This Registration Statement also constitutes Post-Effective Amendment No. 1 to
Registration Statement No. 333-42965
As filed with the Securities and Exchange Commission on August 24, 1998
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act Of 1933
TELEGROUP, INC.
(Exact name of Registrant as specified in its charter)
Iowa 42-1344121
(State of incorporation) (I.R.S. Employer
Identification Number)
2098 Nutmeg Avenue
Fairfield, Iowa 52556
(515) 472-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Principal Offices)
Douglas A. Neish
Chief Financial Officer
Telegroup, Inc.
2098 Nutmeg Avenue
Fairfield, Iowa 52556
(515) 472-5000
Copy to:
Morris F. DeFeo, Jr., Esq.
Swidler Berlin Shereff Friedman, LLP
3000 K Street, N.W., Suite 300
Washington, DC 20007
Approximate date of commencement of proposed sale to the public: As
soon as practicable on or after the effective date of this Registration
Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Title of Amount Proposed Maximum Proposed Maximum Amount of
Shares to be to be Offering Price Aggregate Offering Registration
Registered Registered Per Unit(1) Price Fee
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Common Stock,
no par value 481,136 $7.69 $3,699,935 $1,091.48
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(1) Estimated solely for purposes of calculating the registration fee. In
accordance with Rule 457(c) of Regulation C, the estimated price for such
shares was based on the average of the high and low reported prices on the
Nasdaq National Market System on August 18, 1998.
Pursuant to Rule 429 under the Securities Act of 1933, as amended, the
Prospectus included as a part of this Registration Statement also relates to
securities of the Registrant covered by an earlier Registration Statement on
Form S-1, File No. 333-42965, declared effective by the Commission on January
30, 1998, and this Registration Statement is deemed to constitute Post-
effective Amendment No. 1 to the earlier Registration Statement.
The Registrant hereby amends this Registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 , as amended, or until the
Registration Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
SUBJECT TO COMPLETION, DATED AUGUST 24, 1998
PROSPECTUS
TELEGROUP, INC.
481,136 Shares of Common Stock
This Prospectus relates to the public offer and sale (the "Offering") of
up to 481,136 shares (the "Securities") of common stock, no par value (the
"Common Stock"), of Telegroup, Inc. ("Telegroup" or the "Company"), which may
be offered from time to time for the account of certain selling shareholders
named herein (the "Selling Shareholders"). See "Selling Shareholders" and
"Plan of Distribution." Information concerning the Selling Shareholders may
change from time to time, which changes will be set forth in an accompanying
Prospectus Supplement.
The Common Stock is traded on the Nasdaq National Market ("Nasdaq") under
the symbol "TGRP." The closing sale price of the Common Stock reported on
Nasdaq on August 18, 1998 was $7.44 per share.
The Company has been advised by the Selling Shareholders that the Selling
Shareholders, acting as principals for their own account, directly or through
agents, dealers or underwriters to be designated from time to time, may sell
the Common Stock from time to time on terms to be determined at the time of
sale through customary brokerage channels, negotiated transactions or a
combination of these methods at fixed prices that may be changed, at market
prices then prevailing or at negotiated prices then obtainable. To the extent
required, the number of shares of Common Stock to be sold, the names of the
Selling Shareholders, the purchase price, the public offering price, the name
of any agent, dealer or underwriter, the amount of any offering expenses, any
applicable commissions or discounts and any other material information with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement or, if appropriate, a post-effective amendment to the Registration
Statement of which this Prospectus is a part. Each of the Selling Shareholders
reserves the right to accept and, together with its agents from time to time,
to reject in whole or in part any proposed purchase of the Securities to be
made directly or through agents. Since the Common Stock registered hereunder
is being offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the "Securities Act"), the Company
cannot include herein information about the price to the public of the Common
Stock or the proceeds to the Selling Shareholders. The Selling Shareholders
and any brokers or dealers executing selling orders on their behalf may be
deemed "underwriters" within the meaning of the Securities Act, in which event
the usual and customary selling commissions which may be paid to the brokers
or dealers may be deemed to be underwriting commissions under the Securities
Act. The aggregate proceeds to the Selling Shareholders from the sale of the
Securities offered by the Selling Shareholders hereby will be the purchase
price of such Securities less any discounts or commissions. There can be no
assurance that any or all of the Shares registered hereunder will be sold.
The Company will receive no portion of the proceeds from the sale of the
Securities offered hereby and will bear certain expenses incident to their
registration. See "Plan of Distribution."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION OF
RISK FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES
OF COMMON STOCK OFFERED HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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 THE REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF SUCH STATE.
The date of this Prospectus is August , 1998
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy materials and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy materials and other information may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
regional offices of the Commission: 7 World Trade Center, 13th Floor, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies may also be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Common Stock is quoted on Nasdaq. Such reports, proxy
materials and other information may also be inspected at the National
Association of Securities Dealers, Inc., at 1735 K Street, N.W. Washington,
D.C. 20006. In addition, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission.
This Prospectus constitutes a part of a Registration Statement on Form S-
3 (the "Registration Statement") under the Securities Act with respect to the
Securities offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits thereto,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. Statements contained in this Prospectus as to
the contents of any contracts or other documents referred to are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit or incorporated by
reference into the Registration Statement, each such statement being qualified
in all respects by such reference. For further information with respect to the
Company and the Securities offered hereby, reference is made to the
Registration Statement and the exhibits and schedules thereto. Copies of the
Registration Statement and the exhibits and schedules thereto may be
inspected, without charge, at the offices of the Commission or obtained upon
payment of prescribed rates from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements contained in this Prospectus including any documents that
are incorporated by reference, that express, or involve discussions as to,
expectations, beliefs, plans, objectives, assumptions of future events or
performance (often, but not always, through the use of words or phrases such
as "will likely result," "are expected to," "will continue," "estimates,"
"believes," "anticipates," "intends," "expects, " "intends," "plans" or the
negative thereof or other variations thereon or comparable terminology), are
not historical facts but are "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995) that involve
risks and uncertainties. Accordingly, any such statements are qualified in
their entirety by reference to, and are accompanied by, the factors discussed
throughout this Prospectus, and particularly by the risk factors set forth
herein under "Risk Factors." Among the key factors that have a direct bearing
on the Company's results of operations are the potential risk of delay
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implementing the Company's business plan, the political, economic and legal
aspects of the markets in which the Company operates, competition and the
Company's need for additional financing. These and other factors are
discussed herein under "Risk Factors" and elsewhere in this Prospectus.
The risk factors described herein could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements of
the Company made by or on behalf of the Company, and investors, therefore,
should not place undue reliance on any such forward-looking statements.
Further, any forward-looking statement speaks only as of the date on which
such statement is made, and the Company undertakes no obligation to update any
forward-looking statement or statements to reflect events or circumstances
after the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for management to predict all of such factors. Further, management
cannot assess the impact of each such factor on the Company's business or the
extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates by reference in this Prospectus: (i) the
Company's Annual Report on Form 10-K for the year ended December 31, 1997;
(ii) Quarterly Reports on Form 10-Q for each of the fiscal quarters ended
March 31,1998 and June 30,1998; (iii) Current Report on Form 8-K filed on
December 12, 1997, as amended pursuant to an amendment filed on January 13,
1998; and (iv) the Company's Proxy Statement filed on April 17, 1998, all of
which have been filed with the Commission pursuant to the Exchange Act.
All reports and other documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Securities
hereby shall be deemed to be incorporated by reference into this Prospectus
and to be a part hereof from the date of filing such reports and documents.
Any statement included or incorporated herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of the other documents incorporated herein by reference, other
than exhibits to such documents unless they are specifically incorporated by
reference into such documents. Requests for such copies should be directed to
the Company's General Counsel at 2098 Nutmeg Avenue, Fairfield, Iowa 52556,
(515) 472-5000.
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THE COMPANY
Telegroup is a rapidly growing global telecommunications company
providing high quality, competitively priced, international and national
telecommunications services. The Company offers a broad range of
international, national, value-added wholesale and enhanced telecommunications
services to approximately 300,000 small and medium-sized business and
residential customers, and 39 wholesale customers in approximately 200
countries. The Company established an early presence in key European and
Asia-Pacific markets in order to capitalize on the market opportunities
presented by full deregulation in the telecommunications industry. Telegroup
has achieved its significant international market penetration by developing
what it believes to be one of the most comprehensive sales, marketing and
customer service organizations in the global telecommunications industry and
by operating a reliable, flexible, cost-effective, digital, facilities-based
network (the ''Telegroup Intelligent Global Network '' or ''TIGN''). The
Company believes that the TIGN is one of the largest alternative global
telecommunications networks. As of June 30, 1998, the TIGN consisted of the
Company's Network Operations Center ("NOC") in Coralville, Iowa, 25 Nortel DMS
and Excel LNX switches, 18 Nortel Passport ATM switches, five enhanced
services platforms, 26,000 miles of owned and leased transmission capacity on
ten digital fiber-optic cable links and leased parallel data transmission
capacity. Telegroup's revenues have increased from $29.8 million in 1993 to
$337.4 million for the year ended December 31, 1997, and were $186.9 million
for the six months ended June 30, 1998. In 1993, the Company had an operating
loss of $0.5 million and a net loss of $0.7 million compared to an operating
loss of $11.8 million and a net loss of $23.7 million for the year ended
December 31, 1997, and an operating loss of $20.8 million and a net loss of
$24.1 million for the six months ended June 30, 1998.
Telegroup is currently undertaking a major expansion of the TIGN to
accomplish its goal of becoming one of the first telecommunications providers
to deploy its own global Asynchronous Transfer Mode ("ATM") based multi-
service transport network capable of carrying, on an integrated basis, high
bandwidth video, data and voice traffic. The Company believes that
telecommunications providers with high capacity, flexible global networks will
be in the best position to address the needs of international customers
seeking a comprehensive telecommunications service solution. Therefore,
Telegroup is building an ATM-based, facilities-intensive international
network, with substantially increased ownership of fiber capacity, scalable
facilities and high performance, high bandwidth data/multi-use capabilities.
The Company intends to compete with providers of high bandwidth, multi-use
telecommunications solutions in 14 markets worldwide by December 31, 2000.
The ATM backbone architecture will allow the Company to provide simultaneous
transmission of voice, data and video. In connection therewith, the Company
has purchased or committed to purchase ownership interests in several sub-
marine fiber-optic cable projects in order to link its switching facilities.
These fiber-optic cables include the Gemini Cable System, the Southern Cross
Cable Network, the CANUS 1/CANTAT-3 Cable Systems, the North Pacific Cable,
UK-Germany 6 and the U.S./Japan Cable. The Company believes that increased
emphasis upon ownership of fiber-optic circuit capacity and the continued
deployment of its owned switches is critical to its operating strategy.
The Company will continue to expand the existing TIGN with additional
voice and ATM switches, and owned and leased network capacity in strategically
-4-
located markets globally. The Company expects that the planned expansion of
and enhancements to the TIGN will strengthen Telegroup's growth by (i)
reducing transmission costs, (ii) enabling the Company to add new product and
service capabilities, and (iii) creating further wholesale revenue
opportunities with regional and global carriers. The Company plans to
supplement its network expansion strategy by acquiring other carriers with
complementary network facilities and by entering into strategic alliances with
voice and data network providers. The Company intends to leverage its large,
established retail customer base, strong sales and marketing capabilities and
relationships with key carriers to help ensure full utilization of its
expanded network capacity.
Telegroup currently provides an extensive range of telecommunications
services on a global basis under the Telegroup Spectra, Telegroup Global
Access and other brand names. The Company's services are typically priced
competitively with the services of other alternative telecommunications
providers and below the prices offered by the incumbent telecommunications
operators ("ITOs"), which are often government-owned or protected telephone
companies. The Company began operations in the United States in 1989, and has
since expanded its presence in key North American, European, Asia-Pacific and
Latin American countries in anticipation of continued deregulation of
telecommunications services. The services offered in a particular market vary
depending upon regulatory constraints and local market demands. Through its
broad array of basic and enhanced services, the Company is able to offer a
comprehensive bundled solution to meet its customers' telecommunications
needs. Currently, the Company offers retail customers national and
international long distance service, prepaid and postpaid calling cards and
toll-free service. The Company's enhanced services include fax store and
forward, fax-mail, voice-mail and conference calling. The Company also
provides a range of services, including enhanced service platforms, on a
wholesale basis to other telecommunications providers and carriers. The
expansion of the TIGN to a multi-service network will enable the Company to
offer additional data services, including desktop video, compressed voice,
interactive applications, store-and-forward video and Internet Protocol ("IP")
voice telephony.
Telegroup's extensive sales, marketing and customer service organization
consists of a worldwide network of independent agents, an internal sales force
and customer service specialists. The Company typically provides marketing,
sales and customer service in local languages and in accordance with the
cultural norms of the respective country and/or region in which the Company
operates. The Company's local sales, marketing and customer service
organization continually monitors changes in each market to remain
competitive, and quickly modifies service and sales strategies in response to
these changes. In addition, the Company believes that it can leverage its
global organization to quickly and efficiently market new and innovative
service offerings. As of June 30, 1998, the Company had six Country Directors
("Country Directors") and over 1,600 active independent agents worldwide
including 24 Country Coordinators ("Country Coordinators"). The Country
Directors and Country Coordinators are responsible for coordinating
Telegroup's operations, including sales, marketing, customer service and
independent agent support, in 60 countries. The Company also has 65 internal
sales personnel in the United States, Australia, France, Germany, Japan, New
Zealand, The Netherlands and the United Kingdom. The Company believes that
its comprehensive global sales, marketing and customer service organization
-5-
will enable the Company to increase its market share and position itself as
one of the leading international telecommunications providers in its target
markets.
The TIGN currently includes a NOC in Coralville, Iowa, as well as
switches, owned and leased transmission capacity and a proprietary distributed
intelligent network architecture. The TIGN is designed to allow
customer-specific information, such as credit limits, current usage, language
selection, call waiting, voice-mail and faxes, and speed dial numbers to be
distributed efficiently over a parallel data network wherever Telegroup has
installed a TIGN switch. In addition, the open, programmable architecture of
the TIGN allows the Company to rapidly deploy new product and service
features, improve service quality and reduce costs through least cost routing.
As of June 30, 1998, the TIGN consisted of (i) the NOC, (ii) 25 Nortel DMS and
Excel LNX switches and 18 Nortel Passport ATM switches in New York, Jersey
City, Los Angeles, London, Paris, Amsterdam, Zurich, Copenhagen, Frankfurt,
Hong Kong, Sydney, Aukland, Tokyo and Milan, (iii) five enhanced services
platforms in Jersey City, Hong Kong, London, Paris and Sydney, (iv) owned and
leased fiber-optic cable links connecting its New York and New Jersey switches
to its switches in London, Sydney, Auckland and Tokyo, and its London switches
to its switches in Paris, Amsterdam and Copenhagen, and (v) leased parallel
data transmission capacity connecting Telegroup's switches to each other and
to the networks of other international and national carriers.
The Company is establishing interconnect or special access agreements and
obtaining licenses in key markets to provide national long distance service
and to reduce international access and termination costs. In this regard, the
Company has entered into interconnect or special access agreements with ITOs
or other carriers in The Netherlands, Denmark, Australia, New Zealand and the
United Kingdom. The Company is negotiating interconnect or special access
agreements and obtaining licenses to provide national long distance
telecommunications services in France, Germany, Sweden, Switzerland and
Brazil.
-6-
RISK FACTORS
An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. In addition to other matters described in
this Prospectus, prospective investors should carefully consider the following
factors before making a decision to purchase the Common Stock offered hereby.
SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company has indebtedness which is substantial in relation to its
stockholders' equity, as well as interest and debt service requirements which
are significant compared to its cash flow from operations. As of June 30,
1998, the Company had approximately $106.0 million of indebtedness
outstanding, representing 87.0% of total capitalization. In addition, the
Company is permitted to incur up to $12.0 million of indebtedness under a $12.0
million Revolving Credit Facility entered into, on August 4, 1998, with
Foothill Capital Corporation (the ''Revolving Credit Facility''). Amounts
outstanding under the Revolving Credit Facility bear interest at a variable
annual rate equal to 2.0% above the base rate of interest for Norwest Bank
Minnesota, NA. The Revolving Credit Facility is secured by substantially all
of the Company's assets and expires on November 2, 1998. As of August 19,
1998, $12.0 million has been drawn by the Company under the Revolving Credit
Facility.
The degree to which the Company is leveraged could have important
consequences to holders of the Securities, including, but not limited to the
following: (i) a substantial portion of the Company's cash flow from
operations must be dedicated to debt service and will not be available for
operations and other purposes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; and (iii) the extent
that the Company's borrowings will be at variable rates of interest, which
exposes the Company to the risk of increased interest rates.
The Company's ability to pay interest on its 8% Convertible Subordinated
Notes due 2005 (the "Convertible Notes") and its 10 1/2% Senior Discount Notes
due 2004 (the "Existing Notes") and satisfy its other debt service will depend
upon the Company's future operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors, many
of which are beyond the Company's control. For the years ended December 31,
1993, 1994, 1996 and 1997, and for the six-months ended June 30, 1997 and
1998, earnings were inadequate to cover fixed charges. In addition, the
Revolving Credit Facility requires the Company to maintain a cash collateral
account into which all available funds are to be deposited and applied to
service the Revolving Credit Facility on a daily basis. If the Company were
unable to borrow under the Revolving Credit Facility due to a default, it
would be left without an available source of cash. There can be no assurance
that the Company's operating results will be sufficient in the future for the
Company to meet its obligations. If the Company is unable to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures for the
expansion or enhancement of the TIGN, selling assets, restructuring or
refinancing its indebtedness or seeking additional equity capital. There can
be no assurance that any of these strategies could be effected on terms
acceptable to the Company, if at all.
-7-
RESTRICTIVE COVENANTS
The indentures governing the Existing Notes (the "Existing Note
Indenture") and the Convertible Notes (the "Convertible Note Indenture" and
collectively, the "Indentures") and the Revolving Credit Facility contain
certain restrictive covenants which affect, and in many respects significantly
limit or prohibit, among other things, the ability of the Company to incur
indebtedness, make prepayments of certain indebtedness, make investments,
engage in transactions with affiliates, create liens, sell assets and engage
in mergers and consolidations. In addition, the collateral securing borrows
under the Revolving Credit Facility consists of substantially all the assets
of the Company. If the Company were unable to repay borrows under the
Revolving Credit Facility, the lender thereunder could proceed against the
collateral securing the Revolving Credit Facility. If the indebtedness under
the Revolving Credit Facility were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay such
indebtedness and other indebtedness of the Company.
ABILITY TO PAY DIVIDENDS
The ability of the Company to pay any dividends is subject to applicable
provisions of state law and its ability to pay cash dividends on the Common
Stock will be subject to the terms of the Indentures and the
instruments governing any other indebtedness of the Company then
outstanding. As of date hereof, the Indentures limit the Company's
ability to pay dividends or make any other distributions on the Common Stock.
Moreover, under Iowa law, the Company is not permitted to make distributions
to its shareholders, including the payment of dividends, if after the
distribution either the Company would not be able to pay its debts as they
become due in the usual course of business, or the Company's total assets
would be less than the sum of its total liabilities plus the amount that would
be needed, if the Company were to be dissolved at the time of the
distribution, to satisfy the preferential rights on dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. The Company cannot predict what the value of its assets or the
amount of its liabilities will be in the future and, accordingly, there can be
no assurance that the Company will be able to pay cash dividends on the Common
Stock.
EXPANSION AND OPERATION OF THE TIGN
The Company believes that it will need to continue to offer a broad array
of services in order to maintain its existing customer base and to attract new
customers. The Company believes that its ability to achieve this objective is
dependent upon its ability to expand and enhance the TIGN by installing ATM
backbone switches and by adding additional voice switches and owned and leased
network capacity. This expansion and enhancement of the TIGN will depend on,
among other factors, the Company's ability to: (i) raise additional capital by
issuing debt or equity securities; (ii) acquire switching hardware and
peripheral equipment; (iii) program the voice switches with proprietary TIGN
software; (iv) transport the hardware and peripherals to the switch
installation sites; (v) obtain a switch collocation site in each country; (vi)
obtain access and egress circuit capacity connecting the switches to the
Public Switched Telephone Network (''PSTN'') and/or other carriers; (vii)
obtain necessary licenses concerning termination and/or origination of
traffic; (viii) obtain approvals necessary to import equipment for use in its
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telecommunications network; (ix) provision customer data; and (x) obtain
access to or ownership of transmission facilities for the backbone and
connections between TIGN switches. In addition, Telegroup's ability to
enhance the TIGN by deploying a high bandwidth ATM network is dependent upon
achieving interoperability with connecting networks. The failure to raise
additional capital or to accomplish any of these tasks could cause a
significant delay in the expansion and enhancement of the TIGN. Significant
delays in the expansion and enhancement of the TIGN, including the deployment
of the ATM network could have a material adverse effect on the Company's
business, financial condition and results of operations.
The successful expansion, enhancement and operation of the TIGN will be
subject to a variety of risks, including operating and technical problems,
regulatory uncertainties, possible delays in the full implementation of
liberalization initiatives, competition, the availability of capital and the
successful development and integration of ATM technology. In expanding and
enhancing the TIGN, the Company may encounter technical difficulties because
of the existence of multiple local technical standards. These difficulties
could involve a delay in programming new voice switches with proprietary TIGN
software or otherwise integrating such switches into the TIGN. In addition, in
expanding and enhancing the TIGN, the Company will incur substantial capital
expenditures and additional fixed operating costs. There can be no assurance
that the TIGN will be expanded and enhanced as planned or, if expanded and
enhanced, that such expansion or enhancement will be completed on schedule, at
a commercially reasonable cost or within the Company's specifications.
In expanding the TIGN, the Company must obtain reasonably priced access
to transmission facilities and interconnection with one or more carriers that
provide access and egress into and from the PSTN. Although the Company has
been successful to date in this regard, there can be no assurance that this
will be the case in the future. See '' Dependence on Telecommunications
Facilities Providers'' and "--Intense International and National
Competition'."
In addition, concurrently with its anticipated expansion and enhancement
of the TIGN, the Company may from time to time experience general problems in
the operation of the TIGN affecting the quality of the voice and data
transmission of some calls transmitted over the TIGN, which could result in
poor quality transmission and interruptions in service. To provide redundancy
in the event of technical difficulties with the TIGN and to the extent the
Company resells transit and termination capacity from other carriers, the
Company relies upon other carriers' networks. Whenever the Company is required
to route traffic over a non-primary choice carrier due to technical
difficulties or capacity shortages with the TIGN or the primary choice
carrier, these calls will be more costly to the Company. Any failure by the
Company to properly operate, expand, manage or maintain the TIGN could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS OF INTRODUCING AND MARKETING NEW SERVICES
The Company believes that the expansion and enhancement of the TIGN to
simultaneously support voice, data and video will enable it to offer a wide
variety of new enhanced services and products, which the Company has not
previously offered. Moreover, the Company intends to offer such services
primarily to carriers, multinational corporations and other companies with
-9-
substantial international data and voice telecommunications needs, a market
which the Company has not previously targeted. There can be no assurance that
such services will be introduced or that, if introduced, that the Company will
succeed in marketing such new services.
The ability of the Company to develop an integrated voice and data
networking capability and introduce these new services is dependent on, among
other things, the ability of the Company to obtain additional financing,
develop new marketing plans, expand and enhance the Company's sales, marketing
and customer care resources and improve and expand the Company's billing and
information systems. There can be no assurance that the Company will obtain
such financing or will be successful in developing such plans or expanding and
enhancing such resources and systems, and the Company's inability to do so
would have a material adverse effect on the planned enhancement and expansion
of the TIGN.
NEED FOR ADDITIONAL FINANCING
The continued development and expansion of the TIGN, including the
implementation of an ATM backbone network, the upgrade or replacement of the
Company's management information systems, the opening of new offices and the
introduction of new telecommunications services, as well as the funding of
anticipated operating losses and net cash outflows, will require additional
capital. The amount of the Company's actual future capital requirements will
depend upon many factors, including the performance of the Company's business,
the rate and manner in which the Company expands the TIGN, increases staffing
levels, upgrades or replaces management information systems, opens new
offices and acquires other businesses, as well as other factors that
are not within the Company's control, including Indefeasible Right of Use
("IRU") availability, competitive conditions, customer growth and regulatory
or other government actions. In the event that the Company's plans or
assumptions change or prove to be inaccurate or if internally generated funds
and funds from other financings, if entered into, prove to be insufficient to
fund the Company's growth and operations, then some or all of the Company's
development and expansion plans could be delayed or abandoned, or the Company
may be required to seek additional funds earlier than currently anticipated.
There can be no assurance that any additional financing will be available to
the Company in the future or, if available, that it could be obtained on terms
acceptable to the Company.
HISTORICAL AND ANTICIPATED LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
For the year ended December 31, 1997, the Company had an operating loss
of $11.8 million and a net loss of $23.7 million, compared to operating income
and a net loss of $0.1 million and $0.1 million, respectively, for the year
ended December 31, 1996. For the six months ended June 30, 1998, the Company
had an operating loss of $20.8 million and a net loss of $24.1 million
compared to operating income and a net loss of $0.4 million and $1.3 million,
respectively, for the six months ended June 30, 1997. The Company expects to
incur lower gross margins, negative EBITDA and significant operating losses
and net losses for the near term as it incurs additional costs associated with
the enhancement and expansion of the TIGN, the expansion of its marketing and
sales organization, and the introduction of new telecommunications services.
Furthermore, the Company expects that operations in new target markets will
continue to incur negative cash flows until an adequate customer base and
-10-
related revenue stream have been established. There can be no assurance that
the Company will achieve or, if achieved, will sustain profitability or
positive cash flow from operating activities in the future. See '' Need for
Additional Financing.''
In addition, the Company intends to expand its operations in or enter
markets where it has limited or no operating experience. Furthermore, in many
of the Company's target markets, the Company intends to offer new services or
services that have previously been provided only by the local ITOs.
Accordingly, there can be no assurance that such operations will generate
operating or net income, and the Company's prospects must therefore be
considered in light of the risks, expenses, problems and delays inherent in
establishing a new business in a rapidly changing industry.
DEPENDENCE ON EFFECTIVE MANAGEMENT INFORMATION SYSTEMS
The Company believes that, based on its current business plan, its
management information systems will be sufficient for the next 12 months, but
will require substantial enhancements, replacements and additional
expenditures to continue their effectiveness after such time as the Company
continues to expand the TIGN and process a higher volume of calls. The
Company has entered into contracts with PeopleSoft and Saville Systems to
improve and expand key software applications and hardware, and to address
problems associated with the timely reporting by its subsidiaries. The Company
has begun implementing its order entry, customer care, billing and financial
accounting systems from these two vendors. The failure to successfully
implement these and other enhancements and replacements in a timely fashion
could result in a material adverse effect on the Company's business, financial
condition and results of operation. Even if the Company is successful in
implementing these enhancements and replacements in a timely fashion, the
Company's management information systems will require further enhancements,
replacements and expenditures.
Although the Company has been able to meet its financial reporting
obligations to date, reconciling certain carrier accounts or, in some cases,
accurately estimating monthly carrier costs has historically been a time-
consuming process and such information has not been available to the Company
on a real time basis. To address these issues, the Company has substantially
upgraded and continues to improve its accounting and billing systems. In this
regard, the Company implemented a call costing and reconciliation system in
June 1997. If the Company fails to accurately reconcile certain carrier
accounts or estimate monthly carrier costs on a timely basis utilizing
existing systems, or fails to successfully upgrade and/or replace accounting,
billing and other systems when necessary, such failure may affect the
Company's ability to manage the Company efficiently. This could result in a
material adverse effect on the Company's business, financial condition or
results of operations.
In conjunction with its enhancement of the TIGN, the Company plans to
develop a multi-level integrated business management and network management
system capable of supporting a number of applications, including order entry,
customer provisioning, service activation, fault management, billing,
performance management and inventory control. The Company has retained Domain
Networks, Inc., a leading telecommunications systems consultant, to assist in
the design and installation of this system. The successful implementation of
this business management and network management system will be critical to
-11-
realize the full benefits of the ATM backbone. The failure to successfully
implement this system in a timely fashion could result in a material adverse
effect on the Company's business, financial condition and results of
operation. In addition, even if the Company is successful in implementing the
system, there can be no assurance that the system will not require
enhancements, replacements or expenditures in the future
RECENT RAPID GROWTH; ABILITY TO MANAGE GROWTH
The Company's ability to continue to grow may be affected by various
factors, many of which are not within the Company's control, including
governmental regulation of the telecommunications industry in the United
States and in other countries, competition, and the availability and cost of
transmission capacity. Although the Company has experienced significant growth
in a relatively short period of time and intends to continue to grow rapidly,
there can be no assurance that the growth experienced by the Company will
continue or that the Company will be able to achieve the growth contemplated
by its business strategy. The Company has experienced significant revenue
growth and has expanded the number of its employees and the geographic scope
of its operations. These factors have resulted in increased responsibilities
for management personnel. The Company's ability to continue to manage its
growth successfully will require it to further expand its network and
infrastructure, enhance its management, financial and information systems and
controls and to effectively expand, train and manage its employee base. In
addition, as the Company increases its service offerings, expands its target
markets and implements the ATM backbone network, there will be additional
demands on its customer service support and sales, marketing and
administrative resources. There can be no assurance that the Company will be
able to successfully manage its expanding operations. If the Company's
management is unable to manage growth effectively, the Company's business,
financial condition and results of operations could be materially and
adversely affected. See '' Dependence on Effective Management Information
Systems."
RISKS ASSOCIATED WITH THE TRANSMISSION OF DATA TRAFFIC
In the United States and countries in which the Company originates,
terminates or transmits data traffic, the Company may be subject to
regulations or policies concerning the data that is transmitted over the TIGN.
As a common carrier of traffic, the Company generally has no editorial control
over the content of the traffic that is transmitted over the TIGN. It is
possible that one or more countries in which the Company originates,
terminates or transmits data traffic could hold the Company responsible for
that content to the extent that the Company holds itself out as an Internet
Services Provider ("ISP") or a similar provider of value-added data services.
It is also possible that the Company could be directly or indirectly affected
by U.S. or foreign government regulations concerning privacy of data,
encryption, taxation of Internet commerce, intellectual property or other
measures. For example, the European Commission intends to issue a directive
that addresses the liability, if any, of ISPs in multiple areas, and has
already issued a directive requiring European Union ("EU") member states to
ensure the privacy of certain customer information when the providers transmit
traffic to non-EU countries. The Company cannot predict the effect on the
Company of these or similar measures enacted or to be enacted by the U.S. or
foreign governments.
-12-
SUBSTANTIAL GOVERNMENT REGULATION
General. The global telecommunications industry is subject to
international treaties and agreements, and to laws and regulations which vary
from country to country. Enforcement and interpretation of these treaties,
agreements, laws and regulations can be unpredictable and are often subject to
informal views of government officials and ministries that regulate
telecommunications in each country. In certain countries, such government
officials and ministries are subject to influence by the local ITO.
The Company has pursued and expects to continue to pursue a strategy of
providing its services to the maximum extent it believes, upon consultation
with counsel, to be permissible under applicable laws and regulations. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear, the Company's aggressive strategy may
result in the Company (i) providing services or using transmission methods
that are found to violate local laws or regulations or (ii) failing to obtain
approvals or make filings subsequently found to be required under such laws or
regulations. Where the Company is found to be or otherwise discovers that it
is in violation of local laws and regulations and believes that it is subject
to enforcement actions by the Federal Communications Commission ("FCC") or the
local authority, it typically seeks to modify its operations or discontinue
operations so as to comply with such laws and regulations. There can be no
assurance, however, that the Company will not be subject to fines, penalties
or other sanctions as a result of violations regardless of whether such
violations are corrected. If the Company's interpretation of applicable laws
and regulations proves incorrect, it could lose, or be unable to obtain,
regulatory approvals necessary to provide certain of its services or to use
certain of its transmission methods. The Company also could have substantial
monetary fines and penalties imposed against it. Except as set forth in this
''--Substantial Government Regulation,'' the Company believes that it is
currently in compliance with all applicable material national and
international regulatory requirements. To the Company's knowledge, it is not
currently subject to any material regulatory inquiry or investigation.
In numerous countries where the Company operates or plans to operate,
local laws or regulations limit the ability of telecommunications companies to
provide basic international telecommunications service in competition with
state-owned or state-sanctioned monopoly carriers. There can be no assurance
that future regulatory, judicial, legislative or political considerations will
permit the Company to offer to residents of such countries all or any of its
services, that regulators or third parties will not raise material issues
regarding the Company's compliance with applicable laws or regulations, or
that such regulatory, judicial, legislative or political decisions will not
have a material adverse effect on the Company. If the Company is unable to
provide the services which it presently provides or intends to provide or to
use its existing or contemplated transmission methods due to its inability to
obtain or retain the requisite governmental approvals for such services or
transmission methods, or for any other reason related to regulatory compliance
or lack thereof, such developments could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is obtaining licenses in key markets to provide national and
international long distance service and establishing interconnect or special
agreements to reduce international access and termination costs. In this
regard, the Company has obtained required authorizations to provide national
and international long distance telecommunications services in the United
-13-
Kingdom, Australia, Japan, Denmark and Sweden and is obtaining licenses to
provide such services in France, Germany, Switzerland and Brazil. The Company
has also entered or intends to enter into interconnection or similar
arrangements with ITOs and other carriers in countries where it operates or
intends to operate. Although they vary widely, laws or regulations in most of
the markets where the Company operates or intends to operate require ITOs to
offer interconnection to competing providers of permitted public
telecommunications networks or publicly available telecommunications services.
In several EU member states, the regulator (or the ITO without regulator
intervention) has interpreted EU Directives to require ITOs to offer cost-
based interconnection to public telecommunications network providers and
access to providers of publicly available telecommunications services at
special interconnection points. Charges for interconnection and for special
access must be cost-oriented and nondiscriminatory under EU Directives. The
Company has entered into interconnect or special access agreements with ITOs
or other carriers in The Netherlands, Denmark, Australia, New Zealand and the
United Kingdom and is negotiating interconnect or special access agreements in
other countries where it operates or intends to operate. The failure of the
Company to successfully complete the negotiation of such interconnect and
special access agreements, and/or obtain all necessary licenses, could have a
material adverse affect on the Company's business, financial condition and
results of operations.
The Company provides a substantial portion of its customers with access
to its services through the use of call-reorigination. Revenues attributable
to retail and wholesale call-reorigination represented 76.6% of the Company's
revenues for the year ended December 31,1996, 67.6% for the year ended
December 31, 1997, and 49.8% for the six months ended June 30, 1998, and are
expected to continue to represent a significant but decreasing portion of the
Company's revenues. Reports have been filed with the International
Telecommunications Union ("ITU") and/or the FCC, claiming that, as of April
16, 1998, 68 countries prohibit certain forms of call-reorigination. Of these
68 countries, the Company does not provide call-reorigination services to
customers in Bermuda, the Bahamas, the Philippines and the Cayman Islands, and
may be required it to cease providing such services to customers in other
jurisdictions in the future. The Company continues to provide call-
reorigination services in the remaining 64 countries, the revenues from which
accounted for 7.3% of the Company's total revenues for the six months ended
June 30, 1998. There can be no assurance that other countries where the
Company derives material revenue will not prohibit call-reorigination in the
future. To the extent that a country with an express prohibition against
call-reorigination is unable to enforce its laws against a provider of such
services, it can request that the FCC enforce such laws in the United States
by, for example, requiring a provider of such services to cease providing
call-reorigination services to such country or, in extreme circumstances, by
revoking such provider's FCC authorizations. See " United States The FCC's
Policies on Call-reorigination." There can be no assurance that the Company's
call-reorigination services will not continue to be, or will not become,
prohibited in certain jurisdictions, including jurisdictions in which the
Company currently provides call-reorigination services, and, depending on the
jurisdictions, services and transmission methods affected, there could be a
material adverse effect on the Company's business, financial condition and
results of operations.
On February 15, 1997, the United States and more than 60 members of the
World Trade Organization (''WTO'') agreed to open their respective
-14-
telecommunications markets to competition and foreign ownership and to adopt
regulatory measures to protect market entrants against anticompetitive
behavior by dominant telephone companies (the ''WTO Agreement''). Although the
Company believes that the WTO Agreement could provide the Company with
significant opportunities to compete in markets that were not previously
accessible, reduce its costs and provide more reliable services, especially as
it focuses less on call re-origination services, the WTO Agreement could also
provide similar opportunities to the Company's competitors. There can be no
assurance that the pro-competitive effects of the WTO Agreement will not have
a material adverse effect on the Company's business, financial condition and
results of operations or that members of the WTO will fully implement the
terms of the WTO Agreement.
United States. In the United States, the provision of the Company's
services is subject to the provisions of the Communications Act of 1934, as
amended (the ''Communications Act''), the 1996 Telecommunications Act (the
''1996 Telecommunications Act'') and the FCC regulations thereunder. While the
recent trend in federal regulation of nondominant telecommunications service
providers, such as the Company, has been in the direction of reduced
regulation, this trend has also given AT&T Corp. (''AT&T''), the largest long
distance carrier in the United States, increased pricing flexibility that has
permitted it to compete more effectively with smaller long distance carriers
such as the Company. In addition, the 1996 Telecommunications Act has opened
the U.S. market to increased competition by allowing the Regional Bell
Operating Companies (''RBOCs'') to provide interexchange service for the first
time. The FCC has also opened the market to increased competition by allowing
certain foreign-owned carriers to provide certain international services in
the U.S. market for the first time. There can be no assurance that these and
future regulatory, judicial and legislative changes will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
U.S. International Long Distance Services. The Company is subject to FCC
rules requiring authorization from the FCC prior to leasing international
capacity, acquiring international facilities, and/or purchasing switched
minutes, and initiating international service between the United States and
foreign points. The Company is also subject to FCC rules which regulate the
manner in which the Company's international services may be provided. FCC
rules also require prior authorization before transferring control of or
assigning FCC authorizations, may require prior approval before becoming
affiliated with certain carriers, and impose various reporting and filing
requirements on companies providing international services under an FCC
authorization. Failure to comply with the FCC's rules could result in fines,
penalties or, in extreme circumstances, in forfeiture of the Company's FCC
authorizations, each of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
The FCC's Policies on Call-reorigination. The Company offers service by
means of call-reorigination pursuant to an FCC authorization (''Section 214
Authorization'') under Section 214 of the Communications Act and certain
relevant FCC decisions. The FCC has determined that call-reorigination service
using uncompleted call signaling does not violate United States or
international law, but has held that United States companies providing such
services must comply with the laws of the countries in which they provide
service to customers as a condition of such companies' Section 214
Authorizations. Current FCC policy provides that foreign governments that
-15-
satisfy certain conditions may request FCC assistance in enforcing their laws
against call-reorigination providers based in the United States that are
violating the explicit laws of these jurisdictions against call reorigination
using uncompleted call signaling. The FCC is currently considering a petition
requesting the FCC to stop enforcing certain countries' laws against call-
reorigination. Thirty-five countries have formally notified the FCC that
call-reorigination services violate their laws. The Company provides call-
reorigination in 34 of these countries, which, collectively, accounted for
approximately 5.6% of the Company's total revenues for the sixth months ended
June 30, 1998. Two of the 35 countries requested assistance from the FCC in
enforcing their prohibitions on call-reorigination within their respective
jurisdictions, which countries accounted for approximately 1.1% of the
Company's total revenues for the sixth months ended June 30,1998. The FCC has
ordered several U.S. carriers to cease providing call-reorigination services
using uncompleted call signaling to customers in the Philippines and allowed
the complaining party, the ITO in the Philippines, to seek damages. Several
U.S. carriers have asked the FCC to reconsider its decision. Although the FCC
is currently considering a petition requesting that it stop enforcing certain
countries' laws against call-reorigination, there can be no assurance that the
FCC will not take additional action to limit the provision of call-
reorigination services. Enforcement action could include an order to cease
providing call-reorigination services in such country, the imposition of one
or more restrictions on the Company, monetary fines or, in extreme
circumstances, the revocation of the Company's Section 214 Authorization, and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
FCC Policies Applicable to Facilities-based Services. The FCC has also
established policies specifically applicable to entities that provide services
over their own international facilities. The Company is required to conduct
its facilities-based international business in compliance with the FCC's
International Settlements Policy (the ''International Settlements Policy'').
The International Settlements Policy establishes the permissible arrangements
for U.S. based facilities-based carriers and their foreign counterparts to
settle the cost of terminating each other's traffic over their respective
networks. Alternatively, U.S. carriers, subject to certain competitive
safeguards, may propose methods to pay for international call termination that
deviate from traditional bilateral accounting rates and the International
Settlements Policy. One of the Company's arrangements with foreign carriers
is subject to the International Settlements Policy and it is possible that the
FCC could take the view that this arrangement does not comply with the
existing International Settlements Policy rules. For the year ended December
31, 1997, less than 1.0% of the Company's revenues were attributable to this
arrangement. If the FCC, on its own motion or in response to a challenge
filed by a third party, determines that the Company's foreign carrier
arrangements do not comply with FCC rules, among other measures, it may issue
a cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations. Such action could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The FCC's Private Line Resale Policy. The FCC's private line resale
policy currently prohibits a carrier from using international private line
circuits to provide switched services (known as international simple resale
(''ISR'')) to or from a country unless the FCC has found that the country
affords U.S. carriers equivalent opportunities to engage in similar activities
-16-
in that country or that the country is a member of the WTO and the local ITO
generally charges U.S. carriers at or below an FCC-determined rate for
terminating U.S. carriers' traffic. The Company is either using or is
prepared to use direct private line capacity among countries where such use is
either authorized or likely to be authorized soon. There can be no assurance
that the FCC or any other country's regulatory authority will not find that
the Company is engaged in unauthorized ISR which 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 in the future be taken by the FCC may enhance the intense competition
faced by the Company. Recent FCC decisions to permit alternative arrangements
outside of its International Settlements Policy, to allow U.S. carriers to
accept certain exclusive arrangements with certain foreign carriers and to
establish lower ceilings ("benchmarks") for the rates U.S. carriers pay
foreign carriers for termination of their traffic, while possibly providing
the Company with more flexibility to respond more rapidly to changes in the
global telecommunications market, 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 operation. If the FCC, on its own motion or in response to a
challenge filed by a third party, determines that the Company's foreign
carrier arrangements do not comply with FCC rules, among other measures, it
may issue a cease and desist order, impose fines on the Company or, in extreme
circumstances, revoke or suspend its FCC authorizations.
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, as well as any agreements with customers containing rates, terms,
and conditions for international telecommunications services, if those rates,
terms, or conditions are different than those contained in the Company's
tariff. Notwithstanding the foregoing requirements, the Company has not filed
with the FCC certain commercially sensitive carrier-to-carrier customer
contracts, however, to date, no action has been taken with regard to the
Company's failure to file such customer contracts. If the Company charges
rates other than those set forth in, or otherwise violates, its tariff or a
customer agreement filed with the FCC, or fails to file with the FCC carrier-
to-carrier agreements, the FCC or a third party could bring an action against
the Company, which could result in a fine, a judgment or other penalties
against the Company. Such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
U.S. Domestic Long Distance Services. The Company's ability to provide
domestic long distance service in the United States is subject to regulation
by the FCC and relevant state Public Service Commissions (''PSCs'') which
regulate interstate and intrastate rates, respectively, ownership of
transmission facilities, and the terms and conditions under which the
Company's domestic U.S. services are provided. In general, neither the FCC nor
the relevant state PSCs exercise direct oversight over prices charged for the
Company's services or the Company's profit levels, but either or both may do
so in the future. The Company, however, is generally required by federal and
state law and regulations to file tariffs listing the rates, terms and
conditions of services provided. The Company has filed domestic long distance
tariffs with the FCC. Although the FCC has decided to eliminate the
-17-
requirement that non-dominant interstate carriers, such as the Company,
maintain FCC tariffs, a federal court has stayed the FCC's decision, pending
judicial review of the decision. Elimination of tariffs would require that the
Company secure contractual agreements with its customers regarding many of the
terms of its existing tariffs or face possible claims over the respective
rights of the parties once these rights are no longer clearly defined in
tariffs. The Company generally is also required to obtain certification from,
file tariffs with, and comply with all conditions imposed by, the relevant
state PSC prior to the initiation of intrastate service. Telegroup has
obtained authorization, where applicable, to provide intrastate interexchange
service in 49 states, and has filed or is in the process of filing tariffs in
each state where required. The Company has complied, or is in the process of
complying, with reporting requirements imposed by state PSCs in each state in
which it conducts business. Any failure to maintain proper federal and state
tariffing or certification or file required reports, or any difficulties or
delays in obtaining required authorizations, could have a material adverse
effect on the Company's business, financial condition and results of
operations. The FCC also imposes some requirements for marketing of telephone
services and for obtaining customer authorization for changes in the
customer's primary long distance carrier, and the Company generally complies
with these requirements. If these requirements are not met, the Company may be
subject to fines and penalties.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access
services" from local exchange carriers ("LECs") or competitive local exchange
carriers ("CLECs"). Access charges, which are regulated by the FCC for
interstate services and by PSC for intrastate services, represent a
significant portion of the Company's cost of U.S. domestic long distance
services. The FCC has undertaken a comprehensive review of its regulation of
LEC access charges, and has made significant changes in the access service
rate structure. There can be no guarantee that these or future changes will
not have a material adverse effect on the Company's business, financial
condition and results of operations. For example, if LECs are permitted to
allow volume discounts in the pricing of access charges, as currently
proposed, many long distance carriers, including the Company, could be placed
at a significant cost disadvantage to larger competitors. In addition, the
FCC has taken actions to implement the 1996 Telecommunications Act that impose
new regulatory requirements, including the requirement that all
telecommunications service providers, including the Company, contribute some
portion of their telecommunications revenues to a "universal service fund."
These contributions became due beginning in 1998 and are assessed based on
intrastate, interstate and international end user telecommunications revenues.
Contribution factors vary quarterly and carriers, including the Company, are
billed monthly. Contribution factors for the first quarter of 1998 are .0319
for the high cost and low income funds (interstate and international end user
telecommunications revenues) and .0072 for the schools, libraries and rural
health care funds (intrastate, interstate and international end user
telecommunications revenues). Second quarter factors for 1998 are .0314 and
.0076, respectively. Such factors are subject to adjustment on a quarterly
and annual basis and apply to the Company's gross revenues. In addition, the
Company may be subject to state universal service fund contribution
requirements, which will vary from state to state. There can be no assurance
that this will not have a material adverse effect on the Company's business,
financial condition and results of operations.
-18-
In some instances, the Company may be responsible for city sales taxes on
calls made within the jurisdiction of one or more U.S. cities. The Company is
implementing software to track and bill for this tax liability. However, the
Company may be subject to sales tax liability for calls transmitted prior to
the implementation of such tax software and against which it has no
corresponding customer compensation. While the Company believes that any such
liability will not be significant, there can be no assurance that such tax
liability, if any, will not have a material adverse effect on the Company's
business, financial condition and results of operations.
In November 1996, the FCC adopted rules that would require that
interexchange companies offering toll-free access through payphones compensate
certain payphone operators for customers' use of the payphone. After a federal
court reversed in part the FCC's payphone rules and remanded the matter to the
FCC on the basis that the FCC-imposed rate of $.35 per call was arbitrary and
capricious, the FCC ordered that interexchange carriers compensate payphone
owners at a rate of $.284 per call for all calls using their payphones. This
compensation method would be effective from October 7, 1997 through October 6,
1999. After this time period, interexchange carriers would be required to
compensate payphone owners at a market-based rate minus $0.066 per call. On
May 15, 1998, the U.S. Court of Appeals for the D.C. Circuit gave the
Commission six months to issue a revised payphone compensation scheme. The
FCC has issued a public notice and is currently considering industry comments
on this issue. Although the Company cannot predict the outcome of the FCC's
payphone policy on the Company's business, it is possible that such policy
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), corporate reorganizations and assignments of
regulatory authorizations. Such requirements may delay, prevent or deter a
change in control of the Company. The FCC may also impose restrictions on
affiliations with certain foreign telecommunications companies.
European Union. Historically, European countries had prohibited the
direct transport and switching of speech in real-time between switched network
termination points (''Voice Telephony'') except by the ITO. Although the
regulation of the telecommunications industry is to a great extent governed at
a supra-national level by the European Union (''EU''), the Company's provision
of services in the EU is subject to the laws and regulations of each EU member
state in which it provides services. The Full Competition Directive 96/19
(which together with its subsidiary directives is hereinafter called the
''Full Competition Directive'') was adopted on March 13, 1996, and requires
the liberalization of Voice Telephony and the freedom to create alternative
telecommunications infrastructures within EU member states (Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the United Kingdom). While the
requirements of the Full Competition Directive became effective and binding on
each EU member state on January 1, 1998, subject to extensions granted to
certain member states, there can be no assurance that each EU member state
will enact laws that implement the Full Competition Directive in whole or in
part within the allotted time. To the extent the Full Competition Directive
is not implemented, or not properly or fully implemented, in a particular
member state, the Company will not be able to offer its full range of services
or utilize certain transmission or access methods in that country.
-19-
Each EU member state in which the Company currently conducts business has
a different national regulatory scheme, and regulatory variations among the
member states are expected to continue for the foreseeable future. The EU
member states issue laws and regulations governing authorization of new
entrants as well as other issues such as interconnection to ITOs. Licensing
Directive 97/13 prohibits member states from requiring individual licenses for
the provision of services other than Voice Telephony, the establishment and
provision of public telecommunications networks or other networks using radio
frequencies (except that a license may be issued by a member state to give
access to radio frequencies or numbers, to grant rights of way over land or to
impose specific obligations where a licensee has significant market power or
is subject to other obligations under EU law.) EU law also sets requirements
that member states must meet in ensuring interconnection to ITOs. In the EU,
the Company currently owns and operates switching facilities in the United
Kingdom, The Netherlands, Germany, Italy, Denmark and France and provides
telecommunications services without switching facilities in certain other
member countries. The requirements for the Company to obtain necessary
approvals to offer the full range of telecommunications services, including
Voice Telephony and the provision of services over its own facilities, vary
considerably from country to country. Other than in the United Kingdom, The
Netherlands and Denmark, the Company has not obtained approvals necessary to
provide Voice Telephony, or to provide services over its own facilities, in
any EU member country. There can be no assurance that the Company has received
all necessary approvals, filed applications for such approvals, received
comfort letters or obtained all necessary licenses from the applicable
regulatory authorities to offer telecommunications services in the EU, or that
it will do so in the future, or that applicable regulations will require ITOs
to provide the Company with favorable interconnection. In a number of European
countries, including France, Germany and Switzerland, the Company has sought
to position itself for the rapidly liberalizing regulatory environment by
providing, first, traditional call reorigination and, later, transparent call
reorigination and other forms of call through, such as enhanced and switched
voice telecommunications services to business users, including Closed User
Groups (''CUGs''). Although the Company continues to provide some or all of
these services without a license, the Company has not been notified by any
regulatory authority that it is or was operating without a required license.
It is possible that the Company could be fined, or that the Company would not
be allowed to provide specific services in these countries if the Company were
found to have provided Voice Telephony before January 1, 1998, or after that
date without obtaining a proper license. Such actions could have a material
adverse effect on the Company's business, financial condition and results of
operations. EU countries generally do not impose licensing requirements on the
provision of data services over leased facilities.
Moreover, while implementation of the Full Competition Directive has been
occurring in most EU member states where the Company provides services, the
Company may be incorrect in its assumption that (i) each EU member state where
the Company provides or intends to provide services will enact or enforce, on
a timely basis, the measures required by the Full Competition Directive to
ensure that competitors, including the Company, can compete with ITOs and will
abolish, on a timely basis, the respective ITO's monopoly to provide Voice
Telephony within and between member states and other countries, as required by
the Full Competition Directive, (ii) deregulation will continue to occur, and
(iii) the Company will be allowed to continue to provide and to expand its
services in the EU member states. There can be no assurance that an EU member
state will not adopt laws or regulatory requirements that will adversely
-20-
affect the Company. Additionally, there can be no assurance that future EU
regulatory, judicial or legislative changes will not have a material adverse
effect on the Company or that regulators or third parties will not raise
material issues with regard to the Company's compliance with applicable laws
or regulations. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof,
depending on the country or activities involved, such events could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Pacific Rim. Regulation of the Company's activities varies in the
Pacific Rim depending upon the particular country involved. The Company's
ability to provide voice telephony services is regulated in all countries
where the Company provides services. In Australia and New Zealand, regulation
of the Company's provision of telecommunications services is relatively
permissive, although the Company is required, in both countries, to comply
with certain regulations. For example, in New Zealand, the Company is
required to register with the regulator and has complied with such
requirement. Additionally, in Japan, the Company provides call-reorigination
services and is registered as a Special Type II business, which allows the
Company to provide national and international switched voice services to the
public using resold leased international lines (e.g., through ISR).
In Hong Kong, the Office of the Telecommunications Authority (''OFTA'')
has sought to encourage competition in international services consistent with
statutory limitations on competition. The Company has been issued a Public
Non-Exclusive Telecommunications Services (''PNETS'') license which permits
the provision of personal identification number validation and call routing
service and facsimile communication service, and which, in general, has been
interpreted to permit the provision of call-reorigination services. If it
obtains additional PNETS licenses, the Company could provide a broad array of
international value-added services, as well as limited basic switched voice
services to CUGs. There can be no assurance that OFTA will not change its
regulations or policy or, where the Company has interpreted laws and/or
regulations that are unclear, not find the Company in violation of existing
laws or that such change or finding will not require the Company to cease
providing certain services to and from Hong Kong. Moreover, since April 1,
1998, a newly formed government department, the Information Technology and
Broadcasting Bureau (''ITBB''), is responsible for all policies relating to
the telecommunications industry in Hong Kong. There can be no assurance that
the ITBB will not introduce any further changes to the liberalization of the
Hong Kong telecommunications market that may have an adverse effect on the
Company's business in Hong Kong.
Currently, a range of international services, including the operation of
an international gateway for all incoming and outgoing international calls, is
provided in Hong Kong solely by Hong Kong Telephone International (''HKTI''),
the Hong Kong ITO. Until recently, HKTI provided its range of services
pursuant to an exclusive license which was originally scheduled to expire on
October 1, 2006. The Hong Kong government agreed to compensate HKTI for the
early termination of its exclusive license, and, on March 31, 1998, the Hong
Kong government withdrew HKTI's exclusive license and amended the license of
HKTI's local service affiliate to allow HKTI to provide international services
-21-
under that license. Although HKTI continues to provide exclusive services as
it did before March 31, 1998, the Hong Kong government intends to issue an
unlimited number of licenses for provision of ISR for voice service over
circuits and facilities leased from HKTI beginning January 1, 1999. In
addition, the Hong Kong government will allow the provision of international
circuits and facilities beginning January 1, 2000. It is expected that OFTA
will issue a detailed set of guidelines for the application of ISR licenses in
or about October of 1998. It is likely that the issuance of an unlimited
number of licenses for the provision of ISR voice services may have a material
adverse effect on the Company's business in Hong Kong.
On July 1, 1997, the People's Republic of China ("China") resumed
sovereignty over Hong Kong. There can be no assurance that China will
continue the existing licensing regime with respect to the Hong Kong
telecommunications industry. There is also no assurance that China will
continue to implement the existing policies of the Hong Kong government with
respect to promoting the liberalization of the Hong Kong telecommunications
industry in general, including Hong Kong's policy of allowing call-
reorigination, which is currently prohibited in China. For the six months
ended June 30, 1998, one wholesale customer in Hong Kong, New T&T Hong Kong
Limited (the "Hong Kong Customer"), which is an FTNS provider and will be
eligible to self-provide international services by January 1, 1999, accounted
for approximately 7.5% of the Company's total revenues. Substantially all of
the services provided by the Company to this customer consist of call-
reorigination services. The Company's agreement with the Hong Kong Customer
expires in October 1998, automatically renews for one-year periods, and may be
terminated by the Hong Kong Customer if it determines in good faith that the
services provided pursuant to the agreement are no longer commercially viable
in Hong Kong. There can be no assurance that regulatory changes affecting the
Hong Kong telecommunications market, such as permitting the provision of ISR
voices services from January 1, 1999, will not affect the Hong Kong Customer's
decision as to the renewal of the agreement. In addition, the Hong Kong
Customer, as an FTNS provider, will be permitted to provide international
telecommunications services over circuits leased from HKTI starting January 1,
1999. A material reduction in the level of services provided by the Company
to the Hong Kong Customer or a termination of the Company's agreement with the
Hong Kong Customer could have a material adverse effect on the Company's
business, financial condition and results of operations. Moreover, if the
Company loses its rights under its PNETS license and/or if it is unable to
provide call-reorigination services in Hong Kong on either a retail or
wholesale basis, such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
In all Pacific Rim countries, except Hong Kong, the Company is strictly
limited in its provision of public voice and value added services. While some
countries in the Pacific Rim oppose call-reorigination, the Company generally
has not faced significant regulatory impediments. China has specifically
informed the FCC that call-reorigination is illegal in that country.
Australia, New Zealand, Japan and Hong Kong do not prohibit call-
reorigination. If the Company is unable to provide the services it is
presently providing or intends to provide or to use its existing or
contemplated transmission methods due to its inability to receive or retain
formal or informal approvals for such services or transmission methods, or for
any other reason related to regulatory compliance or the lack thereof, such
events could have a material adverse effect on the Company's business,
financial condition and results of operations.
-22-
Other Non-U.S. Markets. To the extent that it seeks to provide
telecommunications services in other non-U.S. markets, the Company will be
subject to the developing laws and regulations governing the competitive
provision of telecommunications services in those markets. The Company
currently plans to provide a limited range of services in South Africa and
certain Latin American countries, as permitted by regulatory conditions in
those markets, and to expand its operations as these markets implement
liberalization to permit competition in the full range of telecommunications
services. The nature, extent and timing of the opportunity for the Company to
compete in these markets will be determined, in part, by the actions taken by
the governments in these countries to implement competition and the response
of incumbent carriers to these efforts. There can be no assurance that any of
these countries will implement competition in the near future or at all, that
the Company will be able to take advantage of any such liberalization in a
timely manner, or that the Company's operations in any such country will be
successful.
DEPENDENCE ON INDEPENDENT AGENTS; CONCENTRATION OF MARKETING RESOURCES
The Company's success depends in significant part on its ability to
recruit, maintain and motivate a network of independent agents, including its
Country Coordinators. Telegroup's international market penetration has
resulted primarily from the sales activities of independent agents compensated
on a commission basis. Telegroup has over 1,600 active independent agents
worldwide. The Company is subject to competition in the recruitment of
independent agents from other organizations that use independent agents to
market their products and services, including those that market
telecommunications services. The motivation of the independent agents, which
can be affected by general economic conditions and a number of intangible
factors, may impact the effectiveness of the independent agents' ability to
recruit customers for the Company's services. Because of the number of factors
that affect the recruiting of independent agents and their effectiveness in
recruiting customers, the Company cannot predict when or to what extent
increases or decreases in the level of independent agent activity will occur
and to what degree the Company's independent agents will be successful in
recruiting customers for the Company's services. There can be no assurance
that the Company will be able to continue to effectively recruit, maintain and
motivate independent agents and, to the extent the Company is not able to do
so, the Company's business, results of operations and financial condition
could be materially and adversely affected.
For the sixth months ended June 30, 1998, approximately 50% of the
Company's retail revenues were derived from customers enrolled by agents who
are contractually prohibited from offering telecommunications services of the
Company's competitors to their customers during the term of their contract and
typically for a period of two years thereafter. Contracts with independent
agents entered into by the Company after July 1996 typically provide for such
exclusivity. As earlier agreements expire, the Company has generally required
its independent agents to enter into such new agreements. In the past, certain
independent agents have elected to terminate their relationship with the
Company in lieu of entering into such new independent agent agreements. In the
event that independent agents transfer a significant number of customers to
other service providers or that a significant number of agents decline to
renew their contracts under the new terms and move their customers to another
carrier, this would have a material adverse effect on the Company's business,
financial condition and results of operations.
-23-
For the sixth months ended June 30, 1998, 50 independent agents and/or
Country Coordinators were responsible for generating approximately 50% of the
Company's international long distance service billings. Any loss of the
Company's internal sales force or certain of the Company's more productive
independent agents, Country Coordinators or Country Directors could have a
material adverse effect on the Company's business, financial condition and
results of operations.
INTENSE INTERNATIONAL AND NATIONAL COMPETITION
The international and national telecommunications industry is highly
competitive. The Company's success depends upon its ability to compete with a
variety of other telecommunications providers in each of its markets,
including the respective ITO in each country in which the Company operates and
global alliances among some of the world's largest telecommunications
carriers. Other potential competitors include data and mixed services networks
providers, cable television companies, wireless telephone companies, Internet
access providers, electric and other utilities with rights of way, railways,
microwave carriers and large end users which have private networks. The
intensity of such competition has recently increased and the Company believes
that such competition will continue to intensify as the number of new entrants
increases. If the Company's competitors devote significant additional
resources to the provision of international or national telecommunications
services to the Company's target customer base of high-volume residential
consumers and small and medium-sized businesses, such action could have a
material adverse effect on the Company's business, financial condition and
results of operations, and there can be no assurance that the Company will be
able to compete successfully against such new or existing competitors.
Similarly, with respect to the Company's ATM strategy, if the Company's
competitors in the mixed services transport business devote significant
resources to implementation of global data networks which are comprised of
high bandwidth circuits, such action could have a material provided by adverse
effect on the Company's business, financial condition and results of
operations, and there can be no assurance that the Company will be able to
compete successfully against such new or existing competitors.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources, larger
networks and a broader portfolio of services than the Company. Additionally,
many competitors have strong name recognition and ''brand'' loyalty, long-
standing relationships with the Company's target customers, and economies of
scale which can result in a lower relative cost structure for transmission and
related costs. These competitors include, among others, AT&T, IXC
Communications, Inc. (''IXC''), Level 3 Communications, Inc. (''Level 3''),
MCI Communications Corp. (''MCI''), Sprint Corporation (''Sprint''), The
Williams Companies, Inc. (''Williams''), WorldCom, Inc. (''WorldCom''), Cable
& Wireless, Inc., Frontier Corp. (''Frontier''), GTE Corporation and Qwest
Communications International Inc. (''Qwest'') and RBOCs outside their exchange
territories providing long distance services in the United States; France
Telecom S.A. in France; KPN Telecom B.V. (''KPN'') and Socie te
Internationale de Te le communications Ae ronautiques, S.C. in The
Netherlands; British Telecommunications plc (''BT''), Cable & Wireless
Communications plc (''Cable & Wireless''), AT&T, WorldCom, Sprint, Energis
plc, COLT Telecom Group plc, and ACC Corp. in the United Kingdom; Deutsche
Telekom AG (''Deutsche Telekom'') in Germany; Swisscom in Switzerland; Telia
AB and NetCom Systems AB (''Netcom'') in Sweden; HKTI in Hong Kong; Telstra
-24-
Corporation Limited and Optus Communications Pty. and AAPT Limited in
Australia; Empresa Brasileira de Telecomunicacoes, S.A. (''Embratel''),
Telecomunicacoes Brasileiras, S.A. (''Telebra s''), Empresas de
Telecomunicaciones de Bogota (''ETB'') and Orbitel, S.A. in Latin America; and
Kokusan Denshin, Denwa Co., Ltd. (''KDD''), NTT Worldwide Telecommunications,
Japan Telecom and International Digital Communications (''IDC'') in Japan. In
many cases, the Company's competitors in a given country have entered into, or
intend to enter into, cross-border alliances to compete for multi-national
customers that are also targeted by the Company. The Company competes with
numerous other long distance and data providers, some of which focus their
efforts on the same customers targeted by the Company. In addition to these
competitors, recent and pending deregulation in various countries may
encourage new entrants. For example, as a result of the 1996
Telecommunications Act in the United States, once certain conditions are met,
RBOCs will be allowed to enter the domestic long distance market, AT&T, MCI
and other long distance carriers will be allowed to enter the local telephone
services market, and any entity (including cable television companies and
utilities) will be allowed to enter both the local service and long distance
telecommunications markets. Moreover, the WTO Agreement could create
opportunities for the Company to enter new foreign markets. However,
implementation of the accord by the United States and other countries could
result in new competition from carriers (including ITOs) previously banned or
limited from providing services. Increased competition in such countries as a
result of the foregoing, and other competitive developments, including entry
by ISPs into the long-distance and frame relay markets, could have an adverse
effect on the Company's business, financial condition and results of
operations. In addition, many smaller carriers have emerged, most of which
specialize in offering international telephone services utilizing dial-up
access methods, some of which have begun to build networks similar to the
TIGN. Finally, industry consolidation is occurring and the Company is unable
to predict the impact on the Company of mergers and acquisitions within the
telecommunications industry.
The Company believes that ITOs generally have certain competitive
advantages due to their control over local connectivity and close ties with
national regulatory authorities. The Company also believes that, in certain
instances, some regulators have shown a reluctance to adopt policies and grant
regulatory approvals that would result in increased competition for the local
ITO. If an ITO were to successfully pressure national regulators to prevent
the Company from providing its services, the Company could be denied
regulatory approval in certain jurisdictions in which its services would
otherwise be permitted, thereby requiring the Company to seek judicial or
other legal enforcement of its right to provide services. Any delay in
obtaining approval, or failure to obtain approval, could have a material
adverse effect on the Company's business, financial condition and results of
operations. If the Company encounters anti-competitive behavior in countries
in which it operates or if the ITO in any country in which the Company
operates uses its competitive advantages to the fullest extent, the Company's
business, financial condition and results of operations could be materially
adversely affected.
The telecommunications industry is intensely competitive and is
significantly influenced by the pricing and marketing decisions of the larger
industry participants. In the United States, the industry has relatively
limited barriers to entry with numerous entities competing for the same
customers. Customers frequently change long distance providers in response to
-25-
the offering of lower rates or promotional incentives by competitors.
Generally, the Company's customers can switch carriers at any time. The
Company believes that competition in all of its markets is likely to increase
and that competition in non-United States markets is likely to become more
similar to competition in the United States market over time as such non-
United States markets continue to experience deregulatory influences. In each
of the countries where the Company markets its services, the Company competes
primarily on the basis of price (particularly with respect to its sales to
other carriers), and also on the basis of customer service and its ability to
provide a variety of telecommunications products and services. There can be no
assurance that the Company will be able to compete successfully in the future.
The Company anticipates that deregulation and increased competition will
result in decreasing customer prices for telecommunications services. The
Company believes that the effects of such decreases will be at least partially
offset by increased telecommunications usage and decreased costs as the
percentage of its traffic transmitted over the TIGN increases. There can be no
assurance that this will be the case. To the extent this is not the case,
there could be an adverse effect on the Company's margins and financial
profits, and the Company's business, financial condition and results of
operations could be materially and adversely effected.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing satellite transmission capacity for services similar to those
provided by the Company. Such technologies include satellite-based systems,
such as the proposed Iridium and GlobalStar systems, utilization of the
Internet for international voice and data communications and digital wireless
communication systems such as personal communications services (''PCS''). The
Company is unable to predict which of many possible future product and service
offerings will be important to maintain its competitive position or what
expenditures will be required to develop and provide such products and
services.
DEPENDENCE ON TELECOMMUNICATIONS FACILITIES PROVIDERS
The Company's success will continue to depend, in part, on its ability to
obtain and utilize transmission capacity on a cost-effective basis. The
Company currently owns a limited amount of telecommunications transmission
infrastructure. Telecommunications traffic originated by the Company's
customers may be transmitted via one or more of the following types of circuit
capacity: (i) capacity purchased from another carrier on a per minute or
bandwidth basis under a switched resale agreement; (ii) capacity leased from
another carrier; or (iii) capacity owned by Telegroup, on an IRU or other
basis. In addition, the Company requires leased circuit capacity and/or
switching capacity to provide access and egress between its switches and the
local PSTN or other carriers in each country.
The Company currently obtains most of its transmission capacity under a
variety of volume-based resale arrangements with facilities-based and other
carriers including ITOs. The Company has entered into resale agreements with
more than 57 carriers in the United States, the United Kingdom, Canada, The
Netherlands, Denmark, Australia, Hong Kong and Switzerland, four of which
accounted for approximately 64.3% of the Company's cost of revenues for the
year ended December 31, 1997 and approximately 62.8% for the sixth months
ended June 30, 1998. Under these arrangements, the Company is subject to the
risk of unanticipated price fluctuations and service restrictions or
-26-
cancellations. The Company generally has not experienced sudden or
unanticipated price fluctuations, service restrictions or cancellations
imposed by such facilities-based carriers but there can be no assurance that
this will be the case in the future. The Company has an agreement with Sprint
Communications Company L.P. ("Sprint L.P.") to use Sprint L.P.'s fiber-optic
network in its delivery of telecommunications services. This agreement, which
extends through December 1998, requires net quarterly usage commitments of
$6.0 million, with the Company liable for 25.0% of any shortfall below such
commitment level. At such time as total usage exceeds $24.0 million during
1998, the Company will have no further commitment. As of August 1, 1998, the
Company had satisfied $20.0 million of its commitment to Sprint L.P. under
this agreement. Under an agreement which began on September 5, 1997, the
Company has a one-year $3.0 million usage commitment with MFS/WorldCom in
Frankfurt, Germany, to use MFS/WorldCom's fiber-optic network in its delivery
of telecommunications services. An extension of the term of this agreement to
June 30, 1999 was agreed to by MFS/WorldCom on July 28, 1998. The Company
also has a two year minimum usage commitment of $55,000,00 with WorldCom, Inc
which began on May 1, 1998, and extends through April 30, 2000. The Company is
responsible for any shortfall below such commitment level. As of August 1,
1998, the Company had fulfilled $20.0 million of this usage commitment. The
Company also has an agreement with Epoch Networks, Inc., which began June 1,
1998, with an aggregate minimum usage commitment of $875,000 over the next two
years. Shortfalls in usage commitments, if any, are recorded as out of
revenues in the period identified. Any significant or unanticipated usage
shortfalls below commitment levels in connection with such agreements could
have a material adverse effect on the Company's business, financial condition
and results of operations. Although the Company believes that its
arrangements and relationships with such carriers generally are satisfactory,
the deterioration or termination of the Company's arrangements and
relationships, or the Company's inability to enter into new arrangements and
relationships with one or more of such carriers could have a material adverse
effect upon the Company's cost structure, service quality, network coverage,
results of operations and financial condition.
In addition, the Company leases circuit capacity at fixed terms ranging
up to 12 months under arrangements with facilities-based long distance
carriers. As a result, the Company depends upon facilities-based carriers such
as the ITOs in each of the countries in which the Company operates to supply
the Company with high capacity transmission links. Some of these carriers are
or may become competitors of the Company. The Company has periodically
experienced difficulties with the quality of the services provided by such
carriers. In addition, the Company has experienced delays in obtaining access
and egress transmission lines supplied by ITOs and other facilities-based
carriers. While the Company seeks to minimize the impact of such difficulties,
there can be no assurance that difficulties with circuit access and quality of
service will not arise in the future and constitute a material adverse effect.
See " Intense International and National Competition." Moreover, minimum
volume contracts may result in relatively high fixed costs to the extent that
the Company does not generate the requisite traffic volume over the particular
route.
RISK OF NETWORK FAILURE
The success of the Company is largely dependent upon its ability to
deliver high quality, uninterrupted telecommunications services and on its
ability to protect its software and hardware against damage from fire,
-27-
earthquake, power loss, telecommunications failure, natural disaster and
similar events. Any failure of the TIGN or other systems or hardware that
causes interruptions in the Company's operations could have a material adverse
effect on the Company's business, financial condition and results of
operations. As the Company expands the TIGN and call traffic grows, there will
be increased stress on hardware, circuit capacity and traffic management
systems. There can be no assurance that the Company will not experience system
failures. The Company's operations are also dependent on its ability to
successfully expand and enhance the TIGN and integrate new and emerging
technologies and equipment, including ATM, which could increase the risk of
system failure and result in further strains upon the TIGN. The Company
attempts to minimize customer inconvenience in the event of a system
disruption by routing traffic to other circuits and switches which may be
owned by other carriers. However, significant or prolonged system failures, or
difficulties for customers in accessing, and maintaining connection with, the
TIGN could damage the reputation of the Company and result in customer
attrition and financial losses. Additionally, any damage to the Company's NOC
could have a negative impact on the Company's ability to monitor the
operations of the TIGN and generate accurate call detail reports.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its expansion in
international markets. In many international markets, the ITO controls access
to the local networks, enjoys better brand recognition and brand and customer
loyalty, and possesses significant operational economies, including a larger
network infrastructure and more operating agreements with other ITOs.
Moreover, an ITO may take many months before allowing competitors, including
the Company, to interconnect to its switches within the target market. Pursuit
of international growth opportunities may require significant investments for
extended periods of time before returns, if any, on such investments are
realized. In addition, there can be no assurance that the Company will be able
to obtain the permits and operating licenses required for it to operate,
obtain access to local transmission facilities or market and sell and deliver
competitive services in these markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks in conducting business
internationally, which could have a material adverse effect on the Company's
international operations, including its strategy to open additional offices in
foreign countries and its ability to repatriate net income from foreign
markets. Such risks may include unexpected changes in regulatory requirements,
value added taxes, tariffs, customs, duties and other trade barriers,
difficulties in staffing and managing foreign operations, problems in
collecting accounts receivable, political risks, fluctuations in currency
exchange rates, foreign exchange controls which restrict or prohibit
repatriation of funds, technology export and import restrictions or
prohibitions, delays from customs brokers or government agencies, seasonal
reductions in business activity during the summer months in Europe and certain
other parts of the world, and potentially adverse tax consequences resulting
from operating in multiple jurisdictions with different tax laws. In addition,
the Company's business could be adversely affected by a reversal in the
current trend toward deregulation of telecommunications carriers. In certain
countries into which the Company may choose to expand in the future, the
Company may need to enter into a joint venture or other strategic relationship
with one or more third parties in order to successfully conduct its operations
-28-
(possibly with an ITO or other carrier). There can be no assurance that such
factors will not have a material adverse effect on the Company's future
operations and, consequently, on the Company's business, results of operations
and financial condition, or that the Company will not have to modify its
current business practices. In addition, there can be no assurance that laws
or administrative practices relating to taxation, foreign exchange or other
matters of countries within which the Company operates will not change. Any
such change could have a material adverse effect on the Company's business,
financial condition, and results of operations.
The Company is subject to the Foreign Corrupt Practices Act (''FCPA''),
which generally prohibits U.S. companies and their intermediaries from bribing
foreign officials for the purpose of obtaining or keeping business. The
Company may be exposed to liability under the FCPA as a result of past or
future actions taken without the Company's knowledge by agents, strategic
partners and other intermediaries. Such liability could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FOREIGN EXCHANGE RATE RISKS; REPATRIATION RISKS
Although the Company and its subsidiaries attempt to match costs and
revenues in terms of local currencies, the Company anticipates that as it
continues its expansion of the TIGN on a global basis, there will be many
instances in which costs and revenues will not be matched with respect to
currency denomination. As a result, the Company anticipates that increasing
portions of its revenues, costs, assets and liabilities will be subject to
fluctuations in foreign currency valuations, and that such changes in exchange
rates may have a material adverse effect on the Company's business, financial
condition and results of operations. While the Company utilizes foreign
currency forward contracts and other currency hedging mechanisms to minimize
exposure to currency fluctuation, there can be no assurance that such hedges
will achieve the desired effect. The Company may experience economic loss and
a negative impact on earnings solely as a result of foreign currency exchange
rate fluctuations. One of the markets in which the Company conducts business,
South Africa, restricts the removal or conversion of the local or foreign
currency. While the Company has taken steps to address these issues, there
can be no assurance that the Company will not experience limitations on its
ability to repatriate funds from its international operations. See '' Risks
Associated with International Operations.''
FAILURE TO COLLECT RECEIVABLES (BAD DEBT RISK)
Many of the countries in which the Company operates do not have
established credit bureaus, thereby making it more difficult for the Company
to ascertain the creditworthiness of potential customers. In addition, the
Company expends considerable resources to collect receivables from customers
who fail to make payment in a timely manner. While the Company continually
seeks to minimize bad debt, the Company's experience indicates that a certain
portion of past due receivables will never be collected and that such bad debt
is a necessary cost of conducting business in the telecommunications industry.
Expenses attributable to the write-off of bad debt, including an estimate of
accounts receivable expected to be written off, represented approximately
3.1%, 2.4% and 2.5% of revenues for the years ended December 31, 1995, 1996
and 1997, respectively, and approximately 2.3% for the six months ended June
30, 1998. There can be no assurance, however, that, with regard to any
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particular time period or periods or a particular geographic location or
locations, bad debt expense will not rise significantly above historical or
anticipated levels. Any significant increase in bad debt levels could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The telecommunications industry has historically been a victim of fraud.
Although the Company has implemented anti-fraud measures to minimize losses
relating to fraudulent practices, there can be no assurance that the Company
can effectively control fraud when operating in the international or national
telecommunications arena. The Company's failure to effectively control fraud
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS ASSOCIATED WITH IMPOSITION OF VAT ON COMPANY'S SERVICES
The member countries of the EU impose 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 15.0% to 25.0% of the sales price of goods and
services. Under basic 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.
As a general rule, in the case of services, VAT is imposed where services
are deemed to have been provided within an EU member state. Pursuant to the
Sixth VAT Directive adopted in 1977 (the ''Sixth Directive''),
telecommunications services were deemed to be provided where the supplier of
such services is located for VAT purposes. Under the Sixth Directive,
therefore, telecommunications services provided by U.S. telecommunications
companies in the United States were deemed to be performed outside the EU and
were outside the scope of VAT. Because telecommunications providers based in
the EU had to charge VAT on telecommunications services they provided, U.S.-
based and other non-EU based telecommunications providers historically enjoyed
a competitive advantage over their EU counterparts under the Sixth Directive.
Derogation to the Sixth Directive. In March 1997, the EU issued a
derogation to the Sixth Directive (the ''Derogation'') that, as of January 1,
1997, authorized individual EU states to amend their laws so as to change the
locus of telecommunications services provided by non-EU based firms, treating
such services as being provided where the customer is located rather than
where the telecommunications provider is established. In the case of sales by
non-EU based telecommunications companies to non-VAT-registered (usually
residential) customers in EU member states, the Derogation provides that the
non-EU based companies will be required to register for, collect, charge and
remit VAT.
Germany and France have adopted rules that, as of January 1, 1997, deem
telecommunications services provided by non-EU based firms to be provided
where the customer is located, thereby subjecting telecommunications services
provided to customers in the EU by non-EU based companies to VAT. The German
and French rules impose VAT on both individual and business customers of non-
EU based telecommunications companies. In the case of sales to individuals (as
opposed to business), German and French rules require that non-EU based
telecommunications carriers collect and remit the VAT. In the case of sales by
such providers to German business customers, the German rules generally
require that such customers collect and remit the VAT. Under the so-called
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"Nullregelung" doctrine, however, certain German 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 exempt
from the aforesaid obligation with regard to certain services. The exemption
only applies if the provider has not invoiced VAT and the respective customer
would be entitled to be fully reimbursed for VAT paid if such VAT had been
invoiced. 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.
Since April 1, 1997, Austria, Belgium, Denmark, Finland, Greece, Ireland,
Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the United
Kingdom have begun to impose VAT on telecommunications services provided by
non-EU based companies. The rules adopted by these countries are generally
similar to those adopted by France and Germany in that they impose VAT on both
individuals and businesses, with non-EU based telecommunications providers
required to collect and remit the VAT in the case of sales to non-VAT-
registered customers and the customer required to collect and remit VAT in the
case of sales to VAT-registered customers.
Proposed Amendment to the Sixth Directive. The EU Commission has
proposed an amendment to the Sixth Directive (the ''Amendment'') 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. Under the Amendment, non-EU based
telecommunications companies would be required to collect and remit VAT on
telecommunications services provided to EU businesses as well as to
individuals.
To the extent that the Company's services are, and in the future become,
subject to VAT, the Company's competitive price advantage with respect to
those EU businesses and other customers required to pay VAT will be reduced.
Such reduction could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company historically has
collected, and will continue to collect, VAT on Global Access Direct services
where it is offered in a VAT country. In addition, the Company's U.K.
Subsidiary acts as the provider of call-reorigination services throughout much
of Europe and collects U.K. VAT, where applicable, on such services. The
Company believes that whatever negative impact the Derogation and the
Amendment will have on its operations as a result of the imposition of VAT on
traditional call-reorigination, such impact will be partially mitigated by the
customer migration towards call-through services and by the fact that call-
reorigination services offered by the Company's U.K. subsidiary are imposed at
the relatively low U.K. rate of 17.5%.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
In furtherance of its business strategy, the Company may enter into
strategic alliances with, acquire assets or businesses from, or make
investments in, companies that are complementary to its current operations.
On April 20, 1998, the Company acquired all of the outstanding capital stock
of Corporate Networks, a group of companies located in the United Kingdom,
which includes South East Telecom Limited (''South East Telecom'') and Phone
Centre Communication (Service) Limited (''Phone Centre''), for $62,544 in cash
and 164,463 shares of unregistered Common Stock valued at $2.3 million, based
on the closing price of the Common Stock on Nasdaq on the closing date of such
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transaction. Additional consideration to be paid in unregistered Common Stock
is due on or before April 30, 1999 based on average monthly usage of telephone
related services by customers over a certain period of time. On May 31, 1998,
the Company purchased for $9.7 million in cash all of the outstanding shares
of Newsnet ITN Limited, an Australian corporation (''Newsnet''), which
provides enhanced fax services. On August 6, 1998, the Company purchased all
of the outstanding capital stock of Switch Telecommunications Pty Ltd., an
Australian corporation (''Switch''), and all of the assets of Frame Relay Pty
Ltd., an Australian corporation (''Frame''), for an aggregate purchase price
of $22.0 million in cash. The Company is negotiating an agreement to acquire
the business and operations of its Country Coordinator in The Netherlands by
purchasing all of the outstanding capital stock of Eurocom Holding B.V. and
Global Access B.V., limited liability companies in The Netherlands. There can
be no assurance that this agreement will be consummated. Except as
set forth herein, the Company has no present agreements with respect to any
such strategic alliance, investment or acquisition. Any such future strategic
alliances, investments or acquisitions would be accompanied by the risks
commonly encountered in such transactions. Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
companies, the potential disruption of the Company's ongoing business, costs
associated with the development and integration of such operations, the
inability of management to maximize the financial and strategic position of
the Company by the successful incorporation of licensed or acquired technology
into the Company's service offerings, the maintenance of uniform standards,
controls, procedures and policies, the impairment of relationships with
employees and customers as a result of changes in management, and higher
customer attrition with respect to customers obtained through acquisitions.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of its management team, as well as its technical, marketing and
sales personnel. While certain of the Company's employees have entered into
employment agreements with the Company, the Company's employees may
voluntarily terminate their employment with the Company at any time. The
Company has obtained a $5 million key man life insurance policy covering Mr.
Cliff Rees, the Company's Chief Executive Officer, but there can be no
assurance that the coverage provided by such policy will be sufficient to
compensate the Company for the loss of Mr. Rees' services. The Company's
success also will depend on its ability to continue to attract and retain
qualified management, marketing, technical and sales personnel. The process of
locating such personnel with the combination of skills and attributes required
to carry out the Company's strategies is often lengthy. Competition for
qualified employees and personnel in the telecommunications industry is
intense. There can be no assurance that the Company will be successful in
attracting and retaining such executives and personnel. The loss of the
services of key personnel, including Mr. Rees, or the inability to attract
additional qualified personnel, could have a material adverse effect on the
Company's business, financial condition and results of operations.
PROTECTION OF PROPRIETARY TECHNOLOGY AND INFORMATION
The Company relies on trade secrets, know-how and continuing
technological advancements to maintain its competitive position. The Company
also relies on unpatented proprietary technology and there can be no assurance
that third parties may not independently develop the same or similar
technology or otherwise obtain access to the Company's unpatented technology,
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trade-secrets and know-how. Although the Company has entered into
confidentiality and invention agreements with certain of its employees and
consultants, no assurance can be given that such agreements will be honored or
that the Company will be able to protect effectively its rights to its
unpatented technology, trade secrets and know-how. If the Company is unable
to maintain the proprietary nature of its technologies, the Company could be
materially and adversely affected.
Competitors in both the United States and foreign countries, many of
which have substantially greater resources and have made substantial
investments in competing technologies, may have applied for or obtained, or
may in the future apply for and obtain, patents that will prevent, limit or
otherwise interfere with the Company's ability to sell its services. The
Company has not conducted an independent review of patents issued to third
parties. Although the Company believes that its products do not infringe on
the patents or other proprietary rights of third parties, there can be no
assurance that other parties will not assert infringement claims against the
Company or that such claims will not be successful. An adverse outcome in the
defense of a patent suit could subject the Company to significant liabilities
to third parties, require disputed rights to be licensed from third parties or
require the Company to cease selling its services.
CONTROL OF COMPANY BY PRINCIPAL SHAREHOLDERS
At August 1, 1998, Fred Gratzon, the Chairman of the Board, and Clifford
Rees, the Chief Executive Officer, collectively beneficially own in the
aggregate approximately 70.5% of the Company's outstanding Common Stock.
Accordingly, if they choose to do so, Messrs. Gratzon and Rees acting together
will have the power to amend the Company's Second Restated Articles of
Incorporation (the "Restated Articles"), elect all of the directors, effect
fundamental corporate transactions such as mergers, asset sales and the sale
of the Company and otherwise direct the Company's business and affairs,
without the approval of any other shareholder.
-33-
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale of the
Common Stock offered hereby, nor will any such proceeds be available for use
by it or for its benefit.
DIVIDEND POLICY
The Company has paid no cash dividends since 1996. The Company currently
intends to retain all future earnings for use in the operation of its business
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future. The declaration and payment in the future of any cash
dividends will be at the discretion of the Company's Board of Directors and
will depend upon, among other things, the earnings, capital requirements and
financial position of the Company, existing and/or future loan covenants and
general economic conditions. In addition, the Indentures and the Revolving
Credit Facility limit the Company's ability to pay dividends or make any other
distributions on the Common Stock.
DESCRIPTION OF COMMON STOCK
As of August 12, 1998, there were 33,527,520 shares of Common Stock
outstanding and held of record by approximately 82 holders of record. Holders
of shares of Common Stock are entitled to one vote per share on all matters on
which the holders of Common Stock are entitled to vote and do not have any
cumulative voting rights. This means that the holders of more than 50% of the
shares voting for the election of directors can elect all of the directors if
they choose to do so; and, in such event, the holders of the remaining shares
of Common Stock will not be able to elect any person to the Board of
Directors. Subject to the rights of the holders of shares of any series of
Preferred Stock, holders of Common Stock are entitled to receive such
dividends as may from time to time be declared by the Board of Directors of
the Company out of funds legally available therefor. Holders of shares of
Common Stock have no preemptive, conversion, redemption, subscription or
similar rights. In the event of a liquidation, dissolution or winding up of
the Company, whether voluntary or involuntary, holders of shares of Common
Stock are entitled to share ratably in the assets of the Company which are
legally available for distribution, if any, remaining after the payment or
provision for the payment of all debts and other liabilities of the Company
and the payment and setting aside for payment of any preferential amount due
to the holders of shares of any series of Preferred Stock. All outstanding
shares of Common Stock are, and all shares of Common Stock offered hereby when
issued will be, upon payment therefor, validly issued, fully paid and non-
assessable. The Common Stock is quoted on Nasdaq under the symbol "TGRP".
The last reported sale price for the Common Stock as reported on Nasdaq on
August 18, 1998, was $7.44 per share.
SELLING SHAREHOLDERS
The following table sets forth the name of each Selling Shareholder, the
aggregate number of shares of Common Stock beneficially owned by each Selling
Shareholder as of the date hereof and the aggregate number of shares of Common
Stock that each Selling Shareholder may offer and sell pursuant to this
Prospectus. Because the Selling Shareholders may sell all or a portion of the
Securities at any time and from time to time after the date hereof, no
estimate can be made of the number of shares of Common Stock that each Selling
-34-
Shareholder may retain upon completion of the Offering pursuant to this
Prospectus. Information concerning the Selling Shareholders may change from
time to time and, to the extent required, will be set forth in an accompanying
Prospectus supplement or, if appropriate, a post-effective amendment to the
Registration Statement of which this Prospectus is a part. To the Company's
knowledge, none of the Selling Shareholders has, or has had within the last
three years, any material relationship with the Company except as disclosed
herein or in the information incorporated by reference herein. The following
table and the disclosure concerning material relationships between the Selling
Shareholders and the Company is based upon information furnished to the
Company by or on behalf of the Selling Shareholders.
Number of Number of
Shares Shares
Name of Selling Shareholder (1) Owned Before Offering Being Registered (2)
LeHeron Corp., Ltd. 297,590 187,593
Dennis Raimondi 114,547 114,547
Golden Gate Management, LC 81,972 81,972
Baroda Hill Investments, Ltd. 66,000 41,605
Kimble John Winter 33,000 20,802
Jim Danaher 19,732 19,732
Ed Malloy 5,000 5,000
Doug Greenfield 5,000 5,000
Ed Malloy IRA 1,428 1,428
Dan Raymond 800 800
Victoria Malloy IRA 657 657
------- --------
Total 627,726 481,136
(1) Information set forth in the table regarding the Selling Shareholders'
Securities is provided to the best knowledge of the Company based on
information furnished to the Company by such respective Selling Shareholders
and/or available to the Company through its stock ledgers or inquiries to
brokers.
(2) Since the Selling Shareholders may offer all or part of the Common
Stock held thereby, and since this offering is not being underwritten on a
firm commitment basis, no estimate can be given as to the amount of Common
Stock to be offered for sale by the Selling Shareholders or as to the amount
of Common Stock that will be held by the Selling Shareholders upon termination
of this offering.
PLAN OF DISTRIBUTION
The Selling Shareholders may sell all or a portion of the Securities
offered hereby from time to time while the Registration Statement of which
this Prospectus is a part remains effective. The Company has been advised by
the Selling Shareholders that the Securities may be sold on terms to be
determined at the time of such sale through customary brokerage channels,
negotiated transactions or a combination of these methods, at fixed prices
that may be changed, at market prices then prevailing or at negotiated prices
then obtainable. There is no assurance that the Selling Shareholders will sell
any or all of the Securities offered hereby. Each of the Selling Shareholders
-35-
reserves the right to accept and, together with its agents from time to time,
to reject in whole or in part any proposed purchase of the Securities to be
made directly or through agents. The Company will receive no portion of the
proceeds from the sale of the Securities offered hereby. The aggregate
proceeds to the Selling Shareholders from the sale of the Securities offered
hereby will be the purchase price of such Securities less any discounts or
commissions.
The Company has been advised by the Selling Shareholders that the Selling
Shareholders, acting as principals for their own account, may sell Securities
from time to time directly to purchasers or through agents, dealers or
underwriters to be designated by the Selling Shareholders from time to time
who may receive compensation in the form of underwriting discounts,
commissions or concessions from the Selling Shareholders and the purchasers of
the Securities for whom they may act as agent. The Selling Shareholders and
any agents, broker-dealers or underwriters that participate with the Selling
Shareholders in the distribution of the Securities may be deemed to be
"underwriters" within the meaning of the Securities Act, in which event any
discounts, commissions or concessions received by such broker-dealers, agents
or underwriters and any profit on the resale of the Securities purchased by
them may be deemed to be underwriting discounts or commissions under the
Securities Act.
A Selling Shareholder may elect to engage a broker or dealer to effect
sales of the Securities in one or more of the following transactions: (a)
block trades in which the broker or dealer so engaged will attempt to sell the
Securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction, (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus, and (c) ordinary brokerage transactions and transactions in
which the broker solicits purchasers. In effecting sales, brokers and dealers
engaged by a Selling Shareholder may arrange for other brokers or dealers to
participate. Broker-dealers may agree with the Selling Shareholders to sell a
specified number of such Securities at a stipulated price, and, to the extent
such broker-dealer is unable to do so acting as agent for a Selling
Shareholder, to purchase as principal any unsold Securities at the price
required to fulfill the broker-dealer commitment to such Selling Shareholder.
Broker-dealers who acquire Securities as principal may thereafter resell such
Securities from time to time in transactions (which may involve crosses and
block transactions and sales to and through other broker-dealers, including
transactions of the nature described above) in the over-the-counter market or
otherwise at prices and on terms then prevailing at the time of sale, at
prices then related to the then-current market price or in negotiated
transactions and, in connection with such resales, may pay to or receive from
the purchasers of such Securities commissions as described above. To the
extent required, the number of Securities to be sold, the names of the Selling
Shareholders, the purchase price, the public offering price, the name of any
agent, dealer or underwriter, the amount of any offering expenses, any
applicable commissions or discounts and any other material information with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement or, if appropriate, a post-effective amendment to the Registration
Statement of which this Prospectus is a part.
The Securities originally issued by the Company contained legends as to
their restricted transferability. These legends will not be necessary with
respect to any Securities sold pursuant to, and during the effectiveness of,
-36-
the Registration Statement of which this Prospectus is a part. Upon the
transfer by the Selling Shareholders of any of the Securities, new
certificates representing such Securities will be issued to the transferee,
free of any such legends.
Under the Exchange Act, any person engaged in the distribution of the
Securities may not simultaneously bid for or purchase securities of the same
class for a period of at least two business days prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the
Selling Shareholders will be subject to applicable provisions of the Exchange
Act and the rules and regulations thereunder, including without limitation the
rules contained in Regulation M, in connection with the transactions in the
Securities during the effectiveness of the Registration Statement of which
this Prospectus is a part. The foregoing may affect the marketability of the
Common Stock and any market making activities with respect to the Common
Stock.
To comply with the securities laws of certain states, if applicable, the
Securities will be sold in such states only through registered or licensed
brokers or dealers. In addition, in certain states the Securities may not be
offered or sold unless they have been registered or qualified for sale in such
state or an exemption from the registration or qualification requirement is
available and is complied with.
Each of the Selling Shareholders has certain registration rights with
respect to the Securities owned by such Selling Shareholder. Notwithstanding
such rights, the Company has voluntarily filed the Registration Statement of
which this Prospectus is a part. The Company will bear all expenses relating
to this registration, other than underwriting discounts and commissions and
fees and disbursements of counsel to the Selling Shareholders.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Marcus and Thompson, P.C.
EXPERTS
The consolidated financial statements and schedule of the Company and
subsidiaries appearing in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997 have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, as set forth in their reports
thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of said firm as experts in
accounting and auditing.
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE
SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT
-37-
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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TABLE OF CONTENTS
PAGE
Available Information...................................... 2
Forward-looking Statements and the Private Securities
Litigation Reform Act................................... 2
Incorporation of Certain Documents by Reference............ 3
The Company................................................ 4
Risk Factors............................................... 7
Use of Proceeds............................................ 34
Dividend Policy............................................ 34
Description of Common Stock................................ 34
Selling Shareholders....................................... 34
Plan of Distribution....................................... 35
Legal Matters.............................................. 37
Experts.................................................... 37
481,136 Shares of Common Stock
TELEGROUP, INC.
PROSPECTUS
AUGUST _____, 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance And Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimated, except the Securities and
Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee........ $ 1,091.48
Accounting Fees and Expenses............................... 3,500.00
Legal Fees and Expenses.................................... 20,000.00
---------
Total.................................................. $24,591.48
Item 15. Indemnification of Directors and Officers.
The Iowa Business Corporation Act confers broad powers upon corporations
incorporated in Iowa with respect to indemnification of any person against
liabilities incurred by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another Corporation or other business entity. These provisions are not
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement or otherwise.
The Company's Second Restated Articles of Incorporation contain a
provision that eliminates the personal liability of the Company's directors to
the Company or its shareholders for monetary damages for breach of fiduciary
duty as a director, except (i) for liability for any breach of the director's
duty of loyalty to the Corporation or its shareholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, (iii) for any transaction from which the director
derived an improper personal benefit, or (iv) for unlawful distributions in
violation of Section 490.833 of the Iowa Business Corporation Act. Any repeal
or amendment of this provision by the shareholders of the Corporation will not
adversely affect any right or protection of a director existing at the time of
such repeal or amendment.
The Company's Amended and Restated Bylaws contain a provision entitling
officers and directors to be indemnified and held harmless by the Company
against expenses, liabilities and costs (including attorneys' fees) actually
and reasonably incurred by such person, to the fullest extent permitted by the
Iowa Business Corporation Act.
The Company has obtained a director and officer liability policy, under
which each director and certain officers of the Company would be insured
against certain liabilities.
The Company entered into indemnification agreements with certain of its
executive officers and directors (collectively, the "Indemnification
Agreements"). Pursuant to the terms of the Indemnification Agreements, each of
the executive officers and directors who are parties thereto will be
indemnified by the Company to the full extent provided by law in the event
such officer or director is made or threatened to be made a party to a claim
arising out of such person acting in his capacity as an officer or director of
the Company. The Company has further agreed that, upon a change in control, as
defined in the Indemnification Agreements, the rights of such officers and
directors to indemnification payments and expense advances will be determined
in accordance with the provisions of the Iowa Business Corporation Act and has
also agreed that, upon a potential change of control, as defined in the
Indemnification Agreements, it will create a trust in an amount sufficient to
satisfy all indemnity expenses reasonably anticipated at the time a written
request to create such a trust is submitted by an officer or director. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Item 16(a). Exhibits.
Exhibit
Number Description
- ------- -----------
*2.1 Plan and Agreement of Reorganization Between the Company, George
Apple and Telegroup South Europe, Inc. Dated September 6, 1996
*2.2 Plan and Agreement of acquisition between the Company, Telecontinent,
S.A. and Georges Apple dated September 6, 1996
2.3 Agreement Between Fastnet UK Limited, Telegroup UK Limited, Giles
Redpath and Telegroup, Inc. (Incorporated by reference to Exhibit 10
to the Company's Form 8-K filed on December 9, 1997, SEC File No.
0-29284)
*3.1 Restated Articles of Incorporation of Telegroup, Inc.
*3.2 Form of Second Restated Articles of Incorporation of Telegroup, Inc.
*3.3 Bylaws of Telegroup, Inc.
*3.4 Form of Amended and Restated Bylaws of Telegroup, Inc.
*4.1 Form of Common Stock Certificate of Telegroup, Inc.
*4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
*4.3 Note and Warrant Purchase Agreement dated as of November 27, 1996
*4.4 Form of Warrant to Purchase Class A Common Stock of Telegroup, Inc.
*4.5 Indenture dated as of November 27, 1996 between Telegroup, Inc. and
The Chase Manhattan Bank
4.6 Indenture for 8.0% Convertible Notes dated September 30, 1997
(Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q
for the quarter-ended September 30, 1997, SEC File No. 0-29284)
4.7 Indenture for 10.5% Senior Discount Notes dated October 23, 1997
(Incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q
for the quarter-ended September 30, 1997, SEC File No. 0-29284)
5.1 Opinion of Marcus & Thompson, P.C.
*10.1 Loan Agreement Dated as of March 28, 1997 by and between the
Company and American National Bank and Trust Company of Chicago
*10.1.1 First Amendment to Loan Agreement between the Company and American
National Bank and Trust Company of Chicago dated as of June 6, 1997.
*10.2 Amended and Restated 1996 Telegroup, Inc. Stock Option Plan
*10.3 Form of Employment Agreement between the Company and Fred Gratzon
*10.4 Form of Employment Agreement between the Company and Clifford Rees
*10.5 Form of Indemnification Agreement
*10.6 Registration Rights Agreement among Telegroup, Inc., Greenwich
Street Capital Partners, L.P., Greenwich Street Capital Offshore
Fund, Ltd., TRV Employees Fund, L.P., The Travelers Insurance
Company and The Travelers Life and Annuity Company Dated as of
November 27, 1996
*10.7 Form of Registration Rights Agreement between the Company and
certain Shareholders of the Company
*^10.8 Agreement between Telegroup, Inc. and New T & T Hong Kong Limited
*^10.9 Resale Solutions Switched Services Agreement between Sprint
Communications Company L.P. and Telegroup, Inc.
*10.10 Form of Employment Agreement between the Company and John P. Lass
*10.11 Form of Employment Agreement between the Company and Ron Jackenthal
*10.12 Form of Employment Agreement between the Company and Certain
Executive Officers
***10.13 Notes Registration Rights Agreement between the Company and Smith
Barney Inc., and Alex Brown Incorporated Dated as of October 23, 1997
**10.14 Registration Rights Agreement between the Company and Smith Barney
Inc. Dated as of September 30, 1997
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Marcus & Thompson, P.C. (to be included in Exhibit 5.1)
* Incorporated by reference to the Company's Registration Statement on
Form S-1, SEC File No. 333-25065.
** Incorporated by reference to the Company's Registration Statement on
Form S-1, SEC File No. 333-42965.
*** Incorporated by reference to the Company's Registration Statement on
Form S-4, SEC File No. 333-42979
^ Confidential Treatment has been granted for portions of this
document. The redacted material has been filed separately with the
Commission.
Item 17. Undertakings.
(a) Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement to include any
material information with respect to the plan of distribution not previously
disclosed in this Registration Statement or any material change to such
information in this 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 as that time shall be deemed to be the
initial bona fide offering thereof;
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) Filings Incorporating Subsequent Exchange Act Documents by Reference
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement 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.
(c) Indemnification for Liabilities
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Fairfield, state of Iowa, on August
21, 1998.
TELEGROUP, INC.
By: /s/ Clifford Rees
-----------------------------
Clifford Rees, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on August 21, 1998.
Signature Title
--------- -----
/s/ Fred Gratzon
- --------------------------- Chairman of the Board and Director
Fred Gratzon
/s/ Clifford Rees
- --------------------------- Chief Executive Officer and Director
Clifford Rees (Principal Executive Officer)
/s/ Steven J. Baumgartner
- --------------------------- President, Chief Operating Officer
Steven J. Baumgartner and Director
/s/ Douglas A. Neish
- --------------------------- Vice President-Finance, Chief
Douglas A. Neish Financial Officer and Director
(Principal Financial Officer)
/s/ Gary Korf
- --------------------------- Director of Finance and Controller
Gary Korf (Principal Accounting Officer)
/s/ Erik E. Stakland
- --------------------------- Senior Vice President-Global Retail
Erik E. Stakland Businesses and Services and Director
/s/ J. Sherman Henderson III
- --------------------------- Director
J. Sherman Henderson III
/s/ Rashi Glazer
- --------------------------- Director
Rashi Glazer
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
*2.1 Plan and Agreement of Reorganization Between the Company, George
Apple and Telegroup South Europe, Inc. Dated September 6, 1996
*2.2 Plan and Agreement of acquisition between the Company, Telecontinent,
S.A. and Georges Apple dated September 6, 1996
2.3 Agreement Between Fastnet UK Limited, Telegroup UK Limited, Giles
Redpath and Telegroup, Inc. (Incorporated by reference to Exhibit 10
to the Company's Form 8-K filed on December 9, 1997, SEC File No.
0-29284)
*3.1 Restated Articles of Incorporation of Telegroup, Inc.
*3.2 Form of Second Restated Articles of Incorporation of Telegroup, Inc.
*3.3 Bylaws of Telegroup, Inc.
*3.4 Form of Amended and Restated Bylaws of Telegroup, Inc.
*4.1 Form of Common Stock Certificate of Telegroup, Inc.
*4.2 Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4
*4.3 Note and Warrant Purchase Agreement dated as of November 27, 1996
*4.4 Form of Warrant to Purchase Class A Common Stock of Telegroup, Inc.
*4.5 Indenture dated as of November 27, 1996 between Telegroup, Inc. and
The Chase Manhattan Bank
4.6 Indenture for 8.0% Convertible Notes dated September 30, 1997
(Incorporated by reference to Exhibit 4.1 to the Company's Form 10-Q
for the quarter-ended September 30, 1997, SEC File No. 0-29284)
4.7 Indenture for 10.5% Senior Discount Notes dated October 23, 1997
(Incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q
for the quarter-ended September 30, 1997, SEC File No. 0-29284)
5.1 Opinion of Marcus & Thompson, P.C.
*10.1 Loan Agreement Dated as of March 28, 1997 by and between the
Company and American National Bank and Trust Company of Chicago
*10.1.1 First Amendment to Loan Agreement between the Company and American
National Bank and Trust Company of Chicago dated as of June 6, 1997.
*10.2 Amended and Restated 1996 Telegroup, Inc. Stock Option Plan
*10.3 Form of Employment Agreement between the Company and Fred Gratzon
*10.4 Form of Employment Agreement between the Company and Clifford Rees
*10.5 Form of Indemnification Agreement
*10.6 Registration Rights Agreement among Telegroup, Inc., Greenwich
Street Capital Partners, L.P., Greenwich Street Capital Offshore
Fund, Ltd., TRV Employees Fund, L.P., The Travelers Insurance
Company and The Travelers Life and Annuity Company Dated as of
November 27, 1996
*10.7 Form of Registration Rights Agreement between the Company and
certain Shareholders of the Company
*^10.8 Agreement between Telegroup, Inc. and New T & T Hong Kong Limited
*^10.9 Resale Solutions Switched Services Agreement between Sprint
Communications Company L.P. and Telegroup, Inc.
*10.10 Form of Employment Agreement between the Company and John P. Lass
*10.11 Form of Employment Agreement between the Company and Ron Jackenthal
*10.12 Form of Employment Agreement between the Company and Certain
Executive Officers
***10.13 Notes Registration Rights Agreement between the Company and Smith
Barney Inc., and Alex Brown Incorporated Dated as of October 23, 1997
**10.14 Registration Rights Agreement between the Company and Smith Barney
Inc. Dated as of September 30, 1997
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Marcus & Thompson, P.C. (to be included in Exhibit 5.1)
* Incorporated by reference to the Company's Registration Statement on
Form S-1, SEC File No. 333-25065.
** Incorporated by reference to the Company's Registration Statement on
Form S-1, SEC File No. 333-42965.
*** Incorporated by reference to the Company's Registration Statement on
Form S-4, SEC File No. 333-42979
^ Confidential Treatment has been granted for portions of this
document. The redacted material has been filed separately with the
Commission.