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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1999
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
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PACIFIC GATEWAY EXCHANGE, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3134065
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
500 Airport Boulevard, Suite 340, Burlingame, California 94010
(Address of principal executive offices)
Telephone Number: 650-375-6700
(Registrant's telephone number, including area code)
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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)
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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 27, 2000, was approximately $310.3 million 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 27, 2000, there were outstanding 20,067,835 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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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," "may," "expects,"
"estimates," or other similar expressions. These forward-looking statements
relate to the plans, objectives, and expectations of Pacific Gateway Exchange,
Inc. ("Pacific Gateway," "we" or "our") 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.
Our revenues and results of operations and future developments in the
telecommunications industry are subject to risks and uncertainties and could
differ materially from those projected in the forward-looking statements as a
result of numerous factors, including the following:
1. availability of financing on acceptable terms, conditions in the
credit market and availability of additional equity on acceptable
terms;
2. difficulties that may be encountered in the development of bandwidth
services, including construction delays, regulatory obstacles,
contract disputes, or the lack or opportunities for additional
bandwidth purchases;
3. uncertainties in the growth of our retail operations and the
development of our new business lines, such as our VOIP, Internet, and
bandwidth, operations, including uncertainties about the difficulty of
integrating acquisitions, hiring appropriate personnel, and
competitive conditions;
4. the termination of operating agreements with other carriers or the
inability to enter into additional operating agreements;
5. inaccuracies in our forecasts of traffic;
6. changes in the availability of transmission facilities such as
domestic, international, and undersea fiber optic cable systems or in
the feasibility, timing, or expense of building or leasing such
facilities;
7. loss of the services of key officers;
8. loss of a customer that provides significant revenues;
9. opportunities for, and problems relating from, the acquisition of
other companies or facilities;
10. changes in the ratios between the amount of telecommunication traffic
that we deliver and the amount we receive from our foreign partners
under our operating agreements and termination arrangements;
11. Internet growth at slower rates than expected; or
12. consolidation of our competitors within the telecommunications,
bandwidth, or Internet industries.
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 in this 10-K, should not be construed as exhaustive.
We undertake 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.
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Overview
We are a diversified global, facilities-based company providing
telecommunications, Internet and bandwidth services. We own and operate a
state-of-the-art high bandwidth fiber optic network connecting key
metropolitan centers in the United States, Europe, Asia and the Pacific. For
the twelve months ended December 31, 1999, our revenues, EBITDA and net income
were $604.6 million, $25.1 million and $8.0 million, respectively.
We have acquired our own global network of undersea cables and land-based
facilities. As of December 31, 1999, we had partial ownership interests in 32
digital undersea fiber optic cable systems in service or under construction in
the Atlantic, Pacific and Caribbean regions, including investments in the
Japan-U.S. cable system and the TAT-14 trans-Atlantic cable system that are
currently being constructed. We have ten international gateway switches
located in the United States, Europe, Asia and the Pacific. Our global network
supports our three major lines of business:
. Telecommunications Services. Since 1995, we have consistently earned
profits and generated positive operating cash flow by using our own
facilities to deliver high quality telecommunications services to a
diverse array of customers. We provide retail end-user
telecommunications services on a pre-subscribed and dial around basis to
our customers in the United States. We plan to offer bundled retail
telecommunications and Internet services to our customers. We specialize
in targeting ethnic groups that are high-volume consumers of
international telecommunications services. We have established intensive
marketing programs to the Filipino, Japanese, Chinese, Vietnamese,
Russian, Romanian and Korean communities resident in the United States.
Our retail business is growing rapidly through internal growth and
strategic acquisitions and is a source of high margin revenues for us.
Our previously announced acquisition of the international retail
business of NOSVA Limited Partnership is currently scheduled to close
this Spring, subject to closing conditions such as regulatory approval.
Our wholesale operations enable us to own and operate our global network
and maintain a low cost base that supports the growth of our retail and
Internet operations. We are able to offer these services through our 44
operating agreements and termination arrangements that provide for the
exchange of traffic with major foreign carriers, as well as our own
international bandwidth and transmission facilities with the capacity to
meet their expanding needs. We have recently begun to provide voice over
Internet Protocol ("VOIP") services to global carriers, Internet service
providers (or ISPs) and other value-added service providers. We plan to
continue to develop our VOIP operations.
. Internet Services. To take advantage of the synergies between our
telecommunications services and the rapid growth of the Internet, we
began offering Internet services in 1999. We currently provide
connectivity services between San Francisco, Los Angeles, Chicago,
Dallas, New York, Washington, D.C., London and Tokyo. We also provide
co-location services at facilities in the United States, London and
Tokyo. We plan to expand our connectivity services to additional key
cities in the U.S. and abroad and add additional offshore co-location
facilities beginning later in 2000. We also plan to offer enhanced
services, including content distribution, hosting and other value-added
Internet solutions, targeting our foreign partners and carrier
customers, a wide range of Internet providers and small to medium-sized
global corporations. We intend to provide these services using a
combination of applications we develop ourselves and applications we
obtain from Internet application and technology providers. For example,
we recently entered into a strategic relationship with a leading
developer of Internet infrastructure software to license their content
distribution technology and jointly develop a content management
interface to give our customers the ability to manage their content and
services on our network. This company will also become an equity
investor in our Onyx subsidiary, conditioned upon an equal amount being
invested by other investors. We will use our global IP network to
deliver these services. We are connected to six major Internet peering
points in the United States, are members of the London and Japan
Internet Exchanges and are in the process of joining the Amsterdam and
Frankfurt Internet Exchange. In addition, in 1999, we acquired an
Internet service provider and Web design company located in England,
which serves as a springboard for the European expansion of our Internet
operations.
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. Bandwidth Services. We opportunistically sell and lease high bandwidth
fiber optic capacity to other global telecommunications carriers,
Internet service providers and satellite communications providers, and
occasionally exchange bandwidth capacity with other carriers. We also
generate recurring cash flow by providing maintenance services on sold
and leased capacity. Our network connects North America, Europe, Asia
and the Pacific, as well as key U.S. cities. To expand the reach of our
network, we also plan to acquire strategic segments of domestic capacity
in foreign countries. For example, in August 1999, we agreed to form a
joint venture with KDD Submarine Cable Systems Inc. to construct and
operate backhaul facilities in Japan connecting the Maruyama, Japan
cable station with Tokyo. Our opportunistic purchases of extensive fiber
optic capacity linking major international destinations give us a
valuable asset that we can deploy in a number of ways, including, for
example, to generate cash from the sale or lease of capacity, to use
ourselves or exchange with other carriers for additional network assets
to expand our global reach and to use in partnering arrangements with
others to foster our Internet initiatives.
Each of our business lines complements the others and creates synergies that
are highly conducive to further growth and profitability. Our fiber optic
network lowers the cost of our telecommunications operations in addition to
giving us a valuable asset for future sales, exchanges, leases and strategic
partnering arrangements. Our Internet operations capitalize on our network and
foreign partnerships and complete the suite of telecommunications, Internet
and bandwidth services that we can offer to customers.
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Strategy
Our goal is to provide high-quality telecommunications, Internet and
bandwidth services over our network. In particular, we plan to:
. Expand Our Higher Margin Retail Business. We plan to expand our retail
customer base in the United States and offshore through focused
marketing efforts and selected acquisitions. We plan to offer bundled
retail telecommunications and Internet services to our retail customer
base. We have succeeded in launching profitable marketing programs aimed
at ethnic communities that are high volume users of international
telecommunications services. In addition, we plan to target our offshore
retail service offerings to markets where we have existing facilities,
sales people and relationships with foreign partners. We expect the
higher margins offered by our retail long distance services to support
our traditional emphasis on generating cash flow.
. Grow Our Global Internet Operations. We plan to grow our Internet
operations by offering our services in key U.S. cities and offshore
markets to our existing foreign partners and carrier customers, a wide
range of Internet service providers and small to medium sized global
corporations. We will continue to establish peering and transit
arrangements to provide these services. We also plan to construct, on
our own or in partnership with others, global data centers in strategic
locations and to offer additional enhanced Internet services, including
content distribution, hosting and other value-added solutions. We plan
to continue to develop strategic alliances with Internet application and
service providers to develop the most advanced products and services. We
also plan to continue to expand our global base through strategic
acquisitions offshore. To further the expansion of our Internet
operations, we may seek additional equity investors and other financing
alternatives for our Internet business.
. Develop our VOIP Operations. We are adding Internet Protocol, sometimes
called "IP," equipment to our network to meet our customers' growing data
needs. We believe that future IP technologies will gradually allow us to
replace circuit switches and transform our network to a packet-based
platform able to carry all types of communications traffic, including
data, voice and video. We plan to become a leading provider of VOIP
services. We are developing best-of-breed VOIP applications, including
voice, fax and other value-added services, which we will deliver over our
IP network. Leveraging our global relationships, we target global
carriers and Internet service providers that we expect will be high-
volume users of VOIP services. By providing these services over our
network, we can ensure high quality services to our customers at higher
margins to us. We plan to rapidly expand our VOIP service offerings
through internal development and strategic acquisitions.
. Provide Services in Offshore Markets. We strategically enter offshore
markets to expand our global reach and our customer base. Many offshore
markets are deregulating and opening to competition. As customers in
these markets will have an opportunity to choose among competing
companies, we are positioned to compete as a low-cost provider of high-
quality telecommunications, Internet and bandwidth services. We are
focusing our strategy on developing a significant presence in a defined
set of geographical routes, particularly in Europe, Latin America, Asia
and the Pacific, where we have either strong relationships with foreign
partners or the opportunity to gain market share at attractive margins.
. Expand our Global Network. We plan to continue to acquire and build
undersea and land-based fiber optic cable capacity that extends our
global reach, increases our network capacity and reduces our overall
network costs. Continued development of our network will enhance our
telecommunications operations and our Internet operations by enabling us
to increase our control over operating costs and quality of services and
provide additional opportunities for profitable bandwidth sales and
leases to other carriers.
. Leverage Wholesale Opportunities. We will continue to support our
wholesale operations, which provide valuable synergies with our other
business operations. For example, our wholesale operations optimize the
use of our global network and maintain our global relationships with our
wholesale customer base. We will increasingly focus on growing and
developing our higher margin service offerings and de-emphasize our
selling efforts into wholesale markets. However, we will continue to seek
high margin wholesale arrangements and will offer our Internet and VOIP
services to our wholesale customer base.
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. Pursue Strategic Financing Alternatives. We are considering various
strategic alternatives, which may include mergers, acquisitions, private
equity investments in us or our subsidiaries, or sales of selected
assets. We have engaged Salomon Smith Barney to provide advice regarding
strategic alternatives. In addition, Deutsche Bank Securities Inc. and
Banc of America Securities LLC are providing assistance with respect to
locating and identifying financing opportunities, including the possible
initial public offering of the common stock of Onyx Networks, our
Internet subsidiary.
Industry Background
Global demand for telecommunications, Internet, and bandwidth services is
rapidly growing for several reasons, including:
. deregulation and the privatization of government-owned telephone
monopolies;
. growth of the Internet;
. technological improvements (including wireless technologies);
. the development of new services requiring greater bandwidth capacity;
. increased competition and declining prices; and
. consolidation in the industry.
Telecommunications
According to TeleGeography, international telecommunications traffic
worldwide increased from approximately $26.8 billion in revenues and 22.3
billion minutes of use in 1988 to $65.9 billion in revenues and 81.8 billion
minutes of use in 1997, representing a compound annual growth rate of 10.6% in
revenues and 15.5% in minutes of use. Furthermore, TeleGeography projects that
the industry will reach approximately $79.9 billion in revenues and 158.6
billion minutes of use by the year 2001. According to International Data
Corporation, sometimes called "IDC," a market research firm, the market for
worldwide Internet telephony is projected to grow from $0.5 billion in
revenues in 1999 to $18.7 billion in revenues in 2004, approximately half of
which would be generated by new services, including voice-enabled e-commerce
and other enhanced services. Wholesale worldwide Internet telephony, including
wholesale international Internet telephony, is expected to grow to $2.0
billion in revenues by the same date. In addition, IDC projects that
international Internet telephony will comprise $17.3 billion in revenues of
the total $18.7 billion in revenues projected in 2004.
Internet
The Internet has experienced tremendous growth and is emerging as a global
medium for communications and commerce. According to IDC, the number of
Internet users worldwide reached approximately 142.2 million in 1998 and is
forecasted to grow to approximately 502.4 million by 2003, representing a
compound annual growth rate of 29%. Businesses increasingly use the Internet
not only to offer e-commerce to consumers and other businesses, but also for
mission critical applications such as sales, marketing, customer service and
project coordination worldwide. Most of these businesses, and substantially
all consumers, obtain Internet connections from one of the large number of
highly competitive ISPs which are seeking to increase their share of this
market. Total U.S.-based ISP revenues for the United States are projected by
IDC to grow from $10.7 billion in 1998 to $37.4 billion in 2003. Total ISP
revenues are projected to grow for Western Europe from $4.3 billion in 1998 to
$17.7 billion in 2003 and for Asia/Pacific (excluding Japan) from $457 million
in 1998 to $4.5 billion in 2003.
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Bandwidth
International data traffic is expected to grow at a compound annual growth
rate of 85% through 2003, according to the Yankee Group. One of the key
factors contributing to the growth in data traffic is the increasing use of
broadband applications dominated by the Internet. The number of ISPs is
growing dramatically on a global basis. These ISPs are expected to require
significant bandwidth capacity to provide efficient service to their customers
and, in particular, to make available popular Internet web sites in the United
States. In addition to Internet growth, there has also been worldwide growth
in the use of other bandwidth-intensive applications, such as video
conferencing, distance learning, e-commerce and corporate intranets.
Global Network
We have acquired our own global network of undersea cables and land-based
facilities. As of December 31, 1999, we had partial ownership interests in 32
digital undersea fiber optic cable systems in service or under construction in
the Atlantic, Pacific and Caribbean regions, including commitments to invest
in the Japan-U.S. and the TAT-14 cable systems that are currently being
constructed. We estimate that the fully-upgraded capacity we will have in the
Japan-U.S. and TAT-14 cable systems will far exceed the aggregate capacity of
our 30 other systems. We have international gateway switching facilities in
the United States, Europe, Asia and the Pacific, and expect to continue to add
switching and routing facilities to our network. Our network employs digital
switching and fiber optic technologies and is supported by comprehensive
monitoring and technical services. Our network covers certain major routes
over which the world's international telecommunications traffic travels and
where we believe Internet services are most in demand. We expect our network
to offer customers seamless connection for telecommunications, Internet and
bandwidth services. We will continue to expand and augment our network with
new technology advancements, including IP capability. We believe that our
network is fundamental to our ability to compete successfully in the
international telecommunications, Internet and bandwidth markets. We regard
our network as a significant competitive advantage that would be expensive and
time-consuming for a new entrant to replicate. We are continually evaluating
our network needs and may invest in additional undersea and land-based fiber
optic cable networks, switching and IP equipment and data centers.
Japan-U.S. and TAT-14 Cable Systems
As part of our mission to create an integrated global, high-capacity fiber
optic cable network, we are designing and developing our systems to connect
two heavily-used international corridors via two new high-capacity undersea
cable systems: the Japan-U.S. cable system and the TAT-14 cable system (United
States to Europe). We will own interests in these cable systems as a member of
a consortium.
The Japan-U.S. cable system is being developed as a 21,000 km self healing
ring system planned for expansion to operate at 640 gigabits per second
(Gbps). Upon service initiation, which is expected to be in the fourth quarter
of 2000, it will connect California and three landing sites in Japan. The
Japan-U.S. cable system will operate initially at 80 Gbps of service capacity
and will be upgraded to 400 Gbps in 2001. We ultimately expect it to be
upgraded to 640 Gbps.
Upon service initiation of this system, we will own 28 STM-1s, which we
expect will be expandable in 2001 to approximately 180 STM-1s at no additional
cost. (An STM-1 is a measure of fiber optic capacity equal to 156 megabits per
second; it is equal to an OC-3, another measure of capacity explained below.)
We have committed to invest $86 million in the Japan-U.S. cable system. As the
system capacity increases to 640 Gbps, we may exercise our option to acquire
an estimated additional 100 STM-1s at an approximate additional cost of $15
million.
The TAT-14 cable system is being developed as a 15,000 km self healing ring
system planned for expansion to operate at 640 Gbps. Upon service initiation,
which is expected to be in the fourth quarter of 2000, it will connect the
United States and Europe with landing stations in the United States, the
United Kingdom, France, Germany, the Netherlands and Denmark.
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Peering Relationships
Peering is the Internet practice under which ISPs exchange each other's
traffic without the payment of settlement charges; transit arrangements
involve cash settlement payments. By implementing our own network and
establishing peering relationships with ISPs, we believe we can lower the cost
of Internet transit and increase the performance and reliability of our
network operations. We are developing our portfolio of private and public
peering arrangements. For example, we are currently connected to six major
public Internet peering points in the United States, including MAE-ATM (East,
West and Dallas), the Palo Alto Internet Exchange, the Ameritech Advanced Data
Service Exchange and the Pacific Bell Network Access Point. We are also
members of the London and Japan Internet Exchanges and are in the process of
joining the Amsterdam and Frankfurt Internet Exchange.
Technology
The fiber optic cables, switching and routing equipment and associated
assets that comprise the physical components of our network can support a
variety of communications technologies. We seek to offer customers a set of
technology options to meet their changing needs and to introduce new
technologies as necessary. Specifically, we believe that a service platform
based on IP equipment will provide us with significant future growth
opportunities because it will enable Internet, voice and video to be carried
inexpensively over our facilities-based network. We have, therefore, begun to
supplement our current voice and data switching technology with IP equipment.
As we add IP equipment to our network, we will be able to offer our
customers additional services, such as high-speed Internet access, Internet
web hosting, e-commerce and other Internet services. Because it is more
efficient, IP technology increases the effective capacity of networks for
these types of applications, and in the future may become the preferred
technology for voice services and faxes as well.
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We expect to further expand our IP network in North America, Latin America,
Europe and Asia, as well as in other select offshore markets, and to acquire
fiber-based IRUs and other rights in telecommunications bandwidth in these
regions to support demand growth and reduce costs.
Circuit Switching vs. Packet Switching
As part of our migration to an IP network, we are configuring our network to
add packet switch-based technology to our current circuit switch-based
systems. Our goal is to meet the current demands of our customers for
reliable, high-quality switched voice connections, while also deploying the
facilities, hardware and software necessary to satisfy their growing demand
for high-speed data transmission.
There are two widely used switching technologies in currently deployed
communications networks: circuit-switching systems and packet-switching
systems. Circuit switch-based communications systems, which currently dominate
the public telephone network, establish a dedicated channel for each
communication (such as a telephone call for voice or fax), maintain the
channel for the duration of the call, and disconnect the channel at the
conclusion of the call.
Packet switch-based communications systems, on which the Internet relies,
format the information to be transmitted into a series of shorter digital
messages called "packets." Each packet consists of a portion of the complete
message plus the addressing information to identify the destination and return
address. A key feature that distinguishes Internet architecture from the
public telephone network is that on the packet-switched Internet a single
dedicated channel between communication points is not required.
Packet switch-based systems offer several advantages over circuit switch-
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network utilization and efficiency, resulting in more information being
transmitted through a given communication channel.
We believe that a form of IP-based switching will eventually replace circuit
switched technologies, and will be the foundation of integrated networks that
treat all transmissions--including voice, fax and video--simply as forms of
data transmission.
Products and Services
Telecommunications Services
Our primary telecommunications services are wholesale and retail long-
distance services. We generated revenues from our telecommunications services
business of approximately $597.4 million in 1999.
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Retail Services. We provide retail end-user telecommunications services on a
pre-subscribed or dial around basis to our customers in the United States and
offshore. We plan to offer bundled retail telecommunications and Internet
services. We specialize in targeting ethnic groups residing in the United
States that are high-volume consumers of international telecommunications
services. We have established intensive marketing programs to the Filipino,
Japanese, Chinese, Vietnamese, Russian, Romanian and Korean communities
resident in the United States. In addition, we provide prepaid calling cards,
debit cards, international toll free and travel card services.
Our retail long distance business leverages off our extensive global network
and termination arrangements. We have increased our retail customer base
through acquisitions and internal growth. To continue the growth of our retail
customer base, we may seek acquisitions of retail long distance businesses in
the United States and offshore. We plan to replicate in offshore markets the
retail business practices that we have developed and successfully applied in
the United States.
Wholesale Long Distance Services. We sell our wholesale long distance
services to other U.S. and international carriers. These carriers use our
sevices to complete international calls originated by their customers. We
benefit from: (1) our extensive relationships in the long distance
telecommunications industry; (2) our ability to generate a high volume of long
distance call traffic; and (3) our advantageous arrangements we have
negotiated with foreign PTTs and other international carriers.
VOIP Services. We provide high quality IP-based communications services to
telecommunications carriers, ISPs and other value-added communications service
providers. Our solution enables communications service providers to outsource
their international voice, fax and other value-added services over the
Internet at lower costs than over traditional networks while maintaining what
we believe to be high quality service. We provide our customers access to our
international IP network throughout the world.
Internet Services
We offer Internet services, targeting on our existing foreign partners and
carrier customers, a wide range of Internet service providers and small to
medium-sized global corporations. We are currently providing connectivity and
co-location services. We will use applications we develop ourselves and those
we obtain from Internet application and technology providers to expand our
service offerings and provide our customers enhanced services, including
content distribution, hosting and other value-added solutions.
We currently deliver connectivity services over our network between San
Francisco, Los Angeles, Chicago, Dallas, New York, Washington, D.C., London
and Tokyo. We are currently providing co-location services at our facilities
in the United States, London and Tokyo and plan to offer them in other key
locations.
We expect that our Internet product offerings will provide customers a range
of options in their Internet access and content and distribution needs--from
simple Internet access to complex outsourced content and application
distribution managed services. Our planned product offerings include hosting
our customers' Web sites, managing servers, maintaining networking equipment,
content and application distribution services, and offering a full range of
data transport options--from shared to dedicated capacity. These offerings
will allow customers to transfer their critical Internet operations to us,
resulting in several important benefits to them. First, outsourcing eliminates
the need to continuously implement rapidly changing technology and
applications. Second, customers do not have to try to attract and retain
scarce technical staff in an area (Internet applications) that is not core to
their businesses. Third, as a result of the first two benefits, customers
should experience lower operating costs for their Internet operations, and
achieve faster deployment of their Internet applications.
Bandwidth Services
We opportunistically sell and lease bandwidth capacity on our global network
to our customers. In addition, we exchange our capacity with other companies
for undersea or land-based capacity in different regions or on different cable
routes. We are designing our bandwidth sales and lease business to meet the
varying needs of the
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global carrier market. For many of our customers, the substantial investment
required to participate in a global cable consortium or to construct similar
facilities is not a viable alternative.
As of December 31, 1999, we had entered into agreements to sell or lease
bandwidth capacity (including maintenance services) valued by the parties at
$141.1 million. Of the $141.1 million, $30.0 million relates to operating and
maintenance revenues to be received over the terms of the contracts (which are
generally 20 years), $57.5 million consists of other cash proceeds we expect
to receive over time and the balance consists of network assets valued by the
parties at $53.6 million to be delivered over time in exchange for our
bandwidth capacity.
Sales and Marketing
Telecommunications
Retail Long Distance Services. Our revenues have grown through internal
growth and acquisitions. We market our retail long distance services to high-
volume users of international telecommunications services, including
individuals and small businesses in ethnic communities in the United States
that generate a high volume of telephone traffic to their home country.
Through our joint venture, called "PinTouch," with Globe Telecom, a
telecommunications company operating in the Philippines, we market
international long distance services primarily to the Filipino-American
community. In addition, through our acquisition of Robo Tel, Inc. in the
second quarter of 1999, we acquired approximately 25,000 Chinese and
Vietnamese residential customers and small businesses based in the United
States. In December 1999, we entered into an agreement to acquire the
international retail business of NOVSA Limited Partnership. If the acquisition
is consummated, we expect to enhance our telemarketing, billing, and customer
service platforms and add a substantial number of retail customers, many of
which are the ethnic customers targeted by our retail operations. The closing
of this acquisition is subject to the satisfaction of certain conditions,
including the receipt of regulatory approvals. The closing is scheduled to
occur this Spring.
We also have ethnic marketing programs for the Japanese, Korean, Romanian
and Russian communities resident in the United States. We employ marketing
expertise that is tailored to each community. For each program we generally
market through newspaper, radio and television advertising, focusing on media
that is in the home country language. Our customer service representatives
speak the native languages of the ethnic communities that we serve. In
addition, we plan to market retail long distance services in our offshore
locations by employing local sales and marketing personnel who have expertise
in the local offshore markets. We will continue to use the breadth of ethnic
retail marketing expertise of our sales force to fuel further retail long
distance services growth in both the United States and offshore.
In addition, in the United States we have formed a "winback center" that
focuses on regaining customers who are no longer using our retail long
distance services and a customer service center to more effectively serve our
existing customer base.
Wholesale Long Distance Services. We market our wholesale long distance
services to other U.S. and international long distance carriers. We believe
that these customers choose Pacific Gateway because we offer comprehensive,
low-cost and highly reliable services. We are able to offer these services
through our 44 operating agreements and termination arrangements that provide
for the exchange of traffic with major foreign carriers, as well as our own
international bandwidth and transmission facilities with the capacity to meet
their expanding needs.
As of December 31, 1999, we had approximately 225 wholesale customers,
including four of the largest U.S. long distance carriers and many of the
other largest telecommunications providers. Our foreign partners include both
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 for foreign telecommunications markets. We
believe 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
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expand their global networks. We currently derive revenues from traffic
originating in the United States, the United Kingdom, Germany, Russia, Japan,
Australia, New Zealand, France, Italy, Denmark and Switzerland.
We have commission-based professionals dedicated to sales and marketing
activities with our U.S. 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 our
wholesale business. We believe that we have been able to compete effectively
by offering more personalized service than our competitors and the assurance
of ongoing senior-level attention to each account.
When we enter a new foreign market, we typically hire a local sales force
that is familiar with the wholesale long-distance telecommunications market.
Similar to U.S. wholesale operations, in each of our offshore locations our
target customer base includes the dominant carrier, as well as small to medium
sized carriers that do not have their own international network.
VOIP Services. Our sales efforts target leading telecommunications carriers
and Internet service providers both in the United States and offshore. Our
sales force is made up of experienced personnel with long-time relationships
in the telecommunications industry. We sell directly to carriers and are
working to develop brand awareness and beneficial relationships through
numerous channels including the web, trade shows, speaking engagements and
joint marketing programs. The ability to provide quality acceptable to leading
carriers through our IP network is a strong selling point for us.
Our marketing strategy includes public relations campaigns, interaction with
industry analysts and attendance at trade shows. We aggressively pursue
favorable coverage in the trade and business press and participate in industry
trade shows.
Internet Services
We are designing our Internet sales and marketing strategy to target our
foreign partners and carrier customers, a wide range of ISPs and small to
medium-sized global businesses that depend on the Internet for core business
operations. Our marketing strategy and infrastructure are geared to respond to
opportunities in the Internet market offshore. We utilize a multi-tiered
channel approach that combines the technical skill and Internet experience of
our direct sales force with the sales and marketing resources of our global
partners. We are thus able to deploy our products and services to a broad and
diverse range of international customers in targeted markets.
Direct Sales. Our direct sales force is locally based in our targeted
markets. Marketing support for the sales staff includes direct contacts with
potential accounts, direct mail, telemarketing, seminars and trade shows. We
plan to develop competitive compensation programs as well as on-the-job and
third party training plans to attract, train and grow motivated, high
producing Internet sales staff.
Strategic Alliances. We expect that strategic alliances will leverage the
existing network of sales people employed by our strategic partners to sell
our services. We plan on partnering with Internet application and service
providers who offer the most advanced products and services. We recently
entered into a strategic relationship with a leading developer of Internet
infrastructure software to license their content distribution technology and
jointly develop a content management interface. This would give our customers
the ability to manage their content and services on our network. This company
will also become an equity investor in our Internet subsidiary, conditioned
upon an equal amount being invested by other investors.
Our Internet services marketing program is focused on building the
international, national and local strength and awareness of our network and
products. To this end, we print advertising in targeted markets and
publications to enhance awareness of our products and services and to generate
leads for our sales team. We focus print advertisements in trade journals,
special interest publications, and international business travel magazines
targeted at corporate management decision-makers.
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Brand awareness is enhanced by participation in industry trade shows such as
ISPCON, Internet World, and others. We also plan to utilize targeted
billboards placed adjacent to our global data centers, direct mailings,
telemarketing programs and other means to reach prospective ISP and corporate
customers.
Bandwidth Services
We have formed a bandwidth sales and lease group to capitalize on our
current and future opportunities resulting from our investments in our global
network. We sell and lease bandwidth capacity to telecommunications carriers,
ISPs and satellite companies, among others. We also use some of our bandwidth
capacity for our own telecommunications and Internet services.
Competition
Telecommunications
The international telecommunications industry is highly competitive and
affected by 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 and retail
telecommunications services market is dominated by large incumbent providers
including AT&T, MCI WorldCom and Sprint. We also compete with other types of
carriers, including long distance carriers, such as Qwest, Global Crossing and
RSL, and international carriers such as Telstra and British Telecom. We may
compete in the future with new competitors including RBOCs. As our network
expands to serve a broader range of customers, we expect to encounter
increasing competition from these and other major domestic and international
communications companies. Moreover, competition is likely to intensify 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 and British Telecom, WorldCom, MCI and
Sprint, Global Crossing and Frontier, and Qwest, KPN and US West. We expect
that continued deregulation in global telecommunications markets will lead to
new market entrants and more competitors.
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 we
provide. Technologies being developed or already introduced include
utilization of the Internet for international voice and data communications,
digital wireless communications systems such as personal communications
services, broadband multimedia applications and satellite networks such as
INTELSAT and PanAmSat.
Internet
The Internet business is intensely competitive. There are few substantial
barriers to providing connectivity and co-location services, and we expect
that we will face additional competition from existing providers and new
market entrants in the future. We believe that participants in this market
must grow rapidly and achieve a significant presence in the market in order to
compete effectively. We also believe that the principal competitive factors in
this market are uncongested connectivity, quality of facilities, level of
customer service, price, the financial stability and credibility of the
provider, brand name and the availability of network management tools.
Potential competitors in this market include:
. global, regional and local telecommunications companies, such as MCI
WorldCom, Sprint, which is being acquired by MCI WorldCom, AT&T and the
RBOCs;
. providers of connectivity and co-location services, such as Metromedia
Fiber Network, Exodus Communications, Global Crossing and Verio;
. international, national and regional ISPs, such as Concentric Network,
PSINet, MCI WorldCom and certain subsidiaries of GTE; and
. large information technology outsourcing firms, such as IBM and
Electronic Data Systems.
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Bandwidth
The market for undersea and land-based fiber optic bandwidth capacity is
highly competitive. We will face competition from existing and planned systems
along each of our planned routes. We compete with providers who construct and
operate their own cable networks, such as Global Crossing, Global TeleSystems,
Qwest, Williams Communications, Level 3 and Metromedia Fiber Network. We also
compete with other carriers which have acquired capacity on the same cable
networks as we have. We compete primarily on the basis of price, availability,
transmission quality and reliability, customer service and location of our
systems.
Billing and Management Information Systems
Accurate operation of a management information system is vital to our
operations, given the high volume of transactions and the need to bill
customers accurately. We maintain our own staff of programming and management
information reporting personnel, as well as contract programmers dedicated to
maintaining our 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, we can monitor our
revenues and gross margins. We provide common data access for system users to
support our customer service, accounting and network monitoring functions.
We have developed our own customized billing and management information
systems software to meet the needs of our customers and vendors and to enhance
our ability to monitor our operations. We utilize an IBM AS400 computer system
and continually upgrade and enhance the system as computer technology
advances. We believe these computer systems are adequate to meet our needs and
the needs of our customers and our vendors.
Furthermore, to support our expansion into retail services, we are refining
our systems to include retail end-user billing and accounting. In particular,
we have recently purchased, and are integrating into our systems, end-user
software that enables us 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 us to accept credit-card payments.
We are currently evaluating and developing software and billing systems to
support our Internet operations.
Regulation
The following summaries of regulatory developments and legislation does not
purport to describe all present and proposed international, federal, state and
local regulations affecting the telecommunication Internet, and bandwidth
industries. Other existing international, federal, state and local legislation
and regulations are currently the subject of judicial proceedings, legislative
hearings and administrative proposals which could change, in varying degrees,
the manner in which this industry operates. Neither the outcome of these
proceedings nor their impact upon us or the telecommunications industry can be
predicted at this time.
Telecommunications
United States
Overview. Our business is subject to varying degrees of telecommunications
regulation by United States regulatory authorities at the federal and state
levels. In the United States, our services are subject to the provisions of
the Communications Act of 1934, as amended, sometimes called the
"Communications Act," FCC regulations under the Communications Act, as well as
the applicable laws and regulations of the various states and state regulatory
commissions. As a carrier offering international and interstate facilities-
based and resale telecommunications services to the public, we must comply
with the requirements of common carriage under the Communications Act,
including the requirement to offer service on a non-discriminatory basis at
just and
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reasonable rates. Applicable state public service commissions or similar state
agencies, sometimes called "PSCs," have jurisdiction over telecommunications
services originating and terminating within the same state under separate
state statutes and regulations. The FCC and the PSCs generally have the
authority to condition, modify, cancel, terminate or revoke operating
authority for failure to comply with federal and state laws and applicable
rules, regulations and policies. Fines or other penalties also may be imposed
for violations, such as the unauthorized switching of carriers, also known as
"slamming." Any such action by the FCC or the PSCs could have a material
adverse affect on our business.
International Service Regulation. In February 1997, 69 countries, including
the United States, signed the World Trade Organization Agreement on Basic
Telecommunications Services Agreement, sometimes called the "WTO Agreement,"
to facilitate competition in basic telecommunications services. The WTO
Agreement became effective February 5, 1998. Pursuant to the terms of the WTO
Agreement, signatories to the WTO Agreement have committed to varying degrees
and within varying time frames to allow access to their domestic and
international markets to competing telecommunications providers, allow foreign
ownership interests in existing telecommunications carriers, and establish
regulatory schemes to develop and implement policies to accommodate
telecommunications competition.
In the United States, international telecommunications carriers are required
to obtain authority under Section 214 of the Communications Act in order to
provide international service that originates or terminates in the United
States. U.S. international common carriers also are required to file and
maintain international tariffs with the FCC specifying the rates, terms and
conditions of their services. We have obtained the required Section 214
authorization from the FCC to provide international facilities-based and
resale services, and have filed an international tariff. In addition, we are
classified by the FCC as a non-dominant carrier with respect to both
international and domestic services.
We must conduct our international business in compliance with the FCC's
International Settlements Policy, the rules that establish the parameters by
which U.S.-based carriers and their foreign correspondents settle the cost of
terminating each other's traffic over their respective networks. Under the
FCC's International Settlements Policy, absent approval from the FCC,
international telecommunications service agreements with dominant foreign
carriers must be non-discriminatory, provide for settlement rates equal to
one-half of the accounting rate, and require proportionate share of return
traffic.
In recent rule reforms, the FCC expressly exempted from the International
Settlements Policy rules U.S. carrier arrangements with non-dominant foreign
carriers, as well as arrangements with any foreign carrier (dominant or non-
dominant) on certain competitive routes where at least 50% of U.S.-billed
traffic is terminated at settlement rates at least 25% below the FCC's
applicable benchmark settlement rates. These routes currently include: Canada,
Denmark, France, Germany, Hong Kong, Ireland, Italy, the Netherlands, Norway,
Sweden and the United Kingdom. For arrangements that will continue to be
subject to the International Settlements Policy, the FCC imposes mandatory
settlement rate benchmarks. These benchmarks are intended to reduce the rates
that U.S. carriers pay foreign carriers to terminate traffic in their home
countries. The FCC also prohibits a U.S. carrier affiliated with a foreign
carrier from providing facilities-based switched or private line services to
the foreign carrier's home market unless and until the foreign carrier has
implemented a settlement rate at or below the relevant benchmark. Certain
confidential filing requirements still apply to dominant carrier arrangements.
The FCC's revisions to the International Settlements Policy also affect the
FCC's rules on International Simple Resale ("ISR") which permit U.S. carriers
to provide international switched services over private lines interconnected
with the public switched telecommunications network on the current FCC-
authorized routes. The FCC declined to remove the International Settlements
Policy completely on all ISR-approved routes, and thus will continue to
maintain the distinction between routes it approves for ISR and routes on
which it removes the International Settlements Policy (where at least 50% of
U.S.-billed traffic is terminated at rates at least 25% below the applicable
settlement rates). Even though the FCC dramatically scaled back the
application of the International Settlements Policy, the FCC's ISR policy
still requires FCC approval to provide ISR service in an arrangement with a
foreign dominant carrier on non-competitive routes.
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To the extent that the International Settlements Policy still applies, the
FCC could find that we do not meet certain International Settlements Policy
requirements with respect to certain of our foreign carrier agreements.
Although the FCC generally has not issued penalties in this area, it has
issued a Notice of Apparent Liability to a U.S. company for violations of the
International Settlements Policy and it could, among other things, issue a
cease and desist order, impose fines or allow the collection of damages if it
finds that we are not in compliance with the International Settlements Policy.
Any of these events could have a material adverse effect on our business,
financial condition or results of operations.
Domestic Interstate Regulation. Our provision of domestic long distance
service in the United States is subject to regulation by the FCC and certain
state PSCs, who regulate to varying degrees interstate and intrastate rates,
respectively, ownership of transmission facilities, and the terms and
conditions under which domestic services are provided. Under federal law, the
domestic interstate carriers are subject to a variety of regulations that, for
instance, govern the documentation and verifications necessary to change a
consumer's long distance carrier and require the filing of periodic reports.
Also, pursuant to federal law, such carriers must file domestic interstate
tariffs with the FCC. The FCC also has jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory
obligations.
The Telecommunications Act of 1996 ("1996 Telecom Act") addresses a wide
range of other telecommunications issues that may potentially impact our
operations. For example, pursuant to the 1996 Telecom Act, the FCC established
a Universal Service Fund that provides subsidies to carriers that provide
service to under-served individuals and in high cost areas. A portion of
carriers' contributions to the Universal Service Fund will also be used to
provide telecommunications and certain other services to schools, libraries
and certain rural health care providers.
The FCC is continuing to revise its universal service rules which may result
in further substantial increases in the overall cost of the subsidy program.
Our share of these federal subsidy funds will be based on our interstate and
international gross end-user telecommunications revenues. The contribution
factor issued by the FCC varies quarterly and is currently 5.7101%. The
amounts contributed may be billed to customers. The U.S. Court of Appeals for
the Fifth Circuit recently issued an order upholding in part, and reversing in
part, the initial FCC order implementing these funds. The Fifth Circuit order
has been appealed. Numerous FCC orders revising these funds are also subject
to petitions for reconsideration and further appeals. The outcome of these
proceedings or their effect cannot be predicted.
Our costs of providing long distance services also will be affected by
changes in the access charge rates imposed by local exchange carriers for
origination and termination of calls over local facilities. The FCC has
significantly revised its access charge rules in recent years to permit
incumbent local exchange carriers greater pricing flexibility and relaxed
regulation of new switched access services in those markets where there are
other providers of access services. The FCC continues to adjust its access
charge rules and has indicated that it will promulgate additional rules
sometime in 2000 that may grant certain local exchange carriers further
flexibility.
The 1996 Telecom Act also 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 long
distance service to customers within its operating area on a state-by-state
basis upon a 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. Recently, the
FCC approved Bell Atlantic's petition to provide long distance service in New
York. As RBOCs are approved to provide in-region interLATA service, a logical
extension might be also to provide international services from their
respective regions. To the extent that RBOCs enter the national and
international long distance business, they could become major competitors. It
is also possible that they may become customers of our wholesale business
although there is no assurance that this would happen.
State Regulation. In addition to regulation by the FCC, certain of our
subsidiaries are subject to varying degrees of state regulation regarding the
provision of intrastate long distance telecommunications services. Most
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states require a certification or other authorization and the filing of
tariffs to offer intrastate long distance services, and require that common
carriers charge just and reasonable rates and not discriminate among
similarly-situated customers. Many states also require the filing of periodic
reports, the payment of various regulatory fees and surcharges, and compliance
with service standards and consumer protection rules, and for pre-paid or
debit card operations, the filing of a surety bond. Our subsidiaries that are
authorized to provide intrastate long distance services may be required by
certain states to obtain prior approval from or notify the relevant PSC of any
transfer of control, sale of assets, corporate reorganization, issuance of
stock or debt instruments and related transactions.
Effect of United States and Foreign Laws on Certain Arrangements
We 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 U.S. and foreign regulatory agencies as
"international simple resale" arrangements. We believe that U.S. and foreign
telecommunications regulations are being liberalized and that such
arrangements are permitted in some instances and may be expressly approved by
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 us or our subsidiaries, possibly including rescission
of our authority pursuant to our Section 214 licenses.
In addition, in arrangements where the counterparties compete with the PTT,
such competition may not be permitted by foreign regulatory agencies.
Regulatory authorities in Hong Kong and the PTT in Mexico have acted against
such arrangements. Moreover, the PTT may act unilaterally to cancel or
eliminate the private line service on which the foreign company depends. The
foreign companies with whom our subsidiaries enter into such arrangements, and
perhaps we or our subsidiaries, could be subject to a variety of penalties in
connection with such arrangements under foreign or United States law. Those
penalties could include 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 our overall revenue and/or profit at the time such
arrangements are discovered and curtailed. Moreover, the discovery of the
existence of such arrangements by foreign PTTs could adversely affect our
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 our business,
financial condition or results of operations.
Internet and VOIP
In the United States and most countries in which the Company conducts its
major operations, there is currently a small but growing body of laws and
regulations directly applicable to Internet access, Internet commerce and
VOIP. Due to the popularity and use of the Internet and VOIP, it is likely
that a growing number of laws and regulations may be adopted at the
international, federal, state and local levels. These regulations cover issues
such as user privacy, consumer protection, freedom of expression, encryption
standards, trade barriers, pricing, characteristics and quality of products
and services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications and licensing. Moreover, a number of laws and
regulations have been proposed and are currently being considered by federal,
state and foreign legislatures with respect to those issues. The nature of any
new laws and regulations and the manner in which existing and new laws and
regulations may be interpreted and enforced cannot be fully determined.
Internet service providers and VOIP providers are currently considered
"enhanced service providers" within the U.S. and are exempt from U.S. federal
and state regulations governing telecommunications common carriers.
Accordingly, our provision of Internet and VOIP services are currently
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exempt from tariffing, certification and rate regulation. We cannot predict
the likelihood that state, federal, or foreign governments will impose
additional regulations on our Internet and VOIP operations or e-commerce
generally, nor can we predict the future impact that any such regulation will
have on our business, financial condition or results of operations.
In April 1998, the FCC issued a report to Congress on the implementation of
the universal service provisions of the 1996 Telecom Act. In its report, the
FCC indicated that it would re-examine its policy of not requiring Internet
service providers and providers of certain forms of VOIP to contribute to the
universal service mechanisms. In addition, the FCC stated that it may
recognize whether phone-to-phone VOIP providers shall be regulated as
telecommunications service providers. The European Commission issued on
January 10, 1998, a Communication addressing whether VOIP should be considered
"voice telephony" and thus subject to regulation by the Member States.
Consistent with its earlier directives, the European Commission stated that
Internet telephony could properly be considered "voice telephony," and thus
subject to regulation by the Member States only if certain factors are
satisfied. The European Commission also held that at the time no form of VOIP
satisfied all of these factors. Currently, providers of VOIP within the EU
Member States are subject to no more than general authorization or declaration
requirements by the Member States. Within the U.S. or internationally, we
cannot predict the outcome of any future proceedings that may impact our
provision of Internet or VOIP services or that may impose additional
requirements, regulations, or changes upon our provision of such services.
Several U.S. laws have attempted to regulate content on the Internet.
Although sections of the Communications Decency Act of 1996, sometimes called
"CDA," that, among other things, proposed to impose criminal penalties on
anyone distributing "indecent" material to minors over the Internet, were held
to be unconstitutional by the United States Supreme Court, there can be no
assurance that similar laws will not be proposed and adopted. In October 1998,
Congress enacted the Child Online Protection Act, sometimes called "COPA,"
which requires that material that is "harmful" to minors be restricted. This
law is currently being challenged in federal district court. On February 1,
1999, a U.S. District Court judge issued a preliminary injunction against
enforcement of portions of that act, and the U.S. Department of Justice has
appealed that decision. Oral arguments were held in November 1999. However,
the "filtering" requirements in COPA have not been stayed, and Internet
service providers must notify users of existing measures (e.g., hardware,
software and filtering devices) that may assist the users in limiting minors'
access to harmful material. Legislation similar to the CDA could subject us
and/or our customers to potential liability, which in turn could have a
material adverse effect on our business, financial condition or results of
operations. In addition, legislation that prohibits or limits sending
unsolicited commercial e-mails has recently been passed at the state level and
continues to be proposed at the federal level; this legislation could subject
us and our customers to potential liability. Moreover, foreign laws, including
Directive 95/46/EC of the European Parliament and of the European Council on
the protection of individuals with regard to the processing of personal data
and on the free movement of such data may be applied to online services and
Internet service providers such as the Company. The future adoption or
application of any future laws or regulations to the Internet might decrease
the growth of the Internet, decrease demand for our services, impose taxes or
other costly technical requirements or otherwise increase the cost of doing
business or in some other manner have a material adverse effect on us or our
customers, which, in turn, could have a material adverse effect on our
business, financial condition or results of operations. In addition, applying
existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy to the Internet is uncertain. The vast majority of these laws were
adopted prior to the advent of the Internet and related technologies and, as a
result, do not contemplate or address the unique issues of the Internet and
related technologies. Changes to these laws intended to address these issues,
including some recently proposed changes, could create uncertainty in the
marketplace which could reduce demand for our services or increase the cost of
doing business as a result of costs of litigation or increased service
delivery costs, or could in some other manner have a material adverse effect
on our business, financial condition or results of operations. In addition, as
our services are available over the Internet in multiple states and foreign
countries, and as we facilitate sales by our customers to end-users located in
these states and foreign countries, these jurisdictions may claim that we are
required to qualify to do business as a foreign corporation in
each of these states or foreign countries. Any new legislation or regulation,
or the application of laws or
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regulations from jurisdictions whose laws may not currently apply to our
business, could have a material adverse effect on our business, financial
condition or results of operations.
Employees
As of December 31, 1999, we and our subsidiaries had 386 full time
employees. We believe our relations with our employees are generally strong.
We expect to continue to add personnel as we continue to expand our operations
and diversify our services. None of our employees are covered under collective
bargaining agreements.
Financial Information About Foreign And Domestic Operations And Export Sales
We have offshore operations throughout the world. For information regarding
revenues by country see Note (12) 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
Prior to 1999, our business consisted entirely of telecommunications
operations. We managed its wholesale, offshore, and retail telecommunication
operations. As a result of the diversification of our business, we now manage
telecommunications, Internet, and bandwidth services. The operating results of
these segments are regularly reviewed by and are integral to our management
and decision-making process. Financial information on our operating segments
is included in Note (12) 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
Liquidity Issues--Although we have received an extension, we do not
currently have the funds to make a scheduled credit line reduction payment and
we have received a waiver of defaults under our credit agreement.
We currently have approximately $75.6 million outstanding under our credit
agreement. The amount available for us to borrow was scheduled to be reduced
from $100 million to $50 million on April 1, 2000. In addition, we determined
that we are in default of certain provisions of this credit agreement, which
constituted an event of default. On March 31, 2000, we obtained a waiver of
these defaults and an extension of the repayment date from the lenders.
Pursuant to this waiver and extension the amount available for us to borrow
will be reduced to $75.6 million and reduced further to $50 million on May 15,
2000, which, will require us to pay approximately $25.6 million on or before
that date.
We cannot assure you that we will be able to comply with the terms of the
waiver and extension. We do not currently have the funds for the repayment
scheduled on May 15, 2000. If we are unable to comply with the terms and make
this repayment or negotiate another extension of the date of repayment, we
will default under the credit agreement.
If we default on our credit agreement, the banks have the right to
immediately accelerate this indebtedness and foreclose on the assets that we
have pledged as security. In addition, a default under this bank credit
agreement would result in a cross default under our Cisco financing
arrangement.
We have substantial amounts that are payable currently or in the short term
that, absent additional financing, we do not have the funds to pay. We will
owe $5 million at the closing of our acquisition of NOSVA, which is scheduled
to occur this spring. This closing is subject to certain conditions, including
regulatory approval. We have discussed obtaining this amount from our lenders
but the lenders have not committed to fund this amount. We have experienced
difficulty in making timely payments on our vendor invoices. If we are unable
to pay these amounts, these parties may, among other things, interrupt service
to us or seek legal remedies against us. We cannot assure that you we will be
able to obtain the financing to satisfy these commitments.
As a result of our liquidity situation, our auditors have included a going
concern explanation to its audit report. We are currently pursuing a number of
strategic and financing alternatives that are directed toward improving our
liquidity, which may include obtaining additional financing, obtaining private
equity investments in us or our subsidiaries, or sales of selected assets. We
have engaged Salomon Smith Barney to provide advice regarding strategic
alternatives. In addition, Deutsche Bank Securities Inc. and Banc of America
Securities LLC are providing assistance with respect to locating and
identifying financing opportunities, including the possible initial public
offering of the common stock of Onyx Networks, our Internet subsidiary. While
we are actively pursuing these alternatives, we cannot assure you that we will
be able to close any strategic transactions.
Need for Additional Financing--Our success is significantly tied to our
ability to raise additional money.
To avoid a default under our credit agreement and other financing
arrangements and to fulfill our long-range business plan, we must raise
substantial additional capital. The actual amount and timing of our future
capital requirements may differ materially from our estimates as a result of
financial, business and other factors, many of which are beyond our control,
as well as future acquisitions.
Our credit facility will be reduced to $50 million on May 15, 2000. Since we
currently have $75 million outstanding under this facility, this reduction
will require us to repay $25 million. We will need to obtain additional
financing for this repayment. Our credit facility matures on November 23,
2000. At that time, we will need to replace it in order to fulfill our
business plan. We cannot assure you that we will be able to raise this
additional financing, or, if we are able to raise this additional financing,
that the terms of that financing will be favorable to us.
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Substantial Leverage--Our substantial indebtedness could adversely affect
our financial health and prevent us from fulfilling certain of our
obligations.
We owe approximately $75 million under our credit facility and have
substantial current financial commitments. We also have a $10 million term
loan vendor financing facility outstanding and a $15 million vendor financing
facility that might be drawn on and increase our debt. Our Internet subsidiary
has committed to purchase approximately $28 million of software and services,
for which we have guaranteed payment. We may also seek additional debt
financing, including additional vendor or other equipment financing
facilities. Our substantial indebtedness could have important consequences.
For example, it could:
. increase our vulnerability to general adverse economic and industry
conditions;
. require us to dedicate a substantial portion of our cash flow from
operations to make interest and principal payments on our indebtedness,
which would reduce the availability of our cash flow to fund working
capital (including expansion of our retail, telecommunications and
Internet operations), capital expenditures, diversification efforts and
other general corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate;
. place us at a competitive disadvantage compared to our competitors that
have less debt;
. limit our ability to borrow additional funds; and
. subject our business to restrictive covenants.
Managing Diversification--The success of our business plan depends on our
ability to enter new lines of business.
We have recently entered into a phase of rapid diversification. We are
expanding our business lines from being a provider of international wholesale
telecommunications services to becoming a diverse supplier of wholesale,
retail and VOIP telecommunications services, bandwidth services and Internet
services. These efforts require us to assume greater risks, such as:
. greater demands on management's time;
. the ability of management to learn new skills while continuing to manage
effectively our existing operations;
. investment risks associated with expenditures for new lines of business;
and
. increased pressures upon our operations and financial systems.
As we grow and expand our business, if we are unable to attract and retain
additional qualified personnel, we could be materially and adversely affected.
We expect that our expansion and diversification will lead to increased
administrative demands, such as:
. increased operational complexity associated with expanded network
facilities and service offerings; and
. administrative burdens associated with managing increased foreign
operations, as well as with hiring, training and supervising new
employees.
If we do not manage our diversification effectively, our business, financial
condition or results of operations may be materially and adversely affected.
We cannot assure you that our bandwidth and Internet business lines will be
successful.
Declining Prices--Each of our business lines is highly sensitive to
declining prices.
Prices of telecommunications services have decreased, and are likely to
decrease in the future, for a variety of reasons, including:
. increased competition among existing carriers;
20
<PAGE>
. new entrants into niche markets; and
. joint ventures and business combinations among large international
carriers that facilitate targeted pricing and cost reductions.
As a result of declining prices, our average telecommunications price per
minute declined from $0.29 per minute during 1998 to $0.24 per minute during
the twelve months ended December 31, 1999.
The prices we charge our customers for international wholesale and retail
services may also decrease in the future due to:
. the provision of international telecommunications services via non-
traditional means (including the Internet); and
. recent technological advances that permit increases in transmission
capacity of communications networks, including 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.
As a part of our business strategy to focus on our other lines of business,
we expect to handle less wholesale traffic in the future. This decrease in
wholesale traffic, coupled with declining wholesale prices, will cause our
wholesale business to become less profitable and generate less cash. We cannot
assure you that our retail, VOIP, Internet and bandwith operations will
generate sufficient profits and cash flow to offset these decreases. The
failure of our other operations to generate sufficient profits and cash flow
may have a material adverse effect on our business, financial condition or
results of operations.
Retail long distance prices have also recently decreased and are likely to
continue to decrease due to increased competition and decreasing wholesale
prices. We cannot assure you that we will be able to increase our retail
traffic volume or reduce our operating costs sufficiently to offset retail
price decreases. Our inability to do so may have a material adverse effect on
our business, financial condition or results of operations.
Prices for Internet services vary from country to country, but are generally
declining. Internet pricing is very competitive, and in some cases, our
competitors provide connectivity or co-location services for no charge. We
cannot assure you that these events will not have a material adverse effect on
our business, financial condition or results of operations.
A decline in the price of undersea or land-based fiber optic capacity could
impair our bandwidth services strategy and have a material adverse effect on
our business, financial condition or results of operations. Factors that could
result in a price decline include availability of capacity and technological
innovations that increase the capacity of a particular system and provide
alternative communications technologies.
Managing Rapid Growth--If we are unable to manage the demands that come with
rapid growth, we may be unable to compete successfully in the future.
We are experiencing a period of rapid growth, which we expect to continue to
place a significant strain on our management and our operational and financial
resources. In order to manage our growth effectively, we must continue to:
. accurately forecast demand for use of our network to optimize its usage
in order to avoid insufficient or excessive transmission facilities,
network capacity or disproportionate fixed expenses;
. implement and improve our operational and financial systems and controls;
and
. expand, train and manage our employee base.
If we do not have sufficient facilities to handle all of our traffic on a
given route, the overflow traffic is handled by other international carriers
on a minutes-of-use basis. We cannot predict at this time whether the quality
of these services will be satisfactory to us and our customers. Additionally,
we generally incur higher costs to handle overflow traffic.
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Our accounting systems and policies have been developed as we have
experienced significant growth. We cannot assure you that they will be
adequate to support our future operations. If we are not able to manage our
growth effectively, maintain the quality of our services and diversify our
services quickly and effectively, then our ability to achieve our business
plan may be materially and adversely affected.
Risks of Reduced Profitability--We may experience lower earnings due to
substantial investments in network facilities and the expansion of our
Internet operations.
The development of network facilities entails prior planning and the
incurrence of significant costs prior to generating any revenues from such
facilities. Our planning, in large part, is based upon our expectations
concerning future revenue growth and market developments. As we expand our
network, our cost of services will increasingly consist of fixed costs arising
from the ownership and maintenance of our switches and undersea fiber optic
cables. Cost increases and a decrease in our operating margins may occur in
the short-term, resulting in lower earnings. If we handle less traffic or
otherwise fail to make optimal use of our network, our gross margin could
decline significantly, which could have a material adverse effect on our
business, financial condition or results of operations.
The construction of undersea and land-based cable facilities is ongoing and
time sensitive. Our business plan for the expansion of our network is based in
large part upon our expectations as to the construction costs and availability
of the Japan-U.S. and TAT-14 undersea cable systems which are currently under
construction. If construction costs of these systems exceed expectations or if
planned cable system marketing efforts do not succeed, we will be required to
contribute additional capital to fund these cable systems. If these cable
systems are not available for service on a timely basis, whether due to
construction delays or otherwise, the delay in receipt of revenues and the
obligation to provide services from other sources, perhaps at increased costs
(or risk of certain customers terminating their arrangement with us), could
have a material adverse effect on our business, financial condition or results
of operations.
The terms of our cable system consortium arrangements, including the Japan-
U.S. and TAT-14 undersea cable systems, contain various obligations for which
we are responsible, including the payment of annual operating and maintenance
costs, compliance with operating and other technical standards and
restrictions as to the use, assignability and sale of capacity. If due to
disputes, breaches or otherwise, the cable facilities provided for in such
arrangements are not available to us, it would have a material adverse affect
on our business, financial condition or results of operations.
The expansion of our Internet operations also will require substantial
investment in equipment, personnel and sales and marketing efforts, and may
involve substantial expenses that are not now anticipated. We expect that
these investments will decrease our profitability in the short-term.
Risks from Internet Operations--We may not be able to successfully grow our
Internet operations.
Our success in our Internet operations will depend on several factors,
including our ability to:
. expand into the Internet business;
. negotiate peering agreements with other Internet providers;
. achieve the "critical mass" necessary for success as an Internet
company;
. compete successfully and earn profits in an increasingly competitive and
price sensitive Internet marketplace;
. identify data center sites and install facilities in a timely and cost-
effective manner;
. win customers from established vendors;
. develop or acquire leading technologies;
. obtain the necessary capital to finance business development;
22
<PAGE>
. hire network, customer support, sales and marketing personnel to
implement and manage our Internet operations; and
. comply with a growing number of domestic and foreign legal and
regulatory requirements affecting Internet providers and their
customers.
The expansion of our Internet operations will require us to expend
substantial resources for the lease and build out of data centers, purchase of
equipment and hiring of network, customer support, sales and marketing
personnel. We also may make significant investments in sales and marketing and
the development of new services as we expand our Internet operations. These
investments will impose a substantial strain on our financial resources and
could impair our ability to pay interest and principal on the notes. We cannot
assure you that we will be able to successfully grow our Internet operations,
that our Internet operations will become profitable or that we will remain in
the Internet market. We are unable to predict the impact that existing or
future laws governing the Internet may have on our business.
Risks from VOIP Operations--We may not be able to successfully develop our
VOIP operations.
If the market for Internet telephony and new services does not develop as we
expect, or develops more slowly than expected, our business, financial
condition and results of operations may be materially and adversely affected.
Our customers may be reluctant to use our VOIP services for a number of
reasons, including:
. perceptions that the quality of voice transmitted over the Internet is
low;
. perceptions that Internet telephony is unreliable; and
. our inability to deliver traffic over the Internet with significant cost
advantages.
The growth of our business depends on carriers and other communications
service providers generating an increased volume of international voice and
fax traffic and selecting our network to carry at least some of this traffic.
If the volume of international voice and fax traffic fails to increase, or
decreases, and our customers do not employ our network, our VOIP operations
will not be profitable, which may materially and adversely affect our
business, financial condition and results of operations.
We cannot assure you that end-users will continue to purchase services from
our customers or that our customers will maintain a demand for our services.
Our VOIP operations may become subject to regulation in the future. If VOIP
is regulated in a manner similar to traditional telephony, our VOIP operations
may be burdened and any cost advantages provided by VOIP may be eliminated. We
are unable to predict whether, and to what extent, VOIP will be regulated and
the impact such regulation may have on our business.
Competition--We operate in highly competitive business sectors and compete
with many larger and better capitalized companies.
The international telecommunications industry is highly competitive.
International telecommunications providers compete on the basis of:
. price;
. customer service;
. transmission quality;
. breadth of service offerings; and
. value-added services.
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In addition, competition may increase due to deregulation of the
telecommunications industry in offshore markets.
The wholesale and retail telecommunications, bandwidth and Internet markets
tend to be dominated by companies much larger than we are with financial and
network resources that far exceed ours. The wave of consolidation sweeping
through the telecommunications industry may increase the competition we face.
Competition would further intensify if the Regional Bell Operating
Companies, sometimes called "RBOCs," are permitted to offer long distance
services. Any significant increase in competition could have a material
adverse effect on our business, financial condition or results of operations.
Sufficiency of Our Network--We must be able to expand and adapt our network
infrastructure.
We must continue to expand and adapt our network as the number of customers
we serve grows, our service portfolio expands and technology advances. If we
are unable to expand and adapt our network infrastructure, we may lose
customers. Furthermore, we only recently have deployed our Internet services.
Accordingly, it is difficult to determine if our network will be able to
handle, connect and manage large numbers of users at high transmission speeds.
We may not be able to provide our customers with the increasing levels of data
transmission capacity they may require for a number of reasons, such as our
possible inability to raise the funds needed to develop the network
infrastructure to maintain adequate data transmission speeds or our inability
to obtain additional network capacity. We may encounter unforeseen
circumstances that could require us to incur additional costs or to delay
necessary network upgrades. We may experience equipment or software
incompatibility, among other things, if we upgrade our network to increase its
capacity. This may cause delays in our attempts to expand or improve our
services.
Technological Advances--Technological advances could impact our competitive
position.
The communications industry is experiencing a period of rapid technological
evolution, marked by the introduction of new product and service offerings and
increasing fiber optic transmission capacity. The technologies being developed
or already introduced include:
. fiber optic cable systems having capacity far in excess of our current
network capacity;
. satellite-based systems, such as the INTELSAT and PanAmSat systems;
. equipment utilizing the Internet for international telecommunications
and data communications;
. digital wireless communications systems such as personal communications
services;
. broadband multimedia applications; and
. digital subscriber line technology.
Any of these technologies could render some of our facilities obsolete or no
longer cost-effective.
We are unable to predict which of the many possible future products and
service offerings will be important to maintain our competitive position or
what expenditures will be required to develop and provide those products and
services.
Dependence on Operating Agreements With Foreign Partners--Termination of our
operating agreements or our inability to enter into operating agreements in
the future could materially and adversely affect our ability to compete in
foreign countries.
We rely on operating agreements with foreign partners to terminate
telecommunications traffic in, and receive return telecommunications traffic
from, foreign countries. These operating agreements are generally for an
unspecified term in accordance with industry practice. Many of our foreign
partners have invested with us in our digital undersea fiber optic cable
systems to assure long-term telecommunications access between their countries
and the United States. While we have been successful in negotiating and
maintaining these operating agreements,
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the trend toward deregulation of telecommunications in many countries and a
significant reduction in outgoing traffic carried by us, among other things,
could cause foreign partners to terminate their operating agreements or cause
these operating agreements to have substantially less value to us. Termination
of some of these operating agreements could have a material adverse effect on
our business, financial condition or results of operations.
We cannot assure you that we will be able to enter into additional operating
agreements in the future. In some countries that have a monopoly carrier or
very few competing carriers, it may be difficult for us 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 in that country may be unacceptable, in which case, in order to
terminate traffic in that country, we would be required to find other carriers
willing to terminate traffic or use alternative arrangements that may be more
costly. The failure to enter into these types of additional operating
agreements could limit our ability to increase our revenues on a profitable
basis.
Dependence on Availability of Transmission Facilities--We may not be able to
obtain the additional bandwidth capacity that we need on a timely basis, or at
all, in order to implement our business plan.
We need access to substantial amounts of additional bandwidth capacity in
order to achieve our business plan. Our ability to obtain this capacity
depends on many factors, several of which are beyond our control, including:
. the formation of new fiber optic cable consortiums;
. the ability of the consortiums to obtain financing, the necessary rights
of way and regulatory and environmental approvals;
. the availability of personnel and equipment to construct the cables; and
. political and economic events in the countries involved.
These events could preclude or delay the construction or the completion of
facilities necessary for the achievement of our business plan and could have a
material adverse effect on our business, financial condition or results of
operations.
System Security--We face risks associated with the security of our systems.
Although we expect to design and implement a variety of network security
measures, unauthorized access, computer viruses, accidental or intentional
action and other disruptions could occur. In addition, we may incur
significant costs to prevent breaches in security or to alleviate problems
caused by breaches. Any breaches that may occur could result in liability to
us, loss of existing customers and the deterrence of future customers.
Change in Accounting Standards--A change in accounting standards has
required us to change our timing of recognizing revenues.
Effective June 30, 1999, the Financial Accounting Standards Board, ("FASB"),
issued FASB Interpretation No. 43 "Real Estate Sales," ("FIN 43"), which
affirms that sales of "integral equipment" be accounted for in accordance with
real estate accounting rules as previously set forth in FASB No. 66. The
application of FIN 43 has resulted in the classification of undersea and land-
based fiber optic cables and related equipment as "integral equipment" as
defined in FIN 43. This change in the accounting for indefeasible rights to
use ("IRUs,)" fiber optic capacity does not change the timing or amount of
cash proceeds or network assets we expect to receive under the commitments we
have made to sell or lease bandwidth capacity. It requires us, however, to
recognize the revenue from some agreements as operating leases over the lives
of the agreements as opposed to the industry practice prior to the adoption of
FIN 43, under which revenues were recognized during the period in which
initial access to the capacity was provided. As a result, this change in
accounting treatment reduces the revenues and income that we would recognize
in the earlier years of the agreements and spreads it out over the lives of
the agreements regardless of when the cash or network assets were received or
initial access to the capacity was
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provided. Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
Risks of International Telecommunications Business--We have significant
operations that are subject to risks of operating in foreign countries.
We currently generate a substantial portion of our revenues by providing
international telecommunications services to our customers in the United
States and in six offshore markets. The international nature of our operations
subjects us to certain risks, such as:
. changes in foreign government regulations and telecommunications
standards;
. enforcement actions by government agencies charging that our foreign
carrier arrangements are inconsistent with regulatory policy;
. changes in licensing requirements;
. changes in taxes;
. establishment of other trade barriers;
. ability to staff and manage our foreign operations; and
. political and economic instability in foreign nations.
Our revenues and costs of long distance services are sensitive to:
. changes in international settlement rates;
. differences in payment cycles between U.S. and foreign carriers;
. changes in the ratios between traffic we deliver and traffic we receive;
. foreign currency fluctuations; and
. import and export regulations.
In addition, our business could be adversely affected by a reversal in the
current trend toward deregulation of foreign government-owned
telecommunications carriers.
If any dispute arises from our foreign operations, we may be subject to the
exclusive jurisdiction of foreign courts and may not be successful in having
those disputes brought to court in the United States. We also may be hindered
or prevented from enforcing our rights with respect to foreign governments
because of the doctrine of sovereign immunity.
We cannot assure you that the laws, regulations or administrative practices
of foreign countries relating to our ability to do business in those countries
will not change. Any such change could have a material adverse effect on our
business, financial condition or results of operations. We will be
increasingly subject to these risks as we proceed with the planned expansion
of our international operations.
Dependence on Key Personnel--Our success is significantly tied to the
continued services of certain of our officers and other key personnel.
We are dependent on the efforts of certain key personnel to successfully
operate our business. These individuals include:
. Howard A. Neckowitz, Chairman of the Board, President and Chief
Executive Officer;
. Gail E. Granton, Co-Chief Operating Officer, Global Marketing and
Offshore Development and Secretary; and
. Thomas J. Murphy, Co-Chief Operating Officer, Global Networks and IP
Development.
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as well as a group of employees with long-standing industry relationships and
technical knowledge of our operations. The loss of the services of one or more
of these individuals could materially and adversely affect our business and
our future prospects.
Risks Associated with Joint Ventures, Direct Investments and Acquisitions--
We may not be able integrate these investments successfully with our existing
business.
An important component in our business strategy is to expand through joint
ventures, investments and acquisitions. This growth strategy depends on the
continued availability of suitable strategic opportunities and subjects us to
certain risks. Pursuing these transactions could place significant demands on
our financial and management resources and potentially disrupt our ongoing
business. Transactions also may require integration of business and network
systems and other physical facilities and personnel. Difficulties in
integration could cause system degradation, added costs and loss of employees
and customers. We cannot assure you that we will be successful in overcoming
these risks or other problems in connection with future transactions.
Government Regulation--We are subject to telecommunications regulation in
the United States and in foreign countries, and the manner in which such
regulation is interpreted or enforced could materially impact our business.
As an international and U.S. domestic telecommunications company, we are
subject to varying degrees of regulation in the United States at the federal
and state level and in each of the other jurisdictions in which we provide our
services. Interpretation and enforcement of these laws and regulations vary
widely, can be unpredictable, and may be subject to the informal views of
government officials that regulate telecommunications in each country. To the
extent that the interpretation or enforcement of applicable laws and
regulations is uncertain or unclear: (1) we may provide services or use
transmission methods that violate U.S. or foreign laws or regulations; or (2)
we may fail to obtain approvals or to file certain reports or other documents
that may be required under such laws or regulations.
If we are found to be in violation of applicable laws and regulations or if
our interpretation of such laws and regulations proves incorrect, we could be
subject to enforcement actions or lose, or be unable to obtain, regulatory
approvals necessary to provide certain services or to use certain transmission
methods. We cannot assure you that we will not be subject to fines, penalties
or other sanctions, including being denied the ability to offer products and
services, as a result of any violations, regardless or whether such violations
are corrected. In addition, we cannot assure you that future U.S. or foreign
regulatory, judicial and legislative actions or changes will not impair our
operations, or that domestic or international regulators or third parties will
not raise material issues with regard to our compliance with applicable
regulations. Any of these events could have a material adverse effect on our
business, financial condition or results of operations.
Operating Results Subject to Significant Fluctuations--Our quarterly
operating results are subject to variation, which could cause us not to meet
the expectations of securities analysts, and should not be relied upon as an
accurate indicator of our overall performance.
Our quarterly operating results are difficult to forecast with any degree of
accuracy because a number of factors subject these results to significant
fluctuations.
Our operating results have fluctuated in the past and are likely to
fluctuate significantly in the future. These fluctuations could cause our
reported results to fall short of the expectations of securities analysts and
investors for such quarter, which could have a material adverse effect on the
market price of the notes, the warrants or our common stock. Factors that
could lead to such fluctuations include capital costs, the introduction of new
products and services, problems associated with entering new lines of business
and announcements about us or our competitors. Additional factors that may
contribute to variability of operating results include:
. the pricing and mix of services we offer;
. our customer retention rate;
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. changes in pricing policies and product offerings by our competitors;
. growth in demand for network and Internet access services;
. one-time costs associated with acquisitions and regional consolidation;
. general telecommunications services' performance and availability; and
. other factors discussed in these risk factors.
Our revenues in any given period can vary due to factors such as:
. delays or difficulties in the development of new products or programs or
in the integration of business and network systems and other physical
facilities and new management personnel;
. technical difficulties with or failures of portions of our network that
impact our ability to provide services to or bill our customers;
. demand for and market acceptance of our Internet services;
. capacity utilization of our Internet service exchange facilities;
. the ability to maintain or increase peering relationships; and
. changes in our pricing policies and those of our competitors.
In response to competitive pressures, we may take certain pricing or
marketing actions that could have a material adverse effect on our business,
financial condition or results of operations. Therefore, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful and cannot be relied upon as indicators of future performance.
Customer Concentration--Our business would be seriously impaired if we lost
one or more of our significant customers.
Our five largest customers accounted for approximately 29.3% of our revenues
for the twelve months ended December 31, 1999, and two of these customers
collectively accounted for approximately 19.0% of our revenues for that
period. Our operating and financial performance is currently dependent, in
large part, upon our relationships with these customers. We cannot assure you
that we will be able to maintain these relationships consistent with
historical levels or at all.
Online Service Liability--We may face liability and other risks as a result
of information disseminated through our network.
The law relating to the liability of Internet access, inter-connection and
service providers for information carried by their networks is currently
unsettled. It is possible that claims could be made against Internet access
and inter-connection providers under United States, European Union or other
foreign law for defamation, negligence, privacy, infringement, regulated
content or under other legal theories. We carry general liability insurance,
but it may not be adequate to compensate or cover us in the event that we
become liable for information carried by our network. In addition, legislation
has been recently passed, and continues to be proposed, that imposes liability
for or prohibits the transmission over the Internet of certain types of
information. The increased attention focused upon liability issues as a result
of potential lawsuits, new laws and legislative proposals could impact the
growth of Internet use.
Anti-Takeover Provisions--Certain provisions of our charter, bylaws and
Delaware law may discourage or impede a change of control.
Our board of directors has the authority to cause us to issue up to
5,000,000 shares of preferred stock and to determine the price, rights,
preferences and privileges of those shares without any further vote or actions
by the stockholders. Our board of directors authorized for issuance 50,000
shares of preferred stock designated as
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Series A Junior Participating Preferred Stock. The rights of the holders of
our common stock will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that we may issue in the future.
The issuance of shares of preferred stock 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 our outstanding voting stock. Our
board is divided into three classes, each of which comes up for election once
every three years. As a result, it would not be possible for a person to take
control of our board in one election. We are subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits us 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.
Furthermore, certain provisions of our 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, which could adversely affect the market price
of our common stock. In addition, our stockholders rights plan would cause
substantial dilution to a person or group that attempts to acquire us on terms
not approved by our board of directors. These provisions may discourage
takeover bids for us.
No Future Dividends--We have not paid dividends on our common stock and do
not anticipate doing so in the foreseeable future.
We have not paid dividends to date on our common stock and do not anticipate
paying any cash dividends on our common stock in the foreseeable future. Our
credit facility and the Cisco vendor financing facility restrict our ability
to pay dividends on our common stock. Future debt instruments may also contain
provisions restricting our ability to pay dividends on our common stock.
ITEM 2. PROPERTIES
Our principal offices are located in 36,400 square feet of space in
Burlingame, California. We lease this space under agreements that expire in
December 2003 and beyond. We also lease a total of approximately 40,000 square
feet in the U.S. in New York, Los Angeles, Dallas, and Santa Ana, California
for our telecommunications switching equipment and retail operations and
75,000 square feet of space in the United Kingdom, New Zealand, Russia, Japan,
Germany, and Australia as sites for our offshore telecommunications switching
facilities. In addition, we lease a total of approximately 50,000 square feet
of space in the U.S., the United Kingdom, and Japan for our Internet
operations. We believe that our facilities are adequate to support our current
needs and that suitable additional facilities will be available, when needed,
on commercially reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
We are party to various legal proceedings in the ordinary course of
business. Although the ultimate resolution of the proceedings cannot be
ascertained, we do not expect that they will have a material adverse impact on
our business, financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our shareholders during the fourth
fiscal quarter of the fiscal year ended December 31, 1999.
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MANAGEMENT
Our Executive Officers
The following sets forth the names and ages of each of our executive
officers and the positions they hold:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Howard A. Neckowitz.............. 46 Chairman of the Board of Directors,
President and Chief Executive Officer
Gail E. Granton.................. 44 Director, Co-Chief Operating Officer,
Global Marketing and Offshore
Development and Secretary
Thomas J. Murphy................. 48 Co-Chief Operating Officer, Network
Development and IP Services
Robert F. Craver................. 57 Senior Vice President, International
Relations
Fred A. Weismiller............... 58 Executive Vice President, International
Marketing
Ronald D. Anderson............... 43 Senior Vice President, Operations and
Engineering
Sandra D. Grey................... 33 Chief Financial Officer and Vice
President, Finance
</TABLE>
Set forth below is a brief description of the business experience of each of
our executive officers.
Howard A. Neckowitz has served as our President, Chief Executive Officer and
Chairman of the Board since our inception in August 1991. From 1986 to 1991,
Mr. Neckowitz 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. 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.
Gail E. Granton became Co-Chief Operating Officer, Global Marketing and
Offshore Development in March 1999. Prior to her promotion, Ms. Granton served
as our Executive Vice President, International Business Development since our
inception in August 1991. Ms. Granton has been our Secretary and a Director
since our inception in August 1991. From August 1991 to August 1996, she
served as our Chief Financial Officer. 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 telecommunications 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.
Thomas J. Murphy became Co-Chief Operating Officer, Network Development and
IP Services in August 1999. Before that, he served as our Executive Vice
President, Global Networks and Multimedia Services since August 1998. From
1992 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.
30
<PAGE>
Robert F. Craver has served as our Senior Vice President, International
Relations since February 1994. Prior to joining us, 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.
Fred A. Weismiller has served as our Executive Vice President, International
Marketing since he joined us in November 1994. Mr. Weismiller's
responsibilities include developing foreign-based customers for basic
international long distance and IP-based services. From 1991 to 1994,
Mr. Weismiller served as Managing Director and Executive Director, Sales and
Marketing at Telecom New Zealand. Mr. Weismiller has 30 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.
Ronald D. Anderson has served as our Senior Vice President, Operations and
Engineering 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 MCI 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.
Sandra D. Grey has served as our Chief Financial Officer and Vice President,
Finance since August 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 its international subsidiary. Ms.
Grey has more than eight years experience in the international
telecommunications industry. Ms. Grey has resigned her position to join
another company. We expect to name her successor shortly.
31
<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, 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
Quarter ended March 31, 1999................................ $47.563 $22.500
Quarter ended June 30, 1999................................. $42.875 $26.375
Quarter ended September 30, 1999............................ $31.000 $14.000
Quarter ended December 31, 1999............................. $24.375 $15.438
</TABLE>
As of March 27, 2000, there were 142 holders of record of our Common Shares.
We have never paid cash dividends on our Common Stock and have no plans to
do so in the foreseeable future. We intend to retain earnings to develop and
expand our 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, 1999, have been derived from our
audited consolidated financial statements. 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,
-----------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................... $604,591 $466,291 $298,609 $162,426 $76,416
Cost of long distance
services..................... 516,671 393,640 254,076 140,340 66,346
-------- -------- -------- -------- -------
Gross profit................ 87,920 72,651 44,533 22,086 10,070
Selling, general and
administrative expenses...... 62,865 36,791 21,416 11,113 5,467
Depreciation and
amortization................. 14,691 8,713 5,417 2,044 1,124
-------- -------- -------- -------- -------
Operating income.............. 10,364 27,147 17,700 8,929 3,479
Other (income) expense, net... (1,090) (1,132) (126) 129 --
Interest (income) expense,
net.......................... (923) (2,292) (2,009) (885) 538
-------- -------- -------- -------- -------
Income before income taxes.. 12,377 30,571 19,835 9,685 2,941
Provision for income taxes.... 4,332 10,635 7,338 3,877 1,155
-------- -------- -------- -------- -------
Net income.................. $ 8,045 $ 19,936 $ 12,497 $ 5,808 $ 1,786
======== ======== ======== ======== =======
Net income per share--
diluted.................... $ 0.41 $ 0.97 $ 0.64 $ 0.34 $ 0.12
======== ======== ======== ======== =======
Weighted average number of
common shares outstanding--
diluted...................... 19,772 20,495 19,497 16,872 14,535
======== ======== ======== ======== =======
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
(In thousands, except revenues per minute of use
amounts)
<S> <C> <C> <C> <C> <C>
Other Operating Data:
EBITDA(1)............... $ 25,055 $ 35,860 $ 23,117 $ 10,973 $ 4,603
Capital expenditures.... $ 69,644 $ 49,611 $ 36,725 $ 18,669 $ 7,233
Minutes of use.......... 2,465,003 1,635,285 1,025,649 563,495 252,925
Revenues per minute
use.................... $ 0.24 $ 0.29 $ 0.29 $ 0.29 $ 0.30
<CAPTION>
As of December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 27,189 $ 30,041 $ 43,850 $ 45,563 $ 1,792
Working capital
(deficit).............. $ (54,388) $ (7,649) $ 14,541 $ 35,051 $ (6,412)
Total assets............ $ 374,805 $ 235,637 $ 171,617 $103,816 $ 29,976
Stockholders' equity.... $ 115,019 $ 100,639 $ 76,573 $ 62,472 $ 2,891
</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 our
cash needs. EBITDA is a financial measure commonly used in our 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," "may," "expects,"
"estimates," or other similar expressions. These forward-looking statements
relate to the plans, objectives, and expectations of Pacific Gateway Exchange,
Inc. ("Pacific Gateway", "we", "our", or "the Company") regarding our future
operations or financial performance or related to our 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 us or any other person that the forward-looking statements will come true.
Our revenues and results of operations and future developments in the
telecommunications industry are subject to risks and uncertainties and could
differ materially from those projected in the forward-looking statements as a
result of numerous factors, including the following:
1. availability of financing on acceptable terms, conditions in the
credit market and availability of additional equity on acceptable
terms;
2. difficulties that may be encountered in the development of bandwidth
services, including construction delays, regulatory obstacles,
contract disputes, or the lack or opportunities for additional
bandwidth purchases;
3. uncertainties in the growth of our retail operations and the
development of our new business lines, such as our VOIP, bandwidth,
and Internet operations, including uncertainties about the difficulty
of integrating acquisitions, hiring appropriate personnel, and
competitive conditions;
33
<PAGE>
4. the termination of operating agreements with other carriers or the
inability to enter into additional operating agreements;
5. inaccuracies in our forecasts of traffic;
6. changes in the availability of transmission facilities such as
domestic, international, and undersea fiber optic cable systems or in
the feasibility, timing, or expense of building or leasing such
facilities;
7. loss of the services of key officers;
8. loss of a customer that provides significant revenues;
9. opportunities for, and problems relating from, the acquisition of
other companies or facilities;
10. changes in the ratios between the amount of telecommunication traffic
that we deliver and the amount we receive from our foreign partners
under our operating agreements and termination arrangements;
11. Internet growth at slower rates than expected; or
12. consolidation of our competitors within the telecommunications,
bandwidth, or Internet industries.
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 in this 10-K, should
not be construed as exhaustive. We undertake 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 Exchange was founded in August 1991 to capitalize on the
significant growth opportunities in the international telecommunications
services market. Since then, we have undertaken five strategic initiatives in
response to regulatory and technological developments: (1) as foreign
countries deregulated their telecommunications markets, we started offshore
wholesale operations; (2) in response to technological innovation and consumer
demand, we entered the market for retail services; (3) to participate in the
growth of the Internet, in 1999, we began our Internet operations by providing
connectivity and co-location services and it plans to provide other Internet
services to the global Internet community; (4) to take advantage of the
Internet as a medium of telephony, we recently began providing VoIP services
to telecommunications carriers, ISPs, and other value-added service providers;
and (5) to meet the growing global demand for high bandwidth fiber optic
capacity, we have acquired significant interests in strategic, state-of-the-
art undersea and land-based cable systems. We use the bandwidth capacity for
our own operations in addition to selling, leasing, and exchanging it in
opportunistic transactions.
We expect our growth strategy to have a number of effects on our future
results of operations. In particular, we expect to: (1) generate losses from
our Internet services business as a result of substantial start-up costs;
(2) receive substantial cash proceeds from sales or leases of bandwidth
capacity; (3) incur increased interest costs attributable to indebtedness; and
(4) incur increased administrative expenses as we pursue strategic and
financing alternatives to address liquidity. As a result of our success in
expanding our service offerings, we are de-emphasizing our wholesale selling
efforts. Therefore, we expect; (1) lower future revenues and gross profits
from our wholesale telecommunications business; (2) revenues from our retail
and VoIP services to partially offset our decreased wholesale revenues in 2000
and fully offset them in 2001 and beyond; and (3) gross profits from our
retail operations and VOIP operations to fully offset our decreased wholesale
gross profits in 2000 and beyond.
Prior to 1999, our business consisted entirely of telecommunications
operations. We managed our business in segments of wholesale, offshore, and
retail telecommunication operations. As a result of the diversification of our
business, we now manage our business in segments of telecommunications,
Internet, and bandwidth services. The operating results of these segments are
regularly reviewed by and are integral to management and its
34
<PAGE>
decision-making process. Financial information on our new operating segments
is included in Note (12) entitled "Segment Data" in the Notes to the
Consolidated Financial Statements.
As described above, we derive our revenues from three operating segments:
telecommunications, Internet, and bandwidth services. Our telecommunications
revenues are based upon the number of minutes billable and recorded upon
completion of a call. We derive telecommunication revenues from carrying a mix
of wholesale and retail long distance traffic in the U.S. and offshore. We
expect to increase our retail telecommunication revenues from internal growth
through sales and marketing efforts focused on customers with significant
international long-distance usage, including other telecommunications
carriers, ethnic, and other retail customers and re-sellers, and by offering
new products, such as bundled services. As it has done in the past, we plan to
seek strategic acquisitions that expand our customer base and increase our
market share.
Prices in the long distance industry have decreased in recent years and, as
competition continues to increase, we believe that prices are likely to
continue to decrease. In addition, as deregulation accelerates and competition
increases in offshore markets, our revenues per minute are likely to be
adversely impacted. We believe that such decreases in prices will be offset by
increased telecommunications usage.
Cost of telecommunications revenue is comprised primarily of costs incurred
from other domestic and foreign telecommunications carriers to originate,
transport, and terminate calls. The majority of our cost of telecommunication
revenue is variable, based upon the number of minutes of use, with
transmission and termination costs being our most significant expense. As we
increase the portion of traffic transmitted over our owned or leased
facilities, the cost of telecommunication revenue will be increasingly
comprised of fixed costs. We seek to lower our cost of telecommunication
revenue by:
. optimizing the routing of calls over the lowest cost route;
. increasing volumes on our owned lines;
. negotiating lower variable usage based costs with domestic and foreign
service providers and negotiating additional and lower cost foreign
carrier agreements with the foreign incumbent carriers and others; and
. continuing to expand our network to extend our global reach.
We generally realize a higher average price per minute and gross margin on
our international calls as compared to our domestic long distance services and
a higher average price per minute and gross margin on our retail services as
compared to our wholesale services. Although wholesale services generate a
lower gross margin than retail services, they are an important part of our
business because the high traffic volume of our wholesale customers improves
the utilization of the network and allows for greater flexibility in
negotiating rates from suppliers. Our overall average price per minute and
gross margin may fluctuate based on our relative volume of international
versus domestic long distance services, wholesale services versus retail
services, and the proportion of traffic carried on our owned network versus
resale of other carrier services.
We began generating Internet service revenues in the third quarter of 1999.
Internet revenues include service provider fees and web design revenues. In
1999, Internet service revenues accounted for 1% of our total revenues.
We sell or lease bandwidth capacity on our global network. As of December
31, 1999, we had entered into agreements to sell or lease bandwidth capacity
(including maintenance services) valued by the parties at $141.1 million. Of
the $141.1 million, $30.0 million relates to operating and maintenance
revenues to be received over the terms of the contracts (which is generally 20
years), $57.5 million consists of other cash proceeds that we expect to
receive over time and the balance consists of network assets valued by the
parties at $53.6 million to be delivered over time in exchange for bandwidth
capacity. Of these amounts, we expect to receive cash proceeds, including
operating and maintenance revenues of $15.4 million in 2000. The proceeds from
these sales or leases will be used to fund the expansion of our network and to
meet working capital requirements and other
35
<PAGE>
cash needs. The exchanged assets will provide us with a more extensive network
to support our other operations. We are considering significant sales of fiber
optic capacity to offset possible liquidity shortages in 2000.
Effective June 30, 1999, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 43, "Real Estate Sales," ("FIN 43"), which
affirms that sales of "integral equipment" be accounted for in accordance with
real estate accounting rules as previously set forth in FASB Statement No. 66.
The application of FIN 43 has resulted in the classification of undersea and
land-based fiber optic cables and related equipment as "integral equipment" as
defined by FIN 43. This change in the accounting for indefeasible rights to
use ("IRUs") fiber optic capacity does not change the timing or amount of cash
proceeds or network assets that we expect to receive under the commitments
that it has made to sell or lease bandwidth capacity. It does, however,
require us to recognize the revenue from some agreements as operating leases
over the lives of the agreements as opposed to prior industry practice. Prior
to the adoption of FIN 43, we recognized revenue during the period in which it
provided initial access to the capacity.
By way of example, if we enter into a 20-year IRU capacity agreement that
provides for cash payments of $100 million, under prior industry practice, we
would have recorded revenues of $100 million when it delivered the capacity.
By contrast, in accordance with FIN 43, although we would still receive the
cash payments of $100 million at the same time, we would recognize revenues of
$5 million per year over the 20-year term of the agreement.
Our selling, general, and administrative expenses are comprised primarily of
salaries, commissions, occupancy costs, sales and marketing expenses,
advertising expenses, administrative costs, and sales allowances. These
expenses have been increasing significantly with the expansion of our
operations into retail and Internet services. Management expects this trend to
continue and believes that we will incur additional selling, general and
administrative expenses to support the expansion of our operations into
Internet services. The rapid expansion of our Internet operations will require
significant additional personnel, which likely will affect our operating
results.
We expect that our increased capital investment activity in the future to
affect our operating results in the near term due to increased depreciation
charges and interest expense in connection with borrowings to fund such
expenditures. These costs will be incurred in advance of the realization of
the expected improvements in operating results from such investments.
Although our functional currency is the United States dollar, a significant
portion of our revenues are derived from sales and operations outside the
United States. In the future, we expect to continue to derive a portion of our
revenues and incur operating costs from our operations outside the United
States and therefore changes in exchange rates may have an effect on our
results of operations. We historically have not engaged in hedging
transactions and do not currently contemplate engaging in hedging transactions
to mitigate foreign exchange risks.
As a result of our liquidity issues, our auditors have included a going
concern explanation to their opinion. See "Risk Factors" and "Liquidity and
Capital Resources."
36
<PAGE>
Results of Operations
The following table sets forth income statement data as a percentage of
revenues for the period indicated.
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Revenues................................................ 100.0 % 100.0 % 100.0 %
Cost of services and capacity sold...................... 85.5 % 84.4 % 85.1 %
----- ----- -----
Gross profit.......................................... 14.5 % 15.6 % 14.9 %
Selling, general and administrative expenses............ 10.4 % 7.9 % 7.2 %
Depreciation and amortization........................... 2.4 % 1.9 % 1.8 %
----- ----- -----
Total operating expenses.............................. 12.8 % 9.8 % 9.0 %
----- ----- -----
Operating income........................................ 1.7 % 5.8 % 5.9 %
Other (income) expense, net............................. (0.1)% (0.2)% 0.0 %
Interest (income) expense, net.......................... (0.2)% (0.6)% (0.7)%
----- ----- -----
Income before income taxes............................ 2.0 % 6.6 % 6.6 %
Provision for income taxes.............................. 0.7 % 2.3 % 2.4 %
----- ----- -----
Net income............................................ 1.3 % 4.3 % 4.2 %
===== ===== =====
</TABLE>
Year Ended December 31, 1999, Compared to the Year Ended December 31, 1998
Revenues: Total revenues increased 29.7% to $604.6 million in 1999 from
$466.3 million in 1998. The increase was a result of revenue growth in our
telecommunications services and the introduction of our bandwidth and Internet
services. Telecommunications revenues increased 28.1% to $597.4 million from
$466.3 million in 1998. The increase resulted from an increase in minutes of
use to 2.5 billion in 1999 from 1.6 billion in 1998. The increase in the
number of minutes also resulted from the elasticity associated with decreasing
prices, as the average price per minute charged to customers decreased to
$0.24 in 1999, from $0.29 in 1998. Also contributing to the increase in the
number of minutes was an increase in the number of retail customers primarily
attributable to our acquisition of several retail businesses. Bandwidth
revenues in 1999 were $6.6 million, representing sales of bandwidth capacity
delivered to customers. Refer to the discussion above on the accounting
treatment of revenue recognition of future sales and leases of bandwidth
capacity. Internet revenues in 1999 were $0.6 million, attributable to the
commencement of our Internet services in September 1999. There were no
bandwidth or Internet revenues in 1998.
Gross profit: Gross profit increased 21.0% to $87.9 million in 1999 from
$72.7 million in 1998. Gross margin as a percentage revenues decreased to
14.5% in 1999, from 15.6% in 1998. Telecommunications gross profit increased
12% to $81.7 million in 1999 from $72.7 million in 1998. Increased competition
continues to drive wholesale telecommunications prices downward resulting in
decreased wholesale telecommunications gross margins. This decrease was
partially offset by higher retail gross profit. Bandwidth gross profit was
$5.8 million in 1999 due to the delivery of bandwidth capacity on our network.
Future bandwidth gross profits will be impacted by the application of FIN 43,
as discussed above. Internet gross profit was $0.4 million in 1999.
Selling, general, and administrative expenses (SG&A): SG&A expenses
increased 70.9% to $62.9 million in 1999 from $36.8 million in 1998. As a
percentage of revenues, SG&A expenses were 10.4% in 1999, an increase from
7.9% in 1998. This increase was due primarily to increased personnel and sales
commission expenses. The increase in personnel expenses was directly related
to the increase in the number of employees in our wholly-owned subsidiaries to
386 at December 31, 1999, from 165 at December 31, 1998. In 1999, we hired
retail back-office and telemarketing personnel supporting our increasing
revenue base and additional personnel to support the commencement of our
Internet services' business. We may expand these functions to increase future
revenues and cash flows. In 1999, we also incurred $17.5 million in start-up
and related costs for our Internet initiatives. In the near term, we expect to
incur additional start-up costs to provide Internet services.
37
<PAGE>
Depreciation and amortization: Depreciation and amortization increased 68.6%
to $14.7 million in 1999, from $8.7 million in 1998. Depreciation as a
percentage of revenues was 2.4% in 1999 and 1.9% in 1998. The increase was
primarily due to depreciation of additional telecommunications equipment
acquired since December 31, 1998. Amortization of goodwill and software
development costs also contributed to the increase. Depreciation will continue
to increase as the Japan-U.S. and TAT-14 cable systems, the related back-haul
facilities, and our Internet service equipment are placed in service.
Interest: Interest income decreased to $0.9 million in 1999, from $2.3
million in 1998 due to decreased average cash balances. We had $22.7 million
in average cash balances in 1999, compared to $33.6 million in 1998. In
addition, we have capitalized the interest costs that relate to network and
facility construction per SFAS No. 34, "Capitalization of Interest Cost." We
will amortize the capitalized interest over the related asset's life.
Income tax: Income taxes decreased 59.3% to $4.3 million in 1999, from $10.6
million in 1998, primarily due to decreased operating income. The effective
tax rate increased to 35.0% in 1999 from 34.8% in 1998.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenues: Total revenues increased 56.2% to $466.3 million in 1998 from
$298.6 million in 1997. The increase was primarily the result of growth in our
U.S. wholesale, offshore and retail markets. 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. Our offshore operations in the UK, Russia, New Zealand, and Japan
generated $55.7 million in revenue in 1998 compared to $17.7 million in 1997.
Offshore operations began in 1997 with 35 customers at December 31, 1997, and
grew to 61 customers at December 31, 1998. Retail services, which primarily
provides international long distance services to certain ethnic markets,
contributed $20.0 million to revenue in 1998 compared to $1.1 million in 1997.
As a result of this growth, total minutes increased 59% from 1997 while the
average price per minute charged to customers remained unchanged at $0.29.
During 1998, we experienced price decreases; however, our average price per
minute remained unchanged from 1997 because we were able to expand our
operations in the offshore markets and diversify our operations to include
retail 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 profit: Gross profit increased 63.1% to $72.7 million in 1998 from
$44.5 million in 1997. Gross margin as a percentage of revenues increased to
15.6% in 1998, from 14.9% in 1997, primarily due to the expansion of
operations to include additional offshore markets and the diversification of
operations to include retail services. The offshore and retail services
contributed to gross margin by maintaining higher prices while utilizing our
existing U.S. wholesale low-cost network and back-office systems. In addition,
in the U.S. wholesale operations, we generally paid lower access rates to
carriers terminating our traffic than we paid in 1997.
Selling, general, and administrative expenses: SG&A expenses increased 71.8%
to $36.8 million in 1998 from $21.4 million in 1997. As a percentage of
revenues, SG&A expenses were 7.9% in 1998, an increase from 7.2% in 1997. This
increase was due primarily to increased personnel as the number of employees
at our wholly owned subsidiaries grew to 165 from 90 at December 31, 1997. In
addition, we incurred increased sales commission expenses payable to our joint
venture, PinTouch Telecom, which markets our retail 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 was primarily due to depreciation of the
additional transmission facilities acquired in 1998.
Interest income: Interest income increased 14.1% to $2.3 million in 1998
from $2.0 million in 1997. We had average cash balances of $34 million in
1998, compared to $30 million in 1997.
38
<PAGE>
Other (income) expense, net: Other income was $1.1 million in 1998, compared
to $0.1 million in 1997. The increase was due to the equity earnings of our
unconsolidated joint venture, PinTouch Telecom.
Income tax: Income taxes increased to $10.6 million from $7.3 million,
primarily due to increased operating income. However, the effective tax rate
decreased to 34.8% in 1998 from 37% in 1997. The decrease in the effective tax
rate was attributable to foreign subsidiaries' earnings, a portion of which we
intend to reinvest indefinitely in operations outside the U.S.
Liquidity and Capital Resources
We use our existing cash balances, cash provided by operating activities,
existing lines of credit, and debt facilities to finance our operations.
Net cash provided by operating activities increased to $30.4 million in 1999
from $28.9 million in 1998. This increase in cash provided by operating
activities was primarily due to increased liabilities and deferred revenues,
partially offset by increased accounts receivable balances. These increases
resulted from our expansion.
Net cash used in investing activities increased to $87.1 million in 1999, up
from $52.9 million in 1998 and $36.5 million in 1997. Capital expenditures in
1999 totaled $69.6 million, compared to $49.6 million in 1998 and $36.7
million in 1997. The capital expenditures in 1999 were for undersea fiber
optic cable and offshore transmission equipment, while capital expenditures in
1998 were primarily for transmission equipment. Capital expenditures in 1997
were primarily for domestic switches. In 1999, we invested a total of $17.4
million in cash to acquire retail businesses and an Internet service provider.
Of the $17.4 million, we acquired: (1) telecommunications businesses for $15.0
million; and (2) Onyx Internet Ltd., a United Kingdom Internet service
provider and Web designer, for $2.4 million in cash. In the first quarter of
1998, we acquired 16.66% of a Mexican multimedia company for $3.3 million in
cash and $1.8 million in Pacific Gateway's common stock.
Net cash provided by financing activities was $53.9 million in 1999, $10.2
million in 1998, and $0.5 million in 1997. In 1999, we borrowed an additional
$45.4 million under our credit facility (discussed below) and obtained $10.0
million in financing from GE Capital Corporation. We also received proceeds
from the exercise of stock options and dividends from our equity investment in
PinTouch.
In November 1999, we obtained a one-year $100 million credit facility from
Deutsche Bank Securities Inc and Banc of America Securities LLC. At December
31, 1999, we had $54.1 million in borrowings under our credit facility. At
March 30, 2000, we had $75.6 million in borrowings under this facility.
We were in default of certain provisions of this credit agreement, at
December 31, 1999, and on subsequent dates. On March 31, 2000, we obtained a
waiver of the defaults and an extension of the credit facility from April 1,
2000, to May 15, 2000. Pursuant to this waiver and extension: (1) the amount
available for us to borrow will be reduced to $75.6 million, which is the
amount currently outstanding; (2) the interest rate on our loans will increase
from LIBOR +3.5% to Bank of America's reference rate +2.5%; and (3) the credit
facility will be reduced to $50 million on May 15, 2000, which, will require
us to pay approximately $25.6 million on or before that date. In addition, we
will be responsible for certain fees and expenses of the banks, which we
expect will initially be $450,000. We cannot assure you that we will be able
to comply with the terms of the credit agreement as amended.
If we default on our credit agreement, the banks have the right to
immediately accelerate this indebtedness and foreclose on the assets that we
have pledged as security. In addition, a default under this bank credit
agreement would result in a cross default under our Cisco financing
arrangement.
39
<PAGE>
In December 1999, we obtained $10.0 million in financing from GE Capital
Corporation (GECC), to be used to finance our expansion and to meet our
working capital needs. We plan to expand our financing with GECC.
Also in December 1999, we obtained a $15.0 million vendor financing facility
from Cisco Systems Capital Corporation. The facility may be used to finance
the purchase of Cisco Internet routers and related hardware and software. At
December 31, 1999, we held no amount outstanding under this vendor financing.
At December 31, 1999, we had outstanding commitments, due before December
31, 2000, of approximately $145.0 million. This includes the commitment to
purchase undersea fiber optic cable in the Japan-US cable network for $55.6
million and in the TAT-14 cable system for $64.1 million. As part of our
global network expansion, we plan to invest substantial amounts in back-haul
facilities in Europe, Japan, and the U.S. Also, we committed to purchase the
international retail division of NOSVA Limited Partnership in December 1999.
The
40
<PAGE>
purchase price of $40.2 million is comprised of $21.0 million in cash and
$19.2 million in our common stock. Pending regulatory approval, we expect to
close the acquisition in the second quarter of 2000. In addition, we have
experienced difficulty in making timely payments on our vendor invoices.
In March 2000, a leading developer of Internet infrastructure software
agreed to make an equity investment of up to $8 million in Onyx Networks, our
Internet subsidiary, conditioned upon an equal amount being invested by other
investors. In addition, our Internet subsidiary, Onyx Networks, committed to
purchase approximately $28 million of software. These amounts are payable in
monthly installments of varying length ranging from 15 to 24 installments,
beginning June 1, 2000. We have guaranteed these payments.
As of December 31, 1999, we had entered into agreements to sell or lease
bandwidth capacity (including maintenance services) valued by the parties at
$141.1 million, of which $30.0 million relates to operating and maintenance
revenues to be received over the term of the contracts, which is generally 20
years. Of the $141.1 million: 1) we expect to receive cash proceeds over time
of $87.5 million, of which we expect to receive $15.4 million in 2000; and 2)
network assets valued by the parties at $53.6 million in exchange for our
bandwidth capacity delivered over time.
Additional financing arrangements are necessary to satisfy our capital
requirements and the failure to obtain such arrangements could have a material
adverse effect on our results of operation or financial condition. As a result
of our liquidity situation, our auditors have included a going concern
explanation to their audit report. To fund our planned capital requirements
and operations, we are actively exploring several alternatives to fund or
reduce our capital commitments, including: 1) public or private sales of our
securities; 2) sales of fiber optic capacity; and 3) minority investments in
Onyx Networks, our Internet subsidiary; or 4) a sale of one or more of our
subsidiaries. The Company has engaged Salomon Smith Barney to provide
financial advisory and investment banking services regarding possible
strategic alternatives. In addition, Deutsche Bank Securities Inc. and Banc of
America Securities LLC are providing assistance with respect to locating and
identifying financing opportunities, including the possible initial public
offering of the common stock of Onyx Networks, our Internet subsidiary. The
timing and terms of any financing activities will be subject to market
conditions and other factors beyond our control. There can be no assurance
that such financing arrangements will be consummated.
Year 2000
The "Year 2000" issue was the risk that our internal computer systems,
network elements, software applications, and other business systems may not
have properly reflected or recognized the year 2000. The expenses associated
with our Year 2000 remediation program did not have a material effect on our
operating results or financial condition in 1999. We experienced no
significant Year 2000 related problems, however, there can be no assurance
that and any loss incurred by any of our customers as a result of the Year
2000 problem will not have a material adverse impact on our financial
condition or results of operations in the future.
41
<PAGE>
Quarterly Results of Operations
The following tables set forth statement of operations data for each of our
last eight calendar quarters and the percentage of our revenues represented by
each line item reflected therein. This information has been prepared on the
same basis as the audited financial statements contained herein. 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. June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 30, 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- --------- -------- --------- -------- ---------
Restated Restated Restated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share amounts)
Revenues................ $154,415 $170,061 $139,586 $140,529 $126,414 $124,853 $109,952 $105,072
Cost of services and
capacity sold.......... 128,839 144,964 121,433 121,435 106,804 104,644 92,951 89,241
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit........... 25,576 25,097 18,153 19,094 19,610 20,209 17,001 15,831
Selling, general, and
administrative
expenses............... 21,620 17,317 12,759 11,169 10,327 11,612 7,290 7,562
Depreciation and
amortization........... 4,781 3,785 3,344 2,781 2,395 2,209 2,146 1,963
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 26,401 21,102 16,103 13,950 12,722 13,821 9,436 9,525
-------- -------- -------- -------- -------- -------- -------- --------
Operating income....... (825) 3,995 2,050 5,144 6,888 6,388 7,565 6,306
Other (income) expense,
net.................... (44) (299) (524) (223) (14) (1,712) 496 98
Interest (income)
expense, net........... (298) (158) (249) (218) (591) (532) (556) (613)
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. (483) 4,452 2,823 5,585 7,493 8,632 7,625 6,821
Provision for income
taxes.................. (169) 1,558 988 1,955 2,470 2,980 2,740 2,445
-------- -------- -------- -------- -------- -------- -------- --------
Net income............. $ (314) $ 2,894 $ 1,835 $ 3,630 $ 5,023 $ 5,652 $ 4,885 $ 4,376
======== ======== ======== ======== ======== ======== ======== ========
Net income per share--
diluted............... $ (0.02) $ 0.15 $ 0.09 $ 0.18 $ 0.25 $ 0.29 $ 0.25 $ 0.22
======== ======== ======== ======== ======== ======== ======== ========
<CAPTION>
As a Percentage of Revenues for the Quarter Ended:
-----------------------------------------------------------------------------------------
Dec. 31, Sept. June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 30, 1999 1999 1999 1998 1998 1998 1998
-------- -------- -------- --------- -------- --------- -------- ---------
Restated Restated Restated
<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 services and
capacity sold.......... 83.4 % 85.2 % 87.0 % 86.4 % 84.5 % 83.8 % 84.5 % 84.9 %
-------- -------- -------- -------- -------- -------- -------- --------
Gross margin........... 16.6 % 14.8 % 13.0 % 13.6 % 15.5 % 16.2 % 15.5 % 15.1 %
Selling, general, and
administrative
expenses............... 14.0 % 10.2 % 9.1 % 7.9 % 8.2 % 9.3 % 6.6 % 7.2 %
Depreciation and
amortization........... 3.1 % 2.2 % 2.4 % 2.0 % 1.9 % 1.8 % 2.0 % 1.9 %
-------- -------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 17.1 % 12.4 % 11.5 % 9.9 % 10.1 % 11.1 % 8.6 % 9.1 %
-------- -------- -------- -------- -------- -------- -------- --------
Operating income....... (0.5)% 2.4 % 1.5 % 3.7 % 5.4 % 5.1 % 6.9 % 6.0 %
Other (income) expense,
net.................... 0.0 % (0.2)% (0.4)% (0.1)% -- % (1.4)% 0.5 % 0.1 %
Interest (income)
expense, net........... (0.2)% (0.0)% (0.1)% (0.2)% (0.5)% (0.4)% (0.5)% (0.6)%
-------- -------- -------- -------- -------- -------- -------- --------
Income before income
taxes................. (0.3)% 2.6 % 2.0 % 4.0 % 5.9 % 6.9 % 6.9 % 6.5 %
Provision for income
taxes.................. (0.1) % 0.9 % 0.7 % 1.4 % 2.0 % 2.4 % 2.5 % 2.3 %
-------- -------- -------- -------- -------- -------- -------- --------
Net income............. (0.2) % 1.7 % 1.3 % 2.6 % 3.9 % 4.5 % 4.4 % 4.2 %
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The results of operations and statements of financial position as previously
reported in the Company's interim 1999 financial statements filed on Form 10-Q
have been restated to reflect certain adjustments. The adjustments resulted
from capitalization of certain expenses in incorrect quarters, inappropriate
capitalization of expenses, and other adjustments.
42
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our revenue and capital spending is transacted in U.S. Dollars. As discussed
in the notes to the consolidated financial statements, our assets and
liabilities outside the United States, for which the functional currency is
not U.S. Dollars, are translated into U.S. Dollars. We transact business in
British Pounds, New Zealand Dollars, Australian Dollars, Japanese Yen, and
German Marks. We have not engaged in hedging transactions to reduce our
exposure to fluctuations that may arise from changes in foreign exchange
rates. Based on our overall currency rate exposure at December 31, 1999, a
near-term 10% increase or decrease would not have a material affect on our
operating results or financial condition.
43
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT ACCOUNTANTS
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,
1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in
the United States, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has current debt which is due
and payable in 2000 and also has significant future capital commitments that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
March 31, 2000
San Francisco, California
44
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 27,189 $ 30,041
Accounts receivable, net of allowance for doubtful accounts
of $7,846 in 1999 and $4,312 in 1998...................... 133,998 87,725
Prepaid expenses........................................... 1,065 1,244
Income taxes receivable.................................... -- 1,358
Deferred income tax........................................ 3,701 2,207
Other current assets....................................... 6,455 1,408
-------- --------
Total current assets................................... 172,408 123,983
Property and equipment, net................................ 169,187 103,047
Intangible assets, net..................................... 17,830 1,293
Deferred tax asset ........................................ 2,227 78
Deposits and other assets.................................. 13,153 7,236
-------- --------
Total assets........................................... $374,805 $235,637
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................... $154,601 $118,303
Line of credit............................................. 54,100 8,700
Accrued liabilities........................................ 13,156 4,193
Income taxes payable....................................... 4,279 --
Current portion of capital lease obligations............... 660 436
-------- --------
Total current liabilities.............................. 226,796 131,632
Equipment financing........................................ 10,000 --
Deferred tax liability..................................... 5,850 1,963
Long-term portion of capital lease obligations............. 604 99
Other liabilities.......................................... 16,536 1,304
-------- --------
Total liabilities...................................... 259,786 134,998
-------- --------
Stockholders' Equity:
Preferred stock ($.0001 par value; 5,000,000 shares
authorized, no shares issued)............................. -- --
Common stock and additional paid-in capital ($.0001 par
value; 70,000,000 shares authorized, 19,665,352 shares
issued and 19,521,792 shares outstanding at December 31,
1999; and 19,363,777 shares issued and 19,220,217 shares
outstanding at December 31, 1998)......................... 76,534 65,433
Deferred compensation-restricted stock..................... (8,065) (4,618)
Foreign currency translation............................... (1,285) 34
Retained earnings.......................................... 48,235 40,190
Common stock held in treasury, at cost (143,560 shares at
December 31, 1999 and 1998)............................... (400) (400)
-------- --------
Total stockholders' equity............................. 115,019 100,639
-------- --------
Total liabilities and stockholders' equity............. $374,805 $235,637
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
45
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except net income per share)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................ $604,591 $466,291 $298,609
Cost of services and capacity sold ............. 516,671 393,640 254,076
-------- -------- --------
Gross profit................................ 87,920 72,651 44,533
Selling, general, and administrative expenses... 62,865 36,791 21,416
Depreciation and amortization................... 14,691 8,713 5,417
-------- -------- --------
Total operating expenses.................... 77,556 45,504 26,833
-------- -------- --------
Operating income............................ 10,364 27,147 17,700
Interest income, net............................ (923) (2,292) (2,009)
Other income, net............................... (1,090) (1,132) (126)
-------- -------- --------
Income before income taxes.................. 12,377 30,571 19,835
Provision for income taxes...................... 4,332 10,635 7,338
-------- -------- --------
Net income.................................. $ 8,045 $ 19,936 $ 12,497
======== ======== ========
Net income per share--basic................. $ 0.42 $ 1.05 $ 0.66
======== ======== ========
Net income per share--diluted............... $ 0.41 $ 0.97 $ 0.64
======== ======== ========
Weighted-average number of common shares
outstanding--basic............................. 19,282 19,071 18,960
======== ======== ========
Weighted-average number of common shares
outstanding--diluted........................... 19,772 20,495 19,497
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
46
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Operating Activities:
Net income...................................... $ 8,045 $ 19,936 $ 12,497
Adjustments to net income:
Depreciation and amortization................. 14,691 8,713 5,417
Stock compensation expense.................... 1,181 674 146
Bad debt provision............................ 4,558 2,146 2,173
Equity in earnings of affiliated companies,
net.......................................... (1,500) (1,499) --
Changes in operating assets and liabilities:
Accounts receivable......................... (49,668) (27,558) (38,681)
Accounts receivable, related party.......... -- -- 3,066
Prepaid expenses............................ 255 (733) 306
Income taxes receivable..................... 1,358 -- --
Deferred tax asset.......................... (3,643) (1,189) 88
Other current assets........................ (1,854) -- --
Deposits and other assets................... (906) (1,830) (1,430)
Accounts payable............................ 34,379 30,322 48,309
Accrued liabilities......................... 5,104 460 2,429
Income taxes payable (recoverable).......... 4,703 (2,325) (462)
Deferred tax liability...................... 3,887 1,006 249
Other liabilities........................... 9,782 791 150
-------- -------- --------
Net cash provided by operating activities....... 30,372 28,914 34,257
-------- -------- --------
Investing Activities:
Purchase of property and equipment.............. (69,644) (49,611) (36,725)
Investments in subsidiaries and affiliates...... (17,435) (3,314) 222
-------- -------- --------
Net cash used in investing activities........... (87,079) (52,925) (36,503)
-------- -------- --------
Financing Activities:
Borrowings on revolving line of credit.......... 45,400 8,700 --
Equipment financing............................. 10,000 -- --
Debt issuance costs............................. (3,193) (57) --
Exercise of stock options....................... 1,299 1,157 (209)
Dividends received from affiliated company...... 966 900 742
Repayments on capital lease obligations......... (617) (498) --
-------- -------- --------
Net cash provided by financing activities....... 53,855 10,202 533
-------- -------- --------
Net decrease in cash and cash equivalents....... (2,852) (13,809) (1,713)
Cash and cash equivalents at beginning of the
period......................................... 30,041 43,850 45,563
-------- -------- --------
Cash and cash equivalents at end of the period.. $ 27,189 $ 30,041 $ 43,850
======== ======== ========
Supplemental data:
Common stock issued to acquired businesses ..... $ 4,750 $ 1,800 $ --
Value of cable exchanged........................ $ 7,532 $ -- $ --
Assets acquired under capital leases............ $ 1,006 $ 631 $ 610
Interest paid................................... $ 1,537 $ -- $ --
Income taxes paid during period................. $ 677 $ 12,067 $ 7,841
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
47
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Comprehensive Income
----------------------------------
Treasury
Common Stock Additional Foreign Accumulated Stock
------------- Paid-in Deferred Currency Retained Comprehensive -------------
Shares Amount Capital Compensation Translation Earnings Income Shares Amount Total
------ ------ ---------- ------------ ----------- -------- ------------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31,
1996................... 19,040 $ 2 $55,113 $ -- $ -- $ 7,757 $ 7,757 (144) $(400) $ 62,472
Stock options
exercised............. 102 -- 742 -- -- -- -- -- -- 742
Stock compensation
expense............... -- -- 146 -- -- -- -- -- -- 146
Tax effect of stock
options exercised..... -- -- 714 -- -- -- -- -- -- 714
Issuance of restricted
stock................. 75 -- 4,134 (4,134) -- -- -- -- -- --
Foreign currency
translation........... -- -- -- -- 2 -- 2 -- -- --
Net income............ -- -- -- -- -- 12,497 12,497 -- -- --
-------
Comprehensive income.. -- -- -- -- -- -- 12,499 -- -- 12,499
------ ----- ------- ------- ------- ------- ------- ---- ----- --------
Balance December 31,
1997................... 19,217 2 60,849 (4,134) 2 20,254 20,256 (144) (400) 76,573
Stock options
exercised............. 89 -- 1,100 -- -- -- -- -- -- 1,100
Stock compensation
expense............... -- -- 194 480 -- -- -- -- -- 674
Tax effect of stock
options exercised..... -- -- 524 -- -- -- -- -- -- 524
Issuance of restricted
stock................. 25 -- 964 (964) -- -- -- -- -- --
Issuance of common
stock, for investment
in company............ 33 -- 1,800 -- -- -- -- -- -- 1,800
Foreign currency
translation........... -- -- -- -- 32 -- 32 -- -- --
Net income............ -- -- -- -- -- 19,936 19,936 -- -- --
-------
Comprehensive income.. -- -- -- -- -- -- 19,968 -- -- 19,968
------ ----- ------- ------- ------- ------- ------- ---- ----- --------
Balance December 31,
1998................... 19,364 2 65,431 (4,618) 34 40,190 40,224 (144) (400) 100,639
Stock options
exercised............. 90 -- 1,299 -- -- -- -- -- -- 1,299
Stock compensation
expense............... -- -- 94 1,087 -- -- -- -- -- 1,181
Tax effect of stock
options exercised..... -- -- 424 -- -- -- -- -- -- 424
Issuance of restricted
stock................. 67 -- 2,408 (2,408) -- -- -- -- -- --
Issuance of options
below market.......... -- -- 2,126 (2,126) -- -- -- -- -- --
Issuance of common
stock, for acquisition
of Robo Tel, Inc...... 144 -- 4,750 -- -- -- -- -- -- 4,750
Foreign currency
translation........... -- -- -- -- (1,319) -- (1,319) -- -- --
Net income............ -- -- -- -- -- 8,045 8,045 -- -- --
-------
Comprehensive income.. -- -- -- -- -- -- 6,726 -- -- 6,726
------ ----- ------- ------- ------- ------- ------- ---- ----- --------
Balance December 31,
1999................... 19,665 $ 2 $76,532 $(8,065) $(1,285) $48,235 $46,950 (144) $(400) $115,019
====== ===== ======= ======= ======= ======= ======= ==== ===== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
48
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The Company and its 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 include
wholesale and retail long distance, Internet, and bandwidth services.
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.
At December 31, 1999, the Company had $54.1 million outstanding under its
$100 million credit facility. As discussed in Note 8 "Debt" and Note 16
"Subsequent Events," this credit facility must be reduced to $50 million on
May 15, 2000, and the remainder is due and payable in November, 2000. At March
30, 2000, the Company had $75.6 million (unaudited) outstanding on its $100
million line of credit. Also as discussed in the Note 10 - "Commitments and
Contingencies" the Company has approximately $145 million in capital
commitments due in the next twelve months. The Company will require additional
funding in order to meet these commitments and continue operations in the
normal course of business. Historically, the Company has funded its operations
primarily through positive operating cash flows. Management plans to pursue
additional equity from new or existing investors, debt financing, or asset
sales to refinance current outstanding debt, and fund future capital
commitments. There is no assurance that management will complete its plans.
Principles of Consolidation:
Consolidated Financial Statements include the accounts of Pacific Gateway
and its majority-owned and controlled subsidiaries in Bermuda, the United
Kingdom, Russia, New Zealand, Australia, Japan, Germany, and Cyprus. The
Company accounts for investments in 20% to 50%-owned companies and
partnerships using the equity method. Intercompany transactions have been
eliminated.
49
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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.
Fair Value of Financial Instruments:
The fair value of financial instruments, consisting of cash, cash
equivalents, accounts receivable, accounts payable, and the line of credit, is
based on interest rates available to the Company and comparisons to quoted
prices. At December 31, 1999 and 1998, 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, 1999 and 1998, the Company had bank deposits in excess of
federally insured limits of $19.4 million and $22.9 million 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.
For the year ended December 31, 1999, the Company derived 11% of its
revenues from a single customer of $64.4 million. 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, the Company
derived 10% of its revenues from a single customer of $31.0 million.
Income Taxes:
The Company accounts for income taxes in accordance with "Statement of
Financial Accounting Standards" No. 109, Accounting for Income Taxes. Under
SFAS No. 109, the Company recognizes current and
50
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
Property and Equipment:
Property and equipment are stated at cost. Maintenance and repairs are
expensed as incurred. Replacements and betterments are capitalized. The
Company classifies costs incurred in connection with the construction of new
property and equipment, including labor, as construction in progress until the
property and equipment becomes operational. The Company capitalized $5.3
million and $3.2 million of direct labor and associated overhead in 1999 and
1998, respectively, exclusive of software development costs, discussed below.
The Company capitalized no labor or overhead costs in 1997. In addition, the
Company capitalizes the interest costs that relate to network and facility
construction per SFAS No. 34, "Capitalization of Interest Cost." The Company
capitalized $2.1 million of interest in 1999. The Company capitalized no
interest in 1998 or 1997. When the property and equipment becomes operational,
the Company places it in service and depreciates it using the straight-line
method over the estimated useful lives. 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.
The Company invests in undersea fiber optic cable systems through the
purchase of indefeasible rights of use ("IRU's") or through an ownership
interest in cable construction consortia.
Software Development Costs:
In accordance with Statement of Position ("SOP") 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use, the Company
capitalizes certain costs related to its software developed for internal use
for which it has no plans to market externally. The Company amortizes
capitalized costs on a straight line basis over the estimated useful life of
the asset, which is between four and seven years. The Company adopted SOP 98-1
in 1998 and capitalized $4.0 million and $1.5 million in 1999 and 1998,
respectively.
Intangible Assets:
Intangible assets primarily include amounts allocated upon acquisitions of
businesses of the excess purchase price over the tangible assets acquired.
These assets are amortized on a straight-line basis over the expected period
of benefit. Intangibles are amortized over periods that do not exceed 10
years.
Costs associated with potential acquisitions are initially deferred. When an
acquisition closes, the Company capitalizes the related costs as part of the
purchase price of the assets acquired. For those acquisitions that are not
completed, the Company expenses related costs in the period in which the
related acquisition is abandoned.
Debt Issuance Costs:
Debt issuance costs are included in other current assets and are being
amortized over the terms of the related debt.
51
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Accounting for Business Combinations:
The Company generally records contingent payments as additional purchase
price and amortizes the payments over the estimated remaining useful life of
the acquired assets.
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, then an impairment loss
is to be recognized based on the fair value of the assets. No impairment
losses have been recognized to date.
Revenue Recognition:
Revenues for telecommunications and Internet 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. Revenue
attributable to leases of bandwidth fiber optic capacity pursuant to ("IRUs")
that qualify for sales-type lease accounting and were entered into prior to
June 30, 1999, are generally recognized at the time of delivery and acceptance
of the fiber optic capacity by the lessee. Bandwidth fiber capacity IRU's that
do not meet the criteria for sales-type lease accounting are accounted for as
operating leases and revenue is recognized over the term of the lease.
The Company's bandwidth fiber capacity agreements generally require the
customer to make a down payment due upon execution of the agreement with the
balance due upon delivery and acceptance of the fiber. Amounts billed or cash
received in excess of revenue earned are recorded as deferred revenue.
The Company is obliged under its bandwidth capacity fiber agreements to
maintain its network in efficient working order and in accordance with
industry standards. The lessee is obligated for the term of the agreement to
pay operating and maintenance costs. The Company recognizes this revenue as
services are provided.
For bandwidth fiber capacity agreements entered into prior to June 30, 1999,
the Company determined the cost of revenue based on an allocation of the total
estimated costs of the network to the fiber optic cable sold. The allocation
takes into account the service capacity of the specific fiber optic capacity
sold relative to the total expected capacity of the network.
The Company is recognizing revenue in accordance with Financial Accounting
Standards Board ("FASB") Interpretation No. 43, "Real Estate Sales, an
interpretation of FASB Statement No. 66" ("FIN 43") and the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." However, accounting practice and
guidance with respect to the accounting treatment of bandwidth sales is
evolving. Any changes in the accounting treatment could affect how the Company
accounts for future bandwidth sales.
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,
52
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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, 1999, 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 that 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.
Earnings Per Share:
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, 1999, 1998, or
1997. 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
(Numerator) (Denominator) Amount
---------- ------------ ---------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
1999
Basic EPS:
Income available to common
stockholders........................ $ 8,045 19,282 $ 0.42
Effect of dilutive stock options..... -- 490 $(0.01)
------- ------ ------
Diluted EPS............................ $ 8,045 19,772 $ 0.41
------- ------ ------
1998
Basic EPS:
Income available to common
stockholders........................ $19,936 19,071 $ 1.05
Effect of dilutive stock options..... -- 1,424 $(0.08)
------- ------ ------
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 $(0.02)
------- ------ ------
Diluted EPS............................ $12,497 19,497 $ 0.64
======= ====== ======
</TABLE>
53
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income:
Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources. Comprehensive income includes foreign currency
translation adjustments, which are excluded from net income.
Financial Statement Classifications:
Certain prior-year amounts have been reclassified to conform to the 1999
financial statement presentation. Such reclassifications have no effect on net
income as previously reported.
(2) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
established accounting and reporting standards for derivative financial
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. To date, the Company does not currently hold
any derivative instruments and does not engage in hedging activities. The
Company expects that the adoption of SFAS No. 133 will not have a material
impact on its financial position, results of operations, or cash flow. The
Company is required to adopt SFAS No. 133 on January 1, 2001.
In June 1999, the FASB issued FIN 43. Under FIN 43, fiber optic cable is
considered integral equipment and accordingly, a lease must include a
provision allowing title to transfer to the lessee in order for that lease to
be accounted for as a sales-type lease. FIN 43 applies to leases of integral
equipment entered into after June 30, 1999.
In November 1999, the SEC staff released Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges" ("SAB 100"). SAB 100 provides
interpretive guidance on how companies should account for and disclose certain
expenses that are commonly reported in connection with exit activities and
business combinations. SAB 100 also addresses contingent liabilities assumed
in a purchase business combination and inventory valuation allowances. SAB 100
must be applied to the financial statements for financial years ending
December 31, 1999. The Company does not believe that the adoption of SAB 100
will have a material affect on its financial results.
In December 1999, the SEC staff released Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides
interpretive guidance on the recognition, presentation, and disclosure of
revenue in the financial statements. SAB 101 must be applied to the financial
statements no later than the second quarter of 2000. The Company does not
believe that the adoption of SAB 101 will have a material affect on its
financial results.
54
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Income Taxes
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December
31,
------------------------
1999 1998 1997
------- ------- ------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal........................................... $ 3,356 $ 7,318 $5,737
State and local................................... 246 1,664 986
Foreign........................................... 487 1,835 279
------- ------- ------
Total current..................................... $ 4,089 $10,817 $7,002
======= ======= ======
Deferred tax expense:
Federal........................................... $ 1,305 $ (242) $ 265
State and local................................... 252 (146) 71
Foreign........................................... (1,314) 206 --
------- ------- ------
Total deferred.................................... $ 243 $ (182) $ 336
------- ------- ------
Total provision..................................... $ 4,332 $10,635 $7,338
======= ======= ======
</TABLE>
Undistributed earnings intended to be reinvested indefinitely in operations
outside the United States were approximately $19.6 million.
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,
--------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected statutory amount............................... 35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit.............. 3.2 % 3.2 % 3.8 %
Tax exempt interest..................................... -- % -- % (0.5)%
Undistributed earnings of certain subsidiaries.......... (3.7)% (5.0)% (2.5)%
Other................................................... 0.5 % 1.6 % 1.2 %
------ ------ ------
35.0 % 34.8 % 37.0 %
====== ====== ======
</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 carry-forwards.
55
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effect of significant temporary differences, which comprise the
deferred tax assets and liabilities, are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------
1999 1998
------ ------
(in
thousands)
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............................. $3,131 $1,483
State taxes................................................. 293 581
Accrued compensation........................................ 174 139
Foreign deferred assets..................................... 2,054 165
Other....................................................... -- 111
------ ------
Total gross deferred tax assets............................... $5,652 $2,479
------ ------
Deferred liabilities:
Depreciation................................................ $4,627 $1,658
Foreign deferred liabilities................................ 947 371
Other....................................................... -- 128
------ ------
Total gross deferred tax liabilities.......................... $5,574 $2,157
------ ------
Net deferred tax assets....................................... $ 78 $ 322
====== ======
</TABLE>
(4) Property and Equipment
The Company is currently expanding its communications network. Costs
associated directly with the construction are capitalized and depreciated over
their useful lives.
Property and equipment consisted of:
<TABLE>
<CAPTION>
December 31,
Depreciable -----------------
Lives (Years) 1999 1998
------------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fiber optic cables.......................... 20 $ 37,531 $ 34,663
Long distance communications equipment...... 5-7 84,433 48,710
Computers and office equipment.............. 4-7 16,725 9,352
Leasehold improvements...................... Term of lease 8,332 2,004
Construction in progress.................... -- 12,605 13,587
Cable construction in progress.............. -- 40,782 12,066
-------- --------
200,408 120,382
-------- --------
Less: accumulated depreciation.............. 31,221 17,335
-------- --------
Total property and equipment, net......... $169,187 $103,047
======== ========
</TABLE>
Related depreciation and amortization expense was $13.8 million, $8.6
million, and $5.4 million in 1999, 1998, and 1997, respectively.
56
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) Acquisitions and Investments
In 1997, the Company acquired a controlling interest in Rustelnet, a
provider of enhanced telecommunications services to the Russian market. Under
purchase accounting, the results of operations of the acquired business have
been included in the accompanying consolidated financial statements from the
date of acquisition. The Company purchased Rustelnet for a nominal amount
while it had cash balances of $0.3 million at the time. The fair value of net
liabilities acquired in the acquisition was $0.2 million. The excess of
purchase price over the estimated fair market value of $0.6 million 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.
In February 1998, the Company purchased 16.6% of the common stock of Ekonom
S.A. de C.V., a Mexican multimedia company, for $3.3 million in cash and $1.8
million in the Company's common stock. The Company's investment in Ekonom is
accounted for under the cost method.
In 1998, the Company also acquired a retail business for approximately $0.8
million in cash. Under purchase accounting, the excess of the aggregate
purchase price over the net assets acquired resulted in total goodwill of $0.8
million, which will be amortized over 10 years.
In June 1999, the Company acquired all of the retail customers and assets of
Robo Tel, Inc. for $6.7 million, consisting of $1.8 million in cash and $4.8
million in the Company's common stock. As part of the acquisition, the Company
recorded $0.9 million of accounts receivable and $0.6 million of accounts
payable; under purchase accounting, the excess of the aggregate purchase price
over the net assets acquired resulted in total goodwill of $6.4 million, which
will be amortized over 10 years.
In the second half of 1999, the Company acquired two retail businesses for
$8.0 million in cash. For one of the acquisitions, the Company expects to pay
additional consideration based on earnings of the business acquired. Since the
commitment is not yet determinable, the contingent consideration has not been
recorded as of December 31, 1999. Under purchase accounting, the excess of the
aggregate purchase price over the net assets acquired resulted in total
goodwill of $7.7 million, which will be amortized over 10 years. In connection
with the acquisitions, the Company entered into management agreements, which
provided the Company with effective control during the regulatory approval
process. Pursuant to the terms of the agreements, the Company is responsible
for managing the retail operations. The Company has recognized revenues in
1999 under the management agreements. The Company closed these two
acquisitions in November and December 1999.
In September 1999, the Company also acquired Onyx Internet, Ltd. for $2.7
million in cash. Onyx Internet serves small to medium sized business and
residential customers throughout England and Scotland. Under purchase
accounting, the excess of the aggregate purchase price over the net assets
acquired resulted in total intangible assets and goodwill of $2.4 million,
which will be amortized over periods ranging from two to 10 years.
In October 1999, the Company entered into a lease agreement with a third
party that gave it effective control of a wholesale telecommunications
business. The assets leased included long distance telecommunications
equipment and wholesale telecommunications customers. Under the agreement, the
Company leased the telecommunications network for two years. In consideration
for the network lease, the Company paid $2.8 million in advance and is
obligated to pay the net operating expenses of the acquired business for the
term of the lease and manage the business during the term of the lease. It
also purchased an option to buy the assets of the business for one dollar at
the end of the lease term. The Company will pay combined consideration of
$2.3 million, consisting of $1.3 million in our common stock and $1.0 million
in cash in the year 2000 for the purchase option. In addition, it will pay
future consideration based on the revenue generated by the business in
57
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the 24 months after the close of the transaction. During the twelve months
ended December 31, 1999, the Company accrued consideration of $0.8 million,
which has been recorded as goodwill and will be amortized over 7 years, which
is the expected life of the network.
In November 1999, the Company entered into agreements to acquire an
additional retail business for $2.7 million. In consideration, the Company
issued a $2.7 million promissory note bearing interest at 15% per annum due
February 28, 2000. In addition, the Company pledged $5.4 million of its common
stock as collateral. In connection with the acquisition, the Company entered
into a management agreement, which provides the Company with effective control
during the regulatory approval process. Pursuant to the terms of the
agreement, the Company is responsible for the management and operation of the
retail customer accounts. The Company has recognized revenues in 1999 under
the management agreement. The acquisition is pending regulatory approval and
the Company expects it to close in the second quarter of 2000. Consideration
given in advance of the close is recorded in deposits and other assets.
Also in November 1999, the Company entered into an agreement to acquire a
retail business for $4.2 million in cash and the issuance of 60,000 shares of
its common stock on the date of closing. In 1999, the Company made payments
totaling $1.4 million towards the purchase price, which it recorded in
deposits and other assets. In connection with the acquisition, the Company
entered into a management agreement, which provides the Company with effective
control during the regulatory approval process. Pursuant to the terms of the
agreement, the Company is responsible for the management and operation of the
customer accounts. The Company has recognized revenues in 1999 under the
management agreement. The acquisition is pending regulatory approval and the
Company expects it to close in the second quarter of 2000.
In December 1999, the Company agreed to purchase the international retail
division of NOSVA Limited Partnership. As a result of the acquisition, the
Company expects to increase its number of ethnic retail customers and
telemarketing employees through NOSVA's back-office operations in Las Vegas,
Nevada. The purchase price of $40.2 million is comprised of $21.0 million in
cash and $19.2 million in the Company's common stock. The Company expects to
pay additional consideration based on earnings of the business acquired. As of
December 31, 1999, the Company had made no payments. The Company paid $3.0
million in January 2000, and is obligated to pay $5 million at close, $8
million 90 days after closing, and $5 million 180 days after closing. Pending
regulatory approval, the Company expects to close the acquisition in the
second quarter of 2000.
(6) Intangible Assets
Intangible assets consisted of:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Goodwill..................................................... $17,590 $1,398
Long-term non-compete agreement.............................. 795 --
Acquired intellectual property............................... 241 --
Other........................................................ 159 --
------- ------
18,785 1,398
------- ------
Less: accumulated amortization............................... 955 105
------- ------
Intangible assets, net..................................... $17,830 $1,293
======= ======
</TABLE>
58
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related amortization expense was $0.9 million, $0.1 million, and $0.0
million in 1999, 1998, and 1997, respectively. The increase in goodwill from
1998 to 1999 resulted from the acquisitions described in Note 5, Acquisitions
and Investments.
(7) Equity Investment
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. The
Company has recognized equity in earnings of $1.5 million and $1.7 million in
1999 and 1998, respectively and received dividends of $1.0 million and $0.9
million in 1999 and 1998, respectively. PinTouch receives commission payments
from the Company that represents the gross profit earned on referred business,
net of allowance for doubtful accounts and billing and collection fees paid by
the Company to third parties. PinTouch earns all of its commission revenues
from the Company.
Condensed financial information for PinTouch, which is unconsolidated and
accounted for under the equity method:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-------------------
1999 1998 1997
------ ------ -----
(in thousands)
<S> <C> <C> <C>
Commission revenues.................................... $7,241 $7,148 $ 195
------ ------ -----
Operating income (loss)................................ 3,155 3,515 (321)
------ ------ -----
Net income (loss)...................................... 3,196 3,547 (321)
Other partners' share of net income (loss)............. 1,678 1,870 (169)
------ ------ -----
Company's share of net income (loss)................. $1,518 $1,677 $(152)
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Current assets (1).......................................... $ 4,246 $2,444
Non-current assets.......................................... 22 13
Current liabilities......................................... (1,211) (600)
------- ------
Total equity................................................ 3,057 1,857
Other partners' equity share................................ 1,621 973
------- ------
Equity investment......................................... $ 1,436 $ 884
======= ======
</TABLE>
- --------
(1) Current assets included $3.8 million and $2.0 million at December 31, 1999
and 1998, respectively, in commission revenues, net of allowance, due from
Pacific Gateway.
(8) Debt
Line of Credit
In November 1999, the Company obtained a one-year $100 million credit
facility from Deutsche Bank Securities Inc. and Banc of America Securities
LLC. The credit facility agreement: (1) states that the Company would use up
to $50 million of the net proceeds from any securities offering in which the
Company receives gross proceeds of $150 million or more to repay the credit
facility; and (2) requires a $50.0 million permanent
59
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reduction in the facility on or before April 1, 2000. As discussed in Note
16--"Subsequent Events," the date of the permanent reduction has been extended
to May 15, 2000. Thereafter, the credit facility would provide a $50.0 million
facility for the Company.
At December 31, 1999, the Company had $54.1 million outstanding and $45.9
million available under this line of credit with an interest rate of 9.35%
(LIBOR plus a margin). The line of credit, which expires on November 23, 2000,
has financial covenants including 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 2.0 to 1.
The Company did not comply with certain financial covenants at December 31,
1999, and received a waiver dated March 31, 2000, from its lenders, which
waived covenant violations as of December 31, 1999. Subsequent to December 31,
1999, the Company did not comply with certain financial covenants. The Company
has obtained a waiver for all covenant violations from January 1, 2000, to
March 31, 2000. The Company expects to amend or refinance its debt agreement
in the second quarter of 2000, although there is no assurance that it will be
able to do so.
At December 31, 1998, the Company had $8.7 million outstanding and $21.3
million available under its previous line of credit with an interest rate of
7.75%. The Company replaced its $30 million line of credit with the $100
million credit facility described above. The line of credit also had financial
covenants including 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 to 1. The Company was in compliance with these
covenants at December 31, 1998.
Financing
In December 1999, the Company obtained $10.0 million in financing from GE
Capital Corporation (GECC), to be used to finance its rapid expansion and to
meet its working capital needs. The Company used certain of its switching
equipment as collateral for the 3 year financing arrangement, which is payable
on a monthly basis. At December 31, 1999, the Company had $10.0 million
outstanding, which bears interest at a fixed interest rate of 9.67%.
Vendor Financing
Also in December 1999, the Company obtained a $15.0 million vendor financing
facility from Cisco Systems Capital Corporation. The facility may be used to
finance the purchase of Cisco Internet routers and related hardware and
software. The facility expires in December 2000. Borrowings bear interest at
an annual rate of LIBOR plus 3%. The Company also pays a commitment fee of
0.5% on any unused portion of the facility and an annual commitment fee of
$50,000, which is due in quarterly installments. As of December 31, 1999, $15
million was available for future borrowings under this facility.
60
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) Other Liabilities
The Company's other liabilities consisted of:
<TABLE>
<CAPTION>
December 31,
--------------
1999 1998
------- ------
(in thousands)
<S> <C> <C>
Bandwidth commitment (1)..................................... $ 7,532 $ --
Deferred bandwidth revenue................................... 5,324 --
Customer advances............................................ 1,733 --
Other........................................................ 1,947 1,304
------- ------
Other liabilities.......................................... $16,536 $1,304
======= ======
</TABLE>
- --------
(1) The Company will settle this liability in kind with the delivery of
bandwidth capacity to third parties as a part of the exchange transactions
discussed in Note 11.
(10) Commitments and Contingencies
Litigation
The Company is party to various legal proceedings in the ordinary course of
business. Although the ultimate resolution of these proceedings cannot be
ascertained, management does not expect that they will have a material adverse
impact on the Company's financial position or results of operations.
Leases
The Company leases office space and equipment under noncancelable operating
leases. Rent expense for 1999, 1998, and 1997 was $4.3 million, $1.3 million,
and $1.0 million, respectively. The Company leases certain computer equipment
under capital lease agreements; the leases have terms of three years with a
minimum purchase price at the end of the leases. Leased capital assets
included in property and equipment at December 31, 1999 and 1998, were $2.2
million and $1.2 million, respectively.
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1999 were:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
(in thousands)
<S> <C> <C>
2000....................................................... $ 5,341 $ 660
2001....................................................... 4,932 443
2002....................................................... 4,958 353
2003....................................................... 4,941 --
2004....................................................... 2,176 --
Thereafter................................................. 4,006 --
------- ------
Total minimum lease payments............................... $26,354 $1,456
=======
Amount representing interest............................. 192
------
Present value of net minimum payments.................... $1,264
======
Current portion.......................................... $ 660
======
</TABLE>
61
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $6.0 million. Upon any such change in
control, each of these individuals would also receive full vesting of any
outstanding stock options.
Purchase Commitments
At December 31, 1999, the Company had outstanding commitments, due before
December 31, 2000, of approximately $145.0 million. This includes the
commitment to purchase undersea fiber optic cable in the Japan-U.S. cable
network for $55.6 million and in TAT-14 cable system for $64.1 million. Also,
the Company has committed to purchase the international retail division of
NOSVA Limited Partnership in December 1999. The purchase price of $40.2
million is comprised of $21.0 million in cash and $19.2 million in the
Company's common stock. Pending regulatory approval, the Company expects to
close the acquisition in the second quarter of 2000.
Sales Commitments
As of December 31, 1999, the Company had entered into agreements to sell,
lease, or exchange bandwidth capacity (including maintenance services) that
represented 16% of the Company's interest in the Japan-US and TAT-14 cable
systems.
(11) Cable Exchanges and Sales
In April 1999, the Company agreed to exchange, in a non-monetary
transaction, capacity on its Trans-Atlantic cable network for certain U.S.
domestic fiber optic cables owned by Williams Communications Group, Inc. The
Company took delivery of a portion of the capacity to be received (the
"Delivered Capacity") in the third quarter. The value applied to the capacity
was $7.5 million. In accordance with Accounting Principles Board Opinion No.
29 "Non Monetary Transactions" ("APB No. 29"), no gain has been recognized on
this transaction.
In the second quarter of 1999, the Company entered into agreements to
provide 20 year IRUs to 10.7% of the capacity, which has been delivered to the
Company. The Company recorded these transactions as sales type leases and
recognized $6.5 million in revenues related to these transactions in 1999.
As discussed in Note 1, "Significant Accounting Policies", sales or leases
of bandwidth capacity entered into after June 30, 1999, are accounted for as
operating leases. In the third quarter, the Company entered into an agreement
to lease capacity under a 20-year IRU agreement. The Company delivered
capacity and recorded revenue in the fourth quarter of $0.1 million for this
lease. The Company has deferred revenues of $5.3 million.
(12) Segment Data
The Company previously reported the business segments of wholesale,
offshore, and retail. As a result of capital investment activities into
diversified business segments, management of the Company now views the results
of operations for wholesale, offshore, and retail as one segment, referred to
as "Telecommunications". The Company has also introduced new reporting
segments in line with its businesses diversification. These are bandwidth
services and Internet services. Bandwidth services represents the Company's
interests in high capacity fiber optic networks. Internet services represents
the Company's acquisition of Onyx Internet during the third quarter and its
increased focus on the provision of services to the Internet industry.
Telecommunication services includes U.S. and offshore wholesale and retail
services. U.S. wholesale provides international telecommunications services
to: (1) U.S.-based carriers that originate international traffic,
62
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
but do not have operating agreements with foreign carriers; (2) existing
international carriers who terminate their overflow telecommunications traffic
on its system; and (3) customers with smaller traffic volumes. Revenues from
the Company's offshore wholesale operations is generated from country-
specific, usage-sensitive rates charged to the Company's carrier customers and
from traffic terminated in its international switching facilities. The Company
operates switching facilities in the United Kingdom, Russia, Australia, Japan,
New Zealand, and Germany. The Company provides retail international long
distance services to the Filipino, Japanese, Chinese, Vietnamese, Russian,
Korean, and Romanian-American communities.
The Company has begun to sell excess bandwidth capacity on its global
network. As discussed in Note 1, "The Company and its Significant Accounting
Policies", future sales or leases of bandwidth capacity will be accounted for
in accordance with FIN 43. The Company also exchanged bandwidth capacity for
additional network facilities, which it will record as fixed assets.
Lastly, the Company began generating Internet service revenues, including
connectivity revenues, in the third quarter of 1999.
Corporate and other includes cash, equity investments, and other
miscellaneous current and non-current assets. These assets are not allocated
to the three operating segments.
The results of operations for the Company's operating segments for each of
the three years ended December 31, were:
<TABLE>
<CAPTION>
Telecom-
munication Bandwidth Internet Corp./
Services Services Services Other Total
---------- --------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
1999
Total sales............... $679,709 $ 6,560 $ 614 $ -- $686,883
Inter-company............. (82,292) -- -- -- (82,292)
-------- ------- -------- ------- --------
Revenues.................. $597,417 $ 6,560 $ 614 $ -- $604,591
-------- ------- -------- ------- --------
Depreciation.............. $ 14,457 $ -- $ 234 $ -- $ 14,691
-------- ------- -------- ------- --------
Operating income.......... $ 22,849 $ 4,644 $(17,129) $ -- $ 10,364
======== ======= ======== ======= ========
1998
Total sales............... $522,575 $ -- $ -- $ -- $522,575
Inter-company............. (56,284) -- -- -- (56,284)
-------- ------- -------- ------- --------
Revenues.................. $466,291 $ -- $ -- $ -- $466,291
======== ======= ======== ======= ========
Depreciation.............. $ 8,713 $ -- $ -- $ -- $ 8,713
======== ======= ======== ======= ========
Operating income.......... $ 27,147 $ -- $ -- $ -- $ 27,147
======== ======= ======== ======= ========
1997
Total sales............... $323,800 $ -- $ -- $ -- $323,800
Inter-company............. (25,191) -- -- -- (25,191)
-------- ------- -------- ------- --------
Revenues.................. $298,609 $ -- $ -- $ -- $298,609
======== ======= ======== ======= ========
Depreciation.............. $ 5,417 $ -- $ -- $ -- $ 5,417
======== ======= ======== ======= ========
Operating income.......... $ 17,700 $ -- $ -- $ -- $ 17,700
======== ======= ======== ======= ========
Total assets at December
31, 1999................. $261,381 $53,054 $ 8,998 $51,372 $374,805
======== ======= ======== ======= ========
Total assets at December
31, 1998................. $192,179 $ -- $ -- $43,458 $235,637
======== ======= ======== ======= ========
</TABLE>
63
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company sells to long distance international telecommunications
companies, foreign partners and to retail customers. At December 31, 1999, the
Company had 44 operating agreements with foreign partners and approximately
225 worldwide telecommunications customers, excluding U.S. retail customers.
Total telecommunications revenues from external customers, including U.S.
retail customers, by country for each of the three years ended December 31,
were:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
United States..................................... $455,158 $334,746 $216,286
United Kingdom.................................... 79,917 51,378 21,625
Russia............................................ 10,771 11,877 6,733
Australia......................................... 14,387 10,988 6,377
New Zealand....................................... 10,553 7,681 2,222
Other............................................. 26,631 49,621 45,366
-------- -------- --------
Total revenues.................................... $597,417 $466,291 $298,609
======== ======== ========
</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.
(13) 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, 1999, 1998, or 1997. 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.
The Company maintains 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 1999, 1998, or 1997.
(14) Stock Option Plan
In September 1995, the Company adopted the 1995 Stock Option Plan (the "1995
Plan"). The 1995 Plan provided non-qualified and incentive stock options to
purchase up to 1,200,000 shares of common stock. Options granted under the
1995 Plan generally vested over four years. The maximum term of options
granted was ten years. The Company granted options to purchase 883,411 shares
of common stock under the 1995 Plan.
In February 1997, the Company adopted the 1997 Long-Term Incentive Plan (the
"1997 Plan"), replacing the 1995 Plan. The 1997 Plan provided for non-
qualified and incentive stock option awards, stock appreciation rights, stock
grants, and stock-based performance units. The Company may award 4,500,000
shares under the 1997 Plan; 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. In July 1999, shareholders
voted to increase the number of shares available
64
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
under the plan to 4,500,000 shares from 4,000,000 shares. In addition, the
Company's Board of Directors approved the 1997 Supplemental Long-Term
Incentive Plan (the "1997 Supplemental Plan") with 2,500,000 shares. The 1997
Supplemental Plan provides non-qualified stock options to non-officer
employees. In January 2000, the Company's Board of Directors increased the
number of shares available under the 1997 Supplemental Plan to 4,500,000
shares.
In September 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.
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 froma 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,
------------------------------------------
1999 1998 1997
------------- ------------- -------------
(in thousands, except per share amounts)
<S> <C> <C> <C>
Net income--as reported......... $ 8,045 $ 19,936 $ 12,497
Net income--pro forma........... $ (8,082) $ 14,308 $ 11,469
Earnings per share--basic as
reported....................... $ 0.42 $ 1.05 $ 0.66
Earnings per share--basic pro
forma.......................... $ (0.42) $ 0.75 $ 0.60
Earnings per share--diluted as
reported....................... $ 0.41 $ 0.97 $ 0.64
Earnings per share--diluted pro
forma.......................... $ (0.41) $ 0.70 $ 0.59
</TABLE>
The fair value of the options granted is approximately $118.6 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 were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Dividend yield....................................... 0.0% 0.0% 0.0%
Volatility........................................... 94.3% 49.4% 40.9%
Risk-free interest rate.............................. 5.6% 4.5% 5.8%
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 1999, 1998, and 1997, the Company granted 66,750,
25,000, and 75,000 shares, respectively, of restricted stock under the 1997
Plan. In 1999, the Company also granted 150,000 stock options at prices below
market value at the date of the grant. The Company recorded deferred
compensation of $4.5 million, $1.0 million, and $4.1 million for the years
ended December 31, 1999, 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, 1999, 1998, and 1997, $1.2 million, $0.7 million, and $0.1
million,
65
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respectively, was recognized as compensation expense for restricted stock,
options granted below market, and stock options granted to non-employees.
Stock Option Awards were:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
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...... 3,991,071 $31.36 2,296,065 $32.14 883,411 $ 9.77
Options granted......... 3,003,410 23.34 2,608,800 32.50 1,610,000 41.60
Options exercised....... (90,886) 14.90 (88,887) 13.02 (101,660) 7.30
Options
forfeited/canceled..... (195,883) 28.13 (824,907) 39.12 (95,686) 11.08
--------- --------- ---------
Options outstanding, end
of year................ 6,707,712 $28.09 3,991,071 $31.36 2,296,065 $32.14
========= ====== ========= ====== ========= ======
Option price range at
end of $ 5.000 to $ 8.500 to $ 8.500 to
year................... $ 53.125 $ 53.125 $ 50.188
Option shares available
for grant at end of
year................... 2,703,673 621,107 2,405,000
========= ========= =========
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Weighted-Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 5.000-
$19.875.. 1,614,981 3.60 $15.43 466,227 $ 9.03
$23.625-
$29.500.. 3,807,731 3.85 27.05 794,366 27.80
$38.500-
$53.125.. 1,285,000 3.38 47.05 504,997 46.89
--------- ---------
$ 5.000-
$53.125.. 6,707,712 3.69 $28.09 1,765,590 $28.30
========= ==== ====== ========= ======
</TABLE>
(15) 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 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
66
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
then 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").
(16) Subsequent Events
In March 2000, a leading developer of Internet infrastructure software
agreed to make an equity investment of up to $8 million in Onyx Networks, our
Internet subsidiary, conditioned upon an equal amount being invested by other
investors. In addition, the Company's Internet subsidiary, Onyx Networks,
committed to purchase approximately $28 million of software and services.
Under the transaction, Onyx will license the vendor's content distribution
technology. The amounts are payable in monthly installments of varying length
ranging from 15 to 24 installments, beginning June 1, 2000. The Company has
guaranteed these payments.
On March 31, 2000, the Company reached an agreement to extend the permanent
reduction of its $100 million line of credit from April 1, 2000, to May 15,
2000. Pursuant to this agreement: (1) the credit facility will be reduced to
$76 million, which is the amount currently outstanding; and (2) the credit
facility will be reduced to $50 million on May 15, 2000, which, will require
the Company to repay approximately $30 million on or before that date.
(17) Selected Quarterly Financial Data (unaudited)
The following table contains selected unaudited consolidated statements of
income for each quarter of fiscal 1999 and 1998. The Company believes this
information reflects all normal recurring adjustments necessary for
presentation of the information for the periods presented. The operating
results for any quarter are not necessarily indicative of results for any
future period.
67
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
For the Three Months Ended:
--------------------------------------------------------------------------
Dec. 31, Sept. June 30, March 31, Dec. 31, Sept. June 30, March 31,
1999 30, 1999 1999 1999 1998 30, 1998 1998 1998
-------- -------- -------- --------- -------- -------- -------- ---------
Restated Restated Restated
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In thousands, except
per share amounts)
Revenues................ $154,415 $170,061 $139,586 $140,529 $126,414 $124,853 $109,952 $105,072
Gross profit............ $ 25,576 $ 25,097 $ 18,153 $ 19,094 $ 19,610 $ 20,209 $ 17,001 $ 15,831
Net income.............. $ (314) $ 2,894 $ 1,835 $ 3,630 $ 5,023 $ 5,652 $ 4,885 $ 4,376
Net income per share:*
Basic.................. $ (0.02) $ 0.15 $ 0.10 $ 0.19 $ 0.26 $ 0.30 $ 0.26 $ 0.23
Diluted................ $ (0.02) $ 0.15 $ 0.09 $ 0.18 $ 0.25 $ 0.29 $ 0.25 $ 0.22
</TABLE>
*Net income per share is computed independently for each of the quarters
presented, therefore, the sum of the quarterly net income per share may not
equal the annual net income per share.
(18) Restatement (unaudited)
The results of operations and statements of financial position as previously
reported in the Company's interim 1999 financial statements filed on Form 10-Q
have been restated to reflect certain adjustments. The adjustments resulted
from capitalization of certain expenses in incorrect quarters, inappropriate
capitalization of expenses and other adjustments.
The net effect of the restatement was:
<TABLE>
<CAPTION>
For the Three Months Ended
-----------------------------------------------------------------------
March 31, 1999 June 30, 1999 September 30, 1999
----------------------- ----------------------- -----------------------
As Reported As Restated As Reported As Restated As Reported As Restated
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $140,529 $140,529 $139,586 $139,586 $170,061 $170,061
Gross profit............ $ 19,094 $ 19,094 $ 18,153 $ 18,153 $ 25,288 $ 25,097
Net income.............. $ 4,223 $ 3,630 $ 2,571 $ 1,835 $ 3,456 $ 2,894
Net income per share:
Basic.................. $ 0.22 $ 0.19 $ 0.13 $ 0.10 $ 0.18 $ 0.15
Diluted................ $ 0.22 $ 0.18 $ 0.13 $ 0.09 $ 0.18 $ 0.15
</TABLE>
68
<PAGE>
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 our Proxy Statement for the 2000
Annual Meeting of Stockholders to be filed within 120 days of the end of 1999.
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 our Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed within 120 days of the end of 1999.
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 our Proxy Statement for the 2000 Annual Meeting of Stockholders to
be filed within 120 days of the end of 1999.
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 our Proxy Statement for the 2000 Annual Meeting of
Stockholders to be filed within 120 days of the end of 1999.
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, 1999 and 1998
Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
- --------
* Included in Item 8 of this 10-K
(a) 2. Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
69
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
(a) 3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
2.1 Asset Purchase Agreement between Filed with this document
International Exchange Communications and
NOSVA Limited Partnership dated December 29,
1999
3.1.1 Amended and Restated Certificate of Incorporated by reference to
Incorporation, as Amended May 20, 1997 Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997
(No. 000-21043)
3.1.2 Certificate of Amendment of Amended and Incorporated by reference to Form
Restated Certificate of Incorporation as 10-K for the year ended December
amended June 19, 1998 31, 1998 (No. 000-21043)
3.2 Amended and Restated Bylaws, as amended Incorporated by reference to
October 23, 1998 Quarterly 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 Incorporated by reference to
Incorporation, as Amended May 20, 1997 Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997
(No. 000-21043)
4.2.2 Certificate of Amendment of Amended and Incorporated by reference to Form
Restated Certificate of Incorporation as 10-K for the year ended December
amended June 19, 1998 31, 1998 (No. 000-21043)
4.3 Rights Agreement dated as of November 17, Incorporated by reference to Form
1997, between the Company and Norwest Bank 8-K filed November 21, 1997
Minnesota, N.A. as Rights Agent (No. 000-21043)
10.1 Form of Indemnification Agreement for Incorporated by reference to Form
directors and officers 10-K for the year ended December
31, 1997 (No. 000-21043)
10.2.1 1997 Long-Term Incentive Plan, as Amended Filed with this document
10.2.2 1997 Supplemental Long-Term Incentive Plan Incorporated by reference to
Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999
(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. Incorporated by reference to
Jensen Registration Statement on Form S-
1 (No. 33-80191)
10.4.2 Proxy dated December 10, 1994 by Jeffrey J. Incorporated by reference to
Jensen Registration Statement on Form S-
1 (No. 33-80191)
10.4.3 Proxy dated December 10, 1994 by Janet Incorporated by reference to
Jensen Kreiger Registration Statement on Form S-
1 (No. 33-80191)
10.4.4 Proxy dated December 10, 1994 by James J. Incorporated by reference to
Jensen Registration Statement on Form S-
1 (No. 33-80191)
10.4.5 Proxy dated December 10, 1994 by Jami J. Incorporated by reference to
Jensen Registration Statement on Form S-
1 (No. 33-80191)
</TABLE>
70
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC
<TABLE>
<CAPTION>
Exhibit
Number Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.4.6 Proxy dated March 23, 2000 by Gail E. Filed with this document
Granton individually and as trustee of The
Granton Foundation
10.4.7 Proxy dated June 10, 1996 by Ronald L. Incorporated by reference to
Jensen Registration Statement on Form S-
1 (No. 33-80191)
10.5.1 Employment Agreement dated as of January 1, Incorporated by reference to
1998 between Howard A. Neckowitz and Pacific Quarterly Report on Form 10-Q for
Gateway Exchange, Inc. the quarter ended June 30, 1998
(No. 000-21043)
10.5.2 Employment Agreement dated as of January 1, Incorporated by reference to
1998 between Gail E. Granton and Pacific Quarterly Report on Form 10-Q for
Gateway Exchange, Inc. the quarter ended June 30, 1998
(No. 000-21043)
10.5.3 Employment Agreement dated as of January 1, Incorporated by reference to
1998 between Ronald D. Anderson and Pacific Quarterly Report on Form 10-Q for
Gateway Exchange, Inc. the quarter ended June 30, 1998
(No. 000-21043)
10.5.4 Employment Agreement dated October 1, 1995 Incorporated by reference to
between Robert F. Craver and Pacific Gateway Quarterly Report on Form 10-Q for
Exchange, Inc. the quarter ended June 30, 1998
(No. 000-21043)
10.5.5 Employment Agreement dated October 1, 1995 Incorporated by reference to
between Fred A. Weismiller and Pacific Quarterly Report on Form 10-Q for
Gateway Exchange, Inc. the quarter ended June 30, 1998
(No. 000-21043)
10.5.6 Restricted Stock Award Agreement dated Incorporated by reference to
December 30, 1997 between Howard A. Quarterly Report on Form 10-Q for
Neckowitz and Pacific Gateway Exchange, Inc. the quarter ended June 30, 1999
(No. 000-21043)
10.5.7 Restricted Stock Award Agreement dated July Incorporated by reference to
21, 1998 between Thomas J. Murphy and Quarterly Report on Form 10-Q for
Pacific Gateway Exchange, Inc. the quarter ended June 30, 1999
(No. 000-21043)
10.5.8 Employment Agreement dated September 3, 1998 Incorporated by reference to Form
between Thomas J. Murphy and Pacific Gateway 10-K for the year ended December
Exchange, Inc. 31, 1998 (No. 000-21043)
10.6 Telephone Service dated May 1, 1995 between Incorporated by reference to
Matrix Telecom, Inc. and Pacific Gateway Registration Statement on Form S-
Exchange, Inc. 1 (No. 33-80191)
10.7 Agreement for Billing Services dated Incorporated by reference to
November 24, 1995 Between Matrix Telecom, Registration Statement on Form S-
Inc. and Pacific Gateway Exchange, Inc. 1 (No. 33-80191)
10.8 First Amended and Restated Credit Agreement Filed with this document
among Pacific Gateway Exchange, Inc.,
Pacific Gateway Exchange (Bermuda) Limited,
Bank of America, N.A. and Deutsche Bank
Securities Inc. dated November 23, 1999
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.
71
<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, 2000.
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, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Howard A. Neckowitz President, Chief Executive
______________________________________ Officer and Chairman of
Howard A. Neckowitz the Board (Principal
Executive Officer)
/s/ Gail E. Granton Executive Vice President,
______________________________________ International Business
Gail E. Granton Development, Secretary
and Director
/s/ Sandra D. Grey Chief Financial Officer,
______________________________________ and Vice President,
Sandra D. Grey Finance (Principal
Financial Officer)
(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>
72
<PAGE>
Pacific Gateway Exchange, Inc.
Schedule II
Valuation and Qualifying Accounts
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions-- Balance
Beginning Costs and Accounts at End
Description of Period Expenses written off of Period
----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
Allowance for doubtful
accounts:
1999........................ $4,312 $4,558 $1,024 $7,846
1998........................ $2,230 $2,146 $ 64 $4,312
1997........................ $1,679 $2,173 $1,622 $2,230
</TABLE>
S-1
<PAGE>
EXHIBIT 2.1
ASSET PURCHASE AGREEMENT
------------------------
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into as
of the 29/th/ day of December, 1999 between International Exchange
Communications, Inc., a Delaware corporation ("Purchaser"), and NOSVA Limited
Partnership, a Maryland limited partnership ("Seller").
WHEREAS, Seller conducts business as a reseller of long distance
telecommunications services and has established a customer base and related
assets which it now desires to sell; and
WHEREAS, Purchaser desires to purchase the customer base and related assets
of Seller on the terms and subject to the conditions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises,
covenants, representations and warranties herein contained, it is hereby agreed
as follows:
1. Sale and Transfer of Assets
---------------------------
1.1 Assets to be Sold
-----------------
Subject to the terms and conditions set forth in this Agreement,
Seller agrees to sell, convey, transfer, assign and deliver to Purchaser, and
Purchaser agrees to purchase from Seller, all of Seller's right, title and
interest in and to the following assets of Seller (the "Assets") excluding
accounts receivable, unbilled call records, cash, bank accounts, marketable
securities, corporate records, tax refunds and claims of Seller against others
for damages:
(a) the "Customer Related Assets," comprised of (1) Seller's international
operating division which markets under the brand names "International Plus" and
"011 Communications" (the "Business") and all residential (as defined by the
applicable local exchange carrier or the competitive local exchange carrier)
international end user long distance telecommunications customer accounts
thereof (but specifically excluding business customer accounts) which are listed
in an electronic format satisfactory to Purchaser (which electronic format shall
include all present and former customer accounts, whether currently active or
inactive, in existence as of the Closing Date) (the "Customer Accounts") (the
end users of the long distance telecommunications services that generate the
Customer Accounts shall be hereinafter referred to as the "Customers"); (2) all
of Seller's rights under any agreements, application forms, term contracts,
letters of agency and all other contractual instruments between Seller and any
and all Customers related to the Customer Accounts (collectively, the "Customer
Contracts"), including but not limited to Seller's right to assert claims and
take other rightful actions in respect of breaches, defaults and other
violations of such Customer Contracts; (3) all customer and other deposits held
or made by Seller related to the Customer Accounts; and (4) all relationships
and goodwill related to the Customer Accounts; and
(b) the following assets (the "Non-Customer Assets"):
(i) all of Seller's rights in those contracts set forth on Schedule
1.1(b)(i) (collectively, the "Non-Customer Contracts");
<PAGE>
(ii) all of Seller's current toll-free numbers used by and in the
Business for customer service in accordance with Section 2.3(f);
(iii) the Intellectual Property (as hereinafter defined);
(iv) all leases, leasehold interests, equipment, furniture, fixtures,
computers, telephones and other tangible, intangible, real and personal property
occupied and/or utilized by and in the Business, to the extent set forth in
Schedule 1.1(b)(iv) and specifically including any and all lead lists utilized
in the Business;
(v) to the extent allowable under applicable laws, rules and
regulations, carrier identification code (CIC) number 210; and
(vi) the local service customer accounts of NOS Communications Inc.
which accompany certain of the long distance customer accounts of Seller ("the
Local Customers").
1.2 NOS
---
Subject to the terms and conditions set forth in this Agreement,
Seller hereby agrees to cause NOS Communications, Inc. ("NOS") to sell, convey,
transfer, assign and deliver to Purchaser all of NOS's right, title and interest
in and to the Intellectual Property (as hereinafter defined) and the Local
Customers.
1.3 CIC Code
--------
Purchaser and Seller agree that in the event CIC number 210 cannot be
transferred to Purchaser as contemplated in Section 1.1(b)(v) above, then the
Cash Purchase Price (as hereafter defined) shall be reduced by an amount equal
to (a) $750,000.00 plus (b) the actual cost up to $200,000 of moving the
customers to another CIC number, which aggregate amount shall be deducted from
the payment due pursuant to Section 2.3(b)(iii) below.
2. The Closing
-----------
2.1 Place and Date
--------------
The closing of the purchase and sale of the Assets (the "Closing")
shall take place at the offices of Purchaser located at 533 Airport Boulevard,
Suite 505, Burlingame, California 94010, at or before 10:00 a.m., local time, as
soon as reasonably practicable after the conditions set forth in Section 7
hereof have been satisfied but in no event later than March 31, 2000. The date
of the Closing is herein referred to as the "Closing Date."
2.2 Transfer of Assets
------------------
(a) At the Closing and subject to the terms and conditions of this
Agreement, Seller shall deliver to Purchaser the following, and simultaneously
with such delivery, Seller shall take such action as may be necessary or
reasonably requested by Purchaser to place Purchaser in possession and control
of the Assets:
2
<PAGE>
(i) Such bills of sale, assignments, novation agreements, master
letters of agency or other instruments of transfer and assignment as shall be
necessary to vest in Purchaser title to the Assets sold and assigned under this
Agreement, free and clear of all liens, claims and encumbrances;
(ii) Copies of Seller's partnership resolutions authorizing the
execution, delivery and performance of this Agreement by Seller and a
certificate of Seller's general partner dated the Closing Date, that such
resolutions were duly adopted and are in full force and effect;
(iii) A current list (in electronic format) of the Customer Accounts
to be transferred and an aging report for all accounts receivable ("Accounts
Receivable") associated with and derived from such Customer Accounts; and
(iv) Such other certificates or other documents or instruments as the
Purchaser or Purchaser's counsel may reasonably request.
(b) At the Closing, as a condition to Seller's obligations under this
Agreement, Purchaser shall deliver to Seller the following:
(i) All instruments as may be reasonably necessary by which
Purchaser assumes the obligations and liabilities to be assumed by it hereunder;
(ii) Copies of resolutions of the Board of Directors of Purchaser
authorizing the execution, delivery and performance of this Agreement by
Purchaser, including, without limitation, the issuance (if applicable) of the
Purchase Price Shares (as hereinafter defined) by Pacific Gateway Exchange, Inc.
("PGE"), and a certificate of Purchaser's secretary, dated the Closing Date,
that such resolutions were duly adopted and are in full force and effect;
(iii) That portion of the Purchase Consideration (as hereinafter
defined) due on the Closing Date, including duly issued certificates
representing the Purchase Price Shares (if applicable);
(iv) Reimbursement of the Security Deposits set forth in Schedule
1.1(b)(i); and
(v) Such other certificates or other documents or instruments as
Seller or Seller's counsel may reasonably request.
2.3 Purchase Consideration; Adjustments; Earn-Out; Integration
----------------------------------------------------------
(a) The purchase consideration to be paid by Purchaser to Seller for the
Assets shall be:
(i) $21 million ($21,000,000.00) in cash (the "Cash Purchase Price");
and
(ii) The Purchase Price Shares described in Section 2.3(c) below.
3
<PAGE>
(iii) The purchase consideration described in this Section 2.3(a)
shall be referred to hereinafter, as adjusted, as the "Purchase
Consideration."
(b) The Cash Purchase Price shall be paid as follows:
(i) on or before January 3, 2000, Purchaser shall pay to Seller $3
million ($3,000,000.00) in cash (hereinafter, the "Breakup
Cash") which shall constitute a non-refundable deposit which
Seller shall retain sole and absolute ownership of
notwithstanding any termination of this Agreement;
(ii) at the Closing, Purchaser shall pay to Seller $5 million
($5,000,000.00) in cash;
(iii) on or before the close of business on the ninetieth (90/th/) day
following the Closing Date, Purchaser shall pay to Seller $8
million ($8,000,000.00) in cash; and
(iv) on or before the close of business on the one hundred eightieth
(180/th/) day following the Closing Date, Purchaser shall pay to
Seller $5 million ($5,000,000.00) in cash.
The Cash Purchase Price shall be payable in immediately available funds by wire
transfer in accordance with the instructions delivered in writing by Seller to
Purchaser.
(c) The Purchase Price Shares (as hereafter defined) shall be issued in
accordance with the following:
(i) on or before January 15, 2000, Purchaser shall issue to Seller
that number of shares (the "Breakup Shares") of common stock,
par value $.0001 per share, of PGE ("PGE Common Stock") in an
amount equal to $3 million ($3,000,000.00) (the "Breakup Share
Amount") in the event Purchaser, in the course of conducting its
due diligence review of the Business, from the date of this
Agreement through and including January 15, 2000, does not learn
of any gross misrepresentations of Seller contained herein
("Gross Misrepresentations"). In the event Purchaser does learn
of such Gross Misrepresentations, Purchaser shall elect to
either (i) provide written notice of the nature of the Gross
Misrepresentations to Seller and in such notice elect to
terminate this Agreement (the "Termination Notice") or (ii)
provide Seller with written notice waiving such Gross
Misrepresentations and elect to proceed with the transactions
contemplated by this Agreement (the "Waiver Notice"). In the
event Seller receives the Termination Notice, then this
Agreement shall terminate provided that Seller shall have the
right to dispute pursuant to Section 9.13 whether there were in
fact any such Gross Misrepresentations and if Seller
successfully disputes such fact then Purchaser shall forthwith
upon receipt of the final decision of the arbitrator cause the
Breakup Shares to be delivered to Seller. Termination of this
Agreement pursuant to the Termination Notice and retention of
the Breakup Shares shall be
4
<PAGE>
Purchaser's sole and exclusive remedy for a Gross
Misrepresentation and Purchaser shall have no other liability or
obligation to Seller under this Agreement. In the event (i)
Purchaser is satisfied with the due diligence review of the
Business, it shall provide Seller with a notice of satisfaction
on or before January 15, 2000 (the "Satisfaction Notice") or
(ii) Purchaser provides Seller with a Waiver Notice, then in
either such event Purchaser shall concurrently deliver the
Breakup Shares to Seller. In the event Purchaser receives the
Breakup Shares pursuant to the terms of this Agreement, then the
Breakup Shares shall constitute a non-refundable deposit which
Seller shall retain sole and absolute ownership of
notwithstanding any termination of this Agreement.
(ii) On or before the Closing Date, Purchaser shall issue to Seller
that number of shares PGE Common Stock in an amount equal to
$16.2 million ($16,200,000.00) (the foregoing amount plus the
Breakup Share Amount shall be referred to hereinafter as the
"Stock Purchase Price") minus (A) $3.855 million ($3,855,000.00)
=====
(the "Earn-Out Amount") and also minus (B) $1.2 million
($1,200,000.00) (the "Additional Amount").
(iii) That number of shares of PGE Common Stock representing the Earn-
Out Amount shall be referred to hereinafter as the "Earn-Out
Shares." Purchaser shall cause the Earn-Out Shares, as adjusted
pursuant to this Section 2.3(c)(iii), to be delivered to Seller
on September 15, 2000. Following the Closing, Seller is to
manage the Business for Purchaser pursuant to the Management
Agreement (as hereinafter defined). The amount of the Earn-Out
Shares to be delivered to Seller are to be reduced in the
following manner in the event the gross revenues of the Business
(as determined by generally accepted accounting principles) (the
"Gross Revenues") are less than Forty-Four Million Four Hundred
Thousand Dollars ($44,400,000) (the "Maximum Amount") in the
aggregate during the period of March 1, 2000 through and
including August 31, 2000 (the "Earn-Out Period"): (A) in the
event the Gross Revenues during the Earn-Out Period are less
than Thirty Million Six Hundred Ninety-Six Thousand Two Hundred
Ninety-Three Dollars ($30,696,293) (the "Minimum Amount") Seller
shall be entitled to no Earn-Out Shares and (B) in the event the
Gross Revenues during the Earn-Out Period are more than the
Minimum Amount but less than the Maximum Amount then the Earn-
Out Amount (and the corresponding number of Earn-Out Shares)
shall be reduced by an amount equal to (I) the Earn Out Amount
times (II) the Maximum Amount less the Gross Revenues, divided
----- ---- -------
by (III) Thirteen Million Seven Hundred Three Thousand Seven
--
Hundred Seven Dollars ($13,703,707) (the "Difference Amount").
Notwithstanding the foregoing, in the event the Closing Date
occurs prior to March 31, 2000 then the Maximum Amount shall be
Forty Million Five Hundred Thousand Dollars ($40,500,000), the
Minimum Amount shall be Twenty-Eight Million Dollars
($28,000,000), the Difference Amount shall be Twelve Million
Five Hundred Thousand Dollars ($12,500,000) and the
5
<PAGE>
Earn-Out Period shall commence on the Closing Date and end on
the date one hundred eighty (180) days later.
(iv) That number of shares of PGE Common Stock representing the
Additional Amount shall be referred to hereinafter as the
"Additional Shares." On or before the earlier of (A) the one
hundred eightieth (180/th/) day following the Closing Date or
(B) the fifteenth (15/th/) day occurring after completion of the
first full calendar month billing cycle (the "First Cycle")
following integration of the Purchaser's customer accounts
pursuant to Section 6.12 hereof, Purchaser shall pay to Seller
the Additional Shares; provided, however, in the event that in
respect of such customer accounts (excluding casual calling
traffic) Seller has billed during the First Cycle less than
seventy percent (70%) of the gross revenues (as determined
according to generally accepted accounting principles) billed by
Purchaser in respect of such accounts (excluding casual calling
traffic) during the last full billing cycle prior to the Closing
Date (the "Last Cycle") then the Additional Amount (and the
corresponding number of Additional Shares to be issued pursuant
to this paragraph) shall be reduced to an amount equal to (A)
$1.2 million ($1,200,000) times (B) (1) the actual gross
revenues billed during the First Cycle divided by (2) the actual
gross revenues billed during the Last Cycle.
(v) Purchaser hereby agrees to use its best efforts to register any
shares of PGE Common Stock issued to Seller pursuant to Sections
2.3(c)(i), (ii), (iii) or (iv) (collectively, the "Purchase
Price Shares"), at its sole cost and expense, under the
Securities Act of 1933, as amended (the "Securities Act"), as
soon as practicable after the respective dates of issuance of
the PGE Common Stock but in no event later than five (5)
business days after such issuance date. PGE agrees to use
reasonable commercial efforts to keep the registration statement
regarding the re-sale of such shares effective under the
Securities Act until the earliest to occur of the following: (A)
all shares received by Seller have been sold; (B) all shares can
be sold in a three (3) month period under Rule 144 of the
Securities Act; or (C) five hundred forty-five (545) days after
the Closing. Seller agrees to cooperate with PGE regarding the
sale of such shares.
(vi) The parties hereby agree that, in calculating the number of
Purchase Price Shares to be issued pursuant to Sections
2.3(c)(i), (ii), (iii) or (iv), the average of the closing bid
and ask price per share for the 20 trading days immediately
preceding the relevant date of issuance to Seller shall be used.
(vii) The parties hereby agree that Purchaser, in its sole discretion,
may substitute cash, in lieu of shares of PGE Common Stock, for
all or any portion of the Purchase Price Shares prior to the
issuance of those shares to Seller pursuant to the terms of this
Agreement. If Purchaser elects to so substitute cash for all of
the Purchase Price Shares, the parties shall be
6
<PAGE>
relieved of their obligations under the Stock Sale Agreement
(as hereafter defined). In addition, Purchaser shall have the
right at any time within the period of one hundred eighty (180)
days following (A) the date of delivery to Seller of the Earn-
Out Shares or the Additional Shares, in the case of such shares
or (B) the Closing Date, in the case of all other PGE Common
Stock constituting Purchase Consideration, to elect to
repurchase from Seller any such PGE Common Stock issued to
Seller. The repurchase price shall be calculated based on the
average of the closing bid and ask price per share for the 20
trading days immediately preceding the relevant repurchase date
(the "Average Price"). In the event the Average Price is equal
to or less than one hundred percent (100%) of the per share
portion of the Stock Purchase Price attributable to the PGE
Common Stock to be repurchased by Purchaser (the "Base Price")
then the repurchase price shall be the Base Price. In the event
the Average Price is equal to or more than one hundred twenty-
five percent (125%) of the Base Price then the repurchase price
shall be one hundred twenty-five percent (125%) of the Base
Price. In the event the Average Price is less than one hundred
twenty-five percent (125%) and more than one hundred percent
(100%) of the Base Price then the repurchase price shall be the
Average Price. The repurchase price shall be paid in cash and
shall be delivered to Seller within three (3) business days of
Purchaser's election to repurchase. Seller shall concurrently
deliver the relevant shares of PGE Common Stock to Purchaser.
(viii) The number of shares of PGE Common Stock received by Seller
shall not be subject to adjustment except if the Seller sells
such shares at any time within the period of one hundred eighty
days (180) following (A) the date of registration under the
Securities Act and delivery to Seller of the Earn-Out Shares or
the Additional Shares (in the case of such shares), or (B) the
Closing Date in the case of all other PGE Common Stock
constituting Purchase Consideration, then in the event (1) the
sale price for such shares is less than ninety percent (90%) of
the portion of the Stock Purchase Price attributable to those
particular shares, Purchaser shall pay to Seller an amount
equal to the difference between ninety percent (90%) of the
portion of the Stock Purchase Price attributable to the
particular shares sold by Seller and the sale price received by
Seller in respect of those shares and (2) the sale price for
such shares is more than one hundred twenty-five percent (125%)
of the portion of the Stock Purchase Price attributable to
those particular shares, Seller shall pay to Purchaser an
amount equal to the difference between one hundred twenty-five
percent (125%) of the portion of the Stock Purchase Price
attributable to the particular shares sold by Seller and the
sale price received by Seller in respect of those shares. The
parties shall effect such adjustments on weekly intervals
commencing one week after the Closing.
(ix) The 545 day period set forth in Section 2.3(c)(v), and the 180
day period set forth in Section 2.3(c)(vii), shall each be
extended by the length of any
7
<PAGE>
Delay Period (as such term is defined in the Stock Sale
Agreement, the form of which is attached hereto as Exhibit 6.8)
(d) A list of Non-Customer Contracts which Purchaser desires to acquire
from Seller and assume at Closing is set forth in Schedule 1.1(b)(i) attached
hereto. In the event the counterparty to any such Non-Customer Contract fails or
refuses to allow the transfer of same to Purchaser prior to the Closing Date,
then Seller shall, at Purchaser's sole option and in Purchaser's sole
discretion, provide the service or function which is the subject of such Non-
Customer Contract on the same terms and conditions as contained therein.
(e) Purchaser agrees to(i) service all Customer Accounts and (ii) perform
all Non-Customer Contracts acquired and assumed by Purchaser pursuant to this
Section 2.3(d) and Purchaser further agrees to indemnify and hold harmless
Seller from and against any claims relating to Purchaser's performance, or
failure to perform, such Customer Accounts and Non-Customer Contracts subsequent
to the Closing Date.
(f) Seller utilizes the toll-free numbers for its customer service set
forth on Schedule 2.3(f). At Closing, Seller shall assign to the Purchaser all
of Seller's right, title and interest in and to all such toll-free numbers, and,
to the extent that Seller is not the owner of the toll-free number which is
manned by any other entity, Seller shall utilize commercially reasonable efforts
to persuade such entity to assign its interests in such toll-free number to
Purchaser.
(g) Purchaser acknowledges that Seller does not maintain copies of all
verification records with respect to the Customer Accounts and that many of such
records may be in the possession of one or more companies that provide
verification services to Seller. In lieu of delivering all such verification
records to Purchaser at Closing, Purchaser agrees that Seller may provide at
Closing a letter addressed to each such verification company directing such
verification company to hold all verification records relating to Customer
Accounts at the direction of Purchaser.
(h) Two days prior to the Closing Date, Seller shall deliver to Purchaser
an aging of all accounts payable ("Accounts Payable") of the Business on an
itemized basis.
(i) Two days prior to the Closing Date, Seller shall deliver to Purchaser
an aging of all accounts receivable of the Business on an itemized basis.
(j) In the event applicable laws, rules or regulations require any
Authorizations to be transferred to Purchaser in order to consummate the
transactions contemplated herein, Seller shall have the option to elect to (i)
transfer such Authorizations or (ii) exclude from the Assets the Customer
Accounts derived from Customers located in the particular state(s) requiring the
transfer of such Authorizations. In the event Seller elects to exclude such
Customer Accounts, the Stock Purchase Price shall be reduced by an amount equal
to (A) Thirty-Five Million Dollars ($35,000,000), times (B) the portion of the
-----
gross revenues (determined by generally accepted accounting principles) of the
Business during the month immediately preceding the Closing Date derived from
Customers located in the state(s) requiring the transfer of such Authorizations,
divided by (C) the total gross revenues of the Business during such preceding
- ----------
month.
8
<PAGE>
(k) Purchaser agrees to use its best efforts to resolve any matters
necessary in order to obtain approval for the transactions contemplated herein
from the Federal Communications Commission ("FCC") and all applicable state
public service and/or utility commissions (collectively, "PSCs"), including,
without limitation, the payment of any fees or taxes in connection therewith,
provided however, that Seller shall forthwith pay any and all fees or taxes
relating to the Business which have accrued but have not been paid as of the
Closing Date.
(l) The allocation of the Purchase Consideration shall be determined prior
to the Closing Date. Following execution of this Agreement, Seller and
Purchaser shall exercise their best efforts to agree upon such allocation. In
the event Seller and Purchaser are unable to reach such agreement, then either
party shall be entitled to request that the allocation be determined by the
accounting firm of Arthur Andersen. The parties shall equally bear all costs,
expenses and charges of Arthur Andersen resulting from such determination;
provided however Purchaser shall pay any such costs, expenses and charges in
excess of Twenty Thousand Dollars ($20,000). Arthur Andersen shall provide each
of the parties written notice of its determination which shall be final and
binding unless one of the parties delivers written notice of dispute to the
other party within seven (7) days of receipt of such determination. In the
event of such dispute, the matter shall be referred to final and binding
arbitration pursuant to Section 9.13 of this Agreement.
(m) All payments received by Seller (whether in its capacity as manager
pursuant to the Management Agreement or otherwise) from Customers after the
Closing in respect of accounts receivable of the Business shall be allocated on
a first in first out basis in accordance with generally accepted accounting
principles.
2.4 Limitation on Assumption of Liabilities.
----------------------------------------
Except for (i) the Customer Accounts and (ii) the Non-Customer
Contracts specifically assumed by Purchaser pursuant to Section 2.3(d) above,
Purchaser shall not be liable for any of the obligations or liabilities of
Seller of any kind or nature. Seller shall pay, perform and discharge all of
the other valid liabilities and obligations related to the Business which have
not been assumed by Purchaser pursuant to this Agreement and shall specifically
indemnify and hold harmless Purchaser from and against same. Purchaser shall
pay, perform and discharge all of the valid liabilities and obligations related
to the Business which have been assumed by Purchaser pursuant to this Agreement
and shall specifically indemnify and hold harmless Seller from and against same.
3. Representations and Warranties of Seller
----------------------------------------
Seller represents and warrants to Purchaser as follows, which
representations and warranties are made as of the date hereof and as of the
Closing Date and shall survive the Closing for a period of one year (except with
respect to the representations and warranties in Section 3.6 which shall survive
for two years):
3.1 Organization
------------
(a) Except as set forth on Schedule 3.1(a) attached hereto Seller is a
limited partnership duly organized, validly existing and in good standing under
the laws of the State of Maryland, is duly qualified and in good standing as a
foreign limited partnership in the states set
9
<PAGE>
forth on Schedule 3.1(a) attached hereto with full requisite legal power and
authority to own its properties and assets and to carry on lawfully its business
as currently conducted, and is not required to be qualified to do business as a
foreign limited partnership in any other jurisdiction, except for those
jurisdiction(s) where the failure to be so qualified would not have a material
adverse effect on the Business.
(b) Seller does not have any subsidiaries and neither owns nor holds any
securities of, or any interest in, any other person or entity and is not a
partner or member in or subject to any joint venture, partnership, limited
liability company or other arrangement or contract that is or could be treated
as a partnership for federal income tax purposes, in each case, other than de
--
minimus interests in publicly traded entities.
- --------
3.2 Authorization
-------------
Seller has all requisite partnership power and authority to enter into
this Agreement and to carry out the transactions contemplated by this Agreement.
The execution, delivery and performance by Seller of this Agreement and the
other agreements and documents referred to herein and therein and the actions
contemplated hereby and thereby have been duly and validly authorized by all
necessary partnership action on the part of Seller, and this Agreement and such
other agreements and documents constitute valid and binding obligations of
Seller, enforceable in accordance with their terms, subject to (i) general
principles of equity, regardless of whether enforcement is sought in a
proceeding in equity or at law, and (ii) bankruptcy, reorganization, insolvency,
fraudulent conveyance, moratorium, receivership or other similar laws relating
to or affecting creditors' rights generally.
3.3 Liabilities
-----------
Except as set forth in Schedule 3.3 attached hereto, and subject to
obtaining the Consents (as herein defined) and the consents of the counter
parties to the assignment of the Non-Customer Contracts, Seller has no
obligations or liabilities, whether direct or indirect, joint or several,
absolute or contingent, matured or unmatured, secured or unsecured, which could
be affected by the execution and delivery of this Agreement or consummation of
the transactions contemplated by this Agreement or which could affect the same.
3.4 Title to and Condition of Assets and Property
---------------------------------------------
At Closing, Seller shall deliver to Purchaser good and marketable
title to the Assets free and clear of all liens, claims, charges, security
interests, options, or other title defects or encumbrances except as otherwise
disclosed pursuant to this Agreement. Except as set forth in Schedule 1.1(b)(i)
attached hereto, the Assets contain no real or personal property currently
leased or otherwise occupied or used, but not owned, by Seller. All property
owned or leased by Seller in connection with the Business constitute all of the
assets currently used or needed in the ongoing operation of the Business as it
is currently operated other than the contracts listed on Schedule 3.6. Except
as set forth in Schedules 3.1(a) and 3.7 attached hereto, the operations which
constitute the Business conform with all applicable federal, state and local
laws, ordinances, rules and regulations except to the extent that any such non-
compliance does not have a material adverse effect on the Business.
10
<PAGE>
3.5 Intellectual Property
---------------------
Set forth on Schedule 3.5 hereto is a complete list of any and all
trade names and trademarks being transferred to Purchaser in respect of the
Business (the "Intellectual Property"). To the best of Seller's knowledge, the
use of the Intellectual Property by Seller does not infringe on the rights of
any person who has ever been employed by Seller since its inception.
3.6 Contracts
---------
Except for Customer Contracts, Non-Customer Contracts, contracts
between Seller and its affiliates, or as set forth in Schedule 3.6 attached
hereto, Seller is not a party to or bound by any contract or agreement, written
or oral with a person or entity which is material to the Business.
Neither Seller nor, to the best of Seller's knowledge any other party
to any Non-Customer Contract, has breached any provisions of, or is in violation
or default under the terms of, or has caused or permitted to exist any event
that with or without due notice or lapse of time or both would constitute a
default or event of default under, any such Non-Customer Contract. There are no
facts or circumstances which have arisen on or prior to the date hereof which
could lead to any additional obligation under any of the Non-Customer Contracts
(payment or otherwise) or to the violation, cancellation or other early
termination of one or more of the Non-Customer Contracts. All Non-Customer
Contracts are valid, binding and in full force and effect and will continue in
full force and effect to the benefit of Seller, its respective successors and
assigns, if such party so elects, without change following the consummation of
the transactions contemplated by this Agreement if assigned to Purchaser in
accordance with Section 2.3(d) hereof. The consummation of the transactions
contemplated by this Agreement will not violate or cause a default or event of
default under any provision of, or result in the acceleration of any obligation
under, or the termination of, any Contract.
3.7 Litigation and Compliance
-------------------------
Except as set forth in Schedule 3.7 attached hereto: (i) There is no
pending or, to the knowledge of Seller, threatened claim, investigation, lawsuit
or administrative proceeding by or against Seller with respect to the Business;
(ii) the Business is in compliance with all federal, state, local and foreign
laws and regulations and administrative orders and all tariffs, rules and
regulations of local exchange carriers and inter-exchange carriers applicable
thereto except to the extent that any such non-compliance does not have a
material adverse effect on the Business, and (iii) there is no order, writ,
injunction or decree relating to or affecting the Business or the transactions
contemplated by this Agreement.
3.8 Non-Contravention
-----------------
Except as set forth in Schedule 3.3 attached hereto, neither the
execution of this Agreement nor the consummation of the transactions
contemplated hereby will result in the breach of any term or provision of,
constitute a default under, or accelerate or augment the performance otherwise
required under, any provision of the partnership agreement of Seller, or any
material agreement (including without limitation any loan agreement or
promissory note),
11
<PAGE>
indenture, instrument, order, law or regulation to which Seller is a party or by
which it is bound, or will result in the creation of any lien or encumbrance
upon any of the Assets.
3.9 Licenses, Permits and Required Consents
---------------------------------------
Set forth on Schedule 3.9 attached hereto is a list of all material
federal, state, local and foreign franchises, tariffs, licenses, ordinances,
certifications, approvals, authorizations and permits (collectively, the
"Authorizations") necessary for Seller to conduct and operate the Business as
currently conducted. All Authorizations relating to the Business are in full
force and effect, no violations have been made in respect thereof, and, other
than those customer complaints and descriptions thereof set forth in Schedule
3.7 attached hereto, no proceeding is pending or, to the knowledge of Seller,
threatened which could have the effect of revoking or limiting any such
Authorizations, and the same will not cease to remain in full force and effect
by reason of the transactions contemplated by this Agreement. Seller shall
exercise its best efforts to file or obtain all FCC and PSC registrations,
filings, applications, notices, transfers, consents, approvals, orders,
qualifications, authorizations, certifications, waivers or other actions of any
kind required to be made, filed, given or obtained by or on behalf of Seller
with, to or from the FCC and PSCs in connection with the consummation of the
transactions contemplated by this Agreement ("Consents").
3.10 Disclosure
----------
No representation, warranty or statement made by or on behalf of
Seller in this Agreement or the Schedules attached hereto or in the certificates
or other materials furnished or to be furnished to Purchaser or its
representatives prior to the Closing in connection with this Agreement and the
transactions contemplated hereby or thereby, contains or will contain any untrue
statement of material fact or omits or will omit to state a material fact
required to be stated herein or therein or necessary to make the statements
contained herein or therein not misleading.
3.11 Brokers
-------
Seller has not engaged any investment banker, financial advisor or
broker of any kind with respect to the sale of the Assets and no fee or other
compensation shall become payable to any investment banker, financial advisor or
broker of any kind, engaged by Seller, upon the closing of the transactions
contemplated hereby.
3.12 Due Diligence
-------------
Seller shall use best efforts to comply in full in responding to the
due diligence requests of the Purchaser through and including January 15, 2000
(provided that Seller shall not be required to permit due diligence requests and
review which materially interfere with Seller's business).
3.13 Investment Representations
--------------------------
Seller represents and warrants to Purchaser that it is acquiring the
Purchase Price Shares registered in its name for its own account and not with a
view to dividing PGE Common Stock with others or participating directly or
indirectly in any resale, distribution or underwriting
12
<PAGE>
thereof and will not transfer or assign PGE Common Stock in violation of the
Securities Act, applicable state securities laws or this Agreement. Seller
further represents and warrants that it is able to bear the economic risk of the
investment in PGE Common Stock and has such knowledge and experience in
financial and business matters that it is capable of evaluating the merits and
risks of such investment. Seller shall provide such information and execute such
documents as Purchaser may reasonably request in order to verify the foregoing.
Seller acknowledges that it has been provided an opportunity to ask questions
and receive answers from Purchaser and PGE concerning the terms and conditions
of the offering of PGE Common Stock and to obtain any additional information
which Purchaser possesses or can acquire without unreasonable effort or expense
that is necessary to verify the accuracy of any information furnished in
connection with said offering.
3.14 Customer Account Materiality
----------------------------
No single Customer Account comprises more than one percent (1%) of the
Business.
3.15 Disclaimer of Fraudulent Intent
-------------------------------
Seller represents and warrants that the transactions described in this
Agreement have been undertaken in good faith, considering their obligations to
any person or entity to whom Seller owes a right to payment, whether or not the
right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured
(collectively such persons with such claims are called "Seller Creditors" under
this paragraph), and has undertaken these transactions without any intent to
hinder, delay or defraud any such Seller Creditors, and either has disclosed in
the ordinary course of business or will undertake to disclose to all such Seller
Creditors (if required by applicable laws rules or regulations) the existence of
this transaction. Seller further represents and warrants that: (1) neither
Seller, nor any current or former employees of Seller or any of Seller's
corporate affiliates will retain possession or control of any of the property
transferred under this Agreement following the Closing, except as expressly
provided in this Agreement or any agreement executed in connection herewith and
then only for and on behalf of the account of the Purchaser; (2) Seller has not
been sued or threatened with suit by any Creditor relative to the Business prior
to the execution of this Agreement; (3) Seller has not removed or concealed any
assets from any Seller Creditors; and (4) Seller believes in good faith that, at
Closing, Seller will receive consideration reasonably equivalent to the value of
the Assets transferred under this Agreement.
3.16 Protection of Customer Accounts
-------------------------------
Seller represents and warrants that it has used its best efforts to
ensure that all information related to the Customer Accounts, including, but not
limited to, all customer lists, mailing lists, books, records, files, data, and
letters of agency, has not been disclosed to anyone other than employees,
directors and agents of Seller and any of Seller's corporate affiliates and that
no such employees, directors or agents will possess, control or otherwise have
any right to such information following the Closing of the transaction
contemplated hereby.
13
<PAGE>
4. Representations and Warranties of Purchaser
-------------------------------------------
Purchaser represents and warrants to Seller as follows:
4.1 Corporate Status
----------------
Purchaser is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware with full corporate power
and authority to carry on its business as now conducted.
4.2 Authority for Agreement
-----------------------
Purchaser has the power and authority to execute and deliver this
Agreement and to carry out its obligations hereunder. The execution, delivery
and performance by Purchaser of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of Purchaser. This Agreement has been
duly executed by Purchaser and the transactions contemplated by them constitute
the legal, valid and binding obligation of Purchaser enforceable against
Purchaser in accordance with its terms. No consent, approval, or authorization
of, or declaration, filing, or registration with, any federal or state
governmental or regulatory authority is required to be made or obtained by
Purchaser in connection with the execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement, except approval of applicable public service commissions.
4.3 No Conflicts
------------
To the best of Purchaser's knowledge, the execution, delivery and
performance of this Agreement and the consummation of all of the transactions
contemplated hereby: (i) do not and will not with or without the giving of
notice or passage of time or both, violate, conflict with or result in a breach
or termination of any provision of, or constitute a default under, or accelerate
or permit the acceleration of the performance required by the terms of, or
result in a creation of any mortgage, security interest, claim, lien, charge or
other encumbrance upon any of its assets pursuant to, or otherwise give rise to
any liability or obligation under any agreement, mortgage, deed of trust,
license, permit or other agreement or instrument, or any order, judgment,
decree, statute, regulation or any other restriction of any kind or description
to which Purchaser is a party or by which Purchaser or its assets may be bound;
and (ii) will not terminate or result in the termination of any such agreement
or instrument, or in any way affect or violate the terms and conditions of, or
result in the cancellation, modification, revocation or suspension of, any
rights in or to its assets.
4.4 Disclosure
----------
The representations, warranties and statements made by Purchaser in
this Agreement and in the certificates and other documents delivered pursuant
hereto do not contain any untrue statement of a material fact, and, when taken
together, do not omit to state any material fact necessary to make such
representations, warranties and statements, in light of the circumstances under
which they are made, not misleading.
14
<PAGE>
4.5 SEC Filings and Financial Information
-------------------------------------
PGE, the owner of 100% of the capital stock of Purchaser, has filed
with the Securities and Exchange Commission (the "Commission") its Annual Report
on Form 10-K for the year ended December 31, 1998, together with all schedules
and exhibits attached thereto, and Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1999, June 30, 1999 and September 30, 1999
(collectively, the "SEC Documents"). Each SEC Document, as of the date of its
filing thereof with the Commission, conformed in all material respects with the
requirements of the Exchange Act, and the rules and regulations thereunder. The
financial statements of PGE, including the notes thereto, included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
Commission with respect thereto, have been prepared in accordance with GAAP
consistently applied (except as may be indicated in the notes thereto) and
present fairly the consolidated financial position of PGE at the dates thereof
and of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal audit adjustments). Since the date of
PGE's last Report on Form 10-Q, there have been no contracts, loss
contingencies, acquisitions or divestitures that are material to PGE that have
not been disclosed to Seller.
4.6 Purchase Price Shares
---------------------
If Purchase Price Shares are issued pursuant to this Agreement, said
Purchase Price Shares shall be (i) fully paid, nonassessable and free and clear
of all liens, encumbrances, pledges, charges and security interests, (ii) shall
be "restricted shares" under Rule 144 promulgated by the Securities Exchange
Commission under the Securities Act, (iii) not subject to any shareholder's
agreement, voting trust or other similar agreement, and (iv) are entitled to the
protections set forth in Section 6.8 hereof.
5. Seller's Obligations Before Closing
-----------------------------------
Seller covenants that from the date of this Agreement and until the Closing
Date:
(a) Through and including January 15, 2000, Purchaser and its counsel,
accountants and other representatives shall have full access to all properties,
books, accounts, records, contracts and documents of or relating to the Business
(including, but not limited to, billing records, customer service history,
verbal letters of agency tapes or written letters of agency where required), but
Purchaser shall not have access to any information not related to the Business.
Through and including January 15, 2000, Seller shall furnish or cause to be
furnished to Purchaser and its representatives all data and information
concerning the Business that may be reasonably requested.
(b) Seller will continue to operate the Business diligently and in
substantially the same manner as prior to this Agreement and shall not take any
actions that vary materially from those methods used by Seller in the operation
of the Business as of the date of this Agreement, without the prior written
consent of Purchaser.
15
<PAGE>
6. Covenants
---------
6.1 Further Assurances
------------------
At any time and from time to time after the Closing Date, each party
shall, without further consideration, execute and deliver to the other such
other instruments of transfer and assumption and shall take such other action as
the other may reasonably request to carry out the transfer of the Assets and the
assumption of the specific liabilities contemplated by this Agreement; provided,
however, Purchaser shall pay the reasonable out of pocket expenses incurred by
Seller in taking any actions requested by Purchaser after the Closing.
6.2 Standstill; Public Announcement
-------------------------------
Prior to the Closing or termination of this Agreement, Seller agrees
not to directly or indirectly solicit, entertain or encourage offers or
negotiate with any other person or entity regarding the purchase or sale of the
Business. The foregoing shall not prohibit Seller from selling some or all of
its business and operations to a third party, provided that such third party
honors and fulfills all obligations, duties and commitments of Seller set forth
herein and in such other agreements executed in connection herewith. Seller
shall not make any public announcement with respect to the subject matter of
this Agreement. Purchaser shall not make any public announcement with respect
to the subject matter of this Agreement without Seller's prior consent, which
consent shall not be unreasonably withheld; provided however Seller shall be
entitled to withhold its consent to any press release that would have a material
adverse impact on Seller or the Business. Notwithstanding any provision of this
Section 6.2 to the contrary, Purchaser and PGE may make any public disclosure
about this Agreement to the extent required in the opinion of its counsel by
federal or state securities laws or NASDAQ rules, provided that Seller shall
have a reasonable opportunity to review such disclosures in advance.
6.3 Authorizations
--------------
Seller shall use commercially reasonable efforts to assist Purchaser
in obtaining all Authorizations necessary to consummate the transactions
contemplated hereby.
6.4 Compliance with Laws
--------------------
Seller understands that Seller's operation of the Business prior to
the Closing of this Agreement is subject to the rules and regulations of the FCC
and the PSCs, and Seller hereby agrees to be fully responsible for the acts and
omissions of all of Seller's agents, servants and representatives in the
connection with the operation of the Business prior to the Closing of this
Agreement which are in violation of all laws, rules, regulations, administrative
decisions and pronouncements of the FCC and the PSCs, including but not limited
to all applicable FCC and PSC rules regarding customer slamming and cramming,
the violation of which may result in severe penalties and adverse consequences
which the FCC or the PSCs agencies may attempt to impose upon Purchaser after
the Closing of this Agreement.
16
<PAGE>
6.5 Bulk Sales
----------
Purchaser and Seller hereby agree to waive compliance with any and all
applicable bulk sales laws.
6.6 Continued Relationships
-----------------------
Up to the Closing Seller shall use commercially reasonable efforts to
preserve intact the Business and keep available the services of its officers and
employees and operate the Business in its ordinary course, and shall cause to be
taken no change in the business, condition or results of operations of Seller
which may have a material adverse effect on the Business.
6.7 Confidentiality
---------------
(a) The provisions of that certain Confidentiality Agreement executed by
and between Purchaser as of December 20, 1999 (the "Confidentiality Agreement")
are incorporated herein by reference. Notwithstanding the foregoing, the
Confidentiality Agreement shall survive any termination of this Agreement.
(b) Notwithstanding the foregoing, Purchaser or PGE may, at any time after
the date of this Agreement, file with the Securities and Exchange Commission
(the "Commission") a Report on Form 8-K pursuant to the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), with respect to the transactions
contemplated by this Agreement, which Report may include, among other things,
financial statements and pro forma financial information with respect to the
Business, and/or file with the Commission a registration statement under the
Securities Act which includes a prospectus containing any information required
to be included therein with respect to the transactions contemplated by this
Agreement, including but not limited to financial statements and pro forma
financial information with respect to the Business, and thereafter distribute
said prospectus in connection with the offer and sale of securities of Purchaser
or PGE. Purchaser or PGE also may include such information in any other
Exchange Act Report or in offering circulars or private placement memoranda
distributed in connection with the offer and sale of debt or equity securities.
Seller shall cooperate with Purchaser or and provide such information and
documents as may be required in connection with any such filings, registration
statements, offering circulars or Exchange Act Reports.
6.8 Stock Sale Agreement
--------------------
A Stock Sale Agreement, in substantially in the form attached hereto
as Exhibit 6.8 (the "Stock Sale Agreement") shall be executed by Purchaser,
Seller and PGE at the Closing.
6.9 Current Information
-------------------
From and after the Closing Date, and for so long as Seller or any
affiliate of Seller hold shares of PGE Common Stock, Purchaser agrees to use its
best efforts to ensure that PGE files all reports required to be filed by it
under the reporting requirement of Section 13 or 15(d), as applicable, of the
Securities Exchange Act of 1934, as amended (the "Act"); or, if PGE is not
subject to Section 13 or 15(d) of the Act, PGE shall make publicly available, on
a current basis,
17
<PAGE>
the information specified in Rule 144(c)(2) promulgated under the Securities
Act. As used in this section, the term "affiliate" shall have the same meaning
as in Rule 501 promulgated under the Securities Act.
6.10 Bringdown Certificate
---------------------
As of the Closing, Seller shall deliver to Purchaser a Bringdown
Certificate with respect to Seller's representations and warranties set forth in
this Agreement. In the event that such Bringdown Certificate does not set forth
facts or circumstances which have a material adverse impact on the Assets, then
Seller's representations and warranties shall be deemed modified as set forth in
such Certificate. In the event that such Bringdown Certificate sets forth facts
or circumstances which have a material adverse impact on the Assets, then
Purchaser's sole and exclusive remedy shall be to elect to terminate this
Agreement; provided in the event (i) Seller took some action between January 15,
2000 and the Closing which results in regulatory consequences having a material
adverse effect on the Business or (ii) there is a twenty five percent (25%)
reduction in the gross revenues of the Business between January 15, 2000 and
the Closing, then Purchaser shall also be entitled to the return of the Breakup
Shares. In the event that Purchaser closes the transactions contemplated by
this Agreement following receipt of such Bringdown Certificate, then Purchaser
shall be deemed to have waived any claims with respect to the matters set forth
in such Bringdown Certificate.
6.11 Due Diligence
-------------
Purchaser shall have completed, to its satisfaction, a due diligence
review of the Business and delivered to Seller by January 15, 2000 either a
Satisfaction Notice or a written notice terminating this Agreement. In the
event Purchaser fails to deliver such notice, then this Agreement shall be
deemed to have terminated. In the event of such termination or deemed
termination, this Agreement shall be of no further force and effect and Seller
shall be entitled to retain the Breakup Cash and, except as otherwise expressly
provided herein, the Breakup Shares.
6.12 Integration
-----------
On or before the Closing, Purchaser shall provide Seller with all
necessary information and data to integrate all of Purchaser's long distance
customer accounts and casual calling traffic into the Business (other than the
Customer Accounts). The scope, extent and nature of such accounts and casual
calling traffic shall be substantially as set forth on Schedule 6.12 attached
hereto. Following the Closing, Seller shall on a best efforts basis integrate
such customer accounts into the Business. Purchaser shall fully cooperate with
such integration. Upon integration of such customer accounts, Seller shall
commence billing such customer accounts pursuant to the Management Agreement.
6.13 SOHO Agreement
--------------
The parties may, but are not obligated to agree in the future to form
a joint venture for the purpose of marketing telecommunications services to
small office/home office customers.
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<PAGE>
7. Conditions Precedent
--------------------
7.1 Conditions to Obligations of Purchaser
--------------------------------------
The obligation of Purchaser to pay the Purchase Consideration to
Seller and to satisfy its other obligations hereunder shall be subject to
fulfillment (or waiver by Purchaser) at or prior to the Closing, of the
following additional conditions, which Seller agrees to use its best efforts to
cause to be fulfilled:
(a) Representations, Performance
----------------------------
The representations and warranties of Seller contained in Section 3
hereof shall be true in all material respects at and as of the Closing Date
(except as otherwise provided herein or as affected by the transactions
contemplated hereby) and Seller shall have duly performed and complied with all
agreements and conditions required by this Agreement to be performed, or
complied with, by it prior to or on the Closing Date.
(b) Partnership Proceedings
-----------------------
All partnership and other proceedings of Seller in connection with the
transactions contemplated by this Agreement and all document and instruments
incident to such partnership proceedings, shall be reasonably satisfactory in
substance and form to Purchaser, and Purchaser shall have received all such
documents and instruments or copies thereof.
(c) Approval of FCC and States
--------------------------
The FCC and the PUCs shall have granted any and all consents and
approvals necessary to consummate the transactions contemplated hereby and any
required notice period(s) shall have expired.
(d) Consents
--------
Seller shall have successfully arranged for the Consents necessary to
assign the Contracts being assumed by Purchaser from Seller to Purchaser.
(e) Non-Competition Agreement
-------------------------
Seller shall have executed a non-competition agreement, substantially
in the form attached hereto as Exhibit 7.1(e) (the "Non-Competition Agreement").
(f) Stock Sale Agreement
--------------------
Seller shall have executed the Stock Sale Agreement referred to in
Section 6.8 above.
(g) Expense Sharing
---------------
Seller shall share on an equal basis the monthly expenses set forth on
Schedule 7.1(g) attached hereto (the "Expense Sharing Arrangement"). The
Expense Sharing
19
<PAGE>
Arrangement shall continue for an initial period of six (6) months from the
Closing Date (the "Initial Period") and shall automatically be renewed for
consecutive additional periods of six (6) months, provided however that either
party (the "Terminating Party") may terminate the Expense Sharing Arrangement at
any time after the Initial Period upon providing the other party (the "Non-
Terminating Party") with sixty (60) days prior written notice of the Terminating
Party's intent to so terminate effective as of the expiration of such sixty (60)
day period. In conjunction therewith Purchaser shall utilize the Los Angeles
telemarketing and support operations center located at 3660 Wilshire Boulevard,
Los Angeles, California (which lease is subject to a Non Customer Contract) (the
"L.A. Center") during nights and weekends and Seller shall utilize the L.A.
Center during the weekdays. All other expenses related to the L.A. Center shall
be borne by Purchaser pursuant to the lease in respect of the L.A. Center.
(h) Due Diligence
-------------
Purchaser shall have completed, to its satisfaction, a due diligence
review of the Business by January 15, 2000.
(i) License Agreement
-----------------
Seller shall have executed and delivered to Purchaser a License
Agreement substantially in the form of Exhibit 7.1(i) attached hereto (the
"License Agreement").
(j) Management Agreement
--------------------
Seller shall have executed and delivered to Purchaser a Management
Agreement substantially in the form of Exhibit 7.1(j) attached hereto (the
"Management Agreement").
7.2 Conditions to Obligations of Seller
-----------------------------------
The obligations of Seller to deliver the bill of sale, assignments,
endorsements and other instruments of transfer relating to the Assets and to
satisfy Seller's other obligations hereunder shall be subject to the
fulfillment, on or prior to the Closing Date (or waiver by Seller), of the
following conditions, which Purchaser agrees to use its best efforts to cause to
be fulfilled:
(a) Representations, Performance
----------------------------
The representations and warranties of Purchaser contained in Section 4
hereof shall be true at and as of the Closing Date. Purchaser shall have duly
performed and complied in all material respects with all agreements and
conditions required by this Agreement to be performed, or complied with, by it
prior to or on the Closing Date.
(b) Corporate Proceedings
---------------------
All corporate and other proceedings of Purchaser in connection with
the transactions contemplated by this Agreement, and all documents and
instruments incident thereto, shall be satisfactory to Seller and Seller shall
have received all such documents and instruments, or copies thereof.
20
<PAGE>
(c) No Material Changes
-------------------
No material changes in the financial position of Purchaser or material
changes in the written information previously disclosed to Seller shall have
occurred.
(d) Delivery of Purchase Consideration
----------------------------------
Seller shall have been paid the Cash Purchase Price in accordance with
Section 2.3 hereof and shall have received bona fide certificates evidencing the
Purchase Price Shares (if applicable) executed by the person or persons required
to so execute such certificates in accordance with the formative corporate
documents of PGE.
(e) Adequate Security
-----------------
Purchaser shall provide Seller with adequate security for the (i)
delivery of the Earn-Out Shares, (ii) delivery of the Additional Shares, (iii)
payment of any portion of the Cash Purchase Price which is to be paid subsequent
to the Closing Date and (iv) payment of the funds to Seller pursuant to Section
2.3 (viii) of this Agreement, which security may, in Purchaser's sole and
absolute discretion, be in the form of any combination of the following: (i) an
irrevocable letter of credit from a national bank; or (ii) escrowed cash; or
(iii) a first priority perfected security interest in the Assets and all new and
replacement assets comprising the Business as owned by Purchaser after the
Closing (such security interest shall be reflected in security documents in form
and substance acceptable to Seller). In the event Seller is provided a security
interest as set forth in item (iii) above and there is a default by Purchaser in
the obligations secured thereby then Seller shall be entitled to elect, in its
sole and absolute discretion, to receive the assets secured by such security
interest (the "Secured Assets") in full satisfaction of such obligations. In
the event of such election Seller shall be entitled to retain all stock, cash or
other consideration received by Seller pursuant to the terms of this Agreement
prior to the date of such election; provided, however, if on the date of such
election Seller shall have received more than sixty percent (60%) of the
Purchase Consideration then upon receipt by Seller of good and marketable title
to the Secured Assets free and clear of all liens, claims, charges, security
interests, options or other title defects or encumbrances Seller shall pay to
Purchaser the difference between (A) the Purchase Consideration actually
received by Seller and (B) sixty percent (60%) of the Purchase Consideration.
(f) License Agreement
-----------------
Purchaser shall have executed and delivered the License Agreement to
Seller.
(g) Management Agreement
--------------------
Purchaser shall have executed and delivered the Management Agreement
to Seller.
21
<PAGE>
8. Indemnification; Manner of Claims
---------------------------------
8.1 Indemnification
---------------
(a) Indemnification by Seller
-------------------------
From and after the Closing Date, Seller will indemnify Purchaser
against, and hold Purchaser harmless from, any and all liability, damage,
deficiency, loss, cost or expense (including reasonable attorneys fees')
(collectively "Losses") that is based upon or that arises out of (i) any
misrepresentation or breach of any representation, warranty or agreement made by
Seller herein, (ii) any obligation, debt or liability of Seller to the extent
that the same is not expressly assumed herein by Purchaser, or (iii) the use and
ownership of the Assets on or prior to the Closing Date (other than those
liabilities specifically assumed by Purchaser hereunder or liabilities which
Purchaser or its affiliates are responsible for pursuant to various contracts
and agreements entered into between Purchaser and its affiliates on the one hand
and Seller and is affiliates on the other hand), provided that Purchaser may
not receive recoveries in excess of the amount of Loss.
(b) Indemnification by Purchaser
----------------------------
From and after the Closing Date, Purchaser will indemnify Seller
against, and hold Purchaser harmless from, any and all Losses based upon or that
arising out of (i) any misrepresentation or breach of any representation,
warranty or agreement made by Purchaser herein, (ii) the use and ownership of
the Assets subsequent to the Closing Date(other than those liabilities which
Seller or its affiliates are responsible for pursuant to various contracts and
agreements entered into between Seller and its affiliates on the one hand and
Purchaser and is affiliates on the other hand), and (iii) any obligation, debt,
liability or Contract of Seller assumed by Purchaser pursuant hereto.
(c) Cap and Floor
-------------
Notwithstanding anything to the contrary in this Agreement, Seller
shall have no liability or obligation to Purchaser with respect to that portion
of the Losses which are (a) less than Five Hundred Thousand Dollars ($500,000)
in the aggregate or (b) greater than Six Million Dollars ($6,000,000) in the
aggregate.
(d) Exclusive Remedy
----------------
Except as otherwise expressly provided for in this Agreement, the
rights under this Section 8.1 shall constitute Purchaser's exclusive rights
against Seller for the matters set forth in this Agreement.
8.2 Manner of Claims
----------------
Any notice of a claim by reason of any of the representations and
warranties contained in this Agreement shall state specifically the
representation or warranty with respect to which the claim is asserted, and the
amount of liability asserted against the other party by reason of the claim.
22
<PAGE>
9. Miscellaneous
-------------
9.1 Consents of Third Parties
-------------------------
This Agreement shall not constitute an agreement to assign any
interest in any instrument, Contract, lease, permit, Authorization or other
agreement or arrangement of Seller, or any claim, right or benefit arising
thereunder or resulting therefrom, if any assignment without the consent of a
third party would constitute a breach or violation thereof or adversely affect
the rights of the Purchaser or Seller thereunder. If a consent of a third party
which is required in order to assign any instrument, Contract, lease, permit,
Authorization or other agreement or arrangement or any claim, right or benefit
arising thereunder or resulting therefrom, which consent Seller shall use its
best efforts to assist Purchaser in obtaining prior to the Closing, is not
obtained prior to the Closing, or if an attempted assignment would be
ineffective or would adversely affect the ability of Seller to convey its
interest to the Purchaser, Seller will cooperate with Purchaser in any lawful
and economically feasible arrangement to provide that Purchaser shall receive
Seller's interest in the benefits under any such instrument, Contract, lease,
permit, Authorization or other agreement or arrangement; and any transfer or
assignment to Purchaser by Seller of any interest under any such instrument,
Contract, lease, permit, Authorization or other agreement or arrangement that
requires the consent of a third party shall be made subject to such consent or
approval being obtained.
9.2 Expenses
--------
Subject to the terms of Sections 8 and 10 hereof, each of the parties
hereto shall bear its own expenses, costs and fees (including attorney's fees)
in connection with the transactions contemplated hereby, including the
preparation and execution of this Agreement and compliance herewith, whether or
not the transactions contemplated hereby shall be consummated.
9.3 Severability
------------
If any term or provision of this Agreement shall be held or deemed to
be, or shall in fact be, inoperative or unenforceable as applied in any
particular case because it conflicts with any other provision or provisions
hereof or any constitution or statute or rule of public policy, or for any other
reason, such circumstances shall not have the effect of rendering the term or
provision in question inoperative or unenforceable in any other case or
circumstance, or of rendering any other provision or provisions herein contained
invalid, inoperative, or unenforceable to any extent whatever, but such term or
provision shall be deemed modified or deleted as or to the extent required by
applicable law. The invalidity of any one or more phrases, sentences, clauses,
sections, or subsections of this Agreement shall not affect the remaining
portions of this Agreement.
9.4 Notices
-------
Any notices or other communications required under this Agreement
shall be in writing, shall be deemed to have been given when delivered in
person, when delivered to a recognized next business day courier, or, if mailed,
when deposited in the United States first
23
<PAGE>
class mail, registered or certified, return receipt requested, with proper
postage prepaid, addressed as follows or to such other address as notice shall
have been given pursuant hereto:
If to Seller:
NOSVA Limited Partnership
Attn: Michael Arnau
4380 Boulder Highway
Las Vegas, NV 89121
With a copy to:
Ronald D. Husdon, Esq.
Kelley Drye & Warren LLP
777 South Figueroa Street
Suite 2700
Los Angeles, CA 90017
If to Purchaser:
International Exchange Communications, Inc.
Attn: Gail E. Granton
533 Airport Blvd., Suite 505
Burlingame, CA 94010
With a copy to:
Benjamin W. Bronston, Esq.
Nowalsky, Bronston & Gothard
A Professional Limited Liability Company
3500 N. Causeway Blvd.
Suite 1442
Metairie, LA 70002
9.5 Amendment
---------
This Agreement may not be amended except by an instrument in writing,
duly executed and delivered on behalf of each of the parties hereto.
9.6 Waiver
------
Any party may waive compliance by another with any of the provisions
of this Agreement. No waiver of any provisions shall be construed as a waiver
of any other provision. Any waiver must be in writing.
24
<PAGE>
9.7 Counterparts
------------
This Agreement may be executed in multiple counterparts, each of which
shall be deemed an original agreement, and all of which taken together shall
constitute one agreement, notwithstanding that all of the parties are not
signatories to the original or to the same counterpart.
9.8 Assignment
----------
Any assignment of this Agreement or the rights or obligations
hereunder by any party without the prior written consent of the nonassigning
parties shall be void. Notwithstanding the foregoing, either party may assign
all or any part of its rights and/or obligations to one or more affiliates,
subsidiaries, parent companies or shareholders of said party. No such
assignment shall relieve the assigning party of any of its obligations or duties
under this Agreement.
9.9 Costs
-----
In the event any action is instituted to enforce or interpret the
terms of this Agreement or arises out of this Agreement, the party prevailing in
such action shall be entitled to recover its reasonable attorney's fees and
costs as determined by the court.
9.10 Entire Agreement; Applicable Law, etc.
--------------------------------------
This Agreement, the Confidentiality Agreement and the other documents
or agreements executed contemporaneously herewith or pursuant hereto constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof. This Agreement shall be governed in all respects, including validity,
interpretation and effect, by the laws of the State of California applicable to
contracts made and to be performed in California.
9.11 Industry Terms and Phrases
--------------------------
All terms and phrases unique to the telecommunications industry and
used within this Agreement shall be defined in accordance with the everyday
meaning assigned to such terms and phrases within the industry.
9.12 Stock Legend
------------
Each of the certificates of PGE Common Stock issued to Seller pursuant
to the transactions hereunder, shall bear the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE MAY NOT BE
SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT FILED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, WITH RESPECT THERETO OR IN ACCORDANCE WITH AN OPINION OF COUNSEL IN
FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER THAT AN EXEMPTION FROM
25
<PAGE>
SUCH REGISTRATION IS AVAILABLE. THE SHARES OF COMMON STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO CERTAIN PROVISIONS OF THAT CERTAIN ASSET PURCHASE
AGREEMENT, DATED AS OF DECEMBER ___, 1999 BETWEEN INTERNATIONAL EXCHANGE
COMMUNICATIONS, INC. AND NOSVA LIMITED PARTNERSHIP AND THE STOCK SALE AGREEMENT
BETWEEN INTERNATIONAL EXCHANGE COMMUNICATIONS, INC. AND NOSVA LIMITED
PARTNERSHIP, DATED AS OF DECEMBER ___, 1999.
9.13 Arbitration
-----------
The parties agree that any controversy or claim arising under this
Agreement shall be resolved through alternative dispute resolution means in the
following manner:
(a) Initially, the parties will engage in nonbinding mediation. Mediation
shall be held in Los Angeles, California or such site as is mutually agreeable
to both parties. The mediator shall be jointly appointed by the parties and
shall have expertise in commercial dispute resolution.
(b) In the event that the dispute of claim is not satisfactorily resolved
through mediation within forty-five (45) days of notice of such claim or dispute
by a party, the parties agree to submit such dispute or claim to binding
arbitration. Arbitration shall be held in Los Angeles, California, or such
other site that is mutually agreeable to the parties. Any judgement, decision
or award by the arbitrator shall be final and binding on the parties and may be
enforced in any court having jurisdiction over a party against whom any such
judgement, decision or award is to be enforced. The parties specifically and
knowingly waive any rights under State or Federal constitutions or statutes
which grant a party the right to trial by jury for any claim that might arise
under this Agreement or which purports to give a party the right to appeal an
arbitrator's judgement, decision or award. The rules and procedures of the
American Arbitration Association shall apply.
(c) The parties shall bear their own costs and expenses, including, but
not limited to, attorney's fees, for any mediation or arbitration, unless
otherwise directed by the mediator or arbitrator.
10. Termination
-----------
10.1 Mutual Consent
--------------
This Agreement may be terminated at any time prior to the Closing by
mutual consent of Seller and Purchaser, expressed by action of their respective
Boards of Directors.
10.2 Automatic Termination
---------------------
This Agreement shall automatically terminate and, except as otherwise
set forth in Section 10.3 below, the obligations of the parties hereunder shall
be discharged if the Closing does not occur on or prior to April 15, 2000.
26
<PAGE>
10.3 Remedies on Termination
-----------------------
In the event Purchaser, without the right to do so under this
Agreement, shall fail or refuse to consummate the transactions contemplated by
this Agreement, or if any default under, or breach of, any representation,
warranty, covenant or condition of this Agreement on the part of Purchaser shall
have occurred that results in the failure to consummate the transactions
contemplated hereby, then Seller's sole and exclusive remedy shall be to obtain
a termination fee in the form of the Breakup Cash (as described in Section
2.3(b)(i) above) plus the Breakup Shares (as described in Section 2.3(c)(i)
----
above) (or any cash which Purchaser may have substituted in lieu of all or any
portion of the Breakup Shares pursuant to Section 2.3(c)(vii)). In the event
Seller, without the right to do so under this Agreement, shall fail or refuse to
consummate the transactions contemplated by this Agreement, or if any default
under, or breach of, any representation, warranty, covenant or condition of this
Agreement on the part of Seller shall have occurred that results in the failure
to consummate the transactions contemplated hereby, then subject to the
limitations and exceptions set forth in this Agreement, Purchaser shall be
entitled to obtain from Seller reasonable costs and attorneys fees incurred in
connection with this Agreement and the right to seek specific performance of
Seller's obligations under this Agreement.
10.4 AS-IS SALE; DISCLAIMERS
-----------------------
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, IT IS UNDERSTOOD AND
AGREED THAT SELLER IS NOT MAKING AND HAS NOT AT ANY TIME MADE ANY WARRANTIES OR
REPRESENTATIONS OF ANY KIND OR CHARACTER, EXPRESS OR IMPLIED, WITH RESPECT TO
THE ASSETS OR THE BUSINESS, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OR
REPRESENTATIONS AS TO HABITABILITY, MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
PURCHASER ACKNOWLEDGES AND AGREES THAT UPON CLOSING SELLER SHALL SELL
AND CONVEY TO PURCHASER AND PURCHASER SHALL ACCEPT THE ASSETS "AS IS, WHERE IS,
----------------
WITH ALL FAULTS" EXCEPT AS OTHERWISE SET FORTH HEREIN. EXCEPT AS EXPRESSLY SET
- ---------------
FORTH IN THIS AGREEMENT, PURCHASER HAS NOT RELIED AND WILL NOT RELY ON, AND
SELLER IS NOT LIABLE FOR OR BOUND BY, ANY EXPRESS OR IMPLIED WARRANTIES,
GUARANTIES, STATEMENTS, REPRESENTATIONS OR INFORMATION PERTAINING TO THE ASSETS
OR THE BUSINESS OR RELATING THERETO, MADE OR FURNISHED BY SELLER OR ANY AGENT
REPRESENTING OR PURPORTING TO REPRESENT SELLER, TO WHOMEVER MADE OR GIVEN,
DIRECTLY OR INDIRECTLY, ORALLY OR IN WRITING. PURCHASER ALSO ACKNOWLEDGES THAT
THE PURCHASE PRICE REFLECTS AND TAKES INTO ACCOUNT THAT THE ASSETS ARE BEING
SOLD "AS-IS."
PURCHASER REPRESENTS TO SELLER THAT PURCHASER HAS CONDUCTED, OR WILL
CONDUCT PRIOR TO CLOSING, SUCH INVESTIGATIONS OF THE ASSETS AND THE BUSINESS, AS
PURCHASER DEEMS NECESSARY OR DESIRABLE TO SATISFY ITSELF AS TO THE CONDITION OF
THE ASSETS AND THE
27
<PAGE>
BUSINESS, AND WILL RELY SOLELY UPON SAME AND THE EXPRESS REPRESENTATIONS AND
WARRANTIES SET FORTH IN THIS AGREEMENT AND NOT UPON ANY INFORMATION PROVIDED BY
OR ON BEHALF OF SELLER OR SELLER'S AFFILIATES, EMPLOYEES OR AGENTS WITH RESPECT
THERETO. UPON CLOSING, PURCHASER SHALL ASSUME THE RISK THAT ADVERSE MATTERS MAY
NOT HAVE BEEN REVEALED BY PURCHASER'S INVESTIGATIONS.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
International Exchange Communications,
Inc.
By:_______________________________
Name:_____________________________
Title:____________________________
NOSVA Limited Partnership
NOS Communications of Virginia, Inc.,
Its General partner
By:_____________________________
Name:___________________________
Title:__________________________
INTERVENTION
------------
And now comes Pacific Gateway Exchange, Inc., a Delaware corporation, for
purposes of intervening into this Asset Purchase Agreement and agreeing to be
bound by the terms of Sections 2.2(b)(ii), 2.2(b)(iii), 2.3(a), 2.3(c), 4.5,
6.8, 6.9, 7.2(d), 7.2(e) and 10.3, but not any other provisions hereof.
Pacific Gateway Exchange, Inc.
By:___________________________
Name:_________________________
Title:________________________
28
<PAGE>
And now comes NOS Communications, Inc., a Maryland corporation, for
purposes of intervening into this Asset Purchase Agreement and agreeing to be
bound by the terms of Sections 1.2 but not any other provisions hereof.
NOS Communications, Inc.
By:________________________
Name:______________________
Title:_____________________
29
<PAGE>
EXHIBIT 10.2.1
PACIFIC GATEWAY EXCHANGE, INC.
1997 LONG-TERM INCENTIVE PLAN
-----------------------------
AS AMENDED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1
GENERAL....................................................................................................... 1
1.1. Purpose.................................................................................... 1
1.2. Participation.............................................................................. 1
SECTION 2
OPTIONS....................................................................................................... 2
2.1. Definition................................................................................. 2
2.2. Eligibility................................................................................ 2
2.3. Price...................................................................................... 2
2.4. Exercise................................................................................... 3
2.5. Post-Exercise Limitations.................................................................. 3
2.6. Expiration Date............................................................................ 3
2.7. Reload Provision........................................................................... 4
SECTION 3
STOCK APPRECIATION RIGHTS..................................................................................... 5
3.1. Definition................................................................................. 5
3.2. Eligibility................................................................................ 5
3.3. Exercise................................................................................... 5
3.4. Settlement of Award........................................................................ 5
3.5. Post-Exercise Limitations.................................................................. 6
3.6. Expiration Date............................................................................ 6
SECTION 4
STOCK AWARDS.................................................................................................. 6
4.1. Definition................................................................................. 6
4.2. Eligibility................................................................................ 7
4.3. Terms and Conditions of Awards............................................................. 7
SECTION 5
STOCK PURCHASE PROGRAM........................................................................................ 8
5.1. Purchase of Stock.......................................................................... 8
5.2. Matching Shares............................................................................ 8
5.3. Restrictions on Shares..................................................................... 8
SECTION 6
PERFORMANCE UNITS............................................................................................. 8
6.1. Definition................................................................................. 8
6.2. Eligibility................................................................................ 8
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
6.3. Terms and Conditions of Awards............................................................. 8
6.4. Settlement................................................................................. 9
6.5. Termination during Performance Period...................................................... 9
SECTION 7
OPERATION AND ADMINISTRATION.................................................................................. 10
7.1. Effective Date............................................................................ 10
7.2. Shares Subject to Plan.................................................................... 10
7.3. Individual Limits on Awards............................................................... 10
7.4. Adjustments to Shares..................................................................... 11
7.5. Limit on Distribution..................................................................... 12
7.6. Liability for Cash Payments............................................................... 13
7.7. Performance-Based Compensation............................................................ 13
7.8. Withholding............................................................................... 14
7.9. Transferability........................................................................... 14
7.10. Notices................................................................................... 14
7.11. Form and Time of Elections................................................................ 14
7.12. Agreement With Company.................................................................... 14
7.13. Limitation of Implied Rights.............................................................. 14
7.14. Evidence.................................................................................. 15
7.15. Action by Company or Related Company...................................................... 15
7.16. Gender and Number......................................................................... 15
SECTION 8
COMMITTEE..................................................................................................... 15
8.1. Administration............................................................................. 15
8.2. Selection of Committee..................................................................... 15
8.3. Powers of Committee........................................................................ 15
8.4. Delegation by Committee.................................................................... 16
8.5. Information to be Furnished to Committee................................................... 16
8.6. Liability and Indemnification of Committee................................................. 16
SECTION 9
CHANGE IN CONTROL............................................................................................. 17
SECTION 10
AMENDMENT AND TERMINATION..................................................................................... 18
APPENDIX A
AWARDS TO NONEMPLOYEE DIRECTORS............................................................................... 19
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
APPENDIX B
ELECTIVE DEFERRAL............................................................................................... 21
</TABLE>
(iii)
<PAGE>
PACIFIC GATEWAY EXCHANGE, INC.
1997 LONG-TERM INCENTIVE PLAN
-----------------------------
AS AMENDED
----------
SECTION 1
---------
GENERAL
-------
a. Purpose. The Pacific Gateway Exchange, Inc. 1997 Long-Term Incentive
-------
Plan (the "Plan") has been established by Pacific Gateway Exchange, Inc. (the
"Company") to:
i. attract and retain employees and other persons providing services to
the Company and the Related Companies (as defined below);
ii. motivate Participants, by means of appropriate incentives, to
achieve long-range goals;
iii. provide incentive compensation opportunities that are competitive
with those of other major corporations; and
iv. further identify Participants' interests with those of the Company's
other stockholders through compensation that is based on the
Company's common stock;
and thereby promote the long-term financial interest of the Company and the
Related Companies, including the growth in value of the Company's equity and
enhancement of long-term stockholder return. The term "Related Company" means
any company during any period in which it is a "subsidiary corporation" (as that
term is defined in Code section 424(f)) with respect to the Company.
b. Participation. Subject to the terms and conditions of the Plan, the
-------------
Committee (as described in Section 8) shall determine and designate, from time
to time, from among the Eligible Individuals, those persons who will be granted
one or more awards under Sections 2, 3, 4, 5 or 6 of the Plan (an "Award"), and
thereby become "Participants" in the Plan. In the discretion of the Committee,
and subject to the terms of the Plan, a Participant may be granted any Award
permitted under the provisions of the Plan, and more than one Award may be
granted to a Participant. Except as otherwise agreed by the Company and the
Participant, or except as otherwise provided in the Plan, an Award under the
Plan shall not affect any previous Award under the Plan or an award under any
other plan maintained by the Company or the Related
<PAGE>
Companies. For purposes of the Plan, the term "Eligible Individual" shall mean
any employee of the Company or a Related Company, any director and any other
person providing material services to the Company or a Related Company.
SECTION 2
---------
OPTIONS
-------
a. Definitions. The grant of an "Option" under this Section 2 entitles
-----------
the Participant to purchase shares of common stock of the Company ("Stock") at a
price fixed at the time the Option is granted, subject to the terms of this
Section. Options granted under this Section may be either Incentive Stock
Options or Non-Qualified Stock Options, as determined in the discretion of the
Committee. An "Incentive Stock Option" is an Option that is intended to satisfy
the requirements applicable to an "incentive stock option" described in section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). A "Non-
Qualified Stock Option" is an Option that is not intended to be an Incentive
Stock Option.
b. Eligibility. The Committee shall designate the Participants to whom
-----------
Options are to be granted under this Section and shall determine the number of
shares of Stock subject to each such Option. To the extent that the aggregate
fair market value of Stock with respect to which Incentive Stock Options are
exercisable for the first time by any individual during any calendar year (under
all plans of the Company and all Related Companies) exceeds $100,000, such
options shall be treated as Non-Qualified Stock Options, to the extent required
by section 422 of the Code.
c. Price. The determination and payment of the purchase price of a share
-----
of Stock under each Option granted under this Section shall be subject to the
following:
i. The purchase price shall be established by the Committee at the time
the Option is granted; provided, however, that in no event shall
such price be less than the par value of a share of Stock on such
date; further, provided, in no event shall the purchase price of a
share of Stock under an Incentive Stock Option be less than the Fair
Market Value (defined below) of a share of stock at the time the
Option is granted.
ii. Subject to the following provisions of this subsection, the full
purchase price of each share of Stock purchased upon the exercise of
any Option shall be paid at the time of such exercise and, as soon
as practicable thereafter, a certificate representing the shares so
purchased shall be delivered to the person entitled thereto.
2
<PAGE>
iii. The purchase price shall be payable in cash or in shares of Stock
(valued at Fair Market Value as of the day of exercise) that have
been held by the Participant at least six months, or in any
combination thereof, as determined by the Committee.
iv. A Participant may elect to pay the purchase price upon the exercise
of an Option through a cashless exercise arrangement to the extent
provided by the Committee.
v. The "Fair Market Value" of a share of Stock of the Company as of any
date shall be the closing price per share of Stock (or the mean of
the closing bid and asked prices of a share, if the Stock is so
reported) on the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), the NASDAQ National Market
System or other national or regional securities exchange or market
system on which the Stock is primarily traded, or, if there shall
have been no such sale so reported on that date, on the last
preceding date on which such a sale was so reported.
vi. Except for adjustments pursuant to paragraph 7.4(b) (relating to the
adjustment of shares), the purchase price for a share of Stock under
any outstanding Option granted under the Plan may not be decreased
after the date of grant nor may an outstanding Option granted under
the Plan be surrendered to the Company as consideration for the
grant of a new Option with a lower exercise price.
d. Exercise. Except as otherwise expressly provided in the Plan, an Option
--------
granted under this Section shall be exercisable in accordance with the following
terms of this subsection:
i. The terms and conditions relating to exercise of an Option shall be
established by the Committee, and may include, without limitation,
conditions relating to completion of a specified period of service
(subject to paragraph (b) below), achievement of performance
standards prior to exercise of the Option or achievement of Stock
ownership objectives by the Participant. The Committee, in its sole
discretion, may accelerate the vesting of any Option under
circumstances designated by it at the time the Option is granted or
thereafter.
ii. No Option may be exercised by a Participant after the Expiration
Date (as defined in subsection 2.6) applicable to that Option.
iii. The exercise of an Option will result in the surrender of the
corresponding rights under a tandem Stock Appreciation Right (as
described in Section 3), if any.
e. Post-Exercise Limitations. The Committee, in its discretion, may
-------------------------
impose such restrictions on shares of Stock acquired pursuant to the exercise of
an Option (including stock acquired pursuant to the exercise of a tandem Stock
Appreciation Right) as it determines to be
3
<PAGE>
desirable, including, without limitation, restrictions relating to disposition
of the shares and forfeiture restrictions based on service, performance, Stock
ownership by the Participant and such other factors as the Committee determines
to be appropriate.
f. Expiration Date. The "Expiration Date" with respect to an Option means
---------------
the date established as the Expiration Date by the Committee at the time of the
grant; provided, however, that the Expiration Date with respect to any Option
shall not be later than the earliest to occur of:
i. the ten-year anniversary of the date on which the Option is granted;
ii. if the Participant's Date of Termination occurs by reason of death
or Disability, the one-year anniversary of such Date of Termination;
iii. if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination;
or
iv. if the Participant's Date of Termination occurs for reasons other
than Retirement, death or Disability, the three-month anniversary of
such Date of Termination.
For purposes of the Plan, a Participant's "Date of Termination" shall be the
date on which he both ceases to be an employee of the Company and the Related
Companies and ceases to perform material services for the Company and the
Related Companies, regardless of the reason for the cessation; provided that a
"Date of Termination" shall not be considered to have occurred during the period
in which the reason for the cessation of services is a leave of absence approved
by the Company or the Related Company which was the recipient of the
Participant's services. Except as otherwise provided by the Committee, a
Participant shall be considered to have a "Disability" during the period in
which he is unable, by reason of a medically determinable physical or mental
impairment, to engage in any substantial gainful activity, which condition, in
the opinion of a physician selected by the Committee, is expected to have a
duration of not less than 120 days. "Retirement" of a Participant shall mean
the occurrence of a Participant's Date of Termination after providing at least
five years of service to the Company or the Related Companies and attaining age
65.
g. Reload Provision. In the event the Participant exercises an Option and
----------------
pays all or a portion of the purchase price in Stock in the manner permitted by
subsection 2.3, or satisfies withholding obligations in Stock if permitted under
subsection 7.8, such Participant (either pursuant to the terms of the Option
Award, or pursuant to the exercise of Committee discretion at the time the
Option is exercised) may be issued a new Option to purchase additional shares of
Stock equal to the number of shares of Stock surrendered to the Company in such
payment. Such new Option shall have an exercise price equal to the Fair Market
Value per share on the date such new Option is granted, shall first be
exercisable six months from the date of grant of
4
<PAGE>
the new Option and shall have an Expiration Date on the same date as the
Expiration Date of the original Option so exercised by payment of the purchase
price or withholding in shares of Stock.
SECTION 3
---------
STOCK APPRECIATION RIGHTS
-------------------------
a. Definition. Subject to the terms of this Section, a "Stock Appreciation
----------
Right" granted under the Plan entitles the Participant to receive, in cash or
Stock (as determined in accordance with subsection 3.4), value equal to all or a
portion of the excess of: (a) the Fair Market Value of a specified number of
shares of Stock at the time of exercise over (b) a specified price designated at
the time the Stock Appreciation Right is granted or, if granted in tandem with
an Option, the exercise price with respect to shares under the tandem Option.
b. Eligibility. Subject to the provisions of the Plan, the Committee shall
-----------
designate the Participants to whom Stock Appreciation Rights are to be granted
under the Plan, shall determine the exercise price or a method by which the
price shall be established with respect to each such Stock Appreciation Right
and shall determine the number of shares of Stock on which each Stock
Appreciation Right is based. A Stock Appreciation Right may be granted in
connection with all or any portion of a previously or contemporaneously-granted
Option or not in connection with an Option. If a Stock Appreciation Right is
granted in connection with an Option then, in the discretion of the Committee,
the Stock Appreciation Right may, but need not, be granted in tandem with the
Option.
c. Exercise. The exercise of Stock Appreciation Rights shall be subject to
--------
the following:
i. If a Stock Appreciation Right is not in tandem with an Option, then
the Stock Appreciation Right shall be exercisable in accordance with
the terms established by the Committee in connection with such
rights; and may include, without limitation, conditions relating to
completion of a specified period of service, achievement of
performance standards prior to exercise of the Stock Appreciation
Rights or achievement of objectives relating to Stock ownership by
the Participant. The Committee, in its sole discretion, may
accelerate the vesting of any Stock Appreciation Right under
circumstances designated by it at the time the Stock Appreciation
Right is granted or thereafter. No Stock Appreciation Right subject
to this paragraph may be exercised by a Participant after the
Expiration Date (as defined in subsection 3.6) applicable to that
Stock Appreciation Right.
ii. If a Stock Appreciation Right is in tandem with an Option, then the
Stock Appreciation Right shall be exercisable at the time the tandem
Option is
5
<PAGE>
exercisable. The exercise of a Stock Appreciation Right will result
in the surrender of the corresponding rights under the tandem
Option.
d. Settlement of Award. Upon the exercise of a Stock Appreciation Right,
-------------------
the value to be distributed to the Participant, in accordance with subsection
3.1, shall be distributed in shares of Stock (valued at their Fair Market Value
at the time of exercise), in cash or in a combination thereof, in the discretion
of the Committee.
e. Post-Exercise Limitations. The Committee, in its discretion, may impose
-------------------------
such restrictions on shares of Stock acquired pursuant to the exercise of a
Stock Appreciation Right as it determines to be desirable, including, without
limitation, restrictions relating to disposition of the shares and forfeiture
restrictions based on service, performance, ownership of Stock by the
Participant and such other factors as the Committee determines to be
appropriate.
f. Expiration Date. If a Stock Appreciation Right is in tandem with an
---------------
Option, then the "Expiration Date" for the Stock Appreciation Right shall be the
Expiration Date for the related Option. If a Stock Appreciation Right is not in
tandem with an Option, then the "Expiration Date" for the Stock Appreciation
Right shall be the date established as the Expiration Date by the Committee;
provided, however, that subject to the following provisions of this subsection,
the Expiration Date with respect to any Stock Appreciation Right shall not be
later than the earliest to occur of:
i. the ten-year anniversary of the date on which the Stock Appreciation
Right is granted;
ii. if the Participant's Date of Termination occurs by reason of death
or Disability, the one-year anniversary of such Date of Termination;
or
iii. if the Participant's Date of Termination occurs by reason of
Retirement, the three-year anniversary of such Date of Termination;
or
iv. if the Participant's Date of Termination occurs by reason other than
Retirement, death or Disability, the three-month anniversary of such
Date of Termination.
SECTION 4
---------
STOCK AWARDS
------------
a. Definition. Subject to the terms of this Section, a Stock Award under
----------
the Plan is a grant of shares of Stock to a Participant, the earning, vesting or
distribution of which is subject to one or more conditions established by the
Committee. Such conditions may relate to events
6
<PAGE>
(such as performance or continued employment) occurring before or after the date
the Stock Award is granted, or the date the Stock is earned by, vested in or
delivered to the Participant. If the vesting of Stock Awards is subject to
conditions occurring after the date of grant, the period beginning on the date
of grant of a Stock Award and ending on the vesting or forfeiture of such Stock
(as applicable) is referred to as the "Restricted Period". Stock Awards may
provide for delivery of the shares of Stock at the time of grant or may provide
for a deferred delivery date. A Stock Award may, but need not, be made in
conjunction with a cash-based incentive compensation program maintained by the
Company and may, but need not, be in lieu of cash otherwise awardable under such
program.
b. Eligibility. The Committee shall designate the Participants to whom
-----------
Stock Awards are to be granted and the number of shares of Stock that are
subject to each such Award.
c. Terms and Conditions of Awards. Stock Awards granted to Participants
------------------------------
under the Plan shall be subject to the following terms and conditions:
i. Beginning on the date of grant (or, if later, the date of
distribution) of shares of Stock comprising a Stock Award, and
including any applicable Restricted Period, the Participant as owner
of such shares shall have the right to vote such shares.
ii. Payment of dividends with respect to Stock Awards shall be subject
to the following:
(1) On and after date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, and the
shares have been distributed to the Participant, the
Participant shall have all dividend rights (and other rights)
of a stockholder with respect to such shares.
(2) Prior to the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, the
Committee, in its sole discretion, may award Dividend Rights
with respect to such shares.
(3) On and after the date that a Participant has a fully earned and
vested right to the shares comprising a Stock Award, but before
the shares have been distributed to the Participant, the
Participant shall be entitled to Dividend Rights with respect
to such shares, at the time and in the form determined by the
Committee.
(4) A "Dividend Right" with respect to shares comprising a Stock
Award shall entitle the Participant, as of each dividend
payment date, to an amount equal to the dividends payable with
respect to a share of Stock multiplied by the number of such
shares. Dividend Rights shall be settled in cash or in shares
of Stock, as determined by the Committee, shall be payable at
the
7
<PAGE>
time and in the form determined by the Committee and shall be
subject to such other terms and conditions as the Committee may
determine.
SECTION 5
---------
STOCK PURCHASE PROGRAM
----------------------
a. Purchase of Stock. The Committee may, from time to time, establish one
-----------------
or more programs under which Participants will be permitted to purchase shares
of Stock under the Plan and shall designate the Participants eligible to
participate under such Stock purchase programs. The purchase price for shares of
Stock available under such programs, and other terms and conditions of such
programs, shall be established by the Committee; provided, however, that with
respect to shares of Stock purchased under a program that does not result in an
award of matching shares (as provided in subsection 5.2), the purchase price may
not be less than 50% of the Fair Market Value of the Stock at the time of
purchase (or, in the Committee's discretion, the average stock value over a
period determined by the Committee), and further provided that the purchase
price may not be less than par value.
b. Matching Shares. Except as otherwise provided in subsection 5.1, any
---------------
Stock purchase program established by the Committee under this Section may
provide for the award of matching shares of Stock.
c. Restrictions on Shares. The Committee may impose such restrictions with
----------------------
respect to shares purchased under subsection 5.1, or matching shares awarded
pursuant to subsection 5.2, as the Committee determines to be appropriate. Such
restrictions may include, without limitation, restrictions of the type that may
be imposed with respect to Stock Awards under Section 4.
SECTION 6
---------
PERFORMANCE UNITS
-----------------
a. Definition. Subject to the terms of this Section, the Award of
----------
Performance Units under the Plan entitles the Participant to receive value for
the units at the end of a Performance Period to the extent provided under the
Award. The number of units earned, and the value received for them, will be
contingent on the degree to which the performance measures established at the
time of grant of the Award are met. For purposes of the Plan, the "Performance
Period" with respect to the award of any Performance Units shall be the period
over which the applicable performance is to be measured.
b. Eligibility. The Committee shall designate the Participants to whom
-----------
Performance Units are to be granted and the number of units subject to each such
Award.
8
<PAGE>
c. Terms and Conditions of Awards. For each Participant, the Committee
------------------------------
will determine the value of units, which may be stated either in cash or in
units representing shares of Stock; the performance measures used for
determining whether the Performance Units are earned; the Performance Period
during which the performance measures will apply; the relationship between the
level of achievement of the performance measures and the degree to which
Performance Units are earned; whether, during or after the Performance Period,
any revision to the performance measures or Performance Period should be made to
reflect significant events or changes that occur during the Performance Period;
and the number of earned Performance Units that will be paid in cash and the
number of earned Performance Units to be paid in shares of Stock.
d. Settlement. Settlement of Performance Units shall be subject to the
----------
following:
i. The Committee will compare the actual performance to the performance
measures established for the Performance Period and determine the
number of units as to which settlement is to be made, and the value
of such units.
ii. Settlement of units earned shall be wholly in cash, wholly in Stock
or in a combination of the two and distributed in a lump sum or
installments, as determined by the Committee.
(1) For Performance Units stated in units representing shares of
Stock when granted, either one share of Stock will be
distributed for each unit earned or cash will be distributed for
each unit earned equal to either (A) the Fair Market Value of a
share of Stock at the end of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
(2) For Performance Units stated in cash when granted, the value of
each unit earned will be distributed in its initial cash value
or shares of Stock will be distributed based on the cash value
of the units earned divided by (A) the Fair Market Value of a
share of Stock at the end of the Performance Period or (B) the
average Stock value over a period determined by the Committee.
iii. Shares of Stock distributed in settlement of the units shall be
subject to such vesting requirements and other conditions, if any, as
the Committee shall determine. Such vesting restrictions may include,
without limitation, restrictions of the type that may be imposed with
respect to Stock Awards under Section 4.
3. Termination during Performance Period. If a Participant's Date of
-------------------------------------
Termination occurs during a Performance Period with respect to any Performance
Units granted to him, the Committee may determine that the Participant will be
entitled to settlement of all or any portion
9
<PAGE>
of the Performance Units as to which he would otherwise be eligible and may
accelerate the determination of the value and settlement of such Performance
Units or make such other adjustments as the Committee, in its sole discretion,
deems desirable.
SECTION 7
---------
OPERATION AND ADMINISTRATION
----------------------------
a. Effective Date. The Plan shall be effective as of the date it is
--------------
adopted by the Board of Directors of the Company (the "Board"); provided,
however, that Awards granted under the Plan prior to its approval by
stockholders will be contingent on approval of the Plan by the Company's
stockholders. The Plan shall be unlimited in duration and, in the event of Plan
termination, shall remain in effect as long as any shares of Stock awarded under
it are outstanding and not fully vested; provided, however, that no new Awards
shall be made under the Plan on or after the tenth anniversary of the date on
which the Plan is adopted by the Board.
b. Shares Subject to Plan. The shares of Stock with respect to which
----------------------
Awards may be made under the Plan shall be shares currently authorized but
unissued or currently held or subsequently acquired by the Company as treasury
shares, including shares purchased in the open market or in private
transactions. Subject to the provisions of subsection 7.4, the number of shares
of Stock which may be issued with respect to Awards under the Plan shall not
exceed 4,500,000 shares in the aggregate. Except as otherwise provided herein,
any shares subject to an Award which for any reason expires or is terminated
without issuance of shares (whether or not cash or other consideration is paid
to a Participant in respect of such shares) shall again be available under the
Plan.
c. Individual Limits on Awards. Notwithstanding any other provision of the
---------------------------
Plan to the contrary, no Participant shall receive any Award of an Option or
Stock Appreciation Right under the Plan that is intended to constitute
"performance-based compensation" (as that term is used in section 162(m) of the
Code) to the extent that the sum of:
i. the number of shares of Stock subject to such Award;
ii. the number of shares of Stock subject to all other prior Awards of
Options and Stock Appreciation Rights under the Plan during the one-year period
ending on the date of the Award; and
iii. the number of shares of Stock subject to all other prior stock
options and stock appreciation rights granted to the Participant under other
plans or arrangements of the Company and Related Companies during the one-year
period ending on the date of the Award;
10
<PAGE>
would exceed the Participant's Individual Limit under the Plan. The
determination made under the foregoing provisions of this subsection shall be
based on the shares subject to the awards at the time of grant, regardless of
when the awards become exercisable. Subject to the provisions of subsection 7.4,
a Participant's "Individual Limit" shall be 500,000 shares. Options and Stock
Appreciation Rights that are not intended to constitute "performance-based
compensation" shall not be subject to the limit otherwise imposed by this
subsection 7.3.
d. Adjustments to Shares.
---------------------
i. If the Company shall effect any subdivision or consolidation of shares
of Stock or other capital readjustment, payment of stock dividend, stock split,
combination of shares or recapitalization or other increase or reduction of the
number of shares of Stock outstanding without receiving compensation therefor in
money, services or property, then the Committee shall adjust (i) the number of
shares of Stock available under the Plan; (ii) the number of shares available
under any individual or other limits; (iii) the number of shares of Stock
subject to outstanding Awards; and (iv) the per-share price under any
outstanding Award to the extent that the Participant is required to pay a
purchase price per share with respect to the Award.
ii. If the Company is reorganized, merged or consolidated or is party to a
plan of exchange with another corporation, pursuant to which reorganization,
merger, consolidation or plan of exchange, the stockholders of the Company
receive any shares of stock or other securities or property, or the Company
shall distribute securities of another corporation to its stockholders, there
shall be substituted for the shares subject to outstanding Awards an appropriate
number of shares of each class of stock or amount of other securities or
property which were distributed to the stockholders of the Company in respect of
such shares, subject to the following:
(1) If the Committee determines that the substitution described in
accordance with the foregoing provisions of this paragraph would not be
fully consistent with the purposes of the Plan or the purposes of the
outstanding Awards under the Plan, the Committee may make such other
adjustments to the Awards to the extent that the Committee determines such
adjustments are consistent with the purposes of the Plan and of the
affected Awards.
(2) All or any of the Awards may be cancelled by the Committee on or
immediately prior to the effective date of the applicable transaction, but
only if the Committee gives reasonable advance notice of the cancellation
to each affected Participant, and only if either: (A) the Participant is
permitted to exercise the Award for a reasonable period prior to the
effective date of the cancellation; or (B) the Participant receives payment
or other benefits that the Committee determines to be reasonable
compensation for the value of the cancelled Awards.
11
<PAGE>
(3) Upon the occurrence of a reorganization of the Company or any
other event described in this paragraph (b), any successor to the Company
shall be substituted for the Company to the extent that the Company and the
successor agree to such substitution.
(iii) Upon (or, in the discretion of the Committee, immediately prior to)
the sale to (or exchange with) a third party unrelated to the Company of all or
substantially all of the assets of the Company, all Awards shall be cancelled.
If Awards are cancelled under this paragraph, then, with respect to any affected
Participant, either:
(1) the Participant shall be provided with reasonable advance notice
of the cancellation, and the Participant shall be permitted to exercise the
Award for a reasonable period prior to the effective date of the
cancellation; or
(2) the Participant shall receive payment or other benefits that the
Committee determines to be reasonable compensation for the value of the
cancelled Awards.
The foregoing provisions of this paragraph shall also apply to the sale of
all or substantially all of the assets of the Company to a related party, if the
Committee determines such application is appropriate.
(iv) In determining what action, if any, is necessary or appropriate under
the foregoing provisions of this subsection, the Committee shall act in a manner
that it determines to be consistent with the purposes of the Plan and of the
affected Awards and, where applicable or otherwise appropriate, in a manner that
it determines to be necessary to preserve the benefits and potential benefits of
the affected Awards for the Participants and the Company.
(v) The existence of this Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of bonds, debentures, preferred or prior
preference stocks ahead of or affecting the Company's Stock or the rights
thereof, the dissolution or liquidation of the Company, any sale or transfer of
all or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
(vi) Except as expressly provided by the terms of this Plan, the issue by
the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property or for labor or services,
either upon direct sale, upon the exercise of rights or warrants to subscribe
therefor or upon conversion of shares or obligations of the Company convertible
into such shares or other securities, shall not affect, and no adjustment by
reason thereof, shall be made with respect to Awards then outstanding hereunder.
12
<PAGE>
(vii) Awards under the Plan are subject to adjustment under this
subsection only during the period in which they are considered to be outstanding
under the Plan. For purposes of this subsection, an Award is considered
"outstanding" on any date if the Participant's ability to obtain all benefits
with respect to the Award is subject to limits imposed by the Plan (including
any limits imposed by the Agreement reflecting the Award). The determination of
whether an Award is outstanding shall be made by the Committee.
e Limit on Distribution. Distribution of shares of Stock or other amounts
---------------------
amounts under the Plan shall be subject to the following:
(i) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws and the applicable
requirements of any securities exchange or similar entity.
(ii) In the case of a Participant who is subject to Section 16(a) and
16(b) of the Securities Exchange Act of 1934, the Committee may, at any time,
add such conditions and limitations to any Award to such Participant, or any
feature of any such Award, as the Committee, in its sole discretion, deems
necessary or desirable to comply with Section 16(a) or 16(b) and the rules and
regulations thereunder or to obtain any exemption therefrom.
(iii) To the extent that the Plan provides for issuance of certificates to
reflect the transfer of shares of Stock, the transfer of such shares may be
effected on a non-certificated basis, to the extent not prohibited by applicable
law or the rules of any stock exchange.
f Liability for Cash Payments. Subject to the provisions of this Section,
---------------------------
each Related Company shall be liable for payment of cash due under the Plan with
respect to any Participant to the extent that such benefits are attributable to
the service rendered for that Related Company by the Participant. Any disputes
relating to liability of a Related Company for cash payments shall be resolved
by the Committee.
g Performance-Based Compensation. To the extent that the Committee
------------------------------
determines that it is necessary or desirable to conform any Awards under the
Plan with the requirements applicable to "Performance-Based Compensation", as
that term is used in Code section 162(m)(4)(C), it may, at or prior to the time
an Award is granted, take such steps and impose such restrictions with respect
to such Award as it determines to be necessary to satisfy such requirements
including, without limitation:
(i) The establishment of performance goals that must be satisfied prior
to the payment or distribution of benefits under such Awards.
13
<PAGE>
(ii) The submission of such Awards and performance goals to the Company's
stockholders for approval and making the receipt of benefits under such Awards
contingent on receipt of such approval.
(iii) Providing that no payment or distribution be made under such Awards
unless the Committee certifies that the goals and the applicable terms of the
Plan and Agreement reflecting the Awards have been satisfied.
To the extent that the Committee determines that the foregoing requirements
relating to Performance-Based Compensation do not apply to Awards under the Plan
because the Awards constitute Options or Stock Appreciation Rights, the
Committee may, at the time the Award is granted, conform the Awards to
alternative methods of satisfying the requirements applicable to Performance-
Based Compensation.
h Withholding. All Awards and other payments under the Plan are subject
-----------
to withholding of all applicable taxes, which withholding obligations may be
satisfied, with the consent of the Committee, through the surrender of shares of
Stock which the Participant already owns or to which a Participant is otherwise
entitled under the Plan.
i Transferability. Awards under the Plan are not transferable except as
---------------
designated by the Participant by will or by the laws of descent and
distribution. To the extent that the Participant who receives an Award under the
Plan has the right to exercise such Award, the Award may be exercised during the
lifetime of the Participant only by the Participant. Notwithstanding the
foregoing provisions of this subsection, the Committee may permit Awards under
the Plan to be transferred to or for the benefit of the Participant's family
(including, without limitation, to a trust for the benefit of a Participant's
family), subject to such limits as the Committee may establish. In no event
shall an Incentive Stock Option be transferable to the extent that such
transferability would violate the requirements applicable to such option under
Code section 422.
j Notices. Any notice or document required to be filed with the Committee
-------
under the Plan will be properly filed if delivered or mailed by registered mail,
postage prepaid, to the Committee, in care of the Company, at its principal
executive offices. The Committee may, by advance written notice to affected
persons, revise such notice procedure from time to time. Any notice required
under the Plan (other than a notice of election) may be waived by the person
entitled to notice.
k Form and Time of Elections. Unless otherwise specified herein, each
--------------------------
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification or
revocation thereof, shall be in writing filed with the Committee at such times,
in such form, and subject to such restrictions and limitations, not inconsistent
with the terms of the Plan, as the Committee shall require.
14
<PAGE>
l Agreement With Company. At the time of an Award to a Participant under
----------------------
the Plan, the Committee may require a Participant to enter into an agreement
with the Company (the "Agreement") in a form specified by the Committee,
agreeing to the terms and conditions of the Plan and to such additional terms
and conditions, not inconsistent with the Plan, as the Committee may, in its
sole discretion, prescribe.
m Limitation of Implied Rights.
----------------------------
(i) Neither a Participant nor any other person shall, by reason of the
Plan, acquire any right in or title to any assets, funds or property of the
Company or any Related Company whatsoever, including, without limitation, any
specific funds, assets, or other property which the Company or any Related
Company, in its sole discretion, may set aside in anticipation of a liability
under the Plan. A Participant shall have only a contractual right to the
amounts, if any, payable under the Plan, unsecured by any assets of the Company
and any Related Company. Nothing contained in the Plan shall constitute a
guarantee by the Company or any Related Company that the assets of such
companies shall be sufficient to pay any benefits to any person.
(ii) The Plan does not constitute a contract of employment, and selection
as a Participant will not give any employee the right to be retained in the
employ of the Company or any Related Company, nor any right or claim to any
benefit under the Plan, unless such right or claim has specifically accrued
under the terms of the Plan. Except as otherwise provided in the Plan, no Award
under the Plan shall confer upon the holder thereof any right as a stockholder
of the Company prior to the date on which he fulfills all service requirements
and other conditions for receipt of such rights and shares of Stock are
registered in his name.
n Evidence. Evidence required of anyone under the Plan may be by
--------
certificate, affidavit, document or other information which the person acting on
it considers pertinent and reliable, and signed, made or presented by the proper
party or parties.
o Action by Company or Related Company. Any action required or permitted
------------------------------------
to be taken by the Company or any Related Company shall be by resolution of its
board of directors, or by action of one or more members of the board (including
a committee of the board) who are duly authorized to act for the board or
(except to the extent prohibited by applicable law or the rules of any stock
exchange) by a duly authorized officer of the company.
p Gender and Number. Where the context admits, words in any gender shall
-----------------
shall include any other gender, words in the singular shall include the plural
and the plural shall include the singular.
SECTION 8
---------
COMMITTEE
---------
15
<PAGE>
a Administration. The authority to control and manage the operation and
--------------
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 8.
b Selection of Committee. The Committee shall be selected by the Board,
----------------------
and shall consist of not fewer than two members of the Board or such greater
number as may be required for compliance with Rule 16b-3 issued under the
Securities Exchange Act of 1934.
c Powers of Committee. The authority to manage and control the operation
-------------------
and administration of the Plan shall be vested in the Committee, subject to the
following:
(i) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select employees to receive Awards, to determine the
time or times of receipt, to determine the types of Awards and the number of
shares covered by the Awards, to establish the terms, conditions, performance
criteria, restrictions, and other provisions of such Awards, and to cancel or
suspend Awards. In making such Award determinations, the Committee may take
into account the nature of services rendered by the respective employee, his
present and potential contribution to the Company's success and such other
factors as the Committee deems relevant.
(ii) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to determine the extent to which Awards under the Plan
will be structured to conform to the requirements applicable to Performance-
Based Compensation, and to take such action, establish such procedures, and
impose such restrictions at the time such Awards are granted as the Committee
determines to be necessary or appropriate to conform to such requirements.
(iii) The Committee will have the authority and discretion to interpret
the Plan, to establish, amend and rescind any rules and regulations relating to
the Plan, to determine the terms and provisions of any agreements made pursuant
to the Plan and to make all other determinations that may be necessary or
advisable for the administration of the Plan.
(iv) Any interpretation of the Plan by the Committee and any decision
made by it under the Plan is final and binding on all persons.
(v) Except as otherwise expressly provided in the Plan, where the
Committee is authorized to make a determination with respect to any Award.
d Delegation by Committee. Except to the extent prohibited by applicable
-----------------------
law or the rules of any stock exchange, the Committee may allocate all or any
portion of its responsibilities and powers to any one or more of its members and
may delegate all or any part of its responsibilities and powers to any person or
persons selected by it. Any such allocation or delegation may be revoked by the
Committee at any time.
16
<PAGE>
e Information to be Furnished to Committee. The Company and Related
----------------------------------------
Companies shall furnish the Committee with such data and information as may be
required for it to discharge its duties. The records of the Company and Related
Companies as to an employee's or Participant's employment (or other provision of
services), termination of employment (or cessation of the provision of
services), leave of absence, reemployment and compensation shall be conclusive
on all persons unless determined to be incorrect. Participants and other
persons entitled to benefits under the Plan must furnish the Committee such
evidence, data or information as the Committee considers desirable to carry out
the terms of the Plan.
f Liability and Indemnification of Committee. No member or authorized
------------------------------------------
delegate of the Committee shall be liable to any person for any action taken or
omitted in connection with the administration of the Plan unless attributable to
his own fraud or willful misconduct; nor shall the Company or any Related
Company be liable to any person for any such action unless attributable to fraud
or willful misconduct on the part of a director or employee of the Company or
Related Company. The Committee, the individual members thereof, and persons
acting as the authorized delegates of the Committee under the Plan, shall be
indemnified by the Company against any and all liabilities, losses, costs and
expenses (including legal fees and expenses) of whatsoever kind and nature which
may be imposed on, incurred by or asserted against the Committee or its members
or authorized delegates by reason of the performance of a Committee function if
the Committee or its members or authorized delegates did not act dishonestly or
in willful violation of the law or regulation under which such liability, loss,
cost or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 9
---------
CHANGE IN CONTROL
-----------------
Except as otherwise provided in the Plan or in the agreement reflecting the
applicable Award, ten days prior to the occurrence of a Change in Control (i)
all outstanding Options and Stock Appreciation Rights shall become immediately
exercisable, (ii) all shares of Restricted Stock and Performance Stock shall
become fully vested, (iii) all vesting restrictions imposed under subsection 6.3
(relating to restrictions on shares purchased by Participants and matching
shares) shall cease to apply, and (iv) Performance Units may be paid out in such
manner and amounts as determined by the Committee; provided, however, such
vesting, lapse of restrictions and payments shall be contingent upon the
consummation of the Change in Control. For purposes of the Plan, a "Change in
Control" shall be deemed to occur on the earliest of the existence of one of the
following events:
(a) the acquisition, other than from the Company, by any individual,
entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the
Exchange Act) of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 50% or
17
<PAGE>
more of either the then outstanding shares of common stock of the Company
entitled to vote generally in the election of directors, but excluding, for this
purpose, any such acquisition by the Company or any of its subsidiaries, or any
employee benefit plan (or related trust) of the Corporation, or any corporation
with respect to which, following such acquisition, more than 50% of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
common stock and voting securities of the Company immediately prior to such
acquisition in substantially the same proportion as their ownership, immediately
prior to such acquisition, of the then outstanding shares of common stock of the
Company or the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors, as the
case may be;
(b) individuals who, as of the date hereof, constitute the Board (as of the
date hereof the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board, provided that any individual becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office is in connection
with an actual or threatened "election contest" relating to the election of the
directors of the Company (as such term is used in Rule 14a-11 of Regulation 14A
promulgated under the Exchange Act); or
(c) approval by the Company's shareholders of a reorganization, merger or
consolidation of the Company, in each case, with respect to which all or
substantially all of the individuals and entities who were the respective
beneficial owners of the common stock and voting securities of the Company
immediately prior to such reorganization, merger or consolidation do not,
following such reorganization, merger or consolidation, beneficially own,
directly and indirectly, more than 50% of, respectively, the then outstanding
shares of common stock or the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such reorganization, merger
or consolidation, or of a complete liquidation or dissolution of the Company or
of the sale or other disposition of all or substantially all of the assets of
the Company.
SECTION 10
----------
AMENDMENT AND TERMINATION
-------------------------
The Board may, at any time, amend or terminate the Plan, provided that,
subject to subsection 7.4 (relating to certain adjustments to shares), no
amendment or termination may
18
<PAGE>
materially adversely affect the rights of any Participant or beneficiary under
any Award made under the Plan prior to the date such amendment is adopted by the
Board; and further provided that the provisions of paragraph 2.3(f) (relating to
Option repricing) cannot be amended unless the amendment is approved by the
Company's stockholders.
19
<PAGE>
APPENDIX A
----------
AWARDS TO NONEMPLOYEE DIRECTORS
-------------------------------
1. Eligible Directors. Each director of the Company who is not an employee of
------------------
the Company or Related Company and who does not own stock possessing more than
3% of the total combined voting power of all classes of stock of the Company (a
"Nonemployee Director") shall be eligible for awards under this Appendix A.
2. Awards. Each individual who is a Nonemployee Director shall be granted the
------
following awards:
(a) Initial Option Award - Upon his or her initial election or appointment
to the Board, the Nonemployee Director shall be awarded an Option to
purchase 20,000 shares of Stock upon such initial election or
appointment (an "Initial Option").
(b) Annual Option Award - On each subsequent anniversary of a Nonemployee
Director's election or appointment, if the Nonemployee Director is
then a member of the Board, the Nonemployee Director shall
automatically be awarded an Option to purchase 6,000 shares of Stock
(an "Annual Option").
(c) Annual Stock Award - On January 1 of each year, if the Nonemployee
Director is then a member of the Board, the Nonemployee Director shall
automatically be awarded 3,000 shares of Stock (an "Annual Stock
Award"); provided however, the Annual Stock Award shall not be made to
a Nonemployee Director who has not been a member of the Board for the
entire 12 month period preceding such award date.
Nonemployee Directors who were first appointed to the Board prior to the
effective date of this Plan and received an Initial Option under the
Pacific Gateway Exchange, Inc. 1995 Stock Option Plan (the "1995 Plan")
shall be eligible for Annual Options under this Plan on the anniversary of
the Initial Option awarded under the 1995 Plan, to the extent that the
Company determines that Annual Awards will no longer be made under the 1995
Plan.
3. Exercise Price. The exercise price per share with respect to an Option
--------------
awarded under this Appendix A shall be the Fair Market Value of a share of Stock
on the date such Option is awarded.
4. Vesting. Each Option granted under this Appendix A shall become
-------
exercisable: (i) with respect to 1/4 of the shares awarded, on the first
anniversary of the grant date (the "Initial Vesting Date"); and (ii) with
respect to an additional 1/16 of the shares awarded, on each
20
<PAGE>
subsequent 3-month anniversary of the Initial Vesting Date until such time as
this Option is fully exercisable.
5. Expiration. The Expiration Date with respect to any Option awarded under
----------
this Appendix A shall be the earliest to occur of:
(i) the ten-year anniversary of the date on which the Option is granted;
(ii) if the Nonemployee Director's service on the Board terminates by
reason of death or Disability, the one-year anniversary of such
termination of service;
(iii) if the Nonemployee Director's service on the Board terminates for any
reason other than death or Disability, the three-month anniversary of
such termination of service.
6. Other Terms and Conditions. Except as provided in this Appendix A, the
--------------------------
Option shall be subject to all of the terms and conditions of the Plan.
21
<PAGE>
APPENDIX B
----------
ELECTIVE DEFERRAL
-----------------
1. Deferral Election. A Nonemployee Director may elect to defer delivery of
------------------
all or a portion of the shares of Stock otherwise distributable to him or her as
an Annual Stock Award. An election to defer the receipt of Stock shall be filed
at such time as the Committee may determine, but in all events prior to the date
the Stock would otherwise be distributable to the Nonemployee Director.
2. Accounts. An "Account" shall be maintained on behalf of each Nonemployee
---------
Director who elects to defer the distribution of shares of Stock under this
Appendix B, for the period during which delivery of shares of Stock is deferred.
A Nonemployee Director's Account shall be subject to the following adjustments:
(a) The Account will be credited with Stock Units equal to the number of
shares of Stock as to which the Nonemployee Director has elected
deferred receipt, with such Stock Units to be credited as of the date
on which the shares would otherwise have been delivered to him in the
absence of the deferral.
(b) As of each dividend record date for the Stock following the date any
Stock Units are credited to the Nonemployee Director's Account, and
prior to the date of distribution of shares of Stock with respect to
those Stock Units, the Nonemployee Director's Account shall be
credited with additional Stock Units (including fractional Stock
Units) equal to (i) the amount of the dividend that would be payable
with respect to the number of shares of Stock equal to the number of
Stock Units credited to the Nonemployee Director's Account on the
dividend record date; divided by (ii) the Fair Market Value of a share
----------
of Stock on the date of payment of the dividend.
(c) As of the date of any distribution of shares of Stock with respect to
a Nonemployee Director's Account under subsection 3 of this Appendix
B, the Stock Units credited to a Nonemployee Director's Account shall
be reduced by the number of Shares so distributed to the Nonemployee
Director.
(d) The Account shall be adjusted from time to time, as necessary, in
accordance with subsection 7.4.
3. Distributions.
--------------
22
<PAGE>
(a) Subject to the terms of this subsection 3, a Nonemployee Director
shall specify in writing the time of distribution with respect to
Stock Units deferred in accordance with this Appendix B.
(b) At the time of distribution of deferred shares in accordance with the
Nonemployee Director's election, the Nonemployee Director shall
receive a distribution of shares of Stock equal to the number of Stock
Units credited to his Account immediately prior to such distribution.
If the scheduled distribution date would otherwise occur after a
dividend record date but before the payment of the dividend,
distribution shall be deferred (not more than 30 days) until the
dividend is paid.
(c) In determining a Nonemployee Director's right to distributions of
stock under this subsection 3, the vesting provisions of subsection
2.3 of the Plan shall apply to the Stock Units credited to the
Nonemployee Director's Account as though each unit represented one
share of Stock, and with all units attributable to payment of
dividends being fully vested as of the date they are credited to the
Nonemployee Director's Account.
(d) an the event that a distribution of a Nonemployee Director's Account
is made in installments, the Stock to be distributed shall be charged
to the Account and shall be distributed in whole shares of Stock. The
number of shares to be distributed in any installment shall be
determined by rounding to the next highest integer the product
obtained by multiplying the number of Stock Units then credited to the
Nonemployee Director's Account by a fraction, the numerator of which
is one and the denominator of which is the number of remaining
payments to be made, including such payment.
(e) If a Nonemployee Director dies before payment of his Account
commences, all amounts then credited to his Account shall be
distributed to his Beneficiary (as described below), as soon as
practicable after his death, in a lump sum. If a Nonemployee Director
dies after payment of his Account has commenced but before the entire
balance of such Account has been distributed, the remaining balance
thereof shall be distributed to his Beneficiary, as soon as
practicable after his death, in a lump sum. For purposes of the Plan,
the Nonemployee Director's "Beneficiary" is the person or persons the
Nonemployee Director designates, which designation shall be in
writing, signed by the Nonemployee Director and filed with the
Committee prior to the Nonemployee Director's death. A Beneficiary
designation shall be effective when filed with the Committee in
accordance with the preceding sentence. If more than one Beneficiary
has been designated, the balance in the Nonemployee Director's Account
shall be distributed to each such Beneficiary as indicated, and if not
indicated, per capita.
23
<PAGE>
In the absence of a Beneficiary designation or if no Beneficiary
survives the Nonemployee Director, the Beneficiary shall be the
Nonemployee Director's estate.
(f) Notwithstanding the foregoing, the Committee, in its sole discretion,
as of any date, may accelerate the distribution of the balance in the
Account of any Nonemployee Director, with such acceleration to be paid
in a single lump sum (or former Nonemployee Director).
(g) To the extent provided by the Committee, all or any portion of any
Account balance may be settled by distribution of cash equal to the
Fair Market Value of the Stock corresponding to the Stock Units as to
which distribution is made, with the Fair Market Value determined for
the date immediately prior to the date on which the distribution is
made.
(h) Notwithstanding the foregoing provisions of this subsection 3, if any
Stock Units are credited to a Nonemployee Director's Account as of the
date of a Change in Control, the Nonemployee Director shall receive a
distribution of shares of Stock equal to the number of such Stock
Units. Such distribution shall be in settlement of the Nonemployee
Director's rights to distribution under this subsection 3, provided
that if the record date for a dividend is prior to a Change in
Control, but the dividend payment is to occur after such Change in
Control, the additional shares attributable to such dividends shall be
distributed as soon as practicable thereafter.
4. Limitation of Implied Rights. Neither the Nonemployee Director nor any
----------------------------
other person shall, by reason of deferral of shares of Stock under this Appendix
B, acquire any right in or title to any assets, funds or property of the Company
whatsoever prior to the date such shares are distributed. A Nonemployee
Director shall have only a contractual right to the shares and cash, if any,
distributable under the Plan, unsecured by any assets of the Company. Nothing
contained in the Plan shall constitute a guarantee by the Company that the
assets of the Company shall be sufficient to provide any benefits to any person.
24
<PAGE>
EXHIBIT 10.4.6
IRREVOCABLE PROXY AND VOTING AGREEMENT
I, Gail E. Granton, a shareholder of Pacific Gateway Exchange, Inc., a
Delaware corporation (the "Corporation"), individually and as the trustee of the
Granton Foundation (the "Foundation") hereby appoint Howard A. Neckowitz to be
my proxy agent and the proxy agent of the Foundation and to vote all of my
shares in the Corporation and all shares in the Corporation held by the
Foundation (the "Shares") with respect to all matters submitted to the
stockholders at all meetings of the stockholders, or any adjournments thereof,
and in all consents to any actions taken without a meeting. This appointment
shall commence immediately and end on January 1, 2001. During said period,
Howard A. Neckowitz shall have all of the power that I or the Foundation would
possess with respect to the voting of my shares and all of the Foundation's
shares and granting my consent and the Foundation's consent. I hereby ratify
and confirm all acts that the proxy pursuant to this Irrevocable Proxy and
Voting Agreement (the "Proxy") shall do or cause to be done by virtue of and
within the limitations set forth in this Proxy.
If, during the term of this Proxy, Howard A. Neckowitz becomes unable to
perform his duties as an officer of Pacific Gateway Exchange, Inc. due to his
voluntary resignation, termination for cause, long-term disability, physical or
mental incapacity, or death, then this Proxy shall be null and void. Except as
set forth in this paragraph, this Proxy shall be irrevocable.
I agree that any transfer of the Shares by me or the Foundation prior to
January 1, 2001 other than pursuant to a registered underwritten offering under
the Securities Act of 1933, as amended, (the "Act") or pursuant to Rule 144
under the Act shall be subject to this Proxy. It shall be a condition of such
transfer that the transferee appoint Howard A. Neckowitz as such stockholder's
proxy on terms identical to this Proxy for the term ending upon termination of
this Proxy.
I agree that the Shares shall bear the following legend until this Proxy
terminates as set forth above:
The shares represented by this certificate are subject to a
Irrevocable Proxy and Voting Agreement dated as of March 23, 2000, a
copy of which is on file with the Secretary of the Corporation. Any
purchaser of such shares prior to January 1, 2001, other than pursuant
to a registered underwritten offering under the Securities Act of
1933, as amended, (the "Act") or pursuant to Rule 144 under the Act
shall be bound by such agreement.
IN WITNESS WHEREOF, I have executed this Proxy effective as of the 23rd day
of March, 2000.
/s/ Gail E. Granton
------------------------------------
Gail E. Granton
The Granton Foundation
By: /s/ Gail E. Granton
---------------------------------
Gail E. Granton
Trustee
<PAGE>
EXHIBIT 10.8
Conformed Copy
- --------------------------------------------------------------------------------
$100,000,000
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
Among
PACIFIC GATEWAY EXCHANGE, INC.
PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED
And
BANK OF AMERICA, N.A.
as Administrative Agent
DEUTSCHE BANK SECURITIES INC.
as Syndication Agent
And
BANC OF AMERICA SECURITIES LLC
DEUTSCHE BANK SECURITIES INC.
as Joint Lead Arrangers
and
as Joint Book Managers
And
the
LENDERS
Dated as of November 23, 1999
<PAGE>
$100,000,000
PACIFIC GATEWAY EXCHANGE, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I. DEFINITIONS
1.01. Definitions.............................................................................. 1
1.02. Accounting and Other Terms............................................................... 21
1.03. Currency Equivalents Generally........................................................... 21
ARTICLE II. THE LOAN FACILITY
2.01. Loans.................................................................................... 21
2.02. Making Advances.......................................................................... 22
2.03. Evidence of Debt for Borrowed Money...................................................... 24
2.04. Optional Prepayments..................................................................... 24
2.05. Mandatory Prepayments.................................................................... 25
2.06. Repayment................................................................................ 25
2.07. Interest................................................................................. 26
2.08. Default Interest......................................................................... 26
2.09. Continuation and Conversion Elections.................................................... 27
2.10. Fees..................................................................................... 28
2.11. Reduction and Adjustment of Commitments.................................................. 28
2.12. Funding Losses........................................................................... 30
2.13. Computations and Manner of Payments...................................................... 30
2.14. Yield Protection; Changed Circumstances.................................................. 32
2.15. Use of Proceeds.......................................................................... 35
2.16. Collateral............................................................................... 35
ARTICLE III. LETTERS OF CREDIT
3.01. Issuance of Letters of Credit............................................................ 36
3.02. Letters of Credit Fee.................................................................... 37
3.03. Reimbursement Obligations................................................................ 38
3.04. Lenders' Obligations..................................................................... 39
3.05. Administrative Agent's Obligations....................................................... 39
3.06. Phase-In of the Euro..................................................................... 40
ARTICLE IV. CONDITIONS PRECEDENT
4.01. Conditions Precedent to the Initial Advance and the Issuance of the Initial Letter
of Credit................................................................................ 40
4.02. Conditions Precedent to All Advances and Letters of Credit............................... 43
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties........................................................... 44
5.02. Survival of Representations and Warranties............................................... 51
</TABLE>
i
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<TABLE>
<S> <C>
ARTICLE VI. GENERAL COVENANTS
6.01. Preservation of Existence and Similar Matters............................................ 51
6.02. Business; Compliance with Applicable Law. ............................................... 52
6.03. Maintenance of Properties................................................................ 52
6.04. Accounting Methods and Financial Records................................................. 52
6.05. Insurance................................................................................ 52
6.06. Payment of Taxes and Claims.............................................................. 52
6.07. Visits and Inspections................................................................... 53
6.08. Use of Proceeds.......................................................................... 53
6.09. Indemnity................................................................................ 53
6.10. Environmental Law Compliance............................................................. 54
6.11. Acquisitions, Generally.................................................................. 55
6.12. Subsidiary Designation................................................................... 55
6.13. Year 2000 Compliance..................................................................... 55
6.14. Eurocurrency Conversion to the Euro...................................................... 55
ARTICLE VII. INFORMATION COVENANTS
7.01. Quarterly Financial Statements and Information........................................... 56
7.02. Annual Financial Statements and Information.............................................. 56
7.03. Compliance Certificates.................................................................. 56
7.04. Copies of Other Reports and Notices...................................................... 56
7.05. Notice of Default and Other Matters...................................................... 57
7.06. ERISA Reporting Requirements............................................................. 58
ARTICLE VIII. NEGATIVE COVENANTS
8.01. Financial Covenants...................................................................... 59
8.02. Debt for Borrowed Money.................................................................. 61
8.03. Liens.................................................................................... 62
8.04. Investments.............................................................................. 62
(i) ......................................................................................... 63
(j) ......................................................................................... 63
8.05. Liquidation, Disposition or Acquisition of Assets, Merger, New Subsidiaries.............. 63
8.06. Guaranties; Contingent Liabilities....................................................... 64
8.07. Restricted Payments...................................................................... 64
8.08. Affiliate Transactions................................................................... 64
8.09. Compliance with ERISA.................................................................... 65
8.10. Capital Stock............................................................................ 65
8.11. Sale and Leaseback....................................................................... 65
8.12. Sale or Discount of Receivables.......................................................... 65
8.13. Limitation on Restrictive Agreements..................................................... 65
8.14. Amendment of Material Agreements. ...................................................... 66
8.15. Name Changes. .......................................................................... 66
8.17. The Interest Reserve Securities.......................................................... 66
</TABLE>
ii
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<TABLE>
<S> <C>
ARTICLE IX. EVENTS OF DEFAULT
9.01. Events of Default........................................................................ 67
9.02. Remedies upon Default.................................................................... 70
9.03. Cumulative Rights........................................................................ 71
9.04. Waivers.................................................................................. 71
9.05. Performance by Administrative Agent or any Lender........................................ 71
9.06. Expenditures............................................................................. 71
9.07. Control.................................................................................. 72
ARTICLE X. THE ADMINISTRATIVE AGENT
10.01. Authorization and Action................................................................. 72
10.02. Administrative Agent's Reliance, Etc..................................................... 72
10.03. Bank of America, N.A. and Affiliates..................................................... 73
10.04. Lender Credit Decision................................................................... 73
10.05. Indemnification by Lenders............................................................... 73
10.06. Successor Administrative Agent........................................................... 73
ARTICLE XI. MISCELLANEOUS
11.01. Amendments and Waivers................................................................... 74
11.02. Notices.................................................................................. 74
11.03. Parties in Interest...................................................................... 76
11.04. Assignments and Participations........................................................... 77
11.05. Sharing of Payments...................................................................... 78
11.06. Right of Set-off......................................................................... 78
11.07. Costs, Expenses, and Taxes............................................................... 78
11.08. Rate Provision........................................................................... 79
11.09. Severability............................................................................. 79
11.10. Exceptions to Covenants.................................................................. 80
11.11. Counterparts............................................................................. 80
11.12. GOVERNING LAW; WAIVER OF JURY TRIAL...................................................... 80
11.13. ENTIRE AGREEMENT......................................................................... 81
11.14. Confidentiality.......................................................................... 81
11.15. Amendment, Restatement, Extension, Renewal and Increase.................................. 81
</TABLE>
iii
<PAGE>
$100,000,000
PACIFIC GATEWAY EXCHANGE, INC.
PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED
FIRST AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDED AND RESTATED CREDIT AGREEMENT is dated as of November
23, 1999, among PACIFIC GATEWAY EXCHANGE, INC., a Delaware corporation (the
"Domestic Borrower"), PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED, a Bermuda
company (the "Foreign Borrower"), the Lenders (as defined below), BANC OF
AMERICA SECURITIES LLC, as joint lead arranger and joint book manager, DEUTSCHE
BANK SECURITIES INC., as joint lead arranger, joint book manager and syndication
agent and BANK OF AMERICA, N.A., as a Lender and Administrative Agent.
BACKGROUND.
WHEREAS, the Domestic Borrower, the Administrative Agent and the Lenders
entered into a 364-day Credit Agreement on December 18, 1998 (as amended, the
"Original Credit Agreement"),
WHEREAS, the Domestic Borrower and the Foreign Borrower have requested the
Administrative Agent and the Lenders to amend, restate, extend, and increase the
Original Credit Agreement and add the Foreign Borrower as a Borrower.
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, N.A. f/k/a 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 either Borrower pursuant to
Section 2.01 hereof or any payment by Administrative Agent of a draft drawn
under any Letter of Credit which
1
<PAGE>
is not reimbursed by the Borrower as provided in Section 3.03(d), which shall
---------------
include Domestic Revolver Advances, Foreign 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.
"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, 3.50% per annum,
and with respect to Base Rate Advances, 2.50% per annum.
"Applicable Specified Percentage" means with respect to any Lender, in the
case of the Domestic Revolver Loan, such Lender's Domestic Revolver Specified
Percentage, in the case of the Foreign Revolver Loan, such Lender's Foreign
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.
"Approved Subsidiary" means (i) any wholly owned Domestic DB Subsidiary
which has executed an Unlimited Guaranty of Obligations and security agreement
pledging its assets to secure the Obligations and for which 100% of the Capital
Stock is subject to the first and prior Lien of the Lenders or (ii) with respect
to any wholly owned FB Subsidiary or Foreign DB Subsidiary (A) that has executed
an Unlimited Guaranty of the Obligations of the Foreign Borrower and its
Subsidiaries under the Foreign Commitment, (B) that has executed a security
agreement pledging its assets to secure the Obligations of the Foreign Borrower
and its Subsidiaries under the Foreign Commitment and for which 100% of the
Capital Stock is subject to the first and prior Lien of the Lenders, (C) and for
which the Administrative Agent has received an opinion of foreign counsel in
form reasonably acceptable to Administrative Agent, or (iii) any Subsidiary that
the Lenders, in their sole discretion agree and acknowledge is an Approved
Subsidiary in a subsequent agreement.
"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 PricewaterhouseCoopers or other independent certified
public accountants selected by the Borrower and acceptable to Administrative
Agent.
2
<PAGE>
"Authorized Officer" means, with respect to either Borrower and its
Subsidiaries respectively, any of the Chief Executive Officer, the Chief
Operating Officer, the Chief Financial Officer or any Vice President of the
Domestic 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 Domestic Revolver Loan or the
Foreign 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, N.A. as its "Reference Rate", and
which may not necessarily be the lowest interest rate charged by Bank of
America, N.A., and (ii) the Federal Funds Rate in effect at such time plus
0.50%.
"Board of Directors" means the Board of Directors of the Domestic Borrower
or any committee thereof duly authorized to act on behalf of such Board.
"Borrower" or "Borrowers" means individually the Domestic Borrower and the
Foreign Borrower, and collectively both the Domestic Borrower and the Foreign
Borrower.
"Borrowing" means a borrowing of the same Type made on the same day to the
same Borrower.
"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 New York, New York, 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.
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"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
Domestic Borrower, or (ii) any event which constitutes a change in Control of
the Foreign Borrower, or (iii) any event which results in either Borrower's
failure to own and control 100% of the Capital Stock of any of their
Subsidiaries, except as otherwise expressly permitted hereunder or as scheduled
on Schedule 5.01(a) hereto.
"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 Domestic Commitment and the Foreign Commitment.
"Commitment Fee" means the Domestic Revolver Commitment Fee and the Foreign
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 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) either 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 either 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
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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 either
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 either Borrower or any Subsidiary of either
Borrower of any obligations of such Borrower or any wholly owned Subsidiary of
such 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 (a) 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 or "group" (as defined in
--------
Sections 13(d) and 14(a) of the Securities Exchange Act of 1934) which
beneficially owns (i)35% 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 such corporation and (ii) 35% or more of the
interest in capital or profits of a partnership shall be conclusively presumed
to control such partnership or (b) as defined in the indenture, agreement or
other documentation providing for the High Yield Indebtedness.
"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.
"DB Subsidiaries" means all direct Subsidiaries of the Domestic Borrower
and all further Subsidiaries (direct and indirect) of such direct Subsidiaries,
but shall exclude the Foreign Borrower and PGE New Zealand Partnership.
"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
5
<PAGE>
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 either Borrower and their
Subsidiaries, at any date, without duplication, all Debt of the Borrowers and
their Subsidiaries that constitutes (a) all obligations of the Borrowers and
such Subsidiaries for borrowed money, letters of credit (or applications for
letters of credit) or other similar instruments, (b) all obligations of the
Borrowers and their Subsidiaries evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of the Borrowers and their Subsidiaries
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 Borrowers and their
Subsidiaries, (e) installment payment non-compete agreements for the Borrowers
and their Subsidiaries, and (f) all Contingent Liabilities relating to
obligations of another Person (other than a wholly owned Subsidiary of either
Borrower that has executed an Unlimited Guaranty, with respect to Debt of
another wholly owned Subsidiary of either 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 events, acts or conditions specified in Section 9.01
hereof, whether or not any requirement in connection with such events, acts or
conditions 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 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.
"Domestic Commitment" means the Domestic Revolver Commitment.
"Domestic Commitment Fee" means the Domestic Revolver Commitment Fee.
"Domestic DB Subsidiaries" means DB Subsidiaries that are incorporated or
organized under the Laws of the United States or any state therein.
"Domestic Revolver Commitment" means, with respect to the Domestic Revolver
Loan, $30,000,000 as reduced from time to time pursuant to Section 2.11 hereof.
"Domestic Revolver Advance" means any advance made under the Domestic
Revolver Loan.
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"Domestic Revolver Commitment Fee" means the fee described in Section
2.10(a) hereof.
"Domestic Revolver Loan" means the loan made by a Lender pursuant to
Section 2.01(a) of this Agreement.
"Domestic Revolver Note" means each Note of the Domestic Borrower
evidencing Domestic Revolver Advances under the Domestic 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.
"Domestic Revolver Specified Percentage" means, as to any Lender, the
percentage indicated beside its name on the signature pages hereof designated as
its Domestic Revolver Specified Percentage, or as adjusted or specified (i) in
any Assignment and Acceptance or (ii) in any amendment to this Agreement.
"EMU" shall have the meaning ascribed thereto in Section 6.14 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 either Borrower or any Obligor, or is
under common control with either Borrower or any Obligor, 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
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to in Section 4041(e) of ERISA), (c) the withdrawal by either Borrower, any
Subsidiary of either 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 either Borrower any Subsidiary
of either 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.
"Euro" shall have the meaning ascribed thereto in Section 6.14 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 the Foreign 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, acts or conditions 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.
"Excluded IRU Agreements" means those certain IRU agreements executed by
the Domestic Borrower, the Foreign Borrower or their Subsidiaries and detailed
on Schedule 1.03 hereof.
-------------
"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 New York, 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.
"Fee Letter" means that certain Fee Letter dated as of October 29, 1999
among the Borrowers, the Administrative Agent, Bankers Trust Company, Deutsche
Bank Securities Inc. and Banc of America Securities LLC.
"FB Subsidiaries" means all direct Subsidiaries of the Foreign Borrower and
all further Subsidiaries (direct or indirect) of such direct Subsidiaries.
"Foreign Borrower" means Pacific Gateway Exchange (Bermuda) Limited, a
Bermuda company and wholly owned Subsidiary of the Domestic Borrower.
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<PAGE>
"Foreign Commitment" means the Foreign Revolver Commitment.
"Foreign Commitment Fee" means the Foreign Revolver Commitment Fee.
"Foreign DB Subsidiaries" means DB Subsidiaries that are not Domestic DB
Subsidiaries.
"Foreign Revolver Commitment" means, with respect to the Foreign Revolver
Loan, $70,000,000 as reduced or adjusted from time to time pursuant to Section
2.11 hereof.
"Foreign Revolver Advance" means any advance made under the Foreign
Revolver Loan.
"Foreign Revolver Commitment Fee" means the fee described in Section
2.10(a) hereof.
"Foreign Revolver Loan" means the loan made by a Lender pursuant to Section
2.01(b) of this Agreement.
"Foreign Revolver Note" means each Note of the Foreign Borrower evidencing
Foreign Revolver Advances under the Foreign Revolver Loan hereunder,
substantially in the form of Exhibit G hereto, together in each case, with any
---------
extension, renewal or amendment thereof, or substitution therefor.
"Foreign Revolver Specified Percentage" means, as to any Lender, the
percentage indicated beside its name on the signature pages hereof designated as
its Foreign Revolver Specified Percentage, or as adjusted or specified (i) in
any Assignment and Acceptance or (ii) in any amendment to this Agreement.
"GAAP" means generally accepted accounting principles promulgated in the
United States 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 (i) with respect to the Foreign Borrower, the Domestic
Borrower, each FB Subsidiary and each DB Subsidiary existing on the Closing Date
or formed or acquired by the applicable Borrower after the date hereof and (ii)
with respect to the Domestic Borrower, each Domestic DB Subsidiary existing on
the Closing Date or formed or acquired by the Domestic Borrower after the date
hereof; in each case that has executed an Unlimited Guaranty.
"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,
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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 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.
"High Yield Indebtedness" means any unsecured Debt for Borrowed Money
issued by the Domestic Borrower or unsecured Debt for Borrowed Money that is
contractually subordinate to the Obligations hereunder on terms and conditions,
and subject to documentation acceptable to Majority Lenders
"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 either
Borrower or any of their Subsidiaries 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
Borrowers and their Subsidiaries, the ratio of (a) Operating Cash Flow for the
most recently completed four fiscal quarters to (b) (i) the aggregate amount of
cash Interest Expense actually paid during the most recently completed twelve
month period minus (ii) any interest paid out of the proceeds from the Interest
Reserve Securities.
"Interest Expense" means, for the Borrowers and their Subsidiaries on a
consolidated basis for any period of determination, the gross interest expense
(including capitalized interest) for any period on Total Debt, determined in
accordance with GAAP, minus the sum of interest income for such period.
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"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 either Borrower shall
select), provided, however, that:
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(a) neither Borrower may 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 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 either Borrower and
any Lender.
"Interest Reserve Securities" means those certain United States government
securities to be purchased in connection with the issuance of the High Yield
Indebtedness pursuant to the terms of an indenture or other form of agreement
for purpose of the payment of interest on the High Yield Indebtedness during the
first two years after the issuance of the High Yield Indebtedness.
"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.
"IRU" means an indefeasible right to use fiber or telecommunications
capacity, including the right to use the related transport and network
equipment.
"IRU Agreements" means those certain IRU agreements executed by the
Domestic Borrower, the Foreign Borrower or their Subsidiaries and detailed on
Schedule 1.04 hereof.
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"Japan-US Agreement" means that certain Japan-U.S. Cable Network and
Construction and Maintenance Agreement dated as of July 31, 1998 among Foreign
Borrower and the other parties thereto, as amended from time to time.
"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 Borrowers 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 Foreign Revolver
Commitment minus (without duplication) the sum of (i) all outstanding Foreign
Revolver Advances under the Foreign 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).
"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 Domestic Revolver Loan or the
Foreign 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 Borrowers 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
12
<PAGE>
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 either Borrower, or any Subsidiary of either
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, assignment, security interest,
encumbrance, lien, statutory or otherwise, or charge of any kind, (or an
equivalent under the laws of a country other than the US) or other priority or
preferential arrangement having the practical effect of any of the foregoing,
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
either Borrower or any Subsidiary of either Borrower 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.
"Loan Papers" means this Agreement, the Notes, the Unlimited Guaranties,
the pledge agreements, the financing statements, any Interest Rate Protection
Agreement and related documents entered into by the Borrowers or any Obligor
with any Lender or any Bank Affiliate, all Letters of Credit, all Applications
and all other agreements between either Borrower or any Obligor 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
Obligor 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.
"Loans" means the Domestic Revolver Loan and the Foreign Revolver Loan.
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"Majority Lenders" means (i) if there are three or fewer Lenders, all
Lenders, and (ii) if there are four or more Lenders, any combination of Lenders
having at least 66 2/3% 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 66 2/3% of the aggregate Commitment.
"Material Adverse Change" means any circumstance or event that is or could
reasonably be expected to (a) be material and adverse on the financial
condition, business, operations, prospects, or Properties of the Borrowers and
their Subsidiaries on a consolidated basis or, (b) materially and adversely
affect the validity, enforceability or collection under any Loan Paper or (c)
cause a Default or Event of Default.
"Maturity Date" means the earlier of November 20 , 2000, 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 either Borrower, any Subsidiary of either
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 either
Borrower, any Subsidiary of either Borrower, or any ERISA Affiliate and at least
one Person other than either Borrower, any Subsidiary of either Borrower and any
ERISA Affiliate, or (b) was so maintained and in respect of which either
Borrower, any Subsidiary of either 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.
"National Currency" shall have the meaning ascribed thereto in Section 6.14
------------
hereof.
"Net Proceeds" means the gross cash proceeds received by either Borrower or
any Subsidiary of either Borrower 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 such 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
Borrowers and such Subsidiaries of the Borrowers), and (b) reasonable and
customary transaction costs payable by the Borrowers and any Subsidiary of the
Borrowers that are related to such sale and payable to a Person other than an
Affiliate of the Borrowers and their Subsidiaries.
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"Notes" means each of the Domestic Revolver Notes and the Foreign Revolver
Notes, and "Note" means any Domestic Revolver Note or Foreign 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
applicable 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 applicable 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 either 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 either
Borrower, any other Obligor or any other Person under any Debtor Relief Law).
"Obligor" means (a) the Domestic Borrower, (b) the Foreign Borrower, (c)
each Subsidiary of either Borrower which executes a Loan Paper, (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.
"Onyx Entities" means: (i) Onyx Networks, Inc., a Delaware corporation,
Onyx Networks, Ltd., a Bermuda company, Onyx Networks International, Ltd., an
Ireland company, Onyx Internet Ltd., a U.K. company; (ii) any newly formed or
subsequently acquired direct or indirect Subsidiaries of the Persons described
in clause (i), (iii) any newly formed holding company created to hold the equity
interests in one or more of the Persons described herein; but shall exclude
Domestic Borrower, Foreign Borrower and every other Subsidiary listed on
Schedule 5.01(a) hereof.
"Onyx Parent Company" means the single Onyx Entity for which each and every
other Onyx Entity is a direct or indirect Subsidiary.
"Operating Cash Flow" means for the Borrowers and their Subsidiaries, for
any period, the sum of (without duplication) 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 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, (B) non-cash income and (C) net income associated with
cable and/or fiber sales or swaps.
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<PAGE>
"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 Foreign Borrower or
any Approved Subsidiary in telecommunications or internet service businesses or
related businesses, in compliance with the provisions of Sections 8.05 so long
as in each case (a) prior to the issuance of the High Yield Indebtedness and/or
raising additional equity capital by the Domestic Borrower which generates gross
proceeds of at least $150,000,000 (i) there exists no Default or Event of
Default both before and after giving effect to any such acquisition, (ii) the
Borrowers provide the Administrative Agent and each Lender with a Compliance
Certificate 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, (iii) the
consideration for the acquisition is common Capital Stock of the Domestic
Borrower, (iv) the aggregate consideration for all such acquisitions does not
exceed $30,000,000 and (vi) without the prior written consent of Majority
Lenders, the acquired entity does not have negative cash flow, and (b) after the
issuance of the High Yield Indebtedness and/or raising additional equity capital
by the Domestic Borrower which generates gross proceeds of at least $150,000,000
(i) there exists no Default or Event of Default both before and after giving
effect to any such acquisition, (ii)the Borrowers provide the Administrative
Agent and each Lender with a Compliance Certificate 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, (iii) the acquired entity is in the same line
of business of the Borrowers, (iv) the consideration for the acquisition is
common Capital Stock of the Domestic Borrower or up to $15,000,000 in cash, (v)
the aggregate consideration for all such acquisitions does not exceed
$50,000,000, no more than $15,000,000 of which may be in cash and (vi) without
the prior written consent of Majority Lenders, the acquired entity does not have
negative cash flow.
"Permitted Asset Sales" means (a) assets sales, cable sales, and IRU swaps,
each of the foregoing which are made in the ordinary course of business (b)
assets sales of equipment that is worn out, obsolete, damaged or otherwise
unsuitable for use in the business, and (c) intercompany asset sales made in
accordance with the terms of Section 8.05(a).
"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;
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(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;
(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;
(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 securing Debt existing on the Closing Date which is described on Schedule
--------
8.02 hereto; and
- ----
(h) Liens on equipment financed through capital leases or vendor financing
arrangements permitted pursuant to Section 8.02(f) and (g) hereof.
"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 Debt being refinanced, (ii) the maturity of such new Debt is no shorter
than the Debt being refinanced, (iii) the only Person(s) obligated on such
refinanced Debt are the original Person(s) 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
17
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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
either Borrower or any Subsidiary of either Borrower.
"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 Borrowers and their Subsidiaries, (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 either
Borrower or their Subsidiaries (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 either Borrower or any of their Subsidiaries to any other Subsidiary and/or
any other Affiliate of either 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 either Borrower or any
Subsidiary of either Borrower to a Person that is not an Affiliate of either
Borrower, (c) loans or advances to employees and/or shareholders of either
Borrower and their Subsidiaries, except advances to employees of either Borrower
or their Subsidiaries 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 (except for the Interest Reserve Securities), of any
Total Debt except the Obligations; and (e) payments of any amounts, fees,
advances, loans, investments or otherwise to any Subsidiary.
"Rights" means rights, remedies, powers, and privileges.
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<PAGE>
"Rustelnet" means the Subsidiary organized under the law of the country of
Russia, and identified on Schedule 5.01(a).
"Senior Leverage Ratio" means, on any date of determination, the ratio of
(a) Total Senior Debt on such date to (b) Operating Cash Flow for the four
fiscal quarters immediately preceding the date of determination, provided that
for purposes of this calculation, Operating Cash Flow shall be calculated as if
any Permitted Acquisition consummated on any date during the period of
determination were consummated on the first day in such period of determination,
and all Permitted Assets Sales consummated on any date during the period of
determination were consummated on the first day in such period of determination
"Single Employer Plan" means a single employer plan, as defined in Section
4001(a)(15) of ERISA, other than a Multiple Employer Plan of either 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.
"STM-1" means inventory held for sale (i) in connection with the Japan-US
cable consortium, 180 synchronous transport modules and (ii) in connection with
the TAT-14 cable consortium, 196 synchronous transport modules.
"Subordinated Indebtedness" means Debt of either 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.
"TAT-14 Agreement" means that certain TAT-14 Cable Network Construction and
Maintenance Agreement dated as of September 2, 1998 among Foreign Borrower and
the other parties thereto, as amended from time to time.
"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 Borrowers and their
Subsidiaries which would be shown on a consolidated balance sheet in accordance
with GAAP, including, without limitation, (a) Debt of any other Person secured
by a Lien on the property of either Borrower or any Subsidiary of either
Borrower in an amount equal to the lesser of (i) such Debt of such Person and
(ii) the value of such pledged property, (b) Withdrawal Liability and (c)
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 for the recently
completed four fiscal quarters, the ratio of (a) Total Debt on such date to (b)
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 Borrowers) 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 Borrowers)
sold on any date during the period of determination were sold on the first day
in such period of determination.
"Total Senior Debt" means, at any date, the aggregate of all Debt for
Borrowed Money of the Borrowers and their Subsidiaries (including any overdue
interest on such indebtedness, but excluding any accrued but not overdue
interest on any indebtedness) on a consolidated basis at such date minus the
High Yield Indebtedness.
"Total Specified Percentage" means, as to any Lender on any date of
determination, the percentage that such Lender's outstanding Advances (all
Domestic Revolving Advances and Foreign Revolving Advances) bears to the
aggregate outstanding amount of Advances (all Domestic Revolving Advances and
Foreign Revolving 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 the sum of its (i) Domestic Revolver
Specified Percentage of the Domestic Revolver Commitment plus (ii) Foreign
Revolver Specified Percentage of the Foreign Revolver Commitment bears to the
aggregate Commitments of all Lenders on such date.
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"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 New York
on the Closing Date.
"Unlimited Guaranty" means the Guaranty, executed in substantially similar
form by each Subsidiary of the Borrowers, guarantying payment and performance of
certain of the Obligations, substantially in the form of Exhibit F attached
---------
hereto, with respect to FB Subsidiaries, Foreign DB Subsidiaries and the
Domestic Borrower, and in the form of Exhibit G attached hereto, with respect
---------
to the Domestic DB Subsidiaries, as such agreements may be amended, modified,
renewed or extended from time to time, and each subsequent unlimited Guaranty in
the form of Exhibit F or G (as applicable) hereto executed by any newly
---------- -
acquired or created Subsidiary, as each such agreement may be amended, modified,
renewed or extended from time to time.
"Unused Facility Amount" means the Commitments minus (without duplication)
the sum of (a) all outstanding Domestic Revolver Advances, plus (b) all
outstanding Foreign Revolver Advances, plus (c) all issued and outstanding
Letters of Credit denominated in Dollars, plus (d) all issued and outstanding
Letters of Credit denominated in a Eurocurrency, as converted to Dollars
pursuant to Section 1.03 hereof, plus (e) 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.
"Warrants" means those certain warrants to purchase Capital Stock of the
Domestic Borrower issued in connection with the High Yield Indebtedness.
"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 Borrowers and their
Subsidiaries, unless otherwise expressly stated herein. References herein to
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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
central 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 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. Loans.
(a) Domestic Revolver Loan. Each Lender severally agrees, on the
terms and subject to the conditions hereinafter set forth, to make Domestic
Revolver Advances to the Domestic 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 Domestic Revolver Specified
Percentage of the difference between the Domestic Revolver Commitment and
Domestic Revolver Advances then outstanding. Subject to the terms and
conditions of this Agreement, the Domestic Borrower may borrow, repay and
reborrow the Domestic Revolver Advances; provided, however, that at no time
-------- -------
shall the sum of all outstanding Domestic Revolver Advances exceed the Domestic
Revolver Commitment.
(b) Foreign Revolver Loan. Each Lender severally agrees, on the
terms and subject to the conditions hereinafter set forth, to make Foreign
Revolver Advances to the Foreign 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 Foreign Revolver Specified
Percentage of the difference between the Foreign Revolver Commitment and the sum
(without duplication) of (i) the undrawn face amount of all outstanding Letters
of Credit, plus (ii) 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), plus (iii) Foreign
Revolver Advances then outstanding. Subject to the terms and conditions of this
Agreement, the Foreign Borrower may borrow, repay and reborrow the Foreign
Revolver Advances; provided, however, that at no time shall the sum (without
-------- -------
duplication) of (i) all outstanding Foreign 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 Foreign Revolver
Commitment.
2.02. Making Advances.
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(a) Each Borrowing of Advances shall be made upon the written notice
of the applicable Borrower, received by Administrative Agent not later than
(i)12:00 noon three Business Days prior to the date of the proposed
Borrowing, in the case of Advances which are LIBOR Advances and (ii) 12:00
noon 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) with
respect to Advances drawn under (I) the Domestic Revolver Loan shall not
exceed the unused portion of the Domestic Revolver Commitment, (II) the
Foreign Revolver Loan, shall not exceed the unused portion of the Foreign
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 Domestic Revolver Commitment or the
Foreign Revolver Commitment, respectively), and (II) in the 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 (or any lesser amount
if such amount is the remaining undrawn portion under the Domestic Revolver
Commitment or the Foreign Revolver Commitment, respectively); 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 2:00 p.m. on the date of each Advance under the Domestic
Revolver Loan or the Foreign Revolver Loan hereunder (other than a Refinancing
Advance), make available to Administrative Agent, at its office at Bank of
America Plaza, 901 Main Street, Dallas, Texas 75202, such Lender's Domestic
Revolver Specified Percentage and Foreign Revolver Specified Percentage of the
aggregate Advances under the Loans, 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
applicable 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 applicable Borrower at the
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Administrative Agent, in each case as specified by the applicable Borrower to
the Administrative Agent in writing.
(c) After giving effect to any Borrowing, (i) there shall not be more than
seven different Interest Periods in effect and (ii) the aggregate principal
amount of outstanding Advances under (A) the Domestic Revolver Loan shall not
exceed the Domestic Revolver Commitment, and (B) the Foreign Revolver Loan, plus
the sum of the outstanding amount available to be drawn under all outstanding
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
Foreign 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 applicable 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 applicable 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 such Borrower until the
date such amount is repaid to Administrative Agent, at (i) in the case of such
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.
(g) The applicable 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) such
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.
(a) The Advances made by each Lender under the Domestic Revolver Loan shall
be evidenced by a Domestic Revolver Note in the amount of such Lender's Domestic
Revolver Specified Percentage of the Domestic Revolver Commitment in effect on
the Closing Date.
(b) The Advances made by each Lender under the Foreign Revolver Loan shall
be evidenced by a Foreign Revolver Note in the amount of such Lender's Foreign
Revolver Specified Percentage of the Foreign Revolver Commitment in effect on
the Closing Date.
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(c) 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) Either 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
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Base Advance, the notice of prepayment may be given by telephone by 12:00 noon
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) The application of prepayments made under this Section 2.04 as between
the Domestic Revolver Loan and the Foreign Revolver Loan shall be determined in
accordance with the provisions of Section 2.13(f) hereof. 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 applicable 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 either Borrower or any of the
Subsidiaries consummates any sale of any asset or any of its Properties, other
than Permitted Asset Sales, then such Borrower shall immediately repay the
Obligations under the Loans in an amount equal to 100% of the Net Proceeds of
any such transaction; provided that no such repayment will be required if the
Property sold is subject to a Permitted Lien and the proceeds are used to pay
the Debt secured by such Permitted Lien.
(b) Public or Private Issuance of Debt or Equity. Except as provided in
Section 8.18 hereof, to the extent that either Borrower or any of their
Subsidiaries consummates any public or private issuance of Debt or equity
securities (this provision in and of itself not constituting permission to do
so), then the Borrowers shall immediately pay an amount equal to the Net
Proceeds in excess
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<PAGE>
of $150,000,000 to repay the Obligations under the Loans pro rata; provided,
however, with respect to the Domestic Borrower, no prepayment under this
provision shall be required until such time as the Domestic Borrower has
received $150,000,000 in gross proceeds from the issuance of High Yield
Indebtedness and/or public or private equity, but once the Domestic Borrower has
received $150,000,000 in gross proceeds from the issuance of High Yield
Indebtedness and/or public or private equity, each Borrower must pay all amounts
due as required under Section 2.11(g) after giving effect to respective
Commitment reductions under Section 2.11(c).
(c) Mandatory Prepayments, Generally. Except as otherwise specifically
provided herein, the application of prepayments made under this Section 2.05 as
between the Domestic Revolver Loan and the Foreign Revolver Loan shall be
determined in accordance with the provisions of Section 2.13(f) hereof. 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 (i)
Domestic Revolver Advances in excess of the Domestic Revolver Commitment as
reduced, (ii) Foreign 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 Foreign 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 Loans and all other
Obligations shall be due and payable in full on the Maturity Date.
(d) Amortization. To the extent that the Domestic Borrower has not raised
$150,000,000 in gross proceeds from the issuance of High Yield Indebtedness
and/or public or private equity and pre-paid the Loans in accordance with the
provisions of Section 2.05(b) and reduced the Commitment in accordance with
Section 2.11(c) on or prior to March 31, 2000, on April 1, 2000, the Commitment
shall be reduced pro rata by $50,000,000 between the Domestic Commitment and the
Foreign Commitment.
(e) Repayments, Generally. Any repayments made pursuant to this Section
shall be without premium or penalty, except the applicable Borrower must pay
together with any such prepayments, any Consequential Losses. The application
of prepayments made under this Section 2.06 as between the Domestic Revolver
Loan and the Foreign Revolver Loan shall be determined in
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<PAGE>
accordance with the provisions of Section 2.13(f) hereof. 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, each
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 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
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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 Borrowers 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 either
Borrower during the continuance of an Event of Default.
2.09. Continuation and Conversion Elections.
(a) Either 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
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<PAGE>
(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.
(b) The applicable 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) 12:00 noon 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) 12:00 noon 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 applicable 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.
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(a) 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 Applicable Specified Percentage, a commitment fee (the
"Revolver Commitment Fee") equal to (i) to the extent that 50% or less of the
Commitment is used, 1.00% per annum on the average daily amount of the Unused
Facility Amount and (ii) to the extent that more than 50% of the Commitment is
used, 0.75% per annum on the average daily amount of the Unused Facility Amount,
each 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. Borrowers 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.
2.11. Reduction and Adjustment of Commitments.
(a) Mandatory Termination of the Commitment. The 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
that would be required by Section 2.05(a) hereof to prepay the Loan, regardless
of the outstanding amount of Advances thereunder, as a result of any asset sales
(other than Permitted Assets Sales) of either Borrower or any Subsidiary of
either Borrower (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 270 day period
after any such asset sale, in undersea fiber optic cable capacity, related
terrestrial back-haul capacity and other agreed upon telecommunications assets,
and with respect to insurance proceeds, assets of the type for which the
insurance was paid.
(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
securities by either Borrower or any of their Subsidiaries (other than Debt
permitted to be incurred in accordance with the provisions of Section 8.02 and
except as provided in Section 8.18 hereof) (this provision in and of itself not
constituting permission to effectuate any such transaction), the Commitment
shall be reduced pro rata 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; provided, however, with respect to the Domestic Borrower, no Commitment
reduction or termination under this provision shall be required until such time
as the Domestic Borrower has received $150,000,000 in gross proceeds from the
issuance of High Yield Indebtedness and/or public or private equity, but once
the Domestic Borrower has received $150,000,000 in gross proceeds from the
issuance of High Yield Indebtedness and/or public or private equity, (i) the
Domestic Commitment shall immediately and automatically be reduced to zero and
(ii) the Foreign
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<PAGE>
Commitment shall immediately and automatically be reduced to $50,000,000 (if
greater than that number on the Business Day of issuance of High Yield
Indebtedness). If the Foreign Revolver Commitment has been previously reduced
pursuant to Section 2.11 hereof to less than $50,000,000, it will increase to
$50,000,000 on the Business Day on which the High Yield Indebtedness is issued;
provided no Default or Event of Default exists hereunder or would result
therefrom, and provided that no event shall have occurred that could reasonably
be expected to cause a Material Adverse Change since December 31, 1998 other
than as disclosed through SEC filings through the Closing Date.
(d) Mandatory Reduction of Commitment Due to Scheduled Amortization. To
the extent that the Domestic Borrower has failed to raise $150,000,000 in gross
proceeds from the issuance of High Yield Indebtedness and/or public or private
equity prior to March 31, 2000, repay the Loans in accordance with the
provisions of Section 2.05(b) and reduce the Commitment in accordance with
Section 2.11(c), the Commitment shall be reduced pro rata by $50,000,000 on
April 1, 2000.
(e) Change of Control. If any Change of Control shall have occurred, the
Commitment shall immediately and automatically be reduced to zero.
(f) Voluntary Commitment Reductions. Either 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
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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. Both voluntary and
mandatory reductions of the Commitment shall be apportioned between the Domestic
Revolver Commitment and the Foreign Revolver Commitment in accordance with the
terms of Section 2.13(f) hereof. To the extent outstanding Domestic Revolver
Advances exceed the Domestic Revolver Commitment after any reduction thereof,
the Domestic Borrower shall repay, on the date of such reduction, any such
excess amount and all accrued interest thereon, the applicable Domestic Revolver
Commitment Fee on the amount of such reduction and all other amounts due. To
the extent the (i) Foreign Revolver Advances plus (ii) the undrawn face amount
of all outstanding Letters of Credit, plus (iii) 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) exceed the Foreign Revolver Commitment after any reduction thereof,
the Foreign Borrower shall repay, on the date of such reduction, any such excess
amount and all accrued interest thereon, the applicable Foreign Revolver
Commitment Fee on the amount of such reduction and all other amounts due. Once
reduced or terminated, the Domestic Revolver Commitment and the Foreign 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 Domestic Revolver Commitment or the Foreign Revolver
Commitment pursuant to Section 2.11(d) hereof.
2.12. Funding Losses. Either 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
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condition precedent to the Borrower's right to make, and any Lender's
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<PAGE>
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 Borrowers 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 Borrowers 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 Bank of America Plaza, 901 Main Street, Dallas, Texas 75202, referencing
Pacific Gateway Exchange, Inc. or Pacific Gateway Exchange (Bermuda) Limited, as
applicable. 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 a Borrower
prior to the date on which any payment is due hereunder that such 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 a 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. Each 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 either 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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<PAGE>
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.
(f) Except as provided pursuant to Section 2.11(c), (d), and (g) hereof, to
the extent either Borrower makes any voluntary prepayment, or voluntary
reduction of the Commitment under Section 2.04 or 2.11 hereof, or any mandatory
prepayment, or mandatory reduction of the Commitment under Section 2.05 or 2.11
hereof, then such reduction of Commitment or such prepayment shall be applied as
follows:
(i) So long as there exists no Payment Default or Event of Default.
(A) Repayments and Prepayments. So long as there exists no
Default under Section 9.01(a) hereof or any Event of Default, all voluntary
and mandatory repayments (to the extent not otherwise agreed to herein) and
prepayments shall be applied as directed by the applicable Borrower, and in
the absence of direction by the applicable Borrower, shall be deemed to
repay and prepay (I) payments made by the Domestic Borrower and DB
Subsidiaries shall be applied first to amounts outstanding on the Domestic
Revolver and then, pursuant to the Domestic Borrower's Unlimited Guaranty
of the Foreign Borrower's Obligations, to amounts outstanding on the
Foreign Revolver; and (II) payments made by the Foreign Borrower and FB
Subsidiaries shall be applied first to amounts outstanding on the Foreign
Revolver and then, through repayment of intercompany indebtedness or
Dividends, up to the Domestic Borrower to permit such Borrower to pay
amounts outstanding on the Domestic Revolver. If, however, no amounts
remain outstanding on the Foreign Revolver, in the case of mandatory
prepayments, Foreign Borrower shall have the option of immediately
depositing any remaining mandatory prepayment amounts into an interest
bearing reserve account, established with and pledged to the Administrative
Agent for that purpose. If after 60 days such mandatory prepayment of the
Domestic Revolver has not been made in full, then the Administrative Agent
shall have the right to apply funds on deposit in the reserve account as
necessary to make such mandatory prepayment. Funds on deposit in the
reserve account shall be released to Borrower to the extent (and as) such
mandatory prepayment of the Domestic Revolver is made from other sources;
and
(B) Commitment Reductions. So long as there exists no Default
under Section 9.01(a) hereof or any Event of Default, all voluntary and
mandatory Commitment reductions (to the extent not otherwise agreed to
herein) shall be applied as directed by the applicable Borrower, and in the
absence of direction by such Borrower, shall be deemed to reduce,
respectively, (1) the Domestic Revolver Commitment until the Domestic
Revolver Commitment has been reduced to zero,
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then (2) the Foreign Revolver Commitment until the Foreign Revolver
Commitment has been reduced to zero.
(ii) During the Existence of a Payment Default or Event of Default.
(A) Repayments and Prepayments. So long as there exists a Default
under Section 9.01(a) hereof or any Event of Default,(I) all payments
made by the Domestic Borrower and DB Subsidiaries shall be applied
first to amounts outstanding on the Domestic Revolver and then,
pursuant to the Domestic Borrower's Unlimited Guaranty of Foreign
Borrower's Obligations, to amounts outstanding on the Foreign
Revolver; and (II) all payments made by the Foreign Borrower and FB
Subsidiaries shall be applied first to amounts outstanding on the
Foreign Revolver and then (through repayment of intercompany Debt
permitted under Section 8.02(c) or Dividends permitted under Section
8.07(d)) to the Domestic Borrower to permit such Borrower to pay to
amounts outstanding on the Domestic Revolver.
(B) Commitment Reductions. So long as there exists a Default
under Section 9.01(a) hereof or any Event of Default, all mandatory
and voluntary Commitment reductions shall be applied first to the
Domestic Revolver Commitment, and second, to the Foreign Revolver
Commitment.
2.14. Yield Protection; Changed Circumstances.
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(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 Borrowers shall pay to such Lender such additional amount or amounts
as will adequately compensate such Lender for such reduction. Each Lender will
notify the Borrowers 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
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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 Borrowers 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
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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 reimbursement obligations by an amount deemed by such Lender, to be
material, then, within five days after demand by such Lender, the Borrowers
----
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 Borrowers 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
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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
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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 Borrowers 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
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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 Borrowers, (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
Borrowers 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 Borrowers 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 Borrowers,
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 circumstances causing such suspension no longer
exist and Administrative Agent notifies the Borrowers 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 Borrowers under this Section 2.14 shall survive
any termination of this Agreement, provided that, in no event shall the
Borrowers be required to make a payment
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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 Borrowers 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. Prior to the issuance of $150,000,000 in gross
proceeds from High Yield Indebtedness and/or public or private issuance of
equity securities, the proceeds of the Advances shall be available (and the
Borrowers shall use such proceeds) solely (a) to refinance the existing
$50,000,000 revolving credit facility owed to Bank of America, N.A., (b) in
accordance with the current pro rata portion of Borrower's obligations to fund
STM-1 measured capacity payments demonstrated by invoices from the Japan-US
consortium in connection with the Japan-US Agreement or TAT-14 consortium in
connection with the TAT-14 Agreement for such payments, (c) for up to
$10,000,000 in working capital (determined by working capital expenditures after
the closing of the Loans) and other lawful corporate purposes and (d) for up to
$5,000,000 to light the MFN fiber network. After the issuance of $150,000,000
in gross proceeds from High Yield Indebtedness and/or public or private issuance
of equity securities and the related prepayments and Commitment reductions, the
proceeds of the Advances shall be available (and the Borrowers shall use such
proceeds) solely (a) to make acquisitions approved hereunder and (b) for Capital
Expenditures including (b) above approved by Majority Lenders, and (c) for
Letters of Credit.
2.16. Collateral.
(a) Domestic Revolver Loan. Payment of the Obligations under the
Domestic Revolver Loan will be secured by (i) a first perfected security
interest in all tangible and intangible assets of Domestic Borrower including
currentand future IRU Agreements, but excluding: (A) assets purchased and
subject to Liens under vendor financing arrangements permitted hereunder, (B)
certain assets set forth on Schedule 8.13 hereof or approved by the Majority
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Lenders that may not by contract or law be pledged or assigned, (C) the Interest
Reserve Securities acquired in accordance with Section 8.17 hereof, and (D) the
Excluded IRU Agreements; (ii) first perfected security interest in 66% of the
Capital Stock of Foreign Borrower; (iii) 100% of the Capital Stock of all
Domestic DB Subsidiaries; (iv) 66% of Capital Stock of all Foreign DB
Subsidiaries; (iv) Guaranties by all Domestic DB Subsidiaries, which Guaranties
shall be secured by a first perfected security interest in all tangible and
intangible assets (including intercompany notes) of such Domestic DB
Subsidiaries including current and future IRU Agreements, but excluding: (A)
assets purchased and subject to Liens under vendor financing arrangements
permitted hereunder, (B) certain assets set forth on Schedule 8.13 hereof or
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approved by the Majority Lenders that may not by contract or law be pledged or
assigned, and (C) the Excluded IRU Agreements (collectively, together with all
other Properties or assets of the Borrowers, their Subsidiaries and other
Persons securing the Domestic Obligations from time to time, the "Domestic
Collateral"). The Domestic Borrower agrees that it will, and will cause the
Domestic DB 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 Domestic Collateral
(b) Foreign Revolver Loan. Payment of the Obligations under the Foreign
Revolver Loan will be secured by (i) a Guarantee of Domestic Borrower secured by
the Domestic Collateral; (ii) a first perfected security interest in all
tangible and intangible assets of Foreign Borrower including current and future
IRU Agreements, but excluding: (A)assets purchased and subject to Liens under
vendor financing arrangements permitted hereunder, (B) certain assets set forth
on Schedule 8.13 or approved by Majority Lenders that may not by contract or
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law be pledged or assigned, and (C) the Excluded IRU Agreements; (iii) 100% of
the Capital Stock of all FB Subsidiaries; (iv) Guaranties by all Domestic DB
Subsidiaries, which Guaranties shall be secured by a first perfected security
interest in all tangible and intangible assets of such Domestic DB Subsidiaries
including current and future IRU Agreements, but excluding: (A) assets purchased
and subject to Liens under vendor financing arrangements permitted hereunder,
(B) certain assets set forth on Schedule 8.13 or approved by Majority Lenders
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that may not by contract or law be pledged or assigned, and (C) the Excluded IRU
Agreements;(v)Guaranties by FB Subsidiaries;(vi) Guaranties made by FB
Subsidiaries with assets in excess of $2 million, shall be secured by a first
perfected security interest in all tangible and intangible assets of such FB
Subsidiaries including current and future IRU Agreements, but excluding: (A)
assets purchased and subject to Liens under vendor financing arrangements
permitted hereunder, (B) certain assets set forth on Schedule 8.13 or approved
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by Majority Lenders that may not by contract or law be pledged or assigned, and
(C) the Excluded IRU Agreements; (vii) Guaranties by Foreign DB Subsidiaries,
which Guaranties shall be secured by a first perfected security interest in all
tangible and intangible assets of such Foreign DB Subsidiaries including current
and future IRU Agreements, but excluding: (A) assets purchased and subject to
Liens under vendor financing arrangements permitted hereunder, (B) certain
assets set forth on Schedule 8.13 or approved by Majority Lenders that may not
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by contract or law be pledged or assigned, and (C) the Excluded IRU Agreements.
(collectively, together with all other Properties or assets of the Borrowers,
their Subsidiaries and other Persons securing the Foreign Obligations from time
to time, the "Foreign Collateral"). The Domestic Collateral and the Foreign
Collateral together, the "Collateral". The Domestic Borrower and the Foreign
Borrower agree that they will, and will cause their 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.
ARTICLE III. LETTERS OF CREDIT
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3.01. Issuance of Letters of Credit. The Foreign 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 Foreign 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 Foreign Borrower's
properly completed and duly executed Applications, and subject to the terms of
such Applications and to the terms of this Agreement (which, in the event of a
conflict between the terms of the Application and the terms of this Agreement,
the terms of this Agreement shall control), the Administrative Agent agrees to
issue Letters of Credit on behalf of the Foreign Borrower in an aggregate face
amount not in excess of the lesser of (a) Letter of Credit Commitment and (b)
the remainder of the Foreign Revolver Commitment minus the sum of all
outstanding Foreign 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)
such earlier date as may be required to enable the Foreign 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, or (ii) 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 Foreign Borrower with
respect to any Letter of Credit in their Foreign Revolver Specified Percentages
(or if such Letter of Credit is denominated in a currency other than Dollars,
the Dollar equivalent of their Foreign Revolver Specified Percentage of such
currency). The amount of the Letters of Credit issued and outstanding and the
unpaid reimbursement obligations of the Foreign 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
Foreign Revolver Commitment available, so that at no time shall the sum of (i)
all outstanding Foreign 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 Foreign Revolver Commitment, and at no time shall the sum
of all Foreign 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 Foreign Borrower in respect of such Letters
of Credit exceed its Foreign Revolver Specified Percentage of the Foreign
Revolver Commitment.
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3.02. Letters of Credit Fee. In consideration for the issuance of each
Letter of Credit, the Foreign 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 Foreign 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 Foreign 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 Foreign 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. Foreign Borrower, within one Business
Day of receipt of such notice from Administrative Agent, shall notify
Administrative Agent whether Foreign Borrower intends to make funds available to
Administrative Agent in such currency. Payment shall be made by the Foreign
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 Foreign Borrower would be permitted under the
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terms of Section 2.01, Section 2.02 and Section 4.02 to borrow Foreign 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 Foreign 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 Foreign 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
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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 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 (Bermuda) Limited
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 Foreign 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 Foreign 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 (Bermuda) Limited Special Account, after the
date of the expiration of all Letters of Credit and after all Obligations have
been paid in full, or after the Event of Default shall cease to exist shall be
repaid to the Foreign Borrower promptly thereafter.
(c) The obligations of the Foreign 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 Foreign Borrower
and until all other Obligations shall have been paid in full.
(d) The Foreign 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 Foreign Borrower for any
reason fails to reimburse Administrative Agent in full upon demand, whether by
borrowing Foreign Revolver Advances to pay such reimbursement obligations or
otherwise, the Lenders shall reimburse Administrative Agent in accordance with
each Lender's Foreign Revolver Specified Percentage for amounts due and unpaid
from the Foreign Borrower as set forth in Section 3.04 hereof; provided,
however, that no such reimbursement made by the Lenders shall discharge the
Foreign Borrower's obligations to reimburse Administrative Agent.
(e) The Foreign 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 Foreign 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 Foreign Revolver Specified
Percentage of such amounts due and unpaid from the Foreign Borrower. The
provisions of this Section 3.03(e) shall survive the termination of this
Agreement.
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3.04. Lenders' Obligations. Each Lender agrees, unconditionally and
irrevocably to reimburse Administrative Agent on demand for such Lender's
Foreign Revolver Specified Percentage of each 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 Foreign Borrower and its Subsidiaries or for the
performance of any obligation of the Foreign 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 either 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 Foreign Borrower or any Affiliate of the Foreign 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
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Dollars shall immediately terminate until such time Foreign 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 may issue
such Letters of Credit in accordance with Applicable Law, and such Letters of
Credit will become Obligations of the Foreign 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, (whichever shall
occur first) 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 each 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 or Memorandum of
Association of each Borrower, each United States Subsidiary, and certain of the
Subsidiaries located in the United Kingdom, Germany, Japan, Australia and New
Zealand, certified to be true, complete and correct by the secretary of state of
each such Person's respective state or country of organization as described on
Schedule 5.01, (ii) copies of the By-Laws (or bye-laws) of each Borrower and
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each of the Subsidiaries referenced in (i) above and (iii) copies of a
certificate of good standing and a certificate of existence for the Borrowers
and each Subsidiary referenced in (i) above in their state or country of
organization and each other state or country in which they are required to be
authorized to do business;
(b) duly executed Notes by each Borrower, payable to the order of each
Lender, equal to its Applicable Revolver Specified Percentage of the Commitments
on the Closing Date;
(c) a loan certificate of each Borrower certifying that a copy of the
resolutions of such Borrower and each of the Subsidiaries authorizing such
entity to execute, deliver and perform this Agreement, the Notes and the other
Loan Papers to which each such entity 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
Guarantors;
(e) in form and substance acceptable to the Administrative Agent, a duly
executed and completed pledge agreement or share charge by the Domestic Borrower
pledging or charging 66% of the Capital Stock of the Foreign Borrower to secure
the Domestic Revolver Loan;
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(f) in form and substance acceptable to the Administrative Agent, a duly
executed and completed pledge agreement by the Domestic Borrower pledging 100%
of the Capital Stock of the Domestic DB Subsidiaries of the Domestic Borrower to
secure the Domestic Revolver Loan;
(g) in form and substance acceptable to the Administrative Agent, a duly
executed and completed pledge agreement or share charge by the applicable
Obligor pledging or charging 100% of the Capital Stock of the FB Subsidiaries
owned by such Obligor and 100% of the Capital Stock of the Foreign DB Subsidiary
owned by such Obligor to secure the Foreign Revolver Loan;
(h) original stock or membership certificates, as applicable, constituting
the pledged Capital Stock of the Subsidiaries as described in (e), (f) and (g)
above, together with stock powers executed in blank and UCC filings requested by
the Administrative Agent;
(i) in form and substance acceptable to the Administrative Agent, a duly
executed and completed security agreement and U.C.C. financing statements by the
Domestic Borrower and each of the Domestic DB Subsidiaries of the Domestic
Borrower pledging the tangible and intangible assets of such entities to secure
the Domestic Revolver Loan;
(j) in form and substance acceptable to the Administrative Agent, a duly
executed and completed security agreement and U.C.C. financing statements by the
Domestic Borrower, Foreign Borrower and each Approved Subsidiary pledging the
tangible and intangible assets of such entities to secure the Foreign Revolver
Loan;
(k) Unlimited Guarantys executed by each of the Guarantors as set forth in
Section 2.16 hereof;
(l) payment in full by the Borrowers to the Administrative Agent in
immediately available funds of the fees which are then due, as described in the
Fee Letter;
(m) all other Loan Papers to be delivered on the Closing Date duly
executed and completed, dated the Closing Date;
(n) opinions addressed to Administrative Agent on behalf of the Lenders of
(i) corporate counsel to the Borrowers, each Domestic DB Subsidiary and foreign
counsel for certain Subsidiaries located in the United Kingdom, Germany, Japan,
Australia and New Zealand as described on Schedule 1.02 with respect to
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organizational matters, due authorization, execution, etc., no violation of law
or material agreement, and the validity and enforceability under New York law
and (ii) special FCC counsel and/or PUC counsel to the Borrowers and the
Subsidiaries, as applicable, with respect to the Licenses of the Borrowers and
the Subsidiaries and the transactions contemplated hereby, each in form and
substance acceptable to the Administrative Agent;
(o) assignability of the MFN and the Williams cable IRU contracts on
conditions satisfactory to the Administrative Agent;
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(p) opinion of counsel to Borrowers in a form acceptable to Administrative
Agent confirming Borrowers' and their applicable Subsidiaries' ability to
transfer to a third party cable rights held by Borrowers and their Subsidiaries
without the consent of any consortium group member as a result of the sale of
100% of the Capital Stock of the entities holding any cable rights;
(q) in form and substance acceptable to Administrative Agent, written
agreements from identified cable consortiums to provide Administrative Agent
written notice of any default or event of default with respect to cable
contracts together with an opportunity to cure any such default or event of
default;
(r) 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;
(s) evidence that all corporate proceedings of the Borrowers and each of
their Subsidiaries has taken place 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;
(t) copies of all UCC searches of all Properties of the Borrowers and the
domestic 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 each of the foreign Subsidiaries in the United Kingdom, Germany,
Japan, Australia and New Zealand;
(u) 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;
(v) a certificate from the Borrowers stating that there has been no
Material Adverse Change in the financial condition, business, operations, or
prospects of the Borrowers and their Subsidiaries since December 31, 1998 other
than as disclosed through SEC filings;
(w) evidence satisfactory that the Borrowers and each of their
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
Borrowers and their 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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(x) 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 Borrowers or any Subsidiary 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 Borrowers 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 Borrowers' 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
Borrowers 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 Borrowers 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 December 31, 1998 other than as disclosed
through SEC filings through the Closing Date;
(e) In the case of each Letter of Credit, Foreign Borrower shall have
delivered to the Administrative Agent a duly executed and complete Application
acceptable to Administrative Agent;
(f) In the case of any Domestic Revolver Advance, the aggregate
outstanding Domestic Revolver Advances after giving effect to such proposed
Domestic Revolver Advance, shall not exceed the Domestic Revolver Commitment;
and
(g) In the case of any Foreign Revolver Advance, the aggregate
outstanding Foreign Revolver Advances after giving effect to such proposed
Foreign 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 Foreign Revolver Commitment; and
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(h) Certification in a Compliance Certificate from and calculations by
Borrowers demonstrating compliance with the Capital Expenditure covenant, the
loan use limitations, and to the extent applicable, an invoice from the
applicable consortium for Borrowers' current pro rata portion of the consortium
STM-1 payments in connection with the Japan-US Agreement or the TAT-14
Agreement.
ARTICLE V. REPRESENTATIONS AND WARRANTIES
5.01. Representations and Warranties. The Borrowers hereby represent
and warrant to each Lender as follows:
(a) The respective jurisdictions of incorporation and percentage
ownership of all Subsidiaries, including a designation of the DB Subsidiaries,
the FB Subsidiaries and the Foreign DB Subsidiaries, of the Borrowers on the
Closing Date and listed on Schedule 5.01(a) hereto are true and correct. Each of
----------------
the Borrowers and the Subsidiaries is a entity duly organized, validly existing
and in good standing under the laws of its state or country of organization.
Each of the Borrowers and the Subsidiaries has the corporate power and corporate
authority to own its properties and to carry on its business as now being
conducted. Each of the Borrowers and the Subsidiaries 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 Borrowers have the corporate power and has taken all necessary
corporate action to authorize it to borrow hereunder. Each of the Borrowers and
the 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 Borrowers or such Subsidiary executing it. Each of the Loan Papers to which
the Borrowers and the Approved Subsidiaries are party is a legal, valid and
binding obligation of each of the Borrowers or such Approved 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 either
of the Borrowers or any Approved Subsidiary of the Borrowers).
(c) The execution, delivery and performance by the Borrowers and the
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 (or memorandum of
association or bye-laws) of either of the Borrowers or any Subsidiary, or under
any material License, indenture, agreement or other instrument, to which either
of the Borrowers or any 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
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either of the Borrowers or any Subsidiary, except Permitted Liens, except, with
respect to any of the foregoing, which could not reasonably be expected to cause
a Material Adverse Change.
(d) The Borrowers 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 Borrowers and the
Subsidiaries have been duly authorized and obtained, and are in full force and
effect. The Borrowers and the Subsidiaries 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 Borrowers' 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 Borrowers' knowledge, threatened
challenge or revocation, which such event could reasonably be expected to cause
a Material Adverse Change. The Borrowers and the Subsidiaries 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 Borrowers and the Subsidiaries are in compliance in all material
respects with all material Applicable Laws. The Borrowers and the Subsidiaries
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 Borrowers are 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 Borrowers are 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 Borrowers and the Subsidiaries 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 Borrowers and the Subsidiaries
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
Borrowers or the Subsidiaries 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 either of the Borrowers or any Subsidiary
(except relating to Permitted Liens and Liens permitted by Section 8.03(b)
hereof) is on file in any state or jurisdiction that names either Borrower or
any of the Subsidiaries as debtor or covers (or purports to cover) any assets of
either Borrower or any of the Subsidiaries. Neither the Borrowers nor any of the
Subsidiaries have signed any such financing statement or filing, nor any
security agreement authorizing any Person to file any such financing statement
or filing.
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(h) On the Closing Date, except as reflected on Schedule 5.01(h) hereto,
----------------
there is no material action, suit, proceeding or any other Litigation pending
against, or, to the best of the Borrowers' knowledge, threatened against the
Borrowers or any of their Subsidiaries, or in any other manner relating directly
and materially adversely to the Borrowers any of their 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
Borrowers' knowledge, threatened against the Borrowers or any of their
Subsidiaries, or in any other manner relating to the Borrowers or any of their
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 Borrowers and their
Subsidiaries required by law to be filed have been duly filed and all Taxes,
assessments and governmental charges or levies imposed upon either of the
Borrowers or their Subsidiaries or any of their Properties, income, profits and
assets, and all other material claims for labor, material and supplies which if
left unpaid might become a Lien upon their Properties or assets, except those
that are diligently contested in good faith by the Borrowers and for which
adequate reserves have 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 Borrowers have furnished or caused to be furnished to the
Lenders copies of its financial statements at September 30, 1999 which are
prepared in good faith and complete in all material respects, except for year-
end adjustments and the absence of footnotes. Each such statement presents
fairly in all material respects and in accordance with GAAP (except for year-end
adjustments and absence of footnotes) the financial position of the Borrowers
and the Subsidiaries as at such dates, and the results of operations for the
periods then ended. The Borrowers and the Subsidiaries 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 Borrowers and their Subsidiaries on a
consolidated basis are 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,
except as disclosed in the Domestic Borrower's SEC filings.
(l) None of the Borrowers or their 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 either 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 such 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 either Borrower or any
member of its Controlled Group has any
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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 Borrowers 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
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
Borrowers 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 Borrowers 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 Borrowers'
knowledge, threatened claims, lawsuits or actions (other than routine claims for
benefits in the ordinary course) asserted or instituted against, and neither the
Borrowers nor any member of their 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 Borrowers or any member of their
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 Borrowers or any member of their
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 Borrowers, any member of
their Controlled Group, or any organization to which either Borrower or any
member of their 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 Borrowers or any member of their
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
Borrowers and their 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 Borrowers are not, nor are any of the Subsidiaries 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 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
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purchasing or carrying any margin stock. Not more than 25% of the assets of
either Borrower or any of their Subsidiaries are margin stock (as defined by
Regulation U), and none of the Capital Stock of either Borrower's Subsidiaries
is margin stock (except as may occur as a result of the transactions
contemplated in Section 8.18). None of the Borrowers or their Subsidiaries, nor
any agent acting on their behalf, have taken or will 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 Borrowers and the Subsidiaries are in compliance with all of the
material provisions of their articles of incorporation and by-laws. As of the
Closing Date, no event, act or condition 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 either Borrower or any
of their Subsidiaries under any material contract, or other material indenture,
agreement or other instrument, or any judgment, decree or order to which either
Borrower or any of the Subsidiaries 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, act or condition 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
either Borrower or any of the Subsidiaries under any material contract or other
material indenture, agreement or other instrument, or any judgment, decree or
order to which either Borrower or any of the Subsidiaries 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) Neither Borrower is, nor are any of their Subsidiaries, required to
register under the provisions of the Investment Company Act of 1940, as amended.
Neither the entering into or performance by the Borrowers of this Agreement nor
the issuance of the Notes, nor the execution, delivery and performance of the
obligations under the Loan Papers by the Borrowers and their 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, neither of the Borrowers or any of their
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, neither of the Borrowers
nor any Subsidiary 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 either Borrower
or any of their Subsidiaries except as disclosed to the Lenders in writing, and
which could, in the reasonable judgment of the Borrowers, be expected to cause a
Material Adverse Change. As of the Closing Date, neither the Borrowers nor the
Subsidiaries are in violation of or subject to any existing, pending or, to the
best of either Borrower's knowledge, threatened investigation or inquiry by any
governmental authority or to any material remedial obligations under any
applicable
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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 of either Borrower or the Subsidiaries. On each date after the
Closing Date on which this representation is deemed to be made, neither the
Borrowers nor the Subsidiaries are in violation of or subject to any existing,
pending or, to the best of either Borrower's knowledge, threatened investigation
or inquiry by any governmental authority or to any material remedial obligations
under any applicable Environmental Laws which could reasonably be expected to
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 either Borrower or the Subsidiaries.
Neither the Borrowers nor the Subsidiaries are 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 either Borrower or any Subsidiary by reason of any applicable
Environmental Laws, except those that have been obtained. As of the Closing
Date, neither Borrower nor any or their Subsidiaries have 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 either Borrower or any of their Subsidiaries in violation of any
applicable Environmental Law, except as could be not reasonably be expected to
cause a Material Adverse Change. On each date after the Closing Date on which
this representation is deemed to be made, neither Borrower nor any of their
Subsidiaries have 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 either Borrower any of their Subsidiaries, within the
meaning of the applicable Environmental Laws, except as disclosed to the Lenders
and which such disposal or release could not reasonably be expected to cause a
Material Adverse Change.
(q) On the Closing Date, there is no Litigation, or, to the best of either
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 either Borrower or any of
their Subsidiaries that has not been disclosed in writing to the Lenders either
directly or through SEC filings.
(r) All Capital Stock of the Borrowers and their 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 Borrowers and their Subsidiaries, or the
Subsidiaries of another Subsidiary of either 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 either Borrower and their Subsidiaries, other than the Warrants or
those rights that have been waived. The Capital Stock of the Borrowers and their
Subsidiaries 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
either Borrower (other than to the Lenders or their Affiliates hereunder) with
respect to the making of the Commitment or the Advances hereunder. The
Borrowers agree to indemnify and hold harmless the
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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.
(t) No event, act or condition 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 Borrowers, as of the Closing Date, the
Borrowers and their 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 Borrowers
and the Subsidiaries 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 either Borrower or any of their Subsidiaries to the
effect that (i) any process, method, part or other material presently
contemplated to be employed by either Borrower or any of their Subsidiaries 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 either Borrower or any
of their Subsidiaries 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 taken as a whole which has been furnished to any Lender by or on
behalf of either Borrower or any of their 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 either 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 Borrowers 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 either Borrower or any of their 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) Neither the Borrowers nor any of their Subsidiaries is 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 either Borrower, or the Board of
Directors, unless such Borrower has agreed to a substantially similar provision
in this Agreement.
(x) Year 2000 Compliance.
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(a) The Borrowers have (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 such Borrower and their 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 such Borrower related to the Year 2000
Problem and being Year 2000 Compliant shall not exceed an amount which
could reasonably be expected to cause a Material Adverse Change.
(b) Each of the Borrowers and their 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 Borrowers and their Subsidiaries,
the business failure of which could reasonably be expected to cause 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 Borrowers shall, and shall cause their Subsidiaries 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 such Borrower or such Subsidiary 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 Borrowers shall, and shall cause each of their Subsidiaries to,
qualify and remain qualified and authorized to do business in each jurisdiction
in which the character of its Properties
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or the nature of its business requires such qualification or authorization,
except where the failure to do so could not be reasonably expected to cause a
Material Adverse Change.
6.02. Business; Compliance with Applicable Law. The Borrowers shall, and
shall cause their Subsidiaries 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 reasonably be expected to cause a Material
Adverse Change.
6.03. Maintenance of Properties. The Borrowers shall, and shall cause
their Subsidiaries 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 Borrowers shall, and
shall cause their Subsidiaries 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 Borrowers shall, and shall cause each of their Subsidiaries to
maintain a fiscal year ending on December 31.
6.05. Insurance. The Borrowers shall, and shall cause each of their
Subsidiaries to, maintain insurance (including self insurance with respect to
their deductibles) 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 Borrowers shall, and shall cause
each of their Subsidiaries to, pay and discharge all Taxes, assessments and
governmental charges or levies imposed upon it or its income, Properties,
profits or assets 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 Borrowers diligently in good faith, and
for which adequate reserves have been established in accordance with GAAP. The
Borrowers shall, and shall cause each of their Subsidiaries to, timely file all
information returns required by federal, state or local Tax authorities.
6.07. Visits and Inspections. The Borrowers shall, and shall cause each of
their Subsidiaries 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 and each
of their Subsidiaries as often as the Administrative Agent or any Lender shall
deem advisable, (b) inspect and make extracts from and copies of either of the
Borrower's or their Subsidiary's books and records, and (c) discuss with the
Borrowers' or any of their Subsidiary's directors, officers, employees and the
auditors of either Borrower or any of their Subsidiaries, its business, assets,
liabilities, financial positions, results of operations and business prospects.
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6.08. Use of Proceeds. The Borrower shall use the proceeds of the
Advances exclusively as described in Section 2.15 hereof.
6.09. Indemnity.
(a) Each of the Borrowers shall, and shall cause each of their
respective FB or DB Subsidiaries 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 applicable
Borrower or its respective FB or DB 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 either 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 to the extent that it 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, each of the Borrowers shall, and shall cause each of
their respective FB or DB Subsidiaries 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 Indemnitee or insufficient to hold any Indemnitee harmless
with respect to Indemnified Matters, then the applicable Borrowers and their
respective FB or DB Subsidiaries 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 such Borrower or such Subsidiaries, and either Borrower's stockholders or
their Subsidiaries' stockholders, on the one hand and such Indemnitee on the
other hand but also the relative fault of such Borrower or such Subsidiary 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 either 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
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successors, assigns, heirs and personal representatives of the Borrowers and
their Subsidiaries, the Administrative Agent, the Lenders and all other
Indemnitees. This Section shall survive any termination of this Agreement and
payment of the Obligations.
6.10. Environmental Law Compliance. The use which either of the Borrowers
or any of their respective FB or DB 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 that could reasonably be expected to cause a Material
Adverse Change. 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
either Borrower or any of their respective FB or DB 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. Each of the Borrowers
shall, and shall cause their respective FB or DB Subsidiaries 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 either Borrower
or any of their respective FB or DB 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 such 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 provisions of this paragraph shall survive the Release Date
and shall continue thereafter in full force and effect.
6.11. Acquisitions, Generally. In connection with any Permitted
Acquisition made by either Borrower or any of their Subsidiaries during the term
of this Agreement, such Borrower shall or shall cause such Subsidiary to, (a)
not less than five 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
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conditions set forth in Article VIII 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.
6.12. Subsidiary Designation. The Borrower agrees that each Subsidiary on
the Closing Date will remain a Subsidiary until the Obligations have been repaid
in full and the Commitment has been terminated, except as permitted in Article
VIII hereof.
6.13. Year 2000 Compliance. The Borrowers will promptly notify the
Administrative Agent in the event either 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.
6.14. 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
--------
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 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) The applicable 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 applicable
Borrower) to be necessary to reflect such implementation of the EMU and change
in currency and to put the Lenders and the applicable Borrower in the same
position, so far as possible, that they would have been in if such
implementation and change in
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currency had not occurred. Except as provided in the foregoing provisions of
this Section 6.14, no such implementation or change in currency nor any economic
------------
consequences resulting therefrom shall (i) give rise to the applicable
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
either 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 applicable 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 Domestic Borrower and its Subsidiaries, and (b) consolidated
balance sheets of the Borrowers and their 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 Borrowers and their Subsidiaries, 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. As soon as available,
but in all cases within 120 days after the end of each fiscal year, a copy of
(i) the consolidated and consolidating balance sheets of the Borrowers and their
Subsidiaries, in each case, as of the end of the current and prior fiscal years
and (ii) 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 Borrowers and their 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.
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 either Borrower or any Subsidiary 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 either Borrower or any Subsidiary to stockholders
generally, (iii) each regular or periodic report
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and any registration statement or prospectus (or material written communication
in respect of any thereof) filed by either Borrower or any of their Subsidiaries
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 Borrowers or any of their Subsidiaries.
(b) Promptly upon becoming aware (i) that the holder(s) of any note(s)
or other evidence of indebtedness or other security of either Borrower or any
their Subsidiaries 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 either Borrower or any such
Subsidiary under any material agreement or instrument other than this Agreement
to which such Borrower or any such Subsidiary 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 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 either Borrower,
any in an amount of $250,000 or more in the aggregate, or otherwise could
reasonably be expected to 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
either Borrower or any of their Subsidiaries from any governmental agency, or
any government, political subdivision or other entity, of any material notice,
correspondence, hearing, proceeding or order regarding or affecting either
Borrower or any such Subsidiary or any of their Properties or businesses not in
the ordinary course of business, a copy of such notice, correspondence, hearing,
proceeding or order;
(e) Within 10 calendar days of the end of each calendar month, a report
summarizing all STM-1 leases or sales for such period, the cost associated with
such STM-1 leases or sales and the sale price of such STM-1s; and
(f) 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 Borrowers and their Subsidiaries, as the
Administrative Agent or any Lender may reasonably request.
7.05. Notice of Default and Other Matters. Prompt notice of the following
events after either 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
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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 Borrowers, or any of their
Subsidiaries are insured), against or in any other way relating directly to the
Borrowers, any of their Subsidiaries, or any of their properties, assets or
businesses;
(b) Promptly upon the happening of any act, 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 reasonably be expected to cause a Material
Adverse Change with respect to the business, assets, liabilities, financial
position, results of operations or prospective business of the Borrowers or any
of their Subsidiaries.
7.06. ERISA Reporting Requirements.
(a) Promptly and in any event (i) within 30 days after either Borrower,
or any member of their 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 such
Borrower or any member of its Controlled Group has occurred, and (ii) within 10
days after such 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 such
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
such 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 either Borrower or any member of their Controlled Group from the
PBGC, copies of each notice received by such 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
either Borrower or any member of their 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 either Borrower or
any member of their 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 either Borrower or any member of their
Controlled Group receives from the Plan Sponsor (as defined by Section
4001(a)(10) of ERISA) of any Plan concerning potential withdrawal
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liability pursuant to Section 4219 or 4202 of ERISA, and a statement from the
chief financial officer of such 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 such 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 either 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 either Borrower,
or any such member of their 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
(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.
(i) Prior to the issuance of any High Yield Indebtedness, at
all times until the Obligations have been repaid in full and the
Commitments have been terminated, the Borrowers shall not permit the
Total Leverage Ratio to be more than 3.00 to 1.00.
(ii) After the issuance of any High Yield Indebtedness, at all
times until the Obligations have been repaid in full and the
Commitments have been terminated, the Borrowers shall not permit the
Total Debt to be more than the sum of the following:(A) Operating
Cash Flow (for the most recently completed four quarters) times
3.00; plus (B) 50% of the sum of (x) the lower of (I) the cost of
all STM-1s or (II) the market value of all STM-1s as determined by
STM-1 leases or sales minus (y) all payments due by the Domestic
Borrower or any of its Subsidiaries on the STM-1s; plus (C) cash on
hand at Domestic Borrower on such date, but only to the extent that
such
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cash on hand is in excess of $10,000,000; plus (D) the market value
of the Interest Reserve Securities on such date.
(b) Senior Leverage Ratio. After the issuance of High Yield
Indebtedness, at all times until the Obligations have been repaid in full
and the Commitments have been terminated, the Borrowers shall not permit
the Senior Leverage Ratio to be more than 2.25 to 1.00.
(c) Minimum Operating Cash Flow. The Borrowers shall not permit
Operating Cash Flow for the Borrowers and their Subsidiaries on a
consolidated basis for the following periods of determination to be less
than as indicated below:
Period Amount
------ ------
October 1, 1999 through $ 6,000,000
December 31, 1999
January 1, 2000 through $11,000,000
March 31, 2000
April 1, 2000 through $11,300,000
June 30, 2000
July 1, 2000 through $ 9,000,000
September 30, 2000
(d) Interest Coverage Ratio. At all times until the Obligations
have been repaid in full and the Commitments have been terminated, the
Borrowers shall not permit the Interest Coverage Ratio to be less than 2.00
to 1.00.
(e) Capital Expenditures. The Borrowers shall not permit Capital
Expenditures related to non-STM-1 expenses to exceed the agreed financial
forecasts described below for non-STM-1 payments for such fiscal quarter.
Any unused amount of these Capital Expenditures may be added to the maximum
limitation for such Capital Expenditure for the immediately succeeding
fiscal quarter. The Borrowers shall not permit Capital Expenditures related
to STM-1 payments of the Borrowers and their Subsidiaries to exceed the
amount demonstrated by invoices from the Japan-US or TAT-14 consortiums for
such current payments under the Japan-US Agreement or the TAT-14 Agreement.
Fiscal Quarter Ending Non STM-1 Amount
--------------------- ----------------
December 31, 1999 $14,740,000
March 31, 2000 $ 8,000,000
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June 30, 2000 $ 8,000,000
September 30, 2000 $ 8,000,000
8.02. Debt for Borrowed Money. The Borrowers shall not, and shall
not permit any of their Subsidiaries 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 Borrowers and their Subsidiaries, Debt for
Borrowed Money under the Loan Papers;
(b) with respect to the Borrowers and their Subsidiaries, Debt for
Borrowed Money in existence on the Closing Date described on Schedule 8.02
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hereto and not otherwise permitted pursuant to the terms of this 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 , (i) Debt owed between or among the Domestic
Borrower and the DB Subsidiaries, (ii) owed between or among the Foreign
Borrower and the FB Subsidiaries, (iii) Debt owed by Foreign Borrower or by an
FB Subsidiary to Domestic Borrower or a DB Subsidiary and (iv) owed by the
Domestic Borrower to the Foreign Borrower or an FB Subsidiary incurred for the
purpose of making scheduled payments on the High Yield Indebtedness or payment
hereunder;
(d) so long as there exists no Default or Event of Default both before
and after giving effect thereto, Debt of either 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 either Borrower in respect of Permitted
Refinancing Indebtedness;
(f) so long as there exists no Default or Event of Default both before
and after giving effect to the incurrence thereof and in form and substance
acceptable to the Administrative Agent, secured Debt (including Capital Leases)
of either Borrower or its Subsidiaries in an amount outstanding at any one time
during the term of this Agreement not to exceed an amount equal to $50,000,000;
(g) so long as there exists no Default or Event of Default both before
and after giving effect to the incurrence thereof and in form and substance
acceptable to the Administrative Agent, secured or unsecured Debt (including
Capital Leases) of either Borrower (in addition to permitted Debt described
above) in an amount outstanding at any one time during the term of this
Agreement not to exceed an amount equal to $10,000,000; and
(h) 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 Domestic
Borrower delivers to the Administrative Agent and the Lenders a pro forma
Compliance Certificate giving effect to the incurrence of any High
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Yield Indebtedness and demonstrating compliance with the terms of this Agreement
and the Loan Papers throughout the term of the Loan, unsecured High Yield
Indebtedness of the Domestic Borrower in an amount in the aggregate over the
term of this Agreement not to exceed an amount equal to$250,000,000 with such
other terms and conditions as agreed to by the Administrative Agent and the
Borrower.
8.03. Liens. The Borrowers shall not, and shall not permit any of their
Subsidiaries 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 IRU swaps in the ordinary
course of business as described in Section 8.16 hereof, 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(c), Section
8.02(d),Section 8.02(f), and Section 8.02(g) 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
Obligor and purchased with the proceeds of such Debt and shall not cover
additional assets of the Borrowers or their Subsidiaries. The Borrowers shall
not, and shall not permit their Subsidiaries 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 Borrowers shall not, and shall not permit their
Subsidiaries to, make any Investment, except that either Borrower or its
Subsidiaries 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.;
(e) Investments in acquisitions permitted by Section 8.05(b) hereof;
(f) Accounts receivable that arise in the ordinary course of business
and are payable on standard terms;
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(g) Investments that are in existence on the Closing Date and described
on Schedules 5.01(a) and 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 Approved Subsidiaries, including Debt which is permitted under Section
8.02(c); provided that neither of the Borrowers nor any of their Subsidiaries
may create or acquire any Subsidiary pursuant to this Section 8.04(h) or (i),
without having first given five days prior written notice to the Administrative
Agent in accordance with the terms of Section 11.02 hereof;
(i) so long as there exists no Default or Event of Default both at the
time of such Investment and immediately after giving effect thereto, (i) after
the issuance of the High Yield Indebtedness, Investments in Japan Backhaul
Company not in excess of $35,000,000 and (ii) Investments in FB Subsidiaries or
Foreign DB Subsidiaries which are not Approved Subsidiaries, each of which shall
have assets with a book value of less than $2,000,000 and all of which in the
aggregate shall have assets with a book value of less than $10,000,000 (minus
the amount of Investment permitted to be invested in Rustelnet in Section
8.04(j) below); and
(j) 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 Rustelnet until such time as the book value of its assets exceeds $5
million, at which time Rustelnet shall become an Approved Subsidiary.
8.05. Liquidation, Disposition or Acquisition of Assets, Merger, New
Subsidiaries. The Borrowers shall not, and shall not permit any of their
Subsidiaries 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) Permitted Asset Sales, (ii) any sale, transfer, liquidation or
dissolution of any Subsidiary, provided the assets of that Subsidiary are
transferred either to the Foreign Borrower or an Approved Subsidiary, (iii)
transactions permitted in Sections 8.04(i) and (j), and (iv) transactions
described in Section 8.18 with respect to the Onyx Entities.
(b) except as permitted in Sections 8.04(i) and (j) hereof, 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, and (ii) provided that the Foreign Borrower and Approved Subsidiaries
comply fully with Section 6.11 hereof, and upon the execution and delivery of
the required Loan Papers, Permitted Acquisitions may be consummated by the
Foreign Borrower and Approved Subsidiaries; or
(c) enter into any merger, amalgamation, or consolidation, except that,
so long as there exists no Default or Event of Default and none is caused
thereby, after delivery of prior written notice to the Administrative Agent,(i)
any Domestic DB Subsidiary may merge, amalgamate, or consolidate with or into an
Approved Subsidiary which is another Domestic DB Subsidiary, the Foreign
Borrower, an FB Subsidiary or a Foreign DB Subsidiary (so long as the Foreign
Borrower, such FB
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Subsidiary or Foreign DB Subsidiary is the surviving entity), (ii) any FB
Subsidiary or Foreign DB Subsidiary may merge, amalgamate, or consolidate with
or into an Approved Subsidiary which is another Foreign DB Subsidiary, the
Foreign Borrower, or an FB Subsidiary (so long as the Foreign Borrower, such FB
Subsidiary or Foreign DB Subsidiary is the surviving entity and such entity has
executed an Unlimited Guaranty), and (iii) the Onyx Entities may enter into the
transactions described in Section 8.18 hereof.
8.06. Guaranties; Contingent Liabilities. Other than Debt permitted
pursuant to Section 8.02 hereunder, the Borrowers shall not, and shall not
------------
permit any of their Subsidiaries 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 Borrowers shall not, and shall not permit
any of their Subsidiaries to, directly or indirectly declare, make or pay any
Restricted Payment; provided, however
(a) in addition to Investments permitted under Section 8.04(h),
(i), and (j) hereof, (i) any DB Subsidiary may declare, make and pay
Restricted Payments to the Domestic Borrower (prior to the issuance of the
High Yield Indebtedness), the Foreign Borrower, or any Approved Subsidiary,
and (ii) any FB Subsidiary or Foreign DB Subsidiary may declare, make or
pay Restricted Payments to the Foreign Borrower or any Approved Subsidiary;
(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 Borrowers may make loans and advances to employees of the Borrowers and
their Subsidiaries which, in the aggregate over the term of this Agreement,
do not exceed $100,000; and
(c) so long as
(i) there exists no Default or Event of Default both before
and after giving effect to any such Restricted Payment, and
(ii) with respect to any such distribution relating to the High
Yield Indebtedness, the date any such Distribution is made is such
time as the value of the Interest Reserve Securities is zero,
then the Foreign Borrower and any Subsidiary may declare, make and pay
Restricted Payments constituting Dividends to the Domestic Borrower in an
amount not to exceed the scheduled cash interest due and payable on the
outstanding High Yield Indebtedness,
(d) The Domestic Borrower may make payments of scheduled cash
interest on the outstanding High Yield Indebtedness (i) to the extent such
payments are made from direct proceeds of the Interest Reserve Securities,
and (ii) to the extent the Domestic Borrower receives permitted
Distributions from the Foreign Borrower for such purpose in accordance with
the terms of Sections 8.07(c) hereof; and
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(e) The Borrower and its Subsidiaries may make scheduled payments
of Debt permitted to be incurred under Section 8.02 hereof and payments
from proceeds of collateral subject to Permitted Liens securing such Debt.
8.08. Affiliate Transactions. The Borrowers shall not, and shall not
permit any of their 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 such
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.
- ------------- -------------
8.09. Compliance with ERISA. The Borrowers shall not, and shall not permit
any of their 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
either 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 either 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 either 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 either 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 either 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 Borrowers shall not, and shall not permit any
Subsidiary to (a) make or permit any transfer, assignment, distribution, a
mortgage, charge, pledge or gift of any shares of Capital Stock, except (i) to
the Foreign Borrower or a wholly owned direct or indirect Subsidiary of the
Foreign Borrower, 100% of whose Capital Stock has been pledged as Collateral,
that has executed an Unlimited Guaranty of the Obligations and for whom an
opinion of foreign counsel acceptable in form and substance has been received by
Administrative Agent, and (ii) for asset sales permitted by Section 8.05(a)
hereof and (b) issue any Capital Stock.
8.11. Sale and Leaseback. The Borrowers shall not, and shall not permit
any of their Subsidiaries 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 Borrowers shall not, and shall
not permit any of their Subsidiaries to, directly or indirectly sell, with or
without recourse, for discount or otherwise, any notes or accounts receivable.
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8.13. Limitation on Restrictive Agreements. Except in connection with the
issuance of Debt under Section 8.02 hereof, the Borrowers shall not, and shall
------------
not permit any of their Subsidiaries to, except as otherwise described on
Schedule 8.13 hereto, 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
conditions (which are no more restrictive than those contained herein) 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 such Borrower or any
Subsidiary of either Borrower, (f) the making of loans or advances, (g)
transfers or sales of Property or assets (including Capital Stock) by either
Borrower, or any of their 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 Borrowers shall not, and shall
not permit any of their Subsidiaries to, amend, waive or consent to any
deviation from any provision of any documentation or agreements (other than in
the ordinary course of business) that would be adverse to the Lenders of (i) any
material agreement relating to either Borrower or any such Subsidiary, (ii) in
any material respect, articles of incorporation, by-laws and other
organizational documents of either Borrower or any of their Subsidiaries, (iii)
the Japan-US Agreement, (iv) the TAT-14 Agreement, (v) any indentures,
agreements or other documentation executed in connection with the High Yield
Indebtedness, and (vi) the Warrants.
8.15. Name Changes. Neither Borrower shall, or shall permit any of their
Subsidiaries to, change its name or address without notifying Administrative
Agent 30 calendar day prior to such name change.
8.16. Cable Contracts. The Borrowers shall not, and shall not permit any
of their Subsidiaries to grant a Lien in any interest in any fiber contract to
any party other than the Administrative Agent for the benefit of the Lenders,
other than pursuant to IRU swaps in the ordinary course of business.
8.17. The Interest Reserve Securities. Neither the Domestic Borrower or
the Foreign Borrower shall, and nor shall they permit any of their Subsidiaries
to (i) use any funds to purchase Interest Reserve Securities except proceeds
from the issuance of the High Yield Indebtedness, and interest accrued on such
amounts, (ii) commingle any proceeds of the Interest Reserve Securities with any
other funds of the Domestic Borrower, the Foreign Borrower or any of their
Subsidiaries, or (iii) use the proceeds of the Interest Reserve Securities for
any purpose other than for the Domestic Borrower to make cash interest payments
that are due and payable on the High Yield Indebtedness.
8.18. Onyx Transactions. So long as there exists no Default or Event of
Default both before and after giving effect to any of the transactions otherwise
permitted under this Section 8.18 and upon 10 days written notice to the
Administrative Agent, then notwithstanding anything to the contrary in this
Credit Agreement or any security agreements, pledge agreements, share charges or
any other Loan Paper that creates or authorizes a lien, pledge, mortgage, charge
or debenture on the shares of the Onyx
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Entities or the assets of the Onyx Entities, the following transactions shall be
permitted, subject to the limitations specifically set forth below, without any
further consent of the Lenders.
(a) Asset Transfers. Prior to the occurrence any of the other
transactions set forth in this Section 8.18, shares in or assets of all or any
of the Onyx Entities may be transferred to another Onyx Entity; provided that,
except as set forth in subsection (b), the resulting Onyx Parent Company must be
a direct, wholly-owned Subsidiary of either the Domestic Borrower or the Foreign
Borrower and its shares must be pledged or charged by the Domestic Borrower or
the Foreign Borrower, as applicable, to secure such Borrower's Obligations under
this Credit Agreement.
(b) Issuance of Equity Securities. The Onyx Parent Company may issue
equity securities, in a public or private placement, equal to at least 5% but
not greater than 35%, of the then outstanding equity interests of such entity
without making a mandatory prepayment or causing a Commitment reduction under
Article 2 of this Credit Agreement. Concurrently with the closing of any such
issuance, the Administrative Agent, on behalf of the Lenders, shall:
(i) Release any and all rights the Administrative Agent or the
Lenders may have under Unlimited Guaranties executed by any Onyx Entity;
(ii) Release any and all rights the Administrative Agent or the
Lenders may have under security agreements, pledge agreements, share
charges or any other Loan Paper that creates or authorizes a lien, pledge,
mortgage, charge or debenture on the assets owned by the Onyx Entities,
including any equity interests in one Onyx Entity held by another Onyx
Entities;
(iii) Execute any and all releases, termination statements and such
other documents or instruments as may reasonably be required to effectuate
the foregoing; provided that, the applicable Borrower or the Onyx Parent
Company shall pay the Administrative Agent's reasonable costs and expenses
(including legal counsel) related to such releases, and provided further
that nothing in this subsection (b) shall require Lender to release the
pledge of or charge on the shares of the Onyx Parent Company.
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) Either 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 three business 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;
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(c) Either 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 such 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 cease to create a valid and perfected first priority Lien
in the Collateral purported to be covered thereby or not be in full force and
effect, or shall be declared to be null and void; provided that if any Guaranty
by a Subsidiary that is not an Approved Subsidiary is invalid for any reason not
known to Borrowers at the time of the execution of such Guaranty, then the
invalidity shall not be an Event of Default if within 45 days such Subsidiary
enters into an agreement guaranteeing the Obligations hereunder the fullest
extent allowed under applicable law; or (ii) the validity or enforceability of
any Loan Paper shall be contested by any Obligor, any Subsidiary or any
Affiliate of either Borrower; 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;
(f) Any of the following shall occur: (i) either Borrower or any of
their Subsidiaries (other than Rustelnet) shall make an assignment for the
benefit of creditors or be unable to pay its debts generally as they become due;
(ii) either Borrower or any of their Subsidiaries (other than Rustelnet) 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 such Borrower or any of its Subsidiaries (other than
Rustelnet) or any Debtor Relief Laws; (iii) any such petition or application
shall be filed, or any such proceedings shall be commenced, against either
Borrower or any of their Subsidiaries (other than Rustelnet), 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 either Borrower or such
Subsidiary, or if contested by either 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 either Borrower or any of their Subsidiaries (other than Rustelnet)
decreeing its dissolution; or (v) any final order, judgment, or decree shall be
entered in any proceedings against either Borrower or any of their Subsidiaries
(other than Rustelnet) decreeing its split-up which requires the divestiture of
a substantial part of its assets;
(g) Any of the following shall occur: (i) either Borrower or any or
their Subsidiaries 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) either
Borrower or any of their Subsidiaries shall fail to perform or observe any term
or covenant contained in any agreement or instrument relating to
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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 either Borrower or any of their 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 either Borrower or any Subsidiary of
either 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) either Borrower
or any of their Subsidiaries 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) Either Borrower, or any ERISA Affiliate of either 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 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 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 portion of the assets with a book value of more
than $1,000,000 of either Borrower or any of their Subsidiaries;
(l) 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 either
Borrower or any of their Subsidiaries shall expire without renewal or be
suspended or revoked, or (ii) either Borrower or any of their Subsidiaries shall
become subject to any injunction or other order affecting or which may affect
such Borrower's or any of its Subsidiary's present or proposed operations under
any such License;
(m) Any civil action, suit or proceeding shall be commenced against
either Borrower, any of their 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
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determined by a court of applicable jurisdiction, and which is either non-
appealable or which either Borrower or such Subsidiary has elected not to
appeal; or any criminal action or proceeding shall be commenced against either
Borrower, or any of their Subsidiaries under any federal or state racketeering
statute (including, without limitation, RICO);
(n) There shall occur a Change of Control;
(o) Any Litigation commenced against either Borrower or any of their
Subsidiaries and 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;
(p) Either Borrower or any of their Subsidiaries 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 either Borrower or any of their
Subsidiaries material to the operation of the business of such 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;
(q) Either Borrower or any of their operating 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;
(r) 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 either
Borrower and their Subsidiaries that has generated, for the most recently
completed twelve month period, in excess of five percent of the Operating Cash
Flow;
(s) Any of the following shall have occurred:
(i) Less than 66% of the Capital Stock of the Foreign Borrower
shall be subject to a first priority perfected pledge or Lien in favor of
the Administrative Agent to secure the Domestic Revolver Loan Obligations;
or
(ii) Less than 100% of the Capital Stock of the Foreign Borrower
shall be subject to a first priority perfected pledge or Lien in favor of
the Administrative Agent to secure the Foreign Revolver Loan Obligations;
or
(t) Any of the Borrower or any of its Subsidiaries shall fail to be Year
2000 Compliant and such failure could reasonably be expected to result in an
Material Adverse Change; or
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(u) For any reason, the loss of the chief executive officer of the
Domestic Borrower, if a replacement acceptable to Majority Lenders is not found
within 60 calendar days of such event.
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, or shall at the direction of the Majority Lenders, 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 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 Commitments;
(c) Reduce any claim of Administrative Agent and Lenders to judgment;
(d) Demand (and the Borrowers 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, including the
proviso of Section 3.03(b). The Administrative Agent shall promptly advise the
Borrowers 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
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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 Borrowers 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
demand to the Borrower for reimbursement of such amount until the date of
repayment by the Borrowers.
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,
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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
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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 Borrowers for the individual account of
any Lender pro rata in accordance with the Applicable Specified Percentage, as
set forth
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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 Borrowers or any of their Subsidiaries), 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 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 Borrowers and
their Subsidiaries or to inspect the Property (including the books and records)
of the Borrowers or their 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, N.A. and Affiliates. With respect to its Domestic
Revolver Commitment, its Foreign Revolver Commitment, its Advances, and any Loan
Papers, Bank of America, N.A. 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, N.A. 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, N.A. 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.
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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
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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.
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 Borrowers (which
shall not be unreasonably withheld), provided that, if there exists an Event of
Default that is continuing, no consent of the Borrowers 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.
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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
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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 Domestic
Revolver Commitment, (b) increase the Foreign Revolver Commitment (c) 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, (d)
postpone any date fixed for any payment of principal, interest, fees, or other
amounts payable hereunder, (e) 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", "Domestic Revolver Specified Percentage", "Foreign Revolver
Specified Percentage" or the number of Lenders required to take any action
hereunder, change the definitions of "Commitment", "Domestic Revolver
Commitment", "Foreign 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.
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:
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(i) If to the Borrowers or any or their Subsidiaries.:
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, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202
Telephone No.: (214) 209-1132
Telecopier No.: (214) 209-9390
Attention: Debra S. Wood
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
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(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 Borrowers 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 Borrowers agree 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. Neither Borrower may 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 pro rata with
respect to the Assignor's Applicable Specified Percentage 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 Borrowers, in each case such consent of the Borrowers 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 Borrowers 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 Borrowers 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 Commitments. 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 Borrowers and their Subsidiaries furnished to such Lender by or on behalf of
the Borrowers and their 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, N.A.) may assign any of its interest in the Loan
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Papers to any Person (except as may be required by Law or a Tribunal having
authority over Bank of America, N.A.).
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
Borrowers 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
Borrowers 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 Borrowers or any of their Subsidiaries against any and all of the
obligations of the Borrowers 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 Borrowers
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
Borrowers 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.
(b) In addition, notwithstanding anything to the contrary in the Loan
Papers, the Borrowers shall pay any and all stamp, debt, and other Taxes payable
or determined to be payable in connection
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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 Borrowers or their Subsidiaries
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 Borrowers 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 Borrowers shall make such deductions or withholdings, and (iii) the
Borrowers 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 Borrowers hereunder, the agreements and
obligations of the Borrowers 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 Borrowers 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 inter est 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 Borrowers
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 all agreements among the
parties to the Loan Papers pertaining to the transactions contemplated by or
contained in the Loan Papers.
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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.
(a) THIS AGREEMENT AND ALL OTHER LOAN PAPERS SHALL BE DEEMED TO BE
CONTRACTS MADE IN NEW YORK, NEW YORK, AND SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (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 NEW YORK 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 NEW YORK LOCATED IN NEW YORK CITY, NEW YORK
WILL HAVE JURISDICTION OVER PROCEEDINGS IN CONNECTION HEREWITH. TO THE MAXIMUM
EXTENT PERMITTED BY LAW, THE BORROWERS EACH HEREBY WAIVE 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 BORROWERS, 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.
83
<PAGE>
(b) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE BORROWER HEREBY
WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. THE BORROWERS AGREE 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.
11.14. Confidentiality. Each Lender agrees to keep information obtained by
it pursuant to the terms hereof or the terms of any other Loan Paper that is not
otherwise publicly available ("Confidential Information") confidential in
accordance with such Lender's customary procedures for handling confidential
information of this nature and in accordance with safe and sound banking
practices and agrees that it will only use such Confidential Information in
connection with the transactions contemplated by this Agreement and not disclose
any of such Confidential Information other than (a) to such Lenders and its
Affiliates' (other than an Affiliate which is a competitor of the Borrower or
its Subsidiaries) employees, counsel (in-house and outside), accountants,
consultants, representatives, professional advisors and agents so long as such
Person is advised of the confidentiality of such Confidential Information and
the limitation on its use under this Section 11.14, and needs to have knowledge
of such Confidential Information for such limited use, (b) to regulatory
officials, and in order to comply with any Applicable Law, or other law,
regulation or judicial order, or as requested or required by bank regulators or
auditors or other governmental authorities or Tribunals, (c) as reasonably
deemed necessary in connection with any investigation, legal process or
litigation, or (d) to assignees or participants or proposed assignees or
proposed participants of all or any part of this credit facility. The failure of
any Lender to comply with the provisions of this Section 11.14 shall not affect
the Obligations, or the obligation of the Borrowers to comply with the terms of
this Agreement and the other Loan Papers, or the validity of any assignment or
participation granted pursuant to the terms of this Agreement.
11.15. Amendment, Restatement, Extension, Renewal and Increase. This
Agreement is a renewal and amendment and restatement of the Original Credit
Agreement, and, as such, except for the "Obligation" as defined in the Original
Credit Agreement (which shall survive, be renewed and restated by the terms of
this Agreement), all other terms and provisions supersede in their entirety the
Original Credit Agreement. This Agreement is being restated and amended in
accordance with the terms of Section 11.01 of the Original Credit Agreement.
All subordination agreements, security agreements, pledge agreements, mortgages,
deeds of trust and other documents and instruments granting any security
interest or assigning any interest in any assets of the Borrower or any
Subsidiary to secure the Obligation executed and delivered in connection with
this Agreement that restate any previously granted interest
84
<PAGE>
shall supersede any subordination agreements, security agreements, pledge
agreements, mortgages, deeds of trust and other documents and instruments
granting any security interest or assigning any interest in any assets of the
Borrower or any Subsidiary that were executed and delivered in connection with
the Original Credit Agreement (the "Original Security Documents"), except for
the Liens created under the Original Security Documents which shall remain
valid, binding and enforceable Liens against the Borrower, the Subsidiaries and
each of the other Persons granting any such Liens. All other Original Security
Documents shall continue to secure the Obligations as herein defined, and shall
be in full force and effect.
================================================================================
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
================================================================================
85
<PAGE>
IN WITNESS WHEREOF, this Credit Agreement is executed as of the date first
set forth above.
THE BORROWERS:
PACIFIC GATEWAY EXCHANGE, INC.
/s/
--------------------------------
By: Sandra Grey
Its: Chief Financial Officer
PACIFIC GATEWAY EXCHANGE (BERMUDA) LIMITED
/s/
--------------------------------
By: Gail Granton
Its: Director
86
<PAGE>
ADMINISTRATIVE AGENT:
BANK OF AMERICA, N.A., as Administrative
Agent
/s/
----------------------------------
By: Brian D. Corum
Its: Managing Director
LENDERS:
Domestic Revolver Specified BANK OF AMERICA, N.A., individually as a
Percentage: 50% Lender
Foreign Revolver Specified
Percentage: 50%
Address:
901 Main Street
64th Floor /s/
----------------------------------
Dallas, Texas 75202 By: Debra S. Wood
Attn.: Debra S. Wood Its: Vice President
Tel: (214) 209-1132
Facs: (214) 209-9390
Domestic Revolver Specified BANKERS TRUST COMPANY, individually
Percentage: 50% Lender
as a Foreign Revolver Specified
Percentage: 50%
Address:
_______________
_______________ /s/
_______________ ---------------------------------
Attn.:_________ By:______________________________
Tel:___________ Its:_____________________________
Facs:__________
87
<PAGE>
EXHIBIT 12.1
PACIFIC GATEWAY EXCHANGE, INC.
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, Year ended December 31,
----------------- ------------------------------------------
(in thousands) 1999 1998 1998 1997 1996 1995 1994
-------- ------- -------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Net income $10,249 $14,913 $19,936 $12,497 $5,808 $1,786 $ 636
Adjustments for minority interests:
Equity in earnings of affiliated companies, net (1,322) - (1,499) - - - -
Distributions received from equity investees 966 - 900 - - - -
Income tax expense 5,480 8,165 10,635 7,338 3,877 1,155 205
Net fixed charges less capitalized interest 947 319 425 322 270 585 224
-------- ------- -------- ------- ------ ------- ------
Total Earnings 16,320 23,397 30,397 20,157 9,955 3,526 1,065
======== ======= ======== ======= ====== ======= ======
Fixed Charges:
Interest on long-term debt, net - - - - - - -
Interest on short-term borrowings - - - - 185 538 193
Interest on capital leases (1) 947 319 425 322 85 47 31
Capitalized Interest 993 - - - - - -
Amortized premiums and discounts - - - - - - -
-------- ------- -------- ------- ------ ------- ------
Total Fixed Charges 1,940 319 425 322 270 585 224
======== ======= ======== ======= ====== ======= ======
Ratio of Earnings
to Fixed Charges 8.41 73.34 71.52 62.60 36.87 6.03 4.76
</TABLE>
(1) One-third of all rentals (Estimated to be representative of the interest
component)
1
<PAGE>
EXHIBIT 12.1
PACIFIC GATEWAY EXCHANGE, INC.
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
--------- ------
<S> <C> <C>
Rent:
100-6174 $ 108,361 $ -
100-6252 307,461
100-6251 189,856
Australia 130,570
IECom 203,128
Germany 246,985
Japan 288,922
NZ 18,245
Onyx 6,578
Rustelnet 172,800
UK 4,931
US 1,162,030
---------- ------
Total $2,839,867 $ -
========== ======
Assumed Interest - 1/3 $ 946,622 $ -
</TABLE>
2
<PAGE>
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
Onyx Networks, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Pacific Gateway Exchange (Canada) Inc. . . . . . . . . . . . . . . . . . . . . . . . New Brunswick, Canada
Pacific Gateway Exchange Japan Backhaul, Inc. . . . . . . . . . . . . . . . . . . . . Delaware
Japan Backhaul Company, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japan
Global Time, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Delaware
Pacific Gateway Exchange International Limited . . . . . . . . . . . . . . . . . . . Ireland
Pacific Gateway Exchange (Germany) GmbH . . . . . . . . . . . . . . . . . . . . . . . Germany
Pacific Gateway Exchange (Switzerland) AG . . . . . . . . . . . . . . . . . . . . . . Switzerland
Pacific Gateway Exchange (Iberia) SA . . . . . . . . . . . . . . . . . . . . . . . . Spain
Pacific Gateway Exchange (Hamilton) Limited . . . . . . . . . . . . . . . . . . . . . Bermuda
Pacific Gateway Exchange (Australia) PTY Limited . . . . . . . . . . . . . . . . . . Australia
Pacific Gateway Exchange (Hong Kong) Ltd. . . . . . . . . . . . . . . . . . . . . . . Hong Kong
Pacific Gateway Exchange (Taiwan) Limited . . . . . . . . . . . . . . . . . . . . . . Bermuda
Onyx Networks Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bermuda
Onyx Networks International Limited . . . . . . . . . . . . . . . . . . . . . . . . . Ireland
Onyx Internet Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-24833, 333-51699, 333-30118 and 333-30120) and
Form S-3 (No.333-30112) of Pacific Gateway Exchange, Inc. of our report dated
March 31, 2000 relating to the financial statements and financial statement
schedule, which appear in this Form 10-K.
PricewaterhouseCoopers LLP
San Francisco, California
March 31, 2000
<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,
1999, 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 27,189
<SECURITIES> 0
<RECEIVABLES> 133,998
<ALLOWANCES> 7,846
<INVENTORY> 0
<CURRENT-ASSETS> 172,408
<PP&E> 200,408
<DEPRECIATION> 31,221
<TOTAL-ASSETS> 374,805
<CURRENT-LIABILITIES> 226,796
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 115,079
<TOTAL-LIABILITY-AND-EQUITY> 374,805
<SALES> 604,591
<TOTAL-REVENUES> 604,591
<CGS> 516,671
<TOTAL-COSTS> 594,227
<OTHER-EXPENSES> (2,013)
<LOSS-PROVISION> 4,558
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,377
<INCOME-TAX> 4,332
<INCOME-CONTINUING> 8,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,045
<EPS-BASIC> 0.42
<EPS-DILUTED> 0.41
</TABLE>
