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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 000-21043
Pacific Gateway Exchange, Inc.
(Exact name of registrant as specified in its charter)
Delaware 94-3134065
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
533 Airport Boulevard, Suite 505, Burlingame, California 94010
(Address of principal executive offices)
Telephone Number: 650-375-6700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, Par Value $.0001 per Share
Preferred Share Purchase Rights, Par Value $.0001 per Share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant on March 17, 1999, was approximately $565,700,000, computed upon the
basis of the closing sales price of the Common Shares on that date. For the
purposes of this computation, shares held by directors (and shares held by any
entities in which they serve as officers) and executive officers of the
registrant have been excluded. Such exclusion is not intended, nor shall it be
deemed to be, an admission that such persons are affiliates of the registrant.
As of March 17, 1999, there were outstanding 19,257,112 Common Shares of
$.0001 par value, of the registrant
Documents Incorporated by Reference
1. The Registrant's definitive proxy statement to be filed with the Securities
and Exchange Commission not later than 120 days after the end of the
Registrant's fiscal year pursuant to Regulation 14A relating to the 1999 Annual
General Meeting of Shareholders.
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PACIFIC GATEWAY EXCHANGE, INC.
TABLE OF CONTENTS
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Page
Item Number
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PART I
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1. Business 1
2. Properties 28
3. Legal Proceedings 28
4. Submission of Matters to a Vote of Security Holders 28
Executive Officers 29
PART II
5. Market for the Registrants Common Stock and Related
Stockholder Matters 31
6. Selected Financial Data 31
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 32
7A. Quantitative and Qualitative Disclosures about Market Risk 39
8. Financial Statements and Supplementary Data 40
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 56
PART III
10. Directors and Executive Officers 56
11. Executive Compensation 56
12. Security Ownership of Certain Beneficial Owners and Management 56
13. Certain Relationships and Related Transactions 56
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 56
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PART I
ITEM 1. BUSINESS
Note on forward-looking statements
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by use of
terms such as "believes," "anticipates," "plans," "intends" or "expects." These
forward-looking statements relate to the plans, objectives and expectations of
Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the "Company") regarding
its future operations or financial performance or related to the Company's
expectations regarding the telecommunications industry. In light of the
inherent risks and uncertainties of any forward-looking statement, the inclusion
of forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the forward-looking
statements will come true. The revenues and results of operations of the
Company, and future developments in the telecommunications industry, are
difficult to forecast and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including the
following: (i) changes in international settlement rates; (ii) changes in the
ratios between outgoing and incoming traffic and changes in expected future
revenue from delayed proportional return traffic from foreign partners pursuant
to certain operating agreements; (iii) foreign currency fluctuations; (iv)
termination of certain operating agreements or inability to enter into
additional operating agreements; (v) inaccuracies in the Company's forecasts of
traffic; (vi) changes in or developments under domestic or foreign laws,
regulations, licensing requirements or telecommunications standards; (vii)
foreign political or economic instability; (viii) changes in the availability of
transmission facilities such as domestic, international and undersea fiber optic
cable facilities or in the feasibility and expense of building or leasing such
facilities; (ix) loss of the services of key officers, such as Howard A.
Neckowitz, Chairman of the Board, President and Chief Executive Officer or Gail
E. Granton, Executive Vice President, International Business Development and
Secretary; (x) loss of a customer which provides significant revenues to the
Company; (xi) highly competitive market conditions in the industry and rapid
technological change; (xii) future management decisions regarding, for example,
acquisitions, capital expenditures or financings; (xiii) concentration of
credit risk; (xiv) natural disasters and catastrophic events including network
outages or failures; (xv) opportunities for (and problems relating from) the
acquisition of other companies or offshore facilities; (xvi) difficulties that
may be encountered in the development of bandwidth services; including
construction delays, regulatory obstacles and the availability of opportunities
for additional bandwidth purchases; (xvii) uncertainties in the development of
ethnic marketing programs and new business lines, such as the Company's
commencement of Internet operations and sales to switchless resellers relating,
for example, to the difficulty of hiring appropriate personnel and competitive
conditions; (xviii) Internet growth at slower rates than expected due to market
conditions or (xix) any failure of our computer systems or the computer systems
of third parties that are material to our operations (such as the computer
systems of service providers, suppliers and brokers) to process correctly
information relating to dates in and after the year 2000. See "Risk Factors" for
additional reasons why the forward-looking statements may not be realized. The
foregoing review of important factors, including those discussed in detail
below, should not be construed as exhaustive; the Company undertakes no
obligation to release publicly the results of any future revisions it may make
to forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
Summary
The Company is a rapidly growing facilities-based international
telecommunications carrier that provides low-cost, high quality
telecommunications services to both wholesale and retail customers worldwide.
Through its owned international network, and to a lesser degree leased capacity
and satellite circuits, the Company is able to terminate telecommunications
traffic to any country in the world that has
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direct dial service with the United States. From 1995 to 1998, the Company's
revenues increased from $76.4 million to $466.3 million, its earnings before
interest expense, income taxes, depreciation and amortization ("EBITDA")
increased from $4.6 million to $35.9 million, and its net income increased
from $1.8 million to $19.9 million.
Pacific Gateway is evolving from a wholesale provider of international
voice traffic to a diversified telecommunications company positioned to succeed
in the emerging market for high capacity bandwidth. Pacific Gateway began as an
U.S. centric supplier of wholesale service to U.S. long distance companies. To
complement its U.S. operations, and to provide differentiated sources of
revenues and profits, Pacific Gateway has added extensive offshore operations
and retail operations in the U.S. and abroad. In addition, Pacific Gateway is
now deploying its own high capacity fiber optic network that will enable the
Company to lower the costs of its own operations, to be an active player in the
convergence of voice, data and video traffic, and to provide a platform for its
own Internet operations. The Company expects to launch its Internet
subsidiary, PGE Express, in the future to provide Internet access and co-
location to the Internet community. Pacific Gateway's evolution places it firmly
within two major growth areas: global facilities-based traffic and data
transmission.
Pacific Gateway began in 1991, providing high quality, low cost
international service to the many U.S. long distance companies created by the
breakup of the Bell system. In 1997, Pacific Gateway transformed itself from a
U.S.-centric provider of wholesale service to become a global provider of
telecommunication services. Pacific Gateway has now established operations in
the United Kingdom, Germany, France, Russia, Japan, Australia and New Zealand.
Pacific Gateway was one of the first U.S. companies to obtain a facilities-based
license in Japan to provide wholesale, retail and data services. The Company
has initiated retail operations in the United States, featuring "dial around"
services, prepaid calling cards, international toll-free and travel services
and marketing to switchless resellers. The Company has created ethnic marketing
programs focused on the Filipino and Japanese communities to accelerate its
retail service offerings.
These retail programs leverage the sophisticated array of switches,
facilities and operating agreements that the Company developed for its wholesale
business. In 1998, the Company's management moved to position Pacific Gateway
to become a key player in the convergence of the Internet, voice, data and video
traffic. As the first step in this strategic initiative, the Company has begun
to assemble its own international fiber optic network so that it may become a
global supplier of high bandwidth services as well as a company preeminent in
the origination and termination of global voice traffic. In 1998, the Company
committed to purchase major interests in the Japan-U.S. and TAT-14 Cable Systems
and now is planning the procurement of the necessary backhaul and inland service
segments, both in the U.S. and abroad. The Company plans to continue to invest
in new fiber optic cable networks connecting to strategic global locations. The
Company believes that this strategy should pay off in several ways: first, it
should help the Company's wholesale and retail business by giving the Company
its own source of low cost, high quality transmission facilities. Second,
because the Company bought these interests in significant quantity and at
attractive prices, the Company has the opportunity to realize gains on the sale
of these interests. Third, the Company may be able to swap these interests for
inland service capacity in the U.S. and abroad. Fourth, this strategy should
enable Pacific Gateway to answer the call of Internet Service Providers ("ISPs")
for global bandwidth services able to accommodate the exploding popularity of
the Internet. Finally, and no less important, the Company's commitment to build
and operate its own global fiber optic network will serve as an ideal platform
for the Company's own Internet operations. The Company's Internet subsidiary,
PGE Express, will serve the Internet community by providing co-location of
facilities and access to Pacific Gateway's state-of-the-art global network.
Business Overview
The Company commenced operations in 1991 to provide international switched
services to the numerous long distance carriers created by the deregulation of
the U.S. telephone industry. Since then, as a strategic response to regulatory
and technological developments, the Company has undertaken three
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strategic initiatives. First, as foreign countries have followed the lead of
the U.S. in liberalizing telecommunications regulation, the Company has
initiated operations offshore to provide wholesale and retail service. Second,
in response to technological innovation and consumer demand, the Company is
entering the market for emerging and value-added services. Third, the Company
is positioning itself to become a global player in the burgeoning market for
high capacity bandwidth and Internet services. To accelerate the growth of all
of its business lines, the Company may consider acquisition possibilities and
expects to increase its purchases and construction of network so that the
Company will be positioned to meet the emerging demand for higher bandwidth
services created by the advent of the Internet and future technological
developments. At December 31, 1998, the Company provided international
telecommunication services to approximately 163 customers worldwide, excluding
U.S. retail customers, including all of the largest U.S.-based long distance
carriers.
The Company's U.S. wholesale operations primarily serve large U.S.-based
global carriers that seek competitive rates and high quality overflow line
capacity, as well as small and medium-sized long distance companies that are
unable to invest in their own international transmission facilities. For the
year ended December 31, 1998, U.S. wholesale operations represented
approximately 84% of the Company's revenues. Although the Company believes that
its U.S. wholesale operations will continue to grow, it expects that these
operations will contribute a declining percentage of its revenues as the Company
continues to expand into foreign markets and emerging and value-added services.
The Company's offshore operations provide foreign originating switched
services to wholesale and retail customers located outside the U.S. The Company
has installed switching facilities in the United Kingdom, Russia, Japan and New
Zealand. In addition, the Company derives revenue by terminating traffic that
originates in Germany, France and Australia. For the year ended December 31,
1998, approximately 12% of the Company's revenues were generated by its offshore
operations. The Company expects to continue to expand to additional locations
that begin to liberalize and become competitive. The Company anticipates that
these operations will constitute an increasing percentage of its revenues.
As part of its initiative to focus on emerging and value-added services,
the Company has begun to market its international long distance services
directly to certain retail customers in the United States and overseas. The
Company has ethnic marketing programs to target the Filipino and Japanese
markets and, beginning in the first quarter of 1999, the Chinese and Vietnamese
markets. The Company plans to expand its ethnic marketing program to additional
ethnic communities in 1999. In addition to ethnic marketing, the Company
provides other value-added services, including global prepaid card services
through its subsidiary, Global Time. The Company has begun trials of voice over
IP services and offers dial around services and international 800 services. The
Company has formed a new subsidiary, PGE Express, which plans to provide
services to the Internet community, including Internet connectivity and co-
location, to a wide-range of Internet content providers, web hosting companies
and Internet service providers. For the year ended December 31, 1998, value-
added services contributed 4% to the Company's revenues. The Company believes
that growth in the demand for these higher-margin services will translate into
increased revenues in the future.
The Company has partial ownership interests in 19 digital undersea fiber
optic cable systems in the Atlantic, Pacific and Caribbean regions and operating
agreements that provide for the exchange of traffic with foreign carriers. In
1998, the Company committed to invest in two new undersea fiber optic cable
construction projects: the Japan-U.S. Cable Network, which will connect the U.S.
with Japan, and the TAT-14 Cable Network, which will connect the United States
with the United Kingdom, France, Germany, the Netherlands and Denmark. Both
cable projects are expected to be in operation in 2000. The Company may use
this bandwidth capacity for its own services or it may offer to sell bandwidth
capacity for cash, swap bandwidth capacity for other system needs such as
switching capabilities or capacity in other cable systems, or use bandwidth
capacity as an investment tool for bandwidth intensive enterprises.
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In addition, the Company believes that its bandwidth capacity will be
instrumental in the development and success of its own Internet operations. The
Company expects that its bandwidth and Internet operations will become its
fourth business segment.
The Company's expanding business lines and network enable it to exploit
major developments in the international telecommunications industry. Firstly,
the Company is positioning itself to take advantage of the rapid growth of the
Internet, which is emerging as a global medium for communications and commerce.
The Company expects the demand for international Internet services to grow
exponentially as a result of many factors including increased use of personal
computers, improvements in networking, increased network applications, emerging
technologies which make use of the Internet and easier, faster and cheaper
Internet access. The Company is poised to develop opportunities in this area
through its investment in high capacity bandwidth. In addition, the Company is
launching a new subsidiary, PGE Express, which plans to focus on Internet
services. Second, recent regulatory developments, including an agreement (the
"WTO Agreement") entered into by over 60 countries under the auspices of the
World Trade Organization (the "WTO") and regulations promulgated by the Federal
Communications Commission ("FCC"), have opened international telecommunications
markets to competition and created new opportunities for the Company. The
Company believes that these developments will increase the number of foreign
carriers and the demand for the Company's U.S. wholesale and offshore services.
In addition, these developments should decrease the Company's termination costs
and improve profitability by creating alternative foreign carriers to terminate
calls at reduced rates. Third, the international telecommunications industry is
expected to experience considerable growth in the foreseeable future. The
Company believes that its recent strategic initiatives enable it to capture
opportunities for revenue expansion that arise from the emergence of the
Internet, the continuing deregulation and the growth of international
telecommunications markets.
Industry Background
The international telecommunications market consists of all calls that
originate in one country and terminate in another. This market can be divided
into two major segments: the U.S.-originated international market (the "U.S.-
Originated Market"), consisting of all international calls which either
originate or terminate in the United States, and the overseas-originated
international market (the "Overseas-Originated Market"), consisting of calls
between countries other than the United States. This industry is undergoing a
period of fundamental change that has resulted in substantial growth in
international telecommunications traffic. According to the FCC, the U.S.-
Originated Market grew at an annual rate of 18.2% from $19.2 billion to $22.7
billion in 1997.
The 1984 deregulation of the U.S. telecommunications industry resulted in
the establishment of numerous long distance telecommunication companies. To be
successful, these start-up carriers needed to offer a full range of services to
their customers, including international long distance. Because most of these
carriers did not have the capital resources necessary to invest in international
facilities, new carriers, such as the Company, emerged to meet the increased
demand for affordable international bandwidth.
Deregulation and privatization of foreign markets is also presenting
opportunities for long distance carriers overseas. By eroding the traditional
monopolies held by single national providers, many of which are wholly or
partially government owned, deregulation is allowing new carriers to emerge in
foreign markets and providing U.S.-based providers, such as the Company, the
opportunity to negotiate more favorable agreements with foreign providers. In
addition, deregulation in certain foreign countries is enabling U.S.-based
providers to establish local switching and transmission facilities in order to
terminate their own traffic and to carry international long distance traffic
originated in that country. The Company believes that the growth in traffic
originated in markets outside of the U.S. will be higher than the growth in
traffic originated within the U.S. due to recent deregulation in many foreign
markets, relative economic growth rates and increasing access to
telecommunications facilities in emerging markets.
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In February 1997, over 60 countries signed the WTO Agreement on basic
telecommunications services under the auspices of the WTO, which became
effective February 5, 1998. Under the WTO Agreement, countries committed to
open markets to competition in telecommunications services, improve foreign
investment opportunities in the telecommunications industry and adopt pro-
competitive regulatory principles. Although the Company is unable to predict
the exact effects this agreement will have, it believes the WTO Agreement will
provide the Company with lower access costs and an expanded market potential.
The Company believes that a number of trends in the international
telecommunications market will continue to drive growth in international
transmission usage. These trends include the entry of new telecommunications
providers, lower retail rates caused by reductions in domestic access charges
and international settlement rates, growth in the number of telephones in
service internationally, the proliferation of facsimile, cellular telephone and
paging communications, and growth associated with data transmissions and the use
of the Internet and other new technologies. The Company also expects growth in
the market for emerging and value-added services, such as enhanced facsimile
service, video conferencing, and virtual private network services as carriers
respond to the challenges presented by the convergence of voice and data
telecommunications technologies.
Services
The Company's operations comprise three lines of business: U.S. wholesale
operations, offshore operations, and emerging and value-added services. The
Company provides these services through its network of switching facilities
(located either in the U.S. or offshore) and digital undersea fiber optic cables
and to a lesser degree through leased capacity and satellite circuits. Through
these facilities and its operating agreements with foreign carriers, the Company
can deliver traffic to or between all countries in the world that have direct
dial service with the United States. As of December 31, 1998, the Company had
44 operating agreements with foreign carriers in 28 countries. In the future,
the Company will also provide high bandwidth services as a separate line of
business.
As the following diagram illustrates, a typical international telephone
call that originates in the U.S. first travels through the local carrier's
switched network to the caller's domestic long distance carrier. The domestic
long distance carrier then carries the call to an international gateway switch.
An international carrier, such as the Company, picks up the call at its gateway
switch and sends it through a digital undersea fiber optic cable or satellite
circuit to the corresponding international gateway switch operated by an
international carrier in the destination country. The long distance carrier in
that country then routes the call to its customer through the domestic telephone
network. Foreign-originated traffic is routed back to the United States in a
similar manner.
[INTERNATIONAL SWITCHED SERVICES CHART]
U.S. Wholesale Operations
International Switched Services. The Company's international switched
services consist of international switched calls that either originate in the
U.S. or constitute return traffic to the U.S. from foreign long-distance
carriers. Revenues from international switched services are derived from
country-specific, usage-sensitive rates charged to the Company's carrier
customers and return traffic from its foreign partners. In the U.S., the
Company operates international gateway switches in Los Angeles, New York and
Dallas. Traffic to Asia and the Pacific Rim generally is routed via the Los
Angeles gateway, traffic to Europe and Latin America generally is routed via the
New York gateway and traffic to Mexico generally is routed via the Dallas
gateway. U.S. wholesale international switched services represented
approximately 81.3%, 91.1% and 91.6% of the Company's revenues in 1998, 1997 and
1996, respectively.
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Domestic Switched Services. The Company's domestic switched services
consist of switched long distance calls that originate and terminate within the
United States. The Company's originating network, which provides access and
egress to local network providers, extends to geographical areas around its
switching facilities in Los Angeles (serving most major metropolitan areas in
California, Arizona and Nevada), New York (serving selected metropolitan
locations in New York, Washington, D.C., Massachusetts, Pennsylvania,
Connecticut, New Jersey and Virginia) and Dallas (serving metropolitan areas in
Texas). The Company provides domestic switched services as a cost-effective
means to terminate its return traffic in the foregoing areas and to offer
services to U.S.-based long distance resellers that do not own or lease
switching facilities ("switchless resellers"). The Company inaugurated a
switchless resale marketing program in December 1998. The Company believes
switchless resale is an area with growth potential. Domestic switched services
accounted for approximately 2.5%, 2.6% and 7.4% of the Company's total revenues
in 1998, 1997 and 1996, respectively.
International Private Line Services. The Company provides dedicated point-
to-point connections (those that do not use a public switched network) between
U.S. locations and foreign locations on a selective basis to certain carriers to
help them meet the needs of their end-users. Typical end-users are
multinational corporations or government agencies that have a high volume of
voice and data communications between two or more international locations. For
example, a typical private line would connect the New York and London branches
of an international bank. International private line services represented less
than 1% of the Company's revenues in 1998, 1997 and 1996.
Offshore Operations
The Company's offshore operations have grown as a direct result of the
increased volume of international telecommunications traffic and the
deregulation of telecommunications markets in many foreign countries. Revenues
from the Company's offshore operations are derived from country-specific, usage-
sensitive rates charged to the Company's carrier customers and traffic
terminated in its international switching facilities. The Company has switching
facilities in the United Kingdom, Russia, Japan and New Zealand. In addition,
the Company derives revenues from traffic originating in Germany, France and
Australia.
Although the Company's extensive international network enables it to
compete in numerous foreign markets, it is focusing its strategy on developing a
significant presence in a defined set of geographical routes -- particularly in
Europe, Latin America, Asia and the Pacific Rim -- where it believes it has
either competitive advantages through strong relationships with foreign partners
or the opportunity to gain market share and increase its volume of higher-
margin, value-added services. The Company is also developing switching sites in
Germany and Australia with additional sites expected in the near future. The
Company expects to expand its offshore services offered to include retail
prepaid calling cards enabling it to gain access to the higher margin retail
traffic in these offshore markets.
Offshore operations accounted for approximately 12.0% and 5.9% of the
Company's total revenues in 1998 and 1997, respectively. The Company did not
have offshore operations in 1996.
Emerging and Value-Added Services
In response to technological innovations and consumer demand, the Company
has recently begun broadening its focus to include a variety of emerging and
value-added services to retail and wholesale customers.
Emerging Services. The Company is using its existing network and cost
structure to provide international long distance services to certain ethnic
retail markets. In addition, the Company and Globe Telecom formed a joint
venture, PinTouch, to market international long distance services to the
Filipino-American community. The Company also has ethnic marketing arrangements
with the Japanese-American
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community. During the first quarter of 1999, the Company began marketing to
Chinese and Vietnamese communities. The Company expects to continue to expand to
new ethnic markets in the U.S. and abroad where its wholesale operations provide
a competitive cost structure.
Value-added Services. Value-added services, which the Company provides to
its carrier customers, currently include international toll-free service
(available in certain countries), global prepaid card services, offered through
its subsidiary, Global Time, dial around services and, on a trial basis, voice
transmissions over the Internet. By providing such services, the Company
enables its carrier customers to offer a broader range of international services
to their end-user customers, which the Company expects will stimulate additional
higher margin international traffic over its network.
In the aggregate, emerging and value-added services accounted for 4.2% of
the Company's revenues in 1998 and less than 1% of the Company's revenues in
1997 and 1996.
Bandwidth Services. In 1998, the Company committed to invest approximately
$156 million in undersea fiber optic cable construction commitments, which will
substantially increase the Company's high quality bandwidth capacity. In
particular, the Company committed to invest $86 million in the Japan-U.S. Cable
Network, an undersea cable system connecting Japan and the United States. This
system is initially planned to operate at 80 gigabits per second and is
ultimately expandable to 640 gigabits per second. The Company will initially
have 40 STM-1's on this system, expandable to 300 STM-1's. In addition, the
Company made a $70 million commitment on the TAT-14 cable network, which will
connect the United States with the UK, France, Germany, the Netherlands and
Denmark. This system, using Synchronous Digital Hierarchy (SDH) technology is
planned to operate at 640 gigabits per second. Both of these cable projects are
expected to become operational during 2000.
The Company has formed a bandwidth sales group whose mission is to
capitalize on the opportunities available to the Company as a result of the
Company's recent investments in undersea cable projects such as the Japan-U.S.
and TAT-14 undersea cable projects. Along with providing cost efficiencies for
existing switching operations, the Company intends to market bandwidth capacity
as well as use some of the new bandwidth capacity for its own Internet and
multimedia applications, such as videoconferencing and distance learning. The
Company may also swap bandwidth capacity for switching capabilities and use some
of the capacity as an investment tool for bandwidth intensive enterprises. The
Company expects that bandwidth services will become a separate operating segment
for financial reporting purposes.
Sales and Marketing
The Company sells its services to long distance international
telecommunications companies, foreign partners and retail customers. At
December 31, 1998, the Company had 44 operating agreements and approximately 163
customers worldwide, excluding U.S. retail customers, including all the largest
U.S.-based long distance carriers.
The Company believes that the principal reasons its customers select it to
carry their international traffic are (i) the Company's reputation for operating
a state-of-the-art network at rates that are comparable to or lower than its
competitors and (ii) the Company's size, which enables its experienced sales and
operating personnel to tailor cost-effective telecommunications services to meet
customers' needs and to provide highly responsive, flexible customer solutions.
U.S. Wholesale Operations
The Company's target customer base includes the more than 200 U.S.-based
long distance carriers with annual revenues of $50 million to $2 billion. The
Company focuses its U.S. wholesale marketing efforts primarily on those large
U.S.-based long distance carriers that originate international traffic but do
not have operating agreements with foreign carriers to terminate the traffic;
however, the Company also
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markets its services to small and medium-sized carriers that are unable to
invest in their own international transmission facilities. In addition,
international carriers with operating agreements may use the services of other
international carriers, such as the Company, for overflow traffic or on routes
with smaller traffic volumes.
In addition, the Company's target customer base includes the foreign
telecommunications carriers with which the Company has, or proposes to have,
operating agreements. The Company's foreign partners include both post telephone
and telegraph companies, commonly known as PTTs, which may be wholly or
partially government-owned, and nondominant carriers that may have recently been
established as a result of the deregulation and privatization of foreign
telecommunications markets ("competitive carriers"). The Company believes that
many of the competitive carriers in developing countries, as well as certain
recently privatized PTTs, are likely to seek alliances, partnerships or joint
ventures with other international carriers to expand their global networks.
The Company's wholesale carrier services are generally priced at or below
the market price of the other four leading U.S. international facilities-based
carriers. The Company does not, however, offer a standard discount relative to
any particular carrier's rates, and believes that its ability to obtain traffic
from its customers does not depend upon its pricing alone.
The Company has 27 marketing and sales professionals dedicated to marketing
and maintaining its relationships with its U.S.-based carrier customers.
Marketing is typically conducted on a personalized basis. Participation at
industry conferences, referrals from other carriers and long-term relationships
are key factors in establishing the visibility, reputation and personal trust
necessary to obtain and maintain this business. The Company believes that it
has been able to compete effectively by offering more personalized service than
its competitors and the assurance of ongoing senior-level attention to each
account.
Offshore Operations
When the Company enters a new foreign market, it typically begins its
marketing efforts by building upon its contacts with U.S.-based carriers that
have operations in that foreign market. These contacts are generally very
useful in establishing relationships with the carriers in that market. As its
volume of business in the new market increases, the Company expects to build its
own local sales force. Currently, 11 sales professionals are dedicated to
marketing to the wholesale and retail markets in the UK, Germany, France,
Russia, Japan, Australia and New Zealand.
Emerging and Value-Added Services
In providing services to specific ethnic retail customers, the Company
markets to ethnic communities living in the U.S. that generate a high volume of
telephone traffic to their home country. The Company is able to utilize its
wholesale cost structure and management information systems to take advantage of
the opportunities in these markets. The Company focused on the U.S.-based
Filipino and Japanese markets in 1998. During the first quarter of 1999, the
Company has begun to market to the Chinese and Vietnamese communities. The
Company employs marketing expertise that is relevant to each of these
communities. The Company expects to begin marketing to additional communities
where the underlying cost structure and the marketing talent is available.
Customers
The Company sells to long distance international telecommunications
companies, foreign partners and retail customers. At December 31, 1998, the
Company had approximately 163 worldwide customers, excluding U.S. retail
customers, and 44 operating agreements with foreign partners. In 1998, no
customer accounted for more than 10% of the Company's revenues. For further
information regarding customers, see Note (4) entitled "Segment Data" in the
Notes to Consolidated Financial Statements included in Part II, Item 8 of this
10-K.
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Competition
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The U.S.-based international telecommunications services
market is dominated by AT&T, MCI WorldCom and Sprint. The Company also competes
with other carriers in certain markets. As the Company's network expands to
serve a broader range of customers, Pacific Gateway expects to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than the
Company. Moreover, the Company is likely to be subject to additional
competition as a result of the formation of global alliances and mergers among
the largest telecommunications carriers. Existing or planned global alliances
or combinations include Global One, AT&T/British Telecommunications plc and
Global Crossing/Frontier. The Company also faces competition from companies
offering resold international telecommunications services. The Company expects
that competition from such resellers will increase in the future in tandem with
increasing deregulation of telecommunications markets worldwide.
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. Those technologies being developed or already
introduced include satellite-based systems, such as the proposed Iridium and
GlobalStar systems, utilization of the Internet for international voice and data
communications, digital wireless communication systems such as personal
communications services and broadband multimedia applications. The Company is
unable to predict which of many possible future products 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.
Recent regulatory changes also are expected to increase competition in the
telecommunications industry. In February 1996, the Telecommunications Act of
1996 (the "Telecom Act") was adopted. The Telecom Act promotes additional
competition in the intrastate, interstate and international telecommunications
markets by both U.S.- based and foreign companies. The Telecom Act permits the
Regional Bell Operating Companies ("RBOCs") to compete in interstate and
international service. Although an RBOC currently may not offer international
securities to customers within the region where the RBOC has market power, some
RBOCs have begun to resell international services to customers outside of such
regions or through mobile telephone subsidiaries. AT&T has obtained relaxed
pricing restrictions and relief from other regulatory constraints that should
make it easier for AT&T to compete with alternative carriers such as the
Company. In addition, in February 1997, over 60 countries signed a global
agreement on telecommunications under the auspices of the WTO, which agreement
became effective in February 1998. Under the WTO Agreement, countries committed
to open markets to competition in telecommunications services, improve foreign
investment opportunities in the telecommunications industry and promote pro-
competitive regulatory principles. The FCC has adopted various rules designed
to implement the principles of the WTO Agreement. See "--Government
Regulation." The FCC also adopted streamlined license granting procedures for
carriers from WTO Agreement signatory countries, pursuant to which the FCC
granted more than 200 international applications in the first 90 days after the
streamlined procedures became effective. There can be no assurance that the
Company will be able to effectively compete in the new regulatory environment or
that these changes or other regulatory developments will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The U.S. telecommunications services industry is becoming more concentrated
as a result of mergers, acquisitions and consolidations between and among U.S.
carriers. Major mergers that have been consummated or are expected to close
soon include WorldCom/MCI, AT&T/TCI, Bell Atlantic/GTE, and
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SBC/Ameritech. Numerous other, smaller combinations have been announced or
consummated as well. The Company is unable to predict the effect of these
mergers and combinations on competition. The mergers involving WorldCom/MCI
and Bell Atlantic/GTE, which are important U.S. international carriers,
particularly will affect the Company in ways that are not clear. Consolidation
of large U.S. international carriers has the effect generally of reducing the
number of large, facilities-based carriers that compete with the Company,
while making each such competitor stronger, both financially and in the
variety of international routes covered on a facilities basis. This
consolidation could make it more difficult for the Company to compete in
providing facilities-based services. Similarly, the consolidation and
enlargement of the remaining U.S. RBOCs could make these companies more
important competitors to the Company as the RBOCs begin to offer substantially
end-to-end service between the United States and foreign destinations.
International Network
Network Facilities
The Company has successfully implemented an extensive international
facilities-based network composed of its international gateway switches and
related peripheral equipment and digital undersea fiber optic cable systems, as
well as leased cable and satellite capacity. The Company is continuing to
expand its considerable investment in telecommunications facilities so that it
may depend even less upon assets owned by others and be better able to control
quality and costs. Since the beginning of 1997, the Company more than tripled
its network infrastructure by adding switches to various offshore sites, by
expanding the capacity of its New York and Los Angeles switching facility, and
by purchasing additional capacity on undersea fiber optic cables. The Company
can provide service to any point in the world using a combination of its owned
digital undersea fiber optic network and leased cable and satellite capacity.
The Company's network employs state-of-the-art digital switching and fiber optic
technologies and is supported by comprehensive monitoring and technical
services. The Company believes that this network is fundamental to its ability
to compete successfully in the international telecommunications market and
regards its network as a significant competitive advantage that would be
expensive and time-consuming for a new entrant to replicate.
International Gateway and Domestic Switches. The Company operates
international gateway switches in the U.S in Los Angeles, New York, and Dallas
and offshore in the UK, New Zealand, Russia and Japan. U.S.-originated traffic
to Asia and the Pacific Rim generally is routed via the Los Angeles gateway,
traffic to Europe and Latin America generally is routed via the New York gateway
and traffic to Mexico generally is routed via the Dallas gateway. During 1997,
the Company installed the international gateway switches in London (to serve the
United Kingdom and Western European markets), Moscow (to serve Eastern European
markets) and Auckland (to serve the Pacific Rim). During 1998, the Company
installed its switch in Japan (to serve Japan and Asia markets).
Digital Undersea Fiber Optic Cable Systems. The Company currently has
investments in 19 digital undersea fiber optic cable systems, with an ownership
interest in each of generally less than 1%. A digital undersea fiber optic
cable system is typically owned and operated by a consortium of international
service providers that jointly commit to fund the construction and operating
costs of the cables in proportion to their ownership interests. Typically,
participation in a consortium is limited to those carriers that have the
operating authority to provide direct international service and have obtained
operating agreements with the countries served by the cables. Capacity is
usually owned by two carriers in two countries, each with ownership to the
theoretical "midpoint" of the cable. Because digital undersea fiber optic
cables typically take several years to plan and construct, carriers generally
make investments based on a forecast of anticipated traffic.
In 1998, the Company committed to invest in two new undersea fiber optic
cable construction projects: the Japan-U.S. Cable Network and the TAT-14 Cable
Network, which will connect the United States with the United Kingdom, France,
Germany, the Netherlands and Denmark. As a result of these
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investments the Company will own 240 STM-1's on these systems, increasing to
approximately 480 by 2002 (assuming upgrades), providing the Company with the
equivalent of eight OC-192 or 80 Gps of total capacity on these two systems.
Both cable projects are expected to be in operation in 2000.
The Company seeks to have ownership positions in digital undersea fiber
optic cable systems over routes where it believes its customers' demand will
justify the investment in those fixed assets. Although the Company generally
can earn a higher gross margin on traffic routed through its owned fiber optic
cable routes than on traffic routed through its leased routes, it will continue
to buy usage-sensitive transmission capacity on a per-minute basis from other
U.S. facilities-based international carriers on routes where traffic volumes are
relatively low or inconsistent, as well as to manage overflow traffic on busy
routes.
The Company does not have direct access from its gateway switches to the
digital undersea fiber optic cable heads and currently leases these facilities
from certain of its competitors.
Satellite Facilities. The Company uses leased satellite facilities for
traffic to and from countries where digital undersea fiber optic cables are not
available or cost-effective. The Company also uses leased satellite facilities
for redundancy when digital undersea cable service is temporarily interrupted.
Currently, the Company is evaluating the construction of earth station
facilities based on increasing traffic that may result in such investments being
cost-effective for the Company.
Network Monitoring and Technical Support. The Company provides its
customers with service and support, 24-hour network monitoring, trouble
reporting and response procedures, service implementation coordination, billing
assistance and problem resolution. For each customer, the Company provides a
single point of contact and accepts end-to-end responsibility for installation,
maintenance and problem resolution.
The Company generally uses redundant, highly automated state-of-the-art
telecommunications equipment in its network and has diverse alternate routes
available in case of component or facility failure. Back-up power systems and
automatic traffic re-routing enable the Company to provide a high level of
reliability for its customers. Computerized automatic network monitoring
equipment allows fast and accurate analysis and resolution of network problems.
Operating Agreements
The Company considers its operating agreements to be as vital a component
of its operations as its network facilities. The Company has entered into 44
operating agreements that provide for the exchange of traffic with foreign
carriers in 28 countries. International long distance traffic is traditionally
exchanged under switched voice bilateral operating agreements between long
distance carriers in two countries. To terminate a U.S.-originated call in
another country, a U.S.-based international carrier may have an operating
agreement with a carrier in that country or may pay for transmission service
from another carrier that has such an agreement. Typically, operating agreements
provide for the termination of traffic in, and return traffic to, the partners'
respective countries for mutual compensation through negotiated settlement
rates. Operating agreements typically provide that a foreign carrier will return
through the U.S. carrier the same percentage of total U.S. terminating traffic
as it receives from the U.S.-based carrier and also provide for network
coordination and accounting and settlement procedures. The execution of an
operating agreement between two carriers is typically accompanied by an equal
investment by both carriers in digital undersea fiber optic cable between the
two countries. Although operating agreements generally are for an unspecified
term, the Company believes that the common ownership of transmission facilities,
which are expected to have 20-year useful lives, establishes a solid foundation
for long-term relationships among international carriers.
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Billing and Management Information Systems
Accurate operation of a management information system is vital to the
Company's operations, given the high volume of transactions and the need to bill
customers accurately. The Company maintains its own staff of programming and
management information reporting personnel, as well as contract programmers
dedicated to maintaining the Company's management information system. This
system's functions include reporting on revenues, long distance service costs
and network performance, performing margin analyses and tracking foreign payment
settlements. As a result of refinements that have occurred in this system, the
Company can monitor its revenues, gross margins and net income on a daily basis.
The Company provides common data access for system users to support its customer
service, accounting and network monitoring functions.
The Company has developed its own customized billing and management
information system software to meet the needs of its customers and vendors and
to enhance the Company's ability to monitor its operations. The Company
utilizes an IBM AS400 computer system and continually upgrades and enhances the
system as computer technology advances. The Company believes these computer
systems are more than adequate to meet the needs of the Company, its customers
and its vendors.
Furthermore, to support its expansion into retail and value-added services,
the Company is refining its systems to include retail end-user billing and
accounting. In particular, the Company has recently purchased, and is
integrating into its systems, end-user software that enables the Company to add
sales and use taxes to customers' bills. Future planned additions include
software that tracks customers' credit and collections and software that would
enable the Company to accept credit-card payments.
To date, the Company has not experienced any system problem that has led to
significant delays in billing customers or disputes with its customers over
billing. The Company has separately addressed year 2000 issues, see "Risk
Factors--Year 2000 Issue "following and see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 Issue"
included in Part II, Item 7 of this 10-K.
Government Regulation
Overview
The Company's businesses are heavily regulated. The FCC exercises
authority over all interstate and international facilities-based and resale
services offered by the Company. Services that originate and terminate within
the same state, also known as intrastate services, are regulated by state
regulatory commissions. The Company also may be subject to regulation in
foreign countries in connection with certain business activities. For example,
the Company's use of transit agreements or arrangements, if any, may be affected
by regulations in either the transited or terminating foreign jurisdiction.
Federal Regulation
General Requirements. The Company must comply with the requirements of
common carriage under the Communications Act of 1934 (the "Communications Act"),
as amended by the Telecom Act, including the offering of service on a non-
discriminatory basis at just and reasonable rates, and obtaining FCC approval
prior to most assignments of authorizations or any transfer of de jure or de
facto control of the Company.
The FCC has established different levels of regulation for dominant and
non-dominant carriers. The Company is classified as a non-dominant carrier for
both domestic and international service. Under the Communications Act and the
FCC's rules, all international carriers, including the Company, are
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required to obtain authority under Section 214 of the Communications Act prior
to initiating international common carrier services and must file and maintain
tariffs containing the rates, terms and conditions applicable to their
services. The FCC has streamlined its regulation of non-dominant international
carriers to provide that these tariffs and any revisions thereto are effective
upon one day's notice in lieu of the previous 14-day notice period. The
Company has filed international tariffs (for switched and private line
services) with the FCC. Nevertheless, an otherwise non-dominant U.S.-based
carrier may be subject to dominant carrier regulation on a specific
international route if it is affiliated with a foreign carrier with market
power operating at the foreign point. The Company is not subject to dominant
carrier treatment on any route.
Domestic interstate common carriers such as the Company are not required to
obtain Section 214 or other authority from the FCC for the provision of domestic
interstate telecommunications services. Domestic interstate carriers must,
however, file and maintain tariffs with the FCC containing the specific rates,
terms and conditions applicable to their services. These tariffs are effective
upon one day's notice. The Company has filed a domestic tariff with the FCC.
In late 1996, the FCC implemented significant changes in its tariff
requirements. Exercising forbearance authority granted to it by the Telecom
Act, the FCC ruled that interexchange carriers must cancel their tariffs for
domestic interstate interexchange services. In August 1997, the FCC affirmed its
decision to end tariff filing requirements for domestic interstate long distance
services provided by non-dominant carriers. The FCC also eliminated the
requirement that non-dominant long distance carriers make publicly available
information on rates and terms of their products. The detariffing order has
been stayed by the U.S. Court of Appeals for the District of Columbia, and the
order on reconsideration also is stayed until the Court issues a decision. It
is not known when the Court of Appeals will issue a decision. On March 18,
1999, the FCC adopted an order that would permit the alternative of posting
rates on the carrier's website. This order will not become effective until the
Court affirm's the FCC's mandatory detariffing scheme.
International Services. The Company must have Section 214 facilities-based
authority to offer international services via satellites and undersea fiber
optic cables. Section 214 resale authority is required to resell international
services. The Company has obtained global Section 214 facilities-based and
resale authority.
The Company must conduct its international business in compliance with the
FCC's international settlements policy. The international settlements policy
establishes the permissible boundaries for U.S.-based carriers and their foreign
correspondents to exchange traffic and settle the cost of terminating each
other's traffic over their respective networks. The precise terms of settlement
are established in a correspondent agreement, also referred to as an operating
agreement. Among other terms, the operating agreement establishes the types of
service covered by the agreement, the division of revenues between the carrier
that bills for the call and the carrier that terminates the call at the other
end, the frequency of settlements (i.e. monthly or quarterly), the currency in
which payments will be made, the formula for calculating traffic flows between
countries, technical standards, procedures for the settlement of disputes, the
effective date of the agreement and the term of the agreement. The Company may
provide services over international private lines without complying with the
international settlements policy, but only between the United States and
countries specifically approved by the FCC for this activity.
To promote competition in the international telecommunications market, in
November 1996, the FCC issued a new international settlement order, which
provides international carriers more flexibility in negotiating operating
agreements. Under the FCC's new international settlement order, U.S.-based
carriers can apply for waivers of the FCC's international settlements policy.
Such waivers, if granted, would allow carriers to negotiate more flexible
operating agreements that, for example, allow them to accept greater than a
proportional share of return traffic. When it implemented the WTO Agreement,
(see below) the FCC adopted a rebuttable presumption that flexibility is
permitted for WTO member countries. The FCC has recently proposed to cease
regulation of settlement rates between U.S. carriers and WTO Carriers
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(defined below) that do not have market power. Although the Company is unable
to predict exactly how it will affect its international business, the new
international settlements policy may reduce international access costs and
facilitate the Company's international business.
International telecommunications service providers are required to file
copies of their contracts with other carriers, including operating agreements,
with the FCC within 30 days of execution and to obtain FCC approval of certain
of these contracts. The FCC's rules also require the Company to file
periodically a variety of reports regarding its international traffic flows and
use of international facilities. The FCC has also proposed to relax certain
reporting requirements. In addition, the FCC requires carriers to notify the
Commission 60 days prior to becoming affiliated with a foreign carrier or 30
days after acquiring a 25% or greater noncontrolling interest in a foreign
carrier. The FCC can impose dominant carrier treatment on affiliates of WTO
Carriers (defined below) with market power or restrict service of affiliates of
non-WTO carriers.
In February 1997, the United States entered in the WTO Agreement, which
seeks to open markets to competition in telecommunications services, improve
foreign investment opportunities in the telecommunications industry and promote
pro-competitive regulatory principles. FCC rules implementing the WTO Agreement
became effective February 1998.
The FCC's rules implementing the WTO Agreement facilitate the entry of
foreign carriers operating in countries that signed the WTO Agreement ("WTO
Carriers") into the United States telecommunications market. The rules replace
the effective competitive opportunities test (the "ECO Test") for entry of WTO
Carriers with streamlined procedures that presume entry is pro-competitive. The
rules similarly relax the equivalency test for WTO Carriers that seek to provide
switched services over private lines between the United States and certain WTO
member countries. In addition, the rules revise competitive safeguards to
eliminate or reduce various operating conditions and replace them with more
targeted safeguards that enhance the FCC's ability to monitor and detect anti-
competitive behavior in the United States market. The FCC has retained the
right to issue fines, require additional conditions on a grant of authority and,
if necessary, deny or rescind a grant of authority. The FCC will continue to
apply the ECO test to affiliates of non-WTO Carriers with market power.
The FCC also narrowed the "No Special Concessions" rule which generally
provides that United States carriers cannot accept benefits from foreign
carriers to which other United States carriers are not entitled. This rule
continues to apply to non-WTO Carriers. The new rule applicable to WTO Carriers
simply prohibits United States carriers from entering into exclusive
arrangements with WTO Carriers that have sufficient market power to affect
competition adversely in the United States market. To provide more certainty in
the market, the FCC adopted a rebuttable presumption that WTO Carriers with less
than 50% market share in a foreign market lack such market power. As a result,
United States carriers may enter into exclusive dealings with such WTO Carriers
involving a variety of matters, including operating agreements and
interconnection arrangements.
In addition, in 1997 the FCC revised the safeguards that apply to United
States carriers classified as dominant due to an affiliation with a foreign
carrier that has market power on the foreign end of an international route. The
rules rely on reporting requirement, rather than restrictions on carriers'
provision of service, to prevent affiliated carriers from restricting
competition in the United States. In particular, the rules replace the 14-day
advance notice tariff filing requirement with one-day advance notice requirement
and accords these tariff filings a presumption of lawfulness. The rules also
remove the prior approval requirement for circuit additions or discontinuances
on the dominant route. The rules require quarterly reports on traffic and
revenue, provisioning and maintenance, and circuit status for the dominant
carrier in order to monitor and detect anti-competitive behavior. The rules
also require a limited form of structural separation between United States
carriers and their foreign affiliates with market power. The FCC adopted a
rebuttable presumption that a foreign carrier with less than 50% market share in
the foreign market lacks market power and, therefore, its United States
affiliate should be presumptively treated as non-dominant.
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In August 1997, the FCC adopted mandatory settlement rate benchmarks for
carriers receiving traffic from or sending traffic to the United States. These
benchmarks are intended to reduce the rates that United States carriers pay
foreign carriers to terminate traffic in their home countries. The FCC
prohibits a United States carrier affiliated with a foreign carrier from
providing facilities-based service to the foreign carrier's home market until
and unless the foreign carrier has implemented a settlement rate within the
benchmark. In connection with these rules, the FCC also adopted rules that
liberalize the provision of switched services over private lines to WTO member
countries by allowing such services on routes where 50% or more of United States
billed traffic is being terminated in the foreign country at or below the
applicable settlement rate benchmark, or where the foreign country's rules
concerning the provision of international switched services over private lines
are deemed equivalent to United States rules.
The Company is unable to predict the full effect on the international
telecommunications market resulting from the WTO Agreement or the rules enacted
to implement its provisions or the establishment of mandatory settlement rate
benchmarks. These changes are expected to increase competition in the
telecommunications market. See "--Competition". These changes may result in
lower costs to the Company; however, the revenues that the Company receives from
inbound international traffic may decrease to a greater degree as a result of
increased competition. WTO Carriers with market power in their home markets may
be able to more easily offer United States and foreign customers services to the
disadvantage of United States carriers, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such services. There can be no assurance
that these events would not have a material adverse effect on the Company's
business, financial condition or results of operations.
Foreign Ownership. Under the Communications Act, no common carrier radio
license may be held by non-U.S. citizens or their representatives; foreign
governments or corporations organized under the laws of a foreign country; U.S.
corporations with more than 20% of its stock directly owned or voted by non-U.S.
citizens; or more than 25% of its stock indirectly owned or voted by aliens, in
the last instance without first obtaining FCC approval. For companies from WTO
member countries, the FCC has established an open entry standard, meaning that
the FCC presumptively will approve greater than 25% indirect ownership by a WTO
Carrier of a U.S. common carrier radio licensee subject to certain competitive
safeguards. The FCC has reserved the right in certain cases to attach
additional conditions to a grant of authority, and to deny the application in
the exceptional case in which an application poses a very high risk to
competition. For carriers from countries that are not signatory to the WTO
Agreement, the FCC will continue to apply the ECO test in deciding whether to
approve greater than 25% ownership of a radio licensee.
Federal Legislation and Implementation. The Telecom Act was adopted in
February 1996 and substantially changed the regulation of telecommunications in
the United States. The legislation is designed to promote competition in all
telecommunications markets by, among other things, permitting the FCC to relax
regulations for local exchange carriers and other telecommunications carriers
where the public interest and competition warrant. To the extent such
flexibility is provided, the Company's ability to compete for certain services
may be adversely affected.
The Telecom Act permits RBOCs to provide domestic and international long
distance services to customers located outside of the RBOCs' home regions;
permits a petitioning RBOC to provide domestic and international long distance
service to customers within its operating area on a state by state basis upon
finding by the FCC that a petitioning RBOC has satisfied certain criteria for
opening up its local exchange network to competition and that provision of long
distance services would further the public interest; and removes existing
barriers to entry into local service markets. Additionally, there were
significant changes in: the manner by which carrier-to-carrier arrangements are
regulated at the federal and state level; procedure to revise universal service
standards; and penalties for unauthorized switching of customers. The FCC has
instituted and, in most instances, completed proceedings addressing the
implementation of this legislation. The Company's business could be adversely
affected by competition from the RBOCs, which typically have greater resources
than the Company.
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In implementing the Telecom Act, the FCC established nationwide rules
designed to encourage new entrants to participate in the local services markets
through interconnection with the incumbent local exchange carriers ("ILECs"),
resale of ILECs' retail services, and use of individual and combinations of
unbundled network elements. These rules set the groundwork for the statutory
criteria governing RBOC entry into the long distance market. These rules have
been largely upheld on appeal, while certain elements were remanded to the FCC.
The Company cannot predict the ultimate outcome of the FCC's rulemaking and
possible subsequent court challenges, or the eventual effect on its businesses
or the industry in general.
The FCC has denied applications filed by Ameritech Corporation
("Ameritech"), Southwestern Bell Communications, Inc. ("SBC") and BellSouth
Corporation ("BellSouth") seeking authority to provide in-region, inter-local
access transport area ("interLATA") long distance service to Michigan, Oklahoma,
Louisiana and South Carolina, respectively. In its denial of an Ameritech
application and a BellSouth application, the FCC provided detailed guidance to
applicants regarding the obligations of the applicants, the format of future
applications, the content of future applications, and the review standards that
it will apply in evaluating any future applications. The Company cannot predict
the RBOC's willingness to abide by these FCC guidelines, or the timing or
outcome of future applications submitted to the FCC. Other RBOCs have announced
their intention to file applications at the FCC for authority to provide
interLATA services. The Company cannot predict the outcome of these proceedings.
Both US West and Ameritech entered into a "teaming arrangement" with Qwest
Communications, a domestic U.S. facilities-based carrier whereby the RBOC would
market Qwest's long distance service. AT&T and other IXCs immediately challenged
these arrangements as the unauthorized provision of long distance service by US
West and Ameritech. The FCC first ordered the defendants to cease this
arrangement pending disposition of the IXCs' complaints, and then agreed with
the IXCs and ordered permanent cessation. US West, Ameritech and Qwest have
appealed the FCC's orders. The Company cannot predict the outcome of these
appeals. Once RBOCs are approved to (or de facto) provide in-region interLATA
service, a logical extension of that service might be to also provide
international services. To the extent that the RBOCs enter the international
long distance business, they could become major competitors of the Company. It
is also possible that they could become customers of the Company's wholesale
business although there is no assurance that this would happen.
The Telecom Act also imposes certain requirements on all telecommunications
carriers to facilitate the entry of new telecommunications providers. All
carriers must permit interconnection of their networks with other carriers and
may not deploy network features and functions that interfere with
interoperability. In addition, the Telecom Act requires that all
telecommunications providers contribute equitably to a Universal Service Fund,
although the FCC may exempt an interstate carrier or class of carriers if their
contribution would be minimal. A substantial portion of the Company's
international revenue may be exempt from the Universal Service Fund payment
base. There can be no assurance that the Company will be exempt from
contributing to a Universal Service Fund.
The FCC has issued orders, and is in the process of issuing further orders,
to reform Universal Service Subsidy allocations and adopted various reforms to
the existing rate structure for interstate access services provided by the ILECs
that are designed to reduce access charges, over time, to more economically
efficient levels and rate structures. It also affirmed that information services
providers (including, among others, ISPs should not be subject to existing
access charges ("ISP Exemption"). These FCC orders were upheld on appeal. Also,
several state agencies have started proceedings to address the reallocation of
implicit subsidies contained in access rates and retail service rates to state
universal service funds. Access charges are a principal component of the
Company's telecommunications expense. Pacific Gateway cannot predict whether the
FCC or state proceedings will result in a material impact upon the consolidated
financial position or the Company's profitability.
In a report to Congress in 1998, the FCC stated that providers of phone-to-
phone Internet telephony might eventually be subject to some sort of common
carrier regulation. The FCC, however, has
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not taken further action in this regard. The Company has explored the use of
Internet telephony in various forms. The Company cannot predict what effect, if
any, such FCC regulation would have, if implemented.
Certain provisions of the Telecom Act could materially affect the growth
and operation of the telecommunications industry and the services provided by
the Company. There are numerous rulemakings undertaken or to be undertaken by
the FCC which will interpret and implement the Telecom Act. Further, certain of
the Telecom Act's provisions have been and likely will be challenged in the
courts. The Company is unable to predict the outcome of such rulemakings or
litigation or the substantive effect (financial or otherwise) on the Company of
the legislation and rulemakings. There can be no assurance that current laws
and FCC and other regulation will not be amended or modified. Any such
amendment or modification could have a material adverse effect on the Company's
business, financial condition or results of operations.
State and Local Regulation
In addition to regulation by the FCC, the Company is subject to varying
degrees of state regulation relating to its provision of intrastate long
distance telecommunications services. While the FCC exercises jurisdiction over
all facilities and services of telecommunications common carriers to the extent
those facilities are used to provide domestic interstate or international
communications, state regulatory commissions retain jurisdiction over the same
facilities and services to the extent they are used to provide intrastate
communications. Most states require certification or other authorization and
the filing of tariffs to offer intrastate long distance services, and require
that common carriers use just and reasonable rates and not discriminate among
similarly situated customers. States may also require the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules. The Company may be
required by certain states to obtain prior approval from or notify the state
commission of any transfer of control, sale of assets, corporate reorganization,
issuance of stock or debt instrument and related transactions. The Company is
in the process of obtaining and has pending applications for authority to
provide intrastate long distance telecommunications services in all 50 states.
The Company would also be subject to regulation by local governments if it
installs and operates networks. Many of the regulations issued by these
regulatory bodies may change, the results of which the Company is unable to
predict.
Effect of U.S. and Foreign Laws on Certain Arrangements
Certain subsidiaries of the Company have entered into, and expect to
continue to enter into, certain termination or origination arrangements in
foreign countries that rely on private lines for the termination of U.S.
originated traffic into, or the origination of foreign-based traffic from
foreign countries. These arrangements may be viewed by foreign regulatory
agencies as "international simple resale" arrangements. The Company believes
that foreign telecommunications regulations are being liberalized and that such
arrangements are permitted in some instances and may be expressly approved by
foreign regulatory agencies in other instances. Nevertheless, at this time the
FCC or a foreign regulatory agency in a particular country may take the view
that such arrangements are not in compliance with current regulatory policies.
If the FCC finds that such arrangements violate FCC rules, the FCC could impose
a variety of sanctions on the Company or its subsidiaries, possibly including
rescission of the Company's Section 214 License.
In addition, the counterparties in these arrangements that compete with the
PTT, and their operations may not be permitted by foreign regulatory agencies
and the PTT may act unilaterally to cancel or eliminate the private line service
on which the foreign company depends. Regulatory authorities in Hong Kong and
the PTT in Mexico have acted against such arrangements. The foreign
companies with whom the Company's subsidiaries enter into such arrangements, and
perhaps the Company or its subsidiaries, could be subject to a variety of
penalties in connection with such arrangements under foreign or U.S. law,
including without limitation orders to cease operations or to limit future
operations, loss of licenses or of license opportunities, fines, seizure of
equipment and, in certain foreign jurisdictions, criminal prosecution. The
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revenue and/or profit generated under such arrangements may have become a
significant portion of the overall revenue and/or profit of the Company at the
time such arrangements are discovered and curtailed. Moreover, the discovery
of the existence of such arrangements by foreign PTTs could adversely affect
the Company's business relationships with such foreign PTTs. Any of the
developments described above (i.e., the imposition of penalties, the loss of
revenue and/or profit generated by such arrangements (whether as a result of
regulatory problems or otherwise) or the discovery of the existence of such
arrangements by foreign PTTs) could have a material adverse effect on the
Company's business, financial condition or results of operations.
Employees
As of December 31, 1998, Pacific Gateway's wholly-owned subsidiaries had
165 full-time employees, of which 18 were engaged in international relations, 69
in operations, engineering and information systems, 48 in sales, customer
support and business development and 30 in administration. The Russian
subsidiary, of which the Company owns a majority interest, has 34 employees.
The Company expects to continue to add personnel as the Company continues to
expand its operations and diversify its services.
Financial Information About Foreign And Domestic Operations And Export Sales
The Company has offshore operations in the United Kingdom, New Zealand,
Russia, Bermuda, Japan and Cyprus. For information regarding revenues by
country see Note (4) entitled "Segment Data" in the Notes to the Consolidated
Financial Statements included in Part II, Item 8 of this 10-K.
Financial Information About Industry Segments
The Company adopted Statement of Financial Accounting Standard No.131,
Disclosures about Segments of an Enterprise and Related Information (SFAS No.
131) effective January 1, 1998. SFAS No. 131 requires disclosures of a
Company's operating segments, which is defined as a segment whose operating
results are distinguishable and regularly reviewed by the Company's decision
makers. Prior to the adoption of SFAS No. 131, the Company classified all
operations under one segment, Telecommunications. By utilizing a combination of
factors, principally services provided and geographic areas, the Company has
identified three operating segments: U.S. wholesale, offshore and value-added
services. The operating results of these segments are regularly reviewed by and
integral to the Company's management and its decision-making process. Financial
information on the Company's operating segments is included in Note (4) entitled
"Segment Data" in the Notes to the Consolidated Financial Statements included in
Part II Item 8 of this 10-K.
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Risk Factors
Dependence On Operating Agreements With Foreign Partners
The Company relies on operating agreements with foreign partners to
terminate traffic in, and receive return traffic from, foreign countries. The
operating agreements are generally for an unspecified term in accordance with
industry practice, although many of the Company's foreign partners have mutual
investments with the Company in digital undersea fiber optic cable to assure
long-term telecommunications access between their respective countries and the
United States. While the Company has been successful in negotiating and
maintaining operating agreements, the trend toward deregulation of telephone
communications in many countries and a significant reduction in outgoing traffic
carried by Pacific Gateway, among other things, could cause foreign partners to
terminate their operating agreements or could cause such operating agreements to
have substantially less value to the Company. Such termination by certain of
the Company's foreign partners could have a material adverse effect on the
Company's business, financial condition or results of operations. Moreover,
there can be no assurance that the Company will be able to enter into additional
operating agreements in the future. In certain countries with either a monopoly
carrier or with very few competing carriers, it may be difficult for the Company
to negotiate operating agreements for the termination of traffic on reasonable
terms and at acceptable rates, if at all. In addition, when there are very few
carriers available to terminate traffic in a given country, the transmission
quality provided by any such carrier may be of such low quality as to be
unacceptable to the Company, in which case the Company will be required to find
other carriers willing to terminate traffic. The failure to enter into
additional operating agreements could limit the Company's ability to increase
its revenues on a profitable basis.
Managing Rapid Growth and Diversification
The Company is experiencing a period of rapid growth and diversification,
which is expected to continue to place a significant strain on the Company's
management, operational and financial resources. In order to manage its growth
effectively, the Company must continue to implement and improve its operational
and financial systems and controls, and to expand, train and manage its employee
base. Inaccuracies in the Company's forecasts of traffic could result in
insufficient or excessive transmission facilities and disproportionate fixed
expenses. The Company's overflow traffic is handled by other international
carriers to which the Company pays per minute usage fees. The Company is not
able to assure that the quality of these services is commensurate with the
transmission quality provided by the Company. Finally, the Company has entered
into a phase of rapid diversification. The Company is changing from an
international carrier that measured its revenue essentially according to the
number of "minutes" of phone traffic it terminated to a far more diverse
supplier of "bandwidth" services that expects to enter developing new areas such
as Internet services. Although these diversification efforts promise significant
returns for the Company and its shareholders, these efforts necessarily result
in the assumption of risks, such as greater demands on management time,
investment risks associated with capital expenditures for new lines of business
and increased pressures upon the Company's operations and financial systems.
The inability to attract and retain additional qualified personnel could
materially and adversely affect the Company. The Company expects that its
expansion and diversification will lead to increased financial and
administrative demands, such as increased operational complexity associated
with, expanded network facilities, administrative burdens associated with
managing an increasing number of foreign subsidiaries and relationships with
foreign partner. The Company's accounting systems and policies have been
developed as the Company has experienced significant growth. There can be no
assurance that they will be adequate to support the Company's future operations.
If the Company is not able to manage its growth effectively, maintain the
quality of its service or diversify its services quickly and effectively, the
future development of the Company's business may be adversely affected.
Risks Associated with Growth of Telecommunications Network Customer Base
Although the Company's strategy is to seek to establish significant
traffic volumes prior to investing in fixed-cost facilities, the development of
such facilities entails significant costs and prior planning, which are based in
part on the Company's expectations concerning future revenue growth and market
developments. As the Company expands its network and the volume of its network
traffic, its cost of revenues will increasingly consist of fixed costs arising
from the ownership and maintenance of its switches and undersea fiber optic
cables. While the Company believes that in the long-term these investments will
allow it to reduce its cost of service and to enhance its service offerings, in
the short-term, costs increases and a decrease in the Company's operating
margins may occur. If the Company's traffic volume were to decrease, or fail to
increase to the extent expected or necessary to make efficient use of its
network, the Company's costs as a percentage of revenue could increase
significantly, which could have a material adverse effect on the Company's
business, financial condition or results of operations.
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Risks Of International Telecommunications Business
The Company generates a significant portion of its revenues by providing
international wholesale telecommunications services to its customers. The
international nature of its operations subject the Company to certain risks,
such as changes in foreign government regulations and telecommunications
standards, licensing requirements, tariffs, taxes and other trade barriers, as
well as political and economic instability. The Company's revenues and cost of
long distance services are sensitive to changes in international settlement
rates, changes in the ratios between outgoing and incoming traffic, foreign
currency fluctuations, and import and export regulations. In addition, the
Company's business could be adversely affected by a reversal in the current
trend toward deregulation of government-owned telecommunications carriers. In
the event of any dispute arising from foreign operations, the Company may be
subject to the exclusive jurisdiction of foreign courts and may not be
successful in subjecting foreign persons or entities to the jurisdiction of the
courts in the United States. The Company also may be hindered or prevented from
enforcing its rights with respect to foreign governments because of the doctrine
of sovereign immunity. There can be no assurance that the laws, regulations or
administrative practices of foreign countries relating to the Company's ability
to do business in that country will not change. Any such change could have a
material adverse effect on the Company's business, financial condition or
results of operations. The Company will be increasingly subject to these risks
to the extent that it proceeds with the planned expansion of its international
operations.
International rates charged to customers are likely to decrease in the
future for a variety of reasons, including increased competition between
existing carriers, new entrants into niche markets and the consummation of joint
ventures among large international carriers that facilitate targeted pricing and
cost reductions. The rates that the Company can charge its customers for
international services also may decrease in the future due to the widespread
resale of international private lines to provide switched voice services, the
provision of international services via non-traditional means (including the
Internet) and the rapid growth of international circuit capacity due to the
deployment of new undersea fiber optic cables and new high capacity satellite
systems in the Atlantic, Pacific and Indian Ocean regions. There can be no
assurance that the Company will be able to increase its traffic volume or reduce
its operating costs sufficiently to offset any resulting rate decreases.
Certain subsidiaries of the Company have entered into, and expect to
continue to enter into, certain termination arrangements or origination
arrangements in foreign countries that rely on private lines for the termination
of U.S. originated traffic into, or the origination of foreign-based traffic
from foreign countries. These arrangements may be viewed by foreign regulatory
agencies as "international simple resale" arrangements. The Company believes
that foreign telecommunications regulations are being liberalized, and that in
the future such arrangements may be expressly approved by foreign regulatory
agencies. Nevertheless, the FCC or a foreign regulatory agency in a particular
country may take the view that such arrangements are not in compliance with
current regulatory policies relating to private line resale. If the FCC finds
that such arrangements violate FCC rules, the FCC could impose a variety of
sanctions on the Company, including rescission of the Company's authority to
provide international telecommunication services. In addition, the
counterparties in these arrangements compete with the PTT and their operations
may not be permitted by foreign regulatory agencies. The PTT may act
unilaterally to cancel or eliminate the private line service on which the
foreign company depends. In 1997, regulatory authorities in Hong Kong and the
PTT in Mexico have acted against such arrangements. The foreign companies with
whom the Company's subsidiaries enter into such arrangements, and perhaps the
Company or its subsidiaries, could be subject to a variety of penalties in
connection with such arrangements under foreign or U.S. law, including without
limitation orders to cease operations or to limit future operations, loss of
licenses or of license opportunities, fines, seizure of equipment and, in
certain foreign jurisdictions, criminal prosecution. The revenue and/or profit
generated under such arrangements may have become a significant portion of the
overall revenue and/or profit of the Company at the time such arrangements are
discovered and curtailed. Moreover, the discovery of the existence of such
arrangements by foreign PTTs could adversely affect the Company's business
relationships with such foreign PTTs. Any of the developments described above
(i.e., the imposition of penalties, the loss of revenue and/or profit generated
by such arrangements (whether as a result of regulatory problems or
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otherwise) or the discovery of the existence of such arrangements by foreign
PTTs) could have a material adverse effect on the Company's business,
financial condition or results of operations.
Dependence On Availability Of Transmission Facilities
The future profitability of the Company will depend in part on its ability
to obtain transmission facilities on a cost-effective basis. Because digital
undersea fiber optic cables typically take several years to plan and construct,
carriers generally make investments based on a forecast of anticipated traffic.
Therefore, the Company's operations are subject to the risk that it will not
adequately anticipate the amount of traffic over its network and may not procure
sufficient capacity to ensure the cost-effective transmission of customer
traffic. The Company has not controlled the planning or construction of digital
undersea fiber optic transmission facilities and the Company seeks access to
such facilities through partial ownership positions. If ownership positions are
not available, the Company must seek access to such facilities through lease
arrangements on negotiated terms that may vary with industry and market
conditions. The Company currently has partial ownership interests in 19 digital
undersea fiber optic cable systems. In addition, unlike AT&T, Sprint and MCI
Worldcom, the Company does not have direct access from it's gateway switches to
the digital undersea fiber optic cable heads and will be required either to
build its own "backhaul" facilities or to lease these facilities from these
competitors of the Company.
The Company has applied to obtain partial ownership interests in new
undersea fiber optic cables, which are currently under construction. These
cables are subject to regulation by the FCC, for the U.S. portion, and by
foreign authorities, for overseas termination points. Each new cable system that
lands in the United States must be approved by the FCC before the system may be
activated. The FCC has provided or will provide opportunity for public comment
on each such application. The application of at least one of the cables in which
the Company seeks an interest has been opposed by a private party pursuant to
the FCC notice and comment procedure. There is no guarantee that the FCC or
responsible foreign authorities will take favorable action with respect to the
undersea fiber optic cables in which the Company seeks an interest. In addition,
the FCC approval process may delay the date that a cable system is ready for
service. Regulatory delays regarding the commencement of the operation of a
cable could have material adverse effect on the Company's business, results of
operations, or financial conditions. There can be no assurance of continued
availability of transmission facilities or access to digital undersea fiber
optic cable heads on economically viable terms.
Competition
The international telecommunications industry is highly competitive and
subject to the introduction of new services facilitated by advances in
technology. International telecommunications providers compete on the basis of
price, customer service, transmission quality, breadth of service offerings and
value-added services. The U.S.-based international telecommunications services
market is dominated by AT&T, MCI WorldCom and Sprint. The Company also competes
with other carriers in certain markets. As the Company's network expands to
serve a broader range of customers, Pacific Gateway expects to encounter
increasing competition from these and other major domestic and international
communications companies, many of which may have significantly greater resources
and more extensive domestic and international communications networks than the
Company. Moreover, the Company is likely to be subject to additional
competition as a result of the formation of global alliances and mergers among
the largest telecommunications carriers. Existing or planned global alliances
or combinations include Global One, AT&T/British Telecommunications plc and
Global Crossing/Frontier. The Company also faces competition from companies
offering resold international telecommunications services. The Company expects
that competition from such resellers will increase in the future in tandem with
increasing deregulation of telecommunications markets worldwide.
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. Those technologies being developed or already
introduced include satellite-based systems, such as the proposed Iridium and
GlobalStar systems, utilization of the Internet for international voice and data
communications, digital wireless communication systems such as personal
communications services and broadband multimedia applications. The Company is
unable to
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predict which of many possible future products 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.
Recent regulatory changes also are expected to increase competition in the
telecommunications industry. In February 1996, the Telecom Act was adopted.
The Telecom Act promotes additional competition in the intrastate, interstate
and international telecommunications markets by both U.S.-based and foreign
companies. The Telecom Act permits the RBOCs to compete in interstate and
international service. Although an RBOC currently may not offer international
services to customers within the region where the RBOC has market power, some
RBOCs have begun to resell international services to customers outside of such
regions or through mobile telephone subsidiaries. AT&T has obtained relaxed
pricing restrictions and relief from other regulatory constraints that should
make it easier for AT&T to compete with alternative carriers such as the
Company. In addition, in February 1997, over 60 countries signed a global
agreement on telecommunications under the auspices of the WTO, which agreement
became effective in February 1998. Under the WTO Agreement, countries committed
to open markets to competition in telecommunications services, improve foreign
investment opportunities in the telecommunications industry and promote pro-
competitive regulatory principles. The FCC has adopted various rules designed
to implement the principles of the WTO Agreements. See "--Government
Regulation." The FCC also adopted streamlined license granting procedures for
carriers from WTO Agreement signatory countries, pursuant to which the FCC
granted more than 200 international applications in the first 90 days after the
streamlined procedures became effective. There can be no assurance that the
Company will be able to effectively compete in the new regulatory environment or
that these changes or other regulatory developments will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
The U.S. telecommunications services industry is becoming more concentrated
as a result of mergers, acquisitions and consolidations between and among U.S.
carriers. Major mergers that have been consummated or are expected to close
soon include WorldCom/MCI, AT&T/TCI, Bell Atlantic/GTE and SBC/Ameritech.
Numerous other, smaller combinations have been announced or consummated as well,
such as Global Grossing/Frontier. The Company is unable to predict the effect
of these mergers and combinations on competition. The mergers involving
WorldCom/MCI and Bell Atlantic/GTE, which are important U.S. international
carriers, particularly will affect the Company in ways that are not clear.
Consolidation of large U.S. international carriers has the effect generally of
reducing the number of large, facilities-based carriers that compete with the
Company, while making each such competitor stronger, both financially and in the
variety of international routes covered on a facilities basis. This
consolidation could make it more difficult for the Company to compete in
providing facilities-based services. Similarly, the consolidation and
enlargement of the remaining U.S. RBOCs could make these companies more
important competitors to the Company as the RBOCs begin to offer substantially
end-to-end service between the United States and foreign destinations.
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Risks Related to Bandwidth Capacity Investments
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost-effective completion of the
cable projects in which the Company is investing, as well as on achieving
capacity sales on the Company's portion of these systems once they become
operational, the construction or leasing of necessary "backhaul" facilities, and
the deployment of a fiber optic network of significant capacity within the
United States and foreign countries. There can be no assurance that these new
systems will be completed at all, let alone at the cost or in the time frame
currently estimated. Furthermore, there can be no assurance that the Company
will be able to sell capacity on the new cable systems in which it is investing
at optimal prices. The Company's commitment to cable investments reflects the
Company's belief in rapid growth of the demand for international
telecommunication capacity. There can be no assurance that such anticipated
demand growth will occur. The domestic fiber optic capacity, as well as undersea
fiber optic cable transmission systems, have experienced significant per circuit
price declines resulting from technological advances in fiber optic technology.
Recent technological advances have created even greater per circuit pricing
pressure in the industry. In addition, the introduction of new products or the
emergence of new technologies may enable competitors to install competing
systems at a lower per-circuit cost on routes currently targeted by the Company
or to expand capacity on existing competitive systems, potentially rendering the
Company's systems not cost competitive. The Company's cable investment also will
be subject to the risks inherent in a large-scale, complex undersea fiber optic
telecommunications system employing advanced technology, including operations,
administration, maintenance and repair. There can be no assurance of the actual
useful life of any of the systems that the Company uses and failure of any such
systems could have a material adverse effect on the Company's business,
financial condition or results of operations.
Risk from Proposed Internet Operations
The Company's success in launching Internet operations will depend on
several factors including finding the right personnel to manage the operations;
the Company's ability to compete successfully in the Internet marketplace where
competition already is intense; the Company's ability to win customers from
established vendors; and growth in the Internet in accordance with the Company's
expectations. There can be no assurances that the Company will be able to
successfully enter the Internet marketplace. Failure of the Company to do so
could have a material adverse effect on the Company's diversification strategy,
as well as on its business, financial condition or result of operations.
Dependence On Key Personnel
The Company is dependent on the efforts of certain key personnel to
successfully operate its business. These personnel include Howard A.
Neckowitz, Chairman of the Board, President and Chief Executive Officer; Gail E.
Granton, Executive Vice President, International Business Development and
Secretary; Ronald D. Anderson, Vice President, Operations and Engineering;
Robert F. Craver, Senior Vice President, International Relations; Fred A.
Weismiller, Executive Vice President, International Marketing; Thomas J. Murphy,
Executive Vice President of Global Networks and Multimedia Services and Sandra
D. Grey, Chief Financial Officer and Vice President, Finance, as well as a group
of employees with long-standing industry relationships and technical knowledge
of the Company's operations. The loss of the services of one or more of these
individuals could materially and adversely affect the business of the Company
and its future prospects. The Company does have employment agreements with
certain of these personnel but does not maintain key person life insurance on
any of its officers or employees. The Company's future success will also depend
on its ability to attract and retain additional management, technical and sales
personnel required in connection with the growth and development of its
business.
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Capital Expenditures; Potential Need For Additional Financing
The facilities-based telecommunications industry requires substantial
capital investment in switching and peripheral equipment and digital undersea
fiber optic cables. Growth in the number of minutes transmitted, international
locations and customers served by the Company will require additional investment
in equipment and facilities. Moreover, the Company's diversification strategy
will significantly increase the Company's capital requirements. In particular,
in 1998, the Company incurred commitments of approximately $168 million to
purchase interests in the Japan-U.S. and TAT-14 undersea cable systems. To
fully exploit the potential of these investments, the Company is planning
additional investments in related "backhaul" facilities and bandwidth capacity
located in the United States and Europe. The Company has obtained a commitment
letter from Salomon Brothers Holding Company, Inc. and Goldman Sachs Credit
Partners L.P. for a $200 million credit facility, with the ability to add an
additional $100 million of bank debt. While the Company believes that its
existing and anticipated sources of liquidity should be sufficient to fund the
capital requirements of its current business for the foreseeable future, certain
events may occur that would require the Company to obtain additional financing
which could take the form of the public sale of debt or equity securities. Such
events could include acquisitions, the decision to expand investment in
facilities, faster than expected growth or lower than anticipated funds
generated from operations. There can be no assurance that the Company will be
able to raise additional financing, or, if raised, that the terms of such
financing will be favorable to the Company.
Risks Associated With Joint Ventures, Direct Investments and Acquisitions
An important component in the Company's business strategy is to expand
through joint ventures, investments and acquisitions. This growth strategy is
dependent on the continued availability of suitable strategic opportunities and
subjects the Company to certain risks. Pursuing these transactions could place
significant demands on the Company's financial and management resources and
potentially disrupt the Company's ongoing business. Transactions also may
require integration of financial and call routing systems, network and other
physical facilities and personnel. Difficulties in integration could cause
system degradation, added costs and loss of employees and customers. There can
be no assurance that the Company will be successful in overcoming these risks or
other problems in connection with future transactions. In addition, any such
transactions materially adversely affect the Company's operating results due to
dilutive issuances of securities and the incurrence of additional debt.
Government Regulation
The Company's business is heavily regulated, which in turn imposes certain
risks on the Company. See "Business-Government Regulation." The Company's
interstate and international facilities-based and resale services are subject to
regulation by the FCC, and regulations promulgated by the FCC are subject to
change in the future. The Company is also subject to regulation in foreign
countries in connection with certain of its business activities. For example,
the Company has obtained licenses in certain countries, including the United
Kingdom, Germany, France, Japan, Australia, New Zealand and Canada, and
anticipates becoming licensed in others. In addition, the Company's use of
transit agreements or arrangements, if any, may be affected by laws or
regulations in either the transited or terminating foreign jurisdiction. There
can be no assurance that foreign countries will not adopt laws or regulatory
requirements that could adversely affect the Company, or that the Company will
be able to obtain and keep required licenses and obtain reasonably-priced access
to certain markets. There can be no assurance that future regulatory, judicial
and legislative changes will not have a material adverse effect on the Company's
business, financial condition or results of operations or that regulators or
third parties will not raise issues or take enforcement actions with regard to
the Company's compliance with applicable regulations.
The telecommunications industry has recently experienced significant
regulatory changes designed to open markets to competition in telecommunications
services, improve foreign investment opportunities in the telecommunications
industry and promote pro-competitive regulatory principles. See "Business--
Government Regulation." The Company is unable to predict the full effect of
these changes on the international telecommunications market. These changes are
expected to increase competition in the
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telecommunications market. See "--Competition." These changes may result in
lower costs to the Company; however, the revenues that the Company receives
may decrease to a greater degree as a result of increased competition. For
example, WTO Carriers with market power in their home markets may be able to
more easily offer United States and foreign customers services to the
disadvantage of United States carriers, which may continue to face substantial
obstacles in obtaining from foreign governments and foreign carriers the
authority and facilities to provide such services. There can be no assurance
that these events would not have a material adverse effect on the Company's
business, financial condition or results of operations.
Foreign Ownership
Under the Communications Act, no common carrier radio license may be held
by non-U.S. citizens or their representatives; foreign governments or
corporations organized under the laws of a foreign country; U.S. corporations
with more than 20% of its stock directly owned or voted by non-U.S. citizens; or
more than 25% of its stock indirectly owned or voted by aliens, in the last
instance without first obtaining FCC approval. For WTO entities, the FCC has
established an open entry standard, meaning that the FCC presumptively will
approve greater than 25% indirect ownership by a WTO Carrier of a U.S. common
carrier radio licensee, subject to certain competitive safeguards. The FCC has
reserved the right in certain cases to attach additional conditions to a grant
of authority, and to deny the application in the exceptional case in which an
application poses a very high risk to competition. For carriers from countries
that are not signatory to the WTO Agreement, the FCC will continue to apply the
ECO test in deciding whether to approve greater than 25% ownership of an
international radio licensee.
The FCC also requires a carrier to notify the Commission if it becomes
affiliated with a foreign carrier, if it acquires greater than 25% interest in a
foreign carrier or if a foreign carrier acquires a greater than 25% interest in
the Company.
Federal Legislation and Implementation
The Telecom Act was adopted in February 1996 and substantially changed the
regulation of telecommunications in the United States. The Telecom Act permits
RBOCs to provide domestic and international long distance services to customers
located outside of the RBOCs' home regions; permits a petitioning RBOC to
provide domestic and international long distance service to customers within its
operating area on a state by state basis upon finding by the FCC that a
petitioning RBOC has satisfied certain criteria for opening up its local
exchange network to competition and that provision of long distance services
would further the public interest; and removes existing barriers to entry into
local service markets. Additionally, there were significant changes in: the
manner by which carrier-to-carrier arrangements are regulated at the federal and
state level; procedure to revise universal service standards; and penalties for
unauthorized switching of customers. The FCC has instituted and, in most
instances completed, proceedings addressing the implementation of this
legislation.
In implementing the Telecom Act, the FCC established nationwide rules
designed to encourage new entrants to participate in the local services markets
through interconnection with the incumbent local exchange carriers ("ILECs"),
resale of ILECs' retail services, and use of individual and combinations of
unbundled network elements. These rules set the groundwork for the statutory
criteria governing RBOC entry into the long distance market. These rules have
been largely upheld on appeal, while certain elements were remanded to the FCC.
The Company cannot predict the ultimate outcome of the FCC's rulemaking and
possible subsequent court challenges, or the eventual effect on its businesses
or the industry in general.
The FCC has denied applications filed by Ameritech, SBC and BellSouth
seeking authority to provide in-region, interLATA long distance service to
Michigan, Oklahoma, Louisiana and South Carolina, respectively. In its denial
of an Ameritech application and a BellSouth application, the FCC provided
detailed guidance to applicants regarding the obligations of the applicants, the
format and content of future
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applications and the review standards that it will apply in evaluating any
future applications. The Company cannot predict the RBOC's willingness to
abide by these FCC guidelines, or the timing or outcome of future applications
submitted to the FCC. Other RBOCs have announced their intention to file
applications at the FCC for authority to provide interLATA services. The
Company cannot predict the outcome of these proceedings. Both US West and
Ameritech entered into a "teaming arrangement" with Qwest Communications, a
domestic U.S. facilities-based carrier whereby the RBOC would market Qwest's
long distance service. AT&T and other IXCs immediately challenged these
arrangements as the unauthorized provision of long distance service by US West
and Ameritech. The FCC first ordered the defendants to cease this arrangement
pending disposition of the IXCs' complaints, and then agreed with the IXCs and
ordered permanent cessation. US West, Ameritech and Qwest have appealed the
FCC's orders. The Company cannot predict the outcome of these appeals. Once
RBOCs are approved to (or de facto) provide in-region interLATA service, a
logical extension of that service might be to also provide international
services. To the extent that the RBOCs enter the international long distance
business, they could become major competitors of the Company. It is also
possible that they could become customers of the Company's wholesale business,
although there is no assurance that this would happen.
The Company is subject to access charges and may be subject to Universal
Service Fund contributions on some of its reserves. See "Business--Government
Regulation." The FCC has issued orders to reform Universal Service Subsidy
allocations and adopted various reforms to the existing rate structure for
interstate access services provided by the ILECs that are designed to reduce
access charges, over time, to more economically efficient levels and rate
structures. It also affirmed that information services providers including,
among others, ISPs should not be subject to existing access charges. These FCC
orders were upheld on appeal. Also, several state agencies have started
proceedings to address the reallocation of implicit subsidies contained in
access rates and retail service rates to state universal service funds. Access
charges are a principal component of the Company's telecommunications expense.
Pacific Gateway cannot predict whether the FCC or state proceedings will result
in a material impact upon the consolidated financial position or the Company's
profitability.
In a report to Congress last year, the FCC stated that providers of phone-
to-phone Internet telephony might eventually be subject to some sort of common
carrier regulation. The FCC, however, has not taken further action in this
regard. The Company has explored the use of Internet telephony in various
forms. The Company cannot predict what effect, if any, such FCC regulation
would have, if implemented.
In February 1997, over 60 countries signed a global agreement on
telecommunications under the auspices of the WTO. The WTO Agreement, which
became effective on February 5, 1998, seeks to open markets to competition in
telecommunications services, improve foreign investment opportunities in the
telecommunications industry and promote pro-competitive regulatory principles.
The Company is unable to predict the effect the WTO Agreement will have on the
Company.
In sum, there can be no assurance that current laws and FCC and other
regulations will not be amended or modified. Any such amendment or modification
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Effects of Natural Disasters and Other Catastrophic Events; Risks of Network
Failure
The Company's business is susceptible to natural disasters and catastrophic
events such as earthquakes, fire, power outages, terrorism and war. Any system
or network failure that causes interruptions in the Company's operations could
have a material adverse effect on its business, financial condition or results
of operations. The Company's operations are dependent on its ability to
successfully expand its network and integrate new and emerging technologies and
equipment into its network, which are likely to increase the risk of system
failure and to cause strain upon the network. The Company's operations also are
dependent on the Company's protection of its hardware and other equipment from
damage from natural disasters such as fires, floods, hurricanes and earthquakes,
other catastrophic events such as civil unrest, terrorism and war and other
sources of power loss and telecommunication failures. Although the Company has
taken a number of steps to prevent its network from being affected by natural
disasters, such as building redundant systems for power supply to the switching
equipment, there can be no assurance that any such systems will prevent the
Company's switches from becoming disabled in the event of a natural disaster or
catastrophic event. The failure of the Company's network, or a significant
decrease in telephone traffic resulting from effects of a natural disaster or
catastrophic event, could have a material adverse effect on the Company's
relationship with its customers and the Company's business, financial condition
or results of operations.
26
<PAGE>
Concentration Of Credit Risk
The Company's customer base includes domestic and international companies
in the telecommunications industry. The Company performs ongoing credit
evaluations of its customers but generally does not require collateral to
support accounts receivable from its customers. The Company's allowance for
doubtful accounts is based on current market conditions. Losses on
uncollectible accounts have consistently been insignificant and within
management's expectations. However, the failure of any of the Company's large
customers to remit payments to the Company due to bankruptcy or otherwise could
have a material adverse effect on the Company's business, financial condition or
results of operations.
Anti-Takeover Provisions
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of preferred stock (the "Preferred Stock") and to determine the price,
rights, preferences and privileges of those shares without any further vote or
actions by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in connection
with possible acquisitions and serving other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or may
discourage a third party from attempting to acquire, a majority of the
outstanding voting stock of the Company. The Company is subject to the anti-
takeover provisions of Section 203 of the Delaware General Corporation Law,
which prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder unless the
business combination is approved in a prescribed manner. The application of
Section 203 could have the effect of delaying or preventing a change of control
of the Company. Furthermore, certain provisions of the Company's bylaws,
including provisions that provide that the exact number of directors shall be
determined by a majority of the Board of Directors, that vacancies on the Board
of Directors may be filled only by a majority vote of the directors then in
office, though less than a quorum, and that stockholder meetings may only be
called by the Board of Directors or the Chairman of the Board, may have the
effect of delaying or preventing a change in control of the Company, which could
adversely affect the market price of the Company's Common Stock. In addition,
the Company adopted a stockholders rights plan (the "Stockholders Rights Plan")
in November 1997 and, in connection therewith, entered into a Rights Agreement
between the Company and Norwest Bank Minnesota N.A., as Rights Agent, dated as
of November 17, 1997, which will cause substantial dilution to a person or group
that attempts to acquire the Company on terms not approved by the Company's
Board of Directors. These provisions, along with the adoption of the
Stockholders Rights Plan, may discourage takeover bids for the Company. See
Note (9) in the Notes to the Consolidated Financial Statements included in Part
II, Item 8 of this 10-K for further information on the Stockholders' Rights
Plan.
Operating Results Subject to Significant Fluctuations
The Company's quarterly operating results are difficult to forecast with
any degree of accuracy because a number of factors subject these results to
significant fluctuations. As a result, the Company believes that
period-to-period comparisons of these operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
The Company's financial results include many variable factors and as such
the Company's revenues, costs and expenses have fluctuated in the past and are
likely to continue to fluctuate in the future as a result of numerous factors.
The Company's revenues in any given period can vary due to factors such as call
volume fluctuations, particularly in regions with relatively high per-minute
rates; the addition or loss of large customers, whether through competition,
merger, consolidation or otherwise; the loss of economically beneficial routing
options for the termination of the Company's traffic; financial difficulties of
large customers; pricing pressure resulting from increased competition; delays
or difficulties in the development of new products or programs or in the
integration of new management personnel and technical difficulties with or
failures of portions of the Company's network that impact the Company's ability
to provide service to or bill its customers. The Company's cost of services and
operating expenses in any given period can vary due to factors such as
fluctuation in rates charged by carriers to terminate the Company's traffic;
increases in bad debt expense and reserves; the timing of capital expenditures,
and other costs associated with acquiring or obtaining other rights to switching
and other transmission facilities; changes in the Company's sales incentive
plans; and costs associated with changes in staffing levels of sales, marketing,
technical support and administrative personnel. In addition, the Company's
operating results can vary due to factors such as changes in routing due to
variations in the quality of vendor transmission capability; loss of favorable
routing options; the amount of, and the accounting policy for, return traffic
under operating agreements; actions by domestic or foreign regulatory entities;
the level, timing and pace of the Company's expansion in international and
commercial markets; and general domestic and international economic and
political conditions. Further, a substantial portion of transmission capacity
used by the Company is obtained on a variable, per minute and short-term basis,
subjecting the Company to the possibility of unanticipated price increases and
service cancellations. Since the Company does not generally have long term
arrangements for the purchase of resale of long distance services, and since
rates fluctuate significantly over short periods of time, the Company's gross
margins also may be negatively impacted in the longer term by competitive
pricing pressures.
Possible Volatility of Stock Price
Historically, the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. Future announcements
concerning the Company or its competitors, including results of operations,
technological innovations, government regulations, proprietary rights or
significant litigation, may have a significant impact on the market price of the
Company's Common Stock. Quarterly results may vary substantially from previous
or corresponding periods, causing the Company to fall short of expectations of
public market analysts and investors for such quarter, which could have a
material adverse effect on the market price of the Company's Common Stock.
27
<PAGE>
Dividend Policy
The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The Company intends to retain
earnings to develop and expand its business.
Year 2000 Issue
The "Year 2000" issue affects computer systems, network elements, software
applications and other business systems that have time-sensitive programs that
may not properly reflect or recognize the year 2000. Because many computers and
computer applications define dates by the last two digits of the year, "00" may
not be properly identified as the year 2000. This error could result in
miscalculations or system failures. The Year 2000 issue may also affect the
systems and applications of the Company's vendors and customers. The costs
associated with testing Year 2000 readiness of the Company's internal
information systems and with testing and upgrading of equipment to ensure Year
2000 readiness are not expected to be material to the Company's business,
financial condition or results of operations. A number of the computers of the
Company's customers and vendors that interface with the Company's systems may
run on programs that are not Year 2000 ready and may disrupt the Company's
billing, credit and tracking systems. In the event that any of the Company's
significant vendors and customers do not successfully and timely achieve Year
2000 readiness and the Company is unable to replace them with new and/or
alternative vendors and customers, the Company's business or operations could be
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Part II, Item 7 of this 10-K.
ITEM 2. PROPERTIES
The principal offices of the Company are located in 36,400 square feet of
space in Burlingame, California. The Company leases this space under agreements
which expires in April 1999 and December 2003. The Company also leases a total
of approximately 40,000 square feet in the U.S. in the cities of New York, Los
Angeles and Dallas and in the United Kingdom, New Zealand, Russia, Japan and
Australia as sites for its switching facilities. In addition, the Company
leases a total of approximately 3,000 square feet of office space in Houston,
Texas, Tarzana, California and Riverside, California for its operations. The
Company believes that its facilities are adequate to support its current needs
and that suitable additional facilities will be available, when needed, on
commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently subject to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders of the Company during
the fourth fiscal quarter of the fiscal year ended December 31, 1998.
28
<PAGE>
EXECUTIVE OFFICERS
Set forth below are the names, ages, positions and certain other
information concerning the current executive officers and other key members of
management of the Company.
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Howard A. Neckowitz 45 President and Chief Executive Officer
Gail E. Granton 43 Executive Vice President, International Business
Development and Secretary
Ronald D. Anderson 42 Senior Vice President, Operations and Engineering
Robert F. Craver 56 Senior Vice President, International Relations
Fred A. Weismiller 57 Executive Vice President, International Marketing
Thomas J. Murphy 47 Executive Vice President of Global Networks and
Multimedia Services
Sandra D. Grey 32 Chief Financial Officer and Vice President, Finance
</TABLE>
MR. HOWARD A. NECKOWITZ has served as President, Chief Executive Officer and
Chairman of the Board of the Company since its inception in August 1991. Mr.
Neckowitz previously served as a consultant to major U.S. and overseas
telecommunications companies with respect to valuation and due diligence
processes for the acquisition of ongoing foreign telecommunications operations
and the start-up of competitive carrier operations for international, long
distance, local and cellular operations in various countries. Prior to his
consulting experience, Mr. Neckowitz served from 1982 to 1986 as Director,
International Services, at GTE Sprint, where he founded and developed GTE
Sprint's international services operation. In this position, he was responsible
for feasibility analyses supporting GTE Sprint's entrance into the international
switch service market. From 1977 to 1982, Mr. Neckowitz worked at AT&T in its
Overseas Department.
MS. GAIL E. GRANTON has served as Executive Vice President, International
Business Development, Secretary and a member of the Board of Directors of the
Company since its inception in August 1991. From August 1991 to August 1996,
she served as Chief Financial Officer of the Company. From 1986 to August 1991,
Ms. Granton served as a consultant to major U.S. and overseas telecommunications
companies, focusing on the valuation and due diligence process for the
acquisition of ongoing foreign telecommunication operations and the start-up of
competitive carrier operations for international, long distance, local and
cellular operation in various countries. From 1982 to 1986, Ms. Granton worked
in the International Department of GTE Sprint as a Manager, International
Business Development, reporting to Mr. Neckowitz.
MR. RONALD D. ANDERSON has served as Senior Vice President, Operations and
Engineering of the Company since December 1992. From 1986 to 1992, Mr. Anderson
served in a similar position with TRT International, Inc., an international
telecommunications carrier that has since been acquired by WorldCom. Mr.
Anderson has more than 16 years of experience in domestic and international
telecommunications engineering and operations, with significant experience in
international signaling and transmission for cable and satellite, PTT technical
interface and bilateral technical negotiations.
29
<PAGE>
MR. ROBERT F. CRAVER has served as Senior Vice President, International
Relations of the Company since February 1994. Prior to joining the Company, Mr.
Craver worked at GTE Hawaiian Telephone Co., Inc. from 1987 to 1994. While at
GTE Hawaiian Telephone, Mr. Craver directed that company's international program
as Director of International Services. Mr. Craver has also held international
positions at Sprint and AT&T, for a total of more than 21 years of experience in
the international telecommunications industry. Mr. Craver has extensive
experience in international negotiations with foreign partners and has served as
an officer of the Pacific Telecommunications Council.
MR. FRED A. WEISMILLER joined the Company in November 1994 as Executive Vice
President, International Marketing. Mr. Weismiller's responsibilities include
developing the valued-added long distance services, which can be sold to U.S.
carriers and to carriers in developing overseas markets. From 1991 to 1994, Mr.
Weismiller served as Managing Director and Executive Director, Sales and
Marketing at Telecom New Zealand. Mr. Weismiller has 26 years of experience in
international and domestic telecommunications management, including 20 years
with AT&T, where his final assignment was in Hong Kong as the Managing Director
of the AT&T Regional Technical Center from 1989 to 1990.
MR. THOMAS J. MURPHY joined the Company in August 1998 as Executive Vice
President, Global Networks and Multimedia Services. From 1993 to 1998, Mr.
Murphy worked at Cable and Wireless U.S., a telecommunications company
exclusively servicing the U.S. business market, where he served as the Chief
Operating Officer. Mr. Murphy has extensive experience in telecommunications
operational activities including facilities management, technical operations,
network operations, project management and network planning. Mr. Murphy has
worked in the telecommunications industry for over 20 years.
MS. SANDRA D. GREY has served as Chief Financial Officer of the Company since
1996. From 1989 to 1996, Ms. Grey worked for Telecom New Zealand, the primary
provider of telecommunications services in New Zealand, where she was Chief
Financial Officer of the international subsidiary. Ms. Grey has more than 8
years experience in international telecommunications.
30
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Common Shares were initially offered to the public on July 19, 1996 at
a price of $12.00 per share. The Common Shares are quoted on the NASDAQ
National Market under the symbol "PGEX."
The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Shares as reported by the NASDAQ National Market.
Such prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Quarter ended March 31, 1997 $39.250 $22.500
Quarter ended June 30, 1997 $29.000 $21.750
Quarter ended September 30, 1997 $39.375 $27.000
Quarter ended December 31, 1997 $55.125 $33.000
Quarter ended March 31, 1998 $57.875 $43.188
Quarter ended June 30, 1998 $60.750 $38.875
Quarter ended September 30, 1998 $46.750 $26.500
Quarter ended December 31, 1998 $49.250 $23.250
</TABLE>
As of March 17, 1999 there were 99 holders of record of the Common Shares
of the Company.
The Company has never paid cash dividends on its Common Stock and has no
plans to do so in the foreseeable future. The Company intends to retain
earnings to develop and expand its business.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of
the five years in the period ended December 31, 1998 have been derived from the
audited consolidated financial statements of the Company. The following data
should be read in conjunction with the consolidated financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- -----------
Statement of Operations Data: (In thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues $466,291 $298,609 $162,426 $76,416 $20,913
Cost of long distance 393,640 254,076 140,340 66,346 17,196
----------- ---------- ---------- ---------- -----------
Gross margin 72,651 44,533 22,086 10,070 3,717
Selling, general and administrative expenses 36,791 21,416 11,113 5,467 2,273
Depreciation and amortization 8,713 5,417 2,044 1,124 410
----------- ---------- ---------- ---------- -----------
Operating income 27,147 17,700 8,929 3,479 1,034
Other (income) expense, net (1,132) (126) 129 - -
Interest (income) expense, net (2,292) (2,009) (885) 538 193
----------- ---------- ---------- ---------- -----------
Income before income taxes 30,571 19,835 9,685 2,941 841
Provision for income taxes 10,635 7,338 3,877 1,155 205
----------- ---------- ---------- ---------- -----------
Net income $ 19,936 $ 12,497 $ 5,808 $ 1,786 $ 636
=========== ========== ========== ========== ===========
Net income per share - diluted $0.97 $0.64 $0.34 $0.12 $0.04
=========== ========== ========== ========== ===========
Weighted average number of common
shares outstanding-diluted 20,495 19,497 16,872 14,535 14,300
=========== ========== ========== ========== ===========
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- -----------
(In thousands except revenues per minute of use amounts)
<S> <C> <C> <C> <C> <C>
Other Operating Data:
EBITDA/(1)/ $ 35,860 $ 23,117 $ 10,973 $ 4,603 $ 1,444
Capital expenditures $ 49,611 $ 36,725 $ 18,669 $ 7,233 $ 3,745
Minutes of use 1,635,285 1,025,649 563,495 252,925 61,690
Revenues per minute use $0.29 $0.29 $0.29 $0.30 $0.34
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents $ 30,041 $ 43,850 $ 45,563 $ 1,792 $ 9
Working capital (deficit) $ (8,953) $ 14,541 $ 35,051 $ (6,412) $ 242
Total assets $ 235,637 $ 171,617 $103,816 $ 29,976 $12,301
Stockholders' equity $ 100,639 $ 76,573 $ 62,472 $ 2,891 $ 1,104
</TABLE>
_______________
/(1)/ EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization expense. EBITDA does not represent cash
flows as defined by generally accepted accounting principles and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA is a financial measure commonly used in the
Company's industry and should not be considered in isolation or as a
substitute for net income, cash from operating activities or other
measures of liquidity determined in accordance with generally accepted
accounting principles.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Note on forward-looking statements
This Annual Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements are statements other than historical information or statements of
current condition. Some forward-looking statements may be identified by use of
terms such as "believes," "anticipates," "plans," "intends" or "expects." These
forward-looking statements relate to the plans, objectives and expectations of
Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the "Company") regarding
its future operations or financial performance or related to the Company's
expectations regarding the telecommunications industry. In light of the
inherent risks and uncertainties of any forward-looking statement, the inclusion
of forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the forward-looking
statements will come true. The revenues and results of operations of the
Company, and future developments in the telecommunications industry, are
difficult to forecast and could differ materially from those projected in the
forward-looking statements as a result of numerous factors, including the
following: (i) changes in international settlement rates; (ii) changes in the
ratios between outgoing and incoming traffic and changes in expected future
revenue from delayed proportional return traffic from foreign partners pursuant
to certain operating agreements; (iii) foreign currency fluctuations; (iv)
termination of certain operating agreements or inability to enter into
additional operating agreements; (v) inaccuracies in the Company's forecasts of
traffic; (vi) changes in or developments under domestic or foreign laws,
regulations, licensing requirements or telecommunications standards; (vii)
foreign political or economic instability; (viii) changes in the availability of
transmission facilities such as domestic, international and undersea fiber optic
cable facilities or in the feasibility and expense of building or leasing such
facilities; (ix) loss of the services of key officers, such as Howard A.
Neckowitz, Chairman of the Board, President and Chief Executive Officer or Gail
E. Granton, Executive Vice President, International Business Development and
Secretary; (x) loss of a customer which provides significant revenues to the
Company; (xi) highly competitive market conditions in the industry and rapid
technological change; (xii) future management decisions regarding, for example,
acquisitions, capital expenditures or financings; (xiii) concentration of
credit risk; (xiv) natural disasters
32
<PAGE>
and catastrophic events, including network outages or failures; (xv)
opportunities for (and problems relating to) the acquisition of other companies
or offshore facilities; (xvi) difficulties that maybe encountered in the
development of bandwidth services; including construction delays, regulatory
obstacles and the availability of opportunities for additional bandwidth
services; (xvii) uncertainties in the development of ethnic marketing programs
and new business lines, such as the Company's commencement of Internet
operations and sales to switchless resellers relating, for example, to the
difficulty of hiring appropriate personnel and competitive conditions; (xviii)
Internet growth at slower rates than expected due to market conditions or (xix)
any failure of our computer systems or the computer systems of third parties
that are material to our operations (such as the computer systems of service
providers, suppliers and brokers) to process correctly information relating to
dates in and after the year 2000. See "Risk Factors" included in Part I of this
10-K for additional reasons why the forward-looking statements may not be
realized. The foregoing review of important factors, including those discussed
in detail below, should not be construed as exhaustive; the Company undertakes
no obligation to release publicly the results of any future revisions it may
make to forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Overview
Pacific Gateway was founded in August 1991 to capitalize on the significant
growth opportunities in the international telecommunications services market.
The Company operates an international network consisting of international and
domestic switching facilities in the U.S in New York, Los Angeles and Dallas and
offshore in the United Kingdom, New Zealand, Russia and Japan. The Company has
partial ownership interests in 19 digital undersea fiber optic cable systems in
the Atlantic, Pacific and Caribbean regions and operating agreements with
foreign carriers that provide for the exchange of telecommunications traffic. In
1998, the Company committed to invest in two significant undersea fiber optic
cable construction projects: the Japan-U.S. Cable network for $86 million and
the TAT-14 Cable Network for $70 million, which will connect the United States
with the UK, France, Germany, the Netherlands and Denmark. Both cables are
planned to be placed into operation in 2000. As of December 31, 1998, along
with many varied options for termination, the Company had 44 operating
agreements in 28 countries around the world, which provide for the exchange of
telecommunications traffic with these carriers.
The Company has focused its efforts in 1998 towards expanding its
operations offshore and diversifying its operations to provide value-added
services. In 1998, the Company began operations in Japan and began the
licensing, construction and pre-sales activities in offshore locations of
Germany, France and Australia. Additional offshore locations are expected to be
developed in 1999. To diversify its operations, the Company has initiated
ethnic marketing programs for the Filipino and Japanese ethnic markets to
provide international long distance services. The Company expects to continue
to diversify its markets and service offerings in 1999.
The Company's revenues are derived from three operating segments: U.S.
wholesale, offshore and value-added services. The Company's U.S. wholesale
segment provides international telecommunications services at low cost and high
quality to its target base of U.S.based carriers that originate international
traffic but do not have operating agreements with foreign carriers to terminate
the traffic. The U.S. wholesale segment also provides service to U.S.-based
international carriers, terminating their overflow telecommunications traffic or
on routes with smaller traffic volumes. The offshore segment consists
primarily of traffic originated through the Company's operations in the UK,
Germany, France, Russia, Japan, Australia and New Zealand. The Company is
diversifying its operations to include a variety of emerging and value-added
services. Revenues generated by this operating segment are from providing
international long distance services to certain ethnic retail markets,
principally the Filipino-American and Japanese-American communities. In the
first quarter of 1999, the Company expanded its ethnic retail marketing to
include the Chinese and Vietnamese communities. The Company plans to expand
its ethnic marketing program to additional ethnic communities in 1999.
The majority of the Company's costs are variable and consist of payments to
foreign partners for the termination of traffic, payments to other providers of
long distance services for transmission services, payments to domestic carriers
for the termination of overseas-originated traffic in the United States where
the Company does not
33
<PAGE>
have its own domestic network and payments to local exchange companies for
access charges for originating and terminating international and domestic
traffic. The Company enters new markets by establishing operating agreements
with foreign partners, by gaining termination arrangements with U.S. carriers or
those carriers in offshore markets who are able to terminate traffic on the
Company's behalf and through innovative termination arrangements. The Company
seeks to have ownership positions in cable systems where it believes its
customers' demand will justify the investment in those fixed assets. Although
the Company is generally able to earn a higher gross margin on traffic routed
through its owned circuits relative to leased routes, Pacific Gateway will
continue to buy usage-sensitive transmission capacity on a per minute basis from
other U.S. facilities-based international carriers on routes where traffic
volumes are relatively low or inconsistent, as well as to manage overflow
traffic on busy routes.
Under the FCC mandated operating agreement regime, the Company
traditionally agrees to send U.S.-originated traffic to its foreign partners and
its foreign partners agree to send a proportionate amount of return traffic via
the Company's network at negotiated rates. These agreements contractually
obligate the foreign partners to adhere to the policy of the FCC, whereby
traffic from the foreign country is routed to U.S.-based international carriers,
such as the Company, in the same proportion as traffic carried into the foreign
country. The Company and its foreign partners typically settle the amounts owed
to each other in cash on a net basis, subsequent to the receipt of return
traffic. The Company records the amount due to the foreign partners as an
expense in the period the Company's traffic is delivered. Where the offshore
markets have begun to liberalize, the Company has experienced the traditional
environment changing to a more cost-based termination arrangement.
The following table sets forth income statement data as a percentage of
revenues for the period indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of long distance services 84.4% 85.1% 86.4%
---------- --------- ---------
Gross margin 15.6% 14.9% 13.6%
Selling, general and administrative expenses 7.9% 7.2% 6.8%
Depreciation and amortization 1.9% 1.8% 1.3%
---------- --------- ---------
Total operating expenses 9.8% 9.0% 8.1%
---------- --------- ---------
Operating income 5.8% 5.9% 5.5%
Other (income) expense, net (0.2)% 0.0% 0.0%
Interest income (0.6)% (0.7)% (0.5)%
---------- --------- ---------
Income before income taxes 6.6% 6.6% 6.0%
Provision for income taxes 2.3% 2.4% 2.4%
---------- --------- ---------
Net income 4.3% 4.2% 3.6%
========== ========= =========
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues: Total revenues in 1998 increased 56.2% to $466.3 million from
$298.6 million in 1997. The increase was primarily the result of growth in each
of the Company's three operating segments: U.S. wholesale, offshore and value-
added. U.S. wholesale revenues grew from $279.8 million in 1997 to $390.6
million in 1998. This growth is attributed to an increase in volume of traffic
in the U.S. market and an increase in number of U.S. wholesale customers to 102
at December 31, 1998 from 90 at December 31, 1997. The Company's offshore
operations in the UK, Russia, New Zealand and Japan generated $55.7 million in
revenue for the year ended December 31, 1998 compared to $17.7 million for the
year ended December 31, 1997. Offshore operations began in 1997 with 35
customers at December 31, 1997 and grew to 61 customers at December 31, 1998.
Value-added
34
<PAGE>
services, which primarily provide international long distance services to
certain ethnic markets, contributed $20 million to revenue in 1998 compared to
$1.1 million in 1997. As a result of the growth in all three operating segments,
total minutes increased 59% from 1997 while the average price per minute charged
to customers remained unchanged at 29 cents. During 1998, the Company
experienced price declines in all operating segments; however, the Company's
average price per minute remained unchanged from 1997 because the Company was
able to expand its operations in the offshore markets and diversify its
operations to include value-added services, both of which generally offer higher
prices. The change in the terminating country mix with significantly different
rates per minute, the reduction in the rates received for the traffic
terminating in and transiting the United States and the increase in the
incidental United States domestic terminating traffic are additional factors
influencing the average price per minute.
Gross margin: Gross margin as a percentage of revenues increased from 14.9%
in 1997 to 15.6% in 1998, primarily due to the expansion of operations to
include additional offshore markets and the diversification of operations to
include value-added services. The offshore and value-added services segments
contribute to gross margin by maintaining higher prices while utilizing the
existing U.S. wholesale low-cost network and back-office systems. In addition,
in the U.S. wholesale segment, the Company generally paid lower access rates to
carriers terminating its traffic than it paid in 1997. The Company continues to
experience pressure on gross margin across all operating segments. The Company
expects its expansion and diversification plans will offset this erosion over
the long-term. The cost of long distance service increased to $393.6 million for
the year ended December 31, 1998 from $254.1 million at December 31, 1997.
Selling, general and administrative expenses: As a percentage of revenues,
selling, general and administrative expenses increased from 7.2% in 1997 to 7.9%
in 1998 and the actual expenses increased 71.8% to $36.8 million from $21.4
million. This increase was due primarily to increased personnel as the number
of employees at the Company's wholly owned subsidiaries grew to 165 from 90 at
December 31, 1997. In addition, the Company incurred increased sales commission
expenses payable to its joint venture, PinTouch Telecom, who markets the
Company's value-added services to the Filipino-American ethnic market.
Depreciation and amortization: Depreciation and amortization increased
60.9% to $8.7 million in 1998 from $5.4 million in 1997 representing 1.9% of
1998 total revenues. The increase in the dollar amount was primarily due to
depreciation of the additional transmission facilities acquired in the U.S.
wholesale and offshore operating segments during 1998.
Interest income: Interest income increased 14.1% to $2.3 million in 1998
from $2.0 million in 1997. The increase was primarily due to the Company having
on average $34 million in cash or cash equivalents during 1998 as compared to on
average $30 million in cash or cash equivalents during 1997.
Other (income) expense, net: Other income was $1.1 million in 1998 compared
to $0.1 million in 1997. The increase is related to the equity in the earnings
of the Company's unconsolidated joint venture, PinTouch Telecom.
Income tax: Income taxes increased to $10.6 million from $7.3 million,
primarily due to increased operating income. The effective tax rate was 34.8% in
1998 and 37% in 1997. The decrease in the effective tax rate was attributable to
earnings of certain non-U.S. subsidiaries, a portion of which are intended to be
reinvested indefinitely in operations outside the U.S.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenues: Total revenues in 1997 increased 83.8% to $298.6 million from
$162.4 million in 1996. The increase was primarily the result of an active U.S.
market and growth of the Company's offshore sites in the UK, Russia and New
Zealand. Sales to existing customers increased as the number of operating
agreements grew to 43 at December 31, 1997 from 30 at December 31, 1996. The
total number of customers worldwide increased to 125 at December 31, 1997 from
75 at December 31, 1996. As a result, total minutes increased 82% from 1996
while the
35
<PAGE>
average price per minute charged to customers remained unchanged at 29 cents.
During 1997, prices generally declined in the markets in which the Company
principally operates and may decline further in the future. However, the
Company's average price per minute remained unchanged from 1996 because the
Company was able to increase traffic to markets offering higher prices. The
change in the terminating country mix with significantly different rates per
minute, the reduction in the rates received for the traffic terminating in and
transiting the United States and the increase in the incidental United States
domestic terminating traffic are factors influencing the average customer price
per minute.
Gross margin: Gross margin as a percentage of revenues increased from 13.6%
in 1996 to 14.9% in 1997, primarily because the Company generally paid lower
access rates to foreign carriers than it paid in 1996 and because in certain
countries the competition for call termination has intensified and resulted in
lower termination costs for Pacific Gateway and similar companies. Because the
same rate is charged by the foreign carrier to terminate calls in its country as
the Company charges to terminate calls in the United States, declining rates
have an adverse effect on revenue. However, because the Company sends more
minutes to foreign partners than it receives from them, declining rates improve
the Company's gross margin received on its transactions with such foreign
carriers. Gross margin was 17.0% for the first half of 1997 and was 13.6% for
the second half of 1997.
Gross margin as a percentage of revenues was lower during the second half
of 1997 primarily because the Company's revenues increased significantly from
$114.6 million for the first half of 1997 to $184.0 million for the second half
of 1997. Significant revenue increases generally reduce the Company's short-term
gross margin for two reasons, which again took effect in the second half of
1997. First, to terminate the additional traffic efficiently, the Company incurs
the expense of building new facilities and reconfiguring its U.S. network.
Second, until this can be achieved, the Company has no choice but to terminate
the additional traffic over less efficient, higher cost routes. The cost of long
distance service increased to $254.1 million for the year ended December 31,
1997 from $140.3 million at December 31, 1996.
Selling, general and administrative expenses: As a percentage of revenues,
selling, general and administrative expenses increased from 6.8% in 1996 to 7.2%
in 1997 and the actual expenses increased 92.7% to $21.4 million from $11.1
million. This increase was due primarily to increased personnel as the number of
employees at the Company's wholly-owned subsidiaries grew to 90 and to 30 at its
majority owned Russian subsidiary at December 31, 1997 from 49 at December 31,
1996. In addition, the Company incurred higher sales commission expenses due to
increased revenues.
Depreciation and amortization: Depreciation and amortization increased 165%
to $5.4 million in 1997 from $2.0 million in 1996, representing 1.8% of 1997
total revenues. The increase in the dollar amount was primarily due to
depreciation of additional transmission facilities acquired during 1997.
Interest income: Interest income increased 127% to $2.0 million in 1997
from $0.9 million in 1996. The increase was primarily due to the Company having
on average $30 million in cash or cash equivalents during 1997 as compared to on
average $15 million in cash or cash equivalents during 1996.
Income tax: Income taxes increased to $7.3 million from $3.9 million,
primarily due to increased operating income. The effective tax rate was 37% in
1997 and 40% in 1996. The decrease in the effective tax rate was attributable to
earnings of certain non-U.S. subsidiaries.
Liquidity and Capital Resources
The Company has financed its rapid growth, including its capital
expenditures, through funds provided by operations and the funds from the public
offering completed in the third quarter of 1996. Due to the timing differences
in the international settlements, the Company's accounts receivable turnover
varies from its accounts payable turnover. The length of these turnovers is a
function of different timing requirements in the Company's agreements with
foreign partners. For example, the length of the Company's accounts payable
turnover is partially
36
<PAGE>
due to its accounts payable with foreign partners, which generally have 180 day
terms as a result of the six-month lag in the international settlement process.
Net cash provided by operating activities was $28.9 million for the year
ended December 31, 1998, compared to $34.2 million for the same period in 1997
and $13.9 million in 1996. The decrease in cash provided by operating activities
in 1998 was caused by cash outflows for payments of accounts payable, which were
greater due to the relative shortening of the payment process and income taxes
payable. This decrease was partially offset by greater cash generating net
income. The increase from 1996 to 1997 was primarily a result of an increase in
net income and accounts payable, which were greater than the increase in
accounts receivable.
Net cash used in investing activities increased to $52.9 million in 1998,
from $36.5 million in 1997 and $18.4 million in 1996. The 1998 expenditures were
primarily for additional transmission equipment for the U.S. wholesale domestic
switches in New York and Los Angeles as well as for the acquisition of partial
ownership interests in international fiber optic cable transmission systems.
Capital expenditures in 1997 and 1996 were also for the acquisition of ownership
interests in international fiber optic cable transmission systems and related
equipment.
Net cash provided by financing activities was $10.2 million in 1998, $0.5
million in 1997 and $48.3 million in 1996. In the fourth quarter of 1998, the
Company entered into an uncollateralized 1-year revolving line of credit of up
to $30 million with Bank of America, NT&SA and NationsBanc Montgomery LLC ("1998
Facility") and borrowed $8.7 million pursuant to this line of credit. The
proceeds were used to fund outstanding cable commitments. During the third
quarter of 1996, the Company completed an initial public offering of 6,057,050
shares of Common Stock, which provided the Company with net proceeds of
approximately $54.1 million.
At December 31, 1998, the Company had outstanding commitments of $159
million for the acquisition of additional ownership in digital undersea fiber
optic cables and network equipment. This includes the commitment to purchase
undersea fiber optic cables in the Japan-U.S. cable network for $86 million and
in the TAT-14 cable system for $70 million. The Company has used its revolving
line of credit to fund its first installment payments for these cable systems.
In addition, in the first quarter of 1999, the Company's wholly owned
subsidiary, Pacific Gateway Exchange (Bermuda) Limited, obtained a commitment
letter from Salomon Brothers Holding Company, Inc. and Goldman Sachs Credit
Partners L.P. for a $200 million credit facility, with the ability to layer an
additional $100 million of bank debt. This facility is expected to replace the
1998 facility. The proceeds will be used to fund the $156 million in cable
commitments as well as additional global network expansion and general corporate
purposes. The Company believes that existing cash balances, cash provided by
operating activities, existing lines of credit and debt commitments will be
sufficient to meet its outstanding capital commitments, current capital
expenditures and working capital needs for its expected growth in 1999.
Year 2000 Issue
The "Year 2000" issue affects the computer systems, network elements,
software applications and other business systems that have time-sensitive
programs that may not properly reflect or recognize the year 2000. Because many
computers and computer applications define dates by the last two digits of the
year, "00" may not be properly identified as the year 2000. This error could
result in miscalculations or system failures.
The Company has identified its Year 2000 risk in three categories: internal
information systems; other internal systems; and external vendor and customer
systems.
Internal information systems. The Company's internal information systems
were initially designed to be Year 2000 ready. These systems, such as the
Company's billing system, have been tested in a simulated Year 2000 environment
and were preliminarily determined to be Year 2000 ready. Additional tests will
be conducted for final determination of Year 2000 readiness by April 30, 1999.
The costs associated with testing Year 2000 readiness are not expected to be
material to the Company's business, financial condition or results of
operations.
37
<PAGE>
Other internal systems. The Company has assessed the impact of the Year
2000 on its other internal systems, primarily its telecommunications switching
equipment in the U.S. in Dallas, Los Angeles and New York and offshore in the
UK, New Zealand, Russia and Japan, and has conducted tests on such systems.
Software and hardware upgrades have been ordered for all switching equipment
that was found to be non-compliant and is expected to be in place and fully
functional by April 30, 1999. The costs associated with testing and upgrading
equipment to ensure Year 2000 readiness are not expected to be material to the
Company's business, financial condition or results of operations. The Company is
in the process of identifying and evaluating other operational systems and
applications, which we believe are not mission-critical, such as building
operations and individual personal computers used by the Company personnel.
Vendor and customer systems. The Company has sent letters and
questionnaires to its significant vendors and customers requesting a response
from those third parties on their Year 2000 readiness with respect to
information systems used by those entities which could impact business with the
Company. To the extent that responses to Year 2000 readiness are unsatisfactory,
the Company intends to identify alternative and/or new vendors and customers who
have demonstrated Year 2000 readiness. We are still awaiting responses from our
most significant vendors and customers. There is no assurance, however, that
full Year 2000 readiness will be achieved by such third parties or that the
Company will receive assurances from such third parties. In the event that any
of the Company's significant vendors and customers do not successfully and
timely achieve Year 2000 readiness, and the Company is unable to replace them
with new and/or alternative vendors and customers, the Company's business or
operations could be adversely affected.
As part of the Company's Year 2000 risk program, the Company is evaluating
scenarios that may occur as a result of the century change and anticipates
completing contingency and business continuity plans targeted at mitigating the
effects of any significant Year 2000 noncompliance by mid-1999.
Quarterly Results of Operations
The following tables set forth statement of operations data for each of the
Company's last eight calendar quarters and the percentage of the Company's
revenues represented by each line item reflected therein. This information has
been prepared on the same basis as the audited financial statements contained
herein and, in management's opinion, reflects all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended:
-------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1997 1997 1997 1997
--------- ---------- --------- ---------- --------- ---------- --------- ----------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $126,414 $124,853 $109,952 $105,072 $103,975 $79,997 $63,186 $51,451
Cost of long distance services 106,804 104,644 92,951 89,241 90,869 68,099 51,967 43,141
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Gross margin 19,610 20,209 17,001 15,831 13,106 11,898 11,219 8,310
Selling, general and
administrative expenses 10,327 11,612 7,290 7,562 6,386 5,587 5,618 3,825
Depreciation and amortization 2,395 2,209 2,146 1,963 1,702 1,595 1,267 853
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Operating income 6,888 6,388 7,565 6,306 5,018 4,716 4,334 3,632
Other (income) expense, net (14) (1,712) 496 98 204 (162) (168) -
Interest income (591) (532) (556) (613) (617) (377) (527) (488)
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Income before income taxes 7,493 8,632 7,625 6,821 5,431 5,255 5,029 4,120
Provision for income taxes 2,470 2,980 2,740 2,445 1,728 1,965 1,987 1,658
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Net income $ 5,023 $ 5,652 $ 4,885 $ 4,376 $ 3,703 $ 3,290 $ 3,042 $ 2,462
========= ========== ========= ========== ========= ========== ========= ==========
Net income per
share - diluted $0.25 $0.29 $0.25 $0.22 $0.19 $0.17 $0.16 $0.13
========= ========== ========= ========== ========= ========== ========= ==========
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
As a Percentage of Revenues for the Quarter Ended:
-------------------------------------------------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1997 1997 1997 1997
--------- ---------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of long distance services 84.5 % 83.8 % 84.5 % 84.9 % 87.4 % 85.1 % 82.2 % 83.8 %
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Gross margin 15.5 % 16.2 % 15.5 % 15.1 % 12.6 % 14.9 % 17.8 % 16.2 %
Selling, general and
administrative expenses 8.2 % 9.3 % 6.6 % 7.2 % 6.1 % 7.0 % 8.9 % 7.4 %
Depreciation and amortization 1.9 % 1.8 % 2.0 % 1.9 % 1.6 % 2.0 % 2.0 % 1.7 %
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Operating income 5.4 % 5.1 % 6.9 % 6.0 % 4.9 % 5.9 % 6.9 % 7.1 %
Other (income) expense, net - % (1.4)% 0.5 % 0.1 % 0.2 % (0.2)% (0.3)% - %
Interest income (0.5)% (0.4)% (0.5)% (0.6)% (0.6)% (0.5)% (0.8)% (0.9)%
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Income before income taxes 5.9 % 6.9 % 6.9 % 6.5 % 5.3 % 6.6 % 8.0 % 8.0 %
Provision for income taxes 2.0 % 2.4 % 2.5 % 2.3 % 1.7 % 2.5 % 3.2 % 3.2 %
--------- ---------- --------- ---------- --------- ---------- --------- ----------
Net income 3.9 % 4.5 % 4.4 % 4.2 % 3.6 % 4.1 % 4.8 % 4.8 %
========= ========== ========= ========== ========= ========== ========= ==========
</TABLE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any market risk sensitive instruments for
the years ended December 31, 1998 and 1997.
39
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT ACCOUNTANTS
February 19, 1999, except for Note 10, as to which the date is March 2, 1999
To the Board of Directors and Stockholders
of Pacific Gateway Exchange, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, cash flows and changes in
stockholders' equity present fairly, in all material respects, the financial
position of Pacific Gateway Exchange, Inc. and subsidiaries as of December 31,
1998 and 1997 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedule listed in Item 14(a) of the Form 10-K presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management: our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
40
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------------------------
1998 1997
---------------------- -----------------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 30,041 $ 43,850
Accounts receivable, net of allowance for doubtful accounts
of $4,312 in 1998 and $2,230 in 1997. 87,725 62,313
Prepaids 1,244 511
Income taxes recoverable 1,358 -
Deferred income tax 2,207 1,096
Other current assets 1,408 673
---------------------- -----------------------
Total current assets 123,983 108,443
Property and Equipment:
Undersea fiber optic cables 34,663 31,144
Long distance communications equipment 48,710 30,535
Computers and office equipment 9,352 6,343
Leasehold improvements 2,004 702
Construction in progress 13,587 966
Cable construction in progress 12,066 883
---------------------- -----------------------
120,382 70,573
Less accumulated depreciation 17,335 9,140
---------------------- -----------------------
Total property and equipment, net 103,047 61,433
Deferred income tax 78 -
Deposits and other assets 8,529 1,741
---------------------- -----------------------
Total assets $ 235,637 $ 171,617
====================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 118,303 $ 87,949
Accrued liabilities 4,193 3,733
Income taxes payable - 1,491
Line of credit 8,700 -
Current portion of capitalized lease obligations 436 216
Other liabilities 1,304 513
---------------------- -----------------------
Total current liabilities 132,936 93,902
Long-term portion of capitalized lease obligations 99 185
Deferred income tax 1,963 957
---------------------- -----------------------
Total liabilities 134,998 95,044
Commitments and contingencies (Note 5).
Stockholders' Equity:
Preferred stock, $.0001 par value, authorized
5,000,000 shares, no shares issued - -
Common stock, $.0001 par value, authorized 70,000,000,
issued 19,363,777, outstanding 19,220,217 shares
in 1998; and issued 19,216,710, outstanding
19,073,150 shares in 1997. 2 2
Additional paid in capital 65,431 60,849
Deferred compensation - restricted stock (4,618) (4,134)
Foreign currency translation 34 2
Retained earnings 40,190 20,254
Cost of common stock held in treasury,
143,560 shares in 1998 and 1997 (400) (400)
---------------------- -----------------------
Total stockholders' equity 100,639 76,573
---------------------- -----------------------
Total liabilities and stockholders' equity $ 235,637 $ 171,617
====================== =======================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
41
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
------------------- ---------------- -----------------
<S> <C> <C> <C>
Revenues $ 466,291 $ 298,609 $ 141,912
Revenues - related party - - 20,514
------------------- ---------------- -----------------
Total revenues 466,291 298,609 162,426
Cost of long distance services 393,640 254,076 140,340
------------------- ---------------- -----------------
Gross margin 72,651 44,533 22,086
Selling, general and administrative expenses 36,791 21,416 11,113
Depreciation and amortization 8,713 5,417 2,044
------------------- ---------------- -----------------
Total operating expenses 45,504 26,833 13,157
------------------- ---------------- -----------------
Operating income 27,147 17,700 8,929
Interest income (2,292) (2,009) (885)
Other (income) expense, net (1,132) (126) 129
------------------- ---------------- -----------------
Income before income taxes 30,571 19,835 9,685
Provision for income taxes 10,635 7,338 3,877
------------------- ---------------- -----------------
Net income $ 19,936 $ 12,497 $ 5,808
=================== ================ =================
Net income per share - basic $ 1.05 $ 0.66 $ 0.36
=================== ================ =================
Net income per share - diluted $ 0.97 $ 0.64 $ 0.34
=================== ================ =================
Weighted average number of common shares
outstanding - basic 19,071 18,960 16,234
=================== ================ =================
Weighted average number of common shares
outstanding - diluted 20,495 19,497 16,872
=================== ================ =================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
42
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996
-------------------- ---------------- -------------------
<S> <C> <C> <C>
Operating Activities:
Net income $ 19,936 $ 12,497 $ 5,808
Adjustments to net income:
Depreciation and amortization 8,713 5,417 2,044
Loss on sale of stock - - 129
Stock compensation expense 674 146 85
Bad debt provision 2,146 2,173 855
Equity in earnings of affiliated companies (1,499) - -
Changes in operating assets and liabilities:
Accounts receivable (27,558) (38,681) (13,421)
Accounts receivable, related party - 3,066 196
Notes and advances receivable - - 175
Prepaid expenses (733) 306 (729)
Deferred tax asset (1,189) 88 (816)
Deposits and other assets (1,830) (1,430) (107)
Accounts payable 30,322 48,309 17,053
Accrued liabilities 460 2,429 532
Federal income taxes recoverable (834) - -
Federal income taxes payable (1,491) (462) 1,758
Other liabilities 791 150 (152)
Deferred tax liability 1,006 249 488
-------------------- ---------------- -------------------
Net cash provided by operating activities 28,914 34,257 13,898
-------------------- ---------------- -------------------
Investing Activities:
Purchase of property and equipment (49,611) (36,725) (18,669)
Investment in subsidiaries and affiliates (3,314) 222 -
Other investing activities - - 274
-------------------- ---------------- -------------------
Net cash used in investing activities (52,925) (36,503) (18,395)
-------------------- ---------------- -------------------
Financing Activities:
Borrowings on revolving lines of credit 8,700 - 6,200
Repayments on revolving lines of credit - - (11,620)
Repayments on capital lease obligations (498) (209) -
Proceeds from issuance of common stock 1,157 742 55,130
Payment of issuance costs (57) - (1,042)
Payment to acquire treasury stock - - (400)
Dividends received from affiliated company 900 - -
-------------------- ---------------- -------------------
Net cash provided by financing activities 10,202 533 48,268
-------------------- ---------------- -------------------
Net (decrease) increase in cash and cash equivalents (13,809) (1,713) 43,771
Cash and cash equivalents at beginning of the period 43,850 45,563 1,792
-------------------- ---------------- -------------------
Cash and cash equivalents at end of the period $ 30,041 $ 43,850 $ 45,563
==================== ================ ===================
Supplementary Information:
Interest paid during period $ - $ - $ 276
Income taxes paid during period $ 12,067 $ 7,841 $ 2,447
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
43
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock Additional Deferred Foreign
-------------- Paid-in Compensation - Currency Retained
Shares Amount Capital Restricted Stock Translation Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 14,100 $ 1 $ 941 $ - $ - $ 1,949
Repurchase of common stock - - - - - -
Issuance of common stock,
net of $1,042 issuance
costs 4,940 1 54,087 - - -
Stock compensation expense - - 85 - - -
Net income - - - - - 5,808
-------- -------- ---------- ----------------- ------------ -----------
Balance December 31, 1996 19,040 2 55,113 - - 7,757
Stock options exercised 102 - 742 - - -
Stock compensation expense - - 146 - - -
Tax effect of stock options exercised - - 714 - - -
Issuance of restricted stock 75 - 4,134 (4,134) - -
Foreign currency translation - - - - 2 -
Net income - - - - - 12,497
-------- -------- ---------- ----------------- ------------ -----------
Balance December 31, 1997 19,217 2 60,849 (4,134) 2 20,254
Stock options exercised 89 - 1,100 - - -
Stock compensation expense - - 194 480 - -
Tax effect of stock options exercised - - 524 - - -
Issuance of restricted stock 25 - 964 (964) - -
Issuance of common stock,
for investment in company 33 - 1,800 - - -
Foreign currency translation - - - - 32 -
Net income - - - - - 19,936
-------- -------- ---------- ----------------- ------------ -----------
Balance December 31, 1998 19,364 $ 2 $ 65,431 $ (4,618) $ 34 $ 40,190
======== ======== ========== ================= ============ ===========
<CAPTION>
Treasury Stock
----------------------
Shares Amount Total
<S> <C> <C> <C>
Balance December 31, 1995 - $ - $ 2,891
Repurchase of common stock (144) (400) (400)
Issuance of common stock,
net of $1,042 issuance
costs - - 54,088
Stock compensation expense - - 85
Net income - - 5,808
--------- ---------- --------------
Balance December 31, 1996 (144) (400) 62,472
Stock options exercised - - 742
Stock compensation expense - - 146
Tax effect of stock options exercised - - 714
Issuance of restricted stock - - -
Foreign currency translation - - 2
Net income - - 12,497
--------- ---------- ---------------
Balance December 31, 1997 (144) (400) 76,573
Stock options exercised - - 1,100
Stock compensation expense - - 674
Tax effect of stock options exercised - - 524
Issuance of restricted stock - - -
Issuance of common stock,
for investment in company - - 1,800
Foreign currency translation - - 32
Net income - - 19,936
--------- ---------- ---------------
Balance December 31, 1998 (144) $ (400) $ 100,639
========= ========== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
44
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The Company and Significant Accounting Policies
Description of Business and Organization:
Pacific Gateway Exchange, Inc. ("Pacific Gateway" or the "Company"), a
Delaware corporation, owns and operates an international switched and domestic
switched telecommunications network. The operations of Pacific Gateway have
grown significantly as the result of entering into additional operating
agreements with foreign partners and marketing to certain long distance
companies in the United States which do not have their own international
network. In addition, the Company provides international long distance services
to certain ethnic retail markets, principally the Filipino-American and
Japanese-American communities.
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, changes in
government regulation, dependence on transmission facilities-based carriers and
suppliers, price competition and competition from larger industry participants.
Principles of Consolidation:
Consolidated Financial Statements include the accounts of Pacific Gateway
and majority-owned and controlled subsidiaries principally in Bermuda, the
United Kingdom, Russia, New Zealand, Australia, Japan and Cyprus. Investments
in 20% to 50%-owned companies and partnerships are accounted for on the equity
method. Intercompany transactions have been eliminated.
Foreign Currency Translation:
Assets and liabilities of operations outside the United States, for which
the functional currency is not U.S. dollars, are translated into U.S. dollars
using the exchange rate in effect at each period end. Revenues and expenses are
translated at the average exchange rate prevailing during the period. The
effects of foreign currency translation adjustments arising from differences in
exchange rates from period to period are deferred and included as a component of
"Stockholders' Equity".
For operations in highly-inflationary economies, principally in Russia,
assets and liabilities are maintained in the reporting currency, U.S. dollars.
The effects of foreign currency transactions, and of remeasuring the
financial position and results of operations in the functional currency, are
included in "Selling, general and administrative expenses."
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the dates of the financial
statements and reported amounts of revenues and expenses during the reported
periods. Actual results could differ from those estimates.
Cash and Cash Equivalents:
Cash equivalents consist primarily of money market accounts and called
bonds with original maturities of three months or less. The carrying amounts
reported in the accompanying balance sheets approximate fair market value.
45
<PAGE>
Property and Equipment:
Property and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Replacements and betterments are capitalized. Costs
incurred in connection with the construction of new property and equipment are
capitalized until the property and equipment becomes operational. The cost and
related accumulated depreciation of assets sold or retired are removed from the
account balance, and any resulting gain or loss is reflected in results of
operations. Depreciation is provided for financial reporting purposes using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Undersea fiber optic cables 20 years
Long distance communications equipment 5-7 years
Computers and office equipment 4-7 years
Leasehold improvements term of lease
</TABLE>
The Company invests in undersea fiber optic cable systems through the purchase
of indefeasible rights of user ("IRU's") or through an ownership interest in
cable construction consortia.
Long-Lived Assets:
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of, requires that long-lived assets and certain intangible assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. If undiscounted expected future cash
flows are less than the carrying value of the assets, an impairment loss is to
be recognized based on the fair value of the assets. No impairment losses have
been recognized to date.
Income Taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 has as its basic objective the
recognition of current and deferred income tax assets and liabilities based upon
all events that have been recognized in the financial statements as measured by
the provisions of the enacted tax laws.
Valuation allowances are established when necessary to reduce deferred tax
assets to the estimated amount to be realized. Income tax expense represents
the tax payable for the current period and the change during the period in the
deferred tax assets and liabilities.
Revenue Recognition:
Revenues for telecommunications services provided to customers are
recognized as services are rendered. Revenues for return traffic received
according to the terms of the Company's operating agreements with its foreign
partners are recognized as revenue as the return traffic is received.
Accounting for International Long Distance Traffic:
The Company has entered into operating agreements with 44
telecommunications carriers in 28 countries under which international long
distance traffic is both delivered and received. Under these agreements, the
foreign carriers are contractually obligated to adhere to the policy of the
Federal Communications Commission (the "FCC"), whereby traffic from the foreign
country is routed to international carriers, such as the Company, in the same
proportion as traffic carried into the country. Mutually exchanged traffic
between the Company and foreign carriers is settled through a formal settlement
policy that generally extends over a six-month period at an agreed upon rate.
The Company records the amount due to the foreign partner as an expense in the
period the traffic is delivered. Of the 44 agreements the Company had at
December 31, 1998, 18 agreements provided that the Company generally must wait
up to six months before it actually receives the proportional return traffic. In
circumstances where the Company does not receive the return traffic due from the
foreign partner at the end of the agreed-upon delayed return period, the Company
and the foreign partner may agree to a settlement which compensates the Company
for the return traffic not received, through greater return traffic in future
periods, or a reduction to the Company's current accounts payable balance.
46
<PAGE>
Fair Value of Financial Instruments:
The fair value of financial instruments, consisting of investments in cash,
cash equivalents, receivables, accounts payable and line of credit, is based on
interest rates available to the Company and comparisons to quoted prices. At
December 31, 1998 and 1997, the fair value of these financial instruments
approximates carrying value.
Concentration of Credit Risk:
Financial instruments that potentially subject the Company to concentration
of credit risk consist of cash and cash equivalents and accounts receivable.
At December 31, 1998 and 1997, the Company had bank deposits in excess of
federally insured limits of $22,891,000 and $43,650,000, respectively. The
Company's customer base includes domestic and international companies in the
telecommunications industry. The Company performs ongoing credit evaluations of
its customers but generally does not require collateral to support customer
receivables. The Company's allowance for doubtful accounts is based on current
market conditions. Losses on uncollectible accounts have consistently been
within management's expectations.
Earnings Per Share:
The Company adopted SFAS No. 128, Earnings Per Share, effective December
31, 1997. In accordance with SFAS No. 128, basic earnings per share is
calculated by dividing net income by the weighted-average number of shares
outstanding for the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of shares outstanding during
the period plus the dilutive effect of stock options determined using the
treasury stock method.
There were no adjustments to net income in the calculation of basic and
diluted earnings per share for the years ended December 31, 1998, 1997 and 1996,
respectively. The reconciliation of the weighted average shares outstanding
used in calculating basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Income Shares Per-Share
(in thousands, except per share amounts) (Numerator) (Denominator) Amount
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Basic EPS:
Income available to common stockholders $19,936 19,071 $1.05
Effect of dilutive stock options 1,424
-------------------------------------------------------
Diluted EPS $19,936 20,495 $0.97
1997
Basic EPS:
Income available to common stockholders $12,497 18,960 $0.66
Effect of dilutive stock options 537
-------------------------------------------------------
Diluted EPS $12,497 19,497 $0.64
1996
Basic EPS:
Income available to common stockholders $ 5,808 16,234 $0.36
Effect of dilutive stock options 638
-------------------------------------------------------
Diluted EPS $ 5,808 16,872 $0.34
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Comprehensive Income:
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a financial statement that is displayed with the
same prominence as other financial statements. Comprehensive income includes all
changes in equity (net assets) during a period from non-owner sources. This
includes net income and other comprehensive income. Examples of items to be
included in other comprehensive income, which are excluded from net income,
include foreign currency translation adjustments. The Company adopted SFAS No.
130 for the year ended December 31, 1998. Total other comprehensive income
consisted of foreign currency translation gains, which were not material for all
years presented.
47
<PAGE>
Financial Statement Classifications:
Certain prior-year amounts have been reclassified to conform to the 1998
financial statement presentation. Such reclassifications have no effect on net
income as previously reported.
(2) Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------
(in thousands) 1998 1997 1996
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 7,318 $5,737 $3,364
State and local 1,664 986 841
Foreign 1,835 279 -
--------------------- ---------------------- ---------------------
Total current $10,817 $7,002 $4,205
Deferred tax expense:
Federal $ (242) $ 265 $ (262)
State and local (146) 71 (66)
Foreign 206 - -
--------------------- ---------------------- ---------------------
Total deferred $ (182) $ 336 $ (328)
--------------------- ---------------------- ---------------------
Total provision $10,635 $7,338 $3,877
===================== ====================== =====================
</TABLE>
Undistributed earnings intended to be reinvested indefinitely in operations
outside the United States were approximately $15,349,000.
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rates as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
<S> <C> <C> <C>
Expected statutory amount 35.0% 35.0% 34.0%
State income taxes, net of
federal benefit 3.2% 3.8% 5.3%
Tax exempt interest -% (0.5)% (0.4)%
Undistributed earnings of
certain subsidiaries (5.0)% (2.5)% -%
Other 1.6% 1.2% 1.1%
--------------------- ---------------------- ---------------------
34.8% 37.0% 40.0%
===================== ====================== =====================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes and the impact of available
net operating loss carryforwards.
48
<PAGE>
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
(in thousands) 1998 1997
-------------- ---------------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts $1,483 $ 697
State taxes 581 316
Accrued compensation 139 83
Other 276 -
------------- --------------
Total gross deferred tax assets $2,479 $1,096
Deferred liabilities:
Depreciation $2,029 $ 870
Other 128 87
------------- --------------
Total gross deferred tax
liabilities $2,157 $ 957
-------------- ---------------
Net deferred tax assets $ 322 $ 139
============== ===============
</TABLE>
(3) Acquisitions and Investments
In 1997, the Company acquired a controlling interest in Rustelnet, a
provider of enhanced telecommunications services to the Russian market. The
acquisition was accounted for by the purchase method, and accordingly, the
results of operations of the acquired business have been included in the
accompanying consolidated financial statements from the date of acquisition.
The price was $36,000 with Rustelnet having cash balances of $257,000 at the
time. The fair value of net liabilities acquired in the acquisition was
$158,000. The excess of purchase price over the estimated fair market value of
$627,000 has been allocated to goodwill. Goodwill is being amortized on a
straight-line basis over a 10-year period. In connection with the acquisition
of Rustelnet, the Company purchased Rustelnet shares from individual
shareholders who are members of Pacific Gateway's management. A total of 690
Rustelnet shares were sold by management to the Company for $13,000.
In 1997, the Company and Globe Telecom, a company operating in the
Philippines, formed a joint venture, PinTouch Telecom, to market long distance
services to the Filipino-American community. In accordance with the joint
venture agreement, the Company receives 47.5% of PinTouch's net earnings, for
which the Company has recognized equity in earnings of $1,665,000 and $131,000
for the years ended December 31, 1998 and 1997, respectively.
In February 1998, the Company purchased 16.6% of the common stock of Ekonom
S.A. de C.V., a Mexican multimedia company, for $3,300,000 in cash and
$1,800,000 in the Company's common stock. The Company's investment in Ekonom is
accounted for under the cost method.
(4) Segment Data
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information effective January 1, 1998. SFAS No. 131
requires disclosures of a Company's operating segments, which is defined as a
segment whose operating results are distinguishable and regularly reviewed by
the Company's decision makers. Prior to the adoption of SFAS No. 131, the
Company classified all operations under one segment, Telecommunications. By
utilizing a combination of factors, principally services provided and geographic
areas, the Company has identified three operating segments: U.S. wholesale,
offshore and value-added services. The operating results of these segments are
regularly reviewed by the Company's management and are integral to their
decision-making process.
U.S. wholesale provides international telecommunications services to its
target base of U.S.based carriers that originate international traffic but do
not have operating agreements with foreign carriers to terminate the traffic.
U.S. wholesale also provides service to customers who are existing international
carriers, terminating their overflow telecommunications traffic or on routes
with smaller traffic volumes.
The offshore segment consists primarily of the operating subsidiaries in
the UK, New Zealand, Russia and Japan. The Company has established
telecommunications switching facilities in each location and provides services
similar to U.S. wholesale to its country-specific customers.
49
<PAGE>
The Company's third segment includes a variety of emerging and value-added
services. Presently, this operating segment primarily provides international
long distance services to certain ethnic retail markets, principally the
Filipino-American and Japanese-American communities.
The results of operations for the Company's operating segments for each of
the three years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands) U.S. Value- Total Operating
1998 Wholesale Offshore Added Segments
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $390,619 $55,714 $19,958 $466,291
Sales and transfers between segments 36,405 19,879 - 56,284
------------------------------------------------------
Total sales $427,024 $75,593 $19,958 $522,575
Depreciation and amortization $ 7,031 $ 1,682 $ - $ 8,713
Operating income $ 16,730 $ 6,677 $ 3,740 $ 27,147
Total assets $151,491 $34,831 $ 5,857 $192,179
- ------------------------------------------------------------------------------------------------------
1997
Sales to unaffiliated customers $279,750 $17,739 $ 1,120 $298,609
Sales and transfers between segments 13,186 12,005 - 25,191
------------------------------------------------------
Total sales $292,936 $29,744 $ 1,120 $323,800
Depreciation and amortization $ 4,632 $ 785 $ - $ 5,417
Operating income $ 16,398 $ 1,219 $ 83 $ 17,700
Total assets $105,057 $18,542 $ 1,071 $124,670
- ------------------------------------------------------------------------------------------------------
1996
Sales to unaffiliated customers $162,426 $ - $ - $162,426
Depreciation and amortization $ 2,044 $ - $ - $ 2,044
Operating income $ 8,929 $ - $ - $ 8,929
Total assets $ 55,847 $ - $ - $ 55,847
======================================================================================================
</TABLE>
The reconciliations from the Company's operating segments to the
consolidated totals on the Company's balance sheets and statements of operations
for each of the three years ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands)
1998
- --------------------------------------------------------------
<S> <C>
Total sales for operating segments $522,575
Elimination of sales between segments (56,284)
--------
Total consolidated sales $466,291
Total assets for operating segments $192,179
Assets not allocated to operating segments 43,458
--------
Total consolidated assets $235,637
==============================================================
1997
Total sales for operating segments $323,800
Elimination of sales between segments (25,191)
--------
Total consolidated sales $298,609
Total assets for operating segments $124,670
Assets not allocated to operating segments 46,947
--------
Total consolidated assets $171,617
==============================================================
1996
Total sales for operating segments $162,426
Elimination of sales between segments -
--------
Total consolidated sales $162,426
Total assets for operating segments $ 55,847
Assets not allocated to operating segments 47,969
--------
Total consolidated assets $103,816
==============================================================
</TABLE>
50
<PAGE>
The Company sells to long distance international telecommunications
companies, foreign partners and to retail customers. At December 31, 1998, the
Company had 44 operating agreements with foreign partners and approximately 163
worldwide customers excluding U.S. retail customers. Total revenues from
external customers including U.S. retail customers by country for each of the
three years ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
(in thousands) 1998 1997 1996
------------------------ -------------------- --------------------
<S> <C> <C> <C>
United States $334,746 $216,286 $116,735
United Kingdom 51,378 21,625 4,245
Russia 11,877 6,733 5,630
Australia 10,988 6,377 8,771
New Zealand 7,681 2,222 1,767
Japan 5,369 4,678 5,518
Other 44,252 40,688 19,760
------------------------ -------------------- --------------------
Total revenues $466,291 $298,609 $162,426
======================== ==================== ====================
</TABLE>
Revenues are attributed to countries based on the location of customer.
Other includes revenues from customers located in countries that individually
represented less than 2% of total revenues.
For the year ended December 31, 1998, there were no major customers that
comprised ten percent or more of the Company's revenues. For the year ended
December 31, 1997, 10.4% of the Company's revenues were derived from Frontier
Communications, Inc. of $30,996,000. Matrix Telecom, Inc. derived 12.6% of the
Company's revenues for the year ended December 31, 1996 with revenues of
$20,514,000.
(5) Commitments and Contingencies
Litigation
The Company is not currently subject to any legal proceedings that
management believes will have a material impact on the Company's financial
position or results of operations.
Leases
The Company leases office space and equipment under noncancelable operating
leases. Rental expenses for 1998, 1997 and 1996 were approximately $1,274,000,
$965,000 and $255,000, respectively. The Company leases certain computer
equipment under an agreement that is classified as a capital lease. The lease
has a term of three years with a minimum purchase price at the end of the lease.
Leased capital assets included in property and equipment at December 31, 1998
were $1,241,000.
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(in thousands) Operating leases Capital leases
---------------- --------------
<S> <C> <C>
1999 $ 812 $436
2000 742 112
2001 702 -
2002 672 -
2003 582 -
Thereafter 1,355 -
------ ----
Total minimum lease payments $4,865 $548
======
Amount representing interest 13
----
Present value of net minimum payments $535
----
Current portion $436
====
</TABLE>
51
<PAGE>
Employment Agreements
The Company has entered into employment agreements with certain employees
that provide that, in the event of a change in control, each of these employees
would be entitled to severance following their resignation from the Company.
Should such an event occur, the Company's aggregate obligation for severance
would be approximately $4,764,000. Upon any such change in control, each of
these individuals would also receive full vesting of any outstanding stock
options.
Commitments
At December 31, 1998, the Company had outstanding commitments of $159
million for the acquisition of additional ownership in digital undersea fiber
optic cables and network equipment. This includes the commitment to purchase
undersea fiber optic cable in the Japan-U.S. cable network for $86 million and
in TAT-14 cable system for $70 million.
Line of Credit
During October 1998, the Company entered into an uncollateralized 1-year
revolving line of credit of up to $30 million with an interest rate of LIBOR
plus 1.125% with Bank of America, NT&SA and NationsBanc Montgomery LLC. As of
December 31, 1998, the Company had $8.7 million outstanding and $21.3 million
available under this line of credit with an interest rate of 7.75%. The line of
credit, which expires December 17, 1999, has financial covenants, which require
a maximum ratio of debt to annualized operating cash flow of 3 to 1 and a
minimum interest coverage ratio (ratio of operating cash flow to net interest
expense) of 2.5 to 1. The Company was in compliance with these covenants at
December 31, 1998.
(6) Employee Benefit Plans
In September 1995, the Company established an Employee Stock Purchase Plan
(the "Purchase Plan") which is intended to qualify under section 423 of the
Internal Revenue Code. The Purchase Plan was not active for the years ended
December 31, 1998, 1997 or 1996. Under the Purchase Plan, the Company reserved
up to 400,000 shares of common stock for purchase by employees who meet certain
eligibility requirements. Eligible employees may contribute up to 10% of their
compensation to the Purchase Plan to purchase shares at 85% of the fair market
value of the stock on the first or last day of each six-month offering period as
defined in the Purchase Plan.
In 1996, the Company adopted a 401(k) plan pursuant to which eligible
employees may accumulate savings on a tax-deferred basis. Each year the Company
may make a discretionary profit sharing contribution to the 401(k) plan which
will be allocated to the accounts of eligible employees who are employed on the
last day of the year. The profit sharing allocation is made on a pro rata basis
in proportion to the compensation of the eligible employees. The Company did
not make a contribution in 1998, 1997 or 1996.
(7) Stock Option Plan
On September 30, 1995, the Company adopted the 1995 Stock Option Plan (the
"1995 Plan"). The 1995 Plan provides for the granting of nonqualified and
incentive stock options to purchase up to 1,200,000 shares of common stock.
Options granted under the 1995 Plan generally vest over four years. The maximum
term of options granted is ten years. The Company granted options to purchase
883,411 shares of common stock under the 1995 Plan.
On February 17, 1997, the Company adopted the 1997 Long-Term Incentive Plan
(the "1997 Plan"), replacing the 1995 Plan. The 1997 Plan provides for the
granting of awards of nonqualified and incentive stock options, stock
appreciation rights, stock grants or stock-based performance units. Awards may
be made under the 1997 Plan with respect to 4,000,000 shares of common stock and
with respect to stock option and stock appreciation right awards, no more than
500,000 shares may be awarded to any one individual in any one-year period. The
remaining terms of the 1997 Plan are similar to those described in the 1995
Plan.
On September 18, 1998, the Company repriced 768,500 options to purchase the
Company's common stock granted under the 1997 plan to $27.688 per share, the
fair market value of the Company's common stock on September 18, 1998.
52
<PAGE>
SFAS No. 123, Accounting for Stock-Based Compensation, encourages adoption
of a fair value-based method for valuing the cost of stock-based compensation.
However, it allows companies to continue to use the intrinsic value method
prescribed under Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Options Issued to Employees, for options granted to employees and
disclose pro forma net income and earnings per share in accordance with SFAS No.
123. Had compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income and
earnings per share would have been as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
(in thousands, except per share 1998 1997 1996
amounts) ----------------------- ---------------------- --------------------
<S> <C> <C> <C>
Net income - as reported $19,936 $12,497 $5,808
Net income - pro forma $14,308 $11,469 $5,244
Earnings per share - basic as reported $ 1.05 $ 0.66 $ 0.36
Earnings per share - basic pro forma $ 0.75 $ 0.60 $ 0.32
Earnings per share - diluted as reported $ 0.97 $ 0.64 $ 0.34
Earnings per share - diluted pro forma $ 0.70 $ 0.59 $ 0.31
</TABLE>
The fair value of the options granted by the Company is estimated at $56.5
million on the date of the grant using the Black-Scholes Model for those options
issued after the Company's initial public offering and the Minimum Value
methodology for those options granted prior to the offering. The assumptions
used in the Black- Scholes model are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- --------------------
<S> <C> <C> <C>
Dividend yield 0.0% 0.0% 0.0%
Volatility 49.4% 40.9% 30.5%
Risk-free interest rate 4.5% 5.8% 6.7%
Assumed forfeiture rate 0.0% 0.0% 0.0%
Expected life 5 years 5 years 5 years
</TABLE>
SFAS No. 123 requires that stock-based compensation granted to non-
employees be accounted for based on the fair value-based method described above.
It also requires that restricted stock granted to employees be recognized as
compensation expense over the vesting period, measured at the fair market value
on the grant date. In 1998 and 1997, the Company granted 25,000 and 75,000
shares, respectively, of restricted stock under the 1997 Plan. The Company
recorded deferred compensation of approximately $963,000 and $4,134,000 for the
years ended December 31, 1998 and 1997, respectively. This amount was recorded
as a reduction of stockholders' equity and is being amortized as an expense to
operations over the applicable vesting periods. For the years ended December
31, 1998, 1997 and 1996, $674,000, $146,000 and $85,000, respectively, was
recognized as compensation expense for restricted stock and stock options
granted to non-employees.
53
<PAGE>
Stock Option Awards were:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
--------------------------------- -------------------------------- --------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
-------------- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
Beginning of year 2,296,065 $32.14 883,411 $ 9.77 509,170 $ 8.23
Options granted 2,608,800 32.50 1,610,000 41.60 374,241 12.58
Options exercised (88,887) 13.02 (101,660) 7.30 - -
Options forfeited /
cancelled (824,907) 39.12 (95,686) 11.08 - -
-------------- -------------- ------------- -------------- -------------- --------------
Options outstanding,
End of year 3,991,071 $31.36 2,296,065 $32.14 883,411 $ 9.77
============== ============== ============= ============== ============== ==============
Option price range at $ 8.500 to $ 8.500 to $ 4.400 to
End of year $53.125 $50.188 $ 29.500
Option shares available
for grant at end of
year 621,107 2,405,000 316,589
============== ============= ==============
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Options
Outstanding Exercisable
------------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
---------------- -------------- ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 8.500 - $14.000 566,146 0.98 $ 9.21 411,120 $ 9.08
$ 24.750 - $29.500 2,149,925 3.32 27.87 235,750 27.60
$ 38.500 - $53.125 1,275,000 3.38 47.08 186,250 46.54
---------------- -------------- ---------------- -------------- ---------------
$ 8.500 - $53.125 3,991,071 3.01 $31.36 833,120 $22.69
================ ============== ================ ============== ===============
</TABLE>
(8) Capital Stock
On July 19, 1996, the Company completed an initial public offering of
6,057,050 shares of common stock of which 4,940,050 were offered by the Company
and 1,116,550 shares were offered by certain selling shareholders. The net
proceeds to the Company (after deducting underwriting discounts and estimated
offering expenses) from the sale of the shares was approximately $54.1 million.
(9) Stockholders' Rights Plan
On November 17, 1997, the Board of Directors of the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock. Subject to certain exceptions, each Right, when
exercisable, entitles the registered holder to purchase from the Company one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $0.0001 per share (the "Preferred Stock"), of the Company at a price of
$200, subject to adjustment (the "Purchase Price").
The Rights generally will only be exercisable (i) ten days following a
public announcement that a person or group of affiliated or associated persons
(an "Acquiring Person") has acquired, or obtained the right to acquire, 15% or
more of the outstanding shares of the Company's Common Stock or (ii) 15 business
days following
54
<PAGE>
commencement of (or an announcement of an intention to make) a tender or
exchange offer for 15% or more of the outstanding shares of the Common Stock.
The Rights will expire, if not previously exercised, exchanged or redeemed, on
December 1, 2007.
If any person or group generally acquires 15% or more of the Company's
outstanding Common Stock, each Right, except those held by such an Acquiring
Person, would entitle each holder of a Right to acquire, upon exercise at the
then current exercise price of the Right, Common Stock having a value equal to
two times the exercise price of the Right.
At anytime after a person or group generally acquires more than 15% of the
outstanding Common Stock and prior to their acquisition of 50% or more of the
outstanding Common Stock, each Right, except those held by such an Acquiring
Person, may be exchanged by the Board of Directors for one share of Common
Stock.
If the Company is acquired in a merger or other business combination
transaction or 50% or more of the Company's assets or earnings power is sold,
each Right will entitle the holder thereof (except for the Acquiring Person) to
receive, upon exercise at the then current exercise price of the Right, common
stock of the acquiring or surviving company having a value equal to two times
the exercise price of the Right.
At any time prior to the time an Acquiring Person becomes such, the Board of
Directors may redeem the Rights in whole, but not in part, at a price of $.01
per Right (the "Redemption Price").
(10) Subsequent Event
On March 2, 1999, the Company signed a commitment letter for a $200 million
senior secured credit facility with Salomon Brothers Holding Company, Inc. and
Goldman Sachs Credit Partners L.P. The facility may be increased in the future
of up to $100 million if additional commitments are received from lenders. The
completion of the financing is subject to the execution of definitive loan
documents and customary conditions for this type of facility. The Company plans
to use the facility to finance its undersea fiber optic cable investments and
its expansion into the U.S. and Western Europe domestic markets.
55
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The information concerning directors required by this item is incorporated
by reference to the information contained under the captions "Election of
Directors", "Meetings and Committees of the Board" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's Proxy Statement for the 1999
Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained under the caption "Compensation of Directors and Executive
Officers" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained under the caption "Ownership of the Capital Stock of the
Company" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained under the caption "Certain Relationships and Related
Transactions" in the Company's Proxy Statement for the 1999 Annual Meeting of
Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements*
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
* Included in Item 8 of this 10-K
56
<PAGE>
(a) 2. Financial Statement Schedule
Schedule II Valuation and Qualifying Accounts
(a) 3. Exhibits
<TABLE>
<CAPTION>
Exhibit Description Method of Filing
Number
- --------
<C> <S> <C>
3.1.1 Amended and Restated Certificate of Incorporation, as Incorporated by reference to Quarterly
Amended May 20, 1997 Report on Form 10-Q for the quarter ended
June 30, 1997 (No. 000-21043)
3.1.2 Certificate of Amendment of Amended and Restated Filed with this document
Certificate of Incorporation as amended June 19, 1998
3.2 Amended and Restated Bylaws, as amended October 23, Incorporated by reference to Quarterly
1998 Report on Form 10-Q for the quarter ended
September 30 1998 (No. 000-21043)
4.1 Specimen Certificate for Common Stock Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
4.2.1 Amended and Restated Certificate of Incorporation, as Incorporated by reference to Quarterly
Amended May 20, 1997 Report on Form 10-Q for the quarter ended
June 30, 1997 (No. 000-21043)
4.2.2 Certificate of Amendment of Amended and Restated Refer to exhibit 3.1.2
Certificate of Incorporation as amended June 19, 1998
4.3 Rights Agreement dated as of November 17, 1997, between Incorporated by reference to Form 8-K
the Company and Norwest Bank Minnesota, N.A. as Rights filed November 21, 1997 (No. 000-21043)
Agent
10.1 Form of Indemnification Agreement for directors and Incorporated by reference to Form 10-K for
officers the year ended December 31, 1997 (No.
000-21043)
10.2 1997 Long-Term Incentive Plan Incorporated by reference to Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1997 (No. 000-21043)
10.3 Employee Stock Purchase Plan Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.1 Proxy dated December 10, 1994 by Julie J. Jensen Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.2 Proxy dated December 10, 1994 by Jeffrey J. Jensen Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.3 Proxy dated December 10, 1994 by Janet Jensen Kreiger Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.4 Proxy dated December 10, 1994 by James J. Jensen Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.5 Proxy dated December 10, 1994 by Jami J. Jensen Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.4.6 Proxy dated April 30, 1998 by Gail E. Granton Incorporated by reference to Quarterly
individually and as trustee of the The Granton Foundation Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Method of Filing
Number
- ---------
<C> <S> <C>
10.4.7 Proxy dated June 10, 1996 Ronald L. Jensen Incorporated by reference to Registration
Statement on Form S-1 (No. 33-80191)
10.5.1 Employment Agreement dated as of January 1, 1998 between Incorporated by reference to Quarterly
Howard A. Neckowitz and Pacific Gateway Exchange, Inc. Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
10.5.2 Employment Agreement dated as of January 1, 1998 between Incorporated by reference to Quarterly
Gail E. Granton and Pacific Gateway Exchange, Inc. Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
10.5.3 Employment Agreement dated as of January 1, 1998 between Incorporated by reference to Quarterly
Ronald D. Anderson and Pacific Gateway Exchange,Inc. Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
10.5.4 Employment Agreement dated October 1, 1995 between Incorporated by reference to Quarterly
Robert F. Craver and Pacific Gateway Exchange, Inc. Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
10.5.5 Employment Agreement dated October 1, 1995 between Incorporated by reference to Quarterly
Fred A. Weismiller and Pacific Gateway Exchange, Inc. Report on Form 10-Q for the quarter ended
June 30, 1998 ( No. 000-21043)
10.5.6 Restricted Stock Award Agreement dated December 30,1997 Incorporated by reference to Form 10-K for
between Howard A. Neckowitz and Pacific Gateway the year ended December 31, 1997 (No.
Exchange, Inc. 000-21043)
10.5.7 Employment Agreement dated September 3, 1998 between Filed with this document
Thomas J. Murphy and Pacific Gateway Exchange, Inc.
10.6 Telephone Service dated May 1, 1995 between Matrix Incorporated by reference to Registration
Telecom, Inc. and Pacific Gateway Exchange, Inc. Statement on Form S-1 (No. 33-80191)
10.7 Agreement for Billing Services dated November 24, 1995 Incorporated by reference to Registration
Between Matrix Telecom, Inc. and Pacific Gateway Statement on Form S-1 (No. 33-80191)
Exchange, Inc.
10.8 Credit Agreement among Pacific Gateway Exchange, Inc. Filed with this document
and Bank of America, NT & SA and NationsBanc Montgomery
Securities LLC dated December 18, 1998
21.1 Subsidiaries Filed with this document
23.1 Consent of Independent Accountants Filed with this document
27.1 Financial Data Schedule Filed with this document
</TABLE>
(b) Reports on Form 8-K
None.
58
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Burlingame, California, on the 30th day of March, 1999.
Pacific Gateway Exchange, Inc.
By: /s/ Howard A. Neckowitz
------------------------------
Howard A. Neckowitz
President, Chief Executive Officer and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on behalf of the
Registrant and in the capacities indicated and on the 30th day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Howard A. Neckowitz President, Chief Executive Officer and
- ---------------------------------- Chairman of the Board
Howard A. Neckowitz (Principal Executive Officer)
/s/ Gail E. Granton Executive Vice President,
- ---------------------------------- International Business Development,
Gail E. Granton Secretary and Director
Chief Financial Officer, and
/s/ Sandra D. Grey Vice President, Finance
- ---------------------------------- (Principal Financial Officer)
Sandra D. Grey (Principal Accounting Officer)
/s/ Robert C. Calafell Director
- ----------------------------------
Robert C. Calafell
/s/ Charles M. Dalfen Director
- ----------------------------------
Charles M. Dalfen
/s/ James J. Junewicz Director
- ----------------------------------
James J. Junewicz
/s/ Barry J. Volante Director
- ----------------------------------
Barry J. Volante
</TABLE>
59
<PAGE>
EXHIBIT 3.1.2
CERTIFICATE OF AMENDMENT
------------------------
OF
--
AMENDED AND RESTATED
--------------------
CERTIFICATE OF INCORPORATION
----------------------------
OF
--
PACIFIC GATEWAY EXCHANGE, INC.
------------------------------
-----------------------------------------
Adopted in accordance with the provisions
-----------------------------------------
of Section 242 of the General Corporation
-----------------------------------------
Law of the State of Delaware
----------------------------
-----------------------------------------
I, Gail E. Granton, Secretary of PACIFIC GATEWAY EXCHANGE, INC., a
-----------------------------------------------------------------------
corporation existing under the laws of the State of Delaware, do hereby certify
- -------------------------------------------------------------------------------
as follows:
- -----------
FIRST: That the name of the corporation is Pacific Gateway Exchange, Inc.
--------------------------------------------------------------------------
SECOND: That the first paragraph of Article III of the Amended and Restated
----------------------------------------------------------------------------
Certificate of Incorporation of said Corporation has been amended in its
- ------------------------------------------------------------------------
entirety to read as follows:
- ----------------------------
"The Corporation is authorized to issue two classes of stock to be
------------------------------------------------------------------
designated, respectively, "Common Stock" and "Preferred Stock." The total
--------------------------------------------------------------------------
number of shares which the Corporation is authorized to issue is Seventy-
------------------------------------------------------------------------
Five Million (75,000,000) shares. Seventy Million (70,000,000) shares
----------------------------------------------------------------------
shall be Common Stock, $.0001 par value per share, and Five Million
-------------------------------------------------------------------
(5,000,000) shares shall be Preferred Stock, $.0001 par value per share."
--------------------------------------------------------------------------
<PAGE>
THIRD: That the foregoing amendment has been duly adopted in accordance
-----------------------------------------------------------------------
with the General Corporation Law of the State of Delaware.
- ----------------------------------------------------------
FOURTH: That the Board of Directors of the corporation duly adopted
-------------------------------------------------------------------
resolutions setting forth the foregoing amendment, declaring said amendment to
- ------------------------------------------------------------------------------
be advisable and referring said amendment to the stockholders of the corporation
- --------------------------------------------------------------------------------
for consideration thereof;
- --------------------------
FIFTH: That the foregoing amendment has been duly approved and adopted in
-------------------------------------------------------------------------
accordance with the provisions of the General Corporation Law of the State of
- -----------------------------------------------------------------------------
Delaware by the majority vote of the holders of all outstanding shares entitled
- -------------------------------------------------------------------------------
to vote thereon on.
- -------------------
IN WITNESS WHEREOF, I have signed this certificate this 19th day of June,
-------------------------------------------------------------------------
1998.
- -----
PACIFIC GATEWAY EXCHANGE, INC.
------------------------------
By:
---
Its: Secretary
<PAGE>
EXHIBIT 10.5.7
AMENDED EXECUTIVE EMPLOYMENT AGREEMENT
--------------------------------------
This Amended Agreement made and entered into as of September 3, 1998, amends
and supersedes the Agreement made and entered into as of July 21, 1998 (the
"Effective Date") by and between PACIFIC GATEWAY EXCHANGE, INC. (the "Company")
and Thomas J. Murphy (the "Executive"),
WITNESSETH THAT:
---------------
WHEREAS, the parties desire to enter into this Agreement pertaining to the
continued employment of the Executive by the Company;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth below, it is hereby covenanted and agreed by the Company and the Executive
as follows:
1. Employment Period. Subject to the terms and conditions of this
-----------------
Agreement, the Company hereby agrees to employ the Executive during the
Employment Period (as defined below) and the Executive hereby agrees to remain
in the employ of the Company and to provide services during the Employment
Period in accordance with this Agreement. The "Employment Period" shall be the
period beginning on August 16, 1998 (the "Start Date") and ending on the third
anniversary thereof. After the third anniversary of the Start Date, the
Employment Period shall be automatically extended for 12-month periods, unless
one party to this Agreement provides written notice of non-renewal to the other
at least 60 days before the last day of the Employment Period.
2. Duties. Subject to the terms of this Agreement, the Company hereby
------
agrees to employ the Executive as its Executive Vice President, Global Networks
and Multimedia Applications during the Employment Period, and the Executive
hereby agrees to remain in the employ of the Company during the Employment
Period. The Executive agrees to serve in such other or substitute positions
with the Company as determined by the President of the Company (the
"President"). During the Employment Period, while the Executive is employed by
the Company, the Executive shall devote substantially all of his business time,
energies and talents to serving as its Executive Vice President, Global Networks
and Multimedia Applications. The Executive agrees that he shall perform his
duties faithfully and efficiently subject to the directions of the President.
The Executives duties shall include but not be limited to:
(a) Planning and implementing a Global Network for the Company,
(b) Assisting the Company in acquiring international fiber cables and
increasing the Company's U.S. domestic fiber cable capacity,
(c) Assessing and implementing new technology platforms including the
Company's worldwide ATM and Sonet/P Network,
<PAGE>
(d) Developing new services and products utilizing the Company's global
network including multimedia,
(e) Developing marketing, pricing, and sales for new products,
(f) Assisting in developing a strategy for integrating the Company's
offshore operations and SBU's.
3. Compensation. Subject to the terms and conditions of this Agreement,
------------
during the Employment Period while the Executive is employed by the Company, the
Company shall compensate him for his services as follows:
(a) The Executive shall receive, for each 12-consecutive month period
beginning on the Start Date and each anniversary thereof, an annual
salary of $325,000 (the "Salary"), which Salary shall be payable in
substantially equal monthly installments. The Executive's Salary rate
shall be reviewed annually on or about the anniversary of the Start
Date, to determine whether an adjustment in the amount of Salary is
appropriate. In no event shall the Salary of the Executive be reduced
to an amount that is less than the amount specified in this paragraph
(a), or to an amount less than the amount he was previously receiving.
(b) The Executive shall be entitled to incentive compensation in the form
of a target annual cash bonus of 25% of his salary as of the beginning
of the applicable performance period. The actual bonus paid may be
more or less than the target and shall be determined by the President
taking into consideration whether the Executive has met the
performance targets set by the President for such year (which shall be
set by the President, on or about January 31 of each year), and such
other factors as the President deems relevant.
(c) Under the terms and conditions of the Company's Long Term Incentive
Plan (the "Plan"), the Company shall grant to the Executive options
(the "Options") to purchase 150,000 shares of the common stock of the
Company. The per share exercise price of the Options shall be the
fair market value of a share of the Company's common stock on the date
of such award. This Option shall become exercisable with respect to
1/4 of the shares of stock awarded on the first anniversary of the
grant date (the "Initial Vesting Date") and with respect to an
additional 1/16 of the shares awarded on each subsequent 3-month
anniversary of the Initial Vesting date until such time as this option
is fully exercisable. A formal option agreement (the "Option
Agreement") will be executed between the Executive and the Company in
accordance with Company policy as issued and approved by the Board and
in the substantially the same form as the option agreement attached to
this Agreement. Further, by acceptance of the Option Agreement, the
Executive hereby represents, warrants and confirms that he has been
fully informed as to the business, affairs and financial condition of
the Company and that all information requested by him in respect
thereof has been
-2-
<PAGE>
furnished and any questions he may have had have been answered, and
that no representation has been made to him as to the value for the
Options or the prospects of the Company. He further recognizes that
such value and prospects are highly speculative and may ultimately
prove to have little or no value. If, prior to the vesting of all the
Options, a Change in Control (as defined in Exhibit A hereto) occurs
while the Executive remains employed, the Executive's employment with
the Company is terminated for any reason other than Cause (as defined
in Section 4(h)) and not on account of the Executive's death,
disability, voluntary resignation, or the mutual agreement of the
parties, or the Executive terminates his employment with the Company
for Good Reason (as defined in Section 4(h)), then all Options shall
become fully vested and exercisable on the date of such Change in
Control or termination.
(d) As of the Start Date, the Company shall issue to the Executive 15,000
shares of restricted stock (the "Restricted Stock"). On the first
anniversary of the date of the Start Date, 1/5 of the shares of
Restricted Stock shall become unrestricted, and on each of the second
through fifth anniversaries of the Start Date, an additional 1/5 of
the shares shall become unrestricted. If, prior to all of the
Restricted Stock becoming unrestricted, a Change in Control (as
defined in Exhibit A hereto) occurs while the Executive remains
employed, the Executive's employment with the Company is terminated
for any reason other than Cause (as defined in Section 4(h)) and not
on account of the Executive's death, disability, voluntary
resignation, or the mutual agreement of the parties, or the Executive
terminates his employment with the Company for Good Reason (as defined
in Section 4(h)), then all shares of Restricted Stock shall become
unrestricted on the date of such Change in Control or termination. In
addition, if the Company chooses not to extend the Employment Period
under Section 1 then 1/5 of the 15,000 shares of Restricted Stock
mentioned in this Section 3(d) shall become unrestricted in addition
to any other shares that have become unrestricted pursuant to this
Section 3(d). A formal restricted stock agreement (the "Restricted
Stock Agreement") will be executed between the Executive and the
Company in accordance with Company policy as issued and approved by
the Board.
(e) Except as otherwise specifically provided to the contrary in this
Agreement, the Executive shall be provided with the retirement,
welfare benefits and other fringe benefits to the same extent and on
the same terms as those benefits are provided by the Company from time
to time to the Company's other employees.
(f) The Executive shall be reimbursed by the Company, in accordance with
the policies of the Company are in effect from time to time, for
reasonable expenses for entertainment, travel (including business
class travel for international trips), meals, lodging and similar
items which are authorized by the Company and actually incurred by the
Executive in the promotion of the Company's business.
(g) The Executive shall be reimbursed by the Company for any reasonable
costs incurred and documented for moving of furniture, cars, and other
personal
-3-
<PAGE>
property to a new location as well as any costs incurred by the
Executive for transporting his family members by air travel to a new
location. The amount of such reimbursement shall not exceed $30,000.
(i) The Executive shall be entitled to three weeks paid vacation the 12
month period beginning on the Effective Date and each anniversary of
the Effective Date.
(j) The Executive shall be eligible to participate in any deferred
compensation plan, as it may be created by the Company, in the same
manner and generally to the same extent as other senior executives of
the Company.
(k) For the 12 month period following the Start Date, it is understood
that the Executive intends on continuing to maintain his primary
residence in the State of Maryland, and for such 12 month period, the
Company shall reimburse the Executive for the reasonable expenses
incurred in leasing and maintaining an apartment, or other temporary
residence, in or near Burlingame, California. The expenses allowable
for reimbursement under this subparagraph (k) must be pre-approved by
the President.
(l) The Executive shall receive a cash payment of $50,000 ("signing
bonus") as soon as practicable after the date of this amended
agreement.
4. Rights and Payments Upon Termination or Change in Control. The
---------------------------------------------------------
Executive's right to benefits and payments, if any, for periods after the date
on which his employment with the Company terminates for any reason (his
"Termination Date") shall be determined in accordance with this Section 4:
(a) Minimum Payments. If the Executive's Termination Date occurs during
----------------
the Employment Period for any reason, the Executive shall be entitled
to the following payments, in addition to any payments or benefits to
which the Executive may be entitled under the following provisions of
this Section 4 (other than this paragraph (a)):
(i) his earned but unpaid Salary for the period ending on his
Termination Date; and
(ii) his accrued but unpaid vacation pay for the period ending with
his Termination Date, as determined in accordance with the
Company's policy as in effect from time to time.
Payments to be made to the Executive pursuant to this paragraph 4(a)
shall be made in a lump sum as soon as practicable after the
Executive's Termination Date. Except as may be otherwise expressly
provided to the contrary in this Agreement, nothing in this Agreement
shall be construed as requiring the Executive to be treated as
employed by the Company following his Termination
-4-
<PAGE>
Date for purposes of any employee benefit plan or arrangement in which
he may participate at such time.
(b) Termination By Company for Cause. If the Executive's Termination Date
--------------------------------
occurs during the Employment Period and is a result of the Company's
termination of the Executive's employment on account of Cause (as
defined in paragraph (h) below), then, except as agreed in writing
between the Executive and the Company, the Executive shall have no
right to future payments or benefits under this Agreement (and the
Company shall have no obligation to make any such future payments or
provide any such future benefits) for periods after the Executive's
Termination Date.
(c) Termination for Death or Disability. If the Executive's Termination
-----------------------------------
Date occurs during the Employment Period on account of the Executive's
death or disability (as defined below), then the Executive (or in the
event of his death, his estate) shall be entitled to continuing
payments of his Salary for the period commencing on his Termination
Date and ending on the earliest of (i) 30 days from his Termination
Date, (ii) the last day of the Employment Period, or (iii) in the case
of the Executive's disability, the date on which the Executive
violates the provisions of Section 6 of this Agreement.
(d) Termination by the Company for Reasons Other Than Cause. If the
-------------------------------------------------------
Executive's Termination Date occurs during the Employment Period and
before the date of a Change of Control (as defined in Exhibit A
hereto), and is a result of the Executive's termination of employment
by the Company for any reason other than Cause or on account of
termination by the Executive for Good Reason ( as defined in paragraph
(h)), and not on account of the Executive's death, disability,
voluntary resignation, or the mutual agreement of the parties, then:
(A) The Executive shall receive from the Company for the period
commencing on his Termination Date and ending on the earliest of (i)
the 12-month anniversary of his Termination Date, (ii) the date on
which the Executive violates the provisions of Section 6 or 7 of this
Agreement, or (iii) the date of the Executive's death, the Salary in
effect as of his Termination Date (without regard to any reduction in
such Salary which gives the Executive the right to termination
employment for Good Reason), payable in accordance with the provisions
of paragraph 3(a).
(B) Stock options awarded to the Executive under any option plans of
the Company shall be 100% vested upon the occurrence of the
Executive's Termination Date as described in this paragraph (d) and
shall be exercisable for the period after the Termination Date as
specified for vested options in the applicable option agreement.
(e) Termination for Voluntary Resignation, Mutual Agreement or Other
----------------------------------------------------------------
Reasons. If the Executive's Termination Date occurs during the
-------
Employment Period on
-5-
<PAGE>
account of his voluntary resignation, mutual agreement of the parties,
or any reason other than those specified in paragraphs (b), (c) or (d)
above then, except as agreed in writing between the Executive and the
Company, the Executive shall have no right to future payments or
benefits under this Agreement (and the Company shall have no
obligation to make any such future payments or provide any such future
benefits) for periods after the Executive's Termination Date.
(f) Termination by the Executive for Good Reason. If the Executive's
--------------------------------------------
Termination Date occurs during the Employment Period and before the
date of a Change of Control (as defined in Exhibit A hereto), and is a
result of the Executive's termination of employment by the Executive
for Good Reason (as defined in paragraph (h)), and is not on account
of the Executive's death, disability, or voluntary resignation, the
mutual agreement of the parties or any other reason, then the
Executive shall receive from the Company for the period commencing on
his Termination Date and ending on the earliest of (i) the 12-month
anniversary of his Termination Date, (ii) the date on which the
Executive violates the provisions of Section 6 of this Agreement, or
(iii) the date of the Executive's death, the Salary in effect as of
his Termination Date (without regard to any reduction in such Salary
which gives the Executive the right to terminate employment for Good
Reason), payable in accordance with the provisions of paragraph 3(a).
(g) Payment Upon a Change in Control. If the Executive's Termination Date
--------------------------------
occurs within two years following a Change in Control, including a
Termination Date occurring on the date of a Change of Control, on
account of termination by the Company for reasons other than Cause or
on account of termination by the Executive for Good Reason, then the
Executive shall receive from the Company a lump sum payment equal to
12 months Severance in effect as of his Termination Date (without
regard to any reduction in such salary which gives the Executive the
right to terminate employment for Good Reason).
(h) Definitions. For purposes of this Agreement:
-----------
(i) the term "Cause" shall mean (1) the willful and continued failure
by the Executive to substantially perform his duties under this
Agreement, other than by reason of his being disabled (as defined
below), (2) the willful engaging by the Executive in conduct
which is demonstrably and materially injurious to the Company or
its affiliates, (3) conduct by the Executive that involves theft
or fraud or, in connection with his duties under this Agreement,
dishonesty, (4) Executive's violation of the provisions of
Sections 6 and 7 hereof, or (5) conviction of felony involving
moral turpitude;
(ii) the term "disability" shall mean the inability of the Executive,
after reasonable accommodation, to continue to perform his duties
under this Agreement on a full-time basis as a result of mental
or physical illness,
-6-
<PAGE>
sickness or injury and the President determines that such
disability is of a long-term nature.
(iii)the term "Good Reason" shall mean any of the following which
occur without the Executive's consent and which are not corrected
by the Company within 10 days of written notice to the Company by
the Executive: (1) a diminution of the Executive's duties or the
assignment to him of duties that are inconsistent in any
substantial respect with the position, authority or
responsibilities associated with the position of Executive Vice
President, Global Networks and Multimedia applications, (2) a
reduction in the Executive's Salary rate or bonus potential; or
(3) a relocation of the Executive, that occurs after a Change of
Control and without the Executive's consent, from the Company's
Principal Executive Office as of the date of the Change of
Control, except for required travel on Company business to an
extent substantially consistent with the Executive's business
travel obligations prior to the date of the Change of Control.
Notwithstanding any other provision of this Agreement, the Executive shall
automatically cease to be an officer and/or director of the Company and its
affiliates as of his Termination Date.
5. Set-Off. The Company shall be entitled to set off against the amounts
-------
payable to the Executive under this Agreement, any amounts owed to the
Company or its affiliates by the Executive.
6. Confidential Information. The Executive agrees that:
------------------------
(a) Except as may be required by the lawful order of a court or agency of
competent jurisdiction or as necessary to carry out his duties to the
Company and its affiliates, or except to the extent that the Executive
has express authorization from the Company, he shall keep secret and
confidential indefinitely all non-public information (including,
without limitation, information regarding litigation and pending
litigation) concerning the Company and its affiliates which was
acquired by or disclosed to the Executive during the course of his
employment with the Company or during the course of his consultation
with the Company following his termination of employment and not to
disclose the same, either directly or indirectly, to any other person,
firm, or business entity, or to use it in any way.
(b) Upon his Termination Date or at the Company's earlier request, he will
promptly return to the Company any and all records, documents,
physical property, information, computer disks or other materials
relating to the business of the Company and its affiliates obtained by
him during his course of employment with the Company.
-7-
<PAGE>
(c) Nothing in the foregoing provisions of this Section 6 shall be
construed so as to prevent the Executive from using, in connection
with his employment for himself or an employer other than the Company
or any of its affiliates, knowledge which was acquired by him during
the course of his employment with the Company and its affiliates, and
which is generally known to persons of his experience in other
companies in the same industry.
7. Noncompetition. During the Noncompetition Period (as defined below),
--------------
the Executive agrees that he will not directly or indirectly engage in, assist,
perform services for, establish or open, or have any equity interest (other than
ownership of 5% or less of the outstanding stock of any corporation listed on
the New York or American Stock Exchange or included in the National Association
of Securities Dealers Automated Quotation System) in any person, firm,
corporation, or business entity (whether as an employee, officer, director,
agent, security holder, creditor, consultant, or otherwise) that engages in the
business of providing international or domestic long distance telephone
services. Nothing in this Section 7 shall be construed as limiting the
Executive's duty of loyalty to the Company while he is employed by the Company,
or any other duty he may otherwise have to the Company while he is employed by
the Company. For purposes of this Agreement, the "Noncompetition Period" shall
be the period while the Executive is employed by the Company and for the period,
if any, after the Executive's Termination Date that he is receiving payments
pursuant to Section 4 hereof
8. Equitable Remedies. The Executive acknowledges that the Company would
------------------
be irreparably injured by a violation of Sections 6 and 7 and agrees that the
Company, in addition to other remedies available to it for such breach or
threatened breach, shall be entitled to a preliminary injunction, temporary
restraining order, other equivalent relief, restraining the Executive from any
actual or threatened breach of Sections 6 and 7 without any bond or other
security being required.
9. Defense of Claims. The Executive agrees that, on and after the
-----------------
Effective Date, he will cooperate with the Company and its affiliates in the
defense of any claims that may be made against the Company or its affiliates to
the extent that such claims may relate to services performed by him for the
Company. To the extent travel is required to comply with the requirements of
this Section 9, the Company shall, to the extent possible, provide the Executive
with notice at least 10 days prior to the date on which such travel would be
required and the Company agrees to reimburse the Executive for all of his
reasonable actual expenses associated with such travel; provided, however, that
if the Company reasonably expects the travel to be extensive or unduly
burdensome to the Executive from a financial perspective, the Company may
provide to the Executive pre-paid tickets for transportation in connection with
such travel.
10. Indemnification of Executive. The Company shall provide the Executive
----------------------------
with the same level of indemnification, with respect to the services the
Executive is to provide under the terms of this Agreement, as it provides under
the terms of the Company's Bylaws to the other senior executives of the Company.
11. Representation of Executive. The Executive represents that he has not
---------------------------
signed, and is not currently subject to, any written employment agreement,
noncompetition agreement, or
-8-
<PAGE>
confidentiality agreement, and that his employment by the Company will not
violate the terms of any policy of any prior employer of the Executive regarding
noncompetition or confidentiality.
12. Notices. Notices provided for in this Agreement shall be in writing
-------
and shall be deemed to have been duly received when delivered in person or sent
by facsimile transmission, on the first business day after it is sent by air
express courier service or on the second business day following deposit in the
United States registered or certified mail, return receipt requested, postage
prepaid and addressed, in the case of the Company to the following address:
Pacific Gateway Exchange
533 Airport Boulevard, Suite 505
Burlingame, California 94010
Attention: Howard A. Neckowitz
or to the Executive at his last residence address as shown on the Company's
payroll records, or such other address as either party may have furnished to the
other in writing in accordance herewith, except that a notice of change of
address shall be effective only upon actual receipt.
13. Withholding. All compensation payable under this Agreement shall be
-----------
subject to customary withholding taxes and other employment taxes as required
with respect to compensation paid by a corporation to an employee and the amount
of compensation payable hereunder shall be reduced appropriately to reflect the
amount of any required withholding. The Company shall have no obligation to
make any payments to the Executive or to make the Executive whole for the amount
of any required taxes.
14. Successors. This Agreement shall be binding on, and inure to the
----------
benefit of, the Company and its successors and assigns and any person acquiring,
whether by merger, reorganization, consolidation, by purchase of assets or
otherwise, all or substantially all of the assets of the Company.
15. Nonalienation. The interests of the Executive under this Agreement
-------------
are not subject to the claims of his creditors, other than the Company, and may
not otherwise be voluntarily or involuntarily assigned, alienated or encumbered.
16. Waiver of Breach. The waiver by either the Company or the Executive
----------------
of a breach of any provision of this Agreement shall not operate as or be deemed
a waiver of any subsequent breach by either the Company or the Executive.
Continuation of payments hereunder by the Company following a breach by the
Executive of any provision of this Agreement shall not preclude the Company from
thereafter terminating said payments based upon the same violation.
17. Arbitration. Any dispute, claim or controversy relating to or arising
-----------
out of this Agreement (or the breach thereof) shall be settled by final, binding
and non-appealable arbitration before the American Arbitration Association (the
"Association"), with the hearing to be held in Santa Clara or San Mateo County,
California, under the California Employment
-9-
<PAGE>
Dispute Resolution Rules then in effect for that organization. This Section 15
shall not be construed to limit the Company's right to obtain relief under
Section 8 with respect to any matter or controversy subject to Section 8, and,
pending a final determination by the arbitrator with respect to any such matter
or controversy, the Company shall be entitled to obtain any such relief by
direct application to a court of law, without being required to first arbitrate
such matter or controversy. Arbitration shall be conducted before a single
arbitrator selected by the Company and the Executive. In the event the parties
cannot agree on an arbitrator, then the Association will supply both parties
with a list of seven names from which the parties will alternately strike one
name until only one remains, first choice is determined by a coin toss. The
party winning the coin toss has the option of striking first. Judgment may be
entered on the arbitrator's award in any court of competent jurisdiction to
prevent any continuation of any violation of the provisions of this Agreement.
The cost of the arbitrator, any record or transcript of the arbitration, and
administrative fees, shall be equally borne by the parties. Each party shall
bear the fees of their respective attorneys, the expenses of their witnesses and
any other expenses connected with presenting their cases.
18. Severability. It is mutually agreed and understood by the parties
------------
that should any of the agreements and covenants contained herein be determined
by any court of competent jurisdiction to be invalid by virtue of being vague or
unreasonable, including but not limited to the provisions of Sections 6 and 7,
then the parties hereto consent that this Agreement shall be amended retroactive
to the date of its execution to include the terms and conditions said court
deems to be reasonable and in conformity with the original intent of the parties
and the parties hereto consent that under such circumstances, said court shall
have the power and authority to determine what is reasonable and in conformity
with the original intent of the parties to the extent that said covenants and/or
agreements are enforceable.
19. Applicable Law. This Agreement shall be construed in accordance with
--------------
the laws of the State of California.
20. Amendment. This Agreement may be amended or canceled by mutual
---------
Agreement of the parties in writing without the consent of any other person.
21. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Each counterpart may consist of a copy hereof containing multiple signature
pages, each signed by one party hereto, but together signed by both of the
parties hereto.
22. Other Agreements. This Agreement constitutes the sole and complete
----------------
Agreement between the Company and the Executive and supersedes all other
agreements, both oral and written, between the Company and the Executive with
respect to the matters contained herein including, without limitation any prior
employment agreements between the Company and the Executive. No verbal or other
statements, inducements, or representations have been made to or relied upon by
the Executive. The parties have read and understand this Agreement.
-10-
<PAGE>
Dated as of the Effective Date.
PACIFIC GATEWAY EXCHANGE, INC.
By:
--------------------------------------------
Its: President and Chief Executive Officer
-----------------------------------------------
EXECUTIVE
-11-
<PAGE>
Exhibit A
Definition of Change in Control
For purposes of the Agreement, a "Change in Control" shall mean the
earliest to occur of any one of the following events:
(1) any "Person", as such term is used in Section 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(other than the Company, the Executive, any corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company, and any trustee or other fiduciary holding securities under
an employee benefit plan of the Company), becomes the "beneficial
owner" (as defined in Rule 13d-3 promulgated under the Exchange Act),
of 25% or more of the combined voting power of the Company's then
outstanding securities having the right to vote for the election of
directors ("Voting Stock");
(2) the majority of the Board does not consist of individuals who are
Incumbent Directors, which term means the members of the Board on the
date of this Agreement; provided that any person becoming a director
subsequent to such date whose election or nomination for election was
supported by three-quarters of the directors who then comprised the
Incumbent Directors shall be considered to be an Incumbent Director;
(3) the Company adopts any plan of liquidation for the distribution of
all or substantially all of its assets;
(4) the company merges with or into another company, or all or
substantially all of the assets or business of the Company is
disposed of pursuant to a merger, consolidation or other transaction
(unless the shareholders of the Company immediately prior to such
merger, consolidation or other transaction beneficially own, directly
or indirectly, in substantially the same proportion as they owned the
Voting Stock of the Company, all of the Voting Stock or other
ownership interest of the entity or entities, if any, that succeed to
the business of the Company); or
(5) the Company combines with any other company and is the surviving
corporation but, immediately after the combination, the shareholders
of the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of the combined company
(there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of the combined company,
any shares received by affiliates of such other company in exchange
for stock of such other company).
<PAGE>
Once a Change in Control has occurred, no subsequent event shall be considered a
Change in Control for purposes of this Agreement.
<PAGE>
- -----------------------------------------------------------------------------
Exhibit 10.8
$30,000,000
CREDIT AGREEMENT
Among
PACIFIC GATEWAY EXCHANGE, INC.
And
BANK OF AMERICA, NT&SA
as Administrative Agent
And
NATIONSBANC MONTGOMERY SECURITIES LLC
as Lead Arranger
And
LENDERS
Dated as of December 18, 1998
- -------------------------------------------------------------------------------
<PAGE>
$30,000,000
PACIFIC GATEWAY EXCHANGE, INC.
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
ARTICLE I. DEFINITIONS
1.01. Definitions................................................................................... 1
1.02. Accounting and Other Terms.................................................................... 18
1.03. Currency Equivalents Generally................................................................ 19
ARTICLE II. THE LOAN FACILITY
2.01. Revolver Loan................................................................................. 19
2.02. Making Advances............................................................................... 19
2.03. Evidence of Debt for Borrowed Money........................................................... 21
2.04. Optional Prepayments.......................................................................... 21
2.05. Mandatory Prepayments......................................................................... 21
2.06. Repayment..................................................................................... 22
2.07. Interest...................................................................................... 22
2.08. Default Interest.............................................................................. 23
2.09. Continuation and Conversion Elections......................................................... 23
2.10. Fees.......................................................................................... 24
2.11. Reduction of Commitments...................................................................... 25
2.12. Funding Losses................................................................................ 25
2.13. Computations and Manner of Payments........................................................... 26
2.14. Yield Protection; Changed Circumstances....................................................... 27
2.15. Use of Proceeds............................................................................... 29
2.16. Collateral.................................................................................... 29
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit................................................................. 30
3.02. Letters of Credit Fee......................................................................... 31
3.03. Reimbursement Obligations..................................................................... 31
3.04. Lenders' Obligations.......................................................................... 32
3.05. Administrative Agent's Obligations............................................................ 33
3.06. Phase-In of the Euro.......................................................................... 33
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to the Initial Advance and the Issuance of the Initial Letter of Credit.. 34
4.02. Conditions Precedent to All Advances and Letters of Credit.................................... 36
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties................................................................ 37
5.02. Survival of Representations and Warranties.................................................... 44
</TABLE>
ii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE VI. GENERAL COVENANTS
6.01. Preservation of Existence and Similar Matters................................................. 44
6.02. Business; Compliance with Applicable Law...................................................... 45
6.03. Maintenance of Properties..................................................................... 45
6.04. Accounting Methods and Financial Records...................................................... 45
6.05. Insurance..................................................................................... 45
6.06. Payment of Taxes and Claims................................................................... 45
6.07. Visits and Inspections........................................................................ 45
6.08. Payment of Debt for Borrowed Money............................................................ 46
6.09. Use of Proceeds............................................................................... 46
6.10. Indemnity..................................................................................... 46
6.11. Environmental Law Compliance.................................................................. 47
6.12. Acquisitions, Generally....................................................................... 48
6.13. Subsidiary Designation........................................................................ 48
6.14. Subsidiary Creation or Acquisition............................................................ 48
6.15. Year 2000 Compliance.......................................................................... 48
6.16. Eurocurrency Conversion to the Euro........................................................... 48
ARTICLE VII. INFORMATION COVENANTS
7.01. Quarterly Financial Statements and Information................................................ 49
7.02. Annual Financial Statements and Information................................................... 49
7.03. Compliance Certificates....................................................................... 50
7.04. Copies of Other Reports and Notices........................................................... 50
7.05. Notice of Litigation, Default and Other Matters............................................... 51
7.06. ERISA Reporting Requirements.................................................................. 51
ARTICLE VIII. NEGATIVE COVENANTS
8.01. Financial Covenants........................................................................... 53
8.02. Debt for Borrowed Money....................................................................... 53
8.03. Liens......................................................................................... 54
8.04. Investments................................................................................... 54
8.05. Liquidation, Disposition or Acquisition of Assets, Merger, New Subsidiaries................... 55
8.06. Guaranties; Contingent Liabilities............................................................ 56
8.07. Restricted Payments........................................................................... 56
8.08. Affiliate Transactions........................................................................ 56
8.09. Compliance with ERISA......................................................................... 56
8.10. Capital Stock................................................................................. 57
8.11. Sale and Leaseback............................................................................ 57
8.12. Sale or Discount of Receivables............................................................... 57
8.13. Limitation on Restrictive Agreements.......................................................... 57
8.14. Amendment of Material Agreements.............................................................. 57
8.15. Name Changes.................................................................................. 58
8.16. Unrestricted Subsidiaries..................................................................... 58
</TABLE>
iii
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE IX. EVENTS OF DEFAULT
9.01. Events of Default............................................................................. 58
9.02. Remedies upon Default......................................................................... 61
9.03. Cumulative Rights............................................................................. 62
9.04. Waivers....................................................................................... 62
9.05. Performance by Administrative Agent or any Lender............................................. 62
9.06. Expenditures.................................................................................. 62
9.07. Control....................................................................................... 62
ARTICLE X. THE ADMINISTRATIVE AGENT
10.01. Authorization and Action...................................................................... 63
10.02. Administrative Agent's Reliance, Etc.......................................................... 63
10.03. Bank of America, NT&SA and Affiliates......................................................... 64
10.04. Lender Credit Decision........................................................................ 64
10.05. Indemnification by Lenders.................................................................... 64
10.06. Successor Administrative Agent................................................................ 64
ARTICLE XI. MISCELLANEOUS
11.01. Amendments and Waivers........................................................................ 65
11.02. Notices....................................................................................... 65
11.03. Parties in Interest........................................................................... 67
11.04. Assignments and Participations................................................................ 68
11.05. Sharing of Payments........................................................................... 69
11.06. Right of Set-off.............................................................................. 69
11.07. Costs, Expenses, and Taxes.................................................................... 69
11.08. Rate Provision................................................................................ 70
11.09. Severability.................................................................................. 71
11.10. Exceptions to Covenants....................................................................... 71
11.11. Counterparts.................................................................................. 71
11.12. GOVERNING LAW; WAIVER OF JURY TRIAL........................................................... 71
11.13. ENTIRE AGREEMENT.............................................................................. 72
</TABLE>
iv
<PAGE>
Table of Schedules and Exhibits
Schedules
--------
Schedule 1.01 - Eurocurrencies
Schedule 1.02 - Unrestricted Subsidiaries as of the Closing Date
Schedule 5.01(a) - Jurisdictions of Qualification, Ownership and Capital
Structure - the Borrower and its Subsidiaries
Schedule 5.01(f) - Non-Compliance with FCC or any applicable PUC
Schedule 5.01(h) - Existing Litigation of the Borrower and its Subsidiaries
Schedule 8.02 - Existing Debt and Liabilities of the Borrower and the
Restricted Subsidiaries
Schedule 8.03 - Existing Liens of the Borrower and the Restricted
Subsidiaries
Schedule 8.04 - Existing Investments of the Borrower and the Restricted
Subsidiaries
Schedule 8.08 - Permitted Affiliate Non-Market Transactions
Schedule 8.16 - Permitted Transactions among the Borrower and the
Restricted Subsidiaries and the Unrestricted
Subsidiaries
Exhibits
--------
Exhibit A - Form of Revolver Note
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Borrowing Notice
Exhibit D - Form of Conversion/Continuation Notice
Exhibit E - Form of Assignment and Acceptance
Exhibit F - Form of Unlimited Guaranty
v
<PAGE>
$30,000,000
PACIFIC GATEWAY EXCHANGE, INC.
CREDIT AGREEMENT
THIS CREDIT AGREEMENT is dated as of December 18, 1998, among PACIFIC
GATEWAY EXCHANGE, INC., a Delaware corporation (the "Borrower"), the Lenders (as
defined below), NATIONSBANK MONTGOMERY SECURITIES LLC, as lead arranger and BANK
OF AMERICA, NT&SA, as a Lender and Administrative Agent.
BACKGROUND.
WHEREAS, the Borrower, the Administrative Agent and the Lenders hereby
enter into a Credit Agreement which provides for one 364-day revolving loan
facility in the amount of $30,000,000 (which such loan facility shall also
include multicurrency letter of credit availability of not more than
$5,000,000).
AGREEMENT.
NOW, THEREFORE, for valuable consideration hereby acknowledged, the parties
hereto agree as follows:
ARTICLE I. DEFINITIONS
1.01. Definitions. As used in this Agreement, the following terms have
the respective meanings indicated below (such meanings to be applicable equally
to both the singular and plural forms of such terms):
"Administrative Agent" means Bank of America, NT&SA in its capacity as
Administrative Agent hereunder, or any successor Administrative Agent appointed
pursuant to Section 10.06 hereof.
"Advance" means an advance made by a Lender to the Borrower pursuant to
Section 2.01 hereof or any payment by Administrative Agent of a draft drawn
under any Letter of Credit which is not reimbursed by the Borrower as provided
in Section 3.03(d), which shall include Revolver Advances and Refinancing
---------------
Advances.
"Affiliate" means a Person that directly, or indirectly through one or more
intermediaries, Controls or is Controlled By or is Under Common Control with
another Person.
"Agreement" means this Credit Agreement, as hereafter amended, modified,
increased, extended, restated or supplemented from time to time.
1
<PAGE>
"Annualized Operating Cash Flow" means the product of (a) Operating Cash
Flow for the most recently completed two fiscal quarters, times (b) two.
"Applicable Law" means in respect of any Person, all provisions of Laws of
Tribunals applicable to such Person, and all orders and decrees of all courts
and arbitrators in proceedings or actions to which the Person in question is a
party.
"Applicable Margin" means, with respect to LIBOR Advances, 1.125% per
annum, and with respect to Base Rate Advances, 0% per annum.
"Applicable Specified Percentage" means with respect to any Lender, in the
case of the Revolver Loan, such Lender's Revolver Specified Percentage.
"Application" means any stand-by letter of credit application delivered to
Administrative Agent for or in connection with any stand-by Letter of Credit
pursuant to Article III hereof, in Administrative Agent's standard form for
stand-by multicurrency letters of credit.
"Assignment and Acceptance" means an assignment and acceptance entered into
by a Lender and an assignee in accordance with the terms and conditions of
Section 11.04 hereof, and accepted by Administrative Agent, in the form of
Exhibit E hereto.
- ---------
"Auditor" means Coopers & Lybrand L.L.P. or other independent certified
public accountants selected by the Borrower and acceptable to Administrative
Agent.
"Authorized Officer" means, with respect to the Borrower and its
Subsidiaries respectively, any of the Chief Executive Officer, the President,
the Chief Financial Officer or any Vice President of the Borrower.
"Bank Affiliate" means the holding company of any Lender, or any wholly
owned direct or indirect subsidiary of such holding company or of such Lender.
"Base Advance" means an Advance under the Revolver Loan, bearing interest
at the Base Rate.
"Base Rate" means a per annum interest rate equal to the lesser of (a) the
Highest Lawful Rate, and (b) the sum of the Applicable Margin plus the higher of
(i) a fluctuating rate per annum as shall be in effect from time to time
announced or published by Bank of America, NT&SA as its "Reference Rate", and
which may not necessarily be the lowest interest rate charged by Bank of
America, NT&SA, and (ii) the Federal Funds Rate in effect at such time plus
.50%.
"Bermuda Corp." means Pacific Gateway Exchange (Bermuda) Limited, a Bermuda
corporation and wholly owned Subsidiary of the Borrower.
"Board of Directors" means the Board of Directors of the Borrower or any
committee thereof duly authorized to act on behalf of such Board.
2
<PAGE>
"Borrowing" means a borrowing of the same Type made on the same day.
"Borrowing Notice" has the meaning set forth in Section 2.02(a) hereof.
"Business Day" means a day on which banks are open for the transaction of
business as required by this Agreement in San Francisco, California, and, with
respect to any LIBOR Advance, a domestic business day in London, England and a
day on which commercial banks are open for international business in London,
England (including dealings in United States dollar deposits), and as otherwise
relevant to the determination to be made or the action to be taken.
"Capital Expenditures" means capital expenditures, as defined in accordance
with GAAP.
"Capital Leases" means capital leases and subleases, as defined in
accordance with GAAP.
"Capital Stock" means, as to any Person, the equity interests in such
Person, including, without limitation, the shares of each class of capital stock
of any Person that is a corporation, each class of partnership interests
(including without limitation, general, limited and preference units) in any
Person that is a partnership, and each membership interest in any Person that is
a limited liability company.
"Closing Date" means the date hereof.
"Change of Control" means the occurrence of any one or more of the
following events: (i) any event which constitutes a change in Control of the
Borrower or (ii) any event which results in the Borrower's failure to own and
control 100% of the Capital Stock of the Restricted Subsidiaries and Bermuda
Corp., except as otherwise permitted hereunder.
"Code" means the Internal Revenue Code of 1986, as amended, and any
reference to any provision of the Code shall include all successor provisions
thereto.
"Collateral" has the meaning ascribed thereto in Section 2.16 hereof.
"Commitment" means the Revolver Commitment.
"Commitment Fee" means the Revolver Commitment Fee.
"Communications Act" means, collectively, the Communications Act of 1934,
as amended by the Telecommunications Act of 1996, and as further amended, and
the rules and regulations promulgated thereunder, as from time to time in
effect.
"Compliance Certificate" means a certificate of an Authorized Officer in
the form of Exhibit B hereto, (a) certifying that such individual has no
---------
knowledge that a Default or Event of Default has occurred and is continuing, or
if a Default or Event of Default has occurred and is continuing, a statement as
to the nature thereof and the action being taken or proposed to be taken
3
<PAGE>
with respect thereto and (b) setting forth detailed calculations with respect to
the covenants described in Section 8.01 hereof.
"Consequential Loss" with respect to (a) the Borrower's payment of all or
any portion of the then-outstanding principal amount of a LIBOR Advance on a day
other than the last day of the related Interest Period, including, without
limitation, payments made as a result of the acceleration of the maturity of a
Note, (b) subject to Administrative Agents' prior consent, a LIBOR Advance made
on a date other than the date on which the Advance is to be made according to
Section 2.02(a) or Section 2.09 hereof to the extent such Advance is made on
such other date at the request of the Borrower, or (c) any of the circumstances
specified in Sections 2.04, 2.05 and 2.06 hereof on which a Consequential Loss
may be incurred, means any loss, cost or expense incurred by any Lender as a
result of the timing of the payment or Advance or in liquidating, redepositing,
redeploying or reinvesting the principal amount so paid or affected by the
timing of the Advance or the circumstances described in Sections 2.04, 2.05 or
2.06 hereof, which amount shall be the sum of (i) the interest that, but for the
payment or timing of Advance, such Lender would have earned in respect of that
principal amount, reduced, if such Lender is able to redeposit, redeploy, or
reinvest the principal amount, by the interest earned by such Lender as a result
of redepositing, redeploying or reinvesting the principal amount plus (ii) any
expense or penalty incurred by such Lender by reason of liquidating,
redepositing, redeploying or reinvesting the principal amount. Each
determination by each Lender of any Consequential Loss is, in the absence of
manifest error, presumptive evidence of the validity of such claim, which upon
request by the Borrower shall be certified in a certificate.
"Contingent Liability" means, as to any Person, any obligation or Guaranty,
contingent or otherwise, of such Person guaranteeing or having the economic
effect of guaranteeing any Debt or obligation of any other Person in any manner,
whether directly or indirectly, including without limitation any obligation of
such Person, direct or indirect, (a) to purchase or pay (or advance or supply
funds for the purchase or payment of) such Debt or to purchase (or to advance or
supply funds for the purchase of) any security for the payment of such Debt, (b)
to purchase Property or services for the purpose of assuring the owner of such
Debt of its payment, or (c) to maintain the solvency, working capital, equity,
cash flow, fixed charge or other coverage ratio, or any other financial
condition of the primary obligor so as to enable the primary obligor to pay any
Debt or to comply with any agreement relating to any Debt or obligation, but
excluding endorsement of checks, drafts and other instruments in the ordinary
course of business, provided that this definition of "Contingent Liability"
shall not include Guaranties by the Borrower or any Subsidiary of the Borrower
of any obligations of the Borrower or any wholly owned Restricted Subsidiary of
the Borrower that has executed an Unlimited Guaranty.
"Continue," "Continuation" and "Continued" each refer to the continuation
pursuant to Section 2.09 hereof of a LIBOR Advance from one Interest Period to
the next Interest Period.
"Control" or "Controlled By" or "Under Common Control" mean possession,
direct or indirect, of power to direct or cause the direction of management or
policies (whether through ownership of voting securities, by contract or
otherwise); provided that, in any event any Person which beneficially owns (a)
--------
15% or more (in number of votes) of the securities having ordinary voting power
for the election of directors of a corporation shall be conclusively presumed to
control
4
<PAGE>
such corporation and (b) 10% or more of the interest in capital or profits of a
partnership shall be conclusively presumed to control such partnership.
"Controlled Group" means, as to any Person, all members of a controlled
group of corporations and all trades or businesses (whether or not incorporated)
which are under common control with such Person and which, together with such
Person, are treated as a single employer under Section 414(b), (c), (m) or (o)
of the Code.
"Conversion or Continuance Notice" has the meaning set forth in Section
2.09(b) hereof.
"Debt" means all obligations, contingent or otherwise, which in accordance
with GAAP are required to be classified on the balance sheet as liabilities, and
in any event including (without duplication) (a) Capital Leases, (b) Contingent
Liabilities that are required to be disclosed and quantified in notes to
consolidated financial statements in accordance with GAAP, (c) liabilities
secured by any Lien on any Property, regardless of whether such secured
liability is with or without recourse, and (d) installment payment non-compete
agreements.
"Debt for Borrowed Money" means, with respect to the Borrower, the
Restricted Subsidiaries and Bermuda Corp., at any date, without duplication, all
Debt of the Borrower, the Restricted Subsidiaries and Bermuda Corp. that
constitutes (a) all obligations of the Borrower, such Restricted Subsidiaries
and Bermuda Corp. for borrowed money, letters of credit (or applications for
letters of credit) or other similar instruments, (b) all obligations of the
Borrower, the Restricted Subsidiaries and Bermuda Corp. evidenced by bonds,
debentures, notes or other similar instruments, (c) all obligations of the
Borrower, the Restricted Subsidiaries and Bermuda Corp. to pay the deferred
purchase price of property or services, except trade accounts payable arising in
the ordinary course of business, (d) the principal component of obligations
under Capital Leases of the Borrower, the Restricted Subsidiaries and Bermuda
Corp., (e) installment payment non-compete agreements for the Borrower, each
Restricted Subsidiary and Bermuda Corp., and (f) all Contingent Liabilities
relating to obligations of another Person (other than a wholly owned Restricted
Subsidiary of the Borrower that has executed an Unlimited Guaranty, with respect
to Debt of another wholly owned Restricted Subsidiary of the Borrower that has
executed an Unlimited Guaranty) of the type described in (a) through (e) above.
"Debtor Relief Laws" means applicable bankruptcy, reorganization,
moratorium, or similar Laws, or principles of equity affecting the enforcement
of creditors' rights generally.
"Default" means any event specified in Section 9.01 hereof, whether or not
any requirement in connection with such event for the giving of notice, lapse of
time, or happening of any further condition has been satisfied.
"Distribution" means, as to any Person, (a) any declaration or payment of
any distribution or dividend (other than a stock dividend) on, or the making of
any pro rata distribution, loan, advance, or investment to or in any holder of,
any partnership interest or shares of Capital Stock or other equity interest of
such Person (or the establishment of a sinking fund or otherwise setting aside
of funds for any such purpose), or (b) any purchase, redemption, or other
acquisition or retirement for value of any
5
<PAGE>
shares of partnership interest or Capital Stock or other equity interest of such
Person (or the establishment of a sinking fund or otherwise setting aside of
funds for any such purpose).
"Dollars" and the symbol "$" mean the lawful currency of the United States.
"EMU" shall have the meaning ascribed thereto in Section 6.17 hereto.
------------
"Environmental Claim" means any written notice by any Tribunal alleging
liability for damage to the environment, or by any Person alleging liability for
personal injury (including sickness, disease or death), resulting from or based
upon (a) the presence or release (including sudden or non-sudden, accidental or
non-accidental, leaks or spills) of any Hazardous Material at, in or from
property, whether or not owned by the Borrower or any of its Subsidiaries, or
(b) circumstances forming the basis of any violation, or alleged violation, of
any Environmental Law.
"Environmental Laws" means the Comprehensive Environmental Response,
Compensation, and Liability Act (42 U.S.C. (S)9601 et seq.) ("CERCLA"), the
Hazardous Material Transportation Act (49 U.S.C. (S)1801 et seq.), the Resource
Conservation and Recovery Act (42 U.S.C. (S)6901 et seq.), the Federal Water
Pollution Control Act (33 U.S.C. (S)1251 et seq.), the Clean Air Act (42 U.S.C.
(S)7401 et seq.), the Toxic Substances Control Act (15 U.S.C. (S)2601 et seq.),
and the Occupational Safety and Health Act (29 U.S.C. (S)651 et seq.) ("OSHA"),
as such laws have been or hereafter may be amended or supplemented, and any and
all analogous future federal, or present or future state or local, Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and the rulings and regulations issued thereunder, as from time to time
in effect.
"ERISA Affiliate" means any Person that for purposes of Title IV of ERISA
is a member of the controlled group of the Borrower or any Obligor or any
Unrestricted Subsidiary, or is under common control with Borrower or any Obligor
or any Unrestricted Subsidiary, within the meaning of Section 414(c) of the
Code, and the regulations and rulings issued thereunder.
"ERISA Event" means (a) a reportable event, within the meaning of Section
4043 of ERISA, unless the 30-day notice requirement with respect thereto has
been waived by the PBGC, (b) the issuance by the administrator of any Plan of a
notice of intent to terminate such Plan, pursuant to Section 4041(a)(2) of ERISA
(including any such notice with respect to a plan amendment referred to in
Section 4041(e) of ERISA), (c) the withdrawal by the Borrower, any Subsidiary of
the Borrower or an ERISA Affiliate from a Multiple Employer Plan during a Plan
year for which it was a substantial employer, as defined in Section 4001(a)(2)
of ERISA, (d) the failure by the Borrower any Subsidiary of the Borrower, or any
ERISA Affiliate to make a payment to a Plan required under Section 302 of ERISA,
(e) the adoption of an amendment to a Plan requiring the provision of security
to such Plan, pursuant to Section 307 of ERISA, or (f) the institution by the
PBGC of proceedings to terminate a Plan, pursuant to Section 4042 of ERISA, or
the occurrence of any event or condition that constitutes grounds under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, a Plan.
6
<PAGE>
"Euro" shall have the meaning ascribed thereto in Section 6.17 hereof.
------------
"Eurocurrency" means any currency listed on Schedule 1.01 and any other
-------------
lawful currencies acceptable to each Lender evidenced by its prior written
consent (a) for which Borrower has delivered to Administrative Agent an
Application for a Letter of Credit and (b) which is freely convertible into
Dollars.
"Event of Default" means any of the events specified in Section 9.01 of
this Agreement, provided there has been satisfied any requirement in connection
therewith for the giving of notice, lapse of time, or happening of any further
condition.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"FCC" means the Federal Communications Commission, or any governmental
agency succeeding to the functions thereof.
"Federal Funds Rate" means, for any period, a fluctuating interest rate per
annum equal for each day during such period to the weighted average of the rates
on overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such day (or, if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of San Francisco, or, if such rate is not so published for any day
which is a Business Day, the average of the quotations for such date on such
transactions received by Administrative Agent from three federal funds brokers
of recognized standing selected by it.
"GAAP" means generally accepted accounting principles applied on a
consistent basis. Application on a consistent basis shall mean that the
accounting principles observed in a current period are comparable in all
material respects to those applied in a preceding period, except for new
developments or statements promulgated by the Financial Accounting Standards
Board and other changes in accounting methods permitted by generally accepted
accounting principles.
"Guarantors" means each Restricted Subsidiary of the Borrower existing on
the Closing Date or formed or acquired by the Borrower after the date hereof,
and any direct or indirect Restricted Subsidiary of the Borrower from time to
time thereafter.
"Guaranty" means a guaranty executed by any Person of the obligations of
another Person, or any agreement by which such Person assumes, guarantees,
endorses, contingently agrees to purchase or provide funds for the payment of,
or otherwise becomes liable upon, the obligation of any other Person, or agrees
to maintain the net worth or working capital or other financial condition of any
other Person, or otherwise assures any creditor or such other Person against
loss, including, without limitation, any comfort letter, or take-or-pay contract
and shall include without limitation, the contingent liability of such Person in
connection with any application for a letter of credit.
"Hazardous Materials" means all materials subject to any Environmental Law,
including without limitation materials listed in 49 C.F.R. (S) 172.101,
Hazardous Substances, explosive or
7
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radioactive materials, hazardous or toxic wastes or substances, petroleum or
petroleum distillates, asbestos, or material containing asbestos.
"Hazardous Substances" means hazardous waste as defined in the Clean Water
Act, 33 U.S.C. (S) 1251 et seq., the Comprehensive Environmental Response
Compensation and Liability Act as amended by the Superfund Amendments and
Reauthorization Act, 42 U.S.C. (S) 9601 et seq., the Resource Conservation
Recovery Act, 42 U.S.C. (S) 6901 et seq., and the Toxic Substances Control Act,
15 U.S.C. (S) 2601 et seq.
"Highest Lawful Rate" means at the particular time in question the maximum
rate of interest which, under Applicable Law, any Lender is then permitted to
charge on the Obligations. If the maximum rate of interest which, under
Applicable Law, any Lender is permitted to charge on the Obligations shall
change after the date hereof, the Highest Lawful Rate shall be automatically
increased or decreased, as the case may be, from time to time as of the
effective time of each change in the Highest Lawful Rate without notice to the
Borrower.
"Income Tax Expense" means the aggregate Taxes paid or accrued by the
Borrower, the Restricted Subsidiaries and Bermuda Corp. for the relevant period
of determination.
"Insufficiency" means, with respect to any Plan, the amount, if any, of its
unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA.
"Interest Coverage Ratio" means, on any date of determination for the
Borrower, the Restricted Subsidiaries and Bermuda Corp., the ratio of (a)
Operating Cash Flow for the most recently completed fiscal quarter to (b) the
aggregate amount of cash Interest Expense actually paid during the most recently
completed fiscal quarter.
"Interest Expense" means, for the Borrower, the Restricted Subsidiaries and
Bermuda Corp. on a consolidated basis for any period of determination, the gross
interest expense for any period on Total Debt, determined in accordance with
GAAP, minus the sum of interest income for such period.
"Interest Period" means, with respect to any LIBOR Advance, the period
beginning on the date the Advance is made or continued as a LIBOR Advance and
ending one, two, three or six months thereafter (as the Borrower shall select),
provided, however, that:
- -------- -------
(a) the Borrower may not select any Interest Period that ends after
any principal repayment date unless, after giving effect to such selection,
the aggregate principal amount of LIBOR Advances having Interest Periods
that end on or prior to such principal repayment date, shall be at least
equal to the principal amount of Advances due and payable on and prior to
such date;
(b) whenever the last day of any Interest Period would otherwise occur
on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day, provided,
--------
however, that if such extension would cause the
-------
8
<PAGE>
last day of such Interest Period to occur in the next following
calendar month, the last day of such Interest Period shall occur on the
next preceding Business Day; and
(c) whenever the first day of any Interest Period occurs on a day of
an initial calendar month for which there is no numerically corresponding
day in the calendar month that succeeds such initial calendar month by the
number of months equal to the number of months in such Interest Period,
such Interest Period shall end on the last Business Day of such succeeding
calendar month.
"Interest Rate Protection Agreement" means an interest rate swap, cap,
collar or similar interest rate protection agreement between the Borrower and
any Lender.
"Investment" means any acquisition of all or substantially all of the
assets of any Person, or any direct or indirect purchase or other acquisition
of, or a beneficial interest in, any Capital Stock or other securities of any
other Person, or any direct or indirect loan, advance, or capital contribution
to or investment in any other Person, including without limitation the
incurrence or sufferance of Debt or accounts receivable of any other Person that
are not current assets or do not arise from sales to that other Person in the
ordinary course of business.
"Law" means any constitution, statute, law, ordinance, regulation, rule,
order, writ, injunction, or decree of any Tribunal.
"Lenders" means the lenders listed on the signature pages of this
Agreement, and each transferee which hereafter becomes a party to this Agreement
pursuant to Section 11.04 hereof or pursuant to an amendment to this Agreement,
so long as each is owed any portion of the Obligation or is obligated to make
any Advance hereunder.
"Lending Office" means, with respect to each Lender, its branch or
affiliate, (a) initially, the office of each Lender, branch or affiliate
identified on each Lender's signature page hereto, and (b) subsequently, such
other office of each Lender, branch or affiliate as each Lender may designate to
the Borrower and Administrative Agent as the office from which the Advances of
each Lender will be made and maintained and for the account of which all
payments of principal and interest on the Advances and the Commitment Fee will
thereafter be made. Lenders may have more than one Lending Office for the
purpose of making Base Advances and LIBOR Advances.
"Letter of Credit Commitment" means, on any date of determination, an
amount equal to the lesser of (a) $5,000,000 and (b) the Revolver Commitment
minus the sum of (i) all outstanding Revolver Advances under the Revolver Loan,
(ii) the amount available to be drawn of all outstanding Letters of Credit (or
if such Letters of Credit are denominated in a currency other than Dollars, the
Dollar equivalent of such currency) plus (iii) all reimbursement obligations
under Article III hereof (or if such reimbursement obligations are denominated
in a currency other than Dollars, the Dollar equivalent of such currency).
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<PAGE>
"Letters of Credit" means the irrevocable standby letters of credit issued
by Administrative Agent under and pursuant to Article III hereof, as each may be
amended, modified, substituted, increased, replaced, renewed or extended from
time to time.
"LIBOR Advance" means an Advance under the Revolver Loan, bearing interest
at the LIBOR Rate.
"LIBOR Lending Office" means, with respect to each Lender, the office
designated as its "LIBOR Lending Office" on each Lender's signature page hereto,
or such other office of Lender or any of its affiliates hereafter designated by
notice to the Borrower and Administrative Agent.
"LIBOR Rate" means, for any LIBOR Advance for any Interest Period
therefore, a rate per annum equal to the lesser of (a) the Highest Lawful Rate
and (b) the sum of (i) the Applicable Margin, plus (ii) the rate per annum
(rounded upwards, if necessary, to the nearest one-one hundredth (1/100th) of
one percent (1%)) appearing on Telerate Page 3750 (or any successor page) as the
London interbank offered rate for deposits in United States dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period. If for any reason such rate is not available, the term
"LIBOR Rate" shall mean, for any LIBOR Advance for any Interest Period therefor,
the rate per annum (rounded upwards, if necessary, to the nearest one-one
hundredth (1/100th) of one percent (1%)) appearing on Reuters Screen LIBO page
as the London interbank offered rate for deposits in United States dollars at
approximately 11:00 a.m. (London time) two Business Days prior to the first day
of such Interest Period for a term comparable to such Interest Period; provided,
--------
however, if more than one rate is specified on Reuters Screen LIBO Page, the
- -------
applicable rate shall be the arithmetic mean of all such rates.
"License" means, as to the Borrower, or any Subsidiary of the Borrower, any
license, permit, consent, certificate of need, authorization, certification,
accreditation, franchise, approval, or grant of rights by, or any filing or
registration with, any Tribunal or third Person (including without limitation,
the FCC or any applicable PUC) necessary for such Person to own, build,
maintain, or operate its business or Property.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien, or
charge of any kind, including without limitation any agreement to give or not to
give any of the foregoing, any conditional sale or other title retention
agreement, any lease in the nature thereof, and the filing of or agreement to
give any financing statement or other similar form of public notice under the
Laws of any jurisdiction (except for the filing of a financing statement or
notice in connection with an (a) operating lease or (b) the true consignment of
goods to the Borrower, any Restricted Subsidiary or Bermuda Corp. as consignee).
"Litigation" means any proceeding, claim, lawsuit, arbitration, and/or
investigation conducted by or before any Tribunal or arbitrator, including
without limitation proceedings, claims, lawsuits, and/or investigations under or
pursuant to any environmental, occupational, safety and health, antitrust,
unfair competition, securities, Tax, or other Law, or under or pursuant to any
contract, agreement, or other instrument.
10
<PAGE>
"Loan Papers" means this Agreement, the Notes, the Unlimited Guaranties,
the pledge agreement pledging 66% of the shares of Bermuda Corp. to the
Administrative Agent, financing statements, any Interest Rate Protection
Agreement and related documents entered into by the Borrower with any Lender or
any Bank Affiliate, all Letters of Credit, all Applications and all other
agreements between the Borrower or any Restricted Subsidiary and the
Administrative Agent related to any Letter of Credit, Assignment and
Acceptances, post-closing letters, all security agreements, pledges, mortgages,
deeds of trust, assignments, leasehold mortgages, leasehold deeds of trust,
collateral assignments and other agreements and documentation relating to the
Liens securing the Obligations, and all other documents, instruments,
agreements, or certificates executed or delivered from time to time by any
Person in connection with this Agreement or as security for the Obligations
hereunder, granting collateral or otherwise, as each such agreement may be
amended, modified, substituted, replaced or extended from time to time.
"Majority Lenders" means any combination of Lenders having at least 51.00%
of the aggregate amount of outstanding Advances hereunder, provided, however,
that if no Advances are outstanding, such term means any combination of one or
more Lenders having Total Specified Percentages equal to at least 51.00%.
"Material Adverse Change" means any circumstance or event that is or could
reasonably be expected to (a) be material and adverse to the financial
condition, business, operations, prospects, or Properties of the Borrower, the
Restricted Subsidiaries and Bermuda Corp. on a consolidated basis, (b)
materially and adversely affect the validity or enforceability of any Loan Paper
or (c) cause a Default or Event of Default.
"Maturity Date" means the earlier of December 16,1999, or such earlier date
on which the total amount of outstanding Obligations are due and payable
(including, without limitation, whether by acceleration, scheduled reduction of
the Commitment to zero, mandatory or voluntary commitment reduction of the
Commitment to zero, installment payments or otherwise).
"Maximum Amount" means the maximum amount of interest which, under
Applicable Law, a Lender is permitted to charge on the Obligations.
"Multiemployer Plan" means a multiemployer plan, as defined in Section
4001(a)(3) of ERISA, to which the Borrower, any Subsidiary of the Borrower, or
any ERISA Affiliate is making or accruing an obligation to make contributions,
or has within any of the preceding five plan years made or accrued an obligation
to make contributions, such plan being maintained pursuant to one or more
collective bargaining agreements.
"Multiple Employer Plan" means a single employer plan, as defined in
Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the
Borrower, any Subsidiary of the Borrower, or any ERISA Affiliate and at least
one Person other than the Borrower, any Subsidiary of the Borrower and any ERISA
Affiliate, or (b) was so maintained and in respect of which the Borrower, any
Subsidiary of the Borrower, or any ERISA Affiliate could have liability under
Section 4064 or 4069 of ERISA in the event such plan has been or were to be
terminated.
11
<PAGE>
"National Currency" shall have the meaning ascribed thereto in Section 6.17
------------
hereof.
"Net Proceeds" means the gross cash proceeds received by the Borrower, any
Restricted Subsidiary or Bermuda Corp. in connection with or as a result of any
asset sale not in the ordinary course of business, minus (so long as each of the
following are estimated in good faith by the management of the Borrower and
certified to the Lenders in reasonable detail by an Authorized Officer) (a)
actual taxes estimated in good faith by the Board of Directors incurred as a
result of such sale (after giving effect to all tax benefits available to the
Borrower, such Restricted Subsidiary and Bermuda Corp.), and (b) reasonable and
customary transaction costs payable by the Borrower, any Restricted Subsidiary
and Bermuda Corp. that are related to such sale and payable to a Person other
than an Affiliate of the Borrower and its Subsidiaries.
"Notes" means each of the Revolver Notes, and "Note" means any Revolver
Note, as applicable in the context used, and in each case, with any extension,
renewal or amendment thereof, or substitution therefor.
"Obligations" means all present and future obligations, indebtedness and
liabilities, and all renewals and extensions of all or any part thereof, of the
Borrower and each other Obligor to Lenders and Administrative Agent arising
from, by virtue of, or pursuant to this Agreement, any of the other Loan Papers
and any and all renewals and extensions thereof or any part thereof, or future
amendments thereto, all interest accruing on all or any part thereof and
reasonable attorneys' fees incurred by the Administrative Agent for the
preparation of this Agreement and consummation of this credit facility,
execution of waivers, amendments and consents, and in connection with the
enforcement or the collection of all or any part thereof, and reasonable
attorneys' fees incurred by the Lenders in connection with the enforcement or
the collection of all or any part of the Obligations during the continuance of
an Event of Default, in each case whether such obligations, indebtedness and
liabilities are direct, indirect, fixed, contingent, joint, several or joint and
several. Without limiting the generality of the foregoing, "Obligations"
includes all amounts which would be owed by the Borrower, each other Obligor and
any other Person (other than Administrative Agent or Lenders) to Administrative
Agent or Lenders under any Loan Paper, but for the fact that they are
unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Borrower, any other Obligor
or any other Person (including all such amounts which would become due or would
be secured but for the filing of any petition in bankruptcy, or the commencement
of any insolvency, reorganization or like proceeding of the Borrower, any other
Obligor or any other Person under any Debtor Relief Law).
"Obligor" means (a) the Borrower, (b) each Restricted Subsidiary, (c)
Bermuda Corp., (d) each other Person liable for performance of any of the
Obligations and (e) each other Person the Property of which secures the
performance of any of the Obligations.
"Operating Cash Flow" means the sum of
(a) for the Borrower and the Restricted Subsidiaries, for any period,
the consolidated net income (loss) for such period taken as a single
accounting period, plus the sum of the following amounts for such period to
the extent included in the determination of such
12
<PAGE>
consolidated net income or loss, without duplication: (i) depreciation
expense, (ii) amortization expense and other non-cash losses, (iii)
Interest Expense, (iv) Income Tax Expense and (v) extraordinary losses,
minus the sum of (A) extraordinary gains and (B) non-cash income, plus
(b) for Bermuda Corp. for any period, 66% of the result determined by
the following formula: the sum of (i) the consolidated net income (loss)
for such period taken as a single accounting period, plus (ii) the sum of
the following amounts for such period to the extent included in the
determination of such consolidated net income or loss, without duplication:
(A) depreciation expense, (B) amortization expense and other non-cash
losses, (C) Interest Expense, (D) Income Tax Expense and (E) extraordinary
losses, minus the sum of (I) extraordinary gains and (II) non-cash income.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
agency or entity performing substantially the same functions.
"Permitted Acquisition" means acquisitions made by the Borrower or any
Restricted Subsidiary in telecommunications or internet businesses or related
businesses, so long as in each case (a) there exists no Default or Event of
Default both before and after giving effect to any such acquisition, (b) such
acquired entity becomes a Restricted Subsidiary and executes an Unlimited
Guaranty of the Obligations or such acquired assets are acquired by the Borrower
or a Restricted Subsidiary , and (c) the Borrower provides the Administrative
Agent and each Lender with information demonstrating pro forma compliance with
the terms of this Agreement through the Maturity Date, after giving effect to
such Permitted Acquisition, including, without limitation, each provision of
Section 8.01 hereof.
"Permitted Asset Sales" means (a) assets sales in the ordinary course of
business and (b) assets sales of equipment that is worn out, obsolete, damaged
or otherwise unsuitable for use in the business.
"Permitted Liens" means, as applied to any Person:
(a) any Lien in favor of the Lenders to secure the Obligations hereunder;
(b) (i) Liens on real estate for real estate Taxes not yet delinquent, (ii)
Liens created by lease agreements, statute or common law to secure the payments
of rental amounts and other sums not yet due thereunder, (iii) Liens on
leasehold interests created by the lessor in favor of any mortgagee of the
leased premises, and (iv) Liens for Taxes, assessments, governmental charges,
levies or claims that are being diligently contested in good faith by
appropriate proceedings and for which adequate reserves shall have been set
aside on such Person's books, but only so long as no foreclosure, restraint,
sale or similar proceedings have been commenced with respect thereto;
(c) Liens of carriers, warehousemen, mechanics, laborers and materialmen
and other similar Liens incurred in the ordinary course of business for sums not
yet due or being contested in good faith, if such reserve or appropriate
provision, if any, as shall be required by GAAP shall have been made therefor;
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<PAGE>
(d) Liens incurred in the ordinary course of business in connection with
worker's compensation, unemployment insurance or similar legislation;
(e) Easements, right-of-way, restrictions and other similar encumbrances on
the use of real property which do not interfere with the ordinary conduct of the
business of such Person;
(f) Liens in respect of judgments or awards for which appeals or
proceedings for review are being prosecuted and in respect of which a stay of
execution upon any such appeal or proceeding for review shall have been secured,
provided that (i) such Person shall have established adequate reserves for such
judgments or awards, (ii) such judgments or awards shall be fully insured and
the insurer shall not have denied coverage, or (iii) such judgments or awards
shall have been bonded to the satisfaction of the Majority Lenders; and
(g) Any Liens existing on the Closing Date which are described on Schedule
--------
8.03 hereto and not otherwise described elsewhere in the definition of Permitted
- ----
Liens.
"Permitted Refinancing Indebtedness" means Debt of the applicable Obligor
to the extent all of the proceeds thereof are used to refinance Debt of such
Obligor (plus any premium thereon reasonably acceptable to the Administrative
Agent), provided that after giving effect to the incurrence of such Debt, the
Borrower is in pro forma compliance with the terms of this Agreement, and
provided further that (i) the terms of such new Debt are no more restrictive
than the Loan, (ii) the maturity of such new Debt is no shorter than the Debt
being refinanced, (iii) the only Person obligated on such refinanced Debt is the
original Person obligated on such Debt, (iv) the priority of any such new Debt
shall remain unchanged (if such Debt to be refinanced is subordinated, the
subordination provisions remain unchanged in the new refinanced Debt), and (v)
the parties obligated on such Debt remain the same.
"Person" means an individual, partnership, joint venture, corporation,
limited liability company, trust, Tribunal, unincorporated organization, and
government, or any department, agency, or political subdivision thereof.
"Plan" means a Single Employer Plan or a Multiple Employer Plan.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Prohibited Transaction" has the meaning specified in Section 4975 of the
Code or Section 406 of Title I of ERISA.
"Property" means all types of real, personal, tangible, intangible, or
mixed property, whether owned or hereafter acquired in fee simple or leased by
the Borrower, the Restricted Subsidiaries and Bermuda Corp.
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"PUC" means any state regulatory agency or body that exercises jurisdiction
over the rates or services or the ownership, construction or operation of any
network facility or long distance telecommunications systems or over Persons who
own, construct or operate a network facility or long distance telecommunications
systems, in each case by reason of the nature or type of the business subject to
regulation and not pursuant to laws and regulations of general applicability to
Persons conducting business in such state.
"Quarterly Date" means the last Business Day of each March, June, September
and December during the term of this Agreement.
"Refinancing Advance" means any Advance which is used to pay the principal
amount (or any portion thereof) of an Advance at the end of its Interest Period
and which, after giving effect to such application, does not result in an
increase in the aggregate amount of outstanding Advances.
"Release Date" means the date on which the Notes have been paid, all other
Obligations due and owing have been paid and performed in full, and the
Commitment has been terminated.
"Restricted Payments" means, for the Borrower, the Restricted Subsidiaries
and Bermuda Corp., (a) any direct or indirect Distribution, dividend or other
payment on account of any equity interest in, or shares of Capital Stock or
other securities of the Borrower, its Restricted Subsidiaries and Bermuda Corp.
(or the establishment of any sinking fund or otherwise the setting aside of any
funds with respect thereto); (b) any management, consulting or other similar
fees, or any interest thereon, payable by the Borrower, any of the Restricted
Subsidiaries or Bermuda Corp. to any Unrestricted Subsidiary and/or any other
Affiliate of the Borrower (or the establishment of any sinking fund or otherwise
the setting aside of any funds with respect thereto), but specifically excluding
any consulting fees payable by the Borrower, any Restricted Subsidiary or
Bermuda Corp. to a Person that is not an Affiliate of the Borrower, (c) loans or
advances to employees and/or shareholders of the Borrower and the Subsidiaries
of the Borrower, except advances to employees of the Borrower, its Restricted
Subsidiaries and Bermuda Corp. for moving and travel expenses in the ordinary
course of business; (d) payments of principal and/or interest, or the setting
aside of funds with respect thereto, of any Total Debt except the Obligations;
and (e) payments of any amounts, fees, advances, loans, investments or otherwise
to any Unrestricted Subsidiary.
"Restricted Subsidiary" means all those Subsidiaries of the Borrower that
are not Unrestricted Subsidiaries, provided that, notwithstanding the foregoing
(a) all Subsidiaries designated by the Borrower as Restricted Subsidiaries on
the Closing Date shall remain Restricted Subsidiaries until the Obligations have
been repaid in full and the Commitments terminated and (b)no Person may be
included as a Restricted Subsidiary hereunder that is not party to a currently
effective Unlimited Guaranty guaranteeing the Obligations.
"Revolver Commitment" means, with respect to the Revolver Loan, $30,000,000
as reduced from time to time pursuant to Section 2.11 hereof.
"Revolver Advance" means any advance made under the Revolver Loan.
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"Revolver Commitment Fee" means the fee described in Section 2.10(a)
hereof.
"Revolver Loan" means the loan made by a Lender pursuant to Section 2.01 of
this Agreement.
"Revolver Note" means each Note of the Borrower evidencing Revolver
Advances under the Revolver Loan hereunder, substantially in the form of Exhibit
-------
A hereto, together in each case, with any extension, renewal or amendment
- -
thereof, or substitution therefor.
"Revolver Specified Percentage" means, as to any Lender, the percentage
indicated beside its name on the signature pages hereof designated as its
Revolver Specified Percentage, or as adjusted or specified (i) in any Assignment
and Acceptance or (ii) in any amendment to this Agreement.
"Rights" means rights, remedies, powers, and privileges.
"Single Employer Plan" means a single employer plan, as defined in Section
4001(a)(15) of ERISA, other than a Multiple Employer Plan of the Borrower.
"Solvent" means, with respect to any Person, that on such date (a) the fair
value of the Property of such Person is greater than the total amount of
liabilities, including without limitation Contingent Liabilities of such Person,
(b) the present fair salable value of the assets of such Person on a going
concern basis is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person does not intend to, and does not believe that it will,
incur debts or liabilities beyond such Person's ability to pay as such debts and
liabilities mature, and (d) such Person is not engaged in business or a
transaction, and is not about to engage in business or a transaction, for which
such Person's Property would constitute an unreasonably small capital.
"Special Counsel" means the law firm of Donohoe, Jameson & Carroll, P.C.,
Dallas, Texas, or such other individual or firm acting as special counsel to
Administrative Agent, as designated by Administrative Agent from time to time.
"Subordinated Indebtedness" means Debt of the Borrower that is unsecured
and subordinated to the Obligations, such Debt in each case (a) to be pursuant
to documentation containing terms and conditions no more onerous than this
Agreement and the Loan Papers, (b) to have a maturity not less than one year
after the Maturity Date, and (c) to be subordinated on terms and conditions
acceptable to the Administrative Agent and the Majority Lenders in their sole
discretion.
"Subsidiary" of any Person means any corporation, limited liability
company, partnership, joint venture, trust or estate of which (or in which) 50%
or more of:
(a) the outstanding Capital Stock having voting power to elect a
majority of the board of directors of such corporation (irrespective of
whether at the time Capital Stock of any other class or classes of such
corporation shall or might have voting power upon the occurrence of any
contingency),
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(b) the interest in the capital or profits of such partnership or
joint venture, or
(c) the beneficial interest of such trust or estate, is at the time
directly or indirectly owned by such Person, by such Person and one or more of
its Subsidiaries or by one or more of such Person's Subsidiaries.
"Taxes" means all taxes, assessments, imposts, fees, or other charges at
any time imposed by any Laws or Tribunal.
"Total Debt" means all Debt for Borrowed Money for the Borrower, the
Restricted Subsidiaries and Bermuda Corp. which would be shown on a consolidated
balance sheet in accordance with GAAP, including, without limitation, (a)
Capital Lease obligations, (b) Debt of any other Person secured by a Lien on the
property of the Borrower, any Restricted Subsidiary or Bermuda Corp. in an
amount equal to the lesser of (i) such Debt of such Person and (ii) the value of
such pledged property, (c) Contingent Liabilities, (d) Withdrawal Liability and
(e) overdue interest on any Debt for Borrowed Money (but not accrued interest
that is not overdue).
"Total Leverage Ratio" means, on any date of determination, the ratio of
(a) Total Debt on such date to (b) Annualized Operating Cash Flow, provided that
for purposes of this calculation, Operating Cash Flow shall be calculated as if
all assets (including Capital Stock of the Subsidiaries of the Borrower)
acquired on any date during the period of determination were acquired on the
first day in such period of determination, and all assets (including Capital
Stock of the Subsidiaries of the Borrower) sold on any date during the period of
determination were sold on the first day in such period of determination.
"Total Specified Percentage" means, as to any Lender on any date of
determination, the percentage that such Lender's outstanding Advances bears to
the aggregate outstanding amount of Advances made by all Lenders hereunder,
provided that, if there are no outstanding Advances hereunder, "Total Specified
Percentage" shall mean for such Lender the percentage that its Revolver
Specified Percentage of the Revolver Commitment bears to the aggregate
Commitments of all Lenders on such date.
"Tribunal" means any state, commonwealth, federal, foreign, territorial, or
other court or government body, subdivision, agency, department, commission,
board, bureau, or instrumentality of a governmental body.
"Type" refers to the distinction between Advances bearing interest at the
Base Rate and LIBOR Rate.
"UCC" means the Uniform Commercial Code as adopted in the State of
California on the Closing Date.
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"Unlimited Guaranty" means the Guaranty, executed in substantially similar
form by each Restricted Subsidiary of the Borrower, guarantying payment and
performance of the Obligations, substantially in the form of Exhibit F attached
---------
hereto, as such agreement may be amended, modified, renewed or extended from
time to time, and each subsequent unlimited Guaranty in the form of Exhibit F
---------
hereto executed by any newly acquired or created Restricted Subsidiary, as each
such agreement may be amended, modified, renewed or extended from time to time.
"Unrestricted Subsidiary" means (a) all international Subsidiaries of the
Borrower that are not less than 50% owned and which are designated in writing to
the Administrative Agent and each Lender by the Borrower as Unrestricted
Subsidiaries, provided that no Restricted Subsidiary existing on the Closing
Date may be designated as an Unrestricted Subsidiary and (b) International
Exchange Communications, Inc., a Delaware corporation and a wholly owned
domestic Subsidiary of the Borrower. Unrestricted Subsidiaries as of the
Closing Date are listed on Schedule 1.02 hereto. Except as expressly excluded
-------------
throughout this Agreement and the Loan Papers, Bermuda Corp. shall be an
Unrestricted Subsidiary.
"Unused Facility Amount" means the Commitments minus the sum of (a) all
outstanding Revolver Advances, plus (b) all issued and outstanding Letters of
Credit denominated in Dollars, plus (c) all issued and outstanding Letters of
Credit denominated in a Eurocurrency, as converted to Dollars pursuant to
Section 1.03 hereof, plus (d) all reimbursement obligations with respect to any
- ------------
draws under any Letters of Credit, whether in Dollars or as converted from a
Eurocurrency to Dollars pursuant to Section 1.03 hereof.
------------
"Voting Stock" of a Person means all classes of Capital Stock or other
interests of such Person then outstanding and normally entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof.
"Withdrawal Liability" has the meaning given such term under Part I of
Subtitle E of Title IV of ERISA.
"Year 2000 Compliant" means, with respect to a Person, that all computer
hardware and software that are material to the business and operations of such
Person will on a timely basis be able to perform properly date-sensitive
functions for all dates before and after January 1, 2000, including functions
with respect to any leap year.
1.02. Accounting and Other Terms. All accounting terms used in this
Agreement which are not otherwise defined herein shall be construed in
accordance with GAAP on a consolidated basis for the Borrower and its Restricted
Subsidiaries, unless otherwise expressly stated herein. References herein to
one gender shall be deemed to include all other genders. Except where the
context otherwise requires, (a) definitions imparting the singular shall include
the plural and vice versa and (b) all references to time are deemed to refer to
Pacific coast time.
1.03. Currency Equivalents Generally. For purposes of this Agreement,
the equivalent of any Eurocurrency in Dollars shall be determined by using the
quoted spot rate at which Administrative Agent's principal office in London
offers to exchange such Eurocurrency for Dollars
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in London at 11:00 a.m. (London time) on the date on which such equivalent is to
be determined. The equivalent in Dollars of each Eurocurrency Letter of Credit
may be recalculated hereunder on each date that it shall be necessary to
determine each Lender's Unused Facility Amount of the Commitment, or any or all
Advance or Advances outstanding on such date.
ARTICLE II. THE LOAN FACILITY
2.01. Revolver Loan. Each Lender severally agrees, on the terms and
subject to the conditions hereinafter set forth, to make Revolver Advances to
the Borrower on a Business Day during the period from the Closing Date to the
Maturity Date, in an aggregate principal amount not to exceed at any time
outstanding such Lender's Revolver Specified Percentage of the difference
between the Revolver Commitment and the sum of the undrawn face amount of all
outstanding Letters of Credit, plus reimbursement obligations under Article III
hereof (or if any Letters of Credit or reimbursement obligations are denominated
in a currency other than Dollars, the Dollar equivalent of such currency).
Subject to the terms and conditions of this Agreement, the Borrower may borrow,
repay and reborrow the Revolver Advances; provided, however, that at no time
-------- -------
shall the sum of (i) all outstanding Revolver Advances, plus (ii) the undrawn
face amount of all outstanding Letters of Credit (or if any Letter of Credit is
denominated in a currency other than Dollars, the Dollar equivalent of such
currency), plus (iii) reimbursement obligations under Article III hereof (or if
any reimbursement obligation is denominated in a currency other than Dollars,
the Dollar equivalent of such currency)exceed the Revolver Commitment.
2.02. Making Advances.
(a) Each Borrowing of Advances shall be made upon the written notice
of the Borrower, received by Administrative Agent not later than (i) 10:00
a.m. three Business Days prior to the date of the proposed Borrowing, in
the case of Advances which are LIBOR Advances and (ii) 10:00 a.m. on the
date of such Borrowing, in the case of Advances which are Base Advances.
Each such notice of a Borrowing (a "Borrowing Notice") shall be by telecopy
or telephone, promptly confirmed by letter, in substantially the form of
Exhibit C hereto specifying therein:
---------
(i) the date of such proposed Borrowing, which shall be a
Business Day;
(ii) the Type of Advances of which the Borrowing is to be
comprised;
(iii) the amount of such proposed Borrowing which (A) shall not
exceed the unused portion of the Revolver Commitment less outstanding
Letters of Credit and reimbursement obligations (or if any Letter of Credit
or reimbursement obligation shall be in a currency other than Dollars, the
Dollar equivalent of such currency) and (B) shall (I) in the case of a
Borrowing of Base Advances, be in an amount of not less than $2,000,000 or
an integral multiple of $1,000,000 in excess thereof (or any lesser amount
if such amount is the remaining undrawn portion under the Revolver
Commitment, respectively), and (II) in the
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case of a Borrowing of LIBOR Advances, be in an amount of not less than
$5,000,000 or an integral multiple of $1,000,000 in excess thereof; and
(iv) if the Borrowing is to be comprised of LIBOR Advances, the
duration of the initial Interest Period applicable to such Advances.
If the Borrowing Notice fails to specify the duration of the initial
Interest Period for any Borrowing or Refinancing Advance, as applicable,
comprised of LIBOR Advances, such Interest Period shall be three months.
Administrative Agent shall promptly notify Lenders of each such notice. Each
Lender shall, before 1:00 p.m. on the date of each Advance under the Revolver
Loan hereunder (other than a Refinancing Advance), make available to
Administrative Agent, at its office at 1850 Gateway Blvd., 3rd Floor, Concord,
CA 94520-3282, attn: Paula Steezes, tel. (925) 675 7347, such Lender's Revolver
Specified Percentage of the aggregate Advances under the Revolver Loan, to be
made on that day in immediately available funds.
(b) Unless any applicable condition specified in Article IV has not been
satisfied, Administrative Agent will make the funds promptly available to the
Borrower (other than with respect to a Refinancing Advance) by either (i) wiring
such amounts pursuant to any wiring instructions, or (ii) depositing such amount
in the account of the Borrower at the Administrative Agent, in each case as
specified by the Borrower to the Administrative Agent in writing.
(c) After giving effect to any Borrowing, (i) there shall not be more than
three different Interest Periods in effect and (ii) the aggregate principal
amount of outstanding Advances under the Revolver Loan, plus the sum of the
outstanding amount available to be drawn of the Letters of Credit, and
reimbursement obligations under Article III (or if any Letter of Credit or
reimbursement obligation shall be denominated in a currency other than Dollars,
the Dollar equivalent of such currency) shall not exceed the Revolver
Commitment.
(d) No Interest Period applicable to any Advance shall extend beyond the
Maturity Date.
(e) Unless a Lender shall have notified Administrative Agent prior to the
date of any Advance that it will not make available its Applicable Specified
Percentage of any Advance, Administrative Agent may assume that such Lender has
made the appropriate amount available in accordance with Section 2.02(a) hereof,
and Administrative Agent may, in reliance upon such assumption, make available
to the Borrower a corresponding amount. If and to the extent any Lender shall
not have made such amount available to Administrative Agent, such Lender and the
Borrower severally agree to repay to Administrative Agent immediately on demand
such corresponding amount together with interest thereon, from the date such
amount is made available to the Borrower until the date such amount is repaid to
Administrative Agent, at (i) in the case of the Borrower, the Base Rate, and
(ii) in the case of such Lender, the Federal Funds Rate.
(f) The failure by any Lender to make available its Applicable Specified
Percentage of any Advance hereunder shall not relieve any other Lender of its
obligation, if any, to make available its Applicable Specified Percentage of any
Advance. In no event, however, shall any Lender be responsible for the failure
of any other Lender to make available any portion of any Advance.
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(g) The Borrower shall indemnify each Lender against any Consequential
Loss incurred by each Lender as a result of (i) any failure to fulfill, on or
before the date specified for an Advance, the conditions to the Advance set
forth herein (including a Refinancing Advance) or (ii) the Borrower's requesting
that an Advance (including a Refinancing Advance) not be made on the date
specified in the Borrowing Notice.
2.03. Evidence of Debt for Borrowed Money. The Advances made by each
Lender under the Revolver Loan shall be evidenced by a Revolver Note in the
amount of such Lender's Revolver Specified Percentage of the Revolver Commitment
in effect on the Closing Date. Administrative Agent's and each Lender's records
shall be presumptive evidence as to amounts owed Administrative Agent and such
Lender under the Notes and this Agreement.
2.04. Optional Prepayments.
(a) The Borrower may, upon at least two Business Days prior written notice
to Administrative Agent stating the proposed date and aggregate principal amount
of the prepayment, prepay the outstanding principal amount of any Advances in
whole or in part, together with accrued interest to the date of such prepayment
on the principal amount prepaid without premium or penalty other than any
Consequential Loss; provided, however, that in the case of a prepayment of a
-------- -------
Base Advance, the notice of prepayment may be given by telephone by 10:00 a.m.
on the date of prepayment. Each partial prepayment shall, in the case of Base
Advances under the Loan, be in an aggregate principal amount of not less than
$100,000 or a larger integral multiple of $50,000 in excess thereof and, in the
case of LIBOR Advances under the Loan, be in an aggregate principal amount of
not less than $500,000 or a larger integral multiple of $100,000 in excess
thereof. If any notice of prepayment is given, the principal amount stated
therein, together with accrued interest on the amount prepaid and the amount, if
any, due under Section 2.12 and Section 2.14 hereof, shall be due and payable on
the date specified in such notice unless the Borrower revokes its notice,
provided that, if the Borrower revokes its notice of prepayment prior to such
date specified, the Borrower shall reimburse the Administrative Agent for the
account of all Lenders for all Consequential Losses suffered by each Lender as a
result of the Borrower's failure to prepay. A certificate of each Lender
claiming compensation under this Section 2.04(a), setting forth in reasonable
detail the calculation of the additional amount or amounts to be paid to it
hereunder shall be presumptive evidence of the validity of such claim.
(b) All prepayments made pursuant to this Section 2.04 shall be first
applied to Base Advances then to LIBOR Advances, all without premium or penalty,
except the Borrower must pay together with any such prepayments, any
Consequential Losses identified at such time.
2.05. Mandatory Prepayments.
(a) Asset Sales. To the extent that the Borrower, any of the Restricted
Subsidiaries or Bermuda Corp. consummates any sale of any asset or any of its
Properties, other than Permitted Asset Sales, then the Borrower shall
immediately use 100% of the Net Proceeds of any such transaction to repay the
Obligations under the Loan.
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(b) Public or Private Issuance of Debt or Equity. To the extent that the
Borrower, any of the Restricted Subsidiaries or Bermuda Corp. consummates any
public or private issuance of Debt or equity (this provision in and of itself
not constituting permission to do so), then the Borrower shall immediately use
the Net Proceeds in excess to repay the Obligations under the Revolver Loan.
(c) Mandatory Prepayments, Generally. All prepayments made pursuant to
this Section 2.05 shall be first applied to Base Advances then to LIBOR
Advances, all without premium or penalty, except the Borrower must pay together
with any such prepayments, any Consequential Losses.
2.06. Repayment.
(a) LIBOR Advances. The principal amount of each LIBOR Advance is due and
payable on the last day of the applicable Interest Period, which principal
payment may be made by means of a Refinancing Advance in accordance with the
terms of Section 2.09 hereof (and subject to the other provisions of this
Agreement).
(b) Commitment Reduction. On the date of a reduction of the Commitment
pursuant to Section 2.11 hereof, the aggregate amount of outstanding Revolver
Advances plus the amount available to be drawn of the Letters of Credit, and
reimbursement obligations under Article III (or if any Letter of Credit or
reimbursement obligation shall be denominated in a currency other than Dollars,
the Dollar equivalent of such currency) in excess of the Revolver Commitment as
reduced shall be immediately due and payable (which such principal repayments
may not be made by means of Refinancing Advances).
(c) Maturity Date. All outstanding Advances under the Loan and all other
Obligations shall be due and payable in full on the Maturity Date.
(d) Repayments, Generally. All outstanding Advances and other Obligations
shall be due and payable in full on the Maturity Date. Any repayments made
pursuant to this Section shall be without premium or penalty, except the
Borrower must pay together with any such prepayments, any Consequential Losses.
Advances shall be applied to Base Advances first, and then to LIBOR Advances.
2.07. Interest. Subject to Section 2.08 and Section 11.08 hereof, the
Borrower shall pay interest on the unpaid principal amount of each Advance from
the date of such Advance until such principal shall be paid in full, at either
the Base Rate or the LIBOR Rate, as set forth in subsection (i) or (ii) below,
as selected by the Borrower in accordance with Section 2.02 hereof and as
follows:
(i) Base Advances. Base Advances shall bear interest at a rate per
annum equal to the Base Rate as in effect from time to time. If the amount
of interest payable in respect of any interest computation period is
reduced to the Highest Lawful Rate and the amount of interest payable in
respect of any subsequent interest computation period would be less than
the Maximum Amount, then the amount of interest payable in respect of such
subsequent
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interest computation period shall be automatically increased to the
Maximum Amount; provided that at no time shall the aggregate amount by
--------
which interest paid has been increased pursuant to this sentence exceed the
aggregate amount by which interest has been reduced pursuant to this
sentence.
(ii) LIBOR Advances. LIBOR Advances shall bear interest at the rate
per annum equal to the LIBOR Rate applicable to such Advance.
(iii) Payment Dates. Accrued and unpaid interest on Base Advances
shall be paid quarterly in arrears on each Quarterly Date and on the
Maturity Date. Accrued and unpaid interest in respect of each LIBOR
Advance shall be paid on the last day of the appropriate Interest Period,
on the Maturity Date and on the date of any prepayment or repayment of such
Advance; provided, however, that if any Interest Period for a LIBOR Advance
-------- -------
exceeds three months, interest shall also be paid on the date which falls
three months after the beginning of such Interest Period.
2.08. Default Interest. During the continuation of any Event of
Default, the Borrower shall pay, on demand, interest (after as well as before
judgment to the extent permitted by Law) on the principal amount of all Advances
outstanding and on all other Obligations due and unpaid hereunder at a per annum
rate equal to the lesser of the (a) the Highest Lawful Rate and (b) the Base
Rate plus 2%. LIBOR Advances shall not be available for selection by the
Borrower during the continuance of an Event of Default.
2.09. Continuation and Conversion Elections.
(a) The Borrower may upon irrevocable written notice to Administrative
Agent and subject to the terms of this Agreement:
(i) elect to convert, on any Business Day, all or any portion
of outstanding Advances which are Base Advances (in an aggregate amount not
less than $500,000 or an integral multiple of $100,000 in excess thereof)
into LIBOR Advances; or
(ii) elect to convert at the end of any Interest Period
therefor, all or any portion of outstanding Advances which are LIBOR
Advances comprised in the same Borrowing (in an aggregate amount not less
than $100,000 or an integral multiple of $50,000 in excess thereof) into
Base Advances; or
(iii) elect to continue, at the end of any Interest Period
therefor, any Advances which are LIBOR Advances;
provided, however, that if the aggregate amount of outstanding LIBOR
-------- -------
Advances comprised in the same Borrowing shall have been reduced as a result of
any payment, prepayment or conversion of part thereof to an amount less than
$500,000, the LIBOR Advances comprised in such Borrowing shall automatically
convert into Base Advances at the end of each respective Interest Period.
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(b) The Borrower shall deliver a notice of conversion or continuation (a
"Conversion or Continuation Notice"), in substantially the form of Exhibit D
---------
hereto, to Administrative Agent not later than (i) 10:00 a.m. three Business
Days prior to the proposed date of conversion or continuation, if the Advances
(or any portion of either thereof) are to be converted into or continued as
LIBOR Advances; and (ii) 10:00 a.m. on the Business Day of the proposed
conversion, if the Advances (or any portion thereof) are to be converted into
Base Advances.
Each such Conversion or Continuation Notice shall be by telecopy or
telephone, promptly confirmed by letter, specifying therein:
(i) the proposed date of conversion or continuation;
(ii) the aggregate amount of Advances to be converted or
continued;
(iii) the nature of the proposed conversion or continuation; and
(iv) the duration of the applicable Interest Period.
(c) If, upon the expiration of any Interest Period applicable to LIBOR
Advances, (i) the Borrower shall have failed to select a new Interest Period to
be applicable to such LIBOR Advances, the Interest Period shall be shall be
three months, or (ii) if an Event of Default shall then have occurred and be
continuing, the Borrower shall be deemed to have elected to convert such LIBOR
Advances into Base Advances effective as of the expiration date of such current
Interest Period.
(d) Notwithstanding any other provision contained in this Agreement, after
giving effect to any conversion or continuation of any Advances, there shall not
be outstanding Advances with more than seven different Interest Periods.
2.10. Fees.
(a) Revolver Commitment Fee. Subject to Section 11.08 hereof, the Borrower
shall pay to Administrative Agent for the account of Lenders pro rata in
accordance with each Lender's Revolver Specified Percentage, a commitment fee
(the "Revolver Commitment Fee") equal to 0.375% per annum on the average daily
amount of the Unused Facility Amount, payable in arrears on each Quarterly Date
commencing with the first Quarterly Date after the Closing Date, and continuing
until the Maturity Date.
(b) Other Fees. Borrower shall pay to Administrative Agent and the Lenders
such other fees as set forth in any commitment letter or any fee letter
addressed to the Administrative Agent or any Lender.
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2.11. Reduction of Commitments.
(a) Mandatory Termination of the Revolver Commitment. The Revolver
Commitment shall automatically be reduced to zero and terminate on the Maturity
Date.
(b) Mandatory Reduction of Commitment Due to Asset Sales. The Commitment
shall be reduced immediately and automatically in an amount equal to any amount
required by Section 2.05(a) hereof to prepay the Loan as a result of any asset
sales of the Borrower, any of the Restricted Subsidiaries or Bermuda Corp. (this
provision in and of itself not constituting permission to effectuate any asset
sales), provided that, so long as there exists no Default or Event of Default
both before and after giving effect to such asset sales and both before and
after any permitted reinvestment, the Commitment shall not be automatically and
immediately reduced if the Borrower in good faith intends to reinvest, and such
proceeds are ultimately reinvested within a 12 month period after any such asset
sale, in telecommunications assets or Permitted Acquisitions.
(c) Mandatory Reduction of Commitment Due to Issuances of Public or Private
Debt or Equity. At the time of any issuance of public or private Debt or equity
by the Borrower, any of the Restricted Subsidiaries or Bermuda Corp. (other than
Debt permitted to be incurred in accordance with the provisions of Section 8.02
hereof) (this provision in and of itself not constituting permission to
effectuate any such transaction),the Commitment shall be reduced immediately and
automatically in an amount equal to 100% of any amount required by Section
2.05(b) hereof to prepay outstanding Advances under the Loan (regardless of
whether there are actually any outstanding Advances) as a result of any
issuances of public or private Debt or equity.
(d) Change of Control. If any Change of Control shall have occurred, the
Revolver Commitment shall immediately and automatically be reduced to zero.
(e) Voluntary Commitment Reductions. The Borrower may from time to time,
upon notice to Administrative Agent not later than 1:00 p.m., three Business
Days in advance, terminate in whole or reduce in part the Commitment, as
designated by the Borrower; provided, however, that the Borrower shall pay the
-------- -------
accrued interest and the applicable accrued Commitment Fee on the amount of such
reduction and all amounts due, and any partial reduction shall be in an
aggregate amount which is an integral multiple of $5,000,000.
(g) Commitment Reduction and Repayments, Generally. To the extent
outstanding Revolver Advances exceed the Revolver Commitment after any reduction
thereof, the Borrower shall repay, on the date of such reduction, any such
excess amount and all accrued interest thereon, the applicable Revolver
Commitment Fee on the amount of such reduction and all amounts due. Once reduced
or terminated, the Revolver Commitment may not be increased or reinstated. No
reduction of the Commitment, either voluntary or mandatory shall relieve or
alter the mandatory reduction and termination of the Revolver Commitment
pursuant to Section 2.11 hereof.
2.12. Funding Losses. The Borrower may prepay the outstanding principal
balance of any Advance, in full at any time or in part from time to time in
accordance with the terms of Section 2.04 hereof, provided, that as a condition
--------
precedent to the Borrower's right to make, and any Lender's
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obligation to accept, any such prepayment, each such prepayment shall be in the
amount of 100% of the principal amount to be prepaid, plus accrued unpaid
interest thereon to the date of prepayment, plus any other sums which have
become due to Administrative Agent and Lenders under the Loan Papers on or
before the prepayment date but have not been paid, plus (subject to Section
11.08 hereof) any Consequential Loss.
The Borrower agrees that each Lender is not obligated to actually reinvest
the amount prepaid in any specific obligation as a condition to receiving any
Consequential Loss, or otherwise.
2.13. Computations and Manner of Payments.
(a) The Borrower shall make each payment hereunder and under the other Loan
Papers not later than 1:00 p.m. on the day when due in same day funds (by wire
transfer or otherwise) to Administrative Agent, for the account of Lenders
unless otherwise specifically provided herein, at Administrative Agent's office
at 1850 Gateway Blvd., 3rd Floor, Concord, CA 94520-3282, attn: Paula Steezes,
tel. (925) 675 7347, for further credit to the account of Pacific Gateway
Exchange, Inc. No later than the end of each day when each payment hereunder is
made, the Borrower shall notify Loan Operations at (214) 508-9192 or such other
Person as Administrative Agent may from time to time specify.
(b) Unless Administrative Agent shall have received notice from the
Borrower prior to the date on which any payment is due hereunder that the
Borrower will not make payment in full, Administrative Agent may assume that
such payment is so made on such date and may, in reliance upon such assumption,
make distributions to Lenders. If and to the extent the Borrower shall not have
made such payment in full, each Lender shall repay to Administrative Agent
forthwith on demand the applicable amount distributed, together with interest
thereon at the Federal Funds Rate, from the date of distribution until the date
of repayment. The Borrower hereby authorizes each Lender, if and to the extent
payment is not made when due hereunder, to charge the amount so due against any
account of the Borrower with such Lender.
(c) Subject to Section 11.08 hereof, interest on LIBOR Advances under the
Loan Papers shall be calculated on the basis of actual days elapsed but computed
as if each year consisted of 360 days. Subject to Section 11.08 hereof,
interest on Base Advances, the Commitment Fee and other amounts due under the
Loan Papers shall be calculated on the basis of actual days elapsed but computed
as if each year consisted of 365 or 366 days, as applicable. Such computations
shall be made including the first day but excluding the last day occurring in
the period for which such interest, payment or Commitment Fee is payable. Each
determination by Administrative Agent or a Lender of an interest rate, fee or
commission hereunder shall be presumptive evidence of the validity of such
claim. All payments under the Loan Papers shall be made in United States
dollars, and without setoff, counterclaim, or other defense.
(d) Whenever any payment to be made hereunder or under any other Loan
Papers shall be stated to be due on a day other than a Business Day, such
payment shall be made on the next succeeding Business Day, and such extension of
time shall be included in the computation of interest or fees, if applicable;
provided, however, if such extension would cause payment of interest on or
- -------- -------
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principal of LIBOR Advances to be made in the next following calendar month,
such payment shall be made on the next preceding Business Day.
(e) Reference to any particular index or reference rate for determining any
applicable interest rate under this Agreement is for purposes of calculating the
interest due and is not intended as and shall not be construed as requiring any
Lender to actually obtain funds for any Advance at any particular index or
reference rate.
2.14. Yield Protection; Changed Circumstances.
(a) If any Lender determines that either (i) the adoption of any
Applicable Law, rule, regulation or guideline regarding capital adequacy and
applicable to commercial banks or financial institutions generally or any change
therein, or any change, after the date hereof, in the interpretation or
administration thereof by any Tribunal, central bank or comparable agency
charged with the interpretation or administration thereof, or (ii) compliance by
any Lender (or Lending Office of any Lender) with any request or directive
applicable to commercial banks or financial institutions generally regarding
capital adequacy (whether or not having the force of law) of any such authority,
central bank or comparable agency has the effect of reducing the rate of return
on such Lender's capital as a consequence of its obligations hereunder to a
level below that which such Lender could have achieved but for such adoption,
change or compliance (taking into consideration such Lender's policies with
respect to capital adequacy) by an amount reasonably deemed by such Lender to be
material, then from time to time, within fifteen days after demand by such
Lender, the Borrower shall pay to such Lender such additional amount or amounts
as will adequately compensate such Lender for such reduction. Each Lender will
notify the Borrower of any event occurring after the date of this Agreement
which will entitle such Lender to compensation pursuant to this Section 2.14(a)
as promptly as practicable after such Lender obtains actual knowledge of such
event; provided, no Lender shall be liable for its failure or the failure of any
--------
other Lender to provide such notification. A certificate of such Lender
claiming compensation under this Section 2.14(a), setting forth in reasonable
detail the calculation of the additional amount or amounts to be paid to it
hereunder shall be presumptive evidence of the validity of such claim. If such
Lender demands compensation under this Section 2.14(a), the Borrower may at any
time, on at least five Business Days' prior notice to such Lender (i) repay in
full the then outstanding principal amount of LIBOR Advances, of such Lender,
together with accrued interest thereon, or (ii) convert the LIBOR Advances to
Base Advances in accordance with the provisions of this Agreement; provided,
--------
however, that the Borrower shall be liable for the Consequential Loss arising
- -------
pursuant to those actions.
(b) If, after the date hereof, any Tribunal, central bank or other
comparable authority, at any time imposes, modifies or deems applicable any
reserve (including, without limitation, any imposed by the Board of Governors of
the Federal Reserve System), special deposit or similar requirement against
assets of, deposits with or for the amount of, or credit extended by, any
Lender, or imposes on any Lender any other condition affecting a LIBOR Advance,
the Notes, or its obligation to make a LIBOR Advance, or imposes on any Lender
any other condition affecting a Letter of Credit; and the result of any of the
foregoing is to increase the cost to such Lender of making or maintaining its
Letter of Credit, LIBOR Advances, or to reduce the amount of any sum received or
receivable by such Lender under this Agreement or under the Notes, the Letters
of Credit or
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reimbursement obligations by an amount deemed by such Lender, to be material,
then, within five days after demand by such Lender, the Borrower shall
- ----
pay to such Lender such additional amount or amounts as will compensate such
Lender for such increased cost or reduction. Each Lender will (i) notify the
Borrower of any event occurring after the date of this Agreement that entitles
such Lender to compensation pursuant to this Section 2.14(b), as promptly as
practicable after such Lender obtains actual knowledge of the event; provided,
--------
no Lender shall be liable for its failure or the failure of any other Lender to
provide such notification and (ii) use good faith and reasonable efforts to
designate a different Lending Office for LIBOR Advances, of such Lender if the
designation will avoid the need for, or reduce the amount of, the compensation
and will not, in the sole opinion of such Lender, be disadvantageous to such
Lender. A certificate of such Lender claiming compensation under this Section
2.14(b), setting forth in reasonable detail the computation of the additional
amount or amounts to be paid to it hereunder shall be presumptive evidence of
the validity of such claim. If such Lender demands compensation under this
Section 2.14(b), the Borrower may at any time, on at least five Business Days'
prior notice to such Lender (i) repay in full the then outstanding principal
amount of LIBOR Advances, of such Lender, together with accrued interest
thereon, or (ii) convert the LIBOR Advances to Base Advances in accordance with
the provisions of this Agreement; provided, however, that the Borrower shall be
-------- -------
liable for the Consequential Loss arising pursuant to those actions.
(c) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation or administration of
any Law shall make it unlawful, or any central bank or other Tribunal shall
assert that it is unlawful, for a Lender to perform its obligations hereunder to
issue or maintain Letters of Credit, make LIBOR Advances or to continue to fund
or maintain LIBOR Advances hereunder, then, on notice thereof and demand
therefor by such Lender to the Borrower, (i) each LIBOR Advance will
automatically, upon such demand, convert into a Base Advance, (ii) the
obligation of such Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended until such Lender notifies Administrative Agent and the
Borrower that such Lender has determined that the circumstances causing such
suspension no longer exist, and (iii) the obligation of such Lender to make or
maintain Letters of Credit shall be suspended until such Lender notifies
Administrative Agent and the Borrower that such Lender has determined that the
circumstances causing such suspension no longer exist.
(d) Upon the occurrence and during the continuance of any Default or Event
of Default, (i) each LIBOR Advance will automatically, on the last day of the
then existing Interest Period therefor, convert into a Base Advance and (ii) the
obligation of each Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended.
(e) If any Lender notifies Administrative Agent that the LIBOR Rate for
any Interest Period for any LIBOR Advances will not adequately reflect the cost
to such Lender of making, funding or maintaining LIBOR Advances for such
Interest Period, Administrative Agent shall promptly so notify the Borrower,
whereupon (i) each such LIBOR Advance will automatically, on the last day of the
then existing Interest Period therefor, convert into a Base Advance and (ii) the
obligation of such Lender to make, or to convert Advances into, LIBOR Advances
shall be suspended until such Lender notifies Administrative Agent that such
Lender has determined that the
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circumstances causing such suspension no longer exist and Administrative Agent
notifies the Borrower of such fact.
(f) Failure on the part of any Lender to demand compensation for any
increased costs, increased capital or reduction in amounts received or
receivable or reduction in return on capital pursuant to this Section 2.14 with
respect to any period shall not constitute a waiver of any Lender's right to
demand compensation with respect to such period or any other period, subject,
however, to the limitations set forth in this Section 2.14.
(g) The obligations of the Borrower under this Section 2.14 shall survive
any termination of this Agreement, provided that, in no event shall the Borrower
be required to make a payment under this Section 2.14 with respect to any event
of which the Lender making such claim had knowledge more than 6 months prior to
demand for such payment.
(h) Determinations by Lenders for purposes of this Section 2.14 shall be
presumptively correct. Any certificate delivered to the Borrower by a Lender
pursuant to this Section 2.14 shall include in reasonable detail the basis for
such Lender's demand for additional compensation and a certification that the
claim for compensation is consistent with such Lender's treatment of similar
customers having similar provisions generally in their agreements with such
Lender.
(i) Notwithstanding any other provision of this Agreement, no Lender not
organized under the Laws of the United States or any State (or which has a Bank
Affiliate not organized under the Laws of the United States or any State) shall
be entitled to compensation pursuant to this Section 2.14 with respect to any
amount which would otherwise be due under this Section 2.14 but which is the
result of an act of a Tribunal of the country in which such Lender or Bank
Affiliate is organized.
2.15. Use of Proceeds. The proceeds of the Revolver Advances shall be
available (and the Borrower shall use such proceeds) solely (a) for Permitted
Acquisitions consummated by the Borrower and the Restricted Subsidiaries, (b)
for Capital Expenditures made by the Borrower and the Restricted Subsidiaries
and permitted under the terms of this Agreement, (c) for working capital of the
Borrower and the Restricted Subsidiaries and (d) for other lawful corporate
purposes of the Borrower and the Restricted Subsidiaries.
2.16. Collateral. Payment of the Obligations will be secured by (a) a
first perfected security interest in 66% of the Capital Stock of Bermuda Corp.
and (b) Unlimited Guaranties of the Obligations by each Guarantor (collectively,
together with all other Properties or assets of the Borrower, its Subsidiaries
and other Persons securing the Obligations from time to time, the "Collateral").
The Borrower agrees that it will, and will cause its Subsidiaries to execute and
deliver, or cause to be executed and delivered, such documents as the
Administrative Agent may from time to time reasonably request to create and
perfect a first Lien for the benefit of the Administrative Agent and the Lenders
in the Collateral.
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ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit. The Borrower shall give the
Administrative Agent not less than five Business Days prior written notice of a
request for the issuance of a Letter of Credit, and the Administrative Agent
shall promptly notify each Lender of such request. Letters of Credit may be
issued in Dollars, Eurocurrencies, or, subject to the provisions hereof, other
currencies which are determined by Administrative Agent to be available. If the
Letter of Credit requested is to be denominated in a currency other than Dollars
or Eurocurrencies, Administrative Agent shall notify Borrower within twenty-four
hours of receipt of the completed and duly executed Applications of the
availability of such currency and the expiration date available for Letters of
Credit denominated in such currency. Upon receipt of the Borrower's properly
completed and duly executed Applications, and subject to the terms of such
Applications and to the terms of this Agreement, the Administrative Agent agrees
to issue Letters of Credit on behalf of the Borrower in an aggregate face amount
not in excess of the lesser of (a) Letter of Credit Commitment and (b) the
remainder of the Revolver Commitment minus the sum of all outstanding Revolver
Advances plus the aggregate amount available to be drawn of all outstanding
Letters of Credit (or if any Letter of Credit is denominated in a currency other
than Dollars, the Dollar equivalent of such currency). No Letter of Credit
denominated in Dollars or Eurocurrencies shall have a maturity extending beyond
the earliest of (i) the Maturity Date, or (ii) one year from the date of its
issuance, or (iii) such earlier date as may be required to enable the Borrower
to satisfy its repayment obligations under Section 2.06 hereof. No Letter of
Credit denominated in a currency other than Dollars or Eurocurrencies shall have
a maturity extending beyond the earliest of (i) the Maturity Date, (ii) one year
from the date of its issuance, or (iii) such earlier date as reasonably
determined by Administrative Agent. Subject to such maturity limitations and so
long as no Default or Event of Default has occurred and is continuing or would
result from the renewal of a Letter of Credit, the Letters of Credit may be
renewed by the Administrative Agent in its discretion. The Lenders shall
participate ratably in any liability under the Letters of Credit and in any
unpaid reimbursement obligations of the Borrower with respect to any Letter of
Credit in their Revolver Specified Percentages (or if such Letter of Credit is
denominated in a currency other than Dollars, the Dollar equivalent of their
Revolver Specified Percentage of such currency). The amount of the Letters of
Credit issued and outstanding and the unpaid reimbursement obligations of the
Borrower for such Letters of Credit (or if any Letter of Credit is denominated
in a currency other than Dollars, the Dollar equivalent of such currency) shall
reduce the amount of Revolver Commitment available, so that at no time shall the
sum of (i) all outstanding Revolver Advances in the aggregate, plus (ii) the
aggregate face amount of all outstanding Letters of Credit (or is any Letter of
Credit is denominated in a currency other than Dollars, the Dollar equivalent of
such currency), plus (iii) (without duplication) all outstanding reimbursement
obligations related to Letters of Credit (or if such reimbursement obligations
are denominated in a currency other than Dollars, the Dollar equivalent of such
currency), exceed the Revolver Commitment, and at no time shall the sum of all
Revolver Advances by any Lender made plus its ratable share of amounts available
to be drawn under the Letters of Credit (or if any Letter of Credit is
denominated in a currency other than Dollars, the Dollar equivalent of such
currency) and the unpaid reimbursement obligations (or if any reimbursement
obligation is denominated in a currency other than Dollars, the Dollar
equivalent of such currency) of the Borrower in respect of such Letters of
Credit exceed its Revolver Specified Percentage of the Revolver Commitment.
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3.02. Letters of Credit Fee. In consideration for the issuance of each
Letter of Credit, the Borrower shall pay to (a) the Administrative Agent for its
sole account, an application and processing fee in the amount of the higher of
(i) $350.00 and (ii) the product of 1/8th of 1% multiplied by the face amount of
such Letter of Credit on each Letter of Credit (or if the Letter of Credit is
denominated in a currency other than Dollars, the Dollar equivalent of such
currency calculated by using the quoted spot rate to exchange Dollars for such
currency in effect on the last day of each Quarterly Date as the rate in effect
during the calendar quarter ending on such Quarterly Date), due and payable on
the date of issuance of each Letter of Credit, and (b) the Administrative Agent
for the account of the Administrative Agent and the Lenders in accordance with
their Revolver Specified Percentages, a per annum fee for each Letter of Credit
equal to the higher of (i) $350.00 and (ii) the product of the Applicable Margin
for LIBOR Advances multiplied by the face amount of each such Letter of Credit
(or if such Letter of Credit is denominated in a currency other than Dollars,
the Dollar equivalent of such currency calculated by using the quoted spot rate
to exchange Dollars for such currency in effect on the last day of each
Quarterly Date as the rate in effect during the calendar quarter ending on such
Quarterly Date). Each fee for each Letter of Credit under subsection (b) above
shall be due and payable to the Administrative Agent quarterly as it accrues, on
each Quarterly Date during the term of the Letter of Credit and on the
expiration or renewal and/or extension of each such Letter of Credit, beginning
with the first such Quarterly Date after the issuance of each Letter of Credit
and ending on the expiration date of each such Letter of Credit.
3.03. Reimbursement Obligations.
(a) The Borrower hereby agrees to reimburse Administrative Agent
immediately upon demand by Administrative Agent, and in immediately available
funds, for any payment or disbursement made by Administrative Agent under any
Letter of Credit. Administrative Agent shall notify Borrower within one
Business Day of its receipt of a draw request with respect to a Letter of Credit
issued in a currency other than Dollars. Borrower, within one Business Day of
receipt of such notice from Administrative Agent, shall notify Administrative
Agent whether Borrower intends to make funds available to Administrative Agent
in such currency. Payment shall be made by the Borrower with interest on the
amount so paid or disbursed by Administrative Agent from and including the date
payment is made under any Letter of Credit to and including the date of payment,
at the lesser of (i) the Highest Lawful Rate, and (ii) the sum of the Base Rate
in effect from time to time plus 2% per annum; provided, however, that if the
-------- -------
Borrower would be permitted under the terms of Section 2.01, Section 2.02 and
Section 4.02 to borrow Revolver Advances in amounts at least equal to their
reimbursement obligation for a drawing under any Letter of Credit, a Base
Advance by each Lender, in an amount equal to such Lender's Revolver Specified
Percentage, shall automatically be deemed made on the date of any such payment
or disbursement made by Administrative Agent in the amount of such obligation
and subject to the terms of this Agreement.
(b) The Borrower hereby also agrees to pay to Administrative Agent
immediately upon demand by Administrative Agent and in immediately available
funds, as security for their reimbursement obligations in respect of the Letters
of Credit under Section 3.03(a) hereof and any other amounts payable hereunder
and under the Notes, an amount equal to the aggregate Dollar amount available to
be drawn under Letters of Credit then outstanding (or if any Letter of Credit is
denominated in a currency other than Dollars, the Dollar equivalent of such
currency), irrespective
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of whether the Letters of Credit have been drawn upon, upon an Event of Default.
Any such payments shall be deposited in a separate account designated "Pacific
Gateway Exchange Special Account" or such other designation as Administrative
Agent shall elect. All such amounts deposited with Administrative Agent shall be
and shall remain funds of the Borrower on deposit with Administrative Agent and
may be invested by Administrative Agent as Administrative Agent shall determine.
Such amounts may not be used by Administrative Agent to pay the drawings under
the Letters of Credit; however, such amounts may be used by Administrative Agent
as reimbursement for Letter of Credit drawings which Administrative Agent has
paid. During the existence of an Event of Default but after the expiration of
any Letter of Credit that was not drawn upon, the Borrower may direct the
Administrative Agent to use any cash collateral for any such expired Letter of
Credit, if any, to reduce the amount of the Obligations. Any amounts remaining
in the Pacific Gateway Exchange Special Account, after the date of the
expiration of all Letters of Credit and after all Obligations have been paid in
full, shall be repaid to the Borrower promptly after such expiration and such
payment in full.
(c) The obligations of the Borrower under this Section 3.03 will continue
until all Letters of Credit have expired and all reimbursement obligations with
respect thereto have been paid in full by the Borrower and until all other
Obligations shall have been paid in full.
(d) The Borrower shall be obligated to reimburse Administrative Agent upon
demand for all amounts paid under the Letters of Credit as set forth in Section
3.03(a) hereof; provided, however, if the Borrower for any reason fails to
reimburse Administrative Agent in full upon demand, whether by borrowing
Revolver Advances to pay such reimbursement obligations or otherwise, the
Lenders shall reimburse Administrative Agent in accordance with each Lender's
Revolver Specified Percentage for amounts due and unpaid from the Borrower as
set forth in Section 3.04 hereof; provided, however, that no such reimbursement
made by the Lenders shall discharge the Borrower's obligations to reimburse
Administrative Agent.
(e) The Borrower shall indemnify and hold Administrative Agent or any
Lender, its officers, directors, representatives and employees harmless from
loss for any claim, demand or liability which may be asserted against
Administrative Agent or such indemnified party in connection with actions taken
under the Letters of Credit or in connection therewith (including losses
resulting from the negligence (but not the gross negligence) of Administrative
Agent or such indemnified party), and shall pay Administrative Agent for
reasonable fees of attorneys (who may be employees of Administrative Agent) and
legal costs paid or incurred by Administrative Agent in connection with any
matter related to the Letters of Credit, except for losses and liabilities
incurred as a direct result of the gross negligence or wilful misconduct of
Administrative Agent or such indemnified party. If the Borrower for any reason
fails to indemnify or pay Administrative Agent or such indemnified party as set
forth herein in full, the Lenders shall indemnify and pay Administrative Agent
upon demand, in accordance with each Lender's Revolver Specified Percentage of
such amounts due and unpaid from the Borrower. The provisions of this Section
3.03(e) shall survive the termination of this Agreement.
3.04. Lenders' Obligations. Each Lender agrees, unconditionally and
irrevocably to reimburse Administrative Agent on demand for such Lender's
Revolver Specified Percentage of each
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draw paid by Administrative Agent under any Letter of Credit (or if such Letter
of Credit is denominated in a currency other than Dollars, the Dollar equivalent
of such currency). All amounts payable by any Lender under this subsection shall
include interest thereon at the Federal Funds Rate, from the date of the
applicable draw to the date of reimbursement by such Lender. No Lender shall be
liable for the performance or nonperformance of the obligations of any other
Lender under this Section. The obligations of the Lenders under this Section
shall continue after the Maturity Date and shall survive termination of any Loan
Papers.
3.05. Administrative Agent's Obligations.
(a) Administrative Agent makes no representation or warranty, and assumes
no responsibility with respect to the validity, legality, sufficiency or
enforceability of any Application or any document relative thereto or to the
collectibility thereunder. Administrative Agent assumes no responsibility for
the financial condition of the Borrower and its Subsidiaries or for the
performance of any obligation of the Borrower. Administrative Agent may use its
discretion with respect to exercising or refraining from exercising any rights,
or taking or refraining from taking any action which may be vested in it or
which it may be entitled to take or assert with respect to any Letter of Credit
or any Application.
(b) Administrative Agent shall be under no liability to any Lender, with
respect to anything the Administrative Agent may do or refrain from doing in the
exercise of its judgment, the sole liability and responsibility of
Administrative Agent being to handle each Lender's share on as favorable a basis
as Administrative Agent handles its own share and to promptly remit to each
Lender its share of any sums received by Administrative Agent under any
Application. Administrative Agent shall have no duties or responsibilities
except those expressly set forth herein and those duties and liabilities shall
be subject to the limitations and qualifications set forth herein.
(c) Neither Administrative Agent nor any of its directors, officers, or
employees shall be liable for any action taken or omitted (whether or not such
action taken or omitted is expressly set forth herein) under or in connection
herewith or any other instrument or document in connection herewith, except for
gross negligence or willful misconduct, and no Lender or Borrower waives its
right to institute legal action against Administrative Agent for wrongful
payment of any Letter of Credit due to Administrative Agent's gross negligence
or willful misconduct. Administrative Agent shall incur no liability to any
Lender, the Borrower or any Affiliate of the Borrower or Lender in acting upon
any notice, document, order, consent, certificate, warrant or other instrument
reasonably believed by Administrative Agent to be genuine or authentic and to be
signed by the proper party.
3.06. Phase-In of the Euro. If at any time (i) a National Currency
ceases to be lawful currency of the state issuing the same and is replaced by a
European single or common currency or (ii) any National Currency and the Euro
are at the same time both recognized by the central bank or comparable
governmental authority of the state issuing such currency as the lawful currency
of such state, then Administrative Agent's obligation to issue any Letter of
Credit in a currency other than Dollars shall immediately terminate until such
time Borrower has taken all actions and executed all documents or other Loan
Papers reasonably requested by Administrative Agent in order to insure that
Administrative Agent and each Lender may issue such Letters of Credit in
accordance with
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Applicable Law, and such Letters of Credit will become Obligations of the
Borrower under this Agreement.
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to the Initial Advance and the Issuance of the
Initial Letter of Credit. The obligation of each Lender to make the initial
Advance under the Loan, or issue the initial Letter of Credit, is subject to
receipt by the Administrative Agent of each of the following, in form and
substance satisfactory to the Administrative Agent, with a copy (except for the
Notes) for each Lender:
(a) a loan certificate of the Borrower certifying as to the accuracy of its
representations and warranties in the Loan Papers, certifying that no Default or
Event of Default has occurred under the terms of this Agreement, and including a
certificate of incumbency with respect to each Authorized Officer, and
containing a representation that the following items are attached thereto, and
that each of such items remains unchanged and valid, except as shown on the
attachments: (i) copies of the Articles of Incorporation of the Borrower, each
of the Restricted Subsidiaries and Bermuda Corp., certified to be true, complete
and correct by the secretary of state of each such Person's respective state of
incorporation, (ii) copies of the By-Laws of the Borrower, each of the
Restricted Subsidiaries and Bermuda Corp. and (iii) copies of a certificate of
good standing and a certificate of existence for the Borrower and each
Restricted Subsidiary in Delaware and California, and for Bermuda Corp. in
Bermuda;
(b) duly executed Revolver Notes by the Borrower, payable to the order of
each Lender, equal to its Revolver Specified Percentage of the Revolver
Commitment on the Closing Date;
(c) a loan certificate of the Borrower certifying that a copy of the
resolutions of the Borrower and each of the Restricted Subsidiaries authorizing
them to execute, deliver and perform this Agreement, the Notes and the other
Loan Papers to which each of them is a party is attached and is a true and
accurate copy;
(d) in form and substance acceptable to the Administrative Agent, duly
executed and completed Unlimited Guaranty of the Obligations by each of the
Restricted Subsidiaries;
(e) in form and substance acceptable to the Administrative Agent, a duly
executed and completed pledge agreement by the Borrower pledging 66% of the
Capital Stock of Bermuda Corp.;
(f) original stock or membership certificates, as applicable, constituting
the pledged 66% of the issued Capital Stock of Bermuda Corp., together with
stock powers executed in blank and UCC filings requested by the Administrative
Agent;
(g) payment in full by the Borrower to the Administrative Agent in
immediately available funds of the closing fee described in the first paragraph
of that certain commitment letter dated
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October 15, 1998 from John Sullivan and Jennifer Bishop of the Administrative
Agent to Ms. Sandra Grey of the Borrower;
(h) all other Loan Papers to be delivered on the Closing Date duly executed
and completed, dated the Closing Date;
(i) opinions addressed to Administrative Agent on behalf of the Lenders of
(i) corporate counsel to the Borrower and each Restricted Subsidiary with
respect to organizational matters, due authorization, execution, etc., (ii)
validity and enforceability under California law and (ii) special FCC counsel
and/or PUC counsel to the Borrower and the Restricted Subsidiaries, as
applicable, with respect to the Licenses of the Borrower and the Subsidiaries
and the transactions contemplated hereby, each in form and substance acceptable
to the Administrative Agent;
(j) reimbursement for Administrative Agent with respect to its reasonable
fees and expenses and for Special Counsel's reasonable fees and expenses
rendered through the Closing Date;
(k) evidence that all corporate proceedings of the Borrower and each
Restricted Subsidiary taken in connection with the transactions contemplated by
this Agreement and the other Loan Papers, shall be reasonably satisfactory in
form and substance to the Lenders and Special Counsel; and the Lenders shall
have received copies of all documents or other evidence which the Administrative
Agent, Special Counsel or any Lender may reasonably request in connection with
such transactions;
(l) copies of all UCC searches of all Properties of the Borrower and the
Restricted Subsidiaries showing no Liens except Permitted Liens and Liens
permitted under Section 8.03(b) hereof and similar evidence for lack of Liens on
property of Bermuda Corp.;
(m) a duly completed Compliance Certificate evidencing no Default or Event
of Default dated as of the Closing Date for the most recently ended fiscal
quarter;
(n) a certificate from the Borrower stating that there has been no material
adverse change in the financial condition, business, operations, or prospects of
the Borrower and its Subsidiaries since June 30, 1998;
(o) evidence satisfactory that the Borrower and each of its Subsidiaries
has (i) undertaken a detailed review and assessment of all areas within its
business and operations that could be adversely affected by the "Year 2000
Problem" (that is, the risk that computer applications used by the Borrower and
its Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31,
1999), ii) developed a detailed plan and timeline for addressing the Year 2000
Problem on a timely basis, iii) to date, implemented that plan in accordance
with that timetable, iv) reasonably anticipated that all computer applications
that are material to their business and operations will on a timely basis be
able to perform properly date-sensitive functions and v) made an inquiry of each
of their key suppliers, vendors and customers as to whether such Persons will on
a timely basis be Year 2000 compliant in all material respects and, on the basis
of that inquiry, believe that all such Persons will be so compliant; and
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(p) in form and substance satisfactory to the Lenders and Special Counsel,
such other documents, instruments and certificates as the Administrative Agent
or any Lender may reasonably require in connection with the transactions
contemplated hereby, including without limitation the status, organization or
authority of the Borrower, any Restricted Subsidiary and Bermuda Corp., and the
enforceability of and security for the Obligations.
4.02. Conditions Precedent to All Advances and Letters of Credit. The
obligation of each Lender to make each Advance hereunder (excluding each
Refinancing Advance), and the obligation of the Administrative Agent to issue
any Letter of Credit shall be subject to the further conditions precedent that
on the date of such Advance or such issuance of such Letter of Credit:
(a) All of the representations and warranties of the Borrower under this
Agreement shall be true and correct at such time in all material respects, both
before and after giving effect to the application of the proceeds of the Advance
or the issuance of the Letter of Credit, except those representations and
warranties that specifically speak as of a particular date;
(b) The incumbency of the Authorized Officers shall be as stated in the
certificate of incumbency delivered in the Borrower's loan certificate pursuant
to Section 4.01(a) or as subsequently modified and reflected in a certificate of
incumbency delivered to the Administrative Agent. The Lenders may, without
waiving this condition, consider it fulfilled and a representation by the
Borrower made to such effect if no written notice to the contrary, dated on or
before the date of such Advance or the issuance of such Letter of Credit, is
received by the Administrative Agent from the Borrower prior to the making of
such Advance or such Letter of Credit;
(c) There shall not exist a Default or an Event of Default hereunder and
none shall exist as a result of making any such Advance or issuing such Letter
of Credit, and the Administrative Agent shall have received written or
telephonic certification thereof by an Authorized Officer (which certification,
if telephonic, shall be followed promptly by written certification);
(d) No event shall have occurred that could reasonably be expected to cause
a Material Adverse Change since June 30, 1998;
(e) In the case of each Letter of Credit, Borrower shall have delivered to
the Administrative Agent a duly executed and complete Application acceptable to
Administrative Agent; and
(f) In the case of any Revolver Advance, the aggregate outstanding Revolver
Advances after giving effect to such proposed Revolver Advance, plus the sum of
the face amount of all outstanding Letters of Credit plus all reimbursement
obligations under Article III hereof, shall not exceed the Revolver Commitment.
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ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties. The Borrower hereby represents
and warrants to each Lender as follows:
(a) The respective jurisdictions of incorporation and percentage ownership
of the Subsidiaries of the Borrower on the Closing Date and listed on Schedule
--------
5.01(a) hereto are true and correct. Each of the Borrower, the Restricted
- -------
Subsidiaries and Bermuda Corp. is a entity duly organized, validly existing and
in good standing under the laws of its state of organization. Each of the
Borrower, the Restricted Subsidiaries and Bermuda Corp. has the corporate power
and corporate authority to own its properties and to carry on its business as
now being conducted. Each of the Borrower, the Restricted Subsidiaries and
Bermuda Corp. is duly qualified, in good standing and authorized to do business
in each jurisdiction in which the character of its Properties or the nature of
its business requires such qualification or authorization, except where the
failure to so qualify could not reasonably be expected to cause a Material
Adverse Change.
(b) The Borrower has corporate power and has taken all necessary corporate
action to authorize it to borrow hereunder. Each of the Borrower and the
Restricted Subsidiaries has corporate power and has taken all necessary
corporate action to execute, deliver and perform the Loan Papers to which it is
party in accordance with the terms thereof, and to consummate the transactions
contemplated thereby. Each Loan Paper has been duly executed and delivered by
the Borrower or such Restricted Subsidiary executing it. Each of the Loan
Papers to which the Borrower and the Restricted Subsidiaries are party is a
legal, valid and binding obligation of the Borrower or such Restricted
Subsidiary, as applicable, enforceable in accordance with its terms, subject, to
enforcement of remedies, to the following qualifications: (i) equitable
principles generally, and (ii) bankruptcy, insolvency, liquidation,
reorganization, reconstruction and other similar laws affecting enforcement of
creditors' rights generally (insofar as any such law relates to the bankruptcy,
insolvency or similar event of the Borrower or any Subsidiary of the Borrower).
(c) The execution, delivery and performance by the Borrower and the
Restricted Subsidiaries of the other Loan Papers to which they are respectively
a party, and the consummation of the transactions contemplated thereby, do not
and will not (i) require any consent or approval not already obtained, (ii)
violate any Applicable Law, (iii) conflict with, result in a breach of, or
constitute a default under the articles of incorporation or by-laws of the
Borrower or any Restricted Subsidiary, or under any material License, indenture,
agreement or other instrument, to which the Borrower or any Restricted
Subsidiary is a party or beneficiary of, or by which they or their respective
Properties may be bound, or (iv) result in or require the creation or imposition
of any Lien upon or with respect to any property now owned or hereafter acquired
by the Borrower or any Restricted Subsidiary, except Permitted Liens.
(d) The Borrower and its Subsidiaries are primarily engaged in the
operation of telecommunications, internet and pursuing activities related
thereto.
(e) On the Closing Date, all material Licenses of the Borrower, the
Restricted Subsidiaries and Bermuda Corp. have been duly authorized and
obtained, and are in full force and effect. The
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Borrower, the Restricted Subsidiaries and Bermuda Corp. are in compliance in all
material respects with all provisions thereof. On the Closing Date, no material
License is the subject of any pending or, to the best of the Borrower's
knowledge, threatened challenge or revocation. On each date after the Closing
Date on which this representation is deemed to be made, no material License is
the subject of any pending or, to the best of the Borrower's knowledge,
threatened challenge or revocation, which such event could reasonably be
expected to cause a Material Adverse Change. The Borrower, the Restricted
Subsidiaries and Bermuda Corp. are not required to obtain any material License
that has not already been obtained from, or effect any material filing or
registration that has not already been effected with, the FCC, any applicable
PUC or any other federal, state or local regulatory authority in connection with
the execution and delivery of this Agreement or any other Loan Paper, or the
performance thereof (other than any enforcement of remedies by the
Administrative Agent on behalf of the Lenders), in accordance with their
respective terms, including any borrowings hereunder.
(f) The Borrower, the Restricted Subsidiaries and Bermuda Corp. are in
compliance in all material respects with all material Applicable Laws. The
Borrower, the Restricted Subsidiaries and Bermuda Corp. have duly and timely
filed all reports, statements and filings that are required to be filed by any
of them under the Communications Act, and are in all material respects in
compliance therewith, including without limitation the rules and regulations of
the FCC and each applicable PUC. Except as set forth on Schedule 5.01(f)
----------------
hereto, as of the Closing Date, the Borrower is not aware of any event or
circumstance constituting noncompliance (or any Person alleging noncompliance)
with any rule or regulation of the FCC or any applicable PUC. On each date
after the Closing Date on which this representation is deemed to be made, the
Borrower is not aware of any event or circumstance constituting noncompliance
(or any Person alleging noncompliance) with any rule or regulation of the FCC or
any applicable PUC, which such event or circumstance could reasonably be
expected to cause a Material Adverse Change.
(g) On the Closing Date, the Borrower, the Restricted Subsidiaries and
Bermuda Corp. have good and indefeasible title to, or a valid leasehold interest
in, all of their material assets and Properties. On each date after the Closing
Date on which this representation is deemed to be made, the Borrower, the
Restricted Subsidiaries and Bermuda Corp. have good and indefeasible title to,
or a valid leasehold interest in, all of their material assets and Properties,
in which any such failure could reasonably be expected to cause a Material
Adverse Change. None of the assets of the Borrower, the Restricted Subsidiaries
and Bermuda Corp. is subject to any Liens, except Permitted Liens and Liens
permitted under Section 8.03(b) hereof. No financing statement or other Lien
filing authorized by the Borrower, any Restricted Subsidiary or Bermuda Corp.
(except relating to Permitted Liens and Liens permitted by Section 8.03(b)
hereof) is on file in any state or jurisdiction that names the Borrower, any of
the Restricted Subsidiaries or Bermuda Corp. as debtor or covers (or purports to
cover) any assets of the Borrower, any of the Restricted Subsidiaries or Bermuda
Corp. The Borrower, the Restricted Subsidiaries and Bermuda Corp. have not
signed any such financing statement or filing, nor any security agreement
authorizing any Person to file any such financing statement or filing.
(h) On the Closing Date, except as reflected on Schedule 5.01(h) hereto,
----------------
there is no action, suit, proceeding or any other Litigation pending against,
or, to the best of the Borrower's knowledge,
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threatened against the Borrower or any of its Subsidiaries, or in any other
manner relating directly and materially adversely to the Borrower any of its
Subsidiaries, or any of their material Properties, in any court or before any
arbitrator of any kind or before or by any governmental body. On each date after
the Closing Date on which this representation is deemed to be made, there is no
action, suit, proceeding or any other Litigation pending against, or, to the
best of the Borrower's knowledge, threatened against the Borrower or any of its
Subsidiaries, or in any other manner relating to the Borrower or any of its
Subsidiaries, or any of their Properties, in any court or before any arbitrator
of any kind or before or by any governmental body, which could reasonably be
expected to cause a Material Adverse Change.
(i) All federal, state and other Tax returns of the Borrower and its
Subsidiaries required by law to be filed have been duly filed and all federal,
state and other Taxes, assessments and other governmental charges or levies upon
the Borrower, its Subsidiaries or any of their Properties, income, profits and
assets, which are due and payable, have been paid, except those that are
diligently contested in good faith by the Borrower and for which a reserve has
been established in accordance with GAAP, and no Lien (other than a Permitted
Lien) has attached and no foreclosure, distraint, sale or similar proceedings
have been commenced.
(j) The Borrower has furnished or caused to be furnished to the Lenders
copies of its financial statements at June 30, 1998 which are prepared in good
faith and complete in all material respects. Each such statement presents
fairly in all material respects and in accordance with GAAP, the financial
position of the Borrower, the Restricted Subsidiaries and Bermuda Corp. as at
such dates, and the results of operations for the periods then ended. The
Borrower, the Restricted Subsidiaries and Bermuda Corp. have no material
liabilities, contingent or otherwise, nor material losses, except as disclosed
in writing to the Lenders prior to the Closing Date or as disclosed on any
subsequent financial statements. On the Closing Date after giving effect to the
Advances made on such date, the Borrower, Bermuda Corp. and each of the
Restricted Subsidiaries is Solvent.
(k) On the Closing Date, since the date of the most recent financial
statements delivered to the Lenders, no event or circumstances have occurred or
arisen that could reasonably be expected to cause a Material Adverse Change.
(l) None of the Borrower or its Controlled Group maintains or contributes
to any Plan other than those disclosed to the Administrative Agent in writing.
Each such Plan is in compliance in all material respects with the applicable
provisions of ERISA, the Code, and any other applicable Federal or state law,
rule or regulation. With respect to each Plan of the Borrower and each member
of its Controlled Group (other than a Multiemployer Plan), all reports required
under ERISA or any other Applicable Law to be filed with any governmental
authority, the failure of which to file could reasonably result in liability of
the Borrower or any member of its Controlled Group in excess of $100,000, have
been duly filed. All such reports are true and correct in all material respects
as of the date given. No such Plan of the Borrower or any member of its
Controlled Group has any accumulated funding deficiency (as defined in Section
412(a) of the Code) (without regard to any waiver granted under Section 412 of
the Code), nor has any funding waiver from the Internal Revenue Service been
received or requested. None of the Borrower or any member of its Controlled
Group has failed to make any contribution or pay any amount due or owing as
required by Section 412 of
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the Code or Section 302 of ERISA or the terms of any such Plan prior to the due
date under Section 412 of the Code and Section 302 of ERISA. There has been no
ERISA Event or any event requiring disclosure under Section 4041(c)(3)(C),
4068(f), 4063(a) or 4043(b) of ERISA with respect to any Plan or trust of the
Borrower or any member of its Controlled Group since the effective date of
ERISA. The value of the assets of each Plan (other than a Multiemployer Plan) of
the Borrower and each member of its Controlled Group equaled or exceeded the
present value of the benefit liabilities, as defined in Title IV of ERISA, of
each such Plan as of the most recent valuation date using Plan actuarial
assumptions at such date. There are no pending or, to the best of the Borrower's
knowledge, threatened claims, lawsuits or actions (other than routine claims for
benefits in the ordinary course) asserted or instituted against, and neither the
Borrower nor any member of its Controlled Group has knowledge of any threatened
Litigation or claims against, (i) the assets of any Plan or trust or against any
fiduciary of a Plan with respect to the operation of such Plan, or (ii) the
assets of any employee welfare benefit plan within the meaning of Section 3(1)
or ERISA, or against any fiduciary thereof with respect to the operation of any
such plan. None of the Borrower or any member of its Controlled Group has
engaged in any non-exempt prohibited transactions, within the meaning of Section
406 or Section 4.08 of ERISA or Section 4975 of the Code, in connection with any
Plan. None of the Borrower or any member of its Controlled Group has incurred or
reasonably expects to incur (A) any liability under Title IV of ERISA (other
than premiums due under Section 4007 of ERISA to the PBGC), (B) any withdrawal
liability (and no event has occurred which with the giving of notice under
Section 4219 of ERISA would result in such liability) under Section 4201 of
ERISA as a result of a complete or partial withdrawal (within the meaning of
Section 4203 or 4205 of ERISA) from a Multiemployer Plan, or (C) any liability
under Section 4062 of ERISA to the PBGC or to a trustee appointed under Section
4042 of ERISA. None of the Borrower, any member of its Controlled Group, or any
organization to which the Borrower or any member of its Controlled Group is a
successor or parent corporation within the meaning of ERISA Section 4069(b), has
engaged in a transaction within the meaning of ERISA Section 4069. None of the
Borrower or any member of its Controlled Group maintains or has established any
welfare benefit plan within the meaning of Section 3(1) of ERISA which provides
for continuing benefits or coverage for any participant or any beneficiary of
any participant after such participant's termination of employment except as may
be required by the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA") and the regulations thereunder, and at the expense of the
participant or the beneficiary of the participant, or retiree medical
liabilities. Each of the Borrower and its Controlled Group which maintains a
welfare benefit plan within the meaning of Section 3(1) of ERISA has complied in
all material respects with any applicable notice and continuation requirements
of COBRA and the regulations thereunder.
(m) The Borrower is not, nor is any of the Restricted Subsidiaries or
Bermuda Corp. engaged principally or as one of its important activities in the
business of extending credit for the purpose of purchasing or carrying any
margin stock within the meaning of Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System, and no part of the proceeds of the
Advances will be used to purchase or carry any margin stock (as defined by
Regulation U) or to extend credit to others for the purpose of purchasing or
carrying any margin stock. Not more than 25% of the assets of the Borrower or
any of its Subsidiaries are margin stock (as defined by Regulation U), and none
of the Capital Stock of the Borrower's Subsidiaries is margin stock. None of
the Borrower and its Subsidiaries, nor any agent acting on their behalf, have
taken or will
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<PAGE>
knowingly take any action which might cause this Agreement or any Loan Papers to
violate any regulation of the Board of Governors of the Federal Reserve System
or to violate the Exchange Act, in each case as in effect now or as the same may
hereafter be in effect.
(n) The Borrower, the Restricted Subsidiaries and Bermuda Corp. are in
compliance with all of the provisions of their articles of incorporation and by-
laws. As of the Closing Date, no event has occurred or failed to occur, which
has not been remedied or waived, the occurrence or non-occurrence of which
constitutes, or which with the passage of time or giving of notice or both would
constitute, (i) an Event of Default or (ii) a default by the Borrower, any of
the Restricted Subsidiaries or Bermuda Corp. under any material contract, or
other material indenture, agreement or other instrument, or any judgment, decree
or order to which the Borrower, any of the Restricted Subsidiaries or Bermuda
Corp. is a party or by which they or any of their material Properties is bound.
On each date after the Closing Date on which this representation is deemed to be
made, no event has occurred or failed to occur, which has not been remedied or
waived, the occurrence or non-occurrence of which constitutes, or which with the
passage of time or giving of notice or both would constitute, (i) an Event of
Default or (ii) a default by the Borrower, any of the Restricted Subsidiaries or
Bermuda Corp. under any material contract or other material indenture, agreement
or other instrument, or any judgment, decree or order to which the Borrower, any
of the Restricted Subsidiaries or Bermuda Corp. is a party or by which they or
any of their material Properties is bound, that could reasonably be expected to
cause a Material Adverse Change.
(o) The Borrower is not, nor is any of its Subsidiaries, required to
register under the provisions of the Investment Company Act of 1940, as amended.
Neither the entering into or performance by the Borrower of this Agreement nor
the issuance of the Notes, nor the execution, delivery and performance of the
obligations under the Loan Papers by the Borrower and its Subsidiaries,
violates any provision of such act or requires any consent, approval, or
authorization of, or registration with, the Securities and Exchange Commission
or any other governmental or public body of authority pursuant to any provisions
of such act.
(p) On the Closing Date, none of the Borrower or any of its Subsidiaries
has any actual knowledge or reason to believe that any substance deemed
hazardous by any applicable Environmental Law, has been installed on any real
property now owned by the Borrower or any of its Subsidiaries, except (i) for
hazardous substances the presence of which is not in violation of law and (ii)
as disclosed in writing to the Lenders. On each date after the Closing Date on
which this representation is deemed to be made, none of the Borrower nor any
Restricted Subsidiary or Bermuda Corp. has any actual knowledge or reason to
believe that any substance deemed hazardous by any applicable Environmental Law,
has been installed in violation of law on any real property now owned by the
Borrower or any of the Restricted Subsidiaries or Bermuda Corp. except as
disclosed to the Lenders in writing, and which could not, in the reasonable
judgment of the Borrower, cause a Material Adverse Change. As of the Closing
Date, the Borrower, the Restricted Subsidiaries and Bermuda Corp. are not in
violation of or subject to any existing, pending or, to the best of the
Borrower's knowledge, threatened investigation or inquiry by any governmental
authority or to any material remedial obligations under any applicable
Environmental Laws, and this representation and warranty would continue to be
true and correct following disclosure to the applicable governmental authorities
of all relevant facts, conditions and circumstances, if any, pertaining to any
real property
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of the Borrower, the Restricted Subsidiaries and Bermuda Corp. On each date
after the Closing Date on which this representation is deemed to be made, the
Borrower, the Restricted Subsidiaries and Bermuda Corp. are not in violation of
or subject to any existing, pending or, to the best of the Borrower's knowledge,
threatened investigation or inquiry by any governmental authority or to any
material remedial obligations under any applicable Environmental Laws which
could cause a Material Adverse Change, and this representation and warranty
would continue to be true and correct following disclosure to the applicable
governmental authorities of all relevant facts, conditions and circumstances, if
any, pertaining to any real property of the Borrower, the Restricted
Subsidiaries and Bermuda Corp. The Borrower, the Restricted Subsidiaries and
Bermuda Corp. are not required to obtain any permits, Licenses or similar
authorizations to construct, occupy, operate or use any buildings, improvements,
fixtures, and equipment forming a part of any real property of the Borrower, any
Restricted Subsidiary or Bermuda Corp. by reason of any applicable Environmental
Laws, except those that have been obtained. As of the Closing Date, the
Borrower, the Restricted Subsidiaries and Bermuda Corp. have no actual knowledge
or reason to believe, after reasonable investigation, that any hazardous
substances or solid wastes have been disposed of or otherwise released on or to
the real property of the Borrower, any of its Restricted Subsidiaries or Bermuda
Corp. in violation of any applicable Environmental Law. On each date after the
Closing Date on which this representation is deemed to be made, the Borrower,
the Restricted Subsidiaries and Bermuda Corp. have no actual knowledge or reason
to believe, that any hazardous substances or solid wastes have been disposed of
or otherwise released on or to the real property of the Borrower, any of the
Restricted Subsidiaries and Bermuda Corp., within the meaning of the applicable
Environmental Laws, except as disclosed to the Lenders and which such disposal
or release could not cause a Material Adverse Change.
(q) On the Closing Date, there is no Litigation, or, to the best of the
Borrower's knowledge, threatened Litigation or pending or threatened claim of
breach or default, with respect to any material contract, or any loan agreement
or document evidencing any Debt for Borrowed Money of the Borrower or any of its
Subsidiaries that has not been disclosed in writing to the Lenders.
(r) All Capital Stock of the Borrower and its Subsidiaries has been duly
authorized and validly issued, and is fully paid and nonassessable. The Capital
Stock described on Schedule 5.01(a) hereto constitutes all the issued and
----------------
outstanding Capital Stock of the Borrower and the Subsidiaries of the Borrower,
or the Subsidiaries of another Subsidiary of the Borrower, except such shares
that have been issued after the Closing Date. No Person has conversion rights
with respect to, or any subscription rights, calls, commitments or claims of any
character for, or any repurchase or redemption options relating to, the Capital
Stock of the Borrower and its Subsidiaries, other than those that have been
waived. The Capital Stock of the Borrower and the Subsidiaries of the Borrower
when issued or sold, was either (i) registered or qualified under applicable
federal or state securities laws, or (ii) exempt therefrom.
(s) No broker's, finder's or other fee or commission will be payable by the
Borrower (other than to the Lenders hereunder) with respect to the making of the
Commitment or the Advances hereunder. The Borrower agrees to indemnify and hold
harmless the Administrative Agent and each Lender from and against any claims,
demand, liability, proceedings, costs or expenses asserted with respect to or
arising in connection with any such fees or commissions.
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(t) No event has occurred which permits (or with the passage of time would
permit) the revocation or termination of any material License, which could
result in the imposition of any restriction thereon of such a nature that could
reasonably be expected to cause a Material Adverse Change.
(u) To the best knowledge of the Borrower, as of the Closing Date, the
Borrower and its Subsidiaries have obtained all material patents, trademarks,
service-marks, trade names, copyrights, Licenses and other rights, free from
burdensome restrictions, that are necessary for the operation of their business
as presently conducted and as proposed to be conducted. On each date afer the
Closing Date on which this representation is deemed to be made, the Borrower,
the Restricted Subsidiaries and Bermuda Corp. have obtained all patents,
trademarks, service-marks, trade names, copyrights, Licenses and other rights,
free from burdensome restrictions, that are necessary for the operation of their
business as presently conducted and as proposed to be conducted, except those,
the failure of which to obtain could not be reasonably expected to cause a
Material Adverse Change. Nothing has come to the attention of the Borrower, any
of the Restricted Subsidiaries or Bermuda Corp. to the effect that (i) any
process, method, part or other material presently contemplated to be employed by
the Borrower, any Restricted Subsidiary or Bermuda Corp. may infringe any
patent, trademark, service-mark, trade name, copyright, License or other right
owned by any other Person, or (ii) there is pending or overtly threatened any
claim or Litigation against or affecting the Borrower, any Restricted Subsidiary
or Bermuda Corp. contesting its right to sell or use any such process, method,
part or other material, which could reasonably be expected to cause a Material
Adverse Change.
(v) Neither this Agreement nor any other document, certificate or statement
which has been furnished to any Lender by or on behalf of the Borrower or any of
its Subsidiaries in connection herewith contained any untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statement contained herein and therein not misleading at the time it was
furnished. On the Closing Date, there is no fact known to the Borrower and not
known to the public generally that could reasonably be expected to cause a
Material Adverse Change, which has not been set forth in this Agreement or in
the documents, certificates and statements furnished to the Lenders by or on
behalf of the Borrower prior to the date hereof in connection with the
transaction contemplated hereby. On each date after the Closing Date on which
this representation is deemed to be made, there is no fact known to the Borrower
or any of its Subsidiaries, and not known to the public generally, that could
reasonably be expected to cause a Material Adverse Change, which has not been
disclosed to the Lenders in writing.
(w) The Borrower is not, nor is any Restricted Subsidiary or Bermuda Corp.,
a party to any contractual relationship which is breached or in default solely
as a result of any change in the ownership or management of the Borrower, or the
Board of Directors, unless the Borrower has agreed to a substantially similar
provision in this Agreement.
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(x) Year 2000 Compliance.
(a) The Borrower has (i) undertaken a detailed review and assessment
of all areas within its business and operations that could be adversely
affected by the "Year 2000 Problem" (that is, the risk that computer
hardware and software used by the Borrower and its Subsidiaries may be
unable to recognize and perform properly date-sensitive functions involving
certain dates prior to and any date after December 31, 1999 (including
recognizing and performing properly date-sensitive functions in leap
years)), (ii) developed a detailed plan, timeline and budget for addressing
the Year 2000 Problem on a timely basis, and (iii) to date, implemented
that plan in accordance with that timetable and budget. The aggregate
costs to and charges by the Borrower related to the Year 2000 Problem and
being Year 2000 Compliant shall not exceed an amount which could result in
a Material Adverse Change.
(b) Each of the Borrower and its Subsidiaries is in the process of
making inquiry of each of its key suppliers, vendors and customers as to
whether such Person will on a timely basis be Year 2000 Compliant in all
material respects. "Key suppliers, vendors and customers" refers to those
suppliers, vendors and customers of the Borrower and its Subsidiaries, the
business failure of which could result in a Material Adverse Change.
5.02. Survival of Representations and Warranties. All representations
and warranties made under this Agreement and the other Loan Papers shall be
deemed to be made at and as of the Closing Date and at and as of the date of
each Advance, and each shall be true and correct in all material respects when
made. All such representations and warranties shall survive, and not be waived
by, the execution hereof by any Lender, any investigation or inquiry by any
Lender, or by the making of any Advance under this Agreement.
ARTICLE VI. GENERAL COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the conditions
to borrowing have been or can be fulfilled):
6.01. Preservation of Existence and Similar Matters.
(a) The Borrower shall, and shall cause each Restricted Subsidiary and
Bermuda Corp. to, preserve and maintain, or timely obtain and thereafter
preserve and maintain (i) material rights, franchises, authorizations, consents,
privileges and all other material Licenses from federal, state and local
governmental bodies and any Tribunal (regulatory or otherwise) which the
Borrower, such Restricted Subsidiary or Bermuda Corp. deems reasonably necessary
or advisable to conduct its business in the ordinary course, and (ii) its
existence (except as permitted by Section 8.05 hereof); and
(b) The Borrower shall, and shall cause each Restricted Subsidiary and
Bermuda Corp. to, qualify and remain qualified and authorized to do business in
each jurisdiction in which the
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character of its Properties or the nature of its business requires such
qualification or authorization, except where the failure to do so could not
cause a Material Adverse Change.
6.02. Business; Compliance with Applicable Law. The Borrower shall, and
shall cause the Restricted Subsidiaries and Bermuda Corp. to (a) engage
primarily in the business of telecommunications and internet, and activities
related thereto, and (b) comply in all material respects with the requirements
of all Applicable Law, except where the failure to do so could not cause a
Material Adverse Change.
6.03. Maintenance of Properties. The Borrower shall, and shall cause
each Restricted Subsidiary and Bermuda Corp. to, maintain or cause to be
maintained all their material Properties necessary to the conduct of their
business (whether owned or held under lease) in reasonably good repair, working
order and condition, taken as a whole, and from time to time make or cause to be
made all appropriate repairs, renewals, replacements, additions, betterments and
improvements thereto.
6.04. Accounting Methods and Financial Records. The Borrower shall, and
shall cause each Restricted Subsidiary and Bermuda Corp. to, maintain a system
of accounting established and administered in accordance with GAAP, keep
adequate records and books of account in which complete entries will be made and
all transactions reflected in accordance with GAAP, and keep accurate and
complete records of its respective assets. The Borrower shall, and shall cause
each of the Restricted Subsidiaries and Bermuda Corp. to maintain a fiscal year
ending on December 31.
6.05. Insurance. The Borrower shall, and shall cause each Restricted
Subsidiary and Bermuda Corp. to, maintain insurance from responsible companies
in such amounts and against such risks as shall be customary and usual in the
industry for companies of similar size and capability, but in no event less than
the amount and types insured as of the Closing Date.
6.06. Payment of Taxes and Claims. The Borrower shall, and shall cause
each of its Subsidiaries to, pay and discharge all Taxes, assessments and
governmental charges or levies imposed upon it or its income or Properties prior
to the date on which penalties attach thereto, and all lawful material claims
for labor, materials and supplies which, if unpaid, might become a Lien upon any
of their Properties or assets except those Taxes, assessments and charges
contested by the Borrower diligently in good faith, and for which adequate
reserves have been established in accordance with GAAP. The Borrower shall, and
shall cause each of its Subsidiaries to, timely file all information returns
required by federal, state or local Tax authorities.
6.07. Visits and Inspections. The Borrower shall, and shall cause each
Restricted Subsidiary and Bermuda Corp. to, promptly, permit representatives of
the Administrative Agent or any Lender from time to time, upon prior notice
reasonable under the circumstances, to (a) visit and inspect the Properties of
the Borrower, each Restricted Subsidiary and Bermuda Corp. as often as the
Administrative Agent or any Lender shall deem advisable, (b) inspect and make
extracts from and copies of the Borrower's, each Restricted Subsidiary's and
Bermuda Corp.'s books and records, and (c) discuss with the Borrower's, each
Restricted Subsidiary's and Bermuda Corp.'s directors, officers,
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employees and the auditors of the Borrower, the Restricted Subsidiaries and
Bermuda Corp., its business, assets, liabilities, financial positions, results
of operations and business prospects.
6.08. Payment of Debt for Borrowed Money. The Borrower shall, and shall
cause each Restricted Subsidiary and Bermuda Corp. to, pay its Debt for Borrowed
Money when and as the same becomes due.
6.09. Use of Proceeds. The Borrower shall use the proceeds of the
Revolver Advances exclusively (a) for Permitted Acquisitions consummated by the
Borrower and the Restricted Subsidiaries, (b) for Capital Expenditures made by
the Borrower and the Restricted Subsidiaries and permitted under the terms of
this Agreement, (c) for working capital of the Borrower and the Restricted
Subsidiaries and (d) for other lawful corporate purposes of the Borrower and the
Restricted Subsidiaries.
6.10. Indemnity.
(a) The Borrower shall, and shall cause each Restricted Subsidiary and
Bermuda Corp. to, defend, protect, indemnify and hold harmless the
Administrative Agent, each Lender, each of their respective Affiliates, and each
of their respective (including such Affiliates') officers, directors, employees,
agents, attorneys, shareholders and consultants (including, without limitation,
those retained in connection with the satisfaction or attempted satisfaction of
any of the conditions set forth herein) of each of the foregoing (collectively,
"Indemnitees") from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, claims, costs, expenses and
disbursements of any kind or nature whatsoever (including, without limitation,
the reasonable fees and disbursements of counsel for such Indemnitees in
connection with any investigative, administrative or judicial proceeding,
whether or not such Indemnitees shall be designated a party thereto), imposed
on, incurred by, or asserted against such Indemnitees (whether direct, indirect
or consequential and whether based on any federal, state, or local laws and
regulations), under common law or at equitable cause, or on contract, tort or
otherwise, arising from or connected with the past, present or future operations
of the Borrower any of its Subsidiaries, or any of their predecessors in
interest, in any manner relating to or arising out of this Agreement, the Loan
Papers, or any act, event or transaction or alleged act, event or transaction
relating or attendant thereto, the making of any participations in the Advances
and the management of the Advances, including in connection with, or as a
result, in whole or in part, of any negligence of Administrative Agent or any
Lender (other than those matters raised exclusively by a participant against the
Administrative Agent or any Lender and not the Borrower), or the use or intended
use of the proceeds of the Advances hereunder, or in connection with any
investigation of any potential matter covered hereby, but excluding any claim or
liability that arises as the result of the gross negligence or willful
misconduct of any Indemnitee, as finally judicially determined by a court of
competent jurisdiction (collectively, the "Indemnified Matters").
(b) In addition, the Borrower shall, and shall cause each Restricted
Subsidiary and Bermuda Corp. to, periodically, upon request, reimburse each
Indemnitee for its reasonable legal and other actual expenses (including the
cost of any investigation and preparation) incurred in connection with any
Indemnified Matter. If for any reason the foregoing indemnification is
unavailable to any
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Indemnitee or insufficient to hold any Indemnitee harmless with respect to
Indemnified Matters, then the Borrower, the Restricted Subsidiaries and Bermuda
Corp. shall contribute to the amount paid or payable by such Indemnitee as a
result of such loss, claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received by the Borrower,
the Restricted Subsidiaries and Bermuda Corp., and the Borrower's stockholders,
the Restricted Subsidiaries' stockholders and Bermuda Corp.'s stockholders, on
the one hand and such Indemnitee on the other hand but also the relative fault
of the Borrower, the Restricted Subsidiaries and such Indemnitee, as well as any
other relevant equitable considerations. The reimbursement, indemnity and
contribution obligations under this Section shall be in addition to any
liability which the Borrower may otherwise have, shall extend upon the same
terms and conditions to each Indemnitee, and shall be binding upon and inure to
the benefit of any successors, assigns, heirs and personal representatives of
the Borrower, the Restricted Subsidiaries, Bermuda Corp., the Administrative
Agent, the Lenders and all other Indemnitees. This Section shall survive any
termination of this Agreement and payment of the Obligations.
6.11. Environmental Law Compliance. The use which the Borrower or any
of its Subsidiaries intends to make of any real Property owned by it will not
result in the disposal or other release of any hazardous substance or solid
waste on or to such real Property in violation of any Environmental Law. As
used herein, the terms "hazardous substance" and "release" as used in this
Section shall have the meanings specified in CERCLA (as defined in the
definition of applicable Environmental Laws), and the terms "solid waste" and
"disposal" shall have the meanings specified in RCRA (as defined in the
definition of applicable Environmental Laws); provided, however, that if CERCLA
or RCRA is amended so as to broaden the meaning of any term defined thereby,
such broader meaning shall apply subsequent to the effective date of such
amendment; and provided further, to the extent that any other law applicable to
the Borrower, any of its Subsidiaries or any of their properties and assets
establishes a meaning for "hazardous substance," "release," "solid waste," or
"disposal" which is broader than that specified in either CERCLA or RCRA, such
broader meaning shall apply. The Borrower shall, and shall cause each
Restricted Subsidiary and Bermuda Corp. to, indemnify and hold the
Administrative Agent and each Lender harmless from and against, and to reimburse
them with respect to, any and all claims, demands, causes of action, loss,
damage, liabilities, costs and expenses (including reasonable attorneys' fees
and courts costs) of any kind or character, known or unknown, fixed or
contingent, asserted against or incurred by any of them at any time and from
time to time by reason of or arising out of (a) the failure of the Borrower or
any of its Subsidiaries to perform any obligation hereunder regarding asbestos
or applicable Environmental Laws, (b) any violation on or before the Release
Date of any applicable Environmental Law in effect on or before the Release
Date, and (c) any act, omission, event or circumstance existing or occurring on
or prior to the Release Date (including without limitation the presence on such
real Property or release from such real Property of hazardous substances or
solid wastes disposed of or otherwise released on or prior to the Release Date),
resulting from or in connection with the ownership of the real Property,
regardless of whether the act, omission, event or circumstance constituted a
violation of any applicable Environmental Law at the time of its existence or
occurrence, or whether the act, omission, event or circumstance is caused by or
relates to the negligence of any indemnified Person; provided, that the Borrower
shall not be under any obligation to indemnify the Administrative Agent or any
Lender to the extent that any such liability arises as the result of the gross
negligence or willful misconduct of such Person, as finally judicially
determined by a court of competent jurisdiction. The
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provisions of this paragraph shall survive the Release Date and shall continue
thereafter in full force and effect.
6.12. Acquisitions, Generally. In connection with any Permitted
Acquisition made by the Borrower or any Restricted Subsidiary during the term of
this Agreement, the Borrower shall or shall cause such Restricted Subsidiary to,
(a) not less than ten Business Days prior to the proposed acquisition date,
deliver to Administrative Agent a detailed written description of the proposed
Permitted Acquisition in form reasonably acceptable to the Administrative Agent,
and (b) prior to the consummation of the acquisition a statement certified by an
Authorized Officer that (i) the proposed transaction complies with the
definition of Permitted Acquisition set forth in Article I hereof and with the
terms and conditions set forth in Section 8.05(b) hereof and/or, to the extent
applicable, Section 8.05(d) hereof, and (ii) no Default or Event of Default
exists prior to or after giving effect to any requested Advance or the
consummation of such acquisition, or will exist upon consummation of the
proposed acquisition and related borrowings and transactions, together with a
Compliance Certificate computed after giving effect to such acquisition and
borrowings.
6.13. Subsidiary Designation. The Borrower agrees that each Restricted
Subsidiary on the Closing Date will remain a Restricted Subsidiary until the
Obligations have been repaid in full and the Commitment has been terminated.
6.14. Subsidiary Creation or Acquisition. None of the Borrower, any
Restricted Subsidiary or Bermuda Corp. may create or acquire any Subsidiary
without 20 days prior written notice to the Administrative Agent in accordance
with the terms of Section 11.02 hereof.
6.15. Year 2000 Compliance. The Borrower will promptly notify the
Administrative Agent in the event the Borrower discovers or determines that any
computer application (including those of its suppliers and vendors) that is
material to its or any of it Subsidiaries' business and operations will not be
Year 2000 Compliant on a timely basis, except to the extent that such failure
could not be reasonably expected to cause a Material Adverse Change.
6.16. Eurocurrency Conversion to the Euro.
(a) If, as a result of the implementation of the European economic and
monetary union ("EMU"), (i) any currency in which a Letter of Credit may be
issued under this Agreement (a "National Currency") ceases to be lawful currency
of the state issuing the same and is replaced by a European single or common
currency (the "Euro") or (ii) any National Currency and the Euro are at the same
time both recognized by the central bank or comparable governmental authority of
the state issuing such currency as lawful currency of such state, then any
amount payable hereunder by any party hereto in such National Currency
(including, without limitation, any Advance to be made under this Agreement)
shall instead be payable in the Euro and the amount so payable shall be
determined by redenominating or converting such amount into the Euro at the
exchange rate officially fixed by the European Central Bank for the purpose of
implementing the EMU, provided, that to the extent any EMU legislation provides
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that an amount denominated either in the Euro or in the applicable National
Currency can be paid either in Euros or in the applicable National Currency,
each party to this Agreement shall be entitled to pay or repay such amount in
Euros or in the applicable
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National Currency. Prior to the occurrence of the event or events described in
clause (i) or (ii) of the preceding sentence, each amount payable hereunder in
any such National Currency will, except as otherwise provided herein, continue
to be payable only in that National Currency.
(b) Borrower shall from time to time, at the request of the Administrative
Agent pay to the Administrative Agent for the account of each Lender the amount
of any cost or increased cost incurred by, or of any reduction in any amount
payable to or in the effective return on its capital to, or of interest or other
return foregone by, such Lender or any Affiliate of such Lender as a result of
the introduction of, changeover to or operation of the Euro in any applicable
state.
(c) In addition, this Agreement (including, without limitation, the
definition of LIBOR Rate) will be amended to the extent determined by the
Administrative Agent (acting reasonably and in consultation with the Borrower)
to be necessary to reflect such implementation of the EMU and change in currency
and to put the Lenders and the Borrower in the same position, so far as
possible, that they would have been in if such implementation and change in
currency had not occurred. Except as provided in the foregoing provisions of
this Section 6.17, no such implementation or change in currency nor any economic
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consequences resulting therefrom shall (i) give rise to Borrower's termination
prematurely, contest, cancellation, rescission, alteration, modification or
renegotiation the provisions of this Agreement or (ii) discharge, excuse or
otherwise affect the performance of any obligations of Borrower under this
Agreement or other Loan Papers.
ARTICLE VII. INFORMATION COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the conditions
to borrowing have been or can be fulfilled), the Borrower shall furnish or cause
to be furnished to each Lender:
7.01. Quarterly Financial Statements and Information. Within 45 days
after the end of each fiscal quarter, (a) consolidated and consolidating balance
sheets of the Borrower, the Restricted Subsidiaries and Bermuda Corp., and (b)
consolidated balance sheets of the Borrower and its Subsidiaries, in each case,
as at the end of such quarter, and the related consolidated and consolidating
statements of income and consolidated statements of changes in cash for such
quarter and for the elapsed portion of the year ended with the last day of such
quarter, all of which shall be certified by an Authorized Officer, to, in his or
her opinion, present fairly in all material respects, in accordance with GAAP,
the financial position and results of operations of the Borrower, the Restricted
Subsidiaries and Bermuda Corp., and the Borrower and its Subsidiaries,
respectively, as at the end of and for such period, and for the elapsed portion
of the year ended with the last day of such period.
7.02. Annual Financial Statements and Information.
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(a) Within 120 days after the end of each fiscal year, a copy of (i) (A)
the consolidated and consolidating balance sheets of the Borrower, the
Restricted Subsidiaries and Bermuda Corp., and (B) the consolidated balance
sheets of the Borrower and its Subsidiaries, in each case, as of the end of the
current and prior fiscal years and (ii) (A) consolidated and consolidating
statements of earnings, statements of changes in shareholders' equity, and
statements of changes in cash as of and through the end of such fiscal year for
the Borrower, the Restricted Subsidiaries and Bermuda Corp., and (B)
consolidated statements of earnings, statements of changes in shareholders'
equity, and statements of changes in cash as of and through the end of such
fiscal year for the Borrower and its Subsidiaries, all of which are prepared in
accordance with GAAP, and certified by independent certified public accountants
acceptable to the Lenders, whose opinion shall be in scope and substance in
accordance with GAAP and shall be unqualified.
(b) As soon as available, but in any event within 60 days following the end
of each fiscal year, a copy of the annual consolidated operating budget of the
Borrower and the Restricted Subsidiaries and the Borrower and its Subsidiaries
for the succeeding fiscal year.
7.03. Compliance Certificates. At the time financial statements are
furnished pursuant to Section 7.01 and Section 7.02 hereof, a duly completed
Compliance Certificate evidencing no Default or Event of Default, or to the
extent that a Default or Event of Default exists, the steps being taken to cure
such Default or Event of Default.
7.04. Copies of Other Reports and Notices.
(a) Promptly upon their becoming available, a copy of (i) all material
reports or letters submitted to the Borrower, any Restricted Subsidiary or
Bermuda Corp. by accountants in connection with any annual, interim or special
audit, including without limitation any report prepared in connection with the
annual audit referred to in Section 7.02 hereof, and any other comment letter
submitted to management in connection with any such audit, (ii) each financial
statement, report, notice or proxy statement sent by the Borrower, any
Restricted Subsidiary or Bermuda Corp. to stockholders generally, (iii) each
regular or periodic report and any registration statement or prospectus (or
material written communication in respect of any thereof) filed by the Borrower
or any Restricted Subsidiary with any securities exchange, with the Securities
and Exchange Commission or any successor agency, and (iv) all press releases
concerning material financial aspects of the Borrower or any Subsidiary of the
Borrower.
(b) Promptly upon becoming aware (i) that the holder(s) of any note(s) or
other evidence of indebtedness or other security of the Borrower, any Restricted
Subsidiary or Bermuda Corp. in excess of $250,000 in the aggregate has given
notice or taken any action with respect to a breach, failure to perform, claimed
default or event of default thereunder, (ii) of any occurrence or non-occurrence
of any event which constitutes or which with the passage of time or giving of
notice or both could constitute a material breach by the Borrower, any
Restricted Subsidiary or Bermuda Corp. under any material agreement or
instrument other than this Agreement to which the Borrower, any Restricted
Subsidiary or Bermuda Corp. is a party or by which any of their Properties may
be bound, or (iii) of the occurrence of any event, circumstance or condition
which could reasonably be expected to cause a Material Adverse Change, a written
notice specifying the details thereof (or the
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nature of any claimed default or event of default) and what action is being
taken or is proposed to be taken with respect thereto;
(c) Promptly upon receipt thereof, information with respect to and copies
of any notices received from the FCC, any applicable PUC or any other federal,
state or local regulatory agencies or any tribunal relating to any order,
ruling, law, information or policy that relates to a breach of or noncompliance
with the Communications Act or any law, rule or regulation of any applicable
PUC, or might result in the payment of money by the Borrower, any Restricted
Subsidiary or Bermuda Corp. in an amount of $250,000 or more in the aggregate,
or otherwise cause a Material Adverse Change, or result in the loss or
suspension of any material License or any material contract;
(d) Promptly upon the knowledge of an Authorized Officer of receipt by the
Borrower, any Restricted Subsidiary or Bermuda Corp. from any governmental
agency, or any government, political subdivision or other entity, of any
material notice, correspondence, hearing, proceeding or order regarding or
affecting the Borrower, any Restricted Subsidiary, Bermuda Corp. or any of their
Properties or businesses not in the ordinary course of business, a copy of such
notice, correspondence, hearing, proceeding or order; and
(e) From time to time and promptly upon each request, such data,
certificates, reports, statements, documents or further information regarding
the assets, business, liabilities, financial position, projections, results of
operations or business prospects of the Borrower and the Subsidiaries of the
Borrower, as the Administrative Agent or any Lender may reasonably request.
7.05. Notice of Litigation, Default and Other Matters. Prompt notice of
the following events after the Borrower has knowledge or notice thereof:
(a) The commencement of all proceedings and investigations by or before the
FCC, any applicable PUC, or any other governmental body, and all other actions
and proceedings in any court or before any arbitrator involving claims for
damages (including punitive damages) in excess of either $1,000,000 for any one
proceeding or investigation, or $5,000,000 in the aggregate for all such
proceedings and investigations (after deducting the amount with respect to the
Borrower, or any of its Subsidiaries is insured), against or in any other way
relating directly to the Borrower, any of its Subsidiaries, or any of their
properties, assets or businesses;
(b) Promptly upon the happening of any condition or event which constitutes
a Default or Event of Default, a written notice specifying the nature and period
of existence thereof and what action is being taken or is proposed to be taken
with respect thereto; and
(c) Any event which could cause a Material Adverse Change with respect to
the business, assets, liabilities, financial position, results of operations or
prospective business of the Borrower or any of its Subsidiaries.
7.06. ERISA Reporting Requirements.
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(a) Promptly and in any event (i) within 30 days after the Borrower, or any
member of its Controlled Group knows or has reason to know that any ERISA Event
described in clause (a) of the definition of ERISA Event or any event described
in Section 4063(a) of ERISA with respect to any Plan of the Borrower or any
member of its Controlled Group has occurred, and (ii) within 10 days after the
Borrower or any member of its Controlled Group knows or has reason to know that
any other ERISA Event with respect to any Plan of the Borrower or any member of
its Controlled Group has occurred or a request for a minimum funding waiver
under Section 412 of the Code with respect to any Plan of the Borrower, or any
member of its Controlled Group, a written notice describing such event and
describing what action is being taken or is proposed to be taken with respect
thereto, together with a copy of any notice of event that is given to the PBGC;
(b) Promptly and in any event within two Business Days after receipt
thereof by the Borrower or any member of its Controlled Group from the PBGC,
copies of each notice received by the Borrower or any member of its Controlled
Group of the PBGC's intention to terminate any Plan or to have a trustee
appointed to administer any Plan;
(c) Promptly and in any event within 30 days after the filing thereof by
the Borrower or any member of its Controlled Group with the United States
Department of Labor, the Internal Revenue Service or the PBGC, copies of each
annual and other report (including Schedule B thereto) with respect to each
Plan;
(d) Promptly and in any event within 30 days after receipt thereof, a copy
of any notice, determination letter, ruling or opinion the Borrower or any
member of its Controlled Group receives from the PBGC, the United States
Department of Labor or the Internal Revenue Service with respect to any Plan;
(e) Promptly, and in any event within 10 Business Days after receipt
thereof, a copy of any correspondence the Borrower or any member of its
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Plan concerning potential withdrawal liability
pursuant to Section 4219 or 4202 of ERISA, and a statement from the chief
financial officer of the Borrower or such member of its Controlled Group setting
forth details as to the events giving rise to such potential withdrawal
liability and the action which the Borrower or such member of its Controlled
Group is taking or proposes to take with respect thereto;
(f) Notification within 30 days of any material increases in the benefits
of any existing Plan which is not a Multiemployer Plan, or the establishment of
any new Plans, or the commencement of contributions to any Plan to which the
Borrower, or any member of its Controlled Group was not previously contributing;
(g) Notification within three Business Days after the Borrower, or any
member of its Controlled Group knows or has reason to know that the Borrower, or
any such member of its Controlled Group has or intends to file a notice of
intent to terminate any Plan under a distress termination within the meaning of
Section 4041(c) of ERISA and a copy of such notice; and
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(h) Promptly after receipt of written notice of commencement thereof,
notice of all actions, suits and proceedings before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, affecting the Borrower, or any member of its Controlled Group with
respect to any Plan.
ARTICLE VIII. NEGATIVE COVENANTS
So long as any of the Obligations are outstanding and unpaid or the
Commitment or any Letter of Credit is outstanding (whether or not the conditions
to borrowing have been or can be fulfilled):
8.01. Financial Covenants.
(a) Total Leverage Ratio. At all times until the Obligations have
been repaid in full and the Commitment has been terminated, the Borrower
shall not permit the Total Leverage Ratio to be more than 3.00 to 1.00.
(b) Interest Coverage Ratio. At all times until the Obligations have
been repaid in full and the Commitment has been terminated, the Borrower
shall not permit the Interest Coverage Ratio to be less than 2.50 to 1.00.
8.02. Debt for Borrowed Money. The Borrower shall not, and shall
not permit any Restricted Subsidiary or Bermuda Corp. to, create, assume, incur
or otherwise become or remain obligated in respect of, or permit to be
outstanding, or suffer to exist any Debt for Borrowed Money, except:
(a) with respect to the Borrower and the Restricted Subsidiaries, Debt for
Borrowed Money under the Loan Papers;
(b) with respect to the Borrower, its Restricted Subsidiaries and Bermuda
Corp., Debt for Borrowed Money in existence on the Closing Date described on
Schedule 8.02 hereto and not otherwise permitted pursuant to the terms of this
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Section 8.02, in each case only in the principal amounts and as such Debt for
Borrowed Money exists as of the Closing Date;
(c) provided that no Default or Event of Default exists or would result
from the incurrence thereof, with respect to the Borrower and the wholly owned
Restricted Subsidiaries, Debt owed to each other;
(d) so long as there exists no Default or Event of Default both before and
after giving effect thereto, Debt of the Borrower in respect to Interest Rate
Protection Agreements;
(e) so long as there exists no Default or Event of Default both before and
after giving effect thereto, Debt of the Borrower in respect of Permitted
Refinancing Indebtedness;
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(f) so long as there exists no Default or Event of Default both before and
after giving effect to the incurrence thereof, secured Debt (including Capital
Leases) of the Borrower in an amount in the aggregate over the term of this
Agreement not to exceed an amount equal to $10,000,000; and
(g) so long as there exists no Default or Event of Default both before and
after giving effect to the incurrence thereof, and so long as the Borrower
delivers to the Administrative Agent and the Lenders a pro forma Compliance
Certificate giving effect to the incurrence of any Subordinated Indebtedness and
demonstrating compliance with the terms of this Agreement and the Loan Papers
throughout the term of the Loan, unsecured Subordinated Indebtedness of the
Borrower in an amount in the aggregate over the term of this Agreement not to
exceed an amount equal to $150,000,000 with such other terms and conditions as
agreed to by the Administrative Agent and the Borrower.
8.03. Liens. The Borrower shall not, and shall not permit any
Restricted Subsidiary or Bermuda Corp. to, create, assume, incur, permit or
suffer to exist, directly or indirectly, any Lien on any of its assets or
Properties, whether now owned or hereafter acquired, except (a) Permitted Liens,
and (b) so long as no Default or Event of Default exists or would result from
the incurrence of such Lien, Liens securing Debt permitted to be incurred by
Section 8.02(f) hereof (and any Permitted Refinancing Indebtedness of such
Debt), but only so long as such Debt secured thereby shall not be increased and
the Liens shall cover Properties of the Borrower and purchased with the proceeds
of such Debt and shall not cover additional assets of the Borrower, any such
Restricted Subsidiary or Bermuda Corp. The Borrower shall not, and shall not
permit any Restricted Subsidiary of the Borrower or Bermuda Corp. to, agree with
any other Person that it shall not create, assume, incur, permit or suffer to
exist or to be created, assumed, incurred or permitted to exist, directly or
indirectly, any Lien on any of its assets or Properties.
8.04. Investments. The Borrower shall not, and shall not permit any
Restricted Subsidiary or Bermuda Corp. to, make any Investment, except that the
Borrower may purchase or otherwise acquire and own:
(a) Marketable, direct obligations of, or guaranteed by, the United States
of America and maturing within 365 days of the date of purchase;
(b) Commercial paper issued by U.S. corporations that have a rating of A-
1/P-1 or better by Standard & Poor's Ratings Group, a Division of McGraw-Hill,
Inc. or Moody's Investors Service, Inc.;
(c) Certificates of deposit of domestic banks maturing within 365 days of
the date of purchase, which banks' debt obligations have one of the two highest
ratings obtainable from Standard & Poor's Ratings Group, a Division of McGraw-
Hill, Inc. or Moody's Investors Service, Inc.;
(d) Securities issued by U.S. corporations that have one of the two highest
ratings obtainable from Standard & Poor's Ratings Group, a Division of McGraw-
Hill, Inc. or Moody's Investors Service, Inc.;
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(e) Investments in acquisitions permitted by Section 8.05(b) hereof, so
long as each new Subsidiary of the Borrower (i) is wholly owned and subject to
the provisions hereof as a Restricted Subsidiary and (ii) immediately becomes a
party to an Unlimited Guaranty guaranteeing the Obligations;
(f) Accounts receivable that arise in the ordinary course of business and
are payable on standard terms;
(g) Investments not constituting existing Investments in Subsidiaries that
are in existence on the Closing Date and described on Schedule 8.04 hereto;
-------------
(h) so long as there exists no Default or Event of Default both at the time
of such Investment and immediately after giving effect thereto, Investments in
Unrestricted Subsidiaries and Bermuda Corp. which, in the aggregate, over the
term of this Agreement, do not exceed $10,000,000 for all such Investments.
8.05. Liquidation, Disposition or Acquisition of Assets, Merger, New
Subsidiaries. The Borrower shall not, and shall not permit any Restricted
Subsidiary or Bermuda Corp. to, at any time:
(a) liquidate or dissolve itself (or suffer any liquidation or dissolution)
or otherwise wind up; or sell, lease, abandon, transfer or otherwise dispose of
all or any part of its assets, Properties or business other than (i) so long as
the Borrower complies with Section 2.05 and Section 2.11 hereof, Permitted Asset
Sales, (ii) so long as there exists no Default or Event of Default both before
and after giving effect to any such sale and the Borrower complies with Section
2.05 and Section 2.11 hereof, (A) and after delivery of prior written notice to
the Administrative Agent, any Restricted Subsidiary of the Borrower can be
dissolved so long as a wholly owned Restricted Subsidiary of the Borrower that
has executed an Unlimited Guaranty or the Borrower acquires all such Restricted
Subsidiary's assets, and (B) after delivery of prior written notice to the
Administrative Agent, any wholly owned direct or indirect Restricted Subsidiary
of the Borrower that has executed an Unlimited Guaranty of the Obligations
hereunder may sell or transfer assets, Property or business to the Borrower or
any other wholly owned indirect or indirect Restricted Subsidiary of the
Borrower that has executed an Unlimited Guaranty of the Obligations hereunder.
(b) acquire any assets, Property or business of any other Person, or
participate in any joint venture, except (i) assets and Property acquired in
the ordinary course of business, (ii) provided that the Borrower complies
fully with Sections 6.12, 6.14, 8.04(e) and 8.05(d) hereof, Permitted
Acquisitions may be consummated and (iii) after delivery of prior written
notice to the Administrative Agent, the Borrower or any wholly owned direct or
indirect Restricted Subsidiary of the Borrower that has executed an Unlimited
Guaranty of the Obligations hereunder may acquire assets, Property or business
from any other wholly owned direct or indirect Restricted Subsidiary of the
Borrower that has executed an Unlimited Guaranty of the Obligations hereunder;
(c) enter into any merger or consolidation, except that, so long as there
exists no Default or Event of Default and none is caused thereby (i) after
delivery of prior written notice to the Administrative Agent, any wholly owned
Restricted Subsidiary of the Borrower can merge or consolidate into any other
wholly owned Restricted Subsidiary of the Borrower, or so long as such
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transaction is in connection with a Permitted Acquisition, into another Person,
so long as a wholly owned Restricted Subsidiary of the Borrower which has
executed an Unlimited Guaranty is a survivor, or into the Borrower so long as
the Borrower is the surviving corporation or (ii) after delivery of prior
written notice to the Administrative Agent, another Person may be merged with or
into the Borrower or any wholly owned Restricted Subsidiary of the Borrower that
has executed an Unlimited Guaranty in connection with a Permitted Acquisition,
so long as the Borrower or such wholly owned Restricted Subsidiary is the
surviving corporation; and
(d) create or acquire any Subsidiary, except (a) as permitted by Section
8.04(e) hereof and Section 8.05(b) above, and (b) so long as (i) there exists no
Default or Event of Default both before and after giving effect to the creation
of any new wholly owned Restricted Subsidiary and the transfer of any assets to
such wholly owned Restricted Subsidiary and (ii) immediately upon the creation
of any new wholly owned Restricted Subsidiary, such Restricted Subsidiary shall
become a signatory to an Unlimited Guaranty of the Obligations delivered to the
Administrative Agent, the Borrower may create a new wholly owned Restricted
Subsidiary of the Borrower. Nothing in this Section 8.05(d) shall permit the
Borrower or any Restricted Subsidiary of the Borrower to create any Subsidiary
that is not wholly owned, other than director's qualifying shares not to exceed
1% of the Capital Stock of such Subsidiary.
8.06. Guaranties; Contingent Liabilities. Other than as permitted
pursuant to Section 8.02 hereunder, the Borrower shall not, and shall not permit
------------
any Restricted Subsidiary or Bermuda Corp. to, at any time make or issue any
Guaranty, or assume, be obligated with respect to, or permit to be outstanding
any Contingent Liabilities, except pursuant to the Loan Papers.
8.07. Restricted Payments. The Borrower shall not, and shall not permit
any Restricted Subsidiary or Bermuda Corp. to, directly or indirectly declare,
make or pay any Restricted Payment; provided, however
(a) any wholly owned Subsidiary of the Borrower may declare, make
and pay Restricted Payments to the Borrower or any other wholly owned
Restricted Subsidiary that has executed an Unlimited Guaranty of the
Obligations hereunder, and
(b) so long as there exists no Default or Event of Default both
before and immediately after giving effect to any such Restricted Payment,
the Borrower may make loans and advances to employees of the Borrower and
its Subsidiaries which, in the aggregate over the term of this Agreement,
do not exceed $100,000.
8.08. Affiliate Transactions. The Borrower shall not, and shall not
permit any of its Subsidiaries to, at any time engage in any transaction with an
Affiliate, nor make an assignment or other transfer of any of its assets or
Properties to any Affiliate, on terms materially less advantageous to the
Borrower or any such Subsidiary than would be the case if such transaction had
been effected with a non-Affiliate, except those transactions described on
Schedule 8.08 hereof and to the extent applicable, Schedule 8.16 hereof.
- ------------- -------------
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8.09. Compliance with ERISA. The Borrower shall not, and shall not
permit any of its Subsidiaries to, directly or indirectly, or permit any member
of its Controlled Group to directly or indirectly, (a) terminate any Plan so as
to result in any material (in the opinion of the Majority Lenders) liability to
the Borrower or any member of its Controlled Group, (b) permit to exist any
ERISA Event, or any other event or condition which presents the risk of
liability of the Borrower or any member of its Controlled Group, (c) make a
complete or partial withdrawal (within the meaning of Section 4201 of ERISA)
from any Multiemployer Plan so as to result in any liability to the Borrower or
any member of its Controlled Group, (d) enter into any new Plan or modify any
existing Plan so as to increase its obligations thereunder except in the
ordinary course of business consistent with past practice which could result in
any liability to the Borrower, or any member of its Controlled Group, or (e)
permit the present value of all benefit liabilities, as defined in Title IV of
ERISA, under each Plan of the Borrower, or any member of its Controlled Group
(using the actuarial assumptions utilized by the PBGC upon termination of a
plan) to exceed the fair market value of Plan assets allocable to such benefits
all determined as of the most recent valuation date for each such Plan.
8.10. Capital Stock. The Borrower shall not, and shall not permit any
Restricted Subsidiary or Bermuda Corp. to (a) make or permit any transfer,
assignment, distribution, mortgage, pledge or gift of any shares of Capital
Stock, except (i) to the Borrower or another wholly owned direct or indirect
Restricted Subsidiary of the Borrower that has executed an Unlimited Guaranty of
the Obligations, and (ii) for asset sales permitted by Section 8.05(a) hereof
and (b) issue any Capital Stock.
8.11. Sale and Leaseback. The Borrower shall not, and shall not permit
any Restricted Subsidiary or Bermuda Corp. to, enter into any arrangement
whereby it sells or transfers any of its assets, and thereafter rents or leases
such assets.
8.12. Sale or Discount of Receivables. The Borrower shall not, and
shall not permit any Restricted Subsidiary or Bermuda Corp. to, directly or
indirectly sell, with or without recourse, for discount or otherwise, any notes
or accounts receivable.
8.13. Limitation on Restrictive Agreements. Except as otherwise
permitted in connection with the issuance of Debt under Section 8.02 hereof, the
------------
Borrower shall not, and shall not permit any Restricted Subsidiary or Bermuda
Corp. to, enter into any indenture, agreement, instrument, financing document or
other arrangement which, directly or indirectly, prohibits or restrains, or has
the effect of prohibiting or restraining, or imposes materially adverse
conditions upon: (a) the incurrence of indebtedness, (b) the granting of Liens,
(c) the making or granting of Guarantees, (d) the payment of dividends or
Distributions, (e) the purchase, redemption or retirement of any Capital Stock
of the Borrower or any Subsidiary of the Borrower, (f) the making of loans or
advances, (g) transfers or sales of Property or assets (including Capital Stock)
by the Borrower, or any of the Restricted Subsidiaries, (h) the making of
Investments, (h) any change of control or management, (i) the making of changes
or amendments to this Agreement or any other Loan Paper, or (j) the acceptance
of a waiver or consent with respect to any term or provision of this Agreement
or any other Loan Paper.
8.14. Amendment of Material Agreements. The Borrower shall not, and
shall not permit any Restricted Subsidiary or Bermuda Corp. to, amend, waive or
consent to any deviation from any
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provision of any documentation or agreements of the (i) any material agreement
relating to the Borrower or any such Restricted Subsidiary and (ii) in any
material respect, articles of incorporation, by-laws and other organizational
documents of the Borrower, the Restricted Subsidiaries and Bermuda Corp.
8.15. Name Changes. The Borrower shall not, and shall not permit any
Subsidiary of the Borrower to, change its name without notifying Administrative
Agent 30 calendar day prior to such name change.
8.16. Unrestricted Subsidiaries. Except as specifically permitted by the
terms of this Agreement or listed on Schedule 8.16 hereto, the Borrower shall
-------------
not, and shall not permit any Restricted Subsidiary and Bermuda Corp. to,
contribute any equity, make any loan, advance or other investment in, or
otherwise conduct any business with, any Unrestricted Subsidiary and Bermuda
Corp.
ARTICLE IX. EVENTS OF DEFAULT
9.01. Events of Default. Any one or more of the following shall be an
"Event of Default" hereunder, if the same shall occur for any reason whatsoever,
whether voluntary or involuntary, by operation of Law, or otherwise:
(a) The Borrower shall fail to pay any (i) principal payable under any Loan
Paper on the date due; or (ii) any interest, fees or other amounts payable
within business three days of the date due;
(b) Any representation or warranty made or deemed made by any Obligor (or
any of its officers or representatives) under or in connection with any Loan
Paper shall prove to have been incorrect or misleading in any material respect
when made or deemed made;
(c) The Borrower shall fail to perform or observe any term or covenant
contained in Section 7.05 hereof or in Article VIII hereof;
(d) Any Obligor shall fail to perform or observe any other term or covenant
contained in this Agreement or any other Loan Paper, other than those described
in Sections 9.01(a), (b) and (c) above, and such failure shall not be remedied
within thirty days following the earlier of the Borrower's knowledge of such
failure or notice from any Lender of the occurrence of such failure;
(e) Any of the following shall occur: (i) Any Loan Paper or material
provision thereof shall, for any reason, not be valid and binding on the Obligor
signatory thereto, or not be in full force and effect, or shall be declared to
be null and void; or (ii) the validity or enforceability of any Loan Paper shall
be contested by any Obligor, any Unrestricted Subsidiary or any Affiliate of the
Borrower and its Subsidiaries; or (iii) any Obligor shall deny in writing that
it has any or further liability or obligation under its respective Loan Papers;
or (iv) any default or breach under any provision of any Loan Papers shall
continue after the applicable grace period, if any, specified in such Loan
Paper;
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(f) Any of the following shall occur: (i) the Borrower or any of its
Subsidiaries shall make an assignment for the benefit of creditors or be unable
to pay its debts generally as they become due; (ii) the Borrower or any of its
Subsidiaries shall petition or apply to any Tribunal for the appointment of a
trustee, receiver, or liquidator of it, or of any substantial part of its
assets, or shall commence any proceedings relating to the Borrower or any of its
Subsidiaries under any Debtor Relief Laws; (iii) any such petition or
application shall be filed, or any such proceedings shall be commenced, against
the Borrower or any of its Subsidiaries, or an order, judgment or decree shall
be entered appointing any such trustee, receiver, or liquidator, or approving
the petition in any such proceedings, and such petition or application shall be
consented to or uncontested by the Borrower or such Subsidiary, or if contested
by the Borrower or such Subsidiary, shall not be dismissed within 60 days
following the filing of such petition or application; (iv) any final order,
judgment, or decree shall be entered in any proceedings against the Borrower or
any of its Subsidiaries decreeing its dissolution; or (v) any final order,
judgment, or decree shall be entered in any proceedings against the Borrower or
any of its Subsidiaries decreeing its split-up which requires the divestiture of
a substantial part of its assets;
(g) Any of the following shall occur: (i) The Borrower, or any Subsidiary
of the Borrower shall fail to pay any Debt (other than Debt under the Loan
Papers) in an aggregate amount of $1,000,000 or more when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or otherwise),
and such failure shall continue after the applicable grace period, if any,
specified in the agreement or instrument relating to such Debt; or (ii) the
Borrower or any Subsidiary of the Borrower shall fail to perform or observe any
term or covenant contained in any agreement or instrument relating to any such
Debt, when required to be performed or observed, and such failure shall continue
after the applicable grace period, if any, specified in such agreement or
instrument, and can result in acceleration of the maturity of such Debt; or
(iii) any such Debt shall be declared to be due and payable, or required to be
prepaid, mandatorily redeemed or repurchased (other than by a regularly
scheduled required prepayment), prior to the stated maturity thereof; or (iv)
there shall exist a breach by any the Borrower or any of its Subsidiaries under
one or more material contracts the effect of which could reasonably be expected
to cause a Material Adverse Change;
(h) Any Obligor shall have any final judgment(s) outstanding against it,
and such judgment(s) shall remain unstayed, in effect, and unpaid for the period
of time after which the judgment holder may cause the creation of Liens against
or seizure of any of its Property;
(i) Any of the following shall have occurred: (i) Any ERISA Event shall
have occurred with respect to a Plan of the Borrower or any Subsidiary of the
Borrower, and the sum of the Insufficiency of such Plan and liabilities relating
thereto is equal to or greater than $1,000,000 or (ii) the Borrower, the
Subsidiaries of the Borrower or any ERISA Affiliate of any of them shall have
committed a failure described in Section 302(f)(l) of ERISA, and the amount
determined under Section 302(f)(3) of ERISA is equal to or greater than
$1,000,000;
(j) The Borrower, or any ERISA Affiliate of the Borrower shall have been
notified by the sponsor of a Multiemployer Plan that (A) it has incurred
Withdrawal Liability to such Plan in an amount that exceeds $1,000,000 or
requires payments exceeding $1,000,000 per annum, or (B) such Plan is in
reorganization or is being terminated, within the meaning of Title IV of ERISA,
if as a
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result thereof the aggregate annual contributions to all Multiemployer Plans in
reorganization or being terminated is increased over the amounts contributed to
such Plans for the preceding Plan year by an amount exceeding $1,000,000;
(k) Any of the Borrower or any of its Subsidiaries shall be required under
any Environmental Law (i) to implement any remedial, neutralization, or
stabilization process or program, the cost of which could reasonably be expected
to cause a Material Adverse Change, or (ii) to pay any penalty, fine, or damages
in an aggregate amount which could reasonably be expected to cause a Material
Adverse Change;
(l) Any of the following shall have occurred: (i) Any property or assets
(whether leased or owned), or the operations conducted thereon by any of the
Borrower or any of its Subsidiaries, or any current or prior owner or operator
thereof (in the case of real Property), shall violate or have violated any
applicable Environmental Law, if such violation could reasonably be expected to
cause a Material Adverse Change; or (ii) the Borrower or such Subsidiary shall
not obtain or maintain any License required to be obtained or filed under any
Environmental Law in connection with the use of such Property and assets,
including without limitation past or present treatment, storage, disposal, or
release of Hazardous Materials into the environment, if the failure to obtain or
maintain the same could reasonably be expected to cause a Material Adverse
Change;
(m) Any of the following shall have occurred: (i) A final non-appealable
order is issued by any Tribunal, including, but not limited to, the FCC, any
applicable PUC, or the United States Justice Department, requiring any Obligor
to divest a substantial portion of its assets pursuant to any antitrust,
restraint of trade, unfair competition, industry regulation, or similar Laws, or
(ii) any Tribunal shall condemn, seize, or otherwise appropriate, or take
custody or control of all or any substantial portion of the assets of the
Borrower or any of its Subsidiaries;
(n) Any of the following shall have occurred if the effect thereof could be
reasonably expected to cause a Material Adverse Change: (i) Any License whether
presently existing or hereafter granted to or obtained by the Borrower or any of
its Subsidiaries shall expire without renewal or be suspended or revoked, or
(ii) the Borrower or any of its Subsidiaries shall become subject to any
injunction or other order affecting or which may affect the Borrower's or any of
its Subsidiary's present or proposed operations under any such License;
(o) Any civil action, suit or proceeding shall be commenced against the
Borrower, any of its Subsidiaries under any federal or state racketeering
statute (including, without limitation, the Racketeer Influenced and Corrupt
Organization Act of 1970)("RICO") and such suit shall be adversely determined by
a court of applicable jurisdiction, and which is either non-appealable or which
the Borrower or such Subsidiary has elected not to appeal; or any criminal
action or proceeding shall be commenced against the Borrower, or any of its
Subsidiaries under any federal or state racketeering statute (including, without
limitation, RICO);
(p) There shall occur a Change of Control;
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(q) Any Litigation commenced against the Borrower or any of its
Subsidiaries is adversely determined by a court of applicable jurisdiction,
which such Litigation is either non-appealable or which such Obligor has elected
not to appeal, and in either case, is reasonably expected to cause a Material
Adverse Change;
(r) The Borrower or any Subsidiary of the Borrower shall fail to comply in
any respect with the Communications Act, or any rule or regulation promulgated
by the FCC or any applicable PUC, and such failure could reasonably be expected
to cause a Material Adverse Change; or any License or authorization constituting
authorizations, permits or licenses of the Borrower or any of its Subsidiaries
material to the operation of the business of the Borrower and any of its
Subsidiaries, has expired or shall expire without having been renewed or shall
be canceled or impaired, and such expiration, cancellation or impairment could
reasonably be expected to cause a Material Adverse Change;
(s) The Borrower or any of its Subsidiaries shall fail to operate its
business for any period of time which, in the aggregate, could reasonably be
expected to cause a Material Adverse Change;
(t) Any Substantial Portion shall not, for any reason (including, without
limitation, loss of FCC License, network or otherwise) be operating for a period
in excess of 30 days. For purposes of this Section 9.01(t), "Substantial
Portion" means any portion of the assets or Properties of the Borrower, the
Restricted Subsidiaries and Bermuda Corp. that has generated, for the most
recently completed twelve month period, in excess of five percent of the
Operating Cash Flow;
(u) Any of the following shall have occurred:
(i) Any Loan Paper shall for any reason (other than pursuant to the
terms thereof) cease to create a valid and perfected first priority Lien in
the Collateral purported to be covered thereby (except as permitted by the
terms of this Agreement or consented to by the Lenders); or
(ii) Less than 66% of the Capital Stock of Bermuda Corp. shall be
subject to a first priority perfected pledge to the Administrative Agent to
secure the Obligations; or
(v) Any of the Borrower or any of its Subsidiaries shall fail to be Year
2000 Compliant.
9.02. Remedies upon Default. If an Event of Default described in
Section 9.01(f) shall occur, the aggregate unpaid principal balance of and
accrued interest on all Advances shall, to the extent permitted by applicable
Law, thereupon become due and payable concurrently therewith, without any action
by Administrative Agent or any Lender, and without diligence, presentment,
demand, protest, notice of protest or intent to accelerate, or notice of any
other kind, all of which are hereby expressly waived. Subject to the foregoing
sentence, if any Event of Default shall occur and be continuing, Administrative
Agent may at its election, do any one or more of the following:
(a) Declare the entire unpaid balance of all Obligations immediately due
and payable, whereupon it shall be due and payable without diligence,
presentment, demand, protest, notice of
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protest or intent to accelerate, or notice of any other kind (except notices
specifically provided for under Section 9.01 hereof), all of which are hereby
expressly waived (except to the extent waiver of the foregoing is not permitted
by applicable Law);
(b) Terminate the Revolver Commitment;
(c) Reduce any claim of Administrative Agent and Lenders to judgment;
(d) Demand (and the Borrower shall pay to Administrative Agent) immediately
upon demand and in immediately available funds, the amount equal to the
aggregate amount of the Letters of Credit then outstanding, irrespective of
whether such Letters of Credit have been drawn upon, all as set forth and in
accordance with the terms of provisions of Article III hereof. The
Administrative Agent shall promptly advise the Borrower of any such declaration
or demand but failure to do so shall not impair the effect of such declaration
or demand; and
(e) Exercise any Rights afforded under any Loan Papers, by Law, including
but not limited to the UCC, at equity, or otherwise.
9.03. Cumulative Rights. All Rights available to Administrative Agent
and Lenders under the Loan Papers shall be cumulative of and in addition to all
other Rights granted thereto at Law or in equity, whether or not amounts owing
thereunder shall be due and payable, and whether or not Administrative Agent or
any Lender shall have instituted any suit for collection or other action in
connection with the Loan Papers.
9.04. Waivers. The acceptance by Administrative Agent or any Lender at
any time and from time to time of partial payment of any amount owing under any
Loan Papers shall not be deemed to be a waiver of any Default or Event of
Default then existing. No waiver by Administrative Agent or any Lender of any
Default or Event of Default shall be deemed to be a waiver of any Default or
Event of Default other than such Default or Event of Default. No delay or
omission by Administrative Agent or any Lender in exercising any Right under the
Loan Papers shall impair such Right or be construed as a waiver thereof or an
acquiescence therein, nor shall any single or partial exercise of any such Right
preclude other or further exercise thereof, or the exercise of any other Right
under the Loan Papers or otherwise.
9.05. Performance by Administrative Agent or any Lender. Should any
covenant of any Obligor fail to be performed in accordance with the terms of the
Loan Papers, Administrative Agent may, at its option, perform or attempt to
perform such covenant on behalf of such Obligor. Notwithstanding the foregoing,
it is expressly understood that neither Administrative Agent nor any Lender
assumes, and shall not ever have, except by express written consent of
Administrative Agent or such Lender, any liability or responsibility for the
performance of any duties or covenants of any Obligor.
9.06. Expenditures. The Borrower shall reimburse Administrative Agent
and each Lender for any reasonable sums spent by it in connection with the
exercise of any Right under Section 9.05 hereof. Such sums shall bear interest
at the lesser of (a) the Base Rate (whether or not in effect), plus 2.00% per
annum and (b) the Highest Lawful Rate, from five days after the date any Lender
makes
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demand to the Borrower for reimbursement of such amount until the date of
repayment by the Borrower.
9.07. Control. None of the covenants or other provisions contained in
this Agreement shall, or shall be deemed to, give Administrative Agent or any
Lender any Rights to exercise control over the affairs and/or management of any
Obligor, the power of Administrative Agent and each Lender being limited to the
Rights to exercise the remedies provided in this Article; provided, however,
-------- -------
that if Administrative Agent or any Lender becomes the owner of any partnership,
stock or other equity interest in any Person, whether through foreclosure or
otherwise, it shall be entitled to exercise such legal Rights as it may have by
being an owner of such stock or other equity interest in such Person.
ARTICLE X. THE ADMINISTRATIVE AGENT
10.01. Authorization and Action. Each Lender hereby appoints and
authorizes Administrative Agent to take such action as Administrative Agent on
its behalf and to exercise such powers under this Agreement and the other Loan
Papers as are delegated to the Administrative Agent by the terms of the Loan
Papers, together with such powers as are reasonably incidental thereto. As to
any matters not expressly provided for by this Agreement and the other Loan
Papers (including without limitation enforcement or collection of the Notes),
Administrative Agent shall not be required to exercise any discretion or take
any action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the instructions of
Majority Lenders (or all Lenders, if required under Section 11.01 hereof), and
such instructions shall be binding upon all Lenders; provided, however, that
-------- -------
Administrative Agent shall not be required to take any action which exposes
Administrative Agent to personal liability or which is contrary to any Loan
Papers or applicable Law. Administrative Agent agrees to give to each Lender
notice of each notice given to it by the Borrower pursuant to the terms of this
Agreement, and to distribute to each applicable Lender in like funds all amounts
delivered to Administrative Agent by the Borrower for the individual account of
any Lender pro rata in accordance with the Applicable Specified Percentage, as
set forth in this Agreement. Functions of the Administrative Agent are
administerial in nature and in no event shall the Administrative Agent have a
fiduciary or trustee relationship in respect of any Lender by reason of this
Agreement or any other Loan Paper.
10.02. Administrative Agent's Reliance, Etc. Neither Administrative
Agent, nor any of its directors, officers, agents, employees, or representatives
shall be liable for any action taken or omitted to be taken by it or them under
or in connection with this Agreement or any other Loan Paper, except for its or
their own gross negligence or willful misconduct. Without limitation of the
generality of the foregoing, Administrative Agent (a) may treat the payee of any
Note as the holder thereof until Administrative Agent receives written notice of
the assignment or transfer thereof signed by such payee and in form satisfactory
to Administrative Agent; (b) may consult with legal counsel (including counsel
for the Borrower, any of the Restricted Subsidiaries and Bermuda Corp.),
independent public accountants, and other experts selected by it, and shall not
be liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants, or experts; (c) makes
no warranty or representation to any Lender and shall not be responsible to any
Lender for any statements, warranties, or representations made in or in
connection with this Agreement or any
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other Loan Papers; (d) shall not have any duty to ascertain or to inquire as to
the performance or observance of any of the terms, covenants, or conditions of
this Agreement or any other Loan Papers on the part of the Borrower, the
Restricted Subsidiaries and Bermuda Corp. or to inspect the Property (including
the books and records) of the Borrower or its Subsidiaries; (e) shall not be
responsible to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency, or value of this Agreement, any other
Loan Papers, or any other instrument or document furnished pursuant hereto; and
(f) shall incur no liability under or in respect of this Agreement or any other
Loan Papers by acting upon any notice, consent, certificate, or other instrument
or writing believed by it to be genuine and signed or sent by the proper party
or parties.
10.03. Bank of America, NT&SA and Affiliates. With respect to its
Revolver Commitment, its Advances, and any Loan Papers, Bank of America, NT&SA
has the same Rights under this Agreement as any other Lender and may exercise
the same as though it were not Administrative Agent. Bank of America, NT&SA and
its Affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, any Obligor,
any Affiliate thereof, and any Person who may do business therewith, all as if
Bank of America, NT&SA were not Administrative Agent and without any duty to
account therefor to any Lender.
10.04. Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon Administrative Agent or any other
Lender, and based on the financial statements referred to in Section 5.01(j),
Section 7.01 and Section 7.02 hereof and such other documents and information as
it has deemed appropriate, made its own credit analysis and decision to enter
into this Agreement. Each Lender also acknowledges that it will, independently
and without reliance upon Administrative Agent or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
this Agreement and the other Loan Papers.
10.05. Indemnification by Lenders. Lenders shall indemnify
Administrative Agent, pro rata in accordance with each Lender's Total Specified
Percentage, from and against any and all liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses, or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by, or
asserted against Administrative Agent in any way relating to or arising out of
any Loan Papers or any action taken or omitted by Administrative Agent
thereunder, including any negligence of Administrative Agent; provided, however,
-------- -------
that no Lender shall be liable for any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses, or
disbursements resulting from Administrative Agent's gross negligence or willful
misconduct. Without limitation of the foregoing, Lenders shall reimburse
Administrative Agent, pro rata in accordance with each Lender's Total Specified
Percentage, promptly upon demand for any out-of-pocket expenses (including
reasonable attorneys' fees) incurred by Administrative Agent in connection with
the preparation, execution, delivery, administration, modification, amendment,
or enforcement (whether through negotiation, legal proceedings or otherwise) of,
or legal and other advice in respect of rights or responsibilities under, the
Loan Papers. The indemnity provided in this Section 10.05 shall survive the
termination of this Agreement.
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10.06. Successor Administrative Agent. Administrative Agent may resign
at any time by giving written notice thereof to Lenders and the Borrower, and
may be removed at any time with or without cause by the action of all Lenders
(other than Administrative Agent, if it is a Lender). Upon any such resignation
or removal, Majority Lenders shall have the right to appoint a successor
Administrative Agent with the prior written consent of the Borrower (which shall
not be unreasonably withheld), provided that, if there exists an Event of
Default that is continuing, no consent of the Borrower shall be required. If no
successor Administrative Agent shall have been so appointed and shall have
accepted such appointment within thirty days after the retiring Administrative
Agent's giving of notice of resignation, then the retiring Administrative Agent
may, on behalf of Lenders, appoint a successor Administrative Agent, which shall
be a commercial bank organized under the Laws of the United States of America or
of any State thereof and having a combined capital and surplus of at least
$50,000,000. Upon the acceptance of any appointment as Administrative Agent
hereunder by a successor Administrative Agent, such successor Administrative
Agent shall thereupon succeed to and become vested with all the Rights and
duties of the retiring Administrative Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations under the Loan Papers,
provided that if the retiring or removed Administrative Agent is unable to
appoint a successor Administrative Agent, Administrative Agent shall, after the
expiration of a sixty day period from the date of notice, be relieved of all
obligations as Administrative Agent hereunder. Notwithstanding any
Administrative Agent's resignation or removal hereunder, the provisions of this
Article shall continue to inure to its benefit as to any actions taken or
omitted to be taken by it while it was Administrative Agent under this
Agreement.
ARTICLE XI. MISCELLANEOUS
11.01. Amendments and Waivers. No amendment or waiver of any provision
of this Agreement or any other Loan Papers, nor consent to any departure by the
Borrower or any Obligor therefrom, shall be effective unless the same shall be
in writing and signed by the Borrower and the Administrative Agent with the
consent of the Majority Lenders, and then any such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; provided, however, that no amendment, waiver, or consent shall (and the
-------- -------
result of action or failure to take action shall not) unless in writing and
signed by all of Lenders and Administrative Agent, (a) increase the Revolver
Commitment, (b) reduce any principal, interest, fees, or other amounts payable
hereunder, or waive or result in the waiver of any Event of Default under
Section 9.01(a) hereof, (c) postpone any date fixed for any payment of
principal, interest, fees, or other amounts payable hereunder, (d) release or
impair any collateral or guaranties securing any Obligor's obligations
hereunder, other than releases contemplated hereby and by the other Loan Papers,
(e) change the meaning of "Total Specified Percentage", "Revolver Specified
Percentage" or the number of Lenders required to take any action hereunder,
change the definitions of "Commitment", "Revolver Commitment", "Maturity Date",
"Majority Lenders", or "Letter of Credit Commitment", or (f) amend this Section
11.01. No amendment, waiver, or consent shall affect the Rights or duties of
Administrative Agent under any Loan Papers, unless it is in writing and signed
by Administrative Agent in addition to the requisite number of Lenders.
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11.02. Notices.
(a) Manner of Delivery. All notices communications and other materials to
be given or delivered under the Loan Papers shall, except in those cases where
giving notice by telephone is expressly permitted, be given or delivered in
writing. All written notices, communications and materials shall be sent by
registered or certified mail, postage prepaid, return receipt requested, by
telecopier, or delivered by hand. In the event of a discrepancy between any
telephonic notice and any written confirmation thereof, such written
confirmation shall be deemed the effective notice except to the extent
Administrative Agent, any Lender or the Borrower has acted in reliance on such
telephonic notice.
(b) Addresses. All notices, communications and materials to be given or
delivered pursuant to this Agreement shall be given or delivered at the
following respective addresses and telecopier and telephone numbers and to the
attention of the following individuals or departments:
(i) If to the Borrower, any Restricted Subsidiary or Bermuda Corp.:
Pacific Gateway Exchange, Inc.
533 Airport Blvd., Suite 505
Burlingame, CA 94010
Telephone No.: (650) 375-6730
Telecopier No.: (650) 375-6799
Attention: Ms. Sandra Grey
Chief Financial Officer
With copies to (which is not required for effective delivery as set
forth above):
Mayer, Brown & Platt
190 South La Salle Street
Chicago, Illinois 60603-3441
Telephone No.: (312) 701-7273
Facsimile No.: (312) 701-7711
Attention: J. Thomas Mullen, Esq.
(ii) If to Administrative Agent:
Bank of America, NT&SA
555 California Street, 41st Floor
San Francisco, California 94104
Telephone No.: (415) 622-0232
Telecopier No.: (415) 622-0632
Attention: John J. Sullivan
Vice President
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With a copy to (which is not required for effective delivery as set
forth above):
Donohoe, Jameson & Carroll, P.C.
3400 Renaissance Tower
1201 Elm Street
Dallas, Texas 75270
Telephone No.: (214) 698-3814
Telecopier No.: (214) 744-0231
Attention: Melissa Ruman Stewart
(iii) If to any Lender, to its address shown opposite its signature block
on the signature pages hereto, or on any Assignment and Acceptance, or in any
other notice to the Borrower and the Administrative Agent,
or at such other address or, telecopier or telephone number or to the attention
of such other individual or department as the party to which such information
pertains may hereafter specify for the purpose in a notice to the other
specifically captioned "Notice of Change of Address".
(c) Effectiveness. Each notice, communication and any material to be
given or delivered to any party pursuant to this Agreement shall be effective or
deemed delivered or furnished (i) if sent by mail, on the fifth day after such
notice, communication or material is deposited in the mail, addressed as above
provided, (ii) if sent by telecopier, when such notice, communication or
material is transmitted to the appropriate number, (iii) if sent by hand
delivery or overnight courier, when left at the address of the addressee
addressed as above provided, and (iv) if given by telephone, when communicated
to the individual or any member of the department specified as the individual or
department to whose attention notices, communications and materials are to be
given or delivered except that notices of a change of address, telecopier or
telephone number or individual or department to whose attention notices,
communications and materials are to be given or delivered shall not be effective
until received; provided, however, that notices to Administrative Agent pursuant
-------- -------
to Article II shall be effective when received. The Borrower agrees that
Administrative Agent shall have no duty or obligation to verify or otherwise
confirm telephonic notices given pursuant to Article II, and agrees to indemnify
and hold harmless Administrative Agent and Lenders for any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, and expenses resulting, directly or indirectly, from acting upon any such
notice.
11.03. Parties in Interest. All covenants and agreements contained in
this Agreement and all other Loan Papers shall bind and inure to the benefit of
the respective successors and assigns of the parties hereto. Each Lender may
from time to time assign or transfer its interests hereunder pursuant to Section
11.04 hereof. The Borrower may not assign or transfer its Rights or obligations
hereunder without the prior written consent of Administrative Agent.
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11.04. Assignments and Participations.
(a) Each Lender (an "Assignor") may assign its Rights and obligations as a
Lender under the Loan Papers to one or more transferees pursuant to an
Assignment and Acceptance, so long as (i) each assignment shall be of a
constant, and not a varying percentage of all Rights and obligations thereunder,
(ii) each Assignor shall obtain in each case the prior written consent of
Administrative Agent and the Borrower, in each case such consent of the Borrower
not to be unreasonably withheld or delayed, provided that, in the event there
exists an Event of Default that is continuing, no consent of the Borrower shall
be required to make an assignment, (iii) each Assignor shall in each case pay a
$3,500 processing fee to Administrative Agent and (iv) no such assignment is for
an amount less than $5,000,000 and in increments of $1,000,000 (and, if such
assignment is a partial assignment, no Lender shall hold less than $5,000,000
immediately after giving effect to any assignment). Assignments and other
transfers (except participations) with respect to each Lender's participation in
a given Letter of Credit may only be made with the prior written consent of the
Administrative Agent. Within five Business Days after Administrative Agent
receives notice of any such assignment, the Borrower shall execute and deliver
to Administrative Agent, in exchange for the Notes issued to Assignor, new Notes
to the order of such Assignor and its assignee in amounts equal to their
respective Applicable Specified Percentages of the Revolver Commitment. Such
new Notes shall be dated the effective date of the assignment. It is
specifically acknowledged and agreed that on and after the effective date of
each assignment, the assignee shall be a party hereto and shall have the Rights
and obligations of a Lender under the Loan Papers.
(b) Each Lender may sell participations to one or more Persons in all or any
of its Rights and obligations under the Loan Papers; provided, however, that (i)
-------- -------
such Lender's obligations under the Loan Papers shall remain unchanged, (ii)
such Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, (iii) such Lender shall remain the holder of
its Notes for all purposes of the Loan Papers, (iv) the participant shall be
granted the Right to vote on or consent to only those matters described in
Sections 11.01(a), (b), (c) and (d) hereof, (v) Obligors, the Administrative
Agent, and other Lenders shall continue to deal solely and directly with such
Lender in connection with their respective Rights and obligations under the Loan
Papers and (vi) no such participation is for an amount less than $5,000,000.
(c) Any Lender may, in connection with any assignment or participation, or
proposed assignment or participation, disclose to the assignee or participant,
or proposed assignee or participant, any information relating to the Borrower
and its Subsidiaries furnished to such Lender by or on behalf of the Borrower
and its Subsidiaries.
(d) Notwithstanding any other provision set forth in this Agreement, (i) any
Lender may at any time create a security interest in all or any portion of its
Rights under this Agreement (including, without limitation, the Advances owing
to it and the Notes held by it) in favor of any Federal Reserve Bank in
accordance with Regulation A of the Board of Governors of the Federal Reserve
System, (ii) no participant of any Lender may further assign or participate any
of its interest in the Loan Papers to any Person (except as may be required by
Law or a Tribunal having authority over such participant), and (iii) no Lender
(other than Bank of America, NT&SA) may assign any of
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its interest in the Loan Papers to any Person (except as may be required by Law
or a Tribunal having authority over Bank of America, NT&SA).
11.05. Sharing of Payments. If, after and during the continuance of any
Event of Default, any Lender shall obtain any payment (whether voluntary,
involuntary, through the exercise of any Right of set-off, or otherwise) on
account of its Advances in excess of its pro rata share of payments made by the
Borrower in accordance with such Lender's Total Specified Percentage, such
Lender shall forthwith purchase participations in Advances made by the other
Lenders as shall be necessary to share the excess payment pro rata in accordance
with each Lender's Total Specified Percentage with each of them; provided,
--------
however, that if any of such excess payment is thereafter recovered from the
- -------
purchasing Lender, its purchase from each Lender shall be rescinded and each
Lender shall repay the purchase price to the extent of such recovery together
with a pro rata share of any interest or other amount paid or payable by the
purchasing Lender in respect of the total amount so recovered. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 11.05 may, to the fullest extent permitted by Law,
exercise all its Rights of payment (including the Right of set-off) with respect
to such participation as fully as if such Lender were the direct creditor of the
Borrower in the amount of such participation.
11.06. Right of Set-off. Upon the occurrence and during the continuance
of any Event of Default, each Lender is hereby authorized (after prior written
noticed to the Administrative Agent) at any time and from time to time, to the
fullest extent permitted by Law, to set-off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held and
other indebtedness at any time owing by such Lender to or for the credit or the
account of the Borrower or any of its Subsidiaries against any and all of the
obligations of the Borrower now or hereafter existing under this Agreement and
the other Loan Papers, whether or not Administrative Agent or any Lender shall
have made any demand under this Agreement or the other Loan Papers, and even if
such obligations are unmatured. Each Lender shall promptly notify the Borrower
after any such set-off and application, provided that the failure to give such
notice shall not affect the validity of such set-off and application. The
Rights of each Lender under this Section 11.06 are in addition to other Rights
(including, without limitation, other Rights of set-off) which such Lender may
have.
11.07. Costs, Expenses, and Taxes.
(a) Notwithstanding anything to the contrary in the Loan Papers, the
Borrower agrees to pay on demand (i) all costs and expenses of Administrative
Agent in connection with the preparation and negotiation of all Loan Papers,
including without limitation the reasonable fees and out-of-pocket expenses of
Special Counsel, FCC counsel, PUC counsel and local counsel, as appropriate,
(ii) all costs and expenses (including reasonable attorneys' fees and expenses)
of Administrative Agent in connection with any interpretation, grant and
perfection of any Lien, modification, amendment, waiver, release of any Loan
Papers, restructuring or work-out and (iii) all costs and expenses (including
reasonable attorneys' fees and expenses) of Administrative Agent and each Lender
in connection with any collection of any portion of the Obligations or the
enforcement of any Loan Papers during the continuance of an Event of Default.
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(b) In addition, notwithstanding anything to the contrary in the Loan
Papers, the Borrower shall pay any and all stamp, debt, and other Taxes payable
or determined to be payable in connection with any payment hereunder (other than
Taxes on the overall net income of Administrative Agent or any Lender or
franchise Taxes or Taxes on capital or capital receipts of Administrative Agent
or any Lender), or the execution, delivery, or recordation of any Loan Papers,
and agrees to save Administrative Agent and each Lender harmless from and
against any and all liabilities with respect to, or resulting from any delay in
paying or omission to pay any Taxes in accordance with this Section 11.07,
including any penalty, interest, and expenses relating thereto. All payments by
the Borrower, any Restricted Subsidiary or Bermuda Corp. under any Loan Papers
shall be made free and clear of and without deduction for any present or future
Taxes (other than Taxes on the overall net income of Administrative Agent or any
Lender of any nature now or hereafter existing, levied, or withheld, or
franchise Taxes or Taxes on capital or capital receipts of Administrative Agent
or any Lender), including all interest, penalties, or similar liabilities
relating thereto. If the Borrower shall be required by Law to deduct or to
withhold any Taxes from or in respect of any amount payable hereunder (i) the
amount so payable shall be increased to the extent necessary so that, after
making all required deductions and withholdings (including Taxes on amounts
payable to Administrative Agent or any Lender pursuant to this sentence),
Administrative Agent or any Lender receives an amount equal to the sum it would
have received had no such deductions or withholdings been made, (ii) the
Borrower shall make such deductions or withholdings, and (iii) the Borrower
shall pay the full amount deducted or withheld to the relevant taxing authority
in accordance with applicable Law. Without prejudice to the survival of any
other agreement of the Borrower hereunder, the agreements and obligations of the
Borrower contained in this Section 11.07 shall survive the execution of this
Agreement, termination of the Commitment, repayment of the Obligations,
satisfaction of each agreement securing or assuring the Obligations and
termination of this Agreement and each other Loan Paper.
11.08. Rate Provision. It is not the intention of any party to any Loan
Papers to make an agreement violative of the Laws of any applicable jurisdiction
relating to usury. In no event shall any Obligor or any other Person be
obligated to pay any amount in excess of the Maximum Amount. If Administrative
Agent or any Lender ever receives, collects or applies, as interest, any such
excess, such amount which would be excessive interest shall be deemed a partial
repayment of principal and treated hereunder as such; and if principal is paid
in full, any remaining excess shall be paid to the Borrower or the other Person
entitled thereto. In determining whether or not the interest paid or payable,
under any specific contingency, exceeds the Maximum Amount, each Obligor,
Administrative Agent and each Lender shall, to the maximum extent permitted
under Applicable Laws, (a) characterize any nonprincipal payment as an expense,
fee or premium rather than as interest, (b) exclude voluntary prepayments and
the effect thereof, and (c) amortize, prorate, allocate and spread in equal
parts, the total amount of interest throughout the entire contemplated term of
the Obligations so that the interest rate is uniform throughout the entire term
of the Obligations; provided that if the Obligations are paid and performed in
--------
full prior to the end of the full contemplated term thereof, and if the interest
received for the actual period of existence thereof exceeds the Maximum Amount,
Administrative Agent or Lenders, as appropriate, shall refund to the Borrower
the amount of such excess or credit the amount of such excess against the total
principal amount owing, and, in such event, neither Administrative Agent nor any
Lender shall be subject to any penalties provided by any Laws for contracting
for, charging or receiving interest in excess of the Maximum Amount. This
Section 11.08 shall control every other provision of
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all agreements among the parties to the Loan Papers pertaining to the
transactions contemplated by or contained in the Loan Papers.
11.09. Severability. If any provision of any Loan Papers is held to be
illegal, invalid, or unenforceable under present or future Laws during the term
thereof, such provision shall be fully severable, the appropriate Loan Paper
shall be construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part thereof, and the remaining provisions
thereof shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance therefrom.
Furthermore, in lieu of such illegal, invalid, or unenforceable provision there
shall be added automatically as a part of such Loan Paper a legal, valid, and
enforceable provision as similar in terms to the illegal, invalid, or
unenforceable provision as may be possible.
11.10. Exceptions to Covenants. No Obligor shall be deemed to be
permitted to take any action or to fail to take any action that is permitted as
an exception to any covenant in any Loan Papers, or that is within the
permissible limits of any covenant, if such action or omission would result in a
violation of any other covenant in any Loan Papers.
11.11. Counterparts. This Agreement and the other Loan Papers may be
executed in any number of counterparts, all of which taken together shall
constitute one and the same instrument. In making proof of any such agreement,
it shall not be necessary to produce or account for any counterpart other than
one signed by the party against which enforcement is sought.
11.12. GOVERNING LAW; WAIVER OF JURY TRIAL.
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(a) THIS AGREEMENT AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO BE CONTRACTS
MADE IN SAN FRANCISCO, CALIFORNIA, AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA (EXCEPT TO THE EXTENT THE
ADMINISTRATIVE AGENT AND THE LENDERS HAVE GREATER RIGHTS OR REMEDIES UNDER
FEDERAL LAW, WHETHER AS NATIONAL BANKS OR OTHERWISE, IN WHICH CASE SUCH CHOICE
OF CALIFORNIA LAW SHALL NOT BE DEEMED TO DEPRIVE ADMINISTRATIVE AGENT AND
LENDERS OF ANY SUCH RIGHTS AND REMEDIES AS MAY BE AVAILABLE UNDER FEDERAL LAW)
AND THE UNITED STATES OF AMERICA. WITHOUT EXCLUDING ANY OTHER JURISDICTION, THE
BORROWER AGREES THAT THE FEDERAL COURTS OF CALIFORNIA LOCATED IN SAN FRANCISCO,
CALIFORNIA WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO
THE MAXIMUM EXTENT PERMITTED BY LAW, THE BORROWER HEREBY WAIVES ANY RIGHT THAT
IT MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT,
CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE
OTHER LOAN PAPERS, OR ANY RELATED MATTERS, AND AGREES THAT ANY SUCH DISPUTE
SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. EACH OF BORROWER, THE
ADMINISTRATIVE AGENT AND EACH LENDER REPRESENTS THAT IT HAS KNOWINGLY AND
VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
(b) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER HEREBY WAIVES
PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. THE BORROWER AGREES THAT SERVICE
OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED)
DIRECTED TO THE BORROWER AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS
AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER
DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS SECTION 11.12 SHALL AFFECT
THE RIGHT OF ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE LEGAL PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
11.13. ENTIRE AGREEMENT. THIS AGREEMENT AND THE OTHER LOAN PAPERS
REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENT OF THE PARTIES.
THERE ARE NO ORAL AGREEMENTS BETWEEN THE PARTIES.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, this Credit Agreement is executed as of the date first
set forth above.
THE BORROWER:
PACIFIC GATEWAY EXCHANGE, INC.
/s/ S Grey
------------------------------------------
By: Sandra Grey
Its: Chief Financial Officer
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ADMINISTRATIVE AGENT:
BANK OF AMERICA, NT&SA, as Administrative
Agent
/s/ John J. Sullivan
--------------------------------------
By: John J. Sullivan
Its: Vice President
LENDERS:
Revolver Specified Percentage: 100% BANK OF AMERICA, NT&SA, individually as
a Lender
Address:
555 California Street /s/ John J. Sullivan
41st Floor
San Francisco, CA 94104 ---------------------------------------
Attn.: John J. Sullivan By: John J. Sullivan
Tel: (415) 622-0232 Its: Vice President
Facs: (415) 622-0632
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EXHIBIT 21.1
SUBSIDIARIES OF PACIFIC GATEWAY EXCHANGE, INC.
<TABLE>
<CAPTION>
Name Jurisdiction of Organization
<S> <C>
Pacific Gateway Exchange (U.K.) Limited.............................. United Kingdom
Pacific Gateway Exchange (Cyprus) Limited............................ Republic of Cyprus
Pacific Gateway Exchange New Zealand Limited......................... New Zealand
Pacific Gateway Exchange (New Zealand) Partnership................... New Zealand
Pacific Gateway Exchange (Bermuda) Limited........................... Islands of Bermuda
PGE Japan, Ltd....................................................... Japan
Pacific Gateway Exchange (Japan) Inc................................. Delaware
International Exchange Communications, Inc........................... Delaware
Rustelnet, a Closed Joint Stock Company.............................. Russian Federation
</TABLE>
<PAGE>
EXHIBIT 23.1
[PricewaterhouseCoopers letterhead]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Pacific Gateway Exchange, Inc. on Form S-8 (File No. 333-24833) of our report
dated February 19, 1999, except for Note 10, as to which the date is March 2,
1999, on our audits of the consolidated financial statements and the financial
statement schedules of Pacific Gateway Exchange, Inc. as of December 31, 1998
and 1997, and for the years ended December 31, 1998, 1997 and 1996, which
report is included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
San Francisco, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS AT AND FOR THE PERIOD ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,041
<SECURITIES> 0
<RECEIVABLES> 87,725
<ALLOWANCES> 4,312
<INVENTORY> 0
<CURRENT-ASSETS> 123,983
<PP&E> 120,382
<DEPRECIATION> 17,335
<TOTAL-ASSETS> 235,637
<CURRENT-LIABILITIES> 132,936
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 100,637
<TOTAL-LIABILITY-AND-EQUITY> 235,637
<SALES> 466,291
<TOTAL-REVENUES> 466,291
<CGS> 393,640
<TOTAL-COSTS> 393,640
<OTHER-EXPENSES> (1,132)
<LOSS-PROVISION> 2,146
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 30,571
<INCOME-TAX> 10,635
<INCOME-CONTINUING> 19,936
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,936
<EPS-PRIMARY> $1.05
<EPS-DILUTED> $0.97
</TABLE>
