stock Market, Inc. is no longer reporting such
information. If on any such date the Common Shares are not listed or admitted to
trading on any national securities exchange and are not quoted by The Nasdaq
Stock Market, Inc. or any similar organization, the fair value of the Common
Shares on such date, as determined in good faith by the Board of Directors of
the Company, whose determination shall be conclusive absent manifest error,
shall be used.
6. (a) In case of any consolidation with or merger of the Company with
or into another corporation (other than a merger or consolidation in which the
Company is the surviving or continuing corporation), or in case of any sale,
lease or conveyance to another corporation of the property and assets of any
nature of the Company as an entirety or substantially as an entirety, such
successor, leasing, or purchasing corporation, as the case may be, shall (i)
execute with the Holder an agreement providing that the Holder shall have the
right thereafter to receive upon exercise of this Representative's Warrant
solely the kind and amount of Common Shares and other securities, property,
cash, or any combination thereof receivable upon such consolidation, merger,
sale, lease, or conveyance by a holder of the number of Common Shares for which
this Representative's Warrant might have been exercised immediately prior to
such consolidation, merger, sale, lease, or conveyance and (ii) make effective
provision in its certificate or articles of incorporation or otherwise, if
necessary, to effect such agreement. Such agreement shall provide for
adjustments which shall be as nearly equivalent as practicable to the
adjustments in Section 5 hereof.
(b) In case of any reclassification or change of the Common Shares
issuable upon exercise of this Representative's Warrant (other than a change in
par value or from no par value to a specified par value, or as a result of a
subdivision or combination, but including any change in the
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shares into two or more classes or series of shares), or in case of any
consolidation or merger of another corporation into the Company in which the
Company is the continuing corporation and in which there is a reclassification
or change (including a change to the right to receive cash or other property) of
the Common Shares (other than a change in par value, or from no par value to a
specified par value, or as a result of a subdivision or combination, but
including any change in the shares into two or more classes or series of
shares), the Holder shall have the right thereafter to receive upon exercise of
this Representative's Warrant solely the kind and amount of shares of stock and
other securities, property, cash, or any combination thereof receivable upon
such reclassification, change, consolidation, or merger by a holder of the
number of Common Shares for which this Representative's Warrant might have been
exercised immediately prior to such reclassification, change, consolidation, or
merger. Thereafter, appropriate provision shall be made for adjustments which
shall be as nearly equivalent as practicable to the adjustments in Section 5
hereof.
(c) The above provisions of this Section 6 shall similarly apply to
successive reclassifications and changes of Common Shares and to successive
consolidations, mergers, sales, leases, or conveyances.
7. In case at any time the Company shall propose:
(a) to pay any dividend or make any distribution on Common Shares in
Common Shares or make any other distribution (other than regularly scheduled
cash dividends which are not in a greater amount per share than the most recent
such cash dividend) to all holders of Common Shares; or
(b) to issue any rights, warrants, or other securities to all
holders of Common Shares entitling them to purchase any additional Common Shares
or any other rights, warrants, or other securities; or
(c) to effect any reclassification or change of outstanding Common
Shares, or any consolidation, merger, sale, lease, or conveyance of property,
described in Section 6(b); or
(d) to effect any liquidation, dissolution, or winding up of the
Company;
then, and in any one or more of such cases, the Company shall give written
notice thereof, by registered mail, postage prepaid, to the Holder at the
Holder's address as it shall appear in the Representative's Warrant Register,
mailed at least 15 days prior to (i) the date as of which the holders of record
of Common Shares to be entitled to receive any such dividend, distribution,
rights, warrants, or other securities are to be determined, or (ii) the date on
which any such reclassification, change of outstanding Common Shares,
consolidation, merger, sale, lease, conveyance of property, liquidation,
dissolution, or winding up is expected to become effective, and the date as of
which it is expected that holders of record of Common Shares shall be entitled
to exchange their shares for securities or other property, if any, deliverable
upon such reclassification, change of outstanding shares, consolidation, merger,
sale, lease, conveyance of property, liquidation, dissolution, or winding up.
Any such notice shall be deemed delivered on the date of actual delivery as
shown by
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the certification receipt or at the expiration of the tenth (10th) business day
after the date of mailing, whichever is earlier in time.
8. The issuance of any shares or other securities upon the exercise of
this Representative's Warrant, and the delivery of certificates or other
instruments representing such shares or other securities, shall be made without
charge to the Holder for any tax or other charge in respect of such issuance.
The Company shall not, however, be required to pay any tax which may be payable
in respect of any transfer involved in the issue and delivery of any certificate
in a name other than that of the Holder and the Company shall not be required to
issue or deliver any such certificate unless and until the person or persons
requesting the issue thereof shall have paid to the Company the amount of such
tax or shall have established to the satisfaction of the Company that such tax
has been paid.
9. (a) If, at any time during the four-year period commencing one year
after the Effective Date, the Company shall file a registration statement (other
than on Form S-4, Form S-8, or any successor form) with the Securities and
Exchange Commission (the "Commission") while this Representative's Warrant or
any of the Representative's Securities (as hereinafter defined) are outstanding,
the Company shall give all the then holders of the Representative's Warrants or
any Representative's Securities (collectively, the "Eligible Holders") at least
45 days' prior written notice of the filing of such registration statement. If
requested by any Eligible Holder in writing within 30 days after receipt of any
such notice, the Company shall, at the Company's sole expense (other than the
fees and disbursements of counsel for the Eligible Holders and the underwriting
discounts, if any, payable in respect of the Representative's Securities sold by
any Eligible Holder), register or qualify all or, at each Eligible Holder's
option, any portion of the Representative's Securities of any Eligible Holder
who shall have made such request, concurrently with the registration of such
other securities, all to the extent requisite to permit the public offering and
sale of the Representative's Securities through the facilities of all
appropriate securities exchanges and the over-the-counter market, and will use
its best efforts through its officers, directors, auditors, and counsel to cause
such registration statement to become effective as promptly as practicable.
Notwithstanding the foregoing, if the managing underwriter of any such offering
shall advise the Company in writing that, in its opinion, the distribution of
all or a portion of the Representative's Securities requested to be included in
the registration concurrently with the securities being registered by the
Company would materially adversely affect the distribution of such securities by
the Company for its own account, then any Eligible Holder who shall have
requested registration of his or its Representative's Securities shall delay the
offering and sale of such Representative's Securities (or the portions thereof
so designated by such managing underwriter) for such period, not to exceed 90
days (the "Delay Period"), as the managing underwriter shall request, provided
that no such delay shall be required as to any Representative's Securities if
any securities of the Company are included in such registration statement and
eligible for sale during the Delay Period for the account of any person other
than the Company and any Eligible Holder unless the securities included in such
registration statement and eligible for sale during the Delay Period for such
other person shall have been reduced pro rata to the reduction of the
Representative's Securities which were requested to be included and eligible for
sale during the Delay Period in such registration. As used herein,
"Representative's Securities"
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shall mean the Underlying Securities which have not been previously sold
pursuant to a registration statement or Rule 144 promulgated under the Act.
(b) If, at any time during the four-year period commencing one year
after the Effective Date, the Company shall receive a written request (a
"Request"), from Eligible Holders who in the aggregate own (or upon exercise of
all Representative's Securities then outstanding or issuable would own) a
majority of the total number of Common Shares then included (or which upon such
exercises would be included) in the Representative's Securities (the "Majority
Holders"), to register the sale of all or part of such Representative's
Securities, the Company shall, as promptly as practicable, prepare and file with
the Commission a registration statement sufficient to permit the public offering
and sale of the Representative's Securities through the facilities of all
appropriate securities exchanges and the over-the-counter market, and will use
its best efforts through its officers, directors, auditors, and counsel to cause
such registration statement to become effective as promptly as practicable;
PROVIDED; HOWEVER, that the Company shall only be obligated to register
Representative's Securities on one occasion pursuant to this Section 9(b). All
expenses incurred in connection with such registration (other than the fees and
disbursements of counsel for the Eligible Holders and underwriting discounts, if
any, payable in respect of the Representative's Securities sold by the Eligible
Holders) shall be borne by the Company. Within three business days after
receiving any request contemplated by this Section 9(b), the Company shall give
written notice to all the other Eligible Holders, advising each of them that the
Company is proceeding with such registration and offering to include therein all
or any portion of any such other Eligible Holder's Representative's Securities,
provided that the Company receives a written request to do so from such Eligible
Holder within 30 days after receipt by him or it of the Company's notice.
Notwithstanding anything contained in this Section 9(b) to the contrary: (i) no
person may make a Request that the Company file, nor shall the Company be
obligated to file, a Registration Statement on any date that is within 90 days
of the effective date of any registration statement filed by the Company and
pursuant to which such person was given full "piggyback" registration rights in
accordance with Section 9(a) hereof including without limitation the ability to
include all Representative's Securities requested to be included therein; and
(ii) the Company may delay the registration of the securities to which a Request
relates if upon receipt of such Request (A) the Company notifies the person
making the Request that it is contemplating filing a Registration Statement
within 90 days of such Request, or (B) the Company notifies the person making
the Request that the Board of Directors of the Company has determined that a
material event has occurred that has not been publicly disclosed and which if
disclosed would have a material adverse effect on the Company; provided that (x)
in the case of clause (ii)(A) of this paragraph, the Company shall, as soon as
practical, upon the first to occur of the abandonment of such contemplated
Registration Statement or the expiration of such 90-day period, register the
securities to which the Request relates unless such Request is withdrawn; and
(y) in the case of clause (ii)(B) of this paragraph, the Company may not delay
the filing of the Registration Statement for more than 30 days from the date of
the Request unless such Request is withdrawn.
(c) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall use its best efforts to cause the
Representative's Securities so registered to be registered or qualified for sale
under the securities or Blue Sky Laws of such jurisdictions as the
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<PAGE>
Holder or such holders may reasonably request; PROVIDED, HOWEVER, that the
Company shall not be required to qualify to do business in any state by reason
of this Section 9(c) in which it is not otherwise required to qualify to do
business.
(d) The Company shall keep effective any registration or
qualification contemplated by this Section 9 and shall from time to time amend
or supplement each applicable registration statement, preliminary prospectus,
final prospectus, application, document, and communication until the earlier of
the conclusion of the period required to permit the Eligible Holders to complete
the offer and sale of the Representative's Securities covered thereby and 90
days from the effective date of the Registration Statement; PROVIDED, HOWEVER,
that, if the Company is required to keep any such registration or qualification
in effect with respect to securities other than the Representative's Securities
beyond such period, the Company shall keep such registration or qualification in
effect as it relates to the Representative's Securities for so long as such
registration or qualification remains or is required to remain in effect in
respect of such other securities.
(e) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall furnish to each Eligible Holder such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case, including all exhibits), such reasonable number of copies
of each prospectus contained in such registration statement and each supplement
or amendment thereto (including each preliminary prospectus), all of which shall
conform to the requirements of the Act and the rules and regulations thereunder,
and such other documents, as any Eligible Holder may reasonably request to
facilitate the disposition of the Representative's Securities included in such
registration.
(f) In the event of a registration pursuant to the provisions of
this Section 9, the Company shall enter into a cross-indemnity agreement and a
contribution agreement, each in customary form, with each underwriter, if any,
and, if requested, enter into an underwriting agreement containing conventional
representations, warranties, allocation of expenses, and customary closing
conditions, including, but not limited to, opinions of counsel and accountants'
cold comfort letters, with any underwriter who acquires any Representative's
Securities.
(g) The Company agrees that until all the Representative's
Securities have been sold under a registration statement or pursuant to Rule 144
under the Act, it shall keep current in filing all reports, statements and other
materials required to be filed with the Commission to permit holders of the
Representative's Securities to sell such securities under Rule 144.
(h) So long as any Representative's Securities are outstanding, the
Company will not enter into any agreement requiring the registration of any
securities of the Company which is in conflict with the terms of this Section 9.
10. (a) Subject to the conditions set forth below, the Company agrees
to indemnify and hold harmless each Eligible Holder, its officers, directors,
partners, employees, agents, and counsel, and each person, if any, who controls
any such person within the meaning of Section 15 of the Act or Section 20(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
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from and against any and all loss, liability, charge, claim, damage, and expense
whatsoever (which shall include, for all purposes of this Section 10, but not be
limited to, attorneys' fees and any and all reasonable expenses whatsoever
incurred in investigating, preparing, or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts paid
in settlement of any claim or litigation), as and when incurred, arising out of,
based upon, or in connection with (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any registration statement,
preliminary prospectus, or final prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, relating to the sale of
any of the Representative's Securities, or (B) in any application or other
document or communication (in this Section 10 collectively called an
"application") executed by or on behalf of the Company or based upon written
information furnished by or on behalf of the Company filed in any jurisdiction
in order to register or qualify any of the Representative's Securities under the
securities or Blue Sky laws thereof or filed with the Commission or any
securities exchange; or any omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, unless such statement or omission was made in reliance upon and
in conformity with written information furnished to the Company with respect to
such Eligible Holder by or on behalf of such Person expressly for inclusion in
any registration statement, preliminary prospectus, or final prospectus, or any
AMENDMENT or supplement thereto, or in any application, as the case may be, or
(ii) any breach of any representation, warranty, covenant, or agreement of the
Company contained in this Representative's Warrant. The foregoing agreement to
indemnify shall be in addition to any liability the Company may otherwise have,
including liabilities arising under this Representative's Warrant.
If any action is brought against any Eligible Holder or any of its
officers, directors, partners, employees, agents, or counsel, or any controlling
persons of such person (an "Indemnified Party") in respect of which indemnity
may be sought against the Company pursuant to the foregoing paragraph, such
Indemnified Party or Parties shall promptly notify the Company in writing of the
institution of such action (but the failure so to notify shall not relieve the
Company from any liability other than pursuant to this Section 10) and the
Company shall promptly assume the defense of such action, including the
employment of counsel and payment of expenses. Such Indemnified Party or Parties
shall have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
Indemnified Party or Parties unless the employment of such counsel shall have
been authorized in writing by the Company in connection with the defense of such
action or the Company shall not have promptly employed counsel reasonably
satisfactory to such Indemnified Party or Parties to have charge of the defense
of such action or such Indemnified Party or Parties shall have reasonably
concluded that there may be one or more legal defenses available to it or them
or to other Indemnified Parties which are different from or additional to those
available to the Company, in any of which events such fees and expenses shall be
borne by the Company and the Company shall not have the right to direct the
defense of such action on behalf of the Indemnified Party or Parties. Anything
in this Section 10 to the contrary notwithstanding, the Company shall not be
liable for any settlement of any such claim or action effected without its
written consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each Indemnified Party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of
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judgment in or otherwise seek to terminate any pending or threatened action, in
respect of which indemnity may be sought hereunder (whether or not any
Indemnified Party is a party thereto), unless such settlement, compromise,
consent, or termination includes an unconditional release of each Indemnified
Party from all liability in respect of such action. The Company agrees promptly
to notify the Eligible Holders of the commencement of any litigation or
proceedings against the Company or any of its officers or directors in
connection with the sale of any Representative's Securities or any of its
officers or directors in connection with the sale of any Representative's
Securities or any preliminary prospectus, prospectus, registration statement, or
amendment or supplement thereto, or any application relating to any sale of any
Representative's Securities.
(b) The Holder agrees to indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who shall have signed
any registration statement covering Representative's Securities held by the
Holder, each other person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, and its or their
respective counsel, to the same extent as the foregoing indemnity from the
Company to the Holder in Section 10(a), but only with respect to statements or
omissions, if any, made in any registration statement, preliminary prospectus,
or final prospectus (as from time to time amended and supplemented), or any
amendment or supplement thereto, or in any application, in reliance upon and in
conformity with written information furnished to the Company with respect to the
Holder by or on behalf of the Holder expressly for inclusion in any such
registration statement, preliminary prospectus, or final prospectus, or any
amendment or supplement thereto, or in any application, as the case may be. If
any action shall be brought against the Company or any other person so
indemnified based on any such registration statement, preliminary prospectus, or
final prospectus, or any amendment or supplement thereto, or in any application,
and in respect of which indemnity may be sought against the Holder pursuant to
this Section 10(b), the Holder shall have the rights and duties given to the
Company, and the Company and each other person so indemnified shall have the
rights and duties given to the Indemnified Parties, by the provisions of Section
10(a).
(c) To provide for just and equitable contribution, if (i) an
Indemnified Party makes a claim for indemnification pursuant to Section 10(a) or
10(b) (subject to the limitations thereof) but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this agreement expressly provides for
indemnification in such case, or (ii) any Indemnified Party or indemnifying
party seeks contribution under the Act, the Exchange Act or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed any such
registration statement, any controlling person of the Company, and its or their
respective counsel), as one entity, and the Eligible Holders of the
Representative's Securities included in such registration in the aggregate
(including for this purpose any contribution by or on behalf of an Indemnified
Party), as a second entity, shall contribute to the losses, liabilities, claims,
damages, and expenses whatsoever to which any of them may be subject, on the
basis of relevant equitable considerations such as the relative fault of the
Company and such Eligible Holders in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses. The relative fault, in
the case of an untrue statement, alleged untrue statement, omission, or alleged
omission, shall be determined by, among other things, whether such statement,
alleged statement,
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omission, or alleged omission relates to information supplied by the Company or
by such Eligible Holders, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such statement, alleged
statement, omission, or alleged omission. The Company and the Holder agree that
it would be unjust and inequitable if the respective obligations of the Company
and the Eligible Holders for contribution were determined by pro rata or per
capita allocation of the aggregate losses, liabilities, claims, damages, and
expenses (even if the Holder and the other Indemnified Parties were treated as
one entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 10(c). In no
case shall any Eligible Holder be responsible for a portion of the contribution
obligation imposed on all Eligible Holders in excess of its pro rata share based
on the number of Common Shares (or which would be owned upon exercise of all
Representative's Securities) by it and included in such registration as compared
to the number of Common Shares owned (or which would be owned upon exercise of
all Representative's Securities) by all Eligible Holders and included in such
registration. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. For purposes of
this Section 10(c), each person, if any, who controls any Eligible Holder within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and
each officer, director, partner, employee, agent, and counsel of each such
Eligible Holder or control person shall have the same rights to contribution as
such Eligible Holder or control person and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, each officer of the Company who shall have signed any such
registration statement, each director of the Company, and its or their
respective counsel shall have the same rights to contribution as the Company,
subject in each case to the provisions of this Section 10(c). This Section 10(c)
is intended to supersede any right to contribution under the Act, the Exchange
Act or otherwise.
11. Unless registered pursuant to the provisions of Section 9 hereof,
the certificate or certificates evidencing such securities shall bear the
following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
PURSUANT TO A REGISTRATION STATEMENT FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION. HOWEVER, SUCH SHARES MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) A POST-EFFECTIVE
AMENDMENT TO SUCH REGISTRATION STATEMENT, (ii) A SEPARATE
REGISTRATION STATEMENT UNDER SUCH ACT, OR (iii) AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT."
12. Upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of any Representative's Warrant (and upon
surrender of any Representative's Warrant if mutilated), and upon reimbursement
of the Company's reasonable incidental expenses, the
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Company shall exercise and deliver to the Holder thereof a new Representative's
Warrant of like date, tenor, and denomination.
13. The Holder of any Representative's Warrant shall not have, solely
on account of such status, any rights of a stockholder of the Company, either at
law or in equity, or to any notice of meetings of stockholders or of any other
proceedings of the Company, except as provided in this Representative's Warrant.
14. This Representative's Warrant shall be construed in accordance with
the laws of the State of Florida.
15. The Company irrevocably consents to the jurisdiction of the courts
of the State of Florida and of any federal court located in such State in
connection with any action or proceeding arising out of or relating to this
Representative's Warrant, any document or instrument delivered pursuant to, in
connection with or simultaneously with this Representative's Warrant, or a
breach of this Representative's Warrant or any such document or instrument. In
any such action or proceeding, the Company waives personal service of any
summons, complaint or other process. Within 30 days after such service, or such
other time as may be mutually agreed upon in writing by the attorneys for the
parties to such action or proceeding, the Company shall appear to answer such
summons, complaint or other processes.
Dated: _______________, 1998
WITNESS: URSUS TELECOM CORPORATION
By:
____________________________ ----------------------------
Secretary Luca M. Giussani, President and
Chief Executive Officer
12
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
attached Representative's Warrant.)
FOR VALUE RECEIVED, hereby sells, assigns, and transfers unto a
Representative's Warrant to purchase Common Shares of Ursus Telecom Corporation
(the "Company"), together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint attorney to transfer such
Representative's Warrant on the books of the Company, with full power of
substitution.
Dated:__________________
____________________________
Signature
13
<PAGE>
ELECTION TO EXERCISE
The undersigned hereby exercises his or its rights to purchase
_________ Shares covered by the within Representative's Warrants and tenders
payment herewith in the amount of $__________ in accordance with the terms
thereof, and requests that certificates for such securities be issued in the
name of, and delivered to:
_____________________________________
(Print Name, Address and Social Security
or Tax Identification Number)
and, if such number of Underlying Shares shall not be all the Underlying Shares
covered by the within Representative's Warrant, requests that a new
Representative's Warrant for the balance of the Underlying Shares covered by the
within Representative's Warrant be registered in the name of, and delivered to,
the undersigned at the address stated below.
Dated:_________________ Name:
--------------------------
(Print)
Address:
Signature:
---------------------
14
<PAGE>
EXHIBIT 10.17
_______________, 1998
Joseph Charles & Associates, Inc.
Representative of the Underwriters
2500 N. Military Trail
Suite 300
Boca Raton, Florida 33431
Ladies and Gentlemen:
The undersigned is the holder of (i) ____________ shares of Common
Stock, $.01 par value per share ("Common Stock") of Ursus Telecom Corporation, a
Florida corporation (the "Company") (including preferred stock, warrants,
options or other securities convertible into Common Stock which may be deemed to
be beneficially owned by the undersigned in accordance with the rules and
regulations of the Securities and Exchange Commission), (ii) ___________ shares
of Series A Preferred Stock, $.01 par value per share, of the Company, and (iii)
options (or the right to receive options) to acquire __________ shares of Common
Stock under the Company's 1998 Stock Incentive Plan (collectively, the
"Shares").
The undersigned understands that Joseph Charles & Associates, Inc.
("Joseph Charles"), the representative of the underwriters (the "Underwriters"),
will enter into an Underwriting Agreement with the Company providing for the
public offering ("Public Offering") of up to 1,500,000 shares of Common Stock by
the Company (not including the shares that are subject to the Underwriters'
over-allotment option) pursuant to a Registration Statement (the "Registration
Statement") filed with the Securities and Exchange Commission (File No.
333-46197). The Registration Statement also covers the registration of an
aggregate of __________ shares of the Company's Common Stock to be offered and
sold by the undersigned holder on a non-underwritten basis (the "Registered
Shares").
In consideration of the agreement by the Underwriters to publicly offer
and sell the Company's shares of Common Stock upon the terms set forth in the
Underwriting Agreement, and as an inducement for Joseph Charles to execute the
Underwriting Agreement and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the undersigned agrees that,
without the prior written consent of Joseph Charles or any successor thereto,
which consent may be withheld for any reason, the undersigned will not, for a
period beginning on the effective date of the Registration Statement and
continuing for twelve (12) months thereafter, offer, sell, contract to sell,
transfer, assign, contract to assign, gift, grant any
<PAGE>
option or warrant to purchase or right to acquire, announce his intention to
sell, pledge, exchange, contract to exchange, or otherwise dispose or contract
to dispose of, directly or indirectly, any of the Shares (or any other shares of
capital stock of the Company or any indirect interest or option in any of the
foregoing now or hereafter issued by the Company), including but not limited to
the Registered Shares, except that during such twelve (12) month period the
undersigned may make transfers among Existing Shareholders (as defined in the
Registration Statement) and gifts to the undersigned's children or trusts
established for his children provided that any such person or organization
agrees to be bound by the foregoing restrictions on the disposition of such
securities.
The undersigned further understands and agrees that the Company will
place stop transfer instructions against the Shares (and any other shares of
capital stock of the Company now or hereafter issued by the Company), including
but not limited to the Registered Shares, in accordance with the restrictions
set forth in this lock-up letter. The granting of any consent under this lock-up
letter by Joseph Charles is within the sole and absolute discretion of Joseph
Charles.
The undersigned understands that the Company and the Underwriters
(including the Representative) will proceed with the proposed public offering in
reliance upon this executed lock-up letter.
Very truly yours,
-----------------------------
Signature
Name: ______________________
Date: ______________________
2
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Ursus Tel.net
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 15, 1997 in the Registration Statement (Form
S-1, No. 333-46197) and related Prospectus of Ursus Telecom Corporation for the
registration of 1,925,000 shares of its common stock, 150,000 representative's
warrants and 150,000 shares of common stock underlying the representative's
warrants.
/s/ ERNST & YOUNG LLP
Miami, Florida
April 21, 1998
