<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 31, 1996
REGISTRATION NO. 333-10875
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 54-1708481
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
8180 GREENSBORO DRIVE
SUITE 1100
MCLEAN, VIRGINIA 22102
(703) 848-4625
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
K. PAUL SINGH
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
8180 GREENSBORO DRIVE
SUITE 1100
MCLEAN, VIRGINIA 22102
(703) 848-4625
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
COPIES TO:
JAMES D. EPSTEIN, ESQ. DAVID J. BEVERIDGE, ESQ.
PEPPER, HAMILTON & SCHEETZ SHEARMAN & STERLING
3000 TWO LOGAN SQUARE 599 LEXINGTON AVENUE
PHILADELPHIA, PA 19103-2799 NEW YORK, NY 10022
(215) 981-4000 (212) 848-4000
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE PRICE(2) FEE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 6,900,000 $16.00 $110,400,000 $37,060(3)
</TABLE>
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(1) Includes 900,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of determining the registration fee in
accordance with Rule 457(a).
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains a prospectus relating to a public
offering in the United States (the "U.S. Offering") of an aggregate of
4,800,000 common shares, par value $0.01 per share (the "Common Shares"), of
Primus Telecommunications Group, Incorporated, together with separate
prospectus pages relating to a concurrent offering outside the United States
(the "International Offering") of an aggregate of 1,200,000 Common Shares. The
complete prospectus for the U.S. Offering follows immediately after this
Explanatory Note. After such prospectus are the following alternate pages for
the International Offering: a front cover page and a back cover page. All
other pages of the prospectus for the U.S. Offering are to be used for both
the U.S. Offering and the International Offering. Ten copies of the complete
prospectus for each of the U.S. and International Offerings in the exact forms
in which they are to be used after effectiveness will be filed with the
Securities and Exchange Commission pursuant to Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 31, 1996
PROSPECTUS
6,000,000 SHARES
[LOGO APPEARS HERE]
COMMON STOCK
-------------
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of Primus Telecommunications Group, Incorporated ("Primus" or the
"Company") offered hereby are being offered by the Company. Of the 6,000,000
shares of Common Stock being offered, 4,800,000 shares are being offered
initially in the United States and Canada (the "U.S. Offering") by the U.S.
Underwriters (as defined in "Underwriting") and 1,200,000 shares are being
concurrently offered outside the United States and Canada (the "International
Offering") by the International Managers (as defined in "Underwriting" and,
together with the U.S. Underwriters, the "Underwriters"). The U.S. Offering and
the International Offering are collectively referred to as the "Offering."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $14.00 and $16.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"PRTL."
-------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,200,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
900,000 additional shares of Common Stock on the same terms and conditions
set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters subject to prior sale, withdrawal, cancellation or modification of
the offer without notice, to delivery to and acceptance by the U.S.
Underwriters and to certain further conditions. It is expected that delivery of
certificates representing the shares of Common Stock will be made at the
offices of Lehman Brothers Inc., New York, New York on or about , 1996.
-------------
LEHMAN BROTHERS DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996.
<PAGE>
All references herein to "U.S. dollars," "dollars" or "US$" are to United
States dollars. All references to "A$" are to Australian dollars, the official
currency of Australia. All references to "(Pounds)" are to British pounds, the
official currency of the United Kingdom. All references to "Pesos" are to
Mexican pesos, the official currency of Mexico. The exchange rate of
Australian dollars was A$1.2615 to US$1.00, of British pounds was
(Pounds)0.6282 to US$1.00 and of Mexican Pesos was P$7.8390 to US$1.00 at
October 24, 1996, based on the noon buying rate in New York City for cable
transfers in such currencies as certified for customs purposes by the Federal
Reserve Bank of New York.
The Consolidated Financial Statements of the Company are presented in
accordance with United States generally accepted accounting principles, and
amounts originally measured in foreign currencies for all periods presented
have been translated into U.S. dollars in accordance with the methodology set
forth in Note 2 to the Consolidated Financial Statements of the Company.
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the Offering, the Company will be required to file reports and other
information with the Securities and Exchange Commission (the "Commission")
pursuant to the informational requirements of the Exchange Act.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the securities offered hereby, reference is made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of
any documents referred to herein are not necessarily complete, and in each
instance, reference is made to the copy of the document filed as an exhibit to
the Registration Statement. The Company will issue annual and quarterly
reports. Annual reports will include audited financial statements prepared in
accordance with accounting principles generally accepted in the United States
and a report of its independent auditors with respect to the examination of
such financial statements. In addition, the Company will issue to its
securityholders such other unaudited quarterly or other interim reports as it
deems appropriate.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the Registration Statement may be obtained from the Commission at prescribed
rates from the Public Reference Section of the Commission at such address, and
at the Commission's regional offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are
publicly available through the Commission's site on the Internet's World Wide
Web, located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto and amendments thereof, has been filed with the Commission
through EDGAR.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
[MAP OF WORLD SHOWING PRIMUS' NETWORK, INCLUDING SWITCH LOCATIONS (OPERATIONAL,
UNDER CONSTRUCTION AND PLANNED) AND FIBER LINKS BETWEEN SWITCH LOCATIONS
(EXISTING AND PLANNED) APPEARS HERE]
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. As used in this Prospectus, except where the context
otherwise requires, the terms "Primus" and the "Company" refer to Primus
Telecommunications Group, Incorporated and all of its subsidiaries. Investors
should carefully consider the information set forth under the heading "Risk
Factors." Unless otherwise noted, all information in this Prospectus assumes
that the Underwriters' over-allotment option has not been exercised and has
been adjusted to give effect to a 3.381-for-1 stock split (the "Stock Split")
and the conversion of all outstanding shares of Series A Convertible Preferred
Stock ("Series A Stock") of the Company into shares of Common Stock (the
"Preferred Stock Conversion"). This Prospectus contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Prospective investors are cautioned that such
statements are only predictions and that actual events or results may differ
materially. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors" that could
cause actual results to differ materially from those indicated by such forward-
looking statements.
THE COMPANY
Primus is a multinational telecommunications company that focuses on the
provision of international and domestic long distance services. The Company
seeks to capitalize on the increasing business and consumer demand for
international telecommunications services generated by the globalization of
world economies and the worldwide trend toward deregulation of the
telecommunications sector. The Company has targeted North America, Asia-Pacific
and Europe as its primary service regions (the "Targeted Regions"). The Company
currently provides services in the United States, Australia and the United
Kingdom (the "Operating Hubs"), which are the most deregulated countries within
the Targeted Regions and which serve as regional hubs for expansion into
additional markets within the Targeted Regions. As part of the execution of
this strategy, the Company has commenced operations in Mexico and has installed
a switch in Canada. The Company expects to expand into additional markets as
deregulation occurs and the Company is permitted to offer a full range of
switched public telephone services in such markets.
For the year ended December 31, 1995 and the six months ended June 30, 1996,
the Company had pro forma net revenue of approximately $126 million and $92
million, respectively, after giving effect to the Company's March 1996
acquisition of Axicorp Pty., Ltd. ("Axicorp"), the fourth largest
telecommunications provider in Australia. For the three months ended June 30,
1996, the Company had net revenue of approximately $48 million, of which
approximately $44 million, or 91%, was generated by the Company's Australian
operations. As of September 30, 1996, the Company had 285 full-time employees
and approximately 35,000 customers.
The Company targets, on a retail basis, small- and medium-sized businesses
with significant international long distance traffic and ethnic residential
consumers and, on a wholesale basis, other telecommunications carriers and
resellers with international traffic. The Company provides a broad array of
competitively priced telecommunications services, including international long
distance to over 200 countries, domestic long distance, and international and
domestic private networks, as well as local switched and cellular services in
Australia, prepaid and calling cards in the United States and the United
Kingdom and toll-free services in the United States. The Company markets its
services through a variety of sales channels, including direct sales,
independent agents, direct marketing and associations.
3
<PAGE>
The Company is implementing its international telecommunications network (the
"Network") to reduce and control costs, improve service reliability and
increase flexibility to introduce new products and services. The Network
currently consists of an international gateway switch in Washington, D.C.,
points-of-presence in New York and London, and leased transmission capacity
connecting to the networks of other international and domestic carriers. The
Company also has correspondent agreements with the government-owned Postal,
Telephone and Telegraph Companies ("PTTs") in India, Iran and Honduras. The
Company has installed three additional international gateway switches in
Sydney, Melbourne and Toronto, a switch in Brisbane, and has acquired two
international gateway switches for installation in New York and Los Angeles and
two other switches for installation in Adelaide and Perth, all eight of which
are expected to be operational by the end of the first quarter of 1997. The
Company expects to acquire an additional switch for installation in London and
additional switches and points-of-presence for installation in other major
metropolitan areas of the Targeted Regions. The Company expects to connect its
gateway switches between Sydney and Los Angeles with a trans-Pacific fiber-
optic cable link by the end of the first quarter of 1997. The Company also
intends to purchase additional switches and ownership in international fiber-
optic cables, install international gateway satellite earth station facilities,
lease additional transmission capacity and, where necessary, obtain additional
correspondent agreements.
The Company's objective is to become a leading provider of international and
domestic long distance voice, data and value-added services to its target
customers. The Company's strategy to achieve this objective is to focus on
providing a full range of competitively priced, high-quality services in the
Targeted Regions. Key elements in the Company's strategy include:
. Focus on Customers with Significant International Long
Distance Usage. The Company's primary focus is providing
telecommunications services to small- and medium-sized
businesses with significant international long distance
traffic and to ethnic residential consumers and, on a
wholesale basis, to other telecommunications carriers and
resellers with international traffic. The Company believes
that the international long distance market offers an
attractive business opportunity given its size and, as
compared to the domestic long distance market, its higher
revenue per minute, gross margin and expected growth rate.
Although the Company expects to obtain a significant
percentage of its revenues from offering international long
distance services, the Company currently generates, and
expects to continue to generate over the near term, a greater
percentage of net revenue from domestic long distance
services in an effort to build network traffic more quickly.
. Pursue Early Entry into Selected Deregulating Markets. Primus
seeks to be an early entrant into selected overseas
deregulating telecommunications markets where it believes
there is significant demand for international long distance
services, substantial growth and profit potential, and the
opportunity to establish a customer base and achieve name
recognition. The Company intends to use each Operating Hub as
a base to expand into deregulating markets within the
Targeted Regions and will focus its expansion efforts on
major metropolitan areas with a high concentration of target
customers with international traffic. The Company believes
that management's international telecommunications experience
will assist it in successfully identifying and launching
operations in deregulating markets.
. Implement Intelligent International Network. The Company
expects that the strategic development of the Network will
lead to reduced transmission and other operating costs as a
percentage of net revenue, reduced reliance on other carriers
and more efficient network utilization. The Network will
consist of (i) a global backbone network connecting
intelligent gateway switches in the Targeted Regions, (ii) a
domestic long distance network presence in each of the
Operating Hubs and certain additional countries within the
Targeted Regions and (iii) a combination of leased
facilities, resale arrangements and correspondent agreements.
4
<PAGE>
. Deliver Quality Services at Competitive Prices. The Company
believes that it delivers high-quality services at
competitive prices and provides a high level of customer
service. The Company intends to maintain a low-cost structure
in order to offer its customers international and domestic
long distance services priced below that of its major
competitors. In addition, the Company intends to maintain
strong customer relationships through the use of trained and
experienced service representatives and the provision of
customized billing services.
. Provide a Comprehensive Package of Services. The Company
seeks to provide a comprehensive package of services to
create "one-stop shopping" for its targeted customers'
telecommunications needs, particularly for small- and medium-
sized businesses and ethnic residential consumers that prefer
a full service telecommunications provider. The Company
believes this approach strengthens its marketing efforts and
increases customer retention.
The Company acquired Axicorp, the fourth largest telecommunications provider
in Australia, in March 1996. Axicorp provides the Company early entry into the
deregulating Australian telecommunications market and will serve as the
Company's gateway to the Asia-Pacific region. Prior to the acquisition, Axicorp
was a switchless reseller of long distance, local switched and cellular
services. Since the acquisition, the Company has acquired five switches for use
in Australia, which are expected to be operational by the end of the first
quarter of 1997, and has focused on increasing the number of higher-margin,
higher-volume business customers with significant international long distance
traffic. As part of its increasing focus on business customers, the Company is
increasing Axicorp's direct sales force and reducing its reliance on marketing
through associations. The ongoing transformation of Axicorp's strategy and
operations to those of a facilities-based carrier focused on the provision of
international and domestic long distance services is an example of the
execution of the Company's business model. For the twelve months ended March
31, 1996, Axicorp generated net revenue of approximately $144 million. The
Company acquired Axicorp for $5.7 million in cash, including transaction costs,
455,000 shares of Series A Stock (convertible into 1,538,355 shares of Common
Stock on the date of the Offering) and seller financing consisting of two notes
aggregating $8.1 million. The cash portion of the purchase price was financed
through private placements of Common Stock.
Primus was co-founded in 1994 by K. Paul Singh, its Chairman and Chief
Executive Officer, who formerly served as Vice President of Marketing for MCI.
Mr. Singh previously founded two other telecommunications companies, Overseas
Telecommunications, Inc. ("OTI") and the Cygnus Satellite Corporation
("Cygnus"), both of which focused on international telecommunications. OTI and
Cygnus were acquired by MCI and PanAmSat, respectively. The executive officers
of the Company and several of the other members of its management team have
substantial experience in the telecommunications and other related industries,
and have served in management positions with companies such as MCI, OTI, IBM
and M/A Com (subsequently acquired by Hughes Network Systems, Inc.). See
"Management--Executive Officers, Directors and Key Employees."
On July 31, 1996, the Soros/Chatterjee Group (as defined in "Certain
Transactions") purchased an equity interest in the Company for an aggregate
purchase price of approximately $16.0 million (the "Private Equity Sale") and,
after giving effect to the Offering, will collectively beneficially own 7.3% of
the Common Stock. Additionally, on January 12, 1996, Teleglobe USA, Inc.
("Teleglobe"), invested approximately $1.46 million in the Company and, after
giving effect to the Offering, will beneficially own 2.3% of the Common Stock.
The net proceeds from the Private Equity Sale are being used to fund operating
losses, for working capital, for expansion of the Company's Network and for
other general corporate purposes, and the proceeds from the Teleglobe
investment were used to partially fund the acquisition of Axicorp. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
The Company was incorporated in Delaware in February 1994. The executive
offices of the Company are located at 8180 Greensboro Drive, Suite 1100,
McLean, Virginia 22102 and its telephone number is (703) 848-4625.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company
U.S. Offering.............. 4,800,000 shares
International Offering..... 1,200,000 shares
------------------
Total.................... 6,000,000 shares
Common Stock Outstanding af-
ter the Offering............ 18,028,746 shares (1)
Use of Proceeds.............. Up to $70 million of the net proceeds will be
used to expand the Network, including purchasing
transmission equipment facilities and support
systems, international fiber capacity and
satellite earth station facilities for new and
existing routes. The remaining net proceeds will
be used to fund operating losses and for working
capital and other general corporate purposes.
The net proceeds also may be used for
investments in potential joint ventures,
strategic alliances or acquisitions, although
the Company is not currently party to any
agreement or understanding relating to any such
transaction. See "Use of Proceeds."
Proposed Nasdaq National
Market System Symbol........ PRTL
</TABLE>
- --------
(1) Excludes 1,635,559 shares of Common Stock which may be issued upon
exercise of outstanding options granted pursuant to the Company's employee
stock option plan (the "Employee Plan") and the Company's director stock
option plan (the "Director Plan," together with the Employee Plan, the
"Plans"), and an additional 393,041 shares of Common Stock reserved for
issuance pursuant to the Plans. The weighted average exercise price of all
outstanding options is $3.04 per share. Also excludes up to 1,294,566
shares of Common Stock which may be issued upon exercise of certain
warrants held by the Soros/Chatterjee Group (the "Soros/Chatterjee
Warrants"), assuming such warrants were to be exercised at an assumed
offering price of $15. The actual number of shares of Common Stock
issuable upon exercise of these warrants will be up to 627,899 shares of
Common Stock plus an indeterminate number of shares having a fair market
value of $10 million as of the date of exercise. See "Management--Stock
Option Plans," "Certain Transactions--Private Equity Sale," "Description
of Capital Stock--Warrants" and Notes 8 and 13 to the Consolidated
Financial Statements of the Company.
RISK FACTORS
See "Risk Factors" beginning on page 8 for a discussion of certain
information that should be considered by prospective investors.
6
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table presents summary unaudited pro forma consolidated
financial data and certain actual balance sheet data which has been derived
from, and should be read in conjunction with, the Company's Unaudited Pro Forma
Consolidated Statements of Operations and related notes thereto, the Company's
Consolidated Balance Sheets and related notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
PRO FORMA STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ ----------------------------
1995 1995 1996
------------ ------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE)
<S> <C> <C> <C>
Net revenue......................... $ 125,628 $ 47,930 $ 91,783
Cost of revenue..................... 114,639 43,141 83,918
---------- ---------- ----------
Gross margin...................... 10,989 4,789 7,865
Operating expenses:
Selling, general and
administrative................... 12,955 5,376 8,791
Depreciation and amortization..... 1,842 879 1,098
---------- ---------- ----------
Total operating expenses........ 14,797 6,255 9,889
---------- ---------- ----------
Income (loss) from operations....... (3,808) (1,466) (2,024)
Interest expense.................... (885) (446) (473)
Interest income..................... 132 30 209
Other income (expense).............. -- -- (268)
---------- ---------- ----------
Income (loss) before income taxes... (4,561) (1,882) (2,556)
Income taxes........................ 124 68 743
---------- ---------- ----------
Net income (loss)................... $ (4,685) $ (1,950) $ (3,299)
========== ========== ==========
Net earnings (loss) per common and
common share equivalent............ $ (0.35) $ (0.14) $ (0.23)
========== ========== ==========
Weighted average number of common
and common share equivalents
outstanding........................ 12,338,313 12,170,846 13,497,468
========== ========== ==========
<CAPTION>
AS OF JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA (1) AS ADJUSTED(2)
------------ ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 4,398 $ 20,198 $ 102,698
Total assets........................ 62,297 78,097 160,597
Total long-term obligations......... 16,929 16,929 16,929
Stockholders' equity (deficit)...... 11,800 27,600 110,100
</TABLE>
- --------
(1) After giving effect to the Private Equity Sale.
(2) After giving effect to the Private Equity Sale and the sale of 6,000,000
shares of Common Stock offered in the Offering (assuming an initial public
offering price of $15 per share), less underwriting discounts, commissions,
and estimated expenses of the Offering payable by the Company.
7
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing the shares of the Common Stock
offered hereby.
LIMITED OPERATING HISTORY; ENTRY INTO DEVELOPING MARKETS
The Company was founded in February 1994 and began generating operating
revenues in March 1995. Axicorp, the Company's principal operating subsidiary,
was acquired in March 1996. The Company has generated only limited net revenue
and has limited experience in operating its business. In addition, the Company
intends to enter markets where it has limited or no operating experience.
Furthermore, in many of the Company's target markets, the Company intends to
offer services that have previously been provided only by the local PTT.
Accordingly, there can be no assurance that the Company's future operations
will generate operating or net income, and the Company's prospects must
therefore be considered in light of the risks, expenses, problems and delays
inherent in establishing a new business in a rapidly changing industry. See
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
MANAGING RAPID GROWTH
The Company's strategy of continuing its growth and expansion has placed,
and is expected to continue to place, a significant strain on the Company's
management, operational and financial resources and increased demands on its
systems and controls. The Company plans to develop the Network by adding
switches, cable and satellite facilities, expand its operations within the
United States, Australia and the United Kingdom, and expand into selected
additional markets within the Targeted Regions when business and regulatory
conditions warrant. In order to manage its growth effectively, the Company
must continue to implement and improve its operational and financial systems
and controls, purchase and utilize other transmission facilities, and expand,
train and manage its employee base. Inaccuracies in the Company's forecasts of
traffic could result in insufficient or excessive transmission facilities and
disproportionate fixed expenses. There can be no assurance that the Company
will be able to develop a facilities-based network or expand within its target
markets at the rate presently planned by the Company, or that the existing
regulatory barriers to such expansion will be reduced or eliminated. As the
Company proceeds with its development, there will be additional demands on the
Company's customer support, sales and marketing and administrative resources
and network infrastructure. There can be no assurance that the Company's
operating and financial control systems and infrastructure will be adequate to
maintain and effectively manage future growth. The failure to continue to
upgrade the administrative, operating and financial control systems or the
emergence of unexpected expansion difficulties could materially adversely
affect the Company's business, results of operations and financial condition.
See "--Dependence on Effective Information Systems."
HISTORICAL AND FUTURE NET LOSSES
The Company incurred net losses in 1994 and 1995 and had an accumulated
deficit of approximately $6.2 million as of June 30, 1996. Although the
Company has experienced net revenue growth in each of its last six quarters,
such growth should not be considered to be indicative of future net revenue
growth, if any. The Company expects its net losses to increase as the Company
uses the proceeds of the Offering to accelerate the expansion of its
operations and build-out of the Network. There can be no assurance that the
Company's revenue will grow or be sustained in future periods or that the
Company will be able to achieve profitability in any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEED FOR ADDITIONAL FINANCING
The Company believes that the net proceeds from the Offering, together with
the net proceeds from the Private Equity Sale, borrowing capacity under an
expected line of credit and available capital lease financing will be
sufficient to fund the Company's operating losses, capital expenditures and
other cash needs for the next
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18 months. The Company, however, will need to raise additional capital from
public or private equity or debt sources in order to finance its future
growth, including financing the further construction of the Network and
expanding service within existing markets and to new markets, which can be
capital intensive, as well as its unanticipated working capital needs and
capital expenditure requirements. Furthermore, the Company may need to raise
additional funds in order to take advantage of unanticipated opportunities,
including more rapid international expansion or acquisitions of, investments
in or strategic alliances with, companies that are complementary to the
Company's current operations, or to develop new products or otherwise respond
to unanticipated competitive pressures. There can be no assurance that the
Company will be able to raise such capital on satisfactory terms or at all. If
the Company decides to raise additional funds through the incurrence of debt,
it would likely become subject to restrictive financial covenants. In the
event that the Company is unable to obtain such additional capital or is
unable to obtain such additional capital on acceptable terms, the Company may
be required to reduce the scope of its expansion, which could adversely affect
the Company's business, results of operations and financial condition and its
ability to compete. Additionally, if additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's then
current stockholders would be reduced and, if such equity securities take the
form of preferred stock, the holders of such preferred stock may have rights,
preferences or privileges senior to those of holders of Common Stock. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of
Capital Stock--Preferred Stock."
INTENSE DOMESTIC AND INTERNATIONAL COMPETITION
The long distance telecommunications industry is intensely competitive and
is significantly influenced by the marketing and pricing decisions of the
larger industry participants. In most countries, the industry has relatively
limited barriers to entry with numerous entities competing for the same
customers. Customers frequently change long distance providers in response to
the offering of lower rates or promotional incentives by competitors.
Generally, the Company's customers can switch carriers at any time. The
Company believes that competition in all of its markets is likely to increase
and that competition in non-United States markets is likely to become more
similar to competition in the United States market over time as such non-
United States markets continue to experience deregulatory influences. In each
of its Targeted Regions, the Company competes primarily on the basis of price
(particularly with respect to its sales to other carriers), and also on the
basis of customer service and its ability to provide a variety of
telecommunications products and services. There can be no assurance that the
Company will be able to compete successfully in the future.
Many of the Company's competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks than the Company and a broader portfolio of services, control
transmission lines and have strong name recognition and loyalty, as well as
long-standing relationships with the Company's target customers. In addition,
many of the Company's competitors enjoy economies of scale that can result in
a lower cost structure for transmission and related costs, which could cause
significant pricing pressures within the industry. Several long distance
carriers in the United States have recently introduced pricing strategies that
provide for fixed, low rates for calls within the United States. Such a
strategy, if widely adopted, could have an adverse effect on the Company's
results of operations and financial condition if increases in
telecommunications usage do not result or are insufficient to offset the
effects of such price decreases. The Company's competitors include, among
others, AT&T, MCI, Sprint, WorldCom, Frontier and LCI in the United States;
Telstra, Optus and AAPT in Australia; and British Telecom, Mercury, AT&T,
WorldCom, Sprint and ACC in the United Kingdom. The Company also competes with
numerous other long distance providers, some of which focus their efforts on
the same customers targeted by the Company. In addition to these competitors,
recent and pending deregulation in various countries may encourage new
entrants. For example, as a result of the recently enacted Telecommunications
Act of 1996 (the "1996 Telecommunications Act") in the United States, once
certain conditions are met, Regional Bell Operating Companies ("RBOCs") will
be allowed to enter the domestic long distance market, AT&T, MCI and other
long distance carriers will be allowed to enter the local telephone services
market, and any entity (including cable television companies and utilities)
will be allowed to enter both the local service and long distance
telecommunications markets. Increased competition in
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the United States as a result of the foregoing, and other competitive
developments, including entry by Internet service providers into the long-
distance market, could have an adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business--
Competition" and "Business--Government Regulation."
DEPENDENCE ON TRANSMISSION FACILITIES-BASED CARRIERS
Telephone calls made by the Company's customers are connected through
transmission lines that the Company leases under a variety of arrangements
with transmission facilities-based long distance carriers, many of which are,
or may become, competitors of the Company. The Company's ability to maintain
and expand its business is dependent upon whether the Company continues to
maintain favorable relationships with the transmission facilities-based
carriers from which the Company leases transmission lines. Although the
Company believes that its relationships with carriers generally are
satisfactory, the deterioration or termination of the Company's relationships
with one or more of those carriers could have a material adverse effect upon
the Company's cost structure, service quality, Network diversity, results of
operations and financial condition.
Presently, most transmission lines used by the Company are obtained on a
per-call (or usage) basis, subjecting the Company to the possibility of
unanticipated price increases and service cancellations. Currently, usage
rates generally are less than the rates the Company charges its customers for
connecting calls through these lines. To the extent these variable costs
increase, the Company may experience reduced or, in certain circumstances,
negative margins for some services. As its traffic volume increases between
particular international markets, the Company expects to cease using variable
usage arrangements and enter into fixed monthly or longer-term leasing
arrangements, subject to obtaining any requisite authority. To the extent the
Company does so, and incorrectly projects traffic volume in a particular
geographic area, the Company would experience higher fixed costs without the
increased revenue. Moreover, certain of the vendors from whom the Company
leases transmission lines, including RBOCs and other Local Exchange Carriers
("LECs") in the United States, currently are subject to tariff controls and
other price constraints which in the future may be changed. Regulatory
proposals are pending that may affect the prices charged by the RBOCs and
other LECs to the Company, which could have a material adverse effect on the
Company's margins, business, financial condition and results of operations.
See "--Potential Adverse Effects of Regulation" and "Business--Government
Regulation."
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
A key component of the Company's strategy is its planned expansion in
international markets. In many international markets, the existing carrier
will control access to the local networks, enjoy better brand recognition and
brand and customer loyalty, and have significant operational economies,
including a larger backbone network and correspondent agreements with PTTs.
Moreover, the incumbent may take many months to allow competitors, including
the Company, to interconnect to its switches within the target market. Pursuit
of international growth opportunities may require significant investments for
an extended period before returns, if any, on such investments are realized.
In addition, there can be no assurance that the Company will be able to obtain
the permits and operating licenses required for it to operate, obtain access
to local transmission facilities or to market, sell and deliver competitive
services in these markets.
In addition to the uncertainty as to the Company's ability to expand its
international presence, there are certain risks inherent in doing business on
an international level, such as unexpected changes in regulatory requirements,
tariffs, customs, duties and other trade barriers, difficulties in staffing
and managing foreign operations, problems in collecting accounts receivable,
political risks, fluctuations in currency exchange rates, foreign exchange
controls which restrict or prohibit repatriation of funds, technology export
and import restrictions or prohibitions, delays from customs brokers or
government agencies, seasonal reductions in business activity during the
summer months in Europe and certain other parts of the world, and potentially
adverse tax consequences resulting from operating in multiple jurisdictions
with different tax laws, which could materially adversely impact the Company's
international operations. A significant portion of the Company's net revenue
and expenses is denominated, and is expected to continue to be denominated, in
currencies other than U.S.
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dollars, and changes in exchange rates may have a significant effect on the
Company's results of operations. In addition, the Company's business could be
adversely affected by a reversal in the current trend toward deregulation of
telecommunications carriers. In Mexico, and in certain other countries into
which the Company may choose to expand in the future, the Company may need to
enter into a joint venture or other strategic relationship with one or more
third parties in order to successfully conduct its operations (often with the
PTT or other dominant carrier in a developing country). There can be no
assurance that such factors will not have a material adverse effect on the
Company's future operations and, consequently, on the Company's business,
results of operations and financial condition, or that the Company will not
have to modify its current business practices.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS
To complete its billing, the Company must record and process massive amounts
of data quickly and accurately. While the Company believes its management
information system is currently adequate, it will have to grow as the
Company's business expands and to change as new technological developments
occur. The Company expects to upgrade many of its accounting systems within
the upcoming 12-month period. The Company believes that the successful
implementation and integration of new information systems and backroom support
will be important to its continued growth, its ability to monitor and control
costs, to bill customers accurately and in a timely fashion and to achieve
operating efficiencies. There can be no assurance that the Company will not
encounter delays or cost-overruns or suffer adverse consequences in
implementing these systems. See "Business--Management Information and Billing
Systems." Any such delay or other malfunction of the Company's management
information systems could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS OF INDUSTRY CHANGES AFFECTING COMPETITIVENESS AND FINANCIAL RESULTS
The international telecommunications industry is changing rapidly due to
deregulation, privatization of PTTs, technological improvements, expansion of
telecommunications infrastructure and the globalization of the world's
economies. There can be no assurance that one or more of these factors will
not vary in a manner that could have a material adverse effect on the Company.
In addition, deregulation in any particular market may cause such market to
shift unpredictably. There can be no assurance that the Company will be able
to compete effectively or adjust its contemplated plan of development to meet
changing market conditions.
The telecommunications industry generally is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite transmission capacity for services similar
to those provided by the Company. Potential developments that could adversely
affect the Company if not anticipated or appropriately responded to include
improvements in transmission equipment, development of switching technology
allowing voice/data/video multimedia transmission simultaneously and
commercial availability of Internet-based domestic and international switched
voice/data/video services at prices lower than comparable services offered by
the Company. The Company's profitability will depend on its ability to
anticipate, access and adapt to rapid technological changes and its ability to
offer, on a timely and cost-effective basis, services that meet evolving
industry standards. There can be no assurance that the Company will be able to
access or adapt to such technological changes at a competitive price, maintain
competitive services or obtain new technologies on a timely basis or on
satisfactory terms. See "--Intense Domestic and International Competition."
DEVELOPMENT OF THE NETWORK
The Company has only recently begun operating the Network. The long-term
success of the Company is dependent upon its ability to design, implement,
operate, manage and maintain the Network, activities in which the Company has
limited experience. In expanding the Network, the Company will incur
substantial indebtedness and additional fixed operating costs. There can be no
assurance that the Network can be completed in a timely manner or operated
efficiently. See "Business--Network." Any failure by the Company to properly
design, implement, operate, manage or maintain the Network could have a
material adverse effect on the Company's
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business, results of operations and financial condition. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Business."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its management team and its key
technical, marketing and sales personnel, particularly those of K. Paul Singh,
its Chairman and Chief Executive Officer. The loss of services of one or more
of these key individuals, particularly Mr. Singh, could materially and
adversely affect the business of the Company and its future prospects. The
Company has entered into an employment agreement with Mr. Singh, which expires
on May 30, 1999. The Company maintains and is the beneficiary under $10
million of key person life insurance on Mr. Singh, but not on the lives of any
other officer or director. The Company's future success will also depend on
its ability to attract and retain additional key management, technical and
sales personnel required in connection with the growth and development of its
business. Competition for qualified employees and personnel in the
telecommunications industry is intense, particularly in non-U.S. markets and,
from time to time, there are a limited number of persons with knowledge of and
experience in particular sectors of the telecommunications industry. There can
be no assurance that the Company will be successful in attracting and
retaining such executives and personnel. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
have a material adverse effect on the Company's results of operations,
development efforts and ability to expand. See "Management."
POTENTIAL ADVERSE EFFECTS OF REGULATION
As a multinational telecommunications company, Primus is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations, and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which the Company
operates. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company,
that domestic or international regulators or third parties will not raise
material issues with regard to the Company's compliance or noncompliance with
applicable regulations or that regulatory activities will not have a material
adverse effect on the Company. Certain risks regarding the regulatory
framework in the principal jurisdictions in which the Company provides its
services are briefly described below.
United States. In the United States, the provision of the Company's services
is subject to the provisions of the Communications Act of 1934, as amended
(the "Communications Act"), the 1996 Telecommunications Act and the Federal
Communications Commission (the "FCC") regulations thereunder, as well as the
applicable laws and regulations of the various states administered by the
relevant state public service commission ("PSC"). The recent trend in the
United States, for both federal and state regulation of telecommunications
service providers, has been in the direction of reduced regulation. Although
this trend facilitates market entry and competition by multiple providers, it
has also given AT&T, the largest international and domestic long distance
carrier in the United States, increased pricing and market entry flexibility
that has permitted it to compete more effectively with smaller carriers, such
as the Company. In addition, the recently enacted 1996 Telecommunications Act
has opened the Company's U.S. market to increased competition. There can be no
assurance that future regulatory, judicial and legislative changes in the
United States will not have a material adverse effect on the Company.
Despite recent trends toward deregulation, the FCC and relevant state PSCs
continue to exercise extensive authority to regulate ownership of transmission
facilities, provision of services and the terms and conditions under which the
Company's services are provided. In addition, the Company is required by
federal and state law and regulations to file the tariffs listing the rates,
terms and conditions of the services it provides. Any failure to maintain
proper federal and state tariffs or certification or any finding by the
federal or state agencies that the Company is not operating under permissible
terms and conditions may result in an enforcement action or investigation,
either of which could have a material adverse effect on the Company.
To originate and terminate calls in connection with providing their
services, long distance carriers such as the Company must purchase "access"
from the LECs or Competitive Local Exchange Carriers ("CLECs").
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Access charges represent a significant portion of the Company's cost of
revenue and, generally, such access charges are regulated by the FCC. The FCC
has informally announced that it intends, in the near future, to undertake a
comprehensive review of its regulation of LEC access charges to better account
for increasing levels of local competition. Under alternative access charge
rate structures being considered by the FCC, LECs would be permitted to allow
volume discounts in the pricing of access charges. While the outcome of these
proceedings is uncertain, if these rate structures are adopted, many long
distance carriers, including the Company, could be placed at a significant
cost disadvantage to larger competitors.
The FCC and certain state agencies also impose prior approval requirements
on transfers of control, including pro forma transfers of control resulting
from corporate reorganizations, and assignments of regulatory authorizations.
The FCC also regulates the nature and extent of foreign ownership and foreign
carrier affiliations of the Company. Such requirements may delay, prevent or
deter a change in control of the Company.
Regulatory requirements pertinent to the Company's operations have recently
changed and will continue to change as a result of federal legislation, court
decisions, and new and revised policies of the FCC and state public service
commissions. Among other things, such changes may alter the ability of the
Company to compete with other service providers, to continue providing the
same services, or introduce services currently planned for the future. The
impact on the Company's operations of any changes in applicable regulatory
requirements cannot be predicted.
Australia. In Australia, the provision of the Company's services is subject
to federal regulation pursuant to the Telecommunications Act 1991 of Australia
(the "Telecom Act") and federal regulation of anticompetitive practices
pursuant to the Trade Practices Act 1974. In addition, other federal
legislation, various regulations pursuant to delegated authority and
legislation, ministerial declarations, codes, directions, licenses, statements
of Commonwealth Government policy and court decisions affecting
telecommunications carriers also apply to the Company. There can be no
assurance that future declarations, codes, directions, licenses, regulations,
and judicial and legislative changes will not have a material adverse effect
on the Company.
The Australian telecommunications industry continues to undergo
deregulation, and it is currently expected that the Australian Government will
license additional carriers, including the Company, to own transmission
facilities in July 1997. Both Telstra and Optus have requested that the
Australian Government defer such date, and there can be no assurance that the
deregulatory process will proceed in accordance with the Government's
announced timetable. Any delay in such deregulatory process or in the granting
of licenses to other entities interested in developing their own transmission
facilities in Australia could delay potential price reductions anticipated in
a more competitive market place, thereby delaying the Company's access to
potentially less expensive transmission and access facilities.
The Australian Telecommunications Authority ("AUSTEL"), as the federal
telecommunications regulatory authority, currently has control over a broad
range of issues affecting the operation of the Australian telecommunications
industry including the licensing of carriers, the promotion of competition,
consumer protection and technical matters. As a reseller of domestic, local
and long distance service, cellular service, and international service, the
Company must comply with the terms of the class license that applies to all
service providers until July 1997 or later, if the deregulatory process in
Australia is delayed. The Company currently plans to become a licensed general
carrier as soon as it is practicable to do so. As a general licensed carrier,
the Company will be required to comply with the terms of its own license and
would be subject to greater regulatory controls such as in areas of regulation
of connectivity, provision of access to service providers, land access and
contributions to the net cost of universal service throughout Australia (to
provide telecommunications services at reasonable prices to remote sections of
that country) applicable to licensed facilities-based carriers.
There can be no assurance that a change in government, in government policy
in relation to telecommunications or competition, in AUSTEL's enforcement of
the Telecom Act, in government policy for the restructuring of the various
regulatory authorities that is expected to occur as part of the July 1997
changes,
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or a deferral of the implementation of the Australian Government's
deregulation policy (particularly due to current requests for a deferral by
Telstra and Optus), will not have a material adverse effect on the Company's
business, results of operations or financial condition.
United Kingdom. In the United Kingdom, the provision of the Company's
services is subject to and affected by regulations introduced by the U.K.
telecommunications regulatory authority, the Office of Telecommunications
("Oftel") under the Telecommunications Act of 1984 (the "U.K.
Telecommunications Act"). Since the break up of the U.K. telecommunications
duopoly consisting of British Telecom and Mercury in 1991, it has been the
stated goal of Oftel to create a competitive marketplace from which detailed
regulation could eventually be withdrawn. The regulatory regime currently
being introduced by Oftel has a direct and material effect on the ability of
the Company to conduct its business. Oftel has imposed mandatory rate
reductions on British Telecom in the past, which reductions are expected to
continue for the foreseeable future, and this has had, and may continue to
have, the effect of reducing the prices the Company can charge its customers.
The Company currently holds a license to provide international simple resale
("ISR") services to all international points from the United Kingdom. In
addition, the Company (along with approximately 45 other applicants including
AT&T, WorldCom, and ACC) has recently made application to the U.K. Secretary
for Trade and Industry for a license to provide international facilities-based
voice services. Although the Company currently expects such license to be
granted by the end of the first quarter of 1997, there can be no assurance
that the Company will be granted the license by such time, or at all. Failure
to obtain such license would prevent the Company from providing facilities-
based services in the United Kingdom and would have an adverse effect on the
Company's ability to expand its operations. In addition, there can be no
assurance that future changes in regulation and government will not have a
material adverse effect on the Company's business, results of operations and
financial condition.
Other Jurisdictions. The Company currently provides limited services in
Mexico and Canada, and intends to expand its operations into other
jurisdictions as such markets deregulate and the Company is able to offer a
full range of switched public telephone services to its customers. In
addition, in countries which enact legislation intended to deregulate the
telecommunications sector, there may be significant delays in the adoption of
implementing regulations and uncertainties as to the implementation of the
deregulatory programs which could delay or make more expensive the Company's
entry into such additional markets. The ability of the Company to enter a
particular market and provide telecommunications services, particularly in
Mexico and other developing countries, is dependent upon the extent to which
the regulations in a particular market permit new entrants. In some countries,
regulators may make subjective judgments in awarding licenses and permits,
without any legal recourse for unsuccessful applicants. In the event the
Company is able to gain entry to such a market, no assurances can be given
that the Company will be able to provide a full range of services in such
market, that it will not have to significantly modify its operations to comply
with changes in the regulatory environment in such market, or that any such
changes will not have a material adverse effect on the Company's business,
results of operations or financial condition.
CONTROL OF THE COMPANY
After completion of this Offering, the executive officers and directors of
the Company will continue to beneficially own 5,118,757 shares of Common
Stock, representing 27.8% of the Common Stock, including options to purchase
391,063 shares of Common Stock exercisable on or prior to December 24, 1996.
The executive officers and directors have also been granted options to
purchase an additional 885,603 shares of Common Stock which vest after
December 24, 1996. Of these amounts, Mr. K. Paul Singh, the Company's Chairman
and Chief Executive Officer beneficially owns 4,365,030 shares of Common Stock
and options to purchase an additional 338,100 shares, none of which vest or
are exercisable before December 24, 1996. In addition, the Soros/Chatterjee
Group beneficially owns 1,304,099 shares (including warrants to purchase
338,100 shares of Common Stock exercisable on or prior to December 24, 1996)
and has the right to acquire an additional 956,466 shares (assuming they
exercise their rights to acquire these shares at the time of the consummation
of the Offering). As a result, if they act as a group, the executive officers,
directors and the Soros/Chatterjee Group will exercise significant influence
over such matters as the election of the directors of the Company, amendments
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to the Company's charter, other fundamental corporate transactions such as
mergers, asset sales, and the sale of the Company, and otherwise the direction
of the Company's business and affairs. See "Principal Stockholders" and
"Description of Capital Stock."
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DIVIDENDS; OWNERSHIP
OF AXICORP
Primus is a holding company, the principal assets of which are its operating
subsidiaries in the United States, Australia, the United Kingdom and Mexico.
As a holding company, the Company's internal sources of funds to meet its cash
needs, including payment of expenses, are dividends and other permitted
payments from its direct and indirect subsidiaries, as well as its own credit
arrangements. The ability of the Company's operating subsidiaries to pay
dividends or make other payments to Primus may be restricted by the terms of
various credit arrangements entered into by such operating subsidiaries, as
well as statutory and other legal restrictions, and such payments may have
adverse tax consequences. The failure to pay any such dividends or make any
such other payments would restrict Primus's ability to utilize cash flow from
one subsidiary to cover shortfalls in working capital at another subsidiary
and could otherwise have a material adverse effect upon the Company's
business, financial condition and results of operations.
Although the Company is the beneficial owner of 100% of the capital stock of
Axicorp, 157,333 shares, or approximately 27%, of such capital stock are
registered in the names of certain of the previous shareholders. These shares
will be registered in the name of the Company upon payment of approximately
$8.1 million, on a discounted basis, constituting the deferred portion of the
purchase price for Axicorp. In addition, the remaining 432,667 shares, or
approximately 73%, of Axicorp are pledged in favor of such previous
shareholders as security for the deferred purchase price for Axicorp. Under
the terms of the share mortgage, the previous shareholders have no right to
vote, participate in the governance of Axicorp, receive dividends or transfer
the Axicorp shares. Although the Company intends to pay the deferred purchase
price when due, any failure by the Company to make such payment, or any
failure by the previous shareholders to deliver the pledged shares upon the
making of such payment, could affect the Company's ownership interest in
Axicorp and have an adverse effect on the Company's ability to receive
dividends and other distributions from Axicorp. See "Use of Proceeds" and Note
12 to the Consolidated Financial Statements of the Company.
ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE;
POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that following this Offering, an active
trading market will develop or, if developed, will be maintained. The initial
public offering price of the Common Stock offered hereby was determined by
negotiations between the Company and the Representatives (as herein defined)
of the Underwriters and may bear no relationship to the price at which the
Common Stock will trade after completion of this Offering. For factors
considered in determining the initial public offering price, see
"Underwriting." Historically, the market prices for securities of emerging
companies in the telecommunications industry have been highly volatile. After
completion of this Offering, the market price of the Common Stock could be
subject to significant fluctuations in response to various factors and events,
including the liquidity of the market for the Common Stock, variations in the
Company's quarterly operating results, regulatory or other changes (both
domestic and international) affecting the telecommunications industry
generally, announcements of business developments by the Company or its
competitors, the addition of customers in connection with acquisitions,
changes in the cost of long distance service or other operating costs and
changes in general market conditions.
ANTI-TAKEOVER PROVISIONS
Prior to the completion of this Offering, the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Amended
and Restated By-Laws (the "By-Laws") will be amended to include certain
provisions which may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company unless such takeover or
change in control is approved by the Company's
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Board of Directors. Such provisions may also render the removal of directors
and management more difficult. Specifically, the Company's Certificate of
Incorporation or By-Laws will be amended to provide for a classified Board of
Directors serving staggered three-year terms, restrictions on who may call a
special meeting of stockholders and a prohibition on stockholder action by
written consent. In addition, the Company's Board of Directors has the
authority to issue up to 2,000,000 additional shares of preferred stock (the
"Preferred Stock") and to determine the price, rights, preferences, and
privileges of those shares without any further vote or actions by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of such additional shares
of Preferred Stock, while potentially providing desirable flexibility in
connection with possible acquisitions and serving other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire, or may discourage a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company. The Company has no
present intention to issue such additional shares of Preferred Stock. In
addition, the Company is subject to the anti-takeover provisions of Section
203 of the Delaware General Corporation Law (the "DGCL"), which will prohibit
the Company from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder unless the business
combination is approved in a prescribed manner. The application of Section 203
also could have the effect of delaying or preventing a change of control of
the Company. Furthermore, certain provisions of the Company's By-Laws,
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 by a majority vote of the directors then in
office, though less than a quorum, and that limit the ability of new majority
stockholders to remove directors, all of which may have the effect of delaying
or preventing changes in control or management of the Company, and which could
adversely affect the market price of the Company's Common Stock. Additionally,
certain Federal regulations require prior approval of certain transfers of
control which could also have the effect of delaying, deferring or preventing
a change of control. See "Business--Government Regulations." See "Management--
Classified Board of Directors," "Description of Capital Stock" and "Business--
Government Regulation."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
after this Offering could adversely affect the market price of the shares of
Common Stock. In addition to the 6,000,000 shares of Common Stock offered
hereby which will be freely tradeable, an additional 5,071,500 shares will
become eligible for public sale beginning 180 days after the effective date of
the Registration Statement of which this Prospectus forms a part (the
"Effective Date"), subject to the provisions of Rule 144 promulgated under the
Securities Act. The volume limitations of Rule 144 will apply to the sale of
all of such shares held by affiliates of the Company. Following this Offering,
sales of substantial amounts of shares of Common Stock in the public market,
or even the potential for such sales, could adversely affect the prevailing
market price of the Common Stock and impair the Company's ability to raise
capital through the sale of equity securities. See "Principal Stockholders"
and "Shares Eligible for Future Sale."
DILUTION
Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution in pro forma net tangible book value of $10.13 per share
(assuming an initial public offering price of $15 per share). See "Dilution."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS
The Company may use a portion of the net proceeds from the Offering to pay
certain indebtedness as and when it comes due, including A$12 million
(Australian dollars) owing to the holders of Series A Stock and $2 million
owing to Teleglobe, a current stockholder of the Company. See "Use of
Proceeds." Upon completion of the Offering, certain additional benefits will
accrue to the current stockholders of the Company, including the creation of a
public market for their shares of Common Stock, an increase of $4.43 in the
net tangible book value per share of Common Stock (assuming an initial public
offering price of $15 per share), and ownership of Common Stock in a Company
having a substantially lower debt-to-equity ratio than existed prior to
completion of the Offering. Additionally, the aggregate unrealized gain to
current stockholders, assuming an initial public offering price of $15, will
be approximately $151 million. See "--Dilution."
16
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering will be approximately $82.5 million
($95.1 million if the Underwriter's over-allotment option is exercised in
full), based on an assumed public offering price of $15 per share, less
underwriting discounts and commissions and estimated expenses payable by the
Company. Up to $70 million of the net proceeds will be used to expand the
Network, including purchasing transmission equipment facilities and support
systems, international fiber capacity and satellite earth station facilities
for new and existing routes. The remaining net proceeds will be used to fund
operating losses and for working capital and other general corporate purposes.
The net proceeds also may be used for investments in potential joint ventures,
strategic alliances or acquisitions, although the Company is not currently
party to any agreement or understanding relating to any such transaction.
The Company also may use a portion of the net proceeds to repay certain
existing indebtedness as it matures, including A$9.0 million of indebtedness
incurred as a portion of the purchase price for Axicorp, which is non-interest
bearing and matures on February 17, 1997, subject to extension at the
Company's option for an additional year at the prime rate plus one percent.
The Company believes that the net proceeds from the Offering, together with
the net proceeds from the Private Equity Sale, borrowing capacity under an
expected line of credit and available capital lease financing, will be
sufficient to fund the Company's operating losses, capital expenditures and
other cash needs for the next 18 months. The Company is currently in
discussions to obtain a line of credit to provide it with additional
liquidity, although no assurance can be given that such a line of credit can
be obtained on satisfactory terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Pending use of the net proceeds for the above purposes, the Company intends
to invest such funds in short-term investment grade securities or shares of
investment companies investing primarily in such securities.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company at June 30, 1996 was
$5.3 million, or $0.44 per share of Common Stock. "Net tangible book value"
per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. The pro forma net tangible book value
per share as of June 30, 1996 gives effect to the Private Equity Sale,
Preferred Stock Conversion and Stock Split. Without taking into account any
other change in such pro forma net tangible book value after June 30, 1996,
other than to give effect to the sale by the Company of 6,000,000 shares of
Common Stock offered hereby at an assumed public offering price of $15 per
share and the receipt of the estimated net proceeds therefrom, the pro forma
as adjusted net tangible book value of the Company at June 30, 1996 would have
been approximately $87.8 million, or $4.87 per share of Common Stock. This
represents an immediate increase in such pro forma net tangible book value of
$4.43 per share of Common Stock to existing stockholders and an immediate
dilution of $10.13 per share of Common Stock to persons purchasing shares at
the public offering price ("New Investors").
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $15.00
Pro forma net tangible book value per share at June 30,
1996....................................................... $0.44
Increase attributable to New Investors...................... 4.43
-----
Pro forma as adjusted net tangible book value per share after
this Offering................................................ 4.87
------
Dilution in pro forma net tangible book value per share to New
Investors.................................................... $10.13
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of June
30, 1996, the differences between the existing holders of Common Stock,
including as a result of the Private Equity Sale and the Preferred Stock
Conversion, and the New Investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration to the
Company and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders......... 12,028,746 66.7% $ 29,241,328 24.5% $ 2.43
New Investors................. 6,000,000 33.3 90,000,000 75.5 $15.00
---------- ---- ------------ ----
Total....................... 18,028,746 100% $119,241,328 100%
========== ==== ============ ====
</TABLE>
The above computations assume no exercise of any outstanding options or
warrants. At June 30, 1996, there were outstanding options to purchase
1,635,559 shares of Common Stock at a weighted average exercise price of $3.04
per share. Additionally, on July 31, 1996, the Company issued the
Soros/Chatterjee Warrants, which may be exercised for up to 1,294,566 shares
of Common Stock, assuming such warrants were exercised on the date of the
Offering at an assumed offering price of $15. The actual number of shares of
Common Stock issuable upon exercise of the Soros/Chatterjee Warrants will be
up to 627,899 shares plus an indeterminate number of shares having a fair
market value of $10 million as of the date of exercise. To the extent
outstanding options or the Soros/Chatterjee Warrants are exercised, there will
be further dilution to new investors. See "Certain Transactions--Private
Equity Sale," "Management--Stock Option Plans" and Notes 8 and 13 to the
Consolidated Financial Statements of the Company.
DIVIDEND POLICY
To date, the Company has not paid any dividends on its capital stock. The
Company currently intends to retain any future earnings to fund operations and
the continued development of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future.
Future cash dividends, if any, will be determined by the Board of Directors,
and will be based upon the Company's earnings, capital requirements, financial
condition and other factors deemed relevant by the Board of Directors. The
Company is currently in discussions to obtain a $25 million line of credit,
the agreements relating to which can be expected to include limitations on or
prohibitions against the Company's ability to pay dividends.
18
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1996: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the
Company after giving effect to the Stock Split, the Private Equity Sale and
the Preferred Stock Conversion; and (iii) the pro forma as adjusted
capitalization of the Company after giving effect to the Stock Split, Private
Equity Sale, the Preferred Stock Conversion, and the sale of 6,000,000 shares
of Common Stock offered by the Company hereby (assuming an initial public
offering price of $15 per share), less underwriting discounts, commissions,
and estimated expenses of the Offering payable by the Company, and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
of the Company and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 4,398 $20,198 $102,698
======= ======= ========
Long-term obligations due within one year...... $10,627 $10,627 $ 10,627
Long-term obligations.......................... 6,302 6,302 6,302
Stockholders' Equity:
Preferred Stock, $.01 par value--2,455,000
shares authorized:
Series A Convertible Preferred Stock--455,000
shares
authorized, issued and outstanding; none
issued and outstanding pro forma and pro forma
as adjusted................................... 5 -- --
Common Stock, $.01 par value--35,348,355 shares
authorized;
9,524,392, 12,028,746, and 18,028,746 shares
actual, pro forma and pro
forma as adjusted, respectively, issued and
outstanding(1)................................ 95 120 180
Additional paid-in capital..................... 17,985 33,765 116,205
Accumulated deficit............................ (6,235) (6,235) (6,235)
Cumulative translation adjustment.............. (50) (50) (50)
------- ------- --------
Total stockholders' equity................... 11,800 27,600 110,100
------- ------- --------
Total capitalization........................ $28,729 $44,529 $127,029
======= ======= ========
</TABLE>
- --------
(1) Excludes 1,690,500 and 338,100 shares reserved for issuance under the
Employee Plan and Director Plan, respectively, of which options to
purchase 1,432,699 and 202,860 shares, respectively, have been granted
and are outstanding as of June 30, 1996. Also excludes 1,294,566 shares
which may be issued under the Soros/Chatterjee Warrants assuming such
warrants were exercised on the date of the Offering at an assumed
offering price of $15. The actual number of shares of Common Stock
issuable upon exercise of the Soros/Chatterjee Warrants will be up to
627,899 shares plus an indeterminate number of shares having a fair
market value of $10 million as of the date of exercise. See "Management--
Stock Option Plans" and "Description of Capital Stock--Warrants."
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto contained elsewhere herein and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The statements of operations data for the Company for the period
from the Company's inception on February 4, 1994 to December 31, 1994 and the
year ended December 31, 1995, and the balance sheet data as of December 31,
1994 and 1995 have been derived from the financial statements of the Company,
which have been audited by Deloitte & Touche LLP, independent auditors. The
historical financial data for the Company for the six month periods ended June
30, 1995 and 1996 have been derived from the Company's unaudited financial
statements which, in the opinion of management, include all significant normal
and recurring adjustments necessary for a fair presentation of the financial
position and results of operations for such unaudited period. The historical
data for the Company for the six month period ended June 30, 1996 include the
historical results of Axicorp from March 1, 1996 (the date of acquisition).
The statements of operations data for Axicorp for the nine month period ended
March 31, 1995 and the twelve months ended March 31, 1996 have been derived
from the financial statements of Axicorp, which have been audited by Price
Waterhouse, independent chartered accountants. The historical financial data
for Axicorp for the period from Axicorp's inception on September 17, 1993 to
June 30, 1994 has been derived from Axicorp's unaudited financial statements
which, in the opinion of management, include all significant normal and
recurring adjustments necessary for a fair presentation of the financial
position and results of operations for such unaudited period.
<TABLE>
<CAPTION>
AXICORP (THE PREDECESSOR) THE COMPANY
--------------------------------- ------------------------------------------------
PERIOD FROM TWELVE PERIOD FROM SIX MONTHS
INCEPTION NINE MONTHS MONTHS INCEPTION ENDED
THROUGH ENDED ENDED THROUGH YEAR ENDED JUNE 30,
JUNE 30, MARCH 31, MARCH 31, DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1996 1994 1995 1995 1996
----------- ----------- --------- ------------ ------------ ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue........................... $12,587 $44,797 $144,345 $ -- $ 1,167 $ 221 $ 65,415
Cost of revenue....................... 11,366 40,405 131,712 -- 1,384 203 60,162
------- ------- -------- ---------- ---------- ---------- ----------
Gross margin (deficit)............... 1,221 4,392 12,633 -- (217) 18 5,253
Operating expenses:
Selling, general and
administrative...................... 1,313 4,277 11,558 557 2,024 714 6,707
Depreciation and amortization........ 5 43 235 12 160 65 798
------- ------- -------- ---------- ---------- ---------- ----------
Total operating expenses............ 1,318 4,320 11,793 569 2,184 779 7,505
------- ------- -------- ---------- ---------- ---------- ----------
Income (loss) from operations......... (97) 72 840 (569) (2,401) (761) (2,252)
Interest expense...................... -- -- -- (13) (59) (33) (335)
Interest income....................... -- 30 219 5 35 1 85
Other income (expense)................ -- -- -- -- -- -- (268)
------- ------- -------- ---------- ---------- ---------- ----------
Income (loss) before income taxes..... (97) 102 1,059 (577) (2,425) (793) (2,770)
Income taxes.......................... -- 4 492 -- -- -- 462
------- ------- -------- ---------- ---------- ---------- ----------
Net income (loss)..................... $ (97) $ 98 $ 567 $ (577) $ (2,425) $ (793) $ (3,232)
======= ======= ======== ========== ========== ========== ==========
Net loss per common and common share
equivalents.......................... $ (.04) $ (.18) $ (.06) $ (.23)
========== ========== ========== ==========
Weighted average number of common and
common share equivalents
outstanding.......................... 10,014,032 12,338,313 12,170,846 13,497,468
- -------------------------------------------
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
-----------------------
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 221 $ 2,296 $ 4,398
Total assets............................................ 487 5,042 62,297
Total long-term obligations............................. 13 528 16,929
Stockholders' equity (deficit).......................... (71) 2,562 11,800
</TABLE>
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma consolidated statements of operations data
give effect to the March 1, 1996 acquisition of Axicorp in each case as if it
occurred on January 1, 1995. The unaudited pro forma consolidated statement of
operations data for the six months ended June 30, 1996 includes the operations
of the Company for the six months ended June 30, 1996, which includes the
results of operations of Axicorp since March 1, 1996 (the date of acquisition)
and the operations of Axicorp for the months of January and February 1996. The
unaudited pro forma consolidated statement of operations data for the six
months ended June 30, 1995 includes the results of operations of the Company
and of Axicorp for six months ended June 30, 1995. The unaudited consolidated
pro forma statement of operations data for the year ended December 31, 1995
includes the results of operations data of the Company and Axicorp for the
year ended December 31, 1995.
The unaudited pro forma consolidated statements of operations are presented
for informational purposes only and are not necessarily indicative of the
results of operations that would have been achieved had the acquisition of
Axicorp been completed as of the beginning of the periods presented, nor are
they necessarily indicative of the Company's future results of operations. The
unaudited pro forma consolidated statements of operations should be read in
conjunction with the historical financial statements of the Company and
Axicorp, including the related notes thereto.
21
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
THE RELATED TO
COMPANY(1) AXICORP(2) ACQUISITION(3) AS ADJUSTED
---------- ---------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue.................. $ 65,415 $26,368 $ -- $ 91,783
Cost of revenue.............. 60,162 23,756 -- 83,918
---------- ------- ----- ----------
Gross margin............... 5,253 2,612 -- 7,865
Operating expenses:
Selling, general and admin-
istrative................. 6,707 2,084 -- 8,791
Depreciation and amortiza-
tion...................... 798 48 252 1,098
---------- ------- ----- ----------
Total operating ex-
penses.................. 7,505 2,132 252 9,889
---------- ------- ----- ----------
Income (loss) from opera-
tions....................... (2,252) 480 (252) (2,024)
Interest expense............. (335) -- (138) (473)
Interest income.............. 85 124 -- 209
Other income (expense)....... (268) -- -- (268)
---------- ------- ----- ----------
Income (loss) before income
taxes....................... (2,770) 604 (390) (2,556)
Income taxes................. 462 281 -- 743
---------- ------- ----- ----------
Net income (loss)............ $ (3,232) $ 323 $(390) $ (3,299)
========== ======= ===== ==========
Net loss per common and com-
mon share equivalents....... $ (.23) $ (.23)
========== ==========
Weighted average number of
common and common share
equivalents outstanding..... 13,497,468 13,497,468
========== ==========
</TABLE>
- --------
(1) Reflects the historical results of operations of the Company for the six
months ended June 30, 1996, including Axicorp's operations from March 1,
1996 (acquisition date) to June 30, 1996, as set forth in the Consolidated
Financial Statements of the Company appearing elsewhere in this
Prospectus.
(2) Reflects the historical results of operations of Axicorp for the months of
January and February 1996.
(3) The pro forma adjustments to depreciation and amortization reflect the
following:
<TABLE>
<S> <C>
Increase in amortization of the excess of cost over fair value of
net assets acquired related to the purchase of Axicorp (computed us-
ing the straight line method over thirty years--represents two
months) $100
Increase in amortization of the value associated with the customer
list acquired related to the purchase of Axicorp (computed using the
estimated run-off of the customer base (approximately five years)--
represents two months) 152
----
$252
====
The pro forma adjustment to increase interest expense relates to the
issuance of notes payable of $8,110 related to the acquisition of
Axicorp--represents two months $138
====
The pro forma adjustment to the income tax provision is zero as a val-
uation reserve was applied in full to the tax benefit associated with
the pro forma net loss before income taxes.
</TABLE>
22
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
THE RELATED TO
COMPANY(1) AXICORP(2) ACQUISITION(3) AS ADJUSTED
---------- ---------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue.................. $ 221 $47,709 $ -- $ 47,930
Cost of revenue.............. 203 42,938 -- 43,141
---------- ------- ------- ----------
Gross margin............... 18 4,771 -- 4,789
Operating expenses:
Selling, general and admin-
istrative................. 714 4,662 -- 5,376
Depreciation and amortiza-
tion...................... 65 58 756 879
---------- ------- ------- ----------
Total operating ex-
penses.................. 779 4,720 756 6,255
---------- ------- ------- ----------
Income (loss) from opera-
tions....................... (761) 51 (756) (1,466)
Interest expense............. (33) -- (413) (446)
Interest income.............. 1 29 -- 30
Other income (expense)....... -- -- -- --
---------- ------- ------- ----------
Income (loss) before income
taxes....................... (793) 80 (1,169) (1,882)
Income taxes................. -- 68 -- 68
---------- ------- ------- ----------
Net income (loss)............ $ (793) $ 12 $(1,169) $ (1,950)
========== ======= ======= ==========
Net loss per common and com-
mon share equivalents....... $ (.06) $ (.14)
========== ==========
Weighted average number of
common and common share
equivalents outstanding..... 12,170,846 12,170,846
========== ==========
</TABLE>
- --------
(1) Reflects the historical results of operations of the Company for the six
months ended June 30, 1995, as set forth in the Consolidated Financial
Statements of the Company appearing elsewhere in this Prospectus.
(2) Reflects the historical results of operations of Axicorp for the six
months ended June 30, 1995.
(3) The pro forma adjustments to depreciation and amortization reflect the
following:
<TABLE>
<S> <C>
Increase in amortization of the excess of cost over fair value of
net assets acquired related to the purchase of Axicorp (computed us-
ing the straight line method over thirty years--represents six
months) $300
Increase in amortization of the value associated with the customer
list acquired related to the purchase of Axicorp (computed using the
estimated run-off of the customer base (approximately five years)--
represents six months) 456
----
$756
====
The pro forma adjustment to increase interest expense relates to the
issuance of notes payable of $8,110 related to the acquisition of
Axicorp--represents six months $413
====
The pro forma adjustment to income tax provision is zero as a valua-
tion reserve was applied in full to the tax benefit associated with
the pro forma net loss before income taxes.
</TABLE>
23
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
THE RELATED TO
COMPANY(1) AXICORP(2) ACQUISITION(3) AS ADJUSTED
---------- ---------- -------------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenue.................. $ 1,167 $124,461 $ -- $ 125,628
Cost of revenue.............. 1,384 113,255 -- 114,639
---------- -------- ------- ----------
Gross margin (deficit)..... (217) 11,206 -- 10,989
Operating expenses:
Selling, general and admin-
istrative................. 2,024 10,931 -- 12,955
Depreciation and amortiza-
tion...................... 160 169 1,513 1,842
---------- -------- ------- ----------
Total operating ex-
penses.................. 2,184 11,100 1,513 14,797
---------- -------- ------- ----------
Income (loss) from opera-
tions....................... (2,401) 106 (1,513) (3,808)
Interest expense............. (59) -- (826) (885)
Interest income.............. 35 97 -- 132
Other income (expense)....... -- -- -- --
---------- -------- ------- ----------
Income (loss) before income
taxes....................... (2,425) 203 (2,339) (4,561)
Income taxes................. -- 124 -- 124
---------- -------- ------- ----------
Net income (loss)............ $ (2,425) $ 79 $(2,339) $ (4,685)
========== ======== ======= ==========
Net loss per common and com-
mon share equivalents....... $ (.18) $ (.35)
========== ==========
Weighted average number of
common and common share
equivalents outstanding..... 12,338,313 12,338,313
========== ==========
</TABLE>
- --------
(1) Reflects the historical results of operations of the Company for the year
ended December 31, 1995 as set forth in the Consolidated Financial
Statements of the Company appearing elsewhere in this Prospectus.
(2) Reflects the historical results of operations of Axicorp for the year ended
December 31, 1995.
(3) The pro forma adjustments to depreciation and amortization reflect the
following:
<TABLE>
<S> <C>
Increase in amortization of the excess of cost over fair value of
net assets acquired related to the purchase of Axicorp (computed
using the straight line method over thirty years--represents
twelve months). $ 600
Increase in amortization of the value associated with the customer
list acquired related to the purchase of Axicorp (computed using
the estimated run-off of the customer base (approximately five
years)--represents twelve months) 913
------
$1,513
======
The pro forma adjustment to interest expense relates to the issuance
of notes payable of $8,110 related to the acquisition of Axicorp--
represents twelve months $ 826
======
The pro forma adjustment to the income tax provision is zero as a
valuation reserve was applied in full to the tax benefit associated
with the pro forma net loss before income taxes.
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto contained elsewhere in this Prospectus.
OVERVIEW
Primus is a multinational telecommunications company that focuses on the
provision of international and domestic long distance services. The Company
seeks to capitalize on the increasing business and consumer demand for
international telecommunications services generated by the globalization of
the world's economies and the worldwide trend toward deregulation of the
telecommunications sector. The Company has targeted North America, Asia-
Pacific and Europe as its primary service regions. The Company currently
provides services in the United States, Australia and the United Kingdom,
which are the most deregulated countries within the Targeted Regions and which
serve as regional hubs for expansion into additional markets within the
Targeted Regions. As part of the execution of this strategy, the Company has
commenced operations in Mexico and has installed a switch in Canada. The
Company expects to expand into additional markets as deregulation occurs and
the Company is permitted to offer a full range of switched public telephone
services in such markets.
The Company was founded in February 1994 and through the first half of 1995
was a development stage enterprise involved in various start-up activities
including raising capital, obtaining licenses, acquiring equipment, leasing
space, developing markets and recruiting and training personnel. The Company
began generating revenue during March 1995. On March 1, 1996 the Company
acquired Axicorp, the fourth largest telecommunications provider in Australia.
The acquisition of Axicorp has had a material effect on the Company's results
of operations for the six months ended June 30, 1996. The Company's Australian
operations generated approximately $44 million, or 91%, of the Company's net
revenue for the three months ended June 30, 1996. The acquisition of Axicorp
furthers the Company's objectives by providing a substantial customer base and
significant hub location in the Asia-Pacific market.
The Company is investing substantial resources to transform Axicorp's
strategy and operations to those of a facilities-based carrier focused on the
provision of international and domestic long distance services. Prior to the
acquisition, Axicorp was a switchless reseller of long distance, local and
cellular service. Since the acquisition, the Company has acquired five
switches for use in Australia, all of which are expected to be operational by
the end of the first quarter of 1997, and has focused on increasing the number
of higher-margin, higher-volume business customers with significant
international long-distance traffic. Since the acquisition of Axicorp, the
Company has spent approximately $4 million to implement its Network in
Australia, including the purchase of switches, and anticipates that, of the up
to $70 million of net proceeds currently anticipated to be spent for building
the Network over the next 18 months, approximately 30% will be spent in
Australia. As part of its increasing focus on business customers, the Company
is increasing the direct sales force of Axicorp and lessening its reliance on
marketing through associations. The Company has experienced and expects to
continue to experience lower gross margin as a percentage of net revenue for
Axicorp's local switched and cellular services, as compared to long distance
services.
Net revenue is derived from the number of minutes billed by the Company and
is recorded upon completion of calls. The Company generally prices its
services at a savings compared to the major carriers operating in the Targeted
Regions, which allows the Company to offer competitive pricing to its
customers. In Australia, net revenue is currently derived approximately
equally from the provision of long distance and from the provision of local
and cellular services, primarily to a broad mix of small- and medium-sized
businesses. The Company's net revenue in the United States is derived from
carrying a mix of business, consumer and wholesale carrier long distance
traffic. In the United Kingdom, net revenue is derived from the provision of
long distance services, primarily to ethnic residential consumers, as well as
to small- and medium-sized businesses. The Company intends to generate net
revenue from internal growth through focused sales and marketing efforts on a
retail basis
25
<PAGE>
toward small- and medium-sized businesses with significant international long
distance traffic and ethnic residential consumers and, on a wholesale basis,
to other telecommunications carriers and resellers with international traffic
in the Targeted Regions.
Prices in the long distance industry in the United States and the United
Kingdom have declined in recent years and as competition continues to
increase, the Company believes that prices are likely to continue to decrease.
Additionally, the Company believes that because deregulatory influences only
recently have begun to affect non-U.S. and non-U.K. telecommunications
markets, the deregulatory trend in such markets is expected to result in
greater competition which could adversely affect net revenue per minute and
gross margin as a percentage of net revenue. The Company believes, however,
that such decreases in prices will be at least partially offset by increased
telecommunications usage and decreased costs.
Cost of revenue is primarily comprised of costs incurred from other domestic
and foreign telecommunications carriers to access, transport and terminate
calls. The majority of the Company's cost of revenue is variable, based upon
the number of minutes of use, with transmission and termination costs being
the Company's most significant expense. As the Company increases the portion
of traffic transmitted over its own facilities, cost of revenue increasingly
will reflect lease, ownership and maintenance costs of the Network. In order
to manage such costs, the Company pursues a flexible approach with respect to
Network expansion. The Company initially obtains transmission capacity on a
variable-cost, per-minute leased basis, next acquires additional capacity on a
fixed-cost basis when traffic volume makes such a commitment cost-effective,
and ultimately purchases and operates its own facilities only when traffic
levels justify such investment. The Company also seeks to lower its cost of
revenue through (a) optimizing the routing of calls over the least cost
routing, (b) increasing volumes on its fixed cost leased lines, thereby
spreading the allocation of fixed costs over a larger number of minutes, (c)
negotiating lower variable usage based costs with domestic and foreign service
providers and negotiating additional and lower cost correspondent agreements
with foreign PTTs, and (d) continuing to expand the Network when traffic
volumes justify such investment. See "Risk Factors--Managing Rapid Growth" and
"Business--Network."
Typical of the long distance telecommunications industry, the Company
generally realizes a higher gross margin as a percentage of net revenue on its
international compared to its domestic long distance services and expects to
realize a higher gross margin as a percentage of net revenue on its retail
services compared to those realized on its wholesale services. In addition,
the Company generally realizes a higher gross margin as a percentage of net
revenue on its long distance services as compared to those realized on local
switched and cellular services. Although, after giving effect to the
acquisition of Axicorp, the Company's wholesale services represent only a
small percentage of its net revenue, the Company expects such services to
represent a significantly larger percentage of net revenue over time. While
wholesale services generate a lower gross margin as a percentage of net
revenue than retail services, the additional traffic volume of such wholesale
customers improves the utilization of the Network and allows the Company to
obtain greater volume discounts from its suppliers than it otherwise would
realize. The Company's overall gross margin as a percentage of net revenue may
fluctuate in the future based on its relative volumes of international versus
domestic long distance services and wholesale versus retail long distance
services.
Selling, general and administrative expenses are comprised primarily of
salaries and benefits, commissions, occupancy costs, sales and marketing
expenses, advertising and administrative costs. These expenses have been
increasing over the past year, which is consistent with the development stage
nature of the Company, expansion of the United States and United Kingdom
operations, and the transformation of Axicorp's operations. The Company
expects this trend to continue and believes that additional selling, general
and administrative expenses will be necessary to support the expansion of
sales and marketing efforts and operations.
Since its inception, the Company has made, and expects to continue to make,
significant investments in the development of its operations in its Targeted
Regions and the development and expansion of the Network. The costs of
developing its operations and expanding the Network, including the purchase
and installation of switches, sales and marketing expenses and other
organizational costs, are significant. In addition, increased
26
<PAGE>
capital investment activity in the future can be expected to affect the
Company's operating results in the near term due to increased depreciation
charges and interest expense in connection with borrowings to fund such
expenditures, which costs will be incurred in advance of the realization of
the expected improvements in operating results from such investments. Such
costs and investment activity have resulted in negative cash flows and
operating losses for the Company on an historical basis, which are expected to
continue to increase in the near future as the Company uses the proceeds of
the Offering to accelerate the expansion of its business and the build-out of
the Network. The Company currently anticipates spending approximately $70
million on the improvement and expansion of the Network during the next 18
months. See "--Liquidity and Capital Resources" and "Use of Proceeds."
Although the Company's functional currency is the U.S. dollar, the majority
of the Company's net revenue is derived from its sales and operations outside
the United States. On a pro forma basis, approximately 94% and 99% of the
Company's net revenue was earned, and approximately 91% and 97% of the
Company's operating costs was incurred, in currencies other than the U.S.
dollar for the six months ended June 30, 1996 and the year ended December 31,
1995, respectively. In the future, the Company expects to continue to derive
the majority of its net revenue and incur the majority of its operating costs
outside the United States and changes in exchange rates may have a significant
effect on the Company's results of operations. The Company historically has
not engaged, and does not currently contemplate engaging, in hedging
transactions to mitigate foreign exchange risks. See "Risk Factors--Risks
Associated with International Operations."
RESULTS OF OPERATIONS
As a result of the Company's acquisition of Axicorp on March 1, 1996 and the
development stage nature of the Company in the first quarter of 1995, the
Company believes that a comparison of the historical results of operations for
the six-month periods ended June 30, 1995 and 1996 is not meaningful and that
such results are not necessarily indicative of results for any future period.
Accordingly, the historical results of operations are supplemented with a more
extensive discussion of the pro forma results of operations for the six months
ended June 30, 1995 and 1996 and the pro forma quarterly results of operations
for each of the six quarters in the period ended June 30, 1996, which results
give effect to the acquisition of Axicorp as if it had occurred on January 1,
1995. A discussion of the Company's historical results of operations for the
six months ended June 30, 1995 and 1996, the period from inception (February
4, 1994) through December 31, 1994 and the year ended December 31, 1995, and a
discussion of Axicorp's historical results of operations for the years ended
March 31, 1995 and 1996 follow the discussion of the Company's pro forma
results of operations.
27
<PAGE>
PRO FORMA RESULTS
Results of Operations for the Six Months Ended June 30, 1996 Compared to the
Six Months Ended June 30, 1995
The following table presents certain items from the Company's Unaudited Pro
Forma Consolidated Statements of Operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED -------------------------------
DECEMBER 31, 1995 1995 1996
-------------------- -------------- --------------
$ % $ % $ %
---------- -------- ------- ----- ------- -----
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 125,628 100.0% $47,930 100.0% $91,783 100.0%
Cost of revenue......... 114,639 91.3 43,141 90.0 83,918 91.4
---------- ------- ------- ----- ------- -----
Gross margin.......... 10,989 8.7 4,789 10.0 7,865 8.6
Operating expenses:
Selling, general and
administrative........ 12,955 10.3 5,376 11.2 8,791 9.6
Depreciation and amor-
tization.............. 1,842 1.5 879 1.8 1,098 1.2
---------- ------- ------- ----- ------- -----
Total operating ex-
penses............... 14,797 11.8 6,255 13.1 9,889 10.8
---------- ------- ------- ----- ------- -----
Income (loss) from oper-
ations................. (3,808) (3.0) (1,466) (3.1) (2,024) (2.2)
Interest expense........ (885) (0.7) (446) (0.9) (473) (0.5)
Interest income......... 132 0.1 30 0.1 209 0.2
Other income (expense).. -- -- -- -- (268) (0.3)
---------- ------- ------- ----- ------- -----
Income (loss) before in-
come taxes............. (4,561) (3.6) (1,882) (3.9) (2,556) (2.8)
Income taxes............ 124 0.1 68 0.1 743 0.8
---------- ------- ------- ----- ------- -----
Net income (loss)....... $ (4,685) (3.7)% $(1,950) (4.1)% $(3,299) (3.6)%
========== ======= ======= ===== ======= =====
</TABLE>
Net revenue increased 92%, or $43.9 million, from $47.9 million for the six
months ended June 30, 1995 to $91.8 million for the six months ended June 30,
1996. The Australian net revenue increased 80%, or $37.9 million, from $47.7
million to $85.6 million. The increase was attributable to growth in minutes
of traffic primarily from business customers, as well as an increased number
of cellular customers. Non-Australian net revenue was $6.2 million for the six
months ended June 30, 1996 as compared to minimal revenue of $0.2 million for
the six months ended June 30, 1995. The increase was attributable to a greater
number of customers in all non-Australian geographical regions of the
Company's business and an increase in minutes of use to higher rate per minute
countries, including India, Iran, Japan and Argentina. As the Company
continues to build its sales and marketing staff, establish additional carrier
arrangements and expand the Network, the Company expects the minutes of
traffic and associated revenue to continue to increase.
Cost of revenue increased 95%, or $40.8 million, from $43.1 million for the
six months ended June 30, 1995 to $83.9 million for the six months ended June
30, 1996. The increase was a direct reflection of the increased traffic the
Company carried for customers. The Australian cost of revenue increased 79%,
or $34.1 million, from $42.9 million for the six months ended June 30, 1995 to
$77.0 million for the six months ended June 30, 1996. The Australian cost of
revenue increase is primarily driven by increased traffic and, to a lesser
extent, lower tariff rate discounts implemented by Telstra in February 1996.
The Australian cost of revenue as a percentage of revenue remained constant at
90%. The non-Australian cost of revenue increased $6.8 million as a result of
increased traffic. Cost of revenue as a percentage of net revenue increased
from 90% to 91%. The non-Australian cost of revenue as a percentage of net
revenue increased as a result of the lack of return traffic associated with
newly initiated correspondent agreements, and traffic being carried on more
expensive carriers because of lack of adequate capacity with lower cost
carriers.
Gross margin increased 64%, or $3.1 million, from $4.8 million for the six
months ended June 30, 1995 to $7.9 million for the six months ended June 30,
1996. The Australian gross margin percentage remained constant at 10%. The
non-Australian operations reported a gross deficit of $0.8 million.
28
<PAGE>
Selling, general and administrative expenses increased 64%, or $3.4 million,
from $5.4 million for the six months ended June 30, 1995 to $8.8 million for
the six months ended June 30, 1996. The Australian operations increased
selling, general and administrative expenses $1.4 million as a result of
increased salaries and benefits, commissions and administrative expenses to
support the continued growth in the business. The Australian selling, general
and administrative expenses as a percentage of net revenue decreased from 10%
to 7% for the six months ended June 30, 1995 and 1996, respectively, as a
result of fixed costs being spread over an increasing revenue base. The non-
Australian operations account for the remaining increase of $2.0 million due
to growth in sales and marketing staffing levels, network operations expenses,
and customer service costs.
Depreciation and amortization increased 25%, or $0.2 million, from $0.9
million for the six months ended June 30, 1995 to $1.1 million for the six
months ended June 30, 1996. The increase was primarily attributable to
depreciation for $0.7 million for capital additions associated with the
development of the customer billing system in Australia and $0.9 million of
capital additions for network equipment in the non-Australian markets.
Interest expense increased 6% as a result of additional capital leases to
finance network switching equipment in the United States, as well as the
incurrence of $2.0 million of debt to Teleglobe in February of 1996.
Interest income increased from a negligible amount in the six months ended
June 30, 1995 to $0.2 million in the six months ended June 30, 1996 as a
result of higher average cash balances invested overnight generated from the
private equity placements in December 1995 and February 1996.
Other income (expense) is comprised of a foreign currency transaction loss
of $0.3 million for the six months ended June 30, 1996 associated with the
debt related to the acquisition of Axicorp, which is denominated in Australian
dollars. Fluctuations in the currency exchange rates between the Australian
and U.S. dollar will cause currency transaction gains or losses which will be
recognized in the current period results of operations.
Income taxes is based on the income before taxes generated by Axicorp and
payable to the Australian federal government. There was no income tax
provision (benefit) reflected in either period for the non-Australian
operations as pre-tax losses were incurred in both periods and a full
valuation reserve was applied to the tax benefit.
29
<PAGE>
Quarterly Results of Operations
The following table sets forth unaudited pro forma consolidated statement of
operations data for each of the six fiscal quarters in the period ended June
30, 1996 and has been prepared assuming the acquisition of Axicorp occurred as
of January 1, 1995. The pro forma quarterly information has been derived from,
and should be read in conjunction with, the Consolidated Financial Statements
of the Company, the Financial Statements of Axicorp and the notes thereto
included elsewhere in this Prospectus, and in management's opinion, reflects
all adjustments, consisting only of normal recurring adjustments, necessary
for a fair presentation of the information for the quarters presented. The
operating results for any quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
CONSOLIDATED PREDECESSOR AND COMPANY COMPANY
-------------------------------------------------------- --------
QUARTER ENDED:
-----------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1995 1995 1996 1996
--------- -------- ------------- ------------ --------- --------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
United States, United
Kingdom and Mexico... $ 17 $ 204 $ 276 $ 670 $ 1,931 $ 4,229
Australia............. 20,701 27,008 37,193 39,559 41,574 44,049
------- ------- ------- ------- ------- -------
Total net revenue... 20,718 27,212 37,469 40,229 43,505 48,278
Cost of revenue......... 18,491 24,650 34,366 37,130 39,284 44,634
------- ------- ------- ------- ------- -------
Gross margin.......... 2,227 2,562 3,103 3,099 4,221 3,644
Operating expenses:
Selling, general and
administrative....... 2,574 2,802 3,593 3,986 3,958 4,834
Depreciation and amor-
tization............. 419 460 473 490 525 571
------- ------- ------- ------- ------- -------
Total operating ex-
penses............. 2,993 3,262 4,066 4,476 4,483 5,405
------- ------- ------- ------- ------- -------
Loss from operations.... (766) (700) (963) (1,377) (262) (1,761)
Interest expense........ (221) (226) (219) (221) (236) (238)
Interest income......... 22 8 36 66 170 38
Other income (expense).. -- -- -- -- (213) (55)
------- ------- ------- ------- ------- -------
Loss before income tax-
es..................... (965) (918) (1,146) (1,532) (541) (2,016)
Income taxes............ -- 68 59 (2) 648 96
------- ------- ------- ------- ------- -------
Net loss................ $ (965) $ (986) $(1,205) $(1,530) $(1,189) $(2,112)
======= ======= ======= ======= ======= =======
Net revenue growth per-
centage:
United States, United
Kingdom and Mexico... -- 1,100.0% 35.3% 142.8% 188.2% 119.0%
Australia............. -- 30.5% 37.7% 6.4% 5.1% 6.0%
Total............... -- 31.3% 37.7% 7.4% 8.1% 11.0%
Gross margin percent-
age.................... 10.7% 9.4% 8.3% 7.7% 9.7% 7.5%
Selling, general and
administrative expenses
as a percentage of net
revenue................ 12.4% 10.3% 9.6% 9.9% 9.1% 10.0%
</TABLE>
Quarterly net revenue increased from $20.7 million in the quarter ended
March 31, 1995 to $48.3 million in the quarter ended June 30, 1996. The
Australian net revenue growth in each quarter was due to an increase in
traffic volume primarily as a result of an increase in the business customer
base. The lower rate of growth in Australian net revenue from the quarter
ended September 30, 1995 as compared to the subsequent two quarters is
primarily a result of management's shift in focus to the sale of Axicorp to
the Company and, in the quarter ended June 30, 1996, management's strategic
decision to focus on higher-margin, higher-volume business
30
<PAGE>
customers and an increase in the level of competition. The lower rate of
growth in the Company's net revenue from the quarter ended September 30, 1995
as compared to the three subsequent quarters is primarily a result of
management's strategic decision to focus on higher-margin, higher-volume
business customers and an increase in the level of competition in Australia,
offset by an increase in the traffic volumes primarily associated with
increased carrier traffic in the United States and the introduction of service
in the United Kingdom.
Quarterly gross margin percentages have trended downward during the six
quarters from 11% in the quarter ended March 31, 1995 to 8% in the quarter
ended June 30, 1996. The reduction in the quarterly gross margin percentage in
each of the quarters of 1995 was primarily a result of the lower tariff rate
discounts implemented by Telstra in the Australian market. In the next two
quarters, gross margin percentages were favorably affected by, in Australia,
lower cost per minute of cellular service due to volume discounts and, in the
last quarter for the Company as a whole, current management's focus on higher-
margin, higher-volume business customers, offset by negative gross margin due
to start-up of non-Australian operations.
The Company's quarterly selling, general and administrative expenses have
trended upward during the six month period from $2.6 million in the quarter
ended March 31, 1995 to $4.8 million in the quarter ended June 30, 1996. The
quarterly selling, general and administrative expense increase is reflective
of the worldwide growth in the Company's operations, including increased
personnel costs, network operations costs, sales and marketing expenses and
internal billing systems development costs. The selling, general and
administrative expenses in the fourth quarter of 1995 increased due to the
conversion costs associated with the Australian operations providing direct
billing and customer service to its customer base. In the quarter ended June
30, 1996, selling, general and administrative expenses increased as a
percentage of net revenue due to substantial expenditures incurred in the
commencement of non-Australian operations.
Quarterly depreciation and amortization reflects an increasing trend as a
result of the Company's continued investment in property and equipment
primarily associated with the expansion of the Network. This trend is expected
to continue in the foreseeable future.
HISTORICAL RESULTS--PRIMUS
Results of Operations for the Six Months Ended June 30, 1996 Compared to the
Six Months Ended June 30, 1995
Net revenue increased $65.2 million, from $0.2 million for the six months
ended June 30, 1995 to $65.4 million for the six months ended June 30, 1996.
The growth was attributable to $59.3 million of net revenue associated with
Axicorp from the purchase date of March 1, 1996 through June 30, 1996. The
remaining $5.9 million of net revenue growth was associated primarily with the
commencement of the Company's United States and United Kingdom operations.
Cost of revenue increased $60.0 million, from $0.2 million for the six
months ended June 30, 1995 to $60.2 million for the six months ended June 30,
1996 as a direct result of the increased net revenue. Axicorp's cost of
revenue for the four months ended June 30, 1996 was $53.2 million, or 90% of
Axicorp's net revenue during such period, while the non-Australian cost of
revenue for the full six months ended June 30, 1996 was $7.0 million or 113%
of non-Australian net revenue. The non-Australian cost of revenue reflects the
start-up nature of the Network and traffic being carried on more expensive
carriers until adequate capacity on lower cost carriers could be established.
In addition, the Company's cost of revenue as a percentage of net revenue was
effected by the lack of return traffic associated with newly-initiated
correspondent agreements.
Selling, general and administrative expenses increased from $0.7 million to
$6.7 million for the six months ended June 30, 1995 to June 30, 1996.
Approximately $4.0 million of the increase was attributable to the four months
of activity associated with Axicorp and the remaining $2.0 million related to
the non-Australian operations as a result of increased staffing levels,
increased sales and marketing activity and network operation costs. The non-
Australian selling, general and administrative costs as a percentage of net
revenue for the six months ended June 30, 1996 was 44%, which is reflective of
the growth stage of such business. The Australian selling, general and
administrative expense as a percentage of net revenue was 7% for the four
months from acquisition to June 30, 1996.
31
<PAGE>
Depreciation and amortization increased $0.7 million, from $0.1 million for
the six months ended June 30, 1995 to $0.8 million for the six months ended
June 30, 1996. The majority of the increase was a result of the acquisition of
Axicorp and was comprised of amortization of goodwill and the customer lists
which totaled $0.5 million. The remaining increase is associated with
depreciation related to Axicorp's assets and increased depreciation expense
for the Company as a result of additional capital expenditures for switching
and network related equipment.
Interest expense increased $0.3 million as a result of the additional debt
incurred by the Company in connection with the acquisition of Axicorp, which
totaled $8.4 million as of June 30, 1996, and was outstanding for the four-
month period from March 1, 1996 (the date of acquisition) to June 30, 1996.
Additionally, the Company incurred increased interest expense as a result of
the issuance of a $2.0 million note payable to a stockholder (Teleglobe) in
February 1996.
Interest income of $0.1 million during the six months ended June 30, 1996
relates to the temporary investment of the funds received from the private
placements of equity made by the Company in 1995 and 1996.
Other income (expense) of $0.3 million for the six months ended June 30,
1996 related to foreign currency transaction losses on the Australian dollar-
denominated debt incurred by the Company payable to the sellers for its
acquisition of Axicorp as a result in the appreciation of the Australian
dollar against the U.S. dollar during the period.
Income taxes amount was fully attributable to the operations of Axicorp for
the four months from the date of purchase, and represented the amount of
expense for Australian federal government taxes.
Results of Operations for the Year Ended December 31, 1995 Compared to the
Period from Inception (February 4, 1994) to December 31, 1994
Net revenue and cost of revenue in 1995 were $1.2 million and $1.4 million,
respectively. During the period ended December 31, 1994, the Company did not
have net revenue or cost of revenue as it was in the development stage and
involved in various start-up activities including raising capital, obtaining
licenses, acquiring equipment, leasing space, developing markets, and
recruiting and training personnel. In March 1995, the Company began generating
net revenue and associated cost of revenue.
Gross deficit for 1995 was $0.2 million. As the Company began generating
revenue in 1995, there were fixed network costs that were not offset by the
net revenue generated.
Selling, general and administrative expenses increased from $0.6 million in
1994 to $2.0 million in 1995. The increase was primarily due to additional
costs incurred to support the formation of the Company's administrative,
management, sales and operations personnel.
Depreciation and amortization increased to $0.2 million in 1995. The
increase in depreciation and amortization expense was directly related to the
purchase of Network equipment, including the Company's switch in Washington,
D.C.
HISTORICAL RESULTS--AXICORP
Results of Operations for the Twelve Months Ended March 31, 1996 Compared to
the Twelve Months Ended March 31, 1995
The audited financial statements of Axicorp included in this Prospectus
cover the twelve month period ended March 31, 1996 and the nine month period
ended March 31, 1995. In order to provide a more meaningful presentation of
the changes in the operations of Axicorp, the unaudited results of operations
for the three months ended June 30, 1994 have been combined with the audited
results for the nine-month period ended March 31, 1995 to arrive at a twelve-
month period ended March 31, 1995 ("fiscal 1995") for purposes of comparison
to the audited twelve-month period ended March 31, 1996 ("fiscal 1996").
32
<PAGE>
The following table presents certain items from Axicorp's Statement of
Operations:
<TABLE>
<CAPTION>
THREE NINE
MONTHS MONTHS
ENDED ENDED TWELVE MONTHS ENDED MARCH 31,
JUNE 30, MARCH 31, ----------------------------------
1994 1995 1995 1996
-------- --------- ---------------- -----------------
$ % $ %
-------- ------- --------- -------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenue.............. $4,269 $44,797 $ 49,066 100.0% $ 144,345 100.0%
Cost of revenue.......... 3,855 40,405 44,260 90.2 131,712 91.2
------ ------- -------- ------ --------- ------
Gross margin........... 414 4,392 4,806 9.8 12,633 8.8
Operating expenses:
Selling, general and
administrative........ 480 4,277 4,757 9.7 11,558 8.0
Depreciation and amor-
tization.............. 5 43 48 0.1 235 0.2
------ ------- -------- ------ --------- ------
Total operating ex-
penses.............. 485 4,320 4,805 9.8 11,793 8.2
------ ------- -------- ------ --------- ------
Income (loss) from opera-
tions................... (71) 72 1 -- 840 0.6
Interest expense......... -- -- -- -- -- --
Interest income.......... -- 30 30 0.1 219 0.2
Other income (expense)... -- -- -- -- -- --
------ ------- -------- ------ --------- ------
Income (loss) before in-
come taxes.............. (71) 102 31 0.1 1,059 0.8
Income taxes............. -- 4 4 -- 492 0.3
------ ------- -------- ------ --------- ------
Net income (loss)........ $ (71) $ 98 $ 27 0.1% $ 567 0.4%
====== ======= ======== ====== ========= ======
</TABLE>
Net revenue increased 194%, or $95.2 million, from $49.1 million in fiscal
1995 to $144.3 million in fiscal 1996 primarily due to an increase in volume
of traffic as a result of an increased number of business customers. Net
revenue also increased as a result of an increase in the number of cellular
customers. The Company became one of four authorized resellers of Telstra's
analog and digital cellular service in May 1995.
Cost of revenue increased 198%, or $87.4 million, from $44.3 million in
fiscal 1995 to $131.7 million in fiscal 1996. The increase was attributable to
increased minutes of use, a higher percentage of net revenue being
attributable to cellular services, which have lower margins than non-cellular
services, and lower tariff rate discounts to the Company implemented by
Telstra which were effective in February 1996. Cost of revenue is comprised of
those costs associated with the transmission and termination of traffic by
Telstra. As a percentage of net revenue, cost of revenue increased from 90% in
fiscal 1995 to 91% in fiscal 1996.
Gross margin increased 163%, or $7.8 million, from $4.8 million in fiscal
1995 to $12.6 million in fiscal 1996. As a percentage of revenue, gross margin
decreased from 10% in fiscal 1995 to 9% in fiscal 1996 as a result of higher
cost of revenue.
Selling, general and administrative expenses increased 143%, or $6.8
million, from $4.8 million in fiscal 1995 to $11.6 million in fiscal 1996. The
increase consisted of personnel costs, network operations cost, sales and
marketing expenses and internal billing systems development costs which were
attributable to the overall growth in the business during this period. As a
percentage of net revenue, selling, general and administrative expenses
decreased from 10% in fiscal 1995 to 8% in fiscal 1996, primarily as a result
of fixed costs being spread over a higher revenue base.
Depreciation and amortization increased to $0.2 million in fiscal 1996. The
entire increase was attributable to $0.7 million of fiscal 1996 asset
expenditures primarily related to the internal development of Axicorp's
billing system and fiscal 1995 asset purchases of $0.3 million having a full
year of depreciation and amortization.
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Interest income increased $0.2 million from fiscal 1995 to fiscal 1996 as a
result of higher average cash and cash equivalent balances primarily generated
from operations.
Income taxes represented the Australian federal statutory tax rate applied
to income before income taxes, net of permanently non-deductible items.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from net cash used in operating
activities purchases of network equipment including switches, peripheral
equipment, and international fiber cable capacity and interest and principal
payments on outstanding indebtedness, including capital leases. From time to
time the Company evaluates acquisitions of businesses which complement the
business of the Company. Depending on the cash requirements of potential
transactions, the Company may finance such transactions with a portion of the
proceeds of the Offering or bank borrowings, or the Company may raise
additional funds through other financing vehicles. The Company, however,
presently has no understanding, commitment or agreement with respect to any
acquisition, and is not currently involved in negotiations. There can be no
assurance that if the Company were to pursue such an opportunity, any such
acquisition would occur or that the funds to finance any such acquisition
would be available on reasonable terms, if at all.
Historically, the Company's net cash used in operating activities ($0.5
million, $2.0 million and $4.2 million for the period from February 4, 1994 to
December 31, 1994, the year ended December 31, 1995, and the six months ended
June 30, 1996, respectively) and liquidity needs have been funded from the
private placement of equity securities and, to a lesser extent, through
stockholder loans and capital leases. As of June 30, 1996, the Company had a
working capital deficit of $13.5 million primarily attributable to the current
portion of long-term obligations of $10.6 million. On July 31, 1996, the
Company sold $15.8 million, net of transaction costs, of additional equity in
the Private Equity Sale which, on a pro forma basis as of June 30, 1996, would
result in working capital of $2.3 million.
The Company currently anticipates spending approximately $70 million on the
improvement and expansion of the Network during the next 18 months, including
$10 million of capital expenditures in the remainder of 1996, which includes
the purchase of switches and related peripheral equipment for the
implementation of international gateways in Los Angeles and New York. The
expected 1997 and 1998 capital expenditures include switches, network
equipment, international fiber cable capacity and other international
facilities.
The Company currently is in discussions to obtain a $25 million line of
credit to provide it with additional funding to meet its capital requirements
and will use capital lease financings as appropriate. There can be no
assurance that the Company will be able to obtain a line of credit or capital
lease financing on commercially reasonable terms, if at all. The Company
believes that the net proceeds from the Offering, together with the net
proceeds from the Private Equity Sale, borrowing capacity under an expected
line of credit and available vendor financing, will be sufficient to fund the
Company's net cash used in operating activities, capital expenditures and
other cash needs for the next 18 months. Additional funding through the
incurrence of debt or sale of additional equity will be required to meet the
Company's growth plans beyond the second quarter of 1998, although there can
be no assurance that such additional funds can be obtained on acceptable
terms, if at all. If necessary funds are not available, the Company's business
and results of operations and the future expansion of the business could be
materially adversely affected.
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BUSINESS
GENERAL
Primus is a multinational telecommunications company that focuses on the
provision of international and domestic long distance services. The Company
seeks to capitalize on the increasing business and consumer demand for
international telecommunications services generated by the globalization of
the world's economies and the worldwide trend toward deregulation of the
telecommunications sector. The Company has targeted North America, Asia-
Pacific and Europe as its primary service regions. The Company currently
provides services in the United States, Australia and the United Kingdom,
which are the most deregulated countries within the Targeted Regions and which
serve as regional hubs for expansion into additional markets within the
Targeted Regions. As part of the execution of this strategy, the Company has
commenced operations in Mexico and has installed a switch in Canada. The
Company expects to expand into additional markets as deregulation occurs and
the Company is permitted to offer a full range of switched public telephone
services in such markets.
For the year ended December 31, 1995 and the six months ended June 30, 1996,
the Company had pro forma net revenue of approximately $126 million and $92
million, respectively, after giving effect to the Company's March 1996
acquisition of Axicorp, the fourth largest telecommunications provider in
Australia. For the three months ended June 30, 1996, the Company had net
revenue of approximately $48 million. As of September 30, 1996, the Company
had 285 full-time employees and approximately 35,000 customers.
The Company targets, on a retail basis, small- and medium-sized businesses
with significant international long distance traffic and ethnic residential
consumers and, on a wholesale basis, other telecommunications carriers and
resellers with international traffic. The Company provides a broad array of
competitively priced telecommunications services, including international long
distance to over 200 countries, domestic long distance, international and
domestic private networks, prepaid and calling cards and toll-free services,
as well as local switched and cellular services in Australia. The Company
markets its services through a variety of channels, including direct sales,
independent agents, direct marketing and associations.
The Company is implementing an international telecommunications Network to
reduce and control costs, improve service reliability and increase flexibility
to introduce new products and services. The Network currently consists of an
international gateway switch in Washington, D.C., points-of-presence in New
York and London, and leased transmission capacity connecting to the networks
of other international and domestic carriers. The Company also has
correspondent agreements with government-owned PTTs in India, Iran and
Honduras. The Company has installed three additional international gateway
switches in Sydney, Melbourne and Toronto, a switch in Brisbane, and has
acquired two international gateway switches for installation in New York and
Los Angeles and two other switches for installation in Adelaide and Perth, all
eight of which are expected to be operational by the first quarter of 1997.
The Company expects to acquire an additional switch for installation in London
and additional switches and points-of-presence for installation in other major
metropolitan areas of the Targeted Regions. The Company expects to connect its
gateway switches between Sydney and Los Angeles with a trans-Pacific fiber-
optic cable link by the end of the first quarter of 1997. The Company also
intends to purchase additional switches and ownership in international fiber-
optic cables, install international gateway satellite earth station
facilities, lease additional transmission capacity and, where necessary,
obtain additional correspondent agreements.
INDUSTRY OVERVIEW
General. The international long distance industry, which involves the
transmission of voice and data from the domestic telephone network of one
country to another, is undergoing a period of fundamental change that has
resulted, and is expected to continue to result, in significant growth in
usage of international telecommunications services. In 1994, the international
long distance industry accounted for $50 billion in revenues and 53 billion
minutes of use, up from $29 billion in revenues and 28 billion minutes of use
in 1989. Industry sources estimate that by the year 2000 this market will have
expanded to $93 billion in revenues and 111 billion minutes of use,
representing compound annual growth rates from 1994 of 11% and 13%,
respectively.
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The Company believes the growth in international long distance services is
being driven by (i) increased demand for international telecommunications
services generated by the globalization of the world's economies and the
worldwide trend toward deregulation of the telecommunications sector, (ii)
declining prices and a wider choice of products and services driven by greater
competition resulting from privatization and deregulation, (iii) increased
telephone density and accessibility resulting from technological advances and
greater investment in telecommunications infrastructure, including deployment
of wireless networks, and (iv) increased international business and leisure
travel.
The competition spurred by privatization and deregulation, in addition to
resulting in a wider choice of products and services, has resulted in lower
prices. The Company believes, however, that the lower price environment
resulting from the increase in competition has been more than offset by cost
decreases, as well as an increase in telecommunications usage. For example,
based on FCC data for the period 1989 through 1994, per minute settlement
payments by U.S.-based carriers to PTTs fell 26%, from $0.70 per minute to
$0.52 per minute. Over this same period, however, per minute international
billed revenue fell only 5%, from $1.02 in 1989 to $0.97 in 1994. Therefore,
gross profit per international minute (before local access charges) grew from
$0.32 in 1989 to $0.45 in 1994, a 41% increase. Although there can be no
assurances, the Company believes that as settlement rates and costs for leased
capacity continue to decline, international long distance will continue to
provide high revenue and gross profit per minute. See "Risk Factors--Intense
Domestic and International Competition."
Classification of Service Providers. International long distance carriers
generally can be categorized according to ownership and use of transmission
facilities and switches. Although no carrier utilizes exclusively owned
facilities for the transmission of all of its long distance traffic, carriers
vary from being primarily facilities-based (i.e. they own and operate their
own land based or undersea cable and switches) to those that are purely
resellers of another carrier's transmission network. Generally, the first-tier
long distance companies (e.g., AT&T, MCI and Sprint in the United States;
British Telecom and Mercury in the United Kingdom; and Telstra and Optus in
Australia) are transmission facilities-based carriers that own and operate a
domestic fiber-based network. Second-tier long distance companies (e.g.,
Frontier and LCI in the United States; WorldCom and ACC in the United Kingdom;
and AAPT in Australia) own switching facilities but generally do not own cable
transmission facilities. The third-tier of the market consists of long
distance companies that are generally switchless resellers that rely on the
transmission facilities of other carriers.
Regulatory and Competitive Environment. Prior to deregulation, the long
distance carriers in any particular country generally were government-owned
monopoly carriers, such as British Telecom in the United Kingdom, Telstra in
Australia and Telmex in Mexico. Deregulation of a particular
telecommunications market typically has begun with the introduction of a
second long distance carrier, followed by the authorization of multiple
carriers. In the United States, one of the first deregulated markets,
deregulation began in the 1960's with MCI's authorization to provide long
distance service and was followed in 1984 by AT&T's divestiture of the RBOCs
and, most recently, by the passage of the 1996 Telecommunications Act.
Deregulation has occurred elsewhere, such as in the United Kingdom, and is
being implemented in other countries, including Australia and Mexico.
Call Dynamics. A long distance telephone call consists of three parts:
origination, transport and termination. Generally, a domestic long distance
call originates on a local exchange network and is transported to the network
of a long distance carrier. The call is then carried along the long distance
network to another local exchange network where the call is terminated. An
international long distance call is similar to a domestic long distance call,
but typically involves at least two long distance carriers: the first carrier
transports the call from the country of origination, and the second carrier
terminates the call in the country of termination. These long distance
telephone calls are classified as one of three types of traffic. A call made
from the United States to the United Kingdom is referred to as outbound
traffic for the United States carrier and inbound traffic for the United
Kingdom carrier. The third type of traffic, international transit traffic,
originates and terminates outside a particular country, but is transported
through that country on a carrier's network. Since most major international
fiber optic cable systems are connected to the United States, and
international long-distance prices are
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substantially lower in the United States than in other countries, a large
volume of international transit traffic is routed through the United States.
International calls are transported by land-based or undersea cable or by
microwave via satellites. A carrier can obtain voice circuits on cable systems
either through ownership or leases. Ownership in cables is acquired either
through Indefeasible Rights of Use ("IRUs") or Minimum Assignable Ownership
Units ("MAOUs"). The fundamental difference between an IRU holder and an owner
of MAOUs is that the IRU holder is not entitled to participate in management
decisions relating to the cable system. Between two countries, a carrier from
each country owns a "half-circuit" of a cable, essentially dividing the
ownership of the cable into two equal components. Additionally, any carrier
generally may lease circuits on a cable from another carrier. Unless a carrier
owns a satellite, satellite circuits also must be leased from one of several
existing satellite systems.
Accounting Rate System. Under the accounting rate system (also known as the
settlement system), which is the traditional regulatory model, international
long distance traffic is exchanged under bilateral correspondent agreements
between carriers in two countries. Correspondent agreements generally are three
to five years in length and provide for the termination of traffic in, and
return traffic to, the carriers' respective countries at a negotiated
accounting rate, known as the Total Accounting Rate ("TAR"). In addition,
correspondent agreements provide for network coordination and accounting and
settlement procedures between the carriers. Both carriers are responsible for
their own costs and expenses related to operating their respective halves of
the end-to-end international connection.
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to a
correspondent agreement at a negotiated rate (which must be the same for all
United States-based carriers, unless the FCC approves an exception). For
example, if a foreign carrier charges a U.S. carrier $0.30 per minute to
terminate a call in the foreign country, the U.S. carrier would charge the
foreign carrier the same $0.30 per minute to terminate a call in the United
States. Additionally, the TAR is the same for all carriers transporting traffic
into a particular country, but varies from country to country. The term
"settlement costs" arises because carriers essentially pay each other on a net
basis determined by the difference between inbound and outbound traffic between
them. The following chart illustrates an international long distance call using
the settlement system:
LOGO
Correspondent agreements typically provide that a carrier will return
terminating traffic ("return traffic") in proportion to the traffic it
receives. Return traffic generally is more profitable than outgoing traffic
because the settlement
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rate per minute is substantially greater than the incremental cost of
terminating a call in the country due to the lack of marketing expense and
billing costs, as well as the lower cost structure associated with terminating
calls in the United States. Generally, there is a six-month lag between
outbound traffic and the allocation of the corresponding return traffic and,
in certain instances, a minimum volume commitment must be achieved before
qualifying for receipt of return traffic.
Alternative Calling Procedures. As the international long distance market
has deregulated, long distance companies have devised alternative calling
procedures ("ACPs") in order to complete calls more economically than under
the accounting rate system. Some of the more significant ACPs include (i)
transit, (ii) refiling or "hubbing," (iii) international simple resale ("ISR")
and (iv) call-back. The most common method is transit, which allows traffic
between two countries to be carried through a third country on another
carrier's network. This procedure, which requires agreement among the
particular long distance companies and the countries involved, generally is
used either for overflow traffic during peak periods or where a direct circuit
may not be available or justified based on traffic volume. Refiling or
"hubbing" of traffic, which takes advantage of disparities in settlement rates
between different countries, allows traffic to a potential country to be
treated as if it originated in another country that enjoys lower settlement
rates with the destination country, thereby resulting in a lower overall costs
on an end-to-end basis. United States based carriers are beneficiaries of
refiling on behalf of other carriers because of low international rates. The
difference between transit and refiling is that, with respect to transit, the
carrier in the destination country has a direct relationship with the
originating carrier, while with refiling, the carrier in the destination
country is likely not to even know the identity of the originating carrier.
The choice between transit and refiling is determined primarily by cost. With
ISR, a carrier may completely bypass the settlement system by connecting an
international leased line to the public switch telephone network ("PSTN") of a
foreign country or directly to a customer premise. ISR currently is allowed by
applicable regulatory authorities between a limited number of international
routes, including Canada-United Kingdom, United States-United Kingdom, United
States-Sweden and United Kingdom-Australia and is currently increasing in use.
Call-back avoids the high international rates in a particular country of
origin by providing dial tone in a second country with a lower rate, typically
the United States.
Industry Strategies. Strategies to provide international long distance
services are driven by the emergence of ACPs and the increased demand for
seamless services on a global basis. First-tier service providers primarily
utilize correspondent agreements in order to provide international service.
Second-tier carriers and new entrants primarily are utilizing ACPs and are
developing networks to compete with the first-tier carriers and gain market
share. In response, first-tier carriers have formed alliances to provide
seamless services and one-stop shopping on a global basis. Examples include
Global One (an alliance among Sprint, Deutsche Telekom, France Telecom and
others), Concert (an alliance between British Telecom and MCI) and
WorldPartners (an alliance among AT&T, Unisource and others). Certain new
entrants, including the Company, are establishing their own operations in
multiple countries and, to the extent required to serve other selected
markets, alliances or other arrangements with other carriers.
Description of Operating Markets. The following is a summary of the size,
growth prospects and competitive and regulatory environments of the domestic
and international long distance industries in the Targeted Regions:
UNITED STATES. The United States long distance market is highly deregulated
and is the largest in the world. According to the FCC, in 1994 long distance
telephone revenue was $71.8 billion, including $13.2 billion from
international services (representing 15.5% of the total market). AT&T has
remained the largest long distance carrier in the U.S. market, with market
share of slightly more than 55%, while MCI and Sprint have market shares of
17% and 10%, respectively. AT&T, MCI and Sprint constitute what generally is
regarded as the first-tier in the United States long distance market. Other
large long distance companies with more limited ownership of transmission
capacity, such as WorldCom, Frontier and LCI, constitute the second-tier of
the industry. The remainder of the United States long distance market is
comprised of several hundred smaller companies, largely resellers, which are
known as third-tier carriers.
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AUSTRALIA. AUSTEL estimates that during 1994, the market for all
telecommunication services was A$15 billion and the Company believes that the
market for international and domestic long distance services in Australia
during 1994 accounted for approximately A$10 billion in revenues. Telstra and
Optus are classified as "carriers" because they can own and operate local,
national and international transmission networks. Telstra, which is owned by
the Australian government, is a traditional facilities-based carrier with a
market share of approximately 80%. In addition to the Company and Optus,
Telstra currently competes against switched-based resellers such as AAPT, and
several switchless resellers and call-back service providers, including
PacStar. Australia is planning to further deregulate its long distance market
in June 1997 by allowing service providers other than Telstra and Optus to own
transmission facilities.
UNITED KINGDOM. Oftel estimates that the market for international and
domestic long distance services in the United Kingdom accounted for
approximately (Pounds)1.3 billion and (Pounds)4.2 billion in revenues,
respectively, during fiscal 1994. In the United Kingdom, British Telecom
historically has dominated the telecommunications market and is the largest
carrier. Mercury, which owns and operates interchange transmission facilities,
is the second largest carrier. The remainder of the United Kingdom long
distance market is comprised of an emerging market of licensed
telecommunications service providers, such as Energis, and switch-based
resellers, such as AT&T, WorldCom, MFS, ACC and Esprit.
MEXICO. The market for long distance voice and data telephone services in
Mexico accounted for approximately 22.6 billion Pesos in 1994. In Mexico,
Telmex is currently the monopoly provider of long distance and local services.
In late 1996, however, the long distance market is scheduled to be opened to
competition. As a result, several United States-based long distance carriers
(such as AT&T and MCI) have formed alliances with Mexican partners to
construct long distance networks. Primus, along with MCI, WorldCom and others,
currently provides United States-Mexico cross border private line services.
PRIMUS STRATEGY
The Company's objective is to become a leading provider of international and
domestic long distance voice, data and value-added services to its target
customers. The Company's strategy to achieve this objective is to focus on
providing a full range of competitively priced, high-quality services in the
Targeted Regions. Key elements in the Company's strategy include:
. Focus on Customers with Significant International Long Distance
Usage. The Company's primary focus is providing telecommunications
services to small- and medium-sized businesses with significant
international long distance traffic and to ethnic residential
consumers and, on a wholesale basis, to other telecommunications
carriers and resellers with international traffic. The Company
believes that the international long distance market offers an
attractive business opportunity given its size and, as compared to
the domestic long distance market, its higher revenue per minute,
gross margin and expected growth rate. Although the Company expects
to obtain a significant percentage of its revenue from offering
international long distance services, the Company currently
generates, and expects to continue to generate over the near term, a
greater percentage of net revenue from domestic long distance
services in an effort to build network traffic more quickly.
. Pursue Early Entry into Selected Deregulating Markets. Primus seeks
to be an early entrant into selected deregulating telecommunications
markets where it believes there is significant demand for
international long distance services, substantial growth and profit
potential, and the opportunity to establish a customer base and
achieve name recognition. The Company intends to use each Operating
Hub as a base to expand into deregulating markets within the Targeted
Regions and will focus its expansion efforts on major metropolitan
areas with a high concentration of target customers with
international traffic. The Company believes that management's
international telecommunications experience will assist it in
successfully identifying and launching operations in deregulating
markets.
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. Implement Intelligent International Network. The Company expects that
the strategic development of the Network will lead to reduced
transmission and other operating costs as a percentage of net
revenue, reduced reliance on other carriers and more efficient
network utilization. The Network will consist of (i) a global
backbone network connecting intelligent gateway switches in the
Targeted Regions, (ii) a domestic long distance network presence in
each of the Operating Hubs and certain additional countries within
the Targeted Regions, (iii) a combination of leased facilities,
resale arrangements, and correspondent agreements. In an effort to
manage transmission costs, the Company pursues a flexible approach
with respect to Network expansion. The Company initially obtains
additional transmission capacity on a variable-cost, per-minute
basis, next acquires additional capacity on a fixed-cost basis when
traffic volume makes such a commitment cost-effective, and ultimately
purchases and operates its own facilities only when traffic levels
justify such investment.
. Deliver Quality Services at Competitive Prices. The Company believes
that it delivers high-quality services at competitive prices and
provides a high level of customer service. The Company intends to
maintain a low-cost structure in order to offer its customers
international and domestic long distance services priced below that
of its major competitors. In addition, the Company intends to
maintain strong customer relationships through the use of trained and
experienced service representatives and the provision of customized
billing services.
. Provide a Comprehensive Package of Services. The Company seeks to
provide a comprehensive package of services to create "one-stop
shopping" for its targeted customers' telecommunications needs,
particularly for small- and medium-sized businesses and ethnic
residential consumers that prefer a full service telecommunications
provider. The Company believes this approach strengthens its
marketing efforts and increases customer retention.
NETWORK
Network Design. The Network will consist of (i) a global backbone network
connecting intelligent gateway switches in the Targeted Regions, (ii) a
domestic long distance network presence within each of the Operating Hubs and
certain additional countries within the Targeted Regions and (iii) a
combination of leased facilities, resale arrangements and correspondent
agreements.
The Company has targeted North America, Asia-Pacific and Europe for the
development of the Network. Within each of these Targeted Regions, the Company
has selected the United States (North America), Australia (Asia-Pacific) and
the United Kingdom (Europe) as regional hubs for expansion into additional
markets within the Targeted Regions. These countries were selected based on
their market size, potential growth and favorable regulatory environments. The
Company has a domestic presence within each of these countries and plans to
construct its global backbone network by interconnecting these countries via
international gateway switches, and owned and leased transmission facilities.
The Company has an established customer base in Australia and is in the
process of building its customer base in major metropolitan areas in the
Targeted Regions, which will provide the Company with separate points of
originating traffic that experience peak network usage at different times of
the day, thereby allowing the Company to attain higher utilization of the
Network. The Company expects to expand into additional markets as deregulation
occurs and the Company is permitted to offer a full range of switched public
telephone services. For instance, the Company has used its United States
operations to initiate operations with and into Mexico. The Company intends to
use its United Kingdom operations to coordinate efforts to enter other major
metropolitan European markets in the European Union, including those in France
and Germany, in conjunction with the scheduled deregulation of the
telecommunication industry in certain European Union countries in 1998.
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The following chart illustrates an international long distance call using the
Network from the United States to another market where the Company has an
international gateway switch:
LOGO
Network Implementation. The Network currently consists of an international
gateway switch in Washington, D.C., points-of-presence in New York and London,
and leased transmission capacity connecting to the networks of other
international and domestic carriers. The Company also has correspondent
agreements with India, Iran and Honduras. The Company has installed three
additional international gateway switches in Sydney, Melbourne and Toronto, a
switch in Brisbane, and has acquired two international gateway switches for
installation in New York and Los Angeles and two other switches for
installation in Adelaide and Perth, all eight of which are expected to be
operational by the end of the first quarter of 1997. The Company expects to
acquire an additional switch for installation in London and install additional
points-of-presence and switches in other major metropolitan areas of the
Targeted Regions as the traffic usage warrants the expenditure.
Each of the international gateway switches will be connected to the domestic
and international networks of both the Company and other carriers in a
particular market, allowing the Company to (i) provide seamless service, (ii)
package and market the voice and data services purchased from other carriers
under the "Primus" brand name and (iii) divert a portion of that market's
United States-bound return traffic through the Company's switches in the United
States. In addition, until the Company's customer base grows and it penetrates
other deregulating telecommunications markets, the Company intends to transit a
significant portion of its traffic through the United States. After the
Company's customer base grows and it develops sufficient traffic, the Company
intends to develop its own leased or owned facilities to connect to its various
switches. Where traffic is light or moderate, the Company intends to obtain
capacity to transmit traffic on a per-minute variable cost basis. When traffic
volume increases and such commitments are cost effective, the Company intends
to either lease or purchase lines on a monthly or longer term basis at a fixed
cost and acquire economic interests in transmission capacity through IRUs to
international points.
In countries with highly regulated markets and significant inbound traffic
from its customers and targeted customer segments, the Company intends to use
correspondent agreements when necessary. Assuming significant levels of inbound
and outbound traffic, correspondent agreements may allow the Company to offer
better value to customers calling these markets by improving the Company's
economics over these routes. The Company currently has correspondent agreements
with India, Iran and Honduras and is exploring the possibility of obtaining
additional correspondent agreements with PTTs in certain other countries which
are not expected to deregulate in the near future, although there can be no
assurance that the Company will enter into such agreements on favorable terms,
if at all.
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SERVICES
Primus offers a broad array of telecommunications services through the
Network and through interconnection with the networks of other carriers. While
over time the Company intends to offer a broad range of bundled
telecommunication services, the availability of services within a particular
market will depend upon regulatory constraints and the availability of
services for resale. In order to create a global brand identity, the Company
operates under the name "Primus" in all of the Targeted Regions. In addition,
the Company operates under the name "Axicorp" in Australia.
The Company offers the following services in the United States, United
Kingdom and Australia:
. International and Domestic Long Distance. The Company provides
international long distance voice services to its customers to over
200 countries and provides domestic long distance voice services
within each of the Operating Hubs. On a market-by-market basis,
access methods required to originate a call vary according to
regulatory requirements and the existing domestic telecommunications
infrastructure. In the United States, access methods available to the
Company's customers include "1+", toll-free, dedicated (private line)
and prefix code access. In the United Kingdom, dedicated and prefix
code access are used to originate calls. In Australia, the Company
currently is a reseller of services provided by Telstra. When the
Company operates its own switches in Australia, its services will be
accessed through the use of toll-free, dedicated and prefix code
access.
. Private Network Services. For business customers, the Company designs
and implements international private network services that may be
used for voice, data and video applications. These services are
provided on a turnkey basis whereby the Company installs and operates
equipment necessary to provide end-to-end services at the customer's
premises. The Company's Mexican operations consist exclusively of the
provision of private network services to selected multinational
corporations.
In addition, on a market-by-market basis, the Company provides on a stand
alone and/or bundled basis the following services which the Company expects to
introduce over time in all of its markets:
. Prepaid and Calling Cards. The Company offers prepaid and calling
cards that may be used by customers for domestic and international
telephone calls within and from their home country. With the
Company's prepaid card service, a customer purchases a card that
entitles the customer to make phone calls on the card up to some
monetary limit. The customer is provided an access number (local or
toll free phone number) and personal identification number ("PIN").
The customer dials the access number that accesses the Company's
switch and an attached voice response unit. The unit confirms the
authority of the user to use the account by requiring the PIN to be
entered and confirms that a balance is available on the card. With
the Company's calling card service, the customer selects a PIN. The
account is then billed by Primus on a monthly basis as calls are made
using the card. The Company's prepaid cards are offered in the United
States and calling cards are offered in the United Kingdom. The
Company expects to introduce global prepaid and calling cards in 1997
that will enable customers to make telephone calls in most major
countries while they are outside their home country.
. Cellular Services. The Company is one of four national dealers
selling Telstra analog and digital cellular services in Australia.
The Company intends to provide cellular services on a resale basis in
the United States and the United Kingdom by the end of 1997.
. Local Switched Service. The Company intends to provide local service
on a resale basis as part of its "one-stop shopping" marketing
approach, subject to commercial feasibility and regulatory
limitations. The Company currently provides local switched service in
Australia.
. Toll-free Services. The Company currently provides domestic and
international toll-free services in the United States and intends to
offer such services in the United Kingdom and Australia when its
switches become operational in such countries.
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New services the Company seeks to introduce in selected markets in 1997
include:
. Internet Services. The Company intends to offer switched and
dedicated access to the Internet for use by commercial and
residential customers. These services may be offered on a direct
connection to the Internet or on a resale basis. Once connected to
the Internet, customers will be able to access services provided by
others such as World Wide Web browsing, electronic mail, news feeds
and bulletin boards.
. Data Services. The Company intends to offer packet-switched and frame
relay data services in selected markets, a transmission standard
which utilizes statistical multiplexing technology. Frame relay
enables multiple users to share communication bandwidth for enhanced
data transmission.
. Value-Added Services. The Company intends to offer enhanced facsimile
services, audio and video conferencing, and voice-mail.
There can be no assurance that the Company will be able to launch such
services or that, if launched, such services will be successful.
The Company strives to provide personalized customer service and believes
that the quality of its customer service is one of its competitive advantages.
The Company's larger customers are actively covered by dedicated account and
service representatives who seek to identify, prevent and solve problems. The
Company provides toll-free, 24-hour a day customer service in the United
States, the United Kingdom and Australia. As of September 30, 1996, the
Company employed 58 full-time and 10 part-time customer service
representatives.
CUSTOMERS
The Company's primary focus is providing telecommunications services, on a
retail basis, to small- and medium-sized businesses with significant
international long distance traffic and ethnic residential consumers and, on a
wholesale basis, other carriers and resellers with international traffic.
During the Company's initial growth phase in each service market, however, the
Company expects that it will build revenue from a variety of customers with
either local or long distance (domestic or international) service needs. As of
September 30, 1996, the Company had 128 sales and marketing personnel
operating from 11 offices.
Businesses. The Company's business sales and marketing efforts target small-
and medium-sized businesses with significant international long distance
traffic. The Company believes that these users are attracted to Primus
primarily due to its significant price savings compared to first-tier carriers
and, secondarily, its personalized approach to customer service and support,
including customized billing and bundled service offerings. The Company also
sells its services to large multinational corporations on an opportunistic
basis. As of September 30, 1996, the Company employed 68 full-time direct
sales representatives focused on the business market.
Residential Consumers. The Company's residential sales and marketing
strategy targets ethnic residential consumers who generate high international
traffic volumes. The Company believes that these consumers will be attracted
to Primus because of its significant price savings as compared to first-tier
carriers, simplified pricing structure, multilingual customer service and
support and bundled service offerings. As of September 30, 1996, the Company
employed 35 full-time direct sales representatives focused on the ethnic
residential consumers.
Telecommunications Carriers and Resellers. The Company competes for the
business of other telecommunications carriers and resellers primarily on the
basis of price and, to a lesser extent, service quality. The Company believes
that long distance services, when sold to telecommunications carriers and
other resellers, are, generally, a commodity product and therefore do not
benefit from special sales or promotional efforts. Sales to these other
carriers and resellers, however, help the Company maximize the use of the
Network and thereby minimize fixed costs per minute of use. As of September
30, 1996, the Company employed two direct sales professionals focused on
telecommunications carriers and resellers.
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SALES AND MARKETING
The Company markets its services through a variety of sales channels as
summarized below. The Company's use of these channels may vary from market to
market.
<TABLE>
<CAPTION>
AGENTS AND MEDIA
DIRECT INDEPENDENT AND
SALES SALES DIRECT
FORCE REPRESENTATIVES TELEMARKETING ASSOCIATIONS MAIL
------ --------------- ------------- ------------ ------
<S> <C> <C> <C> <C> <C>
Small/Medium Business-
es..................... ^ ^ ^ ^ ^
Consumers............... ^ ^ ^ ^ ^
Telecommunications
Carriers/Resellers..... ^
Multinational Business-
es..................... ^
</TABLE>
Direct Sales Force. The Company's direct sales force is comprised of 68
full-time employees who focus on small- to medium-sized business customers
with substantial international telecommunications traffic or traffic
potential. The Company also employs 35 full-time direct sales representatives
focused on ethnic residential consumers and two direct sales representatives
who exclusively sell wholesale services to other long distance carriers and
resellers. Direct sales personnel are compensated with a base salary plus
sales commissions.
The Company's direct sales efforts are organized around regional hubs
supported by sales offices. The Company currently has offices in Washington,
D.C., Tampa, Toronto, Mexico City, London, Melbourne, Sydney, Adelaide,
Brisbane and Perth. The Company intends to open additional offices in Los
Angeles and New York City by the end of 1996 and other major United States
metropolitan areas thereafter. These targeted metropolitan areas have a large
number of small- and medium-sized businesses and significant ethnic
populations.
Agents and Independent Sales Representatives. The Company supplements its
direct sales efforts with a network of agents and independent sales
representatives. These agents and representatives, who typically focus on
small- and medium-sized businesses, as well as ethnic residential consumers,
are paid commissions based on long distance revenue generated. Within major
metropolitan regions, the Company usually grants only nonexclusive sales
rights, requires its agents and representatives to maintain minimum quotas and
prohibits them from selling competitors' products.
Telemarketing. The Company employs 23 full-time telemarketing sales persons
to supplement sales efforts to ethnic residential consumers and small- and
medium-sized business customers. From time to time, the Company also engages
outside telemarketing agents to supplement its internal telemarketing efforts.
Associations. Axicorp successfully markets telecommunications services in
Australia to members of trade and professional associations. Axicorp develops
tailored marketing materials jointly with each association, attends meetings
and trade shows, sponsors events and advertises in newsletters. These
associations receive a fee based on revenue generated by sales to its members.
The Company intends to employ similar marketing programs in the United
Kingdom, the United States and in other markets as appropriate.
Media and Direct Mail. The Company uses a variety of print, television and
radio to increase name recognition in new markets. The Company uses targeted
media and direct mail primarily to reach specific small business or consumer
groups. For example, the Company reaches ethnic residential consumers by
print, media advertising campaigns in ethnic newspapers, and on ethnic radio
and television programs.
MANAGEMENT INFORMATION AND BILLING SYSTEMS
The Company uses various management information, network, and customer
billing systems in its different operating subsidiaries to support the
functions of network and traffic management, customer service, customer
billing, and financial reporting. Management believes that its systems are
adequate to meet the Company's needs in the near term, but as the Company
continues to grow, it will invest additional capital to purchase hardware and
software, license more specialized software, increase capacity and link its
systems among different countries.
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United States. In the United States, the Company operates systems for
billing and financial reporting. The Company uses a customer billing system
developed by Electronic Data Systems Inc. ("EDS"). Under an agreement with EDS
through the year 2000, EDS supplies, operates and maintains this system and is
responsible for providing back-up facilities and disaster recovery. The EDS
system is widely used in the telecommunications industry and has been
customized to meet the Company's specific needs. The Company direct bills its
business, reseller, and the majority of its residential customers. The Company
also has capabilities established through suppliers to bill certain
residential customers through their respective LECs, which charge for the
Company's service in a monthly, all inclusive invoice. In addition, the
Company has developed a proprietary, local area network-based customer service
and support information system which is on-line with the EDS platform. The
Company believes that using an EDS billing platform ensures access to one of
the most technologically advanced and feature rich multifunctional platforms
in the industry. In addition to the billing capabilities, the platform
includes on-line customer service, fraud control and the ability to generate a
variety of reports. For financial reporting, the Company uses a combination of
the EDS system and a PC-based accounting system package.
Australia. In Australia, prior to its acquisition by the Company, Axicorp
had developed an in-house proprietary system for customer billing and customer
service and support. The Axicorp billing system is technologically advanced
and possesses features that allow Axicorp to provide its customers with a
single integrated invoice for long distance, local, and cellular services. All
customers are billed directly by Axicorp. Axicorp uses a purchased accounting
system package for financial reporting.
United Kingdom. In the United Kingdom, the Company direct bills its
customers through a billing system provided by Telia, which is the Company's
main network provider. Customer service is supported by in-house systems and
financial reporting is done through a PC-based accounting system package. The
Company is evaluating alternative billing systems for use when the Company
installs its own switch in the United Kingdom.
COMPETITION
The international telecommunications industry is highly competitive and
significantly affected by regulatory changes, marketing and pricing decisions
of the larger industry participants and the introduction of new services made
possible by technological advances. The Company believes that long distance
service providers compete on the basis of price, customer service, product
quality and breadth of services offered. The Company's Operating Hubs have
numerous competitors and there are limited barriers to entry in these markets.
The Company believes that as international telecommunications markets continue
to deregulate, competition in these markets will increase, similar to the
competitive environment that has developed in the United States following the
AT&T divestiture in 1984.
Many of the competitors are significantly larger, have substantially greater
financial, technical and marketing resources and larger networks than the
Company. These competitors include, among others, AT&T, MCI, Sprint, WorldCom,
Frontier and LCI in the United States; Telstra and Optus in Australia; and
British Telecom, Mercury, WorldCom and ACC in the United Kingdom.
Additionally, many larger competitors have formed global alliances, including
WorldPartners (AT&T and others), Concert (MCI and British Telecom) and Global
One (Sprint, France Telecom, Deutsche Telekom and others), in an attempt to
capture market share on a global basis.
Privatization and deregulation have had, and are expected to continue to
have, significant effects on competition in the industry. For example, as a
result of legislation recently enacted in the United States, RBOCs will be
allowed to enter the long distance market, AT&T, MCI and other long distance
carriers will be allowed to enter the local telephone services market, and
cable television companies and utilities will be allowed to enter both the
local and long distance telecommunications markets. In addition, competition
has begun to increase in the European Union telecommunications markets in
anticipation of the scheduled 1998 deregulation of the telecommunications
industry in most European Union countries.
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The following is a brief summary of the competitive environment in each of
the three Operating Hubs:
United States. In the United States, which is the most competitive and among
the most deregulated long distance markets in the world, competition is based
upon pricing, customer service, network quality, and the ability to provide
value-added services. AT&T is the largest supplier of long distance services,
with MCI and Sprint being the next largest providers. In the future, under
provisions of recently enacted federal legislation, the Company anticipates
that it will also compete with RBOCs, LECs and Internet providers in providing
domestic and international long-distance services.
Australia. Australia is one of the most deregulated and competitive
telecommunications markets in the Asia-Pacific region. The Company's principal
competitors in Australia are Telstra, the dominant carrier, Optus, Vodafone,
AAPT and WXL, three other switched-based carriers and a number of switchless
resellers, including PacStar and CorpTel. See "--Network." The Company
believes that when certain carrier-status regulations are modified, currently
expected to occur in June 1997, competition in Australia will increase. The
Company competes in Australia by offering a comprehensive menu of
competitively-priced products and services, including value-added services,
and by providing superior customer service and support.
United Kingdom. The Company's principal competitors in the United Kingdom
are British Telecom, the dominant supplier of telecommunications services in
the United Kingdom, and Mercury, a subsidiary of Cable & Wireless. The Company
also faces competition from licensed public telephone operators (which are
constructing their own facilities-based networks) such as Energis, Colt and
MFS, from cable companies such as Telewest and SBC CableComms, and from
switch-based resellers such as WorldCom, ACC and Esprit. Other United States-
based carriers also may enter the United Kingdom market. The Company competes
in the United Kingdom by offering competitively-priced bundled and stand-alone
services, personalized customer service and value-added services.
GOVERNMENT REGULATION
As a multinational telecommunications company, Primus is subject to varying
degrees of regulation in each of the jurisdictions in which it provides its
services. Local laws and regulations, and the interpretation of such laws and
regulations, differ significantly among the jurisdictions in which the Company
operates. There can be no assurance that future regulatory, judicial and
legislative changes will not have a material adverse effect on the Company,
that domestic or international regulators or third parties will not raise
material issues with regard to the Company's compliance or noncompliance with
applicable regulations or that regulatory activities will not have a material
adverse effect on the Company. See "Risk Factors--Potential Adverse Effects of
Regulation." The regulatory framework in certain jurisdictions in which the
Company provides its services is briefly described below.
United States. In the United States, the provision of the Company's services
is subject to the provisions of the Communications Act, the 1996
Telecommunications Act and the FCC regulations thereunder, as well as the
applicable laws and regulations of the various states. The FCC exercises
jurisdiction over all facilities of, and services offered by,
telecommunications common carriers to the extent such services involve
jurisdictionally interstate communications, while state regulatory authorities
retain jurisdiction over jurisdictionally intrastate communications.
As a carrier offering services to the public, the Company must comply with
the requirements of common carriage under the Communications Act, including
the offering of service on a non-discriminatory basis at just and reasonable
rates, and obtaining FCC approval prior to any assignment of authorizations or
any transfer of de jure or de facto control of the Company. The Company is
classified as a non-dominant common carrier for domestic service and is not
required to obtain specific prior FCC approval to initiate or expand domestic
interstate services. The FCC requires domestic carriers, including the
Company, to maintain tariffs on file at the Commission. Although the
interstate tariffs of non-dominant carriers are subject to FCC review, they
are presumed lawful and are seldom contested. As a domestic non-dominant
carrier, the Company is permitted to
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make tariff filings on a single day's notice and without cost support to
justify specific rates. The FCC is currently considering whether to exempt
non-dominant domestic carriers from federal tariffing requirements, pursuant
to authority granted to the Commission in the 1996 Telecommunications Act,
although there can be no assurance that the FCC will adopt this policy.
DOMESTIC SERVICE REGULATION. The 1996 Telecommunications Act, enacted in
February 1996, is intended to increase competition in the United States
telecommunications markets. The legislation opens the local services markets
by requiring LECs to permit interconnection to their networks and by
establishing LEC obligations with respect to unbundled access, resale, number
portability, dialing parity, access to rights-of-way, mutual compensation and
other matters. In addition, the legislation codifies the LECs' equal access
and nondiscrimination obligations and preempts inconsistent state regulation.
The legislation also contains special provisions that eliminate the
restrictions on the RBOCs and the GTE Operating Companies (the "GTOCs") from
providing long distance services. These new provisions permit an RBOC to enter
the "out-of-region" long distance market immediately upon the receipt of any
state and/or federal regulatory approvals otherwise applicable to the
provision of long distance service. These new provisions also permit an RBOC
to enter the "in-region" long distance market if it satisfies procedural and
substantive requirements, including obtaining FCC approval upon a showing that
in certain situations facilities-based competition is present in its market,
and that it has entered into interconnection agreements which satisfy a 14-
point "checklist" of competitive requirements. The GTOCs are permitted to
enter the long distance market as of the date of enactment of the 1996
Telecommunications Act, without regard to limitations by region, although
necessary regulatory approvals to provide long distance services must be
obtained, and the GTOCs are subject to the provisions of the 1996
Telecommunications Act that impose interconnection and other requirements on
LECs. The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact the Company's
operations. It is unknown at this time precisely the nature and extent of the
impact that the legislation will have on the Company. As required by the
legislation, the FCC will be conducting a large number of proceedings over the
next year to adopt rules and regulations to implement the new statutory
provisions and requirements. On August 1, 1996, the FCC adopted an
Interconnection Order implementing the requirements that incumbent LECs make
available to new entrants interconnection and unbundled network elements, and
offer retail services for resale at wholesale rates.
STATE REGULATION. The Company's intrastate long distance operations are
subject to various state laws and regulations including, in most
jurisdictions, certification and tariff filing requirements. The vast majority
of the states require the Company to apply for certification to provide
intrastate telecommunications services, or at least to register or to be found
exempt from regulation, before commencing intrastate service. Certificates of
authority can generally be conditioned, modified, canceled, terminated, or
revoked by state regulatory authorities for failure to comply with state law
and/or the rules, regulations, and policies of the state regulatory
authorities. Fines and other penalties also may be imposed for such
violations.
The Company has received the necessary certificate and tariff approvals to
provide intrastate long distance service in 37 states. Applications for
certification are pending or will be filed in 11 other states. Although the
Company intends and expects to obtain operating authority in each jurisdiction
in which operating authority is required, there can be no assurance that one
or more of these jurisdictions will not deny the Company's request for
operating authority. The Company monitors regulatory developments in all 50
states to ensure regulatory compliance. The Company provides interstate
service nationwide under FCC interstate tariffs. To the extent that any
incidental intrastate service is provided in any state where the Company has
not yet obtained any required certification, the state commissions in that
state may impose penalties for any such unauthorized provision of service.
PSCs also regulate access charges and other pricing for telecommunications
services within each state. The RBOCs and other local exchange carriers have
been seeking reduction of state regulatory requirements, including greater
pricing flexibility. This could adversely affect the Company in several ways.
If regulations are changed to allow variable pricing of access charges based
on volume, the Company could be placed at a competitive
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disadvantage over larger long distance carriers. The Company also could face
increased price competition from the RBOCs and other local exchange carriers
for intra-LATA and inter-LATA long distance services, which competition may be
increased by the removal of former restrictions on long distance service
offerings by the RBOCs as a result of the 1996 Telecommunications Act.
INTERNATIONAL SERVICE REGULATION. International common carriers, such as
the Company, are required to obtain authority under Section 214 of the
Communications Act and file a tariff containing the rates, terms, and
conditions applicable to their services prior to initiating their
international telecommunications services. The Company has obtained all
required authorizations from the FCC to use, on a facilities and resale basis,
various transmission media for the provision of international switched
services and international private line services.
Under new tariff rules applicable to international carriers, nondominant
international carriers such as the Company must file their international
tariffs and any revisions thereto with one day's notice in lieu of the 14-day
notice previously required. The Company has filed international tariffs for
switched and private line services with the FCC. Additionally, international
telecommunications service providers are required to file copies of their
contracts with other carriers, including correspondent agreements, with the
FCC within 30 days of execution. The Company has filed each of its
correspondent agreements with the FCC. The FCC's rules also require the
Company to file periodically a variety of reports regarding its international
traffic flows and use of international facilities. The FCC has recently
proposed to reduce certain reporting requirements of common carriers, although
the Company is unable to predict the outcome of this proposal.
In addition to the general common carrier principles, the Company must
conduct its international business in compliance with the FCC's international
settlements policy ("ISP"). The ISP establishes the permissible boundaries for
U.S.-based carriers and their foreign correspondents to settle the cost of
terminating each other's traffic over their respective networks. The amount of
payments (the "settlement rate") is determined by the negotiated accounting
rate specified in the correspondent agreement. Under the ISP, unless prior
approval is obtained, the settlement rate generally must be one-half of the
accounting rate. Carriers must obtain waivers of the FCC's rules if they wish
to use an accounting rate that differs from the prevailing rate or vary the
settlement rate from one-half of the accounting rate. As a result of the FCC's
pro-competition policies, the recent trend has been to reduce accounting
rates.
As a U.S.-based international carrier, the Company is also subject to the
FCC's "uniform settlements policy" designed to eliminate foreign carriers'
incentives and opportunities to discriminate in their correspondent agreements
among different U.S.-based carriers through "whipsawing." Whipsawing refers to
the practice of a foreign carrier to vary the accounting and/or settlement
rate offered to different U.S.-based carriers for the benefit of the foreign
carrier, which could secure various incentives by favoring one U.S-based
carrier over another. Under the uniform settlements policy, U.S.-based
carriers can only enter into correspondent agreements that contain the same
accounting rate offered to all U.S.-based carriers. When a U.S.-based carrier
negotiates an accounting rate with a foreign correspondent that is lower than
the accounting rate offered to another U.S.-based carrier for the same
service, the U.S.-based carrier with the lower rate must file a notification
letter with the FCC. If a U.S.-based carrier varies the terms and conditions
of its correspondent agreement in addition to lowering the accounting rate,
then the U.S.-based carrier must request a waiver of the FCC's rules. Both the
notification and the waiver requests are designed to ensure that all U.S.-
based carriers have an opportunity to compete for foreign correspondent return
traffic.
Among other efforts to prevent the practice of whipsawing and inequitable
treatment of similarly situated U.S.-based carriers, the FCC adopted the
principle of proportionate return to ensure that competing U.S.-based carriers
have roughly equitable opportunities to receive the return traffic that
reduces the marginal cost of providing international service. Consistent with
its pro-competition policies, the FCC prohibits U.S.-based carriers from
bargaining for special concessions from foreign partners.
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FOREIGN OWNERSHIP LIMITATIONS. The Communications Act limits the ownership
of an entity holding a common carrier radio license by non-U.S. citizens,
foreign corporations and foreign governments. The Company does not currently
hold any radio licenses. These ownership restrictions currently do not apply
to non-radio facilities, such as fiber optic cable. There can be no assurance,
however, that foreign ownership restrictions will not be imposed on the
operation of non-radio facilities used for the provision of international
services. The FCC recently adopted new rules relating to the entry and
participation of foreign entities in the U.S. telecommunications market. Under
those rules, the FCC will scrutinize an ownership interest greater than 25%,
or a controlling interest at any level in a U.S. carrier by a dominant foreign
carrier, to determine whether the destination market of the foreign carrier
offers "effective, competitive opportunities" ("ECO"). The Commission imposes
the same ECO test and affiliation standard on U.S.-based carriers that invest
in dominant foreign carriers. The FCC may impose restrictions on affiliated
carriers not meeting the ECO test. The new rules also require international
carriers to notify the FCC 60 days in advance of an acquisition of a 10% or
greater interest by a foreign carrier in that U.S. carrier. The FCC has
discretion to determine that unique factors require application of the ECO
test or a change in regulatory status of the U.S. carrier even though the
foreign carrier's interest is less than 25%. These rules also reduce
international tariff notice requirements for dominant, foreign-affiliated
carriers from 45 days' notice to 14 days' notice. Such reduced tariff notice
requirements may make it easier for dominant, foreign-affiliated carriers to
compete with the Company. The 1996 Telecommunications Act partially amends
existing restrictions on foreign ownership of radio licenses by allowing
corporations with non-U.S. citizen officers or directors to hold radio
licenses. Other non-U.S. ownership restrictions, however, remain unchanged.
The effect on the Company of the 1996 Telecommunications Act or other new
legislation or regulations which may become applicable to the Company cannot
be determined.
CHANGING U.S. REGULATIONS. Regulation of the telecommunications industry is
changing rapidly. The FCC is considering a number of international service
issues in the context of several policy rulemaking proceedings and in response
to specific petitions and applications filed by other international carriers.
The FCC's resolution of some of these issues in other proceedings may
adversely affect the Company's international business (by, for example,
permitting larger carriers to take advantage of accounting rate discounts for
high traffic volumes). The Company is unable to predict how the FCC will
resolve the pending international policy issues or how such resolution will
affect its international business. There can be no assurance that future
regulatory changes will not have a material adverse impact on the Company.
Australia. In Australia, the provision of the Company's services is subject
to federal regulation pursuant to the Telecom Act and federal regulation of
anti-competitive practices pursuant to the Trade Practices Act 1974. In
addition, other federal legislation, various regulations pursuant to delegated
authority and legislation, ministerial declarations, codes, directions,
licenses, statements of the Commonwealth Government policy and court decisions
affecting telecommunications carriers also apply to the Company.
The Australian market is undergoing deregulation in two phases. The first
phase of the deregulation process commenced in 1991 and continued in 1992 with
(1) the enactment of the Telecom Act, (2) the corporatization of the local
PTT, Telecom Australia, into the corporation now known as Telstra, (3) the
creation and licensing of a second general carrier, Optus, (4) an agreement by
the Australian Government with Optus not to grant another general carrier
license before July 1, 1997, (5) the creation of a system to enable service
providers to compete with the carriers in the provision of telecommunications
services from 1992, (6) the licensing of Vodafone as a third digital mobile
carrier, and (7) a declared Government policy of achieving full competition by
July 1, 1997, subject to regulation by the Australian Government and the
telecommunications regulatory authority (at the present time, AUSTEL), and
also by the competition regulatory authority (the Australian Competition and
Consumer Commission or "ACCC"), which is expected to be given new jurisdiction
over competition aspects of the Australian telecommunications industry. These
regulatory authorities will have responsibility for economic and technical
regulation of the telecommunications industry as well as promoting competition
and protecting consumers.
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The Australian telecommunications industry continues to undergo
deregulation, and it is currently expected that the Australian Government will
license additional carriers, including the Company, to own transmission
facilities in July 1997. The possible introduction of a new Telecommunications
Act or, alternatively, amendments to the Telecom Act and possibly to
Australia's competition law, the Trade Practices Act, are expected to be made
prior to July 1, 1997 in order to change some aspects of, and to clarify, the
regulatory framework for this second phase of deregulation. Both Telstra and
Optus have requested that the Australian Government defer such date, and there
can be no assurance that the deregulatory process will proceed in accordance
with the Australian Government's announced timetable. Any delay in such
deregulatory process or the granting of licenses to other entities interested
in developing their own transmission facilities in Australia could delay
potential price reductions to resellers anticipated in a more competitive
marketplace.
In the Australian context, a distinction is drawn between carriers licensed
under the Telecom Act and all other providers of telecommunications services.
Telstra, Optus and Vodafone are the only licensed facilities-based carriers
currently operating in Australia with exclusive rights to the transmission
facilities that constitute their networks. Both Telstra and Optus are licensed
by the Australian Government as general carriers and mobile carriers. Telstra
has been designated by AUSTEL as a dominant carrier for international
services. However, Telstra is currently challenging AUSTEL's finding of
dominance in the Australian federal courts.
Until July 1997, other operators may provide service on a resale basis
pursuant to a class license established by Part 10 of the Telecom Act. These
resellers operate in a switched-based or switchless environment and rely on
one or more of the licensed carriers. There are currently three types of class
licenses--service providers license, international service providers license,
and the public access cordless telecommunications services license. The class
licenses set forth the regulatory requirements applicable to all operators
providing services governed by such license. As a reseller of domestic, local
and long distance service, cellular service and international service, the
Company must comply with the terms of the class license that applies to all
service providers until July 1997, or later if the deregulatory process in
Australia is delayed.
A service provider does not need to apply or register for a class license.
However, a registration system does exist, providing some advantages of
certainty to the service provider by ensuring that particular service is
provided under the relevant class license. The system has the commercial
disadvantage of disclosing certain information about a provider's activities.
In addition, a system of forced enrollment exists for AUSTEL to monitor
certain activities. This requirement for enrollment has been applied to
eligible international services.
The remainder of the telecommunications services in Australia, including
value-added services, are open to competition. From July 1997, operators other
than Telstra, Optus and Vodafone may become general licensed carriers assuming
deregulation continues on its current timetable. Axicorp currently plans to
become a licensed general carrier after July 1997. As a general licensed
carrier, Axicorp will be required to comply with the terms of its own license
and will be subject to the greater regulatory controls applicable to licensed
facilities-based carriers.
United Kingdom. In the United Kingdom, the provision of the Company's
services is subject to the provisions of the U.K. Telecommunications Act. The
Secretary of State for Trade and Industry, acting on the advice of the U.K.
Department of Trade and Industry (the "DTI") is responsible for granting UK
telecommunications licenses, while the Director General of Telecommunications
(the "Director General") and Oftel are responsible for enforcing the terms of
such licenses. Oftel attempts to promote effective competition both in
networks and in services to redress anticompetitive behavior. The Company is
also subject to general European Union law.
Until 1981, British Telecom was virtually the sole provider of public
telecommunications services throughout the United Kingdom. This virtual
monopoly ended when, in 1981, the British government granted Mercury a license
to run its own telecommunications system under the British Telecommunications
Act 1981. Both British Telecom and Mercury are licensed under the subsequent
U.K. Telecommunications Act to run
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transmission facilities-based telecommunications systems and provide
telecommunications services. In 1991, the British government established a
"multi-operator" policy to replace the duopoly that had existed between
British Telecom and Mercury. Under the multi-operator policy, the DTI will
recommend the grant of a license to operate a telecommunications network to
any applicant that the DTI believes has a reasonable business plan and where
there are no other overriding considerations not to grant such license. All
public telecommunications operators and international simple resellers operate
under individual licenses granted by the Secretary of State for Trade and
Industry pursuant to the U.K. Telecommunications Act. Any telecommunications
system with compatible equipment that is authorized to be run under an
individual license is permitted to interconnect to British Telecom's network.
Under the terms of British Telecom's license, it is required to allow any such
licensed operator to interconnect its system to British Telecom's system,
unless it is not reasonably practicable to do so (e.g., due to incompatible
equipment).
The Company's subsidiary, Primus Telecommunications, Inc., holds an ISR
license that authorizes it to provide switched voice services over leased
private lines to all international points. In addition, the Company (along
with approximately 45 other applicants, including AT&T, WorldCom and ACC) has
recently made application to the U.K. Secretary for Trade and Industry for a
license to provide international facilities-based voice services. Although the
Company currently expects such license to be granted by the end of the first
quarter of 1997, there can be no assurance that the Company will be granted
the license by such time, or at all. Failure to obtain such license would
prevent the Company from providing facilities-based services in the United
Kingdom and would have an adverse effect on the Company's ability to expand
its operations.
TARIFFS. Telecommunications tariffs on operators in the United Kingdom
(excluding British Telecom) are generally not subject to prior review or
approval by regulatory authorities, although Oftel has historically imposed
price caps on British Telecom. The current price caps on British Telecom
expire at the end of July 1997. Oftel is considering whether it will be able
to police anti-competitive behavior effectively and is currently conducting a
price control review of the U.K. telecommunications industry. Key elements of
Oftel's final proposals in connection with this review include terminating
price controls on British Telecom in 2001, limiting increases in
telecommunications services charges for residential customers to the rate of
inflation, and continued regulation of access charges by British Telecom to
its competing telecommunications service providers. With respect to the
creation of a detailed effective regulatory regime for the future, Oftel has
published its proposals in July 1995 in a document entitled "Effective
Competition: Framework for Action." Key elements of Oftel's plans included (1)
moving to an incremental cost basis for interconnection charges from 1997, (2)
withdrawing from detailed setting of some interconnection charges, (3)
providing for industry-wide contribution to the cost of maintaining "universal
service," (4) eliminating access deficit charges, (5) moving towards pricing
based on capacity charging for interconnection services and (6) developing an
interconnection regime for service providers. There can be no assurances that
such proposals will be implemented, in whole or in part, in the time frame
specified.
FAIR TRADING PRACTICES. Oftel is the principal regulator of the competitive
aspects of the U.K. telecommunications industry. Oftel's limited authority in
this area is derived from the powers given to Oftel under the U.K.
Telecommunications Act and from the terms of the licenses granted under the
U.K. Telecommunications Act. Any dispute between Oftel and a
telecommunications service provider may be referred on appeal to the U.K.
Monopolies and Mergers Commission, which may conduct a detailed and lengthy
review of the facts surrounding such dispute. Furthermore, Oftel has no
authority to impose fines for a breach of the terms of a license issued under
the U.K. Telecommunications Act, and third parties have no right to damages
for a past breach. Oftel has expressed its view that the current regulatory
regime is both obscure and uncertain. Although Oftel is currently seeking more
power to police the competitive aspects of the U.K. telecommunications
industry, no assurances can be given that it will be successful in its efforts
or that it will be able to prohibit anti-competitive conduct harmful to the
Company. The Company is also subject to general European law, which, among
other things, prohibits certain anti-competitive agreements and abuses of
dominant market positions through Articles 85 and 86 of the Treaty of Rome.
The European Commission is entrusted with the principal
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<PAGE>
enforcement powers under European Union competition law. It has the power to
impose fines of up to 10% of a group's annual revenue in respect of breaches
of Articles 85 and 86. In most cases notification of potentially infringing
agreements to the Commission under Article 85 with a request for an exemption
protects against the risk of fines from the date of notification.
In March 1996, Oftel published an interim report on incremental costs
detailing steps to develop a methodology to calculate such costs. The report
has identified two models: "top-down" developed by British Telecom, and
"bottom up" favored by the industry. Incremental costs play a key role in
Oftel's proposals for the control of British Telecom's interconnection charges
as of August 1997. There is a risk that if agreement to costing methodologies
to be used by British Telecom is delayed or does not occur, the matter will be
referred to the MMC which could mean that the implementation of proper
transparency and allocation of costs when operators are seeking
interconnection with British Telecom will be seriously delayed.
Mexico. In Mexico, the provision of the Company's services is subject to the
provisions of the 1940 General Communications Law, 1995 Federal
Telecommunications Law and 1990 Telecommunications Regulations, which provide
the general legal framework for the regulation of telecommunications services
in Mexico. Since the enactment of the 1995 Federal Telecommunications Law, the
Mexican government has adopted several implementing rules regarding
interconnection, long distance services, numbering and signaling, and other
rules are pending.
Pursuant to the 1995 Federal Telecommunications Law, the Mexican government
recently created an independent telecommunications commission that will
regulate and oversee the telecommunications sector in Mexico. The Federal
Telecommunications Commission will take over many of the functions and
responsibilities of the Secretariat of Communications and Transportation
("SCT"). In particular, the Commission's powers and attributions include (i)
the administration of the radioelectric spectrum, (ii) the administration of
the Telecommunications Registry, (iii) to promote and oversee the efficient
interconnection between the public telecommunications networks, (iv) to
resolve interconnection disputes between the concessionaires, (v) to impose
specific obligations on concessionaires that have substantial market power in
the relevant market and (vi) to opine regarding the granting, extension,
assignment or revocation of concessions and permits.
The 1995 Federal Telecommunications Law classifies telecommunications
networks into public or private depending on the use of the network. Public
telecommunications networks are those networks that are used to provide
commercial telecommunications services to the public. Private
telecommunications networks are those that are used to satisfy the specific
telecommunications needs of persons and that do not offer telecommunications
services to the public.
Operators of private networks do not require any authority from the
government unless they use the radio frequency spectrum. Public
telecommunications network operators require specific authority from the
government, which will vary depending on whether a carrier intends to resell
or operate as a facilities-based carrier. "Concessionaires" of public
telecommunications networks are those facilities-based carriers that require a
concession from the federal government to use the radio spectrum, satellite
links or any form of terrestrial cables to provide public telecommunications
services. "Resellers" (or "vendors") of telecommunication services are those
carriers that provide telecommunications services to the public through the
use of capacity acquired from concessionaires of public telecommunications
networks. Resellers only require a permit. No specific authority from the SCT
is required to provide value-added services. However, parties that wish to
provide value-added services must register in the SCT's Telecommunications
Registry. The Company obtained registration to provide such services in August
1996, and currently plans to provide value-added services including Internet
access, enhanced facsimile, voice mail retrieve functionalities, electronic
mail and call store and forward.
The Company, through its subsidiary Primus Telecommunicaciones de Mexico,
S.A. de C.V., is currently providing private network management services to
companies that already have leased a private network to serve
52
<PAGE>
their internal corporate needs. Private network management services qualify as
unregulated services in Mexico and do not require any type of authorization
from any government authority.
In July 1994, the SCT issued the rules for the interconnection of competing
long distance carriers with Telmex's network. The rules provide that Telmex is
required to make 60 of its switches available to its competitors by January 1,
1997, and gradually increase the number of switches until all of its switches
are available to competitors after January 1, 2001. In addition, the rules
provide that as of January 1, 1997, competing carriers may, at their own cost,
interconnect to other switches in Mexico even if they are not included in the
list of 60 switches that Telmex has to make available by 1997.
In this regard, in April 1996, the SCT established the structure of the
principal rates that Telmex will charge new long distance carriers for
interconnection with its network and set the rates for 1997 and 1998. On June
21, 1996, the SCT issued rules governing long distance services, as well as
the Basic Technical Plans for Numbering and for Signaling, which address a
number of technical issues relating to the commencement of competition in long
distance services. The new long distance rules establish the framework and
schedule for the provision of competitive long distance services including
rules regarding presubscription, numbering access codes, allocation of service
related liability, billing and collection and certain consultation and
information sharing mechanisms among service providers and the SCT. The rules,
however, do not address the transmission of international long distance
traffic.
AXICORP
The Company acquired Axicorp, the fourth largest telecommunications provider
in Australia, in March 1996. Axicorp provides the Company early entry into the
deregulating Australian telecommunications market and will serve as the
Company's gateway to the Asia-Pacific region. The Company believes that the
ongoing transformation of Axicorp's strategy and operations to a facilities-
based carrier focused on the provision of international and domestic long
distance services is an example of the execution of the Company's business
model. For the twelve months ended March 31, 1996, Axicorp generated net
revenue of approximately $144 million.
Axicorp began operations in September 1993 in order to capitalize on the
opportunities arising from the advent of the deregulation of the
telecommunications industry in Australia. Prior to the acquisition, Axicorp
pursued a strategy of reselling long distance, local switched and cellular
services at a discount to the prices charged by Telstra, the former monopoly
telecommunications provider in Australia. Axicorp originally marketed and sold
its services through sales agents to professional and trade associations. All
of Axicorp's billing and collection functions were conducted by Telstra.
Since acquiring Axicorp in March 1996, Primus has been investing substantial
resources to transform Axicorp's strategy and operations to those of a
facilities-based carrier focused on the provision of international and
domestic long distance services. The Company has acquired five switches for
use in Australia, which are expected to be operational by the end of the first
quarter of 1997, and has focused on increasing the number of higher-margin,
higher-volume business customers with significant international long distance
traffic. As part of its increasing focus on business customers, the Company is
increasing Axicorp's direct sales force and reducing its reliance on marketing
through associations. In addition, Axicorp's switch network will be integrated
into the Network and the Company intends to offer additional services in
Australia, including prepaid and calling cards, audio-conferencing and toll-
free services.
The Company believes that the integration of Axicorp into the Company's
operations and strategy will be enhanced by certain Australian regulatory
changes expected to become effective in July 1997. Under current regulations,
only Telstra and Optus are licensed as full service facilities-based carriers.
The Australian government, however, has indicated plans to deregulate the
Australian telecommunications market in July 1997, which would permit Axicorp
and others to own transmission facilities. Although both Telstra and Optus
have requested that the government delay the July 1997 implementation of
deregulation, the Company believes that
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<PAGE>
any such delay would not affect the Company's ability to own and operate the
network it is deploying within Australia. See "--Government Regulation."
The Company acquired Axicorp for $5.7 million in cash, including transaction
costs, 455,000 shares of Series A Stock (convertible into 1,538,355 shares of
Common Stock on the date of the Offering) and seller financing recorded on a
discounted basis (the "Seller Financing"), consisting of $4.1 million payable
to Fujitsu Australia Limited and $4.0 million payable to the individual
shareholder sellers. As security for payment of the Seller Financing, the
sellers have collateral security interests in all of the outstanding Axicorp
shares, 27% as registered owner, which will be registered in the Company's
name upon payment of the Seller Financing, and 73% pursuant to a share
mortgage. In turn, the Company is holding 248,334 shares of the Series A Stock
issued to the individual sellers as collateral for the 27% of the Axicorp
shares registered in their names. These shares of Series A Stock will be
released to the sellers once the remaining Axicorp shares are received.
Pursuant to its terms, the Series A Stock will be converted into Common Stock
upon the completion of the Offering.
EMPLOYEES
The following table summarizes the number of full-time employees of the
Company as of September 30, 1996, by region and classification:
<TABLE>
<CAPTION>
UNITED KINGDOM/ ASIA-
NORTH AMERICA EUROPE PACIFIC TOTAL
------------- --------------- ------- -----
<S> <C> <C> <C> <C>
Management and Administrative...... 8 11 23 42
Sales and Marketing................ 41 34 53 128
Customer Service and Support....... 11 18 29 58
Technical.......................... 10 7 40 57
--- --- --- ---
Total............................ 70 70 145 285
=== === === ===
</TABLE>
The Company never has experienced a work stoppage, and none of its employees
is represented by a labor union or covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
PROPERTIES
The Company's headquarters in McLean, Virginia consist of approximately
4,585 square feet of office space under a lease that expires in October 1999
and provides for a monthly rental of $8,000. The Company also leases 3,134
square feet of office space in an adjacent building under a lease which
expires in October 1999 and provides for a monthly rental of $2,100. In
addition the Company leases sales offices in Tampa, Florida and New York City
consisting of 2,859 and 350 square feet, respectively, which leases expire in
April 1998 and April 1997 and provide for a monthly rental of $2,000 and
$3,100 respectively. The Company also leases for $5,900 per month a 2,575
square foot facility which houses the Company's Washington, D.C. switch
through May 1997, and leases for $13,000 per month and $35,000 per month 5,350
and 3,000 square foot facilities in Los Angeles, California and Jersey City,
New Jersey, respectively, at which it intends to locate international gateway
switches.
The Axicorp facilities consist of administrative offices and other
facilities aggregating approximately 30,000 square feet for total monthly
rental of $41,000. Axicorp's leases expire at varying times from January 1997
to August 1999. In the United Kingdom, the Company leases approximately 3,250
square feet of office space which expires in April 1999 and provides for a
monthly rental of $18,000. In Mexico, the Company leases approximately 750
square feet of office space in Mexico City for $1,650 per month and for a term
expiring in October 1997. In Toronto, the Company leases approximately 420
square feet under a lease providing for a monthly rental of $900 and expiring
July 2001.
Management believes that the Company's present office facilities, together
with additional space currently under discussion with its Virginia landlord,
are adequate for its anticipated operations, and that similar space can
readily be obtained as needed. As its network of owned digital switches grows,
the Company will have to lease additional locations to house these facilities.
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<PAGE>
LEGAL PROCEEDINGS
The Company is from time to time involved in litigation incidental to the
conduct of its business. There is no pending legal proceeding to which the
Company is a party which the Company believes is likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
NAME AGE POSITION OF TERM AS DIRECTOR
---- --- -------- -------------------
<S> <C> <C> <C>
K. Paul Singh(1)........ 45 Chairman of the Board of Directors, 1999
President, and Chief Executive
Officer
Neil L. Hazard.......... 44 Executive Vice President and Chief N/A
Financial Officer
John F. DePodesta....... 51 Executive Vice President, Law and 1999
Regulatory Affairs, and Director
George E. Mattos........ 46 Vice President of Operations N/A
John Melick............. 37 Vice President of Sales and Marketing N/A
Thomas R. Kloster....... 36 Corporate Controller N/A
Ravi Bhatia............. 48 Chief Operating Officer, Axicorp N/A
Peter Slaney............ 56 General Manager, Primus N/A
Telecommunications International,
Inc.
Paul Keenan............. 38 General Manager of Mobile Services, N/A
Axicorp
Sim Thiam Soon.......... 43 General Manager of Operations, Axicorp N/A
Herman Fialkov(2)....... 74 Director 1997
David E. Hershberg(2)... 59 Director 1997
John Puente(1)(3)....... 66 Director 1998
</TABLE>
- --------
(1) Member of Nominating Committee
(2) Member of Compensation Committee
(3) Member of Audit Committee
K. Paul Singh co-founded the Company in 1994 with Mr. DePodesta and serves
as its Chairman, President and Chief Executive Officer. From 1991 until he co-
founded the Company, he served as the Vice President of Global Product
marketing for MCI. Prior to joining MCI, Mr. Singh was the Chairman and Chief
Executive Officer of OTI, a provider of private digital communications in over
26 countries which he founded in 1984 and was purchased by MCI in 1991. See
"Certain Transactions."
Neil L. Hazard joined the Company in 1996 as its Executive Vice President
and Chief Financial Officer. Prior to joining the Company, Mr. Hazard was
employed by MCI in several executive positions, most recently as its Director
of Corporate Accounting and Financial Reporting, responsible for consolidation
of MCI's financial results, external reporting to stockholders and SEC
reporting. Mr. Hazard served as acting Controller of MCI for six months and as
Director of Global Product Marketing. Prior to joining MCI in 1991, Mr. Hazard
served as the Chief Financial Officer of OTI.
John F. DePodesta co-founded the Company in 1994 with Mr. Singh, and serves
as a director and its Executive Vice President Law and Regulatory Affairs. In
addition to his position with the Company, Mr. DePodesta also currently serves
as the Senior Vice President, Law and Public Policy for Genesis Health
Ventures, Inc. and the Chairman of the Board of Iron Road Railways
Incorporated, which he co-founded in 1994. Additionally, since 1994 he has
been "of counsel" to the law firm of Pepper, Hamilton & Scheetz, where he was
previously a partner since 1979. Before joining Pepper, Hamilton & Scheetz,
Mr. DePodesta served as the General Counsel of Consolidated Rail Corporation.
See "Certain Transactions."
56
<PAGE>
George E. Mattos joined the Company in 1994 as its Vice-President of
Operations. Prior to joining the Company, Mr. Mattos held several positions
with MCI for over 10 years, most recently as a Senior Manager responsible for
the development of a software monitoring system for customer service,
installation, operation and maintenance of MCI's international
telecommunications network. Mr. Mattos previously was part of MCI's switching
and network intelligence facilities where he was responsible for commencing
switched voice service to various countries.
John Melick joined the Company in 1994 as its Vice President of Sales and
Marketing. Prior to joining the Company, he was a Senior Manager with MCI
responsible for the day-to-day management of its global product portfolio in
Latin American and the Caribbean region. He joined MCI in 1991 at the time of
the acquisition of OTI where he managed the development of OTI's service
expansion into Mexico and Latin America.
Thomas R. Kloster joined the Company in 1996 as its Corporate Controller.
Prior to joining the Company, Mr. Kloster was employed by MCI as Senior
Manager of Corporate Accounting and Reporting, responsible for various facets
of MCI's consolidation of financial results, external and internal reporting,
and accounting for ventures and emerging businesses. Prior to joining MCI in
1994, Mr. Kloster had been employed by Price Waterhouse LLP since 1988, most
recently serving as a Senior Manager.
Ravi Bhatia joined the Company in October 1995 as the Managing Director of
Primus Telecommunications Pty., Ltd. (Australia) and in March 1996 became the
Chief Operating Officer of Axicorp and as such is responsible for implementing
the Company's business strategy in Australia. Mr. Bhatia has over 26 years of
international experience in the telecommunications industry, which includes 9
years of employment with MCI in various sales and marketing positions. Most
recently, he served as the Director of Sales and Marketing for MCI in the
South Pacific Region, based in Sydney.
Peter Slaney joined the Company in 1996 as the Managing Director of Axicorp.
Mr. Slaney was previously a co-founder and served as Managing Director of
Axicorp since its inception in 1993. Prior to forming Axicorp, Mr. Slaney
served as General Manager of the Telecommunications Group of Paxus Australia,
a group that provided professional services and consulting to Telstra. The
majority of Mr. Slaney's career was spent at IBM Corporation where he worked
for 20 years in various capacities, including as an Account Executive Manager
in the personal computer market.
Paul Keenan joined the Company in 1996 as General Manager of Axicorp's
cellular business unit. Mr. Keenan co-founded Axicorp in 1993 and served as
its General Manager, Finance and Administration until he joined the Company.
Prior to co-founding Axicorp, Mr. Keenan had been a Senior Consultant with
Paxus Australia since 1990.
Sim Thiam Soon joined the Company in 1996 as General Manager of Operations
of Axicorp. Mr. Sim co-founded Axicorp in 1993 and served as its General
Manager of Operations until joining the Company. Prior to co-founding Axicorp,
Mr. Sim had been a Manager with Paxus Australia since 1990.
Herman Fialkov became a director of the Company in 1995. He is currently the
General Partner of PolyVentures Associates, L.P., a venture capital firm and
has been associated with various venture capital firms since 1968. Previously,
he was an officer and director of General Instrument Corporation which he
joined in 1960 as a result of its acquisition of General Transistor
Corporation, a company Mr. Fialkov founded.
David E. Hershberg became a director of the Company in 1995. Mr. Hershberg
is the founder, President and CEO of WorldComm Systems, Inc., a system
integrator of satellite earth stations. From 1976 to 1994, Mr. Hershberg was
the President and Chief Executive Officer of Satellite Transmission Systems,
Inc., a global provider of satellite telecommunications equipment, and became
a Group President of California Microwave, Inc., a company that acquired
Satellite Transmission Systems, Inc.
57
<PAGE>
John Puente became a director of the Company in 1995. From 1987 to 1995, he
was Chairman of the Board and CEO of Orion Network Systems, a satellite
telecommunications company. Mr. Puente is currently Chairman of the Board of
Telogy Networks, Inc., a privately-held company. Prior to joining Orion, Mr.
Puente was Vice Chairman of M/A-Com Inc., now known as Hughes Network Systems,
Inc., a diversified telecommunications and manufacturing company, which he
joined in 1978 when M/A-Com acquired Digital Communications Corporation, a
satellite terminal and packet switching manufacturer of which Mr. Puente was a
founder and Chief Executive Officer.
CLASSIFIED BOARD OF DIRECTORS
Pursuant to the Company's By-Laws, the Board of Directors is divided into
three classes of directors each containing, as nearly as possible, an equal
number of directors. Directors within each class are elected to serve three-
year terms and approximately one-third of the directors sit for election at
each annual meeting of the Company's stockholders. A classified board of
directors may have the effect of deterring or delaying any attempt by any
group to obtain control of the Company by a proxy contest since such third
party would be required to have its nominees elected at two separate annual
meetings of the Board of Directors in order to elect a majority of the members
of the Board of Directors. Directors who are elected to fill a vacancy
(including vacancies created by an increase in the number of directors) must
be confirmed by the stockholders at the next annual meeting of stockholders
whether or not such director's term expires at such annual meeting. See
"Description of Capital Stock--Takeover Protection."
DIRECTOR COMPENSATION
The Company pays cash compensation to outside board members who are not
otherwise consultants to the Company. Each such board member is entitled to
receive $500 for each meeting of the Board of Directors, or any committee
thereof, attended by such board member in person or by telephone. The Company
also has adopted a Director Plan under which options for up to a total of
338,100 shares of Common Stock will be issued to those directors of the
Company that are not also employees of the Company. Under the Director Plan,
each of the current non-employee directors has received options with respect
to a total of 50,715 shares at an exercise price of $2.96 per share.
COMMITTEES OF THE BOARD
The Company's Board of Directors has appointed an Audit Committee,
Nominating Committee and a Compensation Committee.
Audit Committee. The Audit Committee, which will consist of Mr. Puente and
an independent director to be appointed after consummation of the Offering,
has the authority and responsibility to hire one or more independent public
accountants to audit the Company's books, records and financial statements and
to review the Company's systems of accounting (including its systems of
internal control); to discuss with such independent public accountants the
results of such audit and review; to conduct periodic independent reviews of
the systems of accounting (including systems of internal control); and to make
reports periodically to the Board of Directors with respect to its findings.
Nominating Committee. The Nominating Committee, which currently consists of
Messrs. Puente (Chairman) and Singh, is responsible for selecting those
persons to be nominated to the Company's Board of Directors.
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<PAGE>
Compensation Committee. The Compensation Committee, which currently consists
of Messrs. Fialkov (Chairman) and Hershberg, is responsible for fixing the
compensation of the Chief Executive Officer and the other executive officers,
as well as making recommendations to the Board of Directors with respect to
other compensation matters such as those relating to the operation of the
Plans and approving certain aspects of the Company's management bonus plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee has any interlocking or
other relationship with the Company that would call into question his
independence with respect to his duties.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company for
services rendered in all capacities during 1995 to the Company's chief
executive officer. No other executive officer of the Company received total
annual salary and bonus in excess of $100,000 during 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------- ------------
OTHER ANNUAL SECURITIES
COMPENSATION UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($) OPTIONS ($) COMPENSATION
- --------------------------- ---- -------- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
K. Paul Singh,
Chairman and Chief
Executive Officer..... 1995 $185,000(1) -- -- -- --
</TABLE>
- --------
(1) Of this amount, the payment of $77,200 was deferred and subsequently paid
on July 31, 1996. See""--Employment Contract."
STOCK OPTION PLANS
Employee Stock Option Plan. The Company established the Employee Plan for
its employees on January 2, 1995 which provides for the grant to selected
employees of the Company and its Subsidiaries who contribute to the
development and success of the Company and its Subsidiaries of both "incentive
stock options" within the meaning of Section 422 of the Code ("ISOs") and
options that are non-qualified for federal income tax purposes ("NQSOs"). The
total number of shares of Common Stock for which options may be granted
pursuant to the Employee Plan is 1,690,500, subject to certain adjustments
reflecting changes in the Company's capitalization. The Employee Plan is
currently administered by the Board of Directors, although it provides for its
administration by a Committee of the Board. The Board of Directors determines,
among other things, which employees will receive options under the Employee
Plan; the time when options will be granted; the type of option (ISO or NQSO,
or both) to be granted, the number of shares subject to each option, the time
or times when the options will become exercisable and expire, and, subject to
certain conditions discussed below, the option price and duration of the
option. Board members administering the Employee Plan may vote on any matters
affecting the administration of the Plan, except that no member may act upon
the granting of an option to himself or herself.
The exercise price of the options granted under the Employee Plan is
determined by the Board of Directors, but may not be less than the fair market
value per share of the Common Stock on the date the option is granted. If,
however, an ISO is granted to any person who, at the time of the grant, owns
capital stock possessing more than 10% of the total combined voting power of
all classes of the Company's capital stock, then the exercise price for such
ISO may not be less than 110% of the fair market value per share of the Common
Stock on the date the option is granted. The Board of Directors also
determines the method of payment for the exercise of options under the
Employee Plan, and may consist entirely of cash, check, promissory notes or
Common Stock having a fair market value on the date of surrender equal to the
aggregate exercise price.
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<PAGE>
Options are not assignable or transferrable other than by will or the laws
of descent and distribution. If an employee's employment with the Company is
terminated for any reason, such employee's options exercisable on the date of
termination are exercisable for three months following the date of
termination. If the Board of Directors makes a determination that a terminated
employee engaged in disloyalty to the Company, disclosed proprietary
information, is convicted of a felony, or breached the terms of a written
confidentiality agreement or non-competition agreement, all unexercised
options held by such employee terminate upon the earlier of the date of such
determination or the date of termination. If an employee becomes disabled or
deceased while an employee of the Company, such employee's options that are
exercisable on the date of disability or death will remain exercisable for
twelve months following the date of disability or death; provided, however,
that if a disabled employee commences employment with a competitor of the
Company during that twelve-month period, all options held by the employee
terminate immediately.
Options issued pursuant to the Employee Plan outstanding on the date of a
"change in control" of the Company become immediately exercisable on such
date. A change in control for purposes of the Employee Plan includes the
acquisition by any person or entity of the beneficial ownership of 50% or more
of the voting power of the Company's stock, the approval by the Company's
shareholders of a merger, reorganization or consolidation of the Company in
which the Company's shareholders do not own 50% or more of the voting power of
the stock of the entity surviving such a transaction, the approval of the
Company's shareholders of an agreement of sale of all or substantially all of
the Company's assets, and the acceptance by the Company's shareholders of a
share exchange in which the Company's shareholders do not own 50% or more of
the voting power of the stock of the entity surviving such exchange.
There are no federal income tax consequences to the Company on the grant or
exercise of an ISO. If an employee disposes of stock acquired through the
exercise of an ISO within one year after the date such stock is acquired or
within two years after the grant of the ISO (a "Disqualifying Disposition"),
the Company will be entitled to a deduction in an amount equal to the
difference between the fair market value of such stock on the date it is
acquired and the exercise price of the ISO. There are no tax consequences to
the Company if an ISO lapses before exercise or is forfeited. The grant of a
NQSO has no immediate tax consequences to the Company. Upon the exercise of a
NQSO by an employee, the Company is entitled to a deduction in an amount equal
to the difference between the fair market value of the share acquired through
exercise of the NQSO and the exercise price of the NQSO. There are no tax
consequences to the Company if a NQSO lapses before exercise or is forfeited.
An employee who receives an ISO is not subject to federal income tax on the
grant or exercise of the ISO; however, the difference between the option price
and the fair market value of the Common Stock received on the exercise of the
ISO ("ISO Stock") is an adjustment for purposes of the alternative minimum
tax. Upon the exercise of an ISO, an employee will have a basis in the ISO
Stock received equal to the amount paid. An employee will be subject to
capital gain or loss upon the sale of ISO Stock, unless such sale constitutes
a Disqualifying Disposition, equal to the difference between the amount
received for the stock and the employee's basis in such. The gain or loss will
be long- or short-term, depending on the length of time the ISO Stock was held
prior to disposition. There are no tax consequences to an employee if an ISO
lapses before exercise or is forfeited.
In the event of a Disqualifying Disposition, an employee will be required to
recognize (1) taxable ordinary income in an amount equal to the difference
between the fair market value of the ISO Stock on the date of exercise of the
ISO and the exercise price; and (2) capital gain or loss (long- or short-term,
as the case may be) in an amount equal to the difference between (a) the
amount realized by the employee upon the Disqualifying Disposition and (b) the
exercise price paid by the employee for the stock, increased by the amount of
ordinary income recognized by the employee, if any. If the disposition
generates an allowable loss (e.g., a sale to an unrelated party not within 30
days of purchase of Common Stock), then the amount required to be recognized
by the employee as ordinary income will be limited to the excess, if any, of
the amount realized on the sale over the basis of the stock.
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The Employee Plan allows an employee to pay an exercise price in cash or
shares of the Company's Common Stock. If the employee pays with shares of the
Company's Common Stock that are already owned, the basis of the newly acquired
ISO Stock will depend on the tax character and number of shares of the
previously owned stock used as payment. If an employee pays with shares
acquired upon other than the exercise of an ISO ("non-ISO Stock"), the
transaction will be tax-free to the extent that the number of shares received
does not exceed the number of shares of non-ISO Stock paid. The basis of the
number of shares of newly acquired ISO Stock which does not exceed the number
of shares of non-ISO Stock paid will be equal to the basis of the shares paid.
The employee's holding period with respect to such shares will include the
holding period of the shares of non-ISO Stock paid. To the extent that the
employee receives more new shares than shares surrendered, the "excess" shares
of ISO Stock will take a zero basis. If an employee exercises an ISO by using
stock that is previously acquired ISO Stock, however, certain special rules
apply. If the employee has not held the previously acquired ISO Stock for at
least two years from the date of grant of the related ISO and one year from
the date the employee acquired the previously acquired ISO Stock, the use of
such ISO Stock to pay the exercise price will constitute a Disqualifying
Disposition and subject the employee to income tax with respect to the ISO
Stock as described above. In such circumstances, the basis of the newly
acquired ISO Stock will be equal to the fair market value of the previously
acquired ISO Stock used as payment.
The grant of a NQSO has no immediate tax consequences to an employee. The
exercise of a NQSO requires an employee to include in gross income the amount
by which the fair market value of the acquired shares exceeds the exercise
price on the exercise date. The Company is required to withhold income and
employment taxes from the employee's wages on account of this income. The
employee's basis in the acquired shares will be their fair market value on the
date of exercise. Upon a subsequent sale of such shares, the employee will
recognize capital gain or loss equal to the difference between the sales price
and the basis in the stock. The capital gain or loss will be long- or short-
term, depending on the length of time that the employee held the shares. There
are no tax consequences to an employee if a NQSO lapses before exercise or is
forfeited. If an employee uses previously owned Common Stock as payment for
the exercise price of a NQSO, to the extent the employee surrenders the same
number of shares received, the exchange is tax-free and the new shares will
have a basis equal to that of the shares surrendered. The holding period for
the new shares, moreover, will include the period the employee held the
surrendered shares. To the extent the employee receives more new shares than
shares surrendered, the "excess" shares are treated as having been acquired
for no consideration and the fair market value of such "excess" shares is
includible in the employee's income as compensation. The basis of the "excess"
shares is their fair market value at the time of receipt. If the previously
owned shares consist of ISO Stock for which the holding requirements were not
met such that their use as payment of the exercise price constituted a
Disqualifying Disposition, the employee will have the income tax consequences
described above.
The Board of Directors has authority to suspend, terminate or discontinue
the Employee Plan or revise or amend it in any manner with respect to options
granted after the date of revision. No such revision, however, can change the
aggregate number of shares subject to the Employee Plan, change the
designation of employees eligible thereunder, or decrease the price at which
options may be granted. The Board may not grant any options under the Employee
Plan after January 2, 2005.
Mr. Singh did not receive a grant or exercise any stock option or stock
appreciation right prior to or during the last fiscal year.
Director Stock Option Plan. The Company also established a Director Plan on
July 27, 1995. The purpose of the Director Plan is to encourage ownership in
the Company by outside directors (present or future incumbent directors who
are not employees of the Company or any subsidiary) whose services are
considered essential to the Company's continued progress. Options granted
under the Director Plan are NQSOs. The Director Plan is administered by a
committee of the Board of Directors consisting of those directors who are not
eligible to receive grants thereunder. The total number of shares of Common
Stock for which options may be granted pursuant to the Director Plan is
338,100. On the effective date of the Director Plan or the first date
thereafter that any director becomes eligible to receive an award under the
Director Plan, each eligible director will
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automatically receive an option to purchase 50,715 shares of Common Stock,
exercisable for 16,905 shares immediately, and 16,905 on each of the next two
anniversary dates of the grant date. All options become immediately
exercisable, however, upon the retirement of a director in accordance with any
mandatory retirement policy of the Board, upon the death or permanent
disability of a director, or if the Company merges with another Company and is
not the surviving corporation, the Company enters into an agreement to sell or
otherwise dispose of all or substantially all of its assets, or any person or
group acquires more than 20% of the Company's outstanding voting stock.
The option price is the fair market value at the date on which an option is
granted. Payment for the exercise of options may consist of cash or Common
Stock. Options issued under the Director Plan are not transferrable other than
by will or the laws of descent and distribution. Options expire upon the
earlier of five years from the date they were granted or three years following
either the retirement or resignation of the director, the failure of the
director to be re-elected, or the permanent disability or death of the
director. No options may be granted under the Director Plan after December 31,
2005.
The grant of a NQSO has no immediate tax consequences to the Company. Upon
the exercise of a NQSO by a director, the Company is entitled to a deduction
in an amount equal to the difference between the fair market value of the
share acquired through exercise of the NQSO and the exercise price of the
NQSO. There are no tax consequences to the Company if a NQSO lapses before
exercise or is forfeited.
The tax consequences to a director upon the grant and exercise of a NQSO,
and the sale of Common Stock acquired upon exercise thereof, are identical to
those described for NQSOs under "--Employee Stock Option Plan" above, except
that the Company has no withholding obligations upon the exercise of a NQSO by
a director.
EMPLOYMENT CONTRACT
The Company has entered into an employment agreement with Mr. Singh (the
"Singh Agreement"). The Singh Agreement is a five-year contract, with a term
beginning on June 1, 1994 and continuing until May 30, 1999, and from year to
year thereafter unless terminated. Under the terms of the Singh Agreement, Mr.
Singh is required to devote his full time efforts to the Company as Chairman
of the Board, President and CEO. The Company is required to compensate Mr.
Singh at an annual rate of $185,000 (which amount is reviewed annually by the
Board of Directors and is subject to increase at their discretion). Mr. Singh,
however, agreed to defer payment of his base salary from June 1, 1994 through
May 31, 1995, which was subsequently paid to him on July 31, 1996. The Company
is also obligated to (i) allow Mr. Singh to participate in any bonus or
incentive compensation plan approved for senior management of the Company,
(ii) provide life insurance in an amount equal to three times Mr. Singh's base
salary and disability insurance which provides monthly payments in an amount
equal to one-twelfth of his then applicable base salary, (iii) provide medical
insurance and (iv) pay up to $2,500 annually for Mr. Singh's personal tax and
financial planning services.
The Company may terminate the Singh Agreement at any time in the event of
his disability or for cause, each as defined in the Singh Agreement. Mr. Singh
may resign from the Company at any time without penalty (other than the non-
competition obligations discussed below). If the Company terminates the Singh
Agreement for disability or cause, the Company will have no further
obligations to Mr. Singh. If, however, the Company terminates the Singh
Agreement other than for disability or cause, the Company will have the
following obligations: (i) if the termination is after May 30, 1999, the
Company must pay Mr. Singh one-twelfth of his then applicable base salary as
severance pay; and (ii) if the termination is before June 1, 1999, the Company
must pay to Mr. Singh, as they become due, all amounts otherwise payable if he
had remained employed by the Company until June 1, 1999. If Mr. Singh resigns,
he may not directly or indirectly compete with the Company's business until
six months after his resignation. If the Company terminates Mr. Singh's
employment for any reason, Mr. Singh may not directly or indirectly compete
with the Company's business until six months after the final payment of any
amounts owed to him under the Singh Agreement become due.
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CERTAIN TRANSACTIONS
PRIVATE EQUITY SALE
In July 1996, Primus completed the sale of 965,999 shares of Common Stock to
the (i) Quantum Industrial Partners LDC, the principal operating subsidiary of
Quantum Industrial Holdings Ltd., an investment fund advised by Soros Fund
Management, a private investment firm owned by Mr. George Soros, (ii) Winston
Partners II LDC, the principal operating subsidiary of Winston Partners II
Offshore Ltd., an investment fund advised by Chatterjee Management Company, a
private entity owned by Dr. Purnendu Chatterjee, (iii) Winston Partners II
LLC, an investment fund advised by Chatterjee Management Company and (iv) S-C
Phoenix Holdings, L.L.C., an investment vehicle owned by affiliates of Mr.
Soros and Dr. Chatterjee (collectively, the "Soros/Chatterjee Group"), for an
aggregate purchase price of approximately $8.0 million. The Soros/Chatterjee
Group also purchased, for an additional $8.0 million, the Soros/Chatterjee
Warrants which afford the Soros/Chatterjee Group the right to receive, upon
exercise, an indeterminate number of shares of Common Stock with a fair market
value of $10.0 million as of the date of exercise, plus up to 627,899
additional shares of Common Stock. Except for 338,100 shares which are
currently exercisable, the Soros/Chatterjee Warrants are exercisable on or
after July 31, 1997 and until July 31, 1999. The Soros/Chatterjee Warrants are
entitled to certain customary antidilution protection in the event of stock
splits, stock dividends, reorganizations and other similar events.
The Soros/Chatterjee Group was granted registration rights pursuant to a
registration rights agreement with the Company (the "Registration Rights
Agreement"). Under the Registration Rights Agreement, the Soros/Chatterjee
Group is entitled to demand registration of its shares after July 31, 1998, a
maximum of three times, the third demand being available only if the
Soros/Chatterjee Group has not registered 80% of its shares of Common Stock
after the first demand registration. The Company is not required to effect any
demand registration within 180 days after the effective date of a previous
demand registration and may postpone, on one occasion in any 365-day period
the filing or effectiveness of a registration statement for a demand
registration for up to 120 days under certain circumstances, including pending
material transactions or the filing by the Company of a registration statement
relating to the sale of shares for its own account. The Soros/Chatterjee Group
is also entitled to unlimited piggyback registrations. Such rights with
respect to this Offering have been waived. All such registrations would be at
the Company's expense, exclusive of underwriting discounts and commissions,
and legal fees (up to $25,000 for each such offering) incurred by the holders
of the registrable securities. The Company and the Soros/Chatterjee Group have
entered into customary indemnification and contribution provisions.
The Soros/Chatterjee Group also entered into a securityholders agreement
with the Company and K. Paul Singh (the "Securityholders Agreement") under
which the Soros/Chatterjee Group has the right until consummation of this
Offering to appoint a nominee for a position as a member of the Board of
Directors of the Company, which the Soros/Chatterjee Group has advised the
Company that it will not exercise prior to consummation of this Offering (and
Mr. Singh has agreed to vote shares over which he has voting control for such
nominee). Pursuant to this agreement, members of the Soros/Chatterjee Group
were granted preemptive rights in connection with most future issuances of
capital stock, including public offerings. Such rights were waived with
respect to this Offering. Additionally, members of the Soros/Chatterjee Group
are entitled to tag-along rights to participate with Mr. Singh and members of
his family in sales of capital stock on the same terms and conditions as Mr.
Singh and members of his family. See "Description of Capital Stock--
Registration Rights." The Soros/Chatterjee Group shares are also subject to
drag along rights in the event holders of a majority of the Common Stock
decide to sell 80% or more of the outstanding capital stock of the Company.
The Securityholders Agreement provides that members of the Soros/Chatterjee
Group will not transfer shares of Common Stock to a company, or any affiliate,
that competes with the Company to a material extent in the provision of
telecommunications services in the United States, Australia, the United
Kingdom, France, Germany, Mexico, Canada, Italy or Hong Kong.
TELEGLOBE
The Company entered into an agreement on January 12, 1996 with Teleglobe,
pursuant to which Teleglobe purchased 410,808 shares of Common Stock for a
total of $1,458,060. The equity investment was consummated
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in February 1996 as was a loan by Teleglobe of $2.0 million to the Company.
The loan, which bears interest at 6.9% per annum (payable quarterly) and
matures on February 9, 1998, is secured by all the assets of the Company,
comprised principally of the stock of the subsidiaries (65% of the stock of
foreign subsidiaries was pledged). Related to the Teleglobe investments, the
Company and a number of its subsidiaries have entered into trading agreements
with Teleglobe with respect to their respective service offerings. The parties
have also agreed to cooperate in an effort to maximize efficiencies with
respect to network facilities.
As part of the transaction, Teleglobe, the Company and Mr. Singh are party
to a shareholders' agreement (the "Teleglobe Agreement") providing Teleglobe
the same consent, preemptive and registration rights as may be granted in the
future to other shareholders of an equal or lesser percentage ownership in the
Company, and participation and tag-along rights whereby Teleglobe is entitled
to sell its shares of Common Stock when certain other shareholders sell or
when the Company issues equity securities that would result in a change of
control of the Company. The Teleglobe Agreement also obligates Teleglobe to
sell its shares if certain other shareholders sell and specified conditions
are met, and grants the Company a right of first refusal upon a sale of the
Teleglobe-owned Common Stock to any competitor of the Company. Teleglobe
waived any preemptive rights and registration rights that arose as a result of
the Private Equity Sale. See "--Teleglobe".
NSI PRIVATE PLACEMENTS
In 1995 and 1996, the Company engaged Northeast Securities, Inc. ("NSI") to
serve as the placement agent for two private placements of the Company's
Common Stock. Mr. Andrew B. Krieger, a former director of Primus, served as a
broker-dealer in the private placements through an affiliation with NSI. In
connection with these offerings, the Company paid Mr. Krieger cash commissions
aggregating approximately $1,007,000. The Company also retained Krieger
Associates, of which Mr. Krieger is the President and Chief Executive Officer,
to perform certain financial and other consulting services and paid a total of
approximately $77,000 for the performance of such services during 1995 and
1996 (to date). In addition, in connection with these private placements, the
Company issued a total of 193,718 shares of Common Stock to Krieger Associates
and Mr. Krieger, and at the direction of Mr. Krieger issued a total of 74,003
shares of Common Stock to other individuals associated with the transaction.
The Company also issued, in connection with these private placements, a total
of 245,555 shares of Common Stock to NSI and certain of its employees
associated with the transactions.
LOAN FROM CHAIRMAN AND CHIEF EXECUTIVE OFFICER
In connection with the initial organization of the Company, K. Paul Singh,
the Company's Chairman of the Board and Chief Executive Officer, loaned the
Company approximately $320,000, accruing interest at a variable rate tied to
the prime rate. On March 31, 1995, the Company and Mr. Singh converted all
then outstanding principal and interest due ($350,000) into 555,559 shares of
Common Stock, at a price per share of $0.63, which shares were issued on such
date.
MANAGEMENT FEES
Prior to the Company's acquisition of Axicorp, Axicorp paid a management fee
based on a percentage of revenue to a company owned primarily by certain
current officers of the Company, including Paul Keenan, Sim Thiam Soon and
Peter Slaney. Total management fees for the nine month period ended March 31,
1995, and the twelve month period ended March 31, 1996 were $616,000 and
$426,000, respectively.
LEGAL SERVICES
From time to time, the Company has retained the law firm of Pepper, Hamilton
& Scheetz, of which John F. DePodesta, a director and an Executive Vice
President of the Company, is "of counsel," to perform legal services for it
and has paid such firm fees totaling $151,807 in 1996 (to date). See "Legal
Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth information as of October 25, 1996 concerning
each person or group known to the Company to be the beneficial owner of more
than 5% of Common Stock, and concerning the beneficial ownership of Common
Stock by the Company's directors, K. Paul Singh and all executive officers and
directors of the Company as a group. Except as otherwise noted and subject to
community property laws, where applicable, each beneficial owner of the Common
Stock listed below has sole investment and voting power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
---------------------------------------
PERCENT OF CLASS
-------------------------
NUMBER BEFORE AFTER
NAME AND ADDRESS(2) OF SHARES OFFERING(13) OFFERING(14)
- ------------------- ------------ ------------ ------------
<S> <C> <C> <C>
K. Paul Singh........................ 4,365,030(3) 36.3% 24.2%
Quantum Industrial Partners LDC...... 652,050(4) 5.3% 3.6%
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Winston Partners II LLC.............. 81,505(5) * *
c/o Chatterjee Advisors L.L.C.
c/o The Chatterjee Group
888 Seventh Avenue
New York, New York 10106
S-C Phoenix Holdings, L.L.C. ........ 391,229(6) 3.2% 2.2%
c/o The Chatterjee Group
888 Seventh Avenue
New York, New York 10106
Winston Partners II LDC.............. 179,315(7) 1.5% 1.0%
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
John F. DePodesta.................... 319,690(8) 2.6% 1.8%
Herman Fialkov....................... 50,715(9) * *
David E. Hershberg................... 42,263(10) * *
John Puente.......................... 152,855(11) 1.3% *
All executive officers and directors
as a group (13 people).............. 5,118,757(12) 41.2% 27.8%
</TABLE>
- --------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes voting or investment power with respect to the
shares beneficially owned. Shares of Common Stock subject to options or
warrants currently exercisable or exercisable on or prior to December 24,
1996 are deemed outstanding for computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding
for computing the percentage ownership of any other person.
(2) Unless otherwise noted in the chart, the address of all persons listed is
c/o Primus Telecommunications Group, Incorporated, 8180 Greensboro Drive,
Suite 1100, McLean, Virginia 22102.
(3) Includes, 377,786 shares of Common Stock owned by Mr. Singh's spouse and
children. Also includes 396,828 shares of Common Stock held of record by
a series of revocable trusts of which Mr. Singh is the trustee and
pursuant to which Mr. Singh has sole voting power and shared dispositive
power.
(4) Quantum Industrial Partners LDC ("Quantum Industrial") has vested
investment discretion with respect to its portfolio investments,
including the Common Stock, in an entity over which Mr. George Soros may
be deemed to have sole and ultimate control. Mr. Soros and Dr. Purnendu
Chatterjee, as a sub-advisor to Quantum Industrial, may be deemed to have
shared beneficial ownership of Common Stock held by Quantum Industrial.
Includes 169,050 shares of Common Stock issuable upon exercise of
warrants granted to Quantum Industrial and exercisable on or prior to
December 24, 1996.
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(5) Winston Partners II LLC has vested investment discretion in its portfolio
investments, including the Common Stock, in Chatterjee Management
Company, an entity over which Dr. Chatterjee may be deemed to have sole
and ultimate control. Dr. Chatterjee may be deemed to have beneficial
ownership of Common Stock held by Winston Partners II LLC. Includes
21,130 shares of Common Stock issuable upon exercise of warrants granted
to Winston Partners II LLC and exercisable on or prior to December 24,
1996.
(6) Mr. Soros and Dr. Chatterjee may be deemed to have shared beneficial
ownership of Common Stock held by S-C Phoenix Holdings, L.L.C. Includes
101,430 shares of Common Stock issuable upon exercise of warrants granted
to S-C Phoenix Holdings, L.L.C. and exercisable on or prior to December
24, 1996.
(7) Winston Partners II LDC has vested investment discretion in its portfolio
investments, including the Common Stock, in Chatterjee Management
Company, an entity over which Dr. Chatterjee may be deemed to have sole
and ultimate control. Dr. Chatterjee may be deemed to have beneficial
ownership of Common Stock held by Winston Partners II LDC. Includes
46,489 shares of Common Stock issuable upon exercise of warrants granted
to Winston Partners II LDC and exercisable on or prior to December 24,
1996.
(8) Includes 101,430 shares of Common Stock issuable upon the exercise of
options granted to Mr. DePodesta and exercisable on or prior to December
24, 1996.
(9) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Fialkov and exercisable on or prior to December
24, 1996.
(10) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Hershberg and exercisable on or prior to December
24, 1996 and 8,453 shares of Common Stock owned by a partnership of which
Mr. Hershberg is a general partner.
(11) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Puente and exercisable on or prior to December 24,
1996.
(12) Includes 391,063 shares of Common Stock issuable upon the exercise of
options granted to directors and executive officers and exercisable on or
prior to December 24, 1996.
(13) Applicable percentage of ownership as of October 25, 1996 is based upon
12,028,746 shares of Common Stock outstanding and after giving effect to
the conversion of preferred stock into 1,538,355 shares of Common Stock.
(14) Applicable percentage ownership after this Offering is based upon
18,028,746 shares of Common Stock outstanding as of October 25, 1996
after giving effect to the issuance of the 6,000,000 shares of Common
Stock offered hereby and after giving effect to the conversion of
preferred stock into 1,538,355 shares of Common Stock.
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DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized to issue up to 40,000,000 shares of Common Stock,
par value $0.01 per share. As of October 25, 1996, the Company had 10,490,391
shares outstanding, 1,635,559 shares of Common Stock reserved for issuance
upon exercise of options granted pursuant to the Plans. An additional
1,294,566 shares of Common Stock may be issued pursuant to the
Soros/Chatterjee Warrants assuming such warrants were exercised on the date of
the Offering at an assumed offering price of $15. The actual number of shares
of Common Stock issuable under the Soros/Chatterjee Warrants will be up to
627,899 shares plus an indeterminate number of shares having a fair market
value of $10 million as of the date of exercise. Holders of shares of Common
Stock are entitled to one vote per share on all matters to be voted upon by
the stockholders. Subject to such preferential rights of the issued and
outstanding Series A Stock more particularly described below, and such
preferential rights as the Company's Board of Directors may grant in
connection with future issuances of Preferred Stock, holders of shares of
Common Stock are entitled to receive such dividends as the Board of Directors
may declare in its discretion out of funds legally available therefor. In the
event of a liquidation, dissolution or winding up of the Company, after
payment of liabilities and any liquidation preference on any shares of
Preferred Stock then outstanding, the holders of shares of Common Stock are
entitled to a distribution of any remaining assets of the Company. Holders of
shares of Common Stock have no cumulative voting or preemptive rights. All
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby, when issued and paid for, will be, fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue up to 2,455,000 shares of Preferred
Stock, par value $0.01 per share, of which 455,000 shares are designated
Series A Stock. All shares of the Series A Stock were issued to the sellers in
the Axicorp transaction, 206,666 shares of which were delivered at closing and
the balance of which are being held by the Company to secure certain post-
closing obligations of the sellers. As a consequence of the consummation of
the Offering, all of the Series A Stock will convert into Common Stock on a
3.381 to one basis.
Dividends are paid on Series A Stock when, as and in the same amount as paid
from time to time on the Common Stock. Holders of Series A Stock are not
entitled to vote on matters related to the Company other than certain matters
related to the capital structure of the Company or matters for which the law
provides for such vote. If the Company grants preemptive rights in connection
with certain issuances, sales or exchanges of Common Stock of the Company or
of securities convertible into Common Stock of the Company, holders of Series
A Stock are also granted such preemptive rights. A holder of Series A Stock
has the right at any time after March 1, 1998 to convert its Series A Stock,
share for share, into Common Stock of the Company. Upon the occurrence of
certain events, including the elimination of certain foreign ownership
restrictions on the Company, the occurrence of certain transfers of the
Company's stock or assets, or the public offering of more than 20% of the
Company's Common Stock, shares of Series A Stock automatically convert into
shares of Common Stock of the Company. Any particular conversion of shares of
Series A Stock held by certain foreign owners into shares of Common Stock of
the Company may be limited by foreign ownership restrictions applicable to the
Company.
In addition to the Series A Stock, the Company, without further action by
the Stockholders, is also authorized to issue up to 2,000,000 shares of other
Preferred Stock, par value $0.01 per share ("Other Preferred Stock"). The
Company's Board of Directors may determine the timing, series, designation and
number of shares of Other Preferred Stock to be issued, as well as the rights,
preferences and limitations of such shares, including those related to voting
power, redemption, conversion, dividend rights and liquidation preferences.
The issuance of Other Preferred Stock could adversely affect the voting power
of the holders of Common Stock of the Company or have the effect of deterring
or delaying any attempt by a person, entity or group to obtain control of the
Company. See "--Takeover Protection."
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WARRANTS
As of October 25, 1996, there were outstanding Soros/Chatterjee Warrants
granting the Soros/Chatterjee Group the right to receive, upon exercise, up to
627,899 shares of Common Stock plus an indeterminate number of shares the fair
market value of which is $10.0 million on the date of exercise. Of the
Soros/Chatterjee Warrants, warrants to purchase 338,100 shares of Common Stock
are currently exercisable, with the remainder being exercisable on or after
July 31, 1997 and until July 31, 1999. The Soros/Chatterjee Warrants are
entitled to certain customary antidilution protection in the event of stock
splits, stock dividends, reorganizations and other similar events. The shares
of Common Stock issued pursuant to the Soros/Chatterjee Warrants as entitled
to certain registration rights described below. See "Certain Transactions--
Private Equity Sale."
REGISTRATION RIGHTS
Soros/Chatterjee Group. Pursuant to a registration rights agreement dated
July 31, 1996, the Soros/Chatterjee Group is entitled to demand registration
of its shares of Common Stock after July 31, 1998, up to three times, the
third demand being available only if the first two did not result in the
Soros/Chatterjee Group having registered 80% of its shares of Common Stock.
The Company is not required to effect any demand registration within 180 days
after the effective date of a previous demand registration and may postpone,
on one occasion in any 365-day period the filing or effectiveness of a
registration statement for a demand registration for up to 120 days under
certain circumstances, including pending material transactions or the filing
by the Company of a registration statement relating to the sale of shares for
its own account. The Soros/Chatterjee Group is also entitled to unlimited
piggyback registrations. Such rights with respect to this Offering have been
waived. All such registrations would be at the Company's expense, exclusive of
underwriting discounts and commissions, and legal fees (up to $25,000 for each
such offering) incurred by the holders of registrable securities. The Company
and the Soros/Chatterjee Group have entered into customary indemnification and
contribution provisions.
Teleglobe. Under a shareholders' agreement between the Company, Mr. Singh
and Teleglobe, Teleglobe has the same consent, preemptive and registration
rights as may be granted in the future to other shareholders of an equal or
lesser percentage ownership in the Company. No such rights have been granted
to other shareholders other than in one instance in which Teleglobe waived its
rights. The shareholders' agreement also provides Teleglobe participation and
tag-along rights whereby Teleglobe is entitled to sell its shares of Common
Stock when certain other shareholders sell or when the Company issues equity
securities that would result in a change of control of the Company. The
agreement also obligates Teleglobe to sell its shares if certain other
shareholders sell and specified conditions are met, and grants the Company a
right of first refusal upon a sale of the Teleglobe-owned Common Stock to any
competitor of the Company.
Other Registration Rights. Pursuant to the terms of the private placements
of Common Stock through NSI as placement agent, purchasers of such shares in
each such private placement (an aggregate of 4,042,084 shares) are entitled to
demand registration of such shares on one occasion (or a total of two demand
registrations) and to piggyback registration rights. The underwriter in any
such registrations may restrict the ability of such holders to include such
shares in a registered offering.
TAKEOVER PROTECTION
The Company is subject to Section 203 of the DGCL which, subject to certain
exceptions, prohibits a Delaware corporation, the voting stock of which is
generally publicly traded (i.e., listed on a national securities exchange or
authorized for quotation on an inter-dealer quotation system of a registered
national securities association) or held of record by more than 2,000
stockholders, from engaging in any "business combination" (as defined below)
with any "interested stockholder" (as defined below) for a period of three
years following the date that such stockholder became an interested
stockholder, unless: (i) prior to such date, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the
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stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (x) by persons who are
directors and also officers, and (y) by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer; or
(iii) on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at least
66 2/3% of the outstanding voting stock which is not owned by the interested
stockholder. Section 203 of the DGCL defines "business combination" to
include: (i) any merger or consolidation involving the corporation and the
interested stockholder; (ii) any sale, transfer, pledge or other disposition
involving the interested stockholder of 10% or more of the assets of the
corporation; (iii) subject to certain exceptions, any transaction which
results in the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder; (iv) any transaction involving the
corporation which has the effect of increasing the proportionate share of the
stock of any class or series of the corporation beneficially owned by the
interested stockholder, or (v) the receipt by the interested stockholder of
the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203
defines an "interested stockholder" as any person who, together with any
affiliates or associates of such person, beneficially owns, directly or
indirectly, 15% or more of the outstanding voting stock of a Delaware
corporation.
Pursuant to the Company's Certificate of Incorporation, the Company's Board
of Directors is divided into three classes of directors each containing, as
nearly as possible, an equal number of directors. Directors within each class
are elected to serve three-year terms and approximately one-third of the
directors sit for election at each annual meeting of the Company's
stockholders. A classified board of directors may have the effect of deterring
or delaying any attempt by any group to obtain control of the Company by a
proxy contest since such third party would be required to have its nominees
elected at two separate annual meetings of the Board of Directors in order to
elect a majority of the members of the Board of Directors. Directors who are
elected to fill a vacancy (including vacancies created by an increase in the
number of directors) must be confirmed by the stockholders at the next annual
meeting of stockholders whether or not such director's term expires at such
annual meeting.
The Company's By-Laws allow the Board of Directors to increase the number of
directors from time to time (though a decrease in the number of directors may
not have the effect of shortening the term of any incumbent director) and to
fill any vacancies on the Board of Directors, including vacancies resulting
from an increase in the number of directors. This provision is designed to
provide the Board of Directors with flexibility to deal with an attempted
hostile takeover by a stockholder who may acquire a majority voting interest
in the Company without paying a premium therefor. This provision allows the
Board of Directors to increase its size and prevent a "squeeze-out" of any
remaining minority interest soon after a new majority stockholder gains
control over the Company. Further, the By-Laws limit the new majority
stockholder's power to remove a current or all current directors before the
annual meeting in the absence of "cause." Cause for removal of a director is
limited to (i) a judicial determination that a director is of unsound mind,
(ii) a conviction of a director of an offense punishable by imprisonment for a
term of more than one year, (iii) a breach or failure by a director to perform
the statutory duties of said director's office if the breach or failure
constitutes self-dealing, willful misconduct or recklessness, or (iv) a
failure of a director, within 60 days after notice of his or her election, to
accept such office either in writing or by attending a meeting of the Board of
Directors and fulfilling such other requirements of qualification as the By-
Laws or Certificate of Incorporation may provide.
Options under the Employee Plan outstanding on the date of a "change in
control" of the Company become immediately exercisable on such date. A change
in control for purposes of this exercise right includes the acquisition by any
person or entity of the beneficial ownership of 50% or more of the voting
power of the Company's stock, the approval by the Company's shareholders of a
merger, reorganization or consolidation of the Company in which the Company's
shareholders do not own 50% or more of the voting power of the stock of the
entity surviving such a transaction, the approval of the Company's
shareholders of an agreement of sale of
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<PAGE>
all or substantially all of the Company's assets, and the acceptance by the
Company's shareholders of a share exchange in which the Company's shareholders
do not own 50% or more of the voting power of the stock of the entity
surviving such exchange.
DIRECTOR LIABILITY
As permitted by Section 102(b)(7) of the DGCL, Article 11 of the Company's
Amended and Restated Certificate of Incorporation provides that no director of
the Company shall be liable to the Company for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for the unlawful payment of dividends on or
redemption of the Company's capital stock, or (iv) for any transaction from
which the director derived an improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is StockTrans, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have 18,028,746 shares of
Common Stock outstanding. Of these shares, the 6,000,000 shares of Common
Stock offered hereby (plus up to 900,000 additional shares if the Underwriters
exercise in full their over-allotment option), will be freely tradeable
without restriction or further registration, except for shares purchased by
"affiliates" or "underwriters" of the Company, as these terms are defined
under the Securities Act, subject to the resale limitations of Rule 144 under
the Securities Act and the regulations promulgated thereunder. The remaining
12,028,746 shares of Common Stock are restricted securities (the "Restricted
Shares") and may not be sold unless they are registered under the Securities
Act or are sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act. Of these 12,028,746
Restricted Shares, 11,489,625 shares will be subject to 180-day "lock-up"
agreements with Lehman Brothers more particularly described below. Upon
expiration of such lock-up agreements, 5,071,500 of the Restricted Shares will
become eligible for sale, subject to compliance with Rule 144. The remaining
6,957,246 Restricted Shares will become eligible for sale at various times
over a period of less than two years. In addition, the shares underlying
certain warrants and options will become eligible for sale subject to
applicable lock-up agreements and compliance with Rule 144.
In general, Rule 144 allows a person who has beneficially owned Restricted
Shares for at least two years, including persons who may be deemed affiliates
of the Company, to sell, within any three-month period, up to the number of
Restricted Shares that does not exceed the greater of (i) one percent of the
then outstanding shares of Common Stock, and (ii) the average weekly trading
volume during the four calendar weeks preceding the date on which notice of
the sale is filed with the Commission. A person who is not deemed to have been
an affiliate of the Company at any time during the 90 days preceding a sale
and who has beneficially owned his or her Restricted Shares for at least three
years would be entitled to sell such Restricted Shares without regard to the
volume limitations described above and certain other conditions of Rule 144.
The Commission has proposed certain amendments to Rule 144 that would reduce
by one year the holding periods required for shares subject to Rule 144 and
144(k) to become eligible for resale in the public market. This proposal, if
adopted, would increase the number of shares of Common Stock eligible for
immediate resale following the expiration of the lock-up agreements described
below. No assurance can be given concerning whether or when the proposal will
be adopted by the Commission.
Under Rule 701, any employee, officer or director or consultant to the
Company who purchased shares pursuant to a written compensatory plan or
contract, including the Employee Plan and the Director Plan, who is not an
affiliate of the Company, is entitled to sell such shares without having to
comply with the public information, holding period, volume limitation or
notice provisions of Rule 144 and permits affiliates to sell such shares
without having to comply with the Rule 144 period restrictions, in each case
commencing 90 days after the Effective Date.
The Company intends to file one or more registration statements under the
Securities Act to register Common Stock to be issued pursuant to the exercise
of options, including options granted or to be granted under the Employee Plan
and the Director Plan.
The holders of approximately 5,418,891 shares of Common Stock upon the
closing of this Offering, and the holders of the Soros/Chatterjee Warrants and
their permitted transferees, are entitled to certain demand and piggy-back
registration rights in respect of their shares. See "Description of Capital
Stock--Registration Rights."
Prior to this Offering, there has been no public market for the securities
of the Company. No predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of a substantial
number of such shares by existing stockholders or by stockholders purchasing
in this Offering could have a negative impact on the market price of the
Common Stock.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCESTO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal tax
consequences of the ownership and disposition of Common Stock by a holder
that, for United States federal income tax purposes, is not a "United States
person" (a "Non-United States Holder"). For purposes of this discussion, a
"United States person" means a citizen or resident alien individual of the
United States, a corporation, partnership or other entity created or organized
in the United States or under the laws of the United States or of any state,
or an estate or trust the income of which may be included in gross income for
United States federal income tax purposes regardless of its source. Resident
alien individuals will be subject to United States federal income tax with
respect to the Common Stock as if they were United States citizens.
The Company has not obtained an opinion of counsel with respect to the tax
consequences discussed below, and nothing contained herein should be construed
as constituting such an opinion. Moreover, this discussion does not consider
any specific facts or circumstances that may apply to a particular Non-United
States Holder. Accordingly, prospective investors are urged to consult their
own tax advisors regarding the United States federal tax consequences of
owning and disposing of Common Stock (including such an investor's status as a
United States person or Non-United States Holder), as well as any tax
consequences that may arise under the laws of any state, municipality or other
taxing jurisdiction, including any foreign taxing jurisdiction.
DIVIDENDS
Dividends paid by the Company to a Non-United States Holder will generally
be subject to withholding of United States federal income tax at the rate of
30% unless the dividend is effectively connected with the conduct of a trade
or business within the United States by the Non-United States Holder, in which
case the dividend will be subject to the same United States federal income tax
on net income that applies to United States persons (and, with respect to
corporate holders and under certain circumstances, the branch profits tax).
Non-United States Holders should consult any applicable United States income
tax treaties, which may provide for reduced withholding or other rules
different from those described above. A Non-United States Holder may be
required to satisfy certain certification requirements in order to claim
treaty benefits or to otherwise claim a reduction of or exemption from
withholding under the foregoing rules, including in the case of dividends
effectively connected with a U.S. trade or business conducted by a Non-United
States Holder.
GAIN ON DISPOSITION
Except under special rules for individuals described below, a Non-United
States Holder generally will not be subject to United States federal income
tax on gain resulting from a sale or other disposition of Common Stock unless
the gain is (i) effectively connected with the conduct of a United States
trade or business by the Non-United States Holder or (ii) treated as
effectively connected with such a trade or business because the Company is or
has been a "United States real property holding corporation" and certain other
conditions are satisfied as discussed below. Any gain from disposition of
Common Stock that is (or is treated as) effectively connected with a United
States trade or business will be subject to substantially the same United
States federal income tax treatment that applies to United States persons
(and, in the case of corporate Non-United States Holders, may be subject to
the branch profits tax), except as otherwise provided by an applicable United
States income tax treaty.
A corporation is generally a "United States real property holding
corporation" for United States federal income tax purposes if the fair market
value of its United States real property interests equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business both within and
outside of the United States. The Company does not believe that it is a United
States real property holding corporation; however, there can be no assurance
that the Company will not become, or be determined to be, such a corporation.
Even if the Company becomes a United States real property holding corporation,
such status will not cause gain from the disposition of Common Stock to be
treated as effectively connected with a United States trade or business so
long as (i) the Common Stock is regularly traded
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on an established securities market (as defined in Treasury Regulations) and
(ii) the Non-United States Holder has not held, directly or indirectly, more
than 5% of the Common Stock at any time during the five-year period ending on
the date of disposition.
Special rules apply to individual Non-United States Holders. An individual
Non-United States Holder who recognizes gain from the disposition of Common
Stock held as a capital asset and is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of
disposition, generally will be taxed at a rate of 30% on any such gain (less
certain capital losses, if any, from United States sources), if the Non-United
States Holder either (i) has a "tax home" in the United States (as defined in
Treasury Regulations) or (ii) maintains an office or other fixed place of
business in the United States to which such gain is attributable. In addition,
certain individual Non-United States Holders who once were United States
citizens may be subject to special rules applicable to United States
expatriates.
In 1990, 1992 and 1995, legislation was introduced that, if enacted, would
under certain circumstances have imposed federal income tax on gain realized
from dispositions of Common Stock by certain Non-United States Holders who
owned, at or prior to, the time of disposition 10% or more of the Common
Stock. There can be no assurance that similar legislation will not be proposed
and, if proposed, enacted in the future.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States federal estate tax purposes and thus
will be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-United States
Holder the amount of dividends paid to, and the tax withheld with respect to,
such holder, regardless of whether any tax was actually withheld because, for
example, the withholding requirement was eliminated under an applicable United
States income tax treaty. That information may also be made available to the
tax authorities of the country in which the Non-United States Holder resides.
United States federal withholding (which generally is imposed at the rate of
31% on certain payments to persons not otherwise exempt who fail to furnish
certain identifying information to the IRS) will generally not apply to
dividends paid to a Non-United States Holder that are subject to withholding
at the 30% rate (or would be so subject but for a reduced rate under an
applicable income tax treaty). In addition, the payer of dividends may rely on
the payee's foreign address in determining that the payee is exempt from
backup withholding, unless the payor has knowledge that the payee is in fact a
United States person.
These backup withholding and information reporting requirements also apply
to the gross proceeds paid to a Non-United States Holder upon the disposition
of Common Stock by or through a United States office of a United States or
foreign broker, unless the holder certifies to the broker under penalties of
perjury as to its name and address and the holder either is a Non-United
States Holder or otherwise establishes an exemption from the requirements.
Information reporting requirements (but not backup withholding) will apply to
a payment of the proceeds of a disposition of Common Stock by or through a
foreign office of (i) a United States broker, (ii) a foreign broker 50% or
more of whose gross income for certain periods is effectively connected with
the conduct of a trade or business in the United States, or (iii) a foreign
broker that is a "controlled foreign corporation" for United States federal
income tax purposes, unless the broker has documentary evidence in its records
that the holder is a Non-United States Holder and certain other conditions are
met, or the holder otherwise established an exemption from the requirements.
Neither backup withholding nor information reporting will generally apply to a
payment of the proceeds of a disposition of Common Stock by or through a
foreign office of a foreign broker not described in the preceding sentence.
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Any amounts withheld under the backup withholding rules will be refunded or
credited against the Non-United States Holder's United States federal income
tax liability, provided that required information is furnished to the IRS.
The U.S. tax rules relating to the 30% withholding on dividends, backup
withholding and information reporting are currently under review by the
Treasury Department and their application to the Common Stock is subject to
change. Specifically, proposed regulations would, if enacted, amend the
ability of the payor to rely on the address of the recipient to determine the
correct withholding of tax. In general, under the proposed regulations a
recipient may be required to provide certain information and documentation to
the payor in order to preclude or reduce otherwise applicable withholdings.
Other changes to the rules described above have also been proposed.
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UNDERWRITING
Under the terms of and subject to the conditions contained in the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, the underwriters
(the "U.S. Underwriters"), for whom Lehman Brothers Inc. and Donaldson, Lufkin
& Jenrette Securities Corporation are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company, and
the Company has agreed to sell to each U.S. Underwriter, the aggregate number
of shares of Common Stock set forth opposite the name of such U.S. Underwriter
below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
Lehman Brothers Inc................................................
Donaldson, Lufkin & Jenrette Securities Corporation................
---
Total..........................................................
===
</TABLE>
Under the terms of and subject to the conditions contained in the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement of which this Prospectus forms a part, the
international managers (the "International Managers"), for whom Lehman
Brothers International (Europe) and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as lead managers (the "Lead Managers"), have severally
agreed to purchase from the Company, and the Company has agreed to sell to
each International Manager, the aggregate number of shares of Common Stock set
forth opposite the name of such Manager below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe).............................
Donaldson, Lufkin & Jenrette Securities Corporation................
---
Total..........................................................
===
</TABLE>
The U.S. Underwriting Agreement and the International Underwriting Agreement
(collectively, the "Underwriting Agreements") provide that the obligations of
the U.S. Underwriters and the International Managers, respectively, to
purchase shares of Common Stock are subject to the approval of certain legal
matters by counsel and to certain other conditions and that, if any of the
shares of Common Stock are purchased by the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement or by the International Managers pursuant to the
International Underwriting Agreement, all the shares of Common Stock agreed to
be purchased by the U.S. Underwriters or the International Managers, as the
case may be, pursuant to their respective Underwriting Agreements must be so
purchased. The initial public offering price and underwriting discounts and
commissions for each of the U.S. Offering and the International Offering are
identical. The closing of each of the U.S. Offering and the International
Offering is conditioned upon the closing of the other.
The Company has been advised by the Representatives and the Lead Managers
that the U.S. Underwriters and the International Managers propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page hereof, and to certain dealers at such public offering price
less a selling
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concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other Underwriters or to certain other brokers or dealers. After the
initial offering to the public, the offering price and other selling terms may
be changed by the Representatives and the Lead Managers.
The Company has granted to the U.S. Underwriters and the International
Managers an option to purchase up to an additional 720,000 shares and 180,000
shares of Common Stock, respectively, exercisable solely to cover over-
allotments, at the initial offering price to the public, less the underwriting
discounts and commissions, shown on the cover page of this Prospectus. Any or
all of such options may be exercised at any time until 30 days after the date
of the U.S. Underwriting Agreement and the International Underwriting
Agreement, as the case may be. To the extent that an option is exercised, each
U.S. Underwriter or International Manager, as the case may be, will be
committed, subject to certain conditions, to purchase a number of the
additional shares of Common Stock proportionate to such Underwriter's initial
commitment as indicated in the preceding tables.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers (the "Agreement
Between") pursuant to which each U.S. Underwriter has agreed that, as part of
the distribution of the shares of Common Stock offered in the United States
and Canada, (a) it is not purchasing any of such shares for the account of
anyone other than a U.S. or Canadian Person (as defined below) and (b) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any prospectus relating to such
shares to anyone other than a U.S. or Canadian Person. In addition, pursuant
to the Agreement Between, each International Manager has agreed that, as part
of the distribution of the shares of Common Stock offered outside the United
States and Canada, (a) it is not purchasing any of such shares for the account
of any U.S. or Canadian Person and (b) it has not offered or sold, and will
not offer, sell, resell or deliver, directly or indirectly, any of such shares
or distribute any prospectus relating to such shares to any U.S. or Canadian
Person.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between, including (i) certain purchases and sales between the U.S.
Underwriters and the International Managers; (ii) certain offers, sales,
resales, deliveries or distributions to or through investment advisors or
other persons exercising investment discretion; (iii) purchases, offers or
sales by a U.S. Underwriter who is also acting as an International Manager for
the account of a Person other than a U.S. or Canadian Person and by an
International Manager who is also acting as a U.S. Underwriter for the account
of a U.S. or Canadian Person; and (iv) other transactions specifically
approved by the U.S. Underwriters and International Managers. As used herein,
"U.S. or Canadian Person" means any resident or citizen of the United States
or Canada, any corporation, partnership or other entity created or organized
in or under the laws of the United States or Canada or any political
subdivision thereof or any estate or trust the income of which is subject to
United States federal income taxation or Canadian income taxation regardless
of the source (other than the foreign branch of any U.S. or Canadian Person),
and includes any United States or Canadian branch of a person other than a
U.S. or Canadian Person. The term "United States" means the United States of
America (including the states thereof and the District of Columbia) and its
territories, its possessions and other areas subject to its jurisdiction and
the term "Canada" means Canada, its provinces, territories, possessions and
other areas subject to its jurisdiction.
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
public offering price as then in effect for Common Stock being sold by the
U.S. Underwriters and International Managers, less an amount not greater than
the selling concession unless otherwise determined by mutual agreement. To the
extent that there are sales pursuant to the Agreement Between, the number of
shares initially available for sale by the U.S. Underwriters or by the
International Managers may be more or less than the amount specified on the
cover page of this Prospectus.
The Representatives and the Lead Managers have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
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The Prospectus is not, and under no circumstances is to be construed as, an
advertisement or a public offering of Common Stock in Canada or any province
or territory thereof. Any offer or sale of the shares of Common Stock in
Canada may only be made pursuant to an exemption from the requirement to file
a prospectus in the province or territory of Canada in which such offer or
sale is made.
Each International Manager has represented and agreed that (i) it has not
offered or sold and prior to the date six months after the date of issue of
the shares of Common Stock will not offer or sell any shares of Common Stock
to persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995; (ii) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 (the "1986 Act") with
respect to anything done by it in relation to the shares of Common Stock in,
from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on, and will only issue and pass on to any person in the United
Kingdom, any investment advertisement (within the meaning of the 1986 Act)
relating to the shares of Common Stock if that person falls within Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995.
No action has been taken or will be taken in any jurisdiction by the Company
or the International Managers that would permit a public offering of the
shares offered pursuant to the Offering in any jurisdiction where action for
that purpose is required, other than the United States. Persons into whose
possession this Prospectus comes are required by the Company and the
International Managers to inform themselves about, and to observe any
restrictions as to, the offering of the shares offered pursuant to the
Offerings and the distribution of this Prospectus.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the
cover page hereof.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to reimburse certain expenses of the Underwriters.
The Company and its stockholders, including all directors and officers,
subject to certain exceptions, have agreed not to, directly or indirectly,
offer for sale, sell or otherwise dispose of or announce the Offering of, any
shares of Common Stock for a period of 180 days after the date of this
Prospectus, without the prior written consent of Lehman Brothers Inc.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "PRTL."
DETERMINATION OF THE OFFERING PRICE
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiations among the Company, the Representatives and the Lead Managers.
Among the factors to be considered in such negotiations will be prevailing
market conditions, the market values of publicly traded companies that the
Underwriters believed to be somewhat comparable to the Company, the demand for
the Common Stock and for similar securities of companies comparable to the
Company, the current state of the Company's development and other factors
deemed relevant. There can, however, be no assurance that the prices at which
the Common Stock will sell in the public market after the Offering will not be
lower than the price at which it will be sold in the Offering.
77
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by Pepper, Hamilton & Scheetz, Philadelphia, Pennsylvania
and for the Underwriters by Shearman & Sterling, New York, New York. Mr. John
DePodesta, "of counsel" to Pepper, Hamilton & Scheetz, is a director and an
Executive Vice President of the Company, and the beneficial owner of 319,690
shares of Common Stock.
EXPERTS
The Consolidated Financial Statements of the Company as of December 31, 1994
and 1995, and for the period from inception (February 4, 1994) to December 31,
1994 and the year ended December 31, 1995 included in this Prospectus, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein. Such Consolidated Financial Statements have
been included herein in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The Financial Statements of Axicorp, as of March 31, 1995 and 1996, and for
the nine months ended March 31, 1995 and the twelve months ended March 31,
1996 included in this Prospectus and in the Registration Statement have been
audited by Price Waterhouse, independent chartered accountants, as indicated
in their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995 and June
30, 1996 (unaudited)................................................... F-3
Consolidated Statements of Operations for the period from February 4,
1994 (inception) to December 31, 1994, the year ended December 31, 1995
and the six months ended June 30, 1995 (unaudited) and 1996
(unaudited)............................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the period
from February 4, 1994 (inception) to December 31, 1994, the year ended
December 31, 1995 and the six months ended June 30, 1996 (unaudited)... F-5
Consolidated Statements of Cash Flows for the period from February 4,
1994 (inception) to December 31, 1994, the year ended December 31, 1995
and the six months ended June 30, 1995 (unaudited) and 1996
(unaudited)............................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
AXICORP PTY., LTD.:
Report of Independent Accountants....................................... F-16
Balance Sheets as of March 31, 1995 and 1996............................ F-17
Statements of Operations for the nine months ended March 31, 1995 and
for the twelve months ended March 31, 1996............................. F-18
Statements of Stockholders' Equity for the nine months ended March 31,
1995 and for the twelve months ended March 31, 1996.................... F-19
Statements of Cash Flows for the nine months ended March 31, 1995 and
for the twelve months ended March 31, 1996............................. F-20
Notes to Financial Statements........................................... F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Primus Telecommunications Group, Incorporated:
We have audited the accompanying consolidated balance sheets of Primus
Telecommunications Group, Incorporated and subsidiaries as of December 31,
1994 and 1995, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the period from February 4,
1994 (date of incorporation) to December 31, 1994 and for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Primus Telecommunications
Group, Incorporated and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for the period from
February 4, 1994 (date of incorporation) to December 31, 1994 and the year ended
December 31, 1995, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
April 23, 1996, except for Note 13
and Note 14, as to which the dates
are July 31, 1996 and October 3, 1996,
respectively
F-2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 220,904 $ 2,295,843 $ 4,397,604
Accounts receivable (net of allowance
of $132,353 at December 31, 1995 and
$1,605,570 (unaudited) at June 30,
1996)................................. -- 664,697 24,848,696
Prepaid expenses and other current as-
sets.................................. 42,743 388,263 557,103
--------- ----------- ------------
Total current assets................. 263,647 3,348,803 29,803,403
PROPERTY AND EQUIPMENT--Net.............. 116,919 948,876 5,570,230
INTANGIBLES--Net......................... -- -- 22,002,091
DEFERRED INCOME TAXES.................... -- -- 4,211,808
OTHER ASSETS............................. 106,250 743,932 709,278
--------- ----------- ------------
TOTAL ASSETS............................. $ 486,816 $ 5,041,611 $ 62,296,810
========= =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable....................... $ 92,273 $ 1,284,341 $ 25,329,431
Accrued expenses and other current lia-
bilities.............................. 122,300 667,748 3,501,252
Due to related party................... 330,850 -- --
Deferred income taxes.................. -- -- 4,737,298
Current portion of long-term obliga-
tions................................. 12,882 101,804 10,626,541
--------- ----------- ------------
Total current liabilities............ 558,305 2,053,893 44,194,522
LONG-TERM OBLIGATIONS.................... -- 425,866 6,302,152
--------- ----------- ------------
Total liabilities.................... 558,305 2,479,759 50,496,674
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value--
2,455,000 shares authorized; issued
and outstanding, 455,000 shares of
Series A Convertible (unaudited) at
June 30, 1996......................... -- -- 4,550
Common stock, $.01 par value--
authorized 16,905,000 shares in 1994
and 1995; 35,348,355 shares
(unaudited) June 30, 1996; issued and
outstanding, 4,039,737 shares in 1994;
7,063,491 shares in 1995; 9,524,392
shares (unaudited) at June 30, 1996... 40,397 70,635 95,244
Additional paid-in capital............. 465,394 5,496,216 17,985,238
Accumulated deficit.................... (577,280) (3,002,518) (6,234,944)
Cumulative translation adjustment...... -- (2,481) (49,952)
--------- ----------- ------------
Total stockholders' equity (defi-
cit)................................ (71,489) 2,561,852 11,800,136
--------- ----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)........................ $ 486,816 $ 5,041,611 $ 62,296,810
========= =========== ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 4, SIX MONTHS ENDED
1994 TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -----------------------
1994 1995 1995 1996
------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUE................. $ -- $ 1,167,058 $ 221,441 $65,414,924
COST OF REVENUE............. -- 1,383,763 203,284 60,162,429
---------- ----------- ---------- -----------
GROSS MARGIN (DEFICIT)...... -- (216,705) 18,157 5,252,495
OPERATING EXPENSES:
Selling, general, and ad-
ministrative............. 556,545 2,024,383 714,710 6,707,373
Depreciation and amortiza-
tion..................... 12,474 160,024 64,764 797,421
---------- ----------- ---------- -----------
Total operating ex-
penses................. 569,019 2,184,407 779,474 7,504,794
---------- ----------- ---------- -----------
LOSS FROM OPERATIONS........ (569,019) (2,401,112) (761,317) (2,252,299)
INTEREST EXPENSE............ (13,028) (58,732) (33,168) (334,775)
INTEREST INCOME............. 4,767 34,606 1,405 85,191
OTHER INCOME (EXPENSE)...... -- -- -- (268,120)
---------- ----------- ---------- -----------
LOSS BEFORE INCOME TAXES.... (577,280) (2,425,238) (793,080) (2,770,003)
INCOME TAXES................ -- -- -- (462,423)
---------- ----------- ---------- -----------
NET LOSS.................... $ (577,280) $(2,425,238) $ (793,080) $(3,232,426)
========== =========== ========== ===========
NET LOSS PER COMMON AND
COMMON SHARE EQUIVALENTS... $ (.04) $ (.18) $ (.06) $ (.23)
========== =========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING.... 10,014,032 12,338,313 12,170,846 13,497,468
========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL CUMULATIVE STOCKHOLDERS'
--------------- ------------------ PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
------- ------- --------- -------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, FEBRUARY 4,
1994 (DATE OF
INCORPORATION)......... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of "founder's
stock" to the
Company's
incorporator.......... -- -- 178,574 1,786 (1,258) -- -- 528
Investment made by
Chairman and Chief
Executive Officer..... -- -- 3,392,905 33,929 216,071 -- -- 250,000
Common shares issued
for services
performed............. -- -- 71,430 714 4,549 -- -- 5,263
Shares purchased by
outside investors in
the form of a trust... -- -- 396,828 3,968 246,032 -- -- 250,000
Net loss............... -- -- -- -- -- (577,280) -- (577,280)
------- ------- --------- -------- ------------ ------------ --------- ------------
BALANCE, DECEMBER 31,
1994................... -- -- 4,039,737 40,397 465,394 (577,280) -- (71,489)
Common shares sold
through private
placement, net of
transaction costs..... -- -- 2,233,817 22,338 3,995,497 -- -- 4,017,835
Conversion of related
party debt to common
stock................. -- -- 555,559 5,556 344,444 -- -- 350,000
Common shares issued
for services
performed............. -- -- 234,378 2,344 690,881 -- -- 693,225
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (2,481) (2,481)
Net loss............... -- -- -- -- -- (2,425,238) -- (2,425,238)
------- ------- --------- -------- ------------ ------------ --------- ------------
BALANCE, DECEMBER 31,
1995................... -- -- 7,063,491 70,635 5,496,216 (3,002,518) (2,481) 2,561,852
Common shares sold
through private
placement, net of
transaction costs
(unaudited)........... -- -- 1,771,194 17,712 4,665,645 -- -- 4,683,357
Common shares sold, net
of transaction costs
(unaudited)........... -- -- 410,808 4,108 1,380,836 -- -- 1,384,944
Common shares issued
for services performed
(unaudited)........... -- -- 278,899 2,789 987,091 -- -- 989,880
Preferred shares issued
for Axicorp
acquisition
(unaudited)........... 455,000 4,550 -- -- 5,455,450 -- -- 5,460,000
Foreign currency
translation adjustment
(unaudited)........... -- -- -- -- -- -- (47,471) (47,471)
Net loss (unaudited)... -- -- -- -- -- (3,232,426) -- (3,232,426)
------- ------- --------- -------- ------------ ------------ --------- ------------
BALANCE, JUNE 30, 1996
(UNAUDITED)............ 455,000 $ 4,550 9,524,392 $ 95,244 $ 17,985,238 $ (6,234,944) $ (49,952) $ 11,800,136
======= ======= ========= ======== ============ ============ ========= ============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 4, SIX MONTHS ENDED
1994 TO YEAR ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------ ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss.................. $(577,280) $(2,425,238) $(793,080) $(3,232,426)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization........... 12,474 160,024 64,763 790,420
Sales allowances........ -- 132,353 -- 614,738
Foreign currency
transaction loss....... -- -- -- 268,120
Deferred income taxes... -- -- -- 299,962
Changes in assets and
liabilities:
(Increase) decrease in
accounts receivable.. -- (797,050) (199,200) (8,040,516)
(Increase) decrease in
prepaid expenses and
other current
assets............... (42,743) (26,925) (46,703) (53,862)
(Increase) decrease in
deferred costs....... (25,000) (35,234) -- --
(Increase) decrease in
other assets......... (81,453) (532,530) (98,250) (213,920)
Increase (decrease) in
accounts payable..... 92,273 1,194,991 209,442 4,717,673
Increase (decrease) in
accrued expenses and
other liabilities.... 135,656 321,697 246,069 614,686
--------- ----------- --------- -----------
Net cash used in
operating
activities......... (486,073) (2,007,912) (616,959) (4,235,125)
--------- ----------- --------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and
equipment................ (105,547) (396,281) (88,116) (1,452,340)
Cash used in business
acquisition, net of cash
acquired................. -- -- -- (1,700,674)
--------- ----------- --------- -----------
Net cash used in
investing
activities......... (105,547) (396,281) (88,116) (3,153,014)
--------- ----------- --------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
capital lease............ (2,230) (63,595) (31,948) (35,486)
Principal borrowed from
Chairman and Chief
Executive Officer........ 314,754 -- -- --
Sale of common stock...... 500,000 4,542,727 964,591 7,376,776
Proceeds from notes
payable--related party... -- -- -- 2,000,000
--------- ----------- --------- -----------
Net cash provided by
financing
activities......... 812,524 4,479,132 932,643 9,341,290
--------- ----------- --------- -----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS................ -- -- -- 148,610
--------- ----------- --------- -----------
NET INCREASE IN CASH........ 220,904 2,074,939 227,568 2,101,761
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD........ -- 220,904 220,904 2,295,843
--------- ----------- --------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD.............. $ 220,904 $ 2,295,843 $ 448,472 $ 4,397,604
========= =========== ========= ===========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for interest.... $ -- $ 36,249 $ 14,397 $ 39,354
--------- ----------- --------- -----------
Non-cash investing and
financing activities:
Common stock issued for
services............... $ 5,263 $ 693,225 $ -- $ 989,880
--------- ----------- --------- -----------
Conversion of related
party debt to common
stock.................. $ -- $ 350,000 $ 350,000 $ --
--------- ----------- --------- -----------
Increase in capital
lease liability for
acquisition of property
and equipment.......... $ 15,112 $ 578,381 $ 543,689 $ 168,302
--------- ----------- --------- -----------
Increase in notes
payable for acquisition
of switch equipment.... $ -- $ -- $ -- $ 2,362,500
--------- ----------- --------- -----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Primus Telecommunications Group, Incorporated (the "Company"), formerly
Global Telecommunications, Inc., was incorporated in Delaware in February
1994. The Company was formed to capitalize on the increase in business and
consumer demand for international telecommunication services. The Company
operates as a holding company and currently has wholly-owned subsidiaries in
the United States, United Kingdom, Australia, and Mexico. Subsequent to
December 31, 1995, the Company purchased all of the outstanding capital stock
of Axicorp, Pty., Ltd. ("Axicorp"), an Australian telecommunications company
(see Note 12).
In 1994, the Company, as a development stage enterprise, was involved in
various start-up activities including raising capital, obtaining licenses,
acquiring equipment, leasing space, developing markets, and recruiting and
training personnel. During 1995, the Company began revenue generating
operations and is no longer in the development stage.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All
intercompany accounts and transactions have been eliminated.
Revenue Recognition--Revenues from long distance telecommunications services
are recognized when the services are provided.
Cost of Revenue--Cost of revenue includes network costs which consist of
access, transport, and termination costs. Such costs are recognized when
incurred in connection with the provision of telecommunications services.
Foreign Currency Translation--The assets and liabilities of the Company's
foreign subsidiaries are translated at the exchange rates in effect on the
reporting date, and income and expenses are translated at the average exchange
rate during the period. The net effect of such translation gains and losses
are accumulated as a separate component of stockholders' equity. Foreign
currency transaction gains and losses are included in Other Income (Expense)
in the consolidated statements of operations.
Cash and Cash Equivalents--The Company considers cash on hand, deposits in
banks, certificates of deposit, and overnight repurchase agreements with
original maturities of three months or less as cash and cash equivalents.
Property and Equipment--Property and equipment, which consists of furniture,
leasehold improvements, and telecommunications equipment, is stated at cost
less accumulated depreciation and amortization. Expenditures for maintenance
and repairs that do not materially extend the useful lives of the assets are
charged to expense. Depreciation and amortization are computed using the
straight-line method over estimated useful lives of the assets, less their net
salvage value, which range from three to eight years, or for leasehold
improvements and leased equipment, over the terms of the leases, whichever is
shorter.
Intangible Assets--At June 30, 1996, intangible assets consist of goodwill
of $17,733,000 (unaudited) and customer lists of $4,269,000 (unaudited).
Goodwill is being amortized over 30 years on a straight-line basis and
customer lists over the estimated run-off of the customer base not to exceed
five years. Accumulated amortization at June 30, 1996, was $199,248
(unaudited) and $304,920 (unaudited) related to the goodwill and customer
lists, respectively.
F-7
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements--As of January 1, 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
The adoption had no effect on the financial position or results of operations
of the Company. SFAS No. 123, Accounting for Stock Based Compensation, becomes
effective and will be adopted by the Company as of December 31, 1996. The
Company does not plan to adopt the recognition and measurement provisions of
SFAS No. 123.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of net revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to concentration of credit risk principally consists of trade
accounts receivable. The Company's six largest customers account for
approximately 52% of gross accounts receivable as of December 31, 1995. At
June 30, 1996, no customer accounted for more than 10% (unaudited) of accounts
receivable. The Company performs ongoing credit evaluations of its customers
but generally does not require collateral to support customer receivables.
Losses on uncollectible accounts have consistently been within management's
expectations.
Income Taxes--The Company recognizes income tax expense for book purposes
following the asset and liability approach for computing deferred income
taxes. Under this method, the deferred tax asset and liability are determined
based on the difference between financial reporting and tax basis of assets
and liabilities. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
Deferred Costs--Legal, investment banking, and other incremental costs
associated with raising capital are recorded as deferred costs and are
included in Other Assets on the consolidated balance sheet. Such costs are
subsequently netted against the proceeds of the stock offerings to which they
relate. In the event that the offering is not successful, such costs would be
written off to operations in the period in which the related offering is
abandoned. Such amounts total $30,263 and $60,125 at December 31, 1994 and
1995, respectively. Subsequent to December 31, 1995, these costs have been
netted against the respective transactions. The Company has also capitalized
$92,609 related to the Axicorp acquisition at December 31, 1995 (see Note 12).
Such amounts were included in the purchase price accounting at acquisition.
There are no deferred costs included in the consolidated balance sheet at June
30, 1996 (unaudited).
Net Loss Per Share--Net loss per common and common share equivalents at the
effective date of the Registration Statement will be computed based upon the
weighted average number of common and common share equivalents, outstanding
during each period. Common share equivalents consist of stock options and
warrants calculated using the modified treasury stock method. Retroactive
restatement has been made to share and per share amounts for the 3.381 to one
stock split and conversion of Series A Convertible Preferred Stock
contemplated by the Company as part of its initial public offering. Primary
and fully diluted loss per share are the same. Pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83, common stock and options
to purchase common stock issued subsequent to August 27, 1995 at prices below
the assumed initial public offering price will be included as outstanding for
all periods presented, using the modified treasury stock method at the assumed
initial public offering price of $15 per share even though the effect is to
reduce the net loss per share.
Interim Financial Information--The interim financial data as of June 30,
1996 and for the six-month periods ended June 30, 1995 and 1996, is unaudited.
The information reflects all adjustments, consisting only of normal recurring
adjustments that, in the opinion of management, are necessary to present
fairly the financial position and results of operations of the Company for the
periods indicated. Results of operations for the interim periods are not
necessarily indicative of the results of operations for the full year.
F-8
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Network equipment........................ $ -- $ 849,062 $5,237,817
Furniture and equipment.................. 55,625 161,071 417,701
Billing system software.................. -- -- 153,398
Leasehold improvements................... 68,302 88,457 174,182
-------- ---------- ----------
123,927 1,098,590 5,983,098
Less: Accumulated depreciation and amor-
tization................................ (7,008) (149,714) (412,868)
-------- ---------- ----------
$116,919 $ 948,876 $5,570,230
======== ========== ==========
</TABLE>
Equipment under capital leases totaled $578,382 and $746,685 (unaudited)
with accumulated depreciation of $75,501 and $130,956 (unaudited) at December
31, 1995 and June 30, 1996, respectively.
4. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
-------- --------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Obligations under capital leases........ $ 12,882 $ 527,670 $ 643,682
Equipment financing..................... -- -- 2,362,500
Note payable--related party............. -- -- 2,000,000
Notes payable relating to Axicorp acqui-
sition................................. -- -- 8,378,761
Settlement obligation................... -- -- 3,543,750
-------- --------- ------------
Subtotal.............................. 12,882 527,670 16,928,693
Less: Current portion of long-term obli-
gations................................ (12,882) (101,804) (10,626,541)
-------- --------- ------------
$ -- $ 425,866 $ 6,302,152
======== ========= ============
</TABLE>
At June 30, 1996, the following describes the components of long-term
obligations (unaudited):
Equipment financing represents the purchase of network switching
equipment for use in its Australian network financed by the vendor.
Beginning in January 1997, 16 monthly payments of approximately $100,000
are due to the vendor. In addition, a payment of approximately $788,000
plus accrued interest is due in May 1998. Interest will accrue at the
Corporate Overdraft Reference Rate plus 1%. At June 30, 1996, the Corporate
Overdraft Reference Rate was 10.75%. The debt is secured by all of the
assets of the Company's Australian subsidiary.
In connection with an investment agreement, in February 1996 the Company
issued a $2,000,000 note payable to Teleglobe, due February 9, 1998 which
bears interest at 6.9% per annum payable quarterly. The debt is secured by
all the assets of the Company.
In connection with the acquisition of Axicorp on March 1, 1996, the
Company issued two notes to the sellers for a total of $8.4 million which
have been recorded on a discounted basis at a rate of 10.18% (see Note 12).
In addition, in conjunction with the Axicorp acquisition, the Company
accrued approximately $3.5 million to settle a pre-acquisition contingency
between Axicorp and one of its competitors. This amount is expected to be
paid during the next year.
F-9
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
The tax expense (deferred) recorded for the six-month period ended June 30,
1996 results from foreign taxes on earnings at the Company's Australian
subsidiary.
The differences between the tax provision (benefit) calculated at the
statutory federal income tax rate and the actual tax provision (benefit) for
each period is shown in the table below.
<TABLE>
<CAPTION>
PERIOD ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- ----------------------
1994 1995 1995 1996
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Tax benefit at federal statu-
tory rate.................... $ (196,275) $ (824,581) $ (268,967) $ (941,801)
State income tax, net of fed-
eral benefit................. (22,860) (91,069) (30,852) (108,030)
Foreign taxes................. -- -- -- 462,423
Unrecognized benefit of net
operating loss............... 218,659 911,036 297,566 1,040,502
Other......................... 476 4,614 2,253 9,329
---------- ---------- ---------- ----------
Income taxes.................. $ -- $ -- $ -- $ 462,423
========== ========== ========== ==========
</TABLE>
The significant components of the Company's deferred tax asset and liability
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax asset (non-current):
Cash to accrual basis adjustments
(U.S.)............................. $ 93,012 $ 366,783 $ --
Accrued expenses.................... -- -- 824,006
Net operating loss carryforward..... 126,435 720,452 5,370,862
Valuation allowance................. (219,447) (1,087,235) (1,983,060)
--------- ----------- -----------
$ -- $ -- $ 4,211,808
========= =========== ===========
Deferred tax liability (current):
Accrued income...................... $ -- $ -- $ 4,158,040
Cash to accrual basis adjustments
(U.S.)............................. -- -- 454,677
Depreciation........................ -- -- 124,581
--------- ----------- -----------
$ -- $ -- $ 4,737,298
========= =========== ===========
</TABLE>
At December 31, 1995, the Company had a U.S. Federal net operating loss
carryforward of approximately $2,000,000, ($6,000,000 (unaudited) at June 30,
1996) that may be applied against future U.S. taxable income until it expires
between the years 2009 and 2010. The Company also has an Australian Federal
net operating loss carryforward of approximately $8.5 million (unaudited) at
June 30, 1996.
Due to the "ownership change" of the Company in early 1996, pursuant to
Section 382 of the Internal Revenue Code, the utilization of the net operating
loss carryforward will be limited to approximately $1.3 million per year
during the carryforward period. A further "ownership change" resulting from
the Company's planned initial public offering (see Note 13) could cause
further limitations.
F-10
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents--The carrying amount reported in the balance
sheets for cash and cash equivalents approximates fair value.
Accounts Receivable and Accounts Payable--The carrying amounts reported
in the balance sheets for accounts receivable and accounts payable
approximate fair value.
Guarantee Required Under Telecommunications Agreement--The carrying
amount reported in the balance sheets for the deposit held in the form of a
certificate of deposit (see Note 7) approximates fair value plus accrued
interest.
7. COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment contract with its Chairman and
Chief Executive Officer through May 30, 1999. Minimum payments over the
remaining period approximate $632,000 as of December 31, 1995 and $540,000
(unaudited) as of June 30, 1996.
Future minimum lease payments under capital lease obligations and operating
leases as of December 31, 1995, are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ --------- ---------
<S> <C> <C>
1996................................................... $ 158,113 $ 246,089
1997................................................... 158,113 124,121
1998................................................... 158,113 --
1999................................................... 158,113 --
2000................................................... 39,533 --
--------- ---------
Total minimum lease payments........................... 671,985 $ 370,210
=========
Less: Amount representing interest..................... (144,315)
---------
$ 527,670
=========
</TABLE>
Rent expense under operating leases was $37,709, $214,508, $72,111
(unaudited) and $223,347 (unaudited) for the periods ended December 31, 1994,
December 31, 1995, June 30, 1995, and June 30, 1996, respectively.
The Company began sending outbound traffic to India during 1995 and, in
connection with its international telecommunication services agreement with
Videsh Sanchar Nigan Limited of India, was required to provide a bank
guarantee of $400,000 in the form of a certificate of deposit that is included
in Other Assets at December 31, 1995.
8. STOCKHOLDERS' EQUITY
The Company was incorporated in February 1994 through the issuance of
178,574 shares of common stock issued to the founder of the Company.
In January 1995, the Company established an Employee Stock Option Plan (the
"Employee Plan"). The total number of shares of common stock authorized to be
issued under the Employee Plan was 845,250. Under the Employee Plan, awards
may be granted to key employees of the Company and its subsidiaries in the
form of Incentive Stock Options or Nonqualified Stock Options. The Employee
Plan allows the granting of options at an
F-11
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise price of no less than 100% (110% in the case of Incentive Stock
Options granted to employees holding more than ten percent of the voting stock
of the Company at the date of grant) of the stock's fair value at the date of
grant. The options vest over a period of up to three years, and no option will
be exercisable more than ten years from the date it is granted. There were
326,097 shares of common stock that remain eligible for future issuance under
the Employee Plan at December 31, 1995. Subsequent to year end, an additional
845,250 shares of common stock were authorized to be issued under the Employee
Plan.
Effective March 13, 1995, the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") was amended to increase the number of
authorized shares of the Company's common stock from 1,000,000 shares to
5,000,000 shares and to split each share of common stock outstanding on March
13, 1995, into 2.1126709 shares of common stock. The Company also intends to
split all common shares at a ratio of 3.381 to one as of the effective date of
its planned initial public offering (see Note 14). All share amounts have been
restated to give effect to the stock splits.
In December 1995, $358,500 was committed to the Company in exchange for
121,209 shares of the Company's common stock in conjunction with a private
placement. The shares were sold in December 1995 and the physical certificates
were issued in January 1996. This amount, net of transaction costs, is
recorded in Prepaid Expenses and Other Current Assets at December 31, 1995.
During 1995, the Board of Directors authorized the Director Stock Option
Plan (the "Director Plan") for nonemployee directors. Under the Director Plan,
an option is automatically granted to each nonemployee director to purchase
50,715 shares of common stock, which vests over a two-year period. The option
price per share is the fair market value of a share of common stock on the
date the option is granted. No option will be exercisable more than ten years
from the date of grant. An aggregate of 338,100 shares of common stock were
reserved for issuance under the Director Plan.
A summary of stock option activity during the year ended December 31, 1995,
and the six months ended June 30, 1996, is as follows:
<TABLE>
<CAPTION>
EMPLOYEE PLAN DIRECTOR PLAN
--------------------- ---------------------
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE RANGE SHARES PRICE RANGE
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding, January 1, 1995...... -- $ -- -- $ --
Granted during 1995............... 519,153 0.67-2.96 202,860 2.96
--------- ---------- ------- -----
Outstanding, December 31, 1995.... 519,153 0.67-2.96 202,860 2.96
Granted during the six-months
ended June 30, 1996 (unaudited).. 913,546 2.96-3.55 -- --
--------- ---------- ------- -----
Outstanding, June 30, 1996
(unaudited)...................... 1,432,699 $0.67-3.55 202,860 $2.96
========= ========== ======= =====
Exercisable options at December
31, 1995......................... 152,145 $ 2.96 67,620 $2.96
========= ========== ======= =====
Exercisable options at June 30,
1996 (unaudited)................. 185,955 $0.67-2.96 67,620 $2.96
========= ========== ======= =====
</TABLE>
No shares have been exercised as of December 31, 1995.
9. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) employee benefit plan (the "401(k) Plan") that
covers substantially all employees. The 401(k) Plan provides that employees
may contribute amounts not to exceed statutory limitations. No employer
contributions were made during 1995 or for the six months ended June 30, 1996
(unaudited).
F-12
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTIES
In connection with capital raised by the Company, a former director of the
Company received 71,430 shares of common stock during 1994 for services
rendered. During 1995, the former director received commissions of 110,944
shares of common stock and was paid $541,921 in connection with the Company's
first private placement. Commissions due to the former director under the
first private placement equal $40,510 at December 31, 1995. Consulting fees
earned under this placement equal to $169,000 are due to the former director,
of which $145,000 was owed at December 31, 1995. During early 1996, the same
director received 82,774 shares of common stock and fees equal to $424,543
which relate to the second private placement (see Note 12). Consulting fees
earned in connection with this second placement equal $157,160. The stock and
cash commissions and consulting fees relate to services provided in
conjunction with the private placements and, as such, have been netted against
the proceeds of the respective placements.
Debt owed to the Company's Chairman and Chief Executive Officer of $330,850
at December 31, 1994 was converted into 555,559 shares of the Company's common
stock at $0.63 per share in March 1995, for a balance due at the time of
conversion of $350,000.
At December 31, 1994 and 1995, deferred salary owed to the Company's
Chairman and Chief Executive Officer was $112,598 and $201,341, respectively.
Deferred salary of $40,000 owed to an officer of the Company for services
performed during 1995 were accrued at December 31, 1995. This balance was paid
in early 1996.
During 1995, the Company purchased consulting services and certain computer
network equipment from a firm whose president is a brother of the Company's
Chairman and Chief Executive Officer for approximately $40,000.
11. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance for doubtful accounts for the year ended
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF PERIOD COSTS AND EXPENSES DEDUCTIONS END OF PERIOD
------------------- ------------------ ---------- -------------
<S> <C> <C> <C>
$ -- $132,353 $ -- $132,353
</TABLE>
12. SUBSEQUENT EVENTS
Capital Stock--In February 1996, the Company's Certificate was amended to
authorize 2,455,000 shares of Preferred Stock (nonvoting) with a par value of
$0.01 per share and to increase the number of shares of Common Stock
authorized to 35,348,355 shares with a par value of $0.01 per share. On March
1, 1996, 455,000 shares of Series A Convertible Preferred Stock were issued in
connection with the purchase of Axicorp; and are convertible into common
shares at the option of the Company and under certain defined events.
Private Placement--In early 1996, the Company raised approximately
$4,700,000, net of transaction costs, in a private placement. This placement
included the sale of 1,771,194 shares of common stock to numerous investors.
The Company also issued 278,899 shares of common stock for services rendered
in conjunction with this offering.
Investment Agreement--In January 1996, the Company entered into an agreement
with Teleglobe, sold 410,808 shares of Common Stock for approximately
$1,400,000 and borrowed $2,000,000 (see Note 4).
F-13
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Acquisition of Axicorp--On March 1, 1996, the Company completed the
acquisition of the outstanding capital stock of Axicorp, the fourth largest
telecommunications carrier in Australia. The purchase price consisted of cash,
Company stock, and seller financing. The Company paid $5.7 million cash,
including transaction costs, and issued 455,000 shares of its Series A
Convertible Preferred Stock. The Company also issued two notes to the sellers.
One note is for $4.1 million payable to Fujitsu Australia Limited which is due
in February 1997, and the other note is for a total of $4.0 million payable to
the individual shareholder sellers, which are due in two equal installments in
February 1997, and February 1998. These notes have been recorded at their
discounted value at the date of acquisition at an interest rate of 10.18%. The
portion of the shareholder note due in February 1997 can be extended for an
additional year at the Company's option. If the option is exercised the note
will accrue interest at the prime rate plus 1%.
As security for payment of the Seller Financing, the sellers have collateral
security interests in all of the outstanding Axicorp shares, 27% as registered
owner, which will be registered in the Company's name upon payment of the
Seller Financing, and 73% pursuant to a share mortgage. In turn, the Company
is holding 248,334 shares of the Series A Convertible Preferred Stock issued
to the individual sellers as collateral for the 27% of the Axicorp shares
registered in their names. These shares will be released to the sellers once
the remaining Axicorp shares are received.
For accounting purposes, the Company has treated the acquisition as a
purchase. Accordingly, the results of Axicorp's operations are included in the
consolidated results of operations of the Company beginning March 1, 1996.
Pro forma operating results for the year ended December 31, 1995, and the
six months ended June 30, 1996, as if Axicorp had been acquired as of January
1, 1995, are as follows (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1995 1996
------------ --------------
<S> <C> <C>
Net revenue..................................... $125,628,000 $ 91,783,000
Net loss........................................ $ (4,685,000) $ (3,299,000)
Loss per share.................................. $ (.35) $ (.23)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would
have occurred had the acquisition been consummated as of the above dates, nor
are they necessarily indicative of future operations.
The following summarizes the allocation of the purchase price to the major
categories of assets acquired and liabilities assumed:
<TABLE>
<S> <C>
Current assets................................................. $ 20,136,000
Customer lists................................................. 4,574,000
Goodwill....................................................... 17,932,000
Other assets................................................... 1,506,000
------------
44,148,000
Liabilities assumed............................................ (24,863,000)
Notes payable.................................................. (8,110,000)
------------
Cash paid and preferred shares issued.......................... $ 11,175,000
============
</TABLE>
F-14
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. PRIVATE EQUITY PLACEMENT
On July 31, 1996 four affiliated institutional investors purchased 965,999
shares of the Company's common stock for $8 million, and for an additional $8
million received warrants to purchase an additional $10 million of common
stock (measured on the basis of fair market value of the common stock on the
date of exercise) and up to another 627,899 shares of Common Stock.
14. COMMON STOCK SPLIT AND CONVERSION OF PREFERRED STOCK
In connection with the Company's planned initial public offering, the Board
has approved a split of all shares of Common Stock at a ratio of 3.381 to one
as of the effective date of the Registration Statement and amended the
Certificate to increase the authorized Common Stock to 40,000,000 shares. All
share amounts have been restated to give effect to this stock split.
Additionally, the Board has approved the conversion of all outstanding shares
of Preferred Stock into shares of Common Stock.
F-15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Axicorp Pty., Ltd.
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of stockholders' equity present fairly, in
all material respects, the financial position of Axicorp Pty., Ltd. at
March 31, 1995 and 1996, and the results of its operations and its cash flows
for the period from July 1, 1994 to March 31, 1995 and for the year ended
March 31, 1996, all expressed in United States Dollars, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits 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.
PRICE WATERHOUSE
Melbourne, Australia
July 31, 1996
F-16
<PAGE>
AXICORP PTY., LTD.
BALANCE SHEETS
(IN US DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
MARCH 31,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 1,435,723 $ 3,218,079
Accounts receivable--trade, net of allowances of
$1,171 and $377,699, respectively.................. 7,893,146 23,715,321
Other current assets................................ 299,126 300,928
----------- -----------
Total current assets.............................. 9,627,995 27,234,328
Plant, equipment and computer software, net........... 365,532 844,337
Deferred tax assets................................... 320,774 2,997,919
Other non-current assets.............................. 7,275 7,785
----------- -----------
Total assets...................................... $10,321,576 $31,084,369
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade creditors................... $ 8,633,069 $23,616,272
Accrued expenses and other liabilities.............. 677,156 1,229,173
Deferred tax liabilities............................ 324,380 3,517,062
Note payable to related party....................... 261,879 1,677,668
----------- -----------
Total current liabilities......................... 9,896,484 30,040,175
----------- -----------
Total liabilities................................. 9,896,484 30,040,175
----------- -----------
Commitments and Contingencies (Note 7)
Stockholders' equity:
Ordinary Shares, AUS$1 par value; 10,000,000 shares
authorized; 590,000 shares issued and outstanding
at March 31,1995, and
March 31, 1996..................................... 427,514 427,514
Special Cumulative Redeemable Preference Shares,
AUS$1 par value; 100,000 shares authorized; 1,180
shares issued at March 31, 1995 and March 31,
1996............................................... -- 855
Retained (loss) earnings.............................. (5,931) 560,751
Cumulative translation adjustment..................... 3,509 55,074
----------- -----------
Total stockholders' equity........................ 425,092 1,044,194
----------- -----------
Total liabilities and stockholders' equity........ $10,321,576 $31,084,369
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
AXICORP PTY., LTD.
STATEMENTS OF OPERATIONS
(IN US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1995 1996
----------- -------------
<S> <C> <C>
Net Revenue........................................... $44,796,839 $144,344,739
Cost of Revenue....................................... 40,404,651 131,712,076
----------- ------------
Gross Margin.......................................... 4,392,188 12,632,663
----------- ------------
Operating Expenses
Selling, General and Administrative................. 4,276,902 11,558,216
Depreciation and Amortization....................... 42,955 234,610
----------- ------------
Total Operating Expenses.............................. 4,319,857 11,792,826
----------- ------------
Income from Operations................................ 72,331 839,837
Interest Income....................................... 29,654 219,300
----------- ------------
Income before Income Taxes............................ 101,985 1,059,137
Income Tax Provision.................................. 3,753 492,455
----------- ------------
Net Income............................................ $ 98,232 $ 566,682
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
AXICORP PTY,. LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN US DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
REDEEMABLE SUBSCRIPTION
ORDINARY SHARES PREFERENCE RECEIVABLE RETAINED CUMULATIVE TOTAL
---------------- SHARE CAPITAL FROM EARNINGS TRANSLATION STOCKHOLDERS'
SHARES AMOUNT AMOUNT STOCKHOLDERS (DEFICIT) ADJUSTMENT EQUITY
------- -------- ------------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1,
1994................... 590,000 $427,514 $ -- $ -- $(104,163) $ -- $ 323,351
Issuance of Shares...... -- -- 855 (855) -- -- --
Foreign currency
translation
adjustment............. -- -- -- -- -- 3,509 3,509
Net income.............. -- -- -- -- 98,232 -- 98,232
------- -------- ----- ----- --------- ------- ----------
BALANCE AT MARCH 31,
1995................... 590,000 427,514 855 (855) (5,931) 3,509 425,092
Issuance of shares...... -- -- -- 855 -- -- 855
Foreign currency
translation
adjustment............. -- -- -- -- -- 51,565 51,565
Net income.............. -- -- -- -- 566,682 -- 566,682
------- -------- ----- ----- --------- ------- ----------
BALANCE AT MARCH 31,
1996................... 590,000 $427,514 $ 855 $ -- $ 560,751 $55,074 $1,044,194
======= ======== ===== ===== ========= ======= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
AXICORP PTY., LTD.
STATEMENTS OF CASH FLOWS
(IN US DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1995 1996
----------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 98,232 $ 566,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation....................................... 42,955 234,610
Allowance for bad and doubtful accounts............ 1,201 359,569
Deferred tax expense............................... 3,729 492,746
Changes in assets and liabilities:
Accounts receivable.............................. (7,688,030) (15,822,175)
Other current assets............................. (99,137) 36,895
Accounts payable................................. 9,066,970 14,983,203
---------- -----------
Net cash provided by operating activities.......... 1,425,920 851,530
---------- -----------
Cash flows from investing activities:
Purchase of plant, equipment and software.......... (342,030) (667,526)
Purchase of investments............................ (161,325) --
Proceeds from investments.......................... -- 150,355
---------- -----------
Net cash used in investing activities.............. (503,355) (517,171)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of shares................... 22,374 877
Proceeds from notes payable--due to related party.. 268,429 1,637,800
Payments on short-term debt--due to related party.. -- (267,637)
---------- -----------
Net cash provided by financing activities.......... 290,803 1,371,040
---------- -----------
Effect of exchange rate changes on cash.............. (26,687) 76,957
Increase in cash..................................... 1,213,368 1,705,399
Cash at the beginning of the period................ 249,042 1,435,723
---------- -----------
Cash at the end of the period........................ $1,435,723 $ 3,218,079
========== ===========
Supplemental disclosures:
Cash paid for interest............................. $ 2,008 $ --
Cash paid for income taxes......................... -- 139,726
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY
The Company
Axicorp Pty., Ltd. ("Axicorp") was incorporated in Victoria, Australia in
1993. Axicorp's principal line of business is the provision of
telecommunication services.
On March 1, 1996 Primus Telecommunications International, Inc. ("PTII"), a
wholly owned subsidiary of Primus Telecommunications Group Incorporated
("Primus"), a United States based long-distance telephone company, acquired
beneficial ownership of all of the outstanding capital stock in Axicorp in
issue at that date.
NOTE 2--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These financial statements have been prepared in accordance with generally
accepted accounting principles in the United States.
Revenue recognition
Axicorp's revenues are derived primarily from long-distance, mobile, local
and data telecommunication charges and are recognized when such services are
provided. Axicorp also derives revenue from sale of mobile equipment and sale
of valued added services. Revenue from such services are recognized when
delivered and provided.
Cost of revenue
Cost of revenue comprises telecommunications network usage charges and other
direct costs incurred in providing telecommunication services to customers,
and are recognized as services are provided.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Plant, Equipment and Computer Software
Plant, equipment and computer software are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization is computed using
the straight line basis over the estimated useful lives of the assets.
Axicorp has capitalized external software costs in relation to the
development of certain computer software, including a billing system, used by
Axicorp in its operations. As of March 31, 1995 and 1996 the accumulated
amortization for computer software is $20,145 and $137,404, respectively.
Plant, equipment and computer software classes and their respective useful
lives are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
. Computer equipment............................................... 3
. Furniture, leasehold improvements and equipment.................. 5 to 7
. Computer software................................................ 2 to 3
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Foreign currency translation
To date, Axicorp has conducted most of its business in Australian dollars.
The financial statements have been presented herein in U.S. dollars because
Primus's reporting currency is the U.S. dollar. All assets and liabilities are
translated into the U.S. dollar at the rate effective at the reporting date
and elements of the income statement are translated at average exchange rates
for the period. Translation differences are included in the foreign currency
translation adjustment (a component of stockholders' equity).
Income Taxes
Income taxes are computed using the asset and liability method. Under the
asset and liability method, deferred tax assets and liabilities are determined
based on the differences between the financial reporting and tax bases of
assets and liabilities and are measured using the currently enacted tax rates
and laws.
Concentration of credit risk
Financial instruments that potentially subject Axicorp to credit risk
consist principally of trade receivables from its customers in Australia.
Axicorp generally requires no collateral from its customers. However, Axicorp
maintains an allowance for bad and doubtful accounts receivable based on the
expected collectibility of all accounts receivable. At March 31, 1995 and 1996
no customer accounted for more than 10% of accounts receivable.
Accounting for impairment of long-lived assets
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of." SFAS 121 requires impairment losses to be recorded for
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the asset's carrying amount. SFAS 121 also addresses the accounting
for impairment losses associated with long-lived assets to be disposed of.
Axicorp adopted SFAS 121 in the first quarter of fiscal 1996. Adoption of SFAS
121 did not have a material impact on Axicorp's results of operations.
Dividends
Any dividend payments made by Axicorp would, under Australian Corporation
Law, be limited to Axicorp's retained earnings, which aggregated $560,751 at
March 31, 1996.
Cash Equivalents
Axicorp considers all liquid investments with a maturity of three months or
less to be cash equivalents.
NOTE 3--PLANT, EQUIPMENT AND COMPUTER SOFTWARE
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 1996
--------- ---------
<S> <C> <C>
Plant, equipment and computer software:
Computer software.................................... $157,028 $ 479,414
Computer hardware.................................... 143,372 429,057
Furniture, leasehold improvement and equipment....... 112,224 232,929
-------- ---------
412,624 1,141,400
Less: accumulated depreciation and amortization........ (47,092) (297,063)
-------- ---------
Net plant and equipment................................ $365,532 $ 844,337
======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--INCOME TAXES
The provision for income taxes is attributable to:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1995 1996
----------- -------------
<S> <C> <C>
Current............................................ $ -- $ --
Deferred........................................... 3,753 492,455
------ --------
$3,753 $492,455
====== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the Australian statutory federal income tax rate to income before provision
for income taxes. The sources and tax effect of the differences are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS TWELVE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1995 1996
----------- -------------
<S> <C> <C>
Income tax at the Australian federal statutory
rate of 36%
(1995--33%)...................................... $33,655 $381,289
Nondeductible expenses............................ -- 86,764
Other............................................. (29,902) 24,402
------- --------
$ 3,753 $492,455
======= ========
</TABLE>
Net deferred tax liabilities and assets reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
Significant components of Axicorp's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Accrued income..................................... $541,325 $4,234,068
Capitalized software............................... 41,321 171,305
-------- ----------
Total deferred tax liabilities..................... 582,646 4,405,373
-------- ----------
Deferred tax assets:
Plant and equipment................................ -- 47,570
Accrued employee entitlement....................... 20,520 59,797
Other accruals..................................... 196,425 657,920
Net tax loss carry forward......................... 362,095 3,120,943
-------- ----------
Total deferred tax assets.......................... 579,040 3,886,230
-------- ----------
Net deferred tax liabilities......................... $ (3,606) $ (519,143)
======== ==========
</TABLE>
Axicorp's carry forward tax losses of $8,669,286 are available to be offset
against future taxable income, without limitation, provided Axicorp continues
to maintain the same business in the year of loss recoupment which it carried
on prior to its acquisition by PTII. The losses arise principally because of
the treatment for
The accompanying notes are an integral part of these statements.
F-23
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
taxation purposes of amounts recorded as income receivable at year end which
are not taxable until their receipt in the following year of income.
Management believes that, based on the evidence of the performance of Axicorp
and other factors, the weight of available evidence indicates that it is more
likely than not that Axicorp will be able to utilize the carry forward tax
loss.
NOTE 5--RELATED PARTY TRANSACTIONS
During the period April 1, 1994 to March 31, 1995 and the twelve months
ended March 31, 1996 Axicorp paid management fees of $616,000 and $426,000,
respectively, to a company owned primarily by officers and directors of
Axicorp. At March 31, 1995, Axicorp owed management fees of $238,000.
At March 31, 1995 and 1996 Axicorp owed related parties $262,000 and
$1,678,000 respectively. The balance at March 31, 1996 is an unsecured loan,
interest at the prime rate of 12% and is repayable on demand.
NOTE 6--EMPLOYEE BENEFIT PLAN
Axicorp is currently required by law to contribute 6% of each employee's
salary to a pension fund for the employee's retirement. Axicorp's contribution
to the pension fund aggregated approximately $44,000 and $157,000 during the
period July 1, 1994 to March 31, 1995 and the twelve months ended March 31,
1996, respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
Leases
Axicorp leases its office facility and certain equipment under cancellable
lease arrangements. The cancellable office facility lease expires in 1997.
Rental expense under all leases totalled $88,000 for the period from July 1,
1994 to March 31, 1995 and $238,000 during the twelve months ended March 31,
1996.
NOTE 8--SALES BY GEOGRAPHIC AREA
Substantially all of the sales of Axicorp have been to customers in
Australia.
The accompanying notes are an integral part of these statements.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE U.S. UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICI-
TATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information................................................... 2
Summary.................................................................. 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dilution................................................................. 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Unaudited Pro Forma Consolidated Statements of Operations................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
Management............................................................... 56
Certain Transactions..................................................... 63
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Certain United States Federal Income Tax Consequences to Non-United
States Holders.......................................................... 72
Underwriting............................................................. 75
Legal Matters............................................................ 78
Experts.................................................................. 78
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS U.S. UNDER-
WRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 SHARES
[MAC LOGO APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated October 31, 1996
PROSPECTUS
6,000,000 SHARES
[INSERT MAC LOGO]
COMMON STOCK
-------------
All of the shares of Common Stock, par value $0.01 per share (the "Common
Stock"), of Primus Telecommunications Group, Incorporated ("Primus" or the
"Company") offered hereby are being offered by the Company. Of the 6,000,000
shares of Common Stock being offered, 1,200,000 shares are being offered
initially outside the United States and Canada (the "International Offering")
by the International Managers (as defined in "Underwriting") and 4,800,000
shares are being concurrently offered in the United States and Canada (the
"U.S. Offering") by the U.S. Underwriters (as defined in "Underwriting" and,
together with the International Managers, the "Underwriters"). The
International Offering and the U.S. Offering are collectively referred to as
the "Offering."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $14.00 and $16.00 per share. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Application has been made to have the Common
Stock approved for quotation on the Nasdaq National Market under the symbol
"PRTL."
-------------
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
- --------------------------------------------------------------------------------
Total(3)................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $1,200,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
900,000 additional shares of Common Stock on the same terms and conditions
set forth herein, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
International Managers subject to prior sale, withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of certificates representing the shares of Common Stock will be made
at the offices of Lehman Brothers Inc., New York, New York on or about ,
1996.
-------------
LEHMAN BROTHERS DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1996.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE INTERNATIONAL MAN-
AGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information................................................... 2
Summary.................................................................. 3
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 17
Dilution................................................................. 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Unaudited Pro Forma Consolidated Statements of Operations................ 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
Management............................................................... 56
Certain Transactions..................................................... 63
Principal Stockholders................................................... 65
Description of Capital Stock............................................. 67
Shares Eligible for Future Sale.......................................... 71
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 72
Underwriting............................................................. 75
Legal Matters............................................................ 78
Experts.................................................................. 78
Index to Financial Statements............................................ F-1
</TABLE>
-----------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS INTERNA-
TIONAL MANAGERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6,000,000 SHARES
[MAC LOGO APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all
of which will be paid by the Company, in connection with the issuance and
distribution of the securities being registered:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- ----------
<S> <C>
SEC Registration Fee.......................................... $ 37,061
NASD Fee...................................................... 11,540
Nasdaq National Market Fee.................................... 47,500
Printing and engraving fees................................... 250,000
Registrant's counsel fees and expenses........................ 350,000
Accounting fees and expenses.................................. 250,000
Blue Sky expenses and counsel fees............................ 10,000
Transfer agent and registrar fees............................. 2,000
Miscellaneous................................................. 241,899
----------
TOTAL....................................................... $1,200,000
==========
</TABLE>
--------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits
each Delaware business corporation to indemnify its directors, officers,
employees and agents against liability for each such person's acts taken in
his or her capacity as a director, officer, employee or agent of the
corporation if such actions were taken in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of
the corporation, and with respect to any criminal action, if he or she had no
reasonable cause to believe his or her conduct was unlawful. Article X of the
Company's Amended and Restated By-Laws provides that the Company, to the full
extent permitted by Section 145 of the DGCL, shall indemnify all past and
present directors or officers of the Company and may indemnify all past or
present employees or other agents of the Company. To the extent that a
director, officer, employee or agent of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to
in such Article X, or in defense of any claim, issue or matter therein, he or
she shall be indemnified by the Company against actually and reasonably
incurred expenses in connection therewith. Such expenses may be paid by the
Company in advance of the final disposition of the action upon receipt of an
undertaking to repay the advance if it is ultimately determined that such
person is not entitled to indemnification.
As permitted by Section 102(b)(7) of the DGCL, Article 11 of the Company's
Amended and Restated Certificate of Incorporation provides that no director of
the Company shall be liable to the Company for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Company or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for the unlawful payment of dividends on or
redemption of the Company's capital stock, or (iv) for any transaction from
which the director derived an improper personal benefit.
The Company expects to obtain a policy insuring it and its directors and
officers against certain liabilities, including liabilities under the
Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued 178,574 shares of Common Stock to John F. DePodesta, its
incorporator, on February 4, 1994 for consideration of $250. Additionally, Mr.
Singh purchased 3,392,905 shares of Common Stock from the Company on June 1,
1994 for $250,000. A trust, the voting power of which is vested in Mr. Singh,
purchased 396,828 shares of Common Stock from the Company on September 30,
1994 for $250,000. During the fourth quarter of 1994, the Company issued to
Mr. Krieger, a former director of the Company, in recognition of the support
he gave to the Company, 71,430 shares of Common Stock. No underwriter or
placement agent participated in any of the foregoing issuances of securities.
During the first quarter of 1995, the Company sold its Common Stock to a
group of private investors consisting of certain family members and colleagues
of Mr. Singh and Mr. DePodesta. The investors paid $300,000 for 476,204 shares
of Common Stock in this transaction. On March 31, 1995, pursuant to an
agreement whereby Mr. Singh forgave certain indebtedness in the amount of
$350,000 owed him by the Company, the Company issued Mr. Singh 555,559 shares
of Common Stock. No underwriter or placement agent participated in any of the
foregoing issuances of securities.
As of December 31, 1995, 1,757,613 shares of the Company's Common Stock were
sold for an aggregate price of $5,198,500 to investors familiar with Mr. Singh
and the Company. This sale was placed by Northeast Securities, Inc. ("NSI"),
which used Andrew Krieger, a former director, as a selling agent. Underwriting
commissions and other expenses in this transaction were $787,440 and 234,378
shares of the Company's Common Stock. On January 31, 1996, NSI and Mr.
Krieger, both acting as placement agents, privately placed 1,771,194 shares of
the Company's Common Stock for an aggregate price of $6,286,404 to other
investors familiar with Mr. Singh and the Company. Underwriting commissions
and other expenses in this transaction totalled $613,167 and 278,899 shares of
the Company's Common Stock.
On February 15, 1996, Teleglobe USA, Inc. invested in the Company by
purchasing 410,808 shares of the Company's Common Stock for $1,458,060. On
March 1, 1996, in connection with the Company's purchase of Axicorp, certain
vendors of Axicorp received 455,000 shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share. In addition, on July
31, 1996, the Soros/Chatterjee Group bought 965,999 shares of the Company's
Common Stock for approximately $8,000,000 and for $8,000,000 was issued
warrants to purchase additional shares of Common Stock. No underwriter or
placement agent participated in any of the foregoing issuances of securities.
The Company believes that the foregoing described issuances of securities,
if they constitute sales, are exempt from registration under the Act by virtue
of the exemption provided by Section 4(2) thereof for transactions not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.(/1/)
1.2 Form of International Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation.(/1/)
3.2 Amended and Restated By-Laws.(/1/)
4.1 Specimen Certificate of the Company's Common Stock, par value
$.01 per share.(/1/)
5.1 Opinion of Pepper, Hamilton & Scheetz respecting the Common
Stock registered hereby.(/1/)
10.1 Share Acquisition Deed, dated March 1, 1996, between the Company
and the shareholders of Axicorp Pty., Ltd.(/1/)
10.2 Switched Transit Agreement, dated June 5, 1995, between
Teleglobe USA, Inc. and the Company for the provision of
services to India.(/1/)
10.3 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA, Inc. and the Company for the provision of
services to Iran.(/1/)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.4 Agreement for Billing and Related Services, dated February 23,
1995, between the Company and Electronic Data Systems Inc.(/1/)
10.5 Employment Agreement, dated June 1, 1994, between the Company
and K. Paul Singh.(/1/)
10.6 Primus Telecommunications Group, Incorporated 1995 Stock Option
Plan.(/1/)
10.7 Primus Telecommunications Group, Incorporated 1995 Director
Stock Option Plan.(/1/)
10.8 International Correspondent Agreement between the Honduras
Telecommunications Company and the Company dated November 30,
1995.(/1/)
10.9 Shareholders Agreement, dated February 22, 1996, among Teleglobe
USA, Inc., K. Paul Singh and the Company.(/1/)
10.10 Securityholders' Agreement, dated July 31, 1996, among the
Company, K. Paul Singh, Quantum Industrial Partners LDC, S-C
Phoenix Holdings, L.L.C., Winston Partners II LDC and Winston
Partners LLC.(/1/)
10.11 Registration Rights Agreement, dated July 31, 1996, among the
Company, Quantum Industrial Partners LDC, S-C Phoenix Holdings,
L.L.C., Winston Partners II LDC and Winston Partners LLC.(/1/)
10.12 Service Provider Agreement between Telstra Corporation Limited
and Axicorp Pty., Ltd. dated May 3, 1995.(/1/)
10.13 Dealer Agreement between Telstra Corporation Limited and Axicorp
Pty., Ltd. dated January 8, 1996.(/1/)
10.14 Hardpatch Transit Agreement dated October 5, 1995 between
Teleglobe USA, Inc. and the Company for the provision of
services to India.(/1/)
10.15 Securities Purchase Agreement dated as of July 31, 1996 among
the Company, Quantum Industrial Partners LDC, S-C Phoenix
Holdings, L.L.C., Winston Partners II LLC, and Winston Partners
II LDC.(/1/)
11.1 Statement re: Computation of Per Share Earnings.(/1/)
22.1 Subsidiaries of the Registrant.(/1/)
23.1 Consent of Deloitte & Touche LLP (included on page II-5 of this
Registration Statement).
23.2 Consent of Price Waterhouse (included on page II-6 of this
Registration Statement).
23.3 Consent of Pepper, Hamilton & Scheetz (included in Exhibit
5.1).(/1/)
24.1 Powers of Attorney.(/1/)
27.1 Financial Data Schedule for the Company for the year ended
December 31, 1995.(/1/)
27.2 Financial Data Schedule for the Company for the six months ended
June 30, 1996.(/1/)
27.3 Financial Data Schedule for Axicorp Pty., Ltd. for the twelve
months ended March 31, 1996.(/1/)
</TABLE>
- --------
(1) Previously filed.
(B) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
All schedules have been omitted because they are not applicable, not
required, or the required information is included in the Financial Statements
or the notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant undertakes that insofar as indemnification for
liabilities arising under the Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred
II-3
<PAGE>
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-4
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-10875 of Primus Telecommunications Group, Incorporated of our report dated
April 23, 1996, except for Note 13 and Note 14, as to which the dates are July
31, 1996 and October 3, 1996, respectively, appearing in the Prospectus, which
is part of this Registration Statement, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Washington, D.C.
October 31, 1996
II-5
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form S-1 (File No. 333-10875) of our report dated
July 31, 1996, relating to the financial statements of Axicorp Pty., Ltd.,
which appears in such Prospectus. We also consent to the references to us under
the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Price Waterhouse has not prepared or certified
such "Selected Financial Data."
Price Waterhouse
Melbourne, Australia
October 31, 1996
II-6
<PAGE>
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Philadelphia,
Commonwealth of Pennsylvania, on the 30th day of October, 1996.
Primus Telecommunications Group,
Incorporated
/s/ K. Paul Singh
By: __________________________________
K. Paul Singh
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons on October 30, 1996 in the
capacities indicated:
SIGNATURES TITLE
Director, Chairman, President and
/s/ K. Paul Singh Chief Executive Officer (principal
- ------------------------------------ executive officer)
K. PAUL SINGH
Executive Vice President and Chief
/s/ Neil L. Hazard Financial Officer (principal
- ------------------------------------ financial officer and principal
NEIL L. HAZARD accounting officer)
* Executive Vice President, Law and
- ------------------------------------ Regulatory Affairs and Director
JOHN F. DEPODESTA
* Director
- ------------------------------------
HERMAN FIALKOV
* Director
- ------------------------------------
DAVID E. HERSHBERG
* Director
- ------------------------------------
JOHN PUENTE
/s/ K. Paul Singh
- ------------------------------------
* K. Paul Singh, Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
<C> <S>
1.2 Form of International Underwriting Agreement.
23.1 Consent of Deloitte & Touche LLP (included on Page II-5 of this
Registration Statement).
23.2 Consent of Price Waterhouse (included on Page II-6 of this
Registration Statement).
</TABLE>
<PAGE>
Exhibit 1.2
6,000,000 Shares
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
------------------------------------
_____ __, 1996
Lehman Brothers International (Europe)
Donaldson, Lufkin & Jenrette Securities Corporation
As Lead Managers of the several
International Managers named in Schedule 1,
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Ladies & Gentlemen:
Primus Telecommunications Group, Incorporated, a Delaware corporation
(the "Company"), proposes to sell 1,200,000 shares (the "Firm Stock") of the
Company's Common Stock, par value $0.01 per share (the "Common Stock"). In
addition, the Company proposes to grant to the International Managers named in
Schedule 1 hereto (the "International Managers") an option to purchase up to an
additional 180,000 shares of the Common Stock on the terms and for the purposes
set forth in Section 3 (the "Option Stock"). The Firm Stock and the Option
Stock, if purchased, are hereinafter collectively called the "Stock." This is
to confirm the agreement concerning the purchase of the Stock from the Company
by the International Managers.
It is understood by all parties that the Company is concurrently
entering into an agreement dated the date hereof (the "U.S. Underwriting
Agreement") providing for the sale by the Company of an aggregate of 5,520,000
shares of Common Stock (including the over-allotment option thereunder) (the
"U.S. Stock") through arrangements with certain underwriters in the United
States and Canada (the "U.S. Underwriters"), for whom Lehman Brothers Inc. and
Donaldson, Lufkin & Jenrette Securities Corporation are acting as
representatives (the "Representatives"). The U.S. Underwriters and the
International Managers
<PAGE>
2
simultaneously are entering into an agreement between the U.S. and international
underwriting syndicates (the "Agreement Between U.S. Underwriters and
International Managers") which provides for, among other things, the transfer of
shares of Common Stock between the two syndicates. Two forms of prospectus are
to be used in connection with the offering and sale of shares of Common Stock
contemplated by the foregoing, one relating to the Stock and the other relating
to the U.S. Stock. The latter form of prospectus will be identical to the
former except for certain substitute pages as included in the registration
statement and amendments thereto referred to below. Except as used in Sections
2, 3, 4, 10 and 11 herein, and except as the context may otherwise require,
references herein to the Stock shall include all the shares of which may be sold
pursuant to either this Agreement or the U.S. Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final form, and
whether as amended or supplemented, shall include both the U.S. and the
international versions thereof.
1. Representations, Warranties and Agreements of the Company. The
Company represents, warrants and agrees that:
(a) A registration statement on Form S-1 (File No. 333-10875), and
amendments thereto, with respect to the Stock have (i) been prepared by the
Company in conformity with the requirements of the United States Securities
Act of 1933 (the "Securities Act") and the rules and regulations (the
"Rules and Regulations") of the United States Securities and Exchange
Commission (the "Commission") thereunder, (ii) been filed with the
Commission under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement and the amendments
thereto have been delivered by the Company to you as the lead managers (the
"Lead Managers") of the International Managers. As used in this Agreement,
"Effective Time" means the date and the time as of which such registration
statement, or the most recent post-effective amendments thereto, if any,
was declared effective by the Commission; "Effective Date" means the date
of the Effective Time; "Preliminary Prospectus" means each prospectus
included in such registration statement, or amendments thereof, before it
became effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Representatives pursuant
to Rule 424(a) of the Rules and Regulations; "Registration Statement" means
such registration statement, as amended at the Effective Time, including
all information contained in the final prospectus filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations in accordance with
Section 5(a) hereof and deemed to be a part of the registration statement
as of the Effective Time pursuant to paragraph (b) of Rule 430A of the
Rules and Regulations and includes any registration statement relating to
the Stock that is filed and declared effective pursuant to Rule 462(b)
under the Securities Act; and "Prospectus" means such final prospectus, as
first filed with the Commission pursuant to paragraph (1) or (4) of Rule
424(b) of the Rules and Regulations. The Commission has not issued any
order preventing or suspending the use of any Preliminary Prospectus.
<PAGE>
3
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the requirements
of the Securities Act and the Rules and Regulations and do not and will
not, as of the applicable effective date (as to the Registration Statement
and any amendment thereto) and as of the applicable filing date (as to the
Prospectus and any amendment or supplement thereto) contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading; provided that no representation or warranty is made as to
information contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
concerning the International Managers furnished to the Company through the
Lead Managers by or on behalf of any International Manager specifically for
inclusion therein.
(c) The Company and each of its subsidiaries (as defined in Section
15) have been duly incorporated and are validly existing as corporations in
good standing under the laws of their respective jurisdictions of
incorporation, are duly qualified to do business and are in good standing
as foreign corporations in each jurisdiction in which their respective
ownership or lease of property or the conduct of their respective
businesses as currently conducted requires such qualification, and have all
power and authority necessary to own or hold their respective properties
and to conduct the businesses in which they are engaged; and none of the
subsidiaries of the Company (other than Primus Telecommunications, Inc. and
Axicorp Pty., Ltd. (collectively, the "Significant Subsidiaries")) is a
"significant subsidiary," as such term is defined in Rule 405 of the Rules
and Regulations.
(d) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company
have been duly and validly authorized and issued, are fully paid and non-
assessable and conform to the description thereof contained in the
Prospectus; and all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued
and are fully paid and non-assessable and (except for directors' qualifying
shares) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims.
(e) The unissued shares of the Stock to be issued and sold by the
Company to the International Managers hereunder and to the U.S.
Underwriters under the U.S. Underwriting Agreement have been duly and
validly authorized and, when issued and delivered against payment therefor
as provided herein and in the U.S. Underwriting Agreement, will be duly and
validly issued, fully paid and non-assessable; and the Stock will conform
to the description thereof contained in the Prospectus.
<PAGE>
4
(f) Each of this Agreement and the International Underwriting
Agreement has been duly authorized, executed and delivered by the Company.
(g) The execution, delivery and performance of this Agreement and
the U.S. Underwriting Agreement by the Company and the consummation of the
transactions contemplated hereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or
other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries
is bound or to which any of the property or assets of the Company or any of
its subsidiaries is subject, nor will such actions result in any violation
of the provisions of the charter or by-laws of the Company or any of its
subsidiaries or any statute or any order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties or assets; and except for
the registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the United States Securities Exchange Act of 1934 (the
"Exchange Act") and applicable state securities laws in connection with the
purchase and distribution of the Stock by the International Managers and
the U.S. Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or body
is required for the execution, delivery and performance of this Agreement
or the U.S. Underwriting Agreement by the Company and the consummation of
the transactions contemplated hereby and thereby.
(h) Except as disclosed in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement.
(i) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period preceding
the date of the Prospectus, including any sales pursuant to Rule 144A
under, or Regulations D or S of, the Securities Act, other than shares
issued pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans or pursuant to outstanding options,
rights or warrants.
(j) Neither the Company nor any of its subsidiaries has sustained,
since the date of the latest audited financial statements included in the
Prospectus, any material loss or interference with its business (x) from
fire, explosion, flood or other calamity,
<PAGE>
5
whether or not covered by insurance, or (y) from any labor dispute or court
or governmental action, order or decree, in either case otherwise than as
set forth or contemplated in the Prospectus; and, since such date, there
has not been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus.
(k) The historical financial statements (including the related notes
and supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at the
dates and for the periods indicated, and have been prepared in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved, except that the unaudited historical
financial statements are subject to normal year-end adjustments. The
unaudited pro forma financial information set forth in the Prospectus
presents fairly, on the basis stated in the Prospectus, the information set
forth therein, has been prepared in accordance with the Rules and
Regulations and the guidelines of the Commission with respect to pro forma
financial statements, has been properly compiled on the pro forma bases set
forth therein and the assumptions used in the preparation thereof are
reasonable and the adjustments used therein are appropriate to give effect
to the transactions or circumstances referred to therein.
(l) Deloitte & Touche LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and who
have delivered the initial letter referred to in Section 7(k) hereof, are
independent public accountants as required by the Securities Act and the
Rules and Regulations; and Price Waterhouse LLP, whose report appears in
the Prospectus and who have delivered the initial letter referred to in
Section 7(l) hereof, were independent accountants as required by the
Securities Act and the Rules and Regulations during the periods covered by
the financial statements on which they reported contained in the
Prospectus.
(m) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them, in each case free and clear
of all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property
and do not materially interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and all real property
and buildings held under lease by the Company and its subsidiaries are held
by them under valid, subsisting and enforceable leases, with such
exceptions as do
<PAGE>
6
not materially interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries.
(n) The Company and each of its subsidiaries carry, or are covered
by, insurance in such amounts and covering such risks as is adequate for
the conduct of their respective businesses and the value of their
respective properties and as is customary for companies engaged in similar
businesses in similar industries with properties of a similar value.
(o) The Company and each of its subsidiaries own or possess adequate
rights to use all material patents, patent applications, trademarks,
service marks, trade names, trademark registrations, service mark
registrations, copyrights and licenses ("Intellectual Property") necessary
for the conduct of their respective businesses and have no reason to
believe that the conduct of their respective businesses will conflict with,
and have not received any notice of any claim of conflict with, any
Intellectual Property of others.
(p) There are no legal or governmental proceedings pending to which
the Company or any of its subsidiaries is a party or of which any property
or assets of the Company or any of its subsidiaries is the subject which,
if determined adversely to the Company or any of its subsidiaries, might
have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries taken as a whole; and to the best of the
Company's knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
(q) There are no contracts or other documents which are required by
the Securities Act or by the Rules and Regulations to be described in the
Prospectus or filed as exhibits to the Registration Statement which have
not been described in the Prospectus or filed as exhibits to the
Registration Statement.
(r) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, which is required
to be described in the Prospectus which is not so described.
(s) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which might be expected to
have a material adverse effect on the consolidated financial position,
stockholders' equity, results of operations, business or prospects of the
Company and its subsidiaries taken as a whole.
<PAGE>
7
(t) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability; the Company has not
incurred and does not expect to incur liability under (i) Title IV of ERISA
with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Section 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the
"Code"); and each "pension plan" for which the Company would have any
liability that is intended to be qualified under Section 401(a) of the Code
is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and has
paid all taxes due thereon, and no tax deficiency has been determined
adversely to the Company or any of its subsidiaries which has had (nor does
the Company have any knowledge of any tax deficiency which, if determined
adversely to the Company or any of its subsidiaries, might have) a material
adverse effect on the consolidated financial position, stockholders'
equity, results of operations, business or prospects of the Company and its
subsidiaries taken as a whole.
(v) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted any
securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred in
the ordinary course of business, (iii) entered into any transaction not in
the ordinary course of business or (iv) declared or paid any dividend on
its capital stock.
(w) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary to
permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted only
in accordance with management's authorization and (D) the reported
accountability for its assets is compared with existing assets at
reasonable intervals.
(x) Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time or
both, would constitute such a default, in the due performance or observance
of any term, covenant or condition contained in any
<PAGE>
8
material indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which it is a party or by which it is bound or
to which any of its properties or assets is subject or (iii) is in
violation of any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or has failed
to obtain any license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or to
the conduct of its business, where any such violation or failure, in the
case of this subclause (iii), might have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company and its subsidiaries,
taken as a whole.
(y) Neither the Company nor any of its subsidiaries, nor any
director, officer, employee or, to the knowledge of the Company any agent
or other person associated with or acting on behalf of the Company or any
of its subsidiaries, has used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expense relating to
political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(z) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes, medical
wastes, hazardous wastes or hazardous substances by the Company or any of
its subsidiaries (or, to the knowledge of the Company, any of their
predecessors in interest) at, upon or from any of the property now or
previously owned or leased by the Company or its subsidiaries in violation
of any applicable law, ordinance, rule, regulation, order, judgment, decree
or permit or which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except for
any violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company and its subsidiaries taken
as a whole; there has been no material spill, discharge, leak, emission,
injection, escape, dumping or release of any kind onto such property or
into the environment surrounding such property of any toxic wastes, medical
wastes, solid wastes, hazardous wastes or hazardous substances due to or
caused by the Company or any of its subsidiaries or with respect to which
the Company or any of its subsidiaries have knowledge, except for any such
spill, discharge, leak, emission, injection, escape, dumping or release
which would not have or would not be reasonably likely to have, singularly
or in the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a material adverse effect on
the
<PAGE>
9
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company and its subsidiaries taken
as a whole; and the terms "hazardous wastes," "toxic wastes," "hazardous
substances" and "medical wastes" shall have the meanings specified in any
applicable local, state, federal and foreign laws or regulations with
respect to environmental protection.
(aa) Neither the Company nor any subsidiary is an "investment company"
nor "a company controlled by an investment company" within the meaning of
such terms under the United States Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
(ab) The Company and its subsidiaries posses all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses as currently conducted, and neither the Company nor any such
subsidiary has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would result in a material adverse change in
the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, except as
described in or contemplated by the Prospectus.
(ac) The Company has not taken, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of
the price of the shares of Common Stock to facilitate the sale or resale of
the Shares.
(ad) The Company has complied and will comply with all of the
provisions of Florida H.B. 1771, codified as Section 517.075 of the Florida
Statutes, and all regulations promulgated thereunder relating to issuers
doing business in Cuba.
2. Purchase of the Stock by the International Managers. On the
basis of the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell 1,200,000
shares of the Firm Stock to the several International Managers and each of the
International Managers, severally and not jointly, agrees to purchase the number
of shares of the Firm Stock set opposite that International Manager's name in
Schedule 1 hereto. The respective purchase obligations of the International
Managers with respect to the Firm Stock shall be rounded among the International
Managers to avoid fractional shares, as the Lead Managers may determine.
In addition, the Company grants to the International Managers an
option to purchase up to 180,000 shares of Option Stock. Such option is granted
solely for the purpose of covering over-allotments in the sale of Firm Stock and
is exercisable as provided in
<PAGE>
10
Section 5 hereof. Shares of Option Stock shall be purchased severally for the
account of the International Managers in proportion to the number of shares of
Firm Stock set opposite the name of such International Managers in Schedule 1
hereto. The respective purchase obligations of each International Manager with
respect to the Option Stock shall be adjusted by the Lead Managers so that no
International Manager shall be obligated to purchase Option Stock other than in
100 share amounts. The price of both the Firm Stock and any Option Stock shall
be $_____ per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as such terms
are hereinafter defined), as the case may be, except upon payment for all the
Stock to be purchased on such Delivery Date as provided herein and in the U.S.
Underwriting Agreement.
3. Offering of Stock by the International Managers. Upon
authorization by the Lead Managers of the release of the Firm Stock, the several
International Managers propose to offer the Firm Stock for sale upon the terms
and conditions set forth in the Prospectus.
It is understood that _______ shares of the Firm Stock will initially
be reserved by the several International Managers for offer and sale upon the
terms and conditions set forth in the Prospectus and in accordance with the
rules and regulations of the National Association of Securities Dealers, Inc. to
employees and persons having business relationships with the Company and its
subsidiaries who have heretofore delivered to the Lead Managers offers or
indications of interest to purchase shares of Firm Stock in form satisfactory to
the Lead Managers, and that any allocation of such Firm Stock among such persons
will be made in accordance with timely directions received by the Lead Managers
from the Company; provided that under no circumstances will the Lead Managers or
any International Manager be liable to the Company or to any such person for any
action taken or omitted in good faith in connection with such offering to
employees and persons having business relationships with the Company and its
subsidiaries. It is further understood that any shares of such Firm Stock which
are not purchased by such persons will be offered by the International Managers
to the public upon the terms and conditions set forth in the Prospectus.
Each International Manager agrees that, except to the extent permitted
by the Agreement Between U.S. Underwriters and International Managers, it will
not offer or sell any of the Stock in the United States or Canada.
4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Shearman & Sterling, 599
Lexington Avenue, New York, New York, at 10:00 A.M., New York City time, on the
third full business day following the date of this Agreement (fourth, if the
pricing occurs after 4:30 P.M. (New York City time) on any given day) or at such
other date or place as shall be determined by
<PAGE>
11
agreement between the Lead Managers and the Company. This date and time are
sometimes referred to as the "First Delivery Date." On the First Delivery Date,
the Company shall deliver or cause to be delivered certificates representing the
Firm Stock to the Lead Managers for the account of each International Manager
against payment to or upon the order of the Company of the purchase price by
certified or official bank check or checks payable in immediately available
funds. Time shall be of the essence, and delivery at the time and place
specified pursuant to this Agreement is a further condition of the obligation of
each International Manager hereunder. Upon delivery, the Firm Stock shall be
registered in such names and in such denominations as the Lead Managers shall
request in writing not less than two full business days prior to the First
Delivery Date. For the purpose of expediting the checking and packaging of the
certificates for the Firm Stock, the Company shall make the certificates
representing the Firm Stock available for inspection by the Lead Managers in New
York, New York, not later than 2:00 P.M., New York City time, on the business
day prior to the First Delivery Date.
At any time, or from time to time, on or before the thirtieth day
after the date of this Agreement, the option granted in Section 2 may be
exercised by written notice being given to the Company by the Lead Managers.
Such notice shall set forth the aggregate number of shares of Option Stock as to
which the option is being exercised, the names in which the shares of Option
Stock are to be registered, the denominations in which the shares of Option
Stock are to be issued and the date and time, as determined by the Lead
Managers, when the shares of Option Stock are to be delivered; provided,
however, that this date and time shall not be earlier than the First Delivery
Date nor earlier than the second business day after the date on which the option
shall have been exercised nor later than the fifth business day after the date
on which the option shall have been exercised. The date and time the shares of
Option Stock are delivered are sometimes referred to as the "Second Delivery
Date" and the First Delivery Date and the Second Delivery Date are sometimes
each referred to as a "Delivery Date").
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the Lead
Managers and the Company) at 10:00 A.M., New York City time, on the Second
Delivery Date. On the Second Delivery Date, the Company shall deliver or cause
to be delivered the certificates representing the Option Stock to the Lead
Managers for the account of each International Manager against payment to or
upon the order of the Company of the purchase price by certified or official
bank check or checks payable in immediately available funds. Time shall be of
the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each International Manager
hereunder. Upon delivery, the Option Stock shall be registered in such names
and in such denominations as the Lead Managers shall request in the aforesaid
written notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the
<PAGE>
12
Option Stock available for inspection by the Lead Managers in New York, New
York, not later than 2:00 P.M., New York City time, on the business day prior to
the Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the Lead Managers
and to file such Prospectus pursuant to Rule 424(b) under the Securities
Act not later than Commission's close of business on the second business
day following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3) under
the Securities Act; to make no further amendment or any supplement to the
Registration Statement or to the Prospectus except as permitted herein; to
advise the Lead Managers, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Lead Managers with copies
thereof; to advise the Lead Managers, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening of
any proceeding for any such purpose, or of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; and, in the event of the issuance
of any stop order or of any order preventing or suspending the use of any
Preliminary Prospectus or the Prospectus or suspending any such
qualification, to use promptly its best efforts to obtain its withdrawal;
(b) To furnish promptly to each of the Lead Managers and to counsel
for the International Managers a signed copy of the Registration Statement
as originally filed with the Commission, and each amendment thereto filed
with the Commission, including all consents and exhibits filed therewith;
(c) To deliver promptly to the Lead Managers such number of the
following documents as the Lead Managers shall reasonably request: (i)
conformed copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case excluding exhibits
other than this Agreement and the computation of per share earnings) and
(ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus; and, if the delivery of a prospectus is required
by law at any time after the Effective Time in connection with the offering
or sale of the Stock or any other securities relating thereto and if at
such time any events shall have occurred as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state any
<PAGE>
13
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made when such Prospectus
is delivered, not misleading, or, if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply with the
Securities Act, to notify the Lead Managers and, upon their request, to
prepare and furnish without charge to each International Manager and to any
dealer in securities as many copies as the Lead Managers may from time to
time reasonably request of an amended or supplemented Prospectus which will
correct such statement or omission or effect such compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the reasonable judgment of the Company or the Lead
Managers, be required by the Securities Act or requested by the Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Lead Managers and counsel for the International Managers and
obtain the consent of the Lead Managers to the filing;
(f) As soon as practicable after the Effective Date, to make generally
available to the Company's security holders and to deliver to the Lead
Managers an earnings statement of the Company and its subsidiaries (which
need not be audited) complying with Section 11(a) of the Securities Act and
the Rules and Regulations (including, at the option of the Company, Rule
158);
(g) For the period ending on the earlier of (i) five years following
the Effective Date or (ii) such date as the Company is no longer required
to file reports under the Exchange Act, to furnish to the Lead Managers
copies of all materials furnished by the Company to its shareholders and
all public reports and all reports and financial statements furnished by
the Company to the principal national securities exchange upon which the
Common Stock may be listed pursuant to requirements of or agreements with
such exchange or to the Commission pursuant to the Exchange Act or any rule
or regulation of the Commission thereunder;
(h) Promptly from time to time to take such action as the Lead
Managers may reasonably request to qualify the Stock for offering and sale
under the securities laws of such jurisdictions as the Lead Managers may
request and to comply with such laws so as to permit the continuance of
sales and dealings therein in such jurisdictions for as long as may be
necessary to complete the distribution of the Stock; provided that in no
event shall the Company be required to qualify as a foreign corporation or
<PAGE>
14
otherwise subject itself to taxation in any jurisdiction in which it is not
otherwise qualified or so subject;
(i) For a period of 180 days from the date of the Prospectus, not to,
directly or indirectly, offer for sale, sell or otherwise dispose of (or
enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the
future of) any shares of Common Stock (other than the Stock and shares
issued pursuant to employee benefit plans, qualified stock option plans or
other employee compensation plans existing on the date hereof or pursuant
to currently outstanding options, warrants or rights), or sell or grant
options, rights or warrants with respect to any shares of Common Stock
(other than the grant of options pursuant to option plans existing on the
date hereof), without the prior written consent of Lehman Brothers Inc.;
and to cause each officer and director of the Company to furnish to the
Lead Managers, prior to the First Delivery Date, a letter or letters, in
form and substance satisfactory to counsel for the International Managers,
pursuant to which each such person shall agree not to, directly or
indirectly, offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to, result
in the disposition by any person at any time in the future of) any shares
of Common Stock for a period of 180 days from the date of the Prospectus,
without the prior written consent of Lehman Brothers Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of the
Stock on the Nasdaq National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance and
evidence of satisfactory distribution, prior to the First Delivery Date;
(k) Prior to filing with the Commission any reports on Form SR
pursuant to Rule 463 of the Rules and Regulations, to furnish a copy
thereof to the counsel for the International Managers and receive and
consider its comments thereon, and to deliver promptly to the
Representatives a signed copy of each report on Form SR filed by it with
the Commission; and
(l) To apply the net proceeds from the sale of the Stock being sold
by the Company substantially as set forth in the Prospectus.
6. Expenses. The Company agrees to pay (a) the costs incident to
the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as
<PAGE>
15
provided in this Agreement; (d) the costs of producing and distributing this
Agreement, the Agreement between U.S. Underwriters and International Managers,
any Supplemental Agreement among U.S. Underwriters and any other related
documents in connection with the offering, purchase, sale and delivery of the
Stock; (e) the fees and expenses (including reasonable legal fees) incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of sale of the Stock; (f) any applicable listing or other
fees; (g) the fees and expenses (including reasonable legal fees) of qualifying
the Stock under the securities laws of the several jurisdictions as provided in
Section 5(h) and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the International Managers);
(h) the reasonable legal fees of counsel for the International Managers in
connection with the application for the inclusion of the Stock on Nasdaq
National Market System; (i) all costs and expenses of the International
Managers, including the fees and disbursements of counsel for the International
Managers, incident to the offer and sale of shares of the Stock by the
International Managers to employees and persons having business relationships
with the Company and its subsidiaries, as described in Section 3; and (j) all
other costs and expenses incident to the performance of the obligations of the
Company under this Agreement; provided that, except as provided in this Section
6 and in Section 11, the International Managers shall pay their own costs and
expenses, including the costs and expenses of their counsel, any transfer taxes
on the Stock which they may sell and the expenses of advertising any offering of
the Stock made by the International Managers.
7. Conditions of International Managers' Obligations. The
respective obligations of the International Managers hereunder are subject to
the accuracy, when made and on each Delivery Date, of the representations and
warranties of the Company contained herein, to the performance by the Company of
its obligations hereunder, and to each of the following additional terms and
conditions:
(a) The Prospectus shall have been timely filed with the Commission in
accordance with Section 5(a); no stop order suspending the effectiveness of
the Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened by
the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus or
otherwise shall have been complied with.
(b) No International Manager or U.S. Underwriter have discovered and
disclosed to the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or supplement
thereto contains an untrue statement of a fact which, in the opinion of
Shearman & Sterling, counsel for the International Managers, is material or
omits to state a fact which, in the opinion of such counsel, is material
and is required to be stated therein or is necessary to make the statements
therein not misleading.
<PAGE>
16
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the U.S. Underwriting
Agreement, the Stock, the Registration Statement and the Prospectus, and
all other legal matters relating to this Agreement and the transactions
contemplated hereby shall be reasonably satisfactory in all material
respects to counsel for the International Managers, and the Company shall
have furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Pepper, Hamilton & Scheetz shall have furnished to the Lead
Managers its written opinion, as counsel to the Company, addressed to the
International Managers and the U.S. Underwriters and dated such Delivery
Date, in the form attached hereto as Exhibit A.
(e) Swidler & Berlin, Chartered shall have furnished to the Lead
Managers its written opinion, as special United States telecommunications
counsel for the Company, addressed to the International Managers and the
U.S. Underwriters and dated such Delivery Date, in the form attached hereto
as Exhibit B.
(f) Rakisons Solicitors shall have furnished to the Lead Managers its
written opinion, as British regulatory counsel for the Company, addressed
to the International Managers and the U.S. Underwriters and dated such
Delivery Date, in the form attached hereto as Exhibit C.
(g) Rawling & Company Solicitors shall have furnished to the Lead
Managers its written opinion, as Australian regulatory counsel for the
Company, addressed to the International Managers and the U.S. Underwriters
and dated such Delivery Date, in the form attached hereto as Exhibit D.
(h) Gallastegui Y Lozano, S.C. shall have furnished to the Lead
Managers its written opinion, as Mexican regulatory counsel for the
Company, addressed to the International Managers and the U.S. Underwriters
and dated such Delivery Date, in the form attached hereto as Exhibit E.
(i) Blake Dawson Waldron shall have furnished to the Lead Managers
its written opinion, as Australian counsel for the Company, addressed to
the International Managers and the U.S. Underwriters and dated such
Delivery Date, in the form attached hereto as Exhibit F.
(j) The Lead Managers shall have received from Shearman & Sterling,
counsel for the International Managers, such opinion or opinions, dated
such Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the
<PAGE>
17
Prospectus and other related matters as the Lead Managers may reasonably
require, and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to
pass upon such matters.
(k) At the time of execution of this Agreement, the Lead Managers
shall have received from Deloitte & Touche LLP a letter, in form and
substance satisfactory to the Lead Managers, addressed to the International
Managers and the U.S. Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission, (ii) stating, as of the date hereof (or, with
respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof),
the conclusions and findings of such firm with respect to the financial
information and other matters ordinarily covered by accountants' "comfort
letters" to underwriters in connection with registered public offerings.
(l) At the time of execution of this Agreement, the Lead Managers
shall have received from Price Waterhouse LLP a letter, in form and
substance satisfactory to the Lead Managers, addressed to the International
Managers and the U.S. Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission, (ii) stating, as of the date hereof (or, with
respect to matters involving changes or developments since the respective
dates as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date hereof),
the conclusions and findings of such firm with respect to the financial
information and other matters ordinarily covered by accountants' "comfort
letters" to underwriters in connection with registered public offerings.
(m) With respect to the letter of Deloitte & Touche LLP referred to
in paragraph (k) of this Section 7 and delivered to the Lead Managers
concurrently with the execution of this Agreement (the "initial letter"),
the Company shall have furnished to the Lead Managers a letter (the "bring-
down letter") of such accountants, addressed to the International Managers
and the U.S. Underwriters and dated such Delivery Date (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission, (ii) stating, as of the date of the bring-down
letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified
<PAGE>
18
financial information is given in the Prospectus, as of a date not more
than five days prior to the date of the bring-down letter), the conclusions
and findings of such firm with respect to the financial information and
other matters covered by the initial letter and (iii) confirming in all
material respects the conclusions and findings set forth in the initial
letter.
(n) With respect to the letter of Price Waterhouse LLP referred to
in paragraph (l) of this Section 7 and delivered to the Lead Managers
concurrently with the execution of this Agreement (the "initial letter"),
the Company shall have furnished to the Lead Managers a letter (the "bring-
down letter") of such accountants, addressed to the International Managers
and the U.S. Underwriters and dated such Delivery Date (i) confirming that
they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of Regulation
S-X of the Commission, (ii) stating, as of the date of the bring-down
letter (or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is given
in the Prospectus, as of a date not more than five days prior to the date
of the bring-down letter), the conclusions and findings of such firm with
respect to the financial information and other matters covered by the
initial letter and (iii) confirming in all material respects the
conclusions and findings set forth in the initial letter.
(o) The Company shall have furnished to the Lead Managers a
certificate, dated such Delivery Date, of its Chairman of the Board, its
President or a Vice President and its chief financial officer stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(p) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement and
the Prospectus and, in their opinion (A) as of the Effective Date, the
Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
(p) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business (x)
from fire, explosion, flood or other calamity,
<PAGE>
19
whether or not covered by insurance, or (y) from any labor dispute or court
or governmental action, order or decree, in either case otherwise than as
set forth or contemplated in the Prospectus or (ii) since such date there
shall not have been any change in the capital stock or long-term debt of
the Company or any of its subsidiaries or any change, or any development
involving a prospective change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of
operations of the Company and its subsidiaries, otherwise than as set forth
or contemplated in the Prospectus, the effect of which, in any such case
described in clause (i) or (ii), is, in the judgment of the Lead Managers,
so material and adverse as to make it impracticable or inadvisable to
proceed with the public offering or the delivery of the Stock being
delivered on such Delivery Date on the terms and in the manner contemplated
in the Prospectus.
(q) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in securities
generally on the New York Stock Exchange or the American Stock Exchange or
in the over-the-counter market, or trading in any securities of the Company
on any exchange or in the over-the-counter market, shall have been
suspended or minimum prices shall have been established on any such
exchange or such market by the Commission, by such exchange or by any other
regulatory body or governmental authority having jurisdiction, (ii) a
banking moratorium shall have been declared by Federal or state
authorities, (iii) the United States shall have become engaged in
hostilities, there shall have been an escalation in hostilities involving
the United States or there shall have been a declaration of a national
emergency or war by the United States or (iv) there shall have occurred
such a material adverse change in general economic, political or financial
conditions (or the effect of international conditions on the financial
markets in the United States shall be such) as to make it, in the judgment
of a majority in interest of the several International Managers,
impracticable or inadvisable to proceed with the public offering or
delivery of the Stock being delivered on such Delivery Date on the terms
and in the manner contemplated in the Prospectus.
(r) The National Market System shall have approved the Stock for
inclusion, subject only to official notice of issuance and evidence of
satisfactory distribution.
(s) The closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the Closing hereunder on the First Delivery
Date.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably satisfactory
to counsel for the International Managers.
<PAGE>
20
8. Indemnification and Contribution. (a) The Company and Primus
Telecommunications, Inc., a Delaware corporation, and Axicorp Pty., Ltd., a
company organized under the laws of Australia (collectively, the "Principal
Subsidiaries"), jointly and severally, shall indemnify and hold harmless each
International Manager, its officers and employees and each person, if any, who
controls any International Manager within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
that International Manager, officer, employee or controlling person may become
subject, under the Securities Act or otherwise, insofar as such loss, claim,
damage, liability or action arises out of, or is based upon, (i) any untrue
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto or (B) in any blue sky application or other
document prepared or executed by the Company (or based upon any written
information furnished by the Company) specifically for the purpose of qualifying
any or all of the Stock under the securities laws of any state or other
jurisdiction (any such application, document or information being hereinafter
called a "Blue Sky Application"), (ii) the omission or alleged omission to state
in any Preliminary Prospectus, the Registration Statement or the Prospectus, or
in any amendment or supplement thereto, or in any Blue Sky Application any
material fact required to be stated therein or necessary to make the statements
therein not misleading or (iii) any act or failure to act or any alleged act or
failure to act by any International Manager in connection with, or relating in
any manner to, the Stock or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon matters covered by clause (i) or (ii) above
(provided that the Company and the Principal Subsidiaries shall not be liable
under this clause (iii) to the extent that it is determined in a final judgment
by a court of competent jurisdiction that such loss, claim, damage, liability or
action resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such International Manager through its gross negligence
or willful misconduct), and shall reimburse each International Manager and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that International Manager, officer,
employee or controlling person in connection with investigating or defending or
preparing to defend against any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that the Company and the
Principal Subsidiaries shall not be liable in any such case to the extent that
any such loss, claim, damage, liability or action arises out of, or is based
upon, any untrue statement or alleged untrue statement or omission or alleged
omission made in any Preliminary Prospectus, the Registration Statement or the
Prospectus, or in any such amendment or supplement, or in any Blue Sky
Application, in reliance upon and in conformity with written information
concerning such International Manager furnished to the Company through the Lead
Managers by or on behalf of any International Manager specifically for inclusion
therein. The foregoing indemnity agreement is in addition to any liability
which the Company or the Principal Subsidiaries may otherwise have to any
<PAGE>
21
International Manager or to any officer, employee or controlling person of that
International Manager.
(b) Each International Manager, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors, and each person, if any, who controls the Company within the meaning
of the Securities Act, from and against any loss, claim, damage or liability,
joint or several, or any action in respect thereof, to which the Company or any
such director, officer or controlling person may become subject, under the
Securities Act or otherwise, insofar as such loss, claim, damage, liability or
action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such International Manager furnished to the Company through the Lead Managers by
or on behalf of that International Manager specifically for inclusion therein,
and shall reimburse the Company and any such director, officer or controlling
person for any legal or other expenses reasonably incurred by the Company or any
such director, officer or controlling person in connection with investigating or
defending or preparing to defend against any such loss, claim, damage, liability
or action as such expenses are incurred. The foregoing indemnity agreement is
in addition to any liability which any International Manager may otherwise have
to the Company or any such director, officer, employee or controlling person.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and provided further that the failure
to notify the indemnifying party shall not relieve it from any liability which
it may have to an indemnified party otherwise than under this Section 8. If any
such claim or action shall be brought against an indemnified party, and it shall
notify the indemnifying party thereof, the indemnifying party shall be entitled
to participate therein and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense thereof with
counsel reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 8 for any
<PAGE>
22
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that the Lead Managers shall have the right to
employ counsel to represent jointly the Lead Managers and those other
International Managers and their respective officers, employees and controlling
persons who may be subject to liability arising out of any claim in respect of
which indemnity may be sought by the International Managers against the Company
or the Principal Subsidiaries under this Section 8 if, in the reasonable
judgment of the Lead Managers, it is advisable for the Lead Managers and those
International Managers, officers, employees and controlling persons to be
jointly represented by separate counsel, and in that event the fees and expenses
of such separate counsel shall be paid by the Company or the Principal
Subsidiaries. No indemnifying party shall (i) without the prior written consent
of the indemnified parties (which consent shall not be unreasonably withheld),
settle or compromise or consent to the entry of any judgment with respect to any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding, or (ii) be liable for any settlement of any such action
effected without its written consent (which consent shall not be unreasonably
withheld), but if settled with the consent of the indemnifying party or if there
be a final judgment of the plaintiff in any such action, the indemnifying party
agrees to indemnify and hold harmless any indemnified party from and against any
loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability, or action in respect thereof, (i) in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Principal Subsidiaries on the one hand and the
International Managers on the other from the offering of the Stock or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company and
the Principal Subsidiaries on the one hand and the International Managers on the
other with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Principal Subsidiaries, on the one hand, and the International
Managers on the other with respect to such offering shall be deemed to be in the
same proportion as the total net proceeds from the offering of the Stock
purchased under this Agreement (before deducting expenses) received by the
Company, on the one hand, and the total underwriting discounts and commissions
received by the International Managers with
<PAGE>
23
respect to the shares of the Stock purchased under this Agreement, on the other
hand, bear to the total gross proceeds from the offering of the shares of the
Stock under this Agreement, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company and the Principal Subsidiaries or the International Managers, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. For purposes of
the preceding two sentences, the net proceeds deemed to be received by the
Company shall be deemed to be also for the benefit of the Principal Subsidiaries
and information supplied by the Company shall also be deemed to have been
supplied by the Principal Subsidiaries. The Company and the Principal
Subsidiaries and the International Managers agree that it would not be just and
equitable if contributions pursuant to this Section were to be determined by pro
rata allocation (even if the International Managers were treated as one entity
for such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, damage or
liability, or action in respect thereof, referred to above in this Section shall
be deemed to include, for purposes of this Section 8(d), any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 8(d), no International Manager shall be required to
contribute any amount in excess of the amount by which the total price at which
the Stock underwritten by it and distributed to the public was offered to the
public exceeds the amount of any damages which such International Manager has
otherwise paid or become liable to pay by reason of any untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The International Managers' obligations to
contribute as provided in this Section 8(d) are several in proportion to their
respective underwriting obligations and not joint.
(e) The International Managers severally confirm and the Company
acknowledges that the statements with respect to the public offering of the
Stock by the International Managers set forth on the cover page of, the legend
concerning over-allotments on the inside front cover page of and the concession
and reallowance figures appearing under the caption "Underwriting" in, the
Prospectus are correct and constitute the only information concerning such
International Managers furnished in writing to the Company by or on behalf of
the Underwriters specifically for inclusion in the Registration Statement and
the Prospectus.
9. Defaulting International Managers. If, on either Delivery Date,
any International Manager defaults in the performance of its obligations under
this Agreement, the remaining non-defaulting International Managers shall be
obligated to purchase the Stock which the defaulting International Manager
agreed but failed to purchase on such Delivery
<PAGE>
24
Date in the respective proportions which the number of shares of the Firm Stock
set opposite the name of each remaining non-defaulting International Manager in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting International Managers in
Schedule 1 hereto; provided, however, that the remaining non-defaulting
International Managers shall not be obligated to purchase any of the Stock on
such Delivery Date if the total number of shares of the Stock which the
defaulting International Manager or International Managers agreed but failed to
purchase on such date exceeds 9.09% of the total number of shares of the Stock
to be purchased on such Delivery Date, and any remaining non-defaulting
International Manager shall not be obligated to purchase more than 110% of the
number of shares of the Stock which it agreed to purchase on such Delivery Date
pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the
remaining non-defaulting International Managers, or those other underwriters
satisfactory to the Lead Managers who so agree, shall have the right, but shall
not be obligated, to purchase, in such proportion as may be agreed upon among
them, all the Stock to be purchased on such Delivery Date. If the remaining
International Managers or other underwriters satisfactory to the Lead Managers
do not elect to purchase the shares which the defaulting International Manager
or International Managers agreed but failed to purchase on such Delivery Date,
this Agreement (or, with respect to the Second Delivery Date, the obligation of
the International Managers to purchase, and of the Company to sell, the Option
Stock) shall terminate without liability on the part of any non-defaulting
International Manager or the Company, except that the Company will continue to
be liable for the payment of expenses to the extent set forth in Sections 6 and
11. As used in this Agreement, the term "International Manager" includes, for
all purposes of this Agreement unless the context requires otherwise, any party
not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm
Stock which a defaulting International Manager agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting International
Manager of any liability it may have to the Company for damages caused by its
default. If other underwriters are obligated or agree to purchase the Stock of
a defaulting or withdrawing International Manager, either the Lead Managers or
the Company may postpone the Delivery Date for up to seven full business days in
order to effect any changes that in the opinion of counsel for the Company or
counsel for the International Managers may be necessary in the Registration
Statement, the Prospectus or in any other document or arrangement.
10. Termination. The obligations of the International Managers
hereunder may be terminated by the Lead Managers by notice given to and received
by the Company prior to delivery of and payment for the Firm Stock if, prior to
that time, any of the events described in Section 7(p) or 7(q), shall have
occurred or if the International Managers shall decline to purchase the Stock
for any reason permitted under this Agreement.
11. Reimbursement of International Managers' Expenses. If the
Company shall fail to tender the Firm Stock for delivery to the International
Managers at the First
<PAGE>
25
Delivery Date by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed, or because any
other condition of the International Managers' obligations hereunder required to
be fulfilled by the Company is not fulfilled, the Company will reimburse the
International Managers for all reasonable out-of-pocket expenses (including fees
and disbursements of counsel) incurred by the International Managers in
connection with this Agreement and the proposed purchase of the Stock, and upon
demand the Company shall pay the full amount thereof to the Lead Managers. If
the International Managers shall have properly exercised their option under
Section 4 hereof to purchase the Option Stock, and if the Company shall fail to
tender the Option Stock for delivery to the International Managers at the Second
Delivery Date by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed, or because any
other condition of the International Managers' obligations hereunder required to
be fulfilled by the Company is not fulfilled, the Company will reimburse the
International Managers for 15% of the reasonable out-of-pocket expenses
(including reasonable fees and disbursements of counsel) incurred by the
International Managers in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company shall pay the full amount
thereof to the Lead Managers. If this Agreement is terminated pursuant to
Section 9 by reason of the default of one or more International Managers, the
Company shall not be obligated to reimburse any defaulting International Manager
on account of those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the International Managers, shall be delivered or sent by
mail, telex or facsimile transmission to Lehman Brothers International
(Europe), One Broadgate, London EC2M 7HA, England, Attention: Syndicate
Department (Fax: 44-171-260-2635), with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of the
General Counsel, Lehman Brothers International (Europe), One Broadgate,
London EC2M 7HA, England; and
(b) if to the Company or to the Principal Subsidiaries, shall be
delivered or sent by mail, telex or facsimile transmission to the address
of the Company set forth in the Registration Statement, Attention: K. Paul
Singh, Chairman and Chief Executive Officer (Fax: (703) 848-4641);
provided, however, that any notice to an International Manager pursuant to
Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission
to such International Manager at its address set forth in its acceptance telex
to the Lead Managers, which address will be supplied to any other party hereto
by the Lead Managers upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made
<PAGE>
26
on behalf of the International Managers by Lehman Brothers Inc. on behalf of the
Lead Managers.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the International Managers, the
Company, and their respective successors. This Agreement and the terms and
provisions hereof are for the sole benefit of only those persons, except that
(A) the representations, warranties, indemnities and agreements of the Company
contained in this Agreement shall also be deemed to be for the benefit of the
person or persons, if any, who control any International Manager within the
meaning of Section 15 of the Securities Act and (B) the indemnity agreement of
the International Managers contained in Section 8(b) of this Agreement shall be
deemed to be for the benefit of directors of the Company, officers of the
Company who have signed the Registration Statement and any person controlling
the Company within the meaning of Section 15 of the Securities Act. Nothing in
this Agreement is intended or shall be construed to give any person, other than
the persons referred to in this Section 13, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision contained
herein.
14. Survival. The respective indemnities, representations,
warranties and agreements of the Company, the Principal Subsidiaries and the
International Managers contained in this Agreement or made by or on behalf on
them, respectively, pursuant to this Agreement, shall survive the delivery of
and payment for the Stock and shall remain in full force and effect, regardless
of any investigation made by or on behalf of any of them or any person
controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary." For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. This Agreement shall be governed by the laws of
the State of New York.
17. Consent to Jurisdiction. Each party irrevocably agrees that any
legal suit, action or proceeding arising out of or based upon this Agreement or
the transactions contemplated hereby ("Related Proceedings") may be instituted
in the federal courts of the United States of America located in the City of New
York or the courts of the State of New York in each case located in the Borough
of Manhattan in the City of New York (collectively, the "Specified Courts"), and
irrevocably submits to the exclusive jurisdiction (except for proceedings
instituted in regard to the enforcement of a judgment of any such court (a
"Related Judgment"), as to which such jurisdiction is non-exclusive) of such
courts in any such suit, action or proceeding. The parties further agree that
service of any process,
<PAGE>
27
summons, notice or document by mail to such party's address set forth above
shall be effective service of process for any lawsuit, action or other
proceeding brought in any such court. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any lawsuit,
action or other proceeding in the Specified Courts, and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such lawsuit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Axicorp Pty., Ltd. hereby
irrevocably appoints CT Corporation System, which currently maintains a New York
City office at 1633 Broadway, New York, New York 10019, United States of
America, as its agent to receive service of process or other legal summons for
purposes of any such action or proceeding that may be instituted in any state or
federal court in the City and State of New York.
18. Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable law, all
immunity (whether on the basis of sovereignty or otherwise) from jurisdiction,
service of process, attachment (both before and after judgment) and execution to
which it might otherwise be entitled in the Specified Courts, and with respect
to any Related Judgment, each party waives any such immunity in the Specified
Courts or any other court of competent jurisdiction, and will not raise or claim
or cause to be pleaded any such immunity at or in respect of any such Related
Proceeding or Related Judgment, including, without limitation, any immunity
pursuant to the United States Foreign Sovereign Immunities Act of 1976, as
amended.
19. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
<PAGE>
28
If the foregoing correctly sets forth the agreement between the
Company, the Principal Subsidiaries and the International Managers, please
indicate your acceptance in the space provided for that purpose below.
Very truly yours,
Primus Telecommunications Group,
Incorporated
By
------------------------------------
Title
------------------------
Primus Telecommunications, Incorporated
By
------------------------------------
Title
------------------------
Axicorp Pty., Ltd.
By
------------------------------------
Title
------------------------
Accepted:
Lehman Brothers International (Europe)
Donaldson, Lufkin & Jenrette
Securities Corporation
For themselves and as Lead Managers
of the several International Managers named
in Schedule 1 hereto
By Lehman Brothers International (Europe)
By
---------------------------------
Authorized Representative
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Lehman Brothers International (Europe) .....................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Total.................................................... 1,200,000
=========
</TABLE>
<PAGE>
EXHIBIT A
, 1996
----------------------
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Re: Primus Telecommunications Group, Incorporated
---------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Primus Telecommunications Group,
Incorporated, a Delaware corporation (the "Company"), in connection with the
execution and delivery by the Company of the Underwriting Agreement dated
_____________, 1996 (the "Underwriting Agreement") by and among the Company and
you, as representatives (the "Representatives") of the several U.S. Underwriters
listed on Schedule I attached thereto (the "U.S. Underwriters"), the
International Underwriting Agreement dated _____________, 1996 (the
"International Underwriting Agreement," and together with the U.S. Underwriting
Agreement, the "Agreements") by and among the Company and you, as Lead Managers
(the "Lead Managers") of the several International Managers listed on Schedule I
thereto (the "International Managers") and the filing by the Company with the
United States Securities and Exchange Commission pursuant to the Securities Act
of 1933, as amended (the "Securities Act"), of the Company's registration
statement on Form S-1 (No. 333-10875), as amended to date, relating to 6,000,000
shares (the "Firm Shares') of the Company's common stock, $.01 par value per
share (the "Common Stock"), and an additional 900,000 shares of Common Stock
which may be purchased by the Underwriters and the International Managers solely
to cover over-allotments (the "Option Shares"). This opinion is delivered to
you pursuant to Section 7(d) of the Agreements.
<PAGE>
A-2
Capitalized terms used herein but not otherwise defined have the meanings
ascribed to them in the Agreements.
In connection with this opinion, we have examined the Agreements, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of the Company, Primus
Telecommunications, Inc. and Axicorp Pty., Ltd. (each a "Subsidiary" and
collectively, the "Subsidiaries") as we have deemed necessary to form the basis
for the opinions hereinafter expressed. We have also made such examination of
laws, of certificates of public officials, and of certificates of officers of
the Company and the Subsidiaries, as we have deemed necessary to enable us to
render this opinion. As to matters of fact relevant to the opinions herein
expressed, we have assumed the accuracy and completeness of, and have relied
solely upon, the representations and warranties of the Company contained in the
Agreements and in such certificates of officers of the Company and the
Subsidiaries, and of certificates of public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than the Company,
(ii) the genuineness of the signatures of, and the authority of, persons signing
the Agreements on behalf of all parties other than the Company, (iii) the
genuineness of all signatures and the authenticity and completeness of all
records, certificates, instruments and documents submitted to us as originals,
and (iv) the conformity to authentic originals of all records, certificates,
instruments and documents submitted to us as certified, conformed, photostatic
or facsimile copies thereof.
This opinion is limited solely to matters governed by the laws of the
State of New York, the General Business Corporation Law of the State of Delaware
and the federal laws of the United States, without regard to conflict or choice
of law principles; provided, however, this opinion does not address federal,
-------- -------
state, or local statutes, laws, rules, regulations, or orders of any
governmental authority relating to governmental regulation of telecommunications
companies. In connection with the opinions set forth in paragraph (1) below, we
have relied exclusively upon a copy of the Company's and each Subsidiary's
charter, as certified by the Secretary of State of their respective
jurisdictions of incorporation, and certificates of good standing issued by
various Secretaries of State, copies of which are attached to this opinion.
Based upon the foregoing assumptions, and subject to the
qualifications set forth below, we are of the opinion that:
(i) The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation, are duly qualified to
do business and are in good standing as foreign corporations in each
jurisdiction in which their respective ownership or lease of property or the
conduct of their respective businesses requires such qualification and have all
power and authority
<PAGE>
A-3
necessary to own or hold their respective properties and conduct the businesses
in which they are engaged;
(ii) The Company has an authorized capitalization as set forth in
the Prospectus, and all of the issued shares of capital stock of the Company
(including the Firm Shares being delivered on the date hereof) have been duly
and validly authorized and issued, are fully paid and non-assessable and conform
to the description thereof contained in the Prospectus; and all of the issued
shares of capital stock of each subsidiary of the Company have been duly and
validly authorized and issued and are fully paid, non-assessable and (except for
directors' qualifying shares) are owned directly or indirectly by the Company,
free and clear of all liens, encumbrances, equities or claims;
(iii) There are no preemptive or other rights to subscribe for or to
purchase, nor any restriction upon the voting or transfer of, any shares of the
Stock pursuant to the Company's charter or by-laws or any agreement or other
instrument known to such counsel;
(iv) The Company and each of its subsidiaries have good and
marketable title in fee simple to all real property owned by them, in each case
free and clear of all liens, encumbrances and defects except such as are
described in the Prospectus or such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Company and its subsidiaries; and all real
property and buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases, with such
exceptions as are not material and do not interfere with the use made and
proposed to be made of such property and buildings by the Company and its
subsidiaries;
(v) To our knowledge and other than as set forth in the
Prospectus, there are no legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of which any property or assets
of the Company or any of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, might have a material
adverse effect on the consolidated financial position, stockholders' equity,
results of operations, business or prospects of the Company and its
subsidiaries; and, to the best of such counsel's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others;
(vi) The Registration Statement was declared effective under the
Securities Act as of ____ p.m. on __________________ ____, 1996, the Prospectus
was filed with the Commission pursuant to subparagraph ____ of Rule 424(b) of
the Rules and Regulations on _____________ ___, 1996 and no stop order
suspending the effectiveness of the Registration Statement has been issued and,
to the knowledge of such counsel, no proceeding for that purpose is pending or
threatened by the Commission;
<PAGE>
A-4
(vii) The Registration Statement and the Prospectus and any further
amendments or supplements thereto made by the Company prior to such Delivery
Date (other than the financial statements and related schedules therein, as to
which we express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations;
(viii) The statements contained in the Registration Statement and
Prospectus under the captions "Certain Transactions," "Management - Employment
Agreements - Option Plans," etc., "Shares Eligible for Future Sale," [other
Sections], insofar as they describe statutes, regulations, legal or governmental
proceedings, contracts or other documents referred to therein are accurate and
fairly summarize the information called for with respect to such documents and
matters and, insofar as such statements constitute matters of law or legal
conclusions, have been reviewed by such counsel and fairly present the
information disclosed therein in all material respects;
(ix) To the best of our knowledge, there are no contracts or other
documents which are required to be described in the Prospectus or filed as
exhibits to the Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described or filed as exhibits to the
Registration Statement;
(x) Each of the Agreements has been duly authorized, executed and
delivered by the Company;
(xi) The issue and sale of the Firm Shares being delivered on the
date hereof by the Company and the compliance by the Company with all of the
provisions of each of the Agreements will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any of its subsidiaries
or any statute or any order, rule or regulation known to such counsel of any
court or governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their properties or assets; and, except for the
registration of the Firm Shares under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be required
under the Exchange Act and applicable state securities laws in connection with
the purchase and distribution of the Firm Shares by the Underwriters, no
consent, approval, authorization or order of, or filing or registration with,
any such court or governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company and the consummation
of the transactions contemplated hereby;
<PAGE>
A-5
(xii) To our knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person the right
(other than rights which have been duly waived) to require the Company to file a
registration statement under the Securities Act with respect to any securities
of the Company owned or to be owned by such person or to require the Company to
include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Securities Act; and
(xiii) There are no restrictions (legal, contractual or otherwise) on
the ability of the Company and its subsidiaries to declare and pay any dividends
or make any payment or transfer of property or assets to its stockholders other
than those described in the Prospectus and such restrictions as would not have a
material adverse effect on the prospects, condition, financial or otherwise, or
in the earnings, business or operations of the Company and its subsidiaries,
taken as a whole; and such descriptions, if any, fairly summarize such
restrictions.
The opinions expressed above are subject to the following additional
qualification:
(a) We have assumed that the parties to the Agreements, other than
the Company, have complied and will continue to comply with all requirements of
good faith, fair dealing and conscionability.
In addition, we hereby advise you that we have participated in
conferences with officers and other representatives of the Company, the
Representatives and Lead Managers, U.S. Underwriters' and International
Managers' Counsel and the independent certified public accountants of the
Company, at which such conferences the contents of the Registration Statement
and Prospectus and related matters were discussed, and although we have not
undertaken to determine independently, and we do not assume any responsibility
for, the accuracy or completeness of the statements contained in the
Registration Statement or the Prospectus, based upon those conferences and
reviews and upon our participation in the preparation of the Registration
Statement and Prospectus, no facts have come to our attention which cause us to
believe that, (i) at the time the Registration Statement became effective and at
all times subsequent thereto up to and on the Closing Date, the Registration
Statement and any amendment or supplement thereto (other than the financial
statements including supporting schedules and the statements contained under
"Business - Government Regulation" and "Risk Factors - Potential Adverse Effect
of Regulation," as to which this statement does not apply) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
(ii) as of the date hereof, or the date of the Prospectus, the Prospectus and
any amendment or supplement thereto (except as aforesaid), contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading.
<PAGE>
A-6
This opinion is rendered only to the addressees set forth above and is
solely for the benefit of such addressees and may not be quoted to or relied
upon by any other person or entity without the express written consent of a
partner of this firm. In addition, Shearman & Sterling may rely upon this
opinion in connection with the delivery of its opinion to the addressees in
connection with the Agreement.
Very truly yours,
PEPPER, HAMILTON & SCHEETZ
By
----------------------------------------
A Partner
<PAGE>
EXHIBIT B
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
October ___, 1996
Ladies and Gentlemen:
We have acted as special United States telecommunications counsel to
Primus Telecommunications Group, Incorporated, a Delaware corporation (the
"Company"), in connection with the execution and delivery by the Company of the
Underwriting Agreement dated _____________, 1996 (the "Underwriting Agreement")
by and among the Company and you, as representatives (the "Representatives") of
the several U.S. Underwriters listed on Schedule I attached thereto (the "U.S.
Underwriters"), the International Underwriting Agreement dated _____________,
1996 (the "International Underwriting Agreement," and together with the U.S.
Underwriting Agreement, the "Agreements") by and among the Company and you, as
Lead Managers (the "Lead Managers") of the several International Managers listed
on Schedule I thereto (the "International Managers") and the filing by the
Company with the United States Securities and Exchange Commission pursuant to
the Securities Act of 1933, as amended (the "Securities Act"), of the Company's
registration statement on Form S-1 (No. 333-10875), as amended to date, relating
to 6,000,000 shares (the "Firm Shares') of the Company's common stock, $.01 par
value per share (the "Common Stock"), and an additional 900,000 shares of Common
Stock which may be purchased by the Underwriters and the International Managers
solely to cover over-allotments (the "Option Shares"). This opinion is
delivered to you pursuant to Section 7(e) of the Agreements. Capitalized terms
used herein but not otherwise defined have the meanings ascribed to them in the
Agreements.
<PAGE>
B-2
In connection with this opinion, we have examined the Agreements, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of the Company [and Primus
Telecommunications, Inc.] (a "Subsidiary") as we have deemed necessary to form
the basis for the opinions hereinafter expressed. We have also made such
examination of laws, of certificates of public officials, and of certificates of
officers of the Company and the Subsidiaries, as we have deemed necessary to
enable us to render this opinion. As to matters of fact relevant to the
opinions herein expressed, we have assumed the accuracy and completeness of, and
have relied solely upon, the representations and warranties of the Company
contained in the Agreements and in such certificates of officers of the Company
and the Subsidiaries, and of certificates of public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than the Company,
(ii) the genuineness of the signatures of, and the authority of, persons signing
the Agreements on behalf of all parties other than the Company, (iii) the
genuineness of all signatures and the authenticity and completeness of all
records, certificates, instruments and documents submitted to us as originals,
and (iv) the conformity to authentic originals of all records, certificates,
instruments and documents submitted to us as certified, conformed, photostatic
or facsimile copies thereof.
Based upon the foregoing assumptions, and subject to the
qualifications set forth below, we are of the opinion that:
(i) (A) The execution and delivery of the Underwriting Agreement by
the Company and the issue and sale of the shares contemplated thereby do not
violate (1) the Federal Communications Act of 1934, as amended (the
"Communications Act"), (2) any rules or regulations of the Federal
Communications Commission ("FCC") applicable to the Company, (3) any state
telecommunications law, rules or regulations ("State Law") applicable to the
Company, and (4) to the best of such counsel's knowledge, any decree from any
court, and (B) no authorization of or filing with the FCC or any state authority
overseeing telecommunications matters ("State Authority"), is necessary for the
execution and delivery of the Underwriting Agreement by the Company and the
issue and sale of the shares contemplated thereby in accordance with the terms
thereof;
(ii) The Company and certain of its subsidiaries (named on Schedule A
hereto) are nondominant carriers authorized by the FCC to provide interstate
interexchangeable telecommunications services. The Company and certain of its
subsidiaries (named on Schedule B hereto) have been granted Section 214
authority by the FCC to provide international message telecommunications
services through the resale of international switched voice and private line
services and each of the Company and such subsidiaries has on file with the FCC
tariffs applicable to its domestic interstate and international services. No
further FCC authority is required by the Company or any such subsidiaries to
conduct its business as described in the Prospectus;
<PAGE>
B-3
(iii) The Company and certain of its subsidiaries (named on Schedule
C hereto) are certified and/or registered to resell intrastate interexchange
telecommunications services in, and are not required to be certified to resell
intrastate interexchange telecommunications services in, the respective states
listed on Schedule D hereto. Each of the Company and such subsidiaries has a
tariff on file in each of the states. No further authority is required from any
of the State Authorities by the Company to conduct its business as described in
the Prospectus;
(iv) (A) Each of the Company and its subsidiaries (1) has made all
reports and filings, and paid all fees, required by the FCC and the State
Authorities; and (2) has all certificates, orders, permits, licenses,
authorizations, consents and approvals of and from, and has made all filings and
registrations, with the FCC and the State Authorities necessary to own, lease,
license and use its properties and assets and to conduct its business in the
manner described in the Prospectus; and (B) neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the revocation
or modification of any such certificates, orders, permits, licenses,
authorizations, consents or approvals, or the qualification or rejection of any
such filing or registration, the effect of which, singly or in the aggregate,
would have a material adverse effect on the prospects, condition, financial or
otherwise, or in the earnings, business or operations of the Company and its
subsidiaries, taken as a whole;
(v) To the best of our knowledge after due inquiry, none of the
Company or any of its subsidiaries is in violation of, or in default under the
Communications Act, the telecommunications rules or regulations of the FCC or
State Law, the effect of which, singly or in the aggregate, would have a
material adverse effect on the prospects, condition, financial or otherwise, or
in the earnings, business or operations of the Company and its subsidiaries,
taken as a whole;
(vi) To the best of our knowledge after due inquiry (A) no decree or
order of the FCC or any State Authority has been issued against the Company or
any of its subsidiaries and (B) no litigation, proceeding, inquiry or
investigation has been commenced or threatened, and no notice of violation or
order to show cause has been issued, against the Company or any of its
subsidiaries before or by the FCC or any State Authority. To the best of such
counsel's knowledge after due inquiry, there are no rulemakings or other
administrative proceedings pending before the FCC or any State Authority which
(A) are generally applicable to telecommunications services or the resale
thereof and (B) which, if decided adversely to the Company's interest, would
have a material adverse effect on the Company and its subsidiaries, taken as a
whole; and
(vii) The statements in the Prospectus under the captions "Risk
Factors - Potential Adverse Effects of Regulation - United States" and "Business
- - Government Regulation - United States," insofar as such statements constitute
a summary of the legal matters, documents or
<PAGE>
B-4
proceedings referred to therein, are accurate in all material respects and
fairly summarize all matters referred to therein.
Very Truly Yours,
Swidler & Berlin, Chartered
<PAGE>
EXHIBIT C
, 1996
----------------------
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Ladies and Gentlemen:
RE: PRIMUS TELECOMMUNICATIONS, INC. ("PRIMUS") - OPINION LETTER
- ----------------------------------------------------------------
We have acted as special counsel to Primus Telecommunications Group,
Incorporated, a Delaware corporation ("Primus"), in connection with the
execution and delivery by Primus of the Underwriting Agreement dated
_____________, 1996 (the "Underwriting Agreement") by and among Primus and you,
as representatives (the "Representatives") of the several U.S. Underwriters
listed on Schedule I attached thereto (the "U.S. Underwriters"), the
International Underwriting Agreement dated _____________, 1996 (the
"International Underwriting Agreement," and together with the U.S. Underwriting
Agreement, the "Agreements") by and among Primus and you, as Lead Managers (the
"Lead Managers") of the several International Managers listed on Schedule I
thereto (the "International Managers") and the filing by Primus with the United
States Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), of Primus' registration statement on
Form S-1 (No. 333-10875), as amended to date, relating to 6,000,000 shares (the
"Firm Shares') of Primus' common stock, $.01 par value per share (the "Common
Stock"), and an additional 900,000 shares of Common Stock which may be purchased
by the Underwriters and the International Managers solely to cover over-
allotments (the "Option Shares"). This opinion is delivered to you pursuant to
Section 7(f) of the Agreements. Capitalized terms used herein but not otherwise
defined have the meanings ascribed to them in the Agreements.
<PAGE>
C-2
In connection with this opinion, we have examined the Agreement, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of Primus and Primus Telecommunications,
Limited. (the "Company") as we have deemed necessary to form the basis for the
opinions hereinafter expressed. We have also made such examination of laws, of
certificates of public officials, and of certificates of officers of Primus and
the Company, as we have deemed necessary to enable us to render this opinion.
As to matters of fact relevant to the opinions herein expressed, we have assumed
the accuracy and completeness of, and have relied solely upon, the
representations and warranties of Primus contained in the Agreements and in such
certificates of officers of Primus and the Company, and of certificates of
public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than Primus, (ii)
the genuineness of the signatures of, and the authority of, persons signing the
Agreements on behalf of all parties other than Primus, (iii) the genuineness of
all signatures and the authenticity and completeness of all records,
certificates, instruments and documents submitted to us as originals, and (iv)
the conformity to authentic originals of all records, certificates, instruments
and documents submitted to us as certified, conformed, photostatic or facsimile
copies thereof.
This opinion is limited solely to matters governed by the laws of the
United Kingdom.
Based upon the foregoing assumptions, and subject to the
qualifications set forth below, we are of the opinion that:
1 (a) the Company has all necessary licenses, designations and
specifications from the Secretary of State for Trade and Industry
("permissions") to conduct its business in the United Kingdom in the
manner described in the Prospectus;
(b) neither the Company nor the Subsidiary has received any notice of
proceedings relating to revocation or modification of any permissions
save for the designation and specification attached herewith and the
notice of intention also attached herewith;
(c) neither the Company nor the Subsidiary is in violation of, or in
default under, English law, regulation, order, or judgment applicable
to either of them; and
(d) there are no restrictions contained in any permission on the ability
of the Company to declare and pay any dividends or make any payment or
transfer any property or assets to its shareholders.
<PAGE>
C-3
2 Insofar as the following statements in the Prospectus related to the UK,
namely those under the captions "Risk Factors - Potential Adverse Effects
of Regulation"; "Business -Government Regulation - United Kingdom" and "-
Competition" and insofar as they constitute summaries of the legal matters,
documents or proceedings referred to therein, they are accurate in all
material respects and fairly summarize all matters referred to therein.
3 The Subsidiary is a limited liability company incorporated under the laws
of England and Wales. To the extent that the Subsidiary owns any assets of
significance these are all located outside the United States. The
Subsidiary has three directors, two of whom are located in the United
States.
Yours faithfully,
Rakisons Solicitors
<PAGE>
EXHIBIT D
__ October 1996
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Ladies and Gentlemen:
We have acted as special counsel to Primus Telecommunications Group,
Incorporated, a Delaware corporation ("Primus"), in connection with the
execution and delivery by Primus of the Underwriting Agreement dated
_____________, 1996 (the "Underwriting Agreement") by and among Primus and you,
as representatives (the "Representatives") of the several U.S. Underwriters
listed on Schedule I attached thereto (the "U.S. Underwriters"), the
International Underwriting Agreement dated _____________, 1996 (the
"International Underwriting Agreement," and together with the U.S. Underwriting
Agreement, the "Agreements") by and among Primus and you, as Lead Managers (the
"Lead Managers") of the several International Managers listed on Schedule I
thereto (the "International Managers") and the filing by Primus with the United
States Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), of Primus' registration statement on
Form S-1 (No. 333-10875), as amended to date, relating to 6,000,000 shares (the
"Firm Shares") of Primus' common stock, $.01 par value per share (the "Common
Stock"), and an additional 900,000 shares of Common Stock which may be purchased
by the Underwriters and the International Managers solely to cover over-
allotments (the "Option Shares"). This opinion is delivered to you pursuant to
Section 7(g) of the Agreements. Capitalized terms used herein but not otherwise
defined have the meanings ascribed to them in the Agreements.
<PAGE>
D-2
In connection with this opinion, we have examined the Agreements, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of Primus Telecommunications Pty. Ltd.
("Primus Australia") and Axicorp Pty., Ltd. ("Axicorp") as we have deemed
necessary to form the basis for the opinions hereinafter expressed. We have
also made such examination of laws, of certificates of public officials, and of
certificates of officers of Primus, Primus Australia and Axicorp, as we have
deemed necessary to enable us to render this opinion. As to matters of fact
relevant to the opinions herein expressed, we have assumed the accuracy and
completeness of, and have relied solely upon, the representations and warranties
of Primus contained in the Agreements and in such certificates of officers of
Primus, Primus Australia and Axicorp, and of certificates of public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than Primus, (ii)
the genuineness of the signatures of, and the authority of, persons signing the
Agreements on behalf of all parties other than Primus, (iii) the genuineness of
all signatures and the authenticity and completeness of all records,
certificates, instruments and documents submitted to us as originals, and (iv)
the conformity to authentic originals of all records, certificates, instruments
and documents submitted to us as certified, conformed, photostatic or facsimile
copies thereof.
This opinion is limited solely to matters governed by the laws of the
Commonwealth of Australia ("Australia").
References to:
1. "$" in this report are to Australian dollars, except where specified as
US$.
2. the "Prospectus" are to a prospectus of the Company dated October __, 1996,
a copy of which is attached to this letter.
We have inspected:
(a) the company statutory records of Axicorp Pty., Ltd. ("Axicorp"), undertaken
a full historical company search with the Australian Securities Commission
and inspected a certified copy of a Share Acquisition Deed dated 1 March
1996 between Primus Telecommunications International, Incorporated ("Primus
International") as purchaser and certain parties as vendors in relation to
all the shares in Axicorp.
(b) the company statutory records of Primus Telecommunications Pty. Ltd.
("Primus Australia") and undertaken a full historical company search with
the Australian Securities Commission.
We have also interviewed Mr. Ravi Bhatia, the Chief Operating Officer of Axicorp
Pty., Ltd. and obtain, a certificate from him, a copy of which is attached.
<PAGE>
D-3
Based upon our investigations and interview and (in relation to paragraphs 3, 5
and 8.3) our opinion of the laws of Australia, we are able to say:
1. AXICORP PTY., LTD. ACN 061 754 943
1.1 Axicorp has an authorized share capital of $10,000,000 divided into
10,000,000 shares of $1.00 and has an issued share capital of $590,000,
comprising 590,000 fully paid ordinary shares of $1.00 each.
Primus International is the registered beneficial owner of shares ( %)
in Axicorp and has options to purchase the balance of the shares in
Axicorp.
Axicorp is a subsidiary of the Company.
432,667 of the shares held by Primus International are mortgaged as
follows:
* 354,000 shares are mortgaged to Fujitsu Australia Ltd. as security for
the performance by Primus International of obligations in relation to
the payment of the balance of purchase price due to Fujitsu for those
shares;
* 78,667 shares are mortgaged to the other vendors to Primus
International as security for the performance by Primus International
of obligations in relation to the put options held by those vendors
over the balance of the shares in Axicorp not owned by Primus
International.
1.2 We are instructed that Axicorp conducts the business of providing local,
domestic and international long distance, mobile, voice, data, facsimile,
enhanced facsimile, calling card, debit card and prepaid card, and ISDN
carriage telecommunications services to business and residential customers
through direct sales force, dealerships, agents, resellers, associations,
affinity groups, direct marketing and others and providing voicemail
equipment to carriers, in Australia and that Axicorp only does business in
Australia.
2. PRIMUS TELECOMMUNICATIONS PTY. LTD. ACN 071 191 396
2.1 Primus Australia has an authorized share capital of $1,000,000 divided into
1,000,000 shares classified as follows:
909,998 Ordinary shares of $1.00 each
10,000 "A" class shares of $1.00 each
10,000 "B" class shares of $1.75 each
10,000 "C" class shares of $1.50 each
10,000 "D" class shares of $1.25 each
10,000 "E" class shares of $1.00 each
10,000 "F" class shares of $0.75 each
10,000 "G" class shares of $0.50 each
10,000 "H" class shares of $0.25 each
10,000 "I" class redeemable preference shares of $1.00 each
<PAGE>
D-4
2 Subscriber shares of $1.00 each
Primus Australia has an issued share capital of $1,001, comprising 1,001
shares of $1.00 each, made up of 999 fully paid ordinary shares and 2 fully
paid Subscriber shares.
The Company is the registered beneficial owner of all the shares in Primus
Australia. Primus Australia is a wholly-owned subsidiary of the Company.
2.2 We are instructed that Primus Australia conducts the business of [..] and
that Primus Australia only does business in Australia.
3. INCORPORATION, STANDING AND POWER & AUTHORITY
3.1 Each of Axicorp and Primus Australia:
(a) has been duly incorporated; and
(b) is validly existing as a corporation in good standing under the laws
of, in the case of Axicorp, Victoria and, in the case of Primus
Australia, New South Wales; and
(c) has all necessary power and authority to own or hold its properties
and conduct the business in which it is engaged in Australia.
4. AUTHORISATIONS TO CONDUCT BUSINESS & COMPLIANCE WITH LAWS
Each of Axicorp and Primus Australia:
(a) has all necessary certificates, orders, permits, licenses,
authorisations, consents and approvals of and from, and has made all
declarations and filings with, all Australian governmental
authorities, all self-regulatory organizations and all courts and
tribunals to own, lease, license and use its properties and assets and
to conduct its business in the manner described in the Prospectus;
(b) has not received any notice of proceedings relating to revocation or
modification of any such certificates, orders, permits, licenses,
authorisations, consents or approvals;
(c) is not in violation of, or in default under, any federal, state or
local law, regulation, rule, decree, order or judgement applicable to
it, the effect of which, singly or in the aggregate, would have a
material adverse effect on the prospects, condition, financial or
otherwise, or on the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, except as described in the
Prospectus.
5. REGULATORY ENVIRONMENT
The statements in the Prospectus under the captions:
* "Risk Factors - Governmental Regulation; Regulatory Uncertainty" and
* "Business - Government Regulation"
<PAGE>
D-5
in each case insofar as such statements constitute summaries of the
Australian legal matters, documents or proceedings referred to therein, are
accurate in all material respects and fairly summarize all matters referred
to therein.
6. RESTRICTIONS ON REPATRIATION OF FUNDS
There are no restrictions (legal, contractual or otherwise) on the ability
of Axicorp or Primus Australia to declare and pay any dividends or make any
payment or transfer of property or assets to its stockholders other than
those described in the Prospectus and such restrictions as would not have a
material adverse effect on the prospects, condition, financial or
otherwise, or on the earnings, business or operations of the Company and
its subsidiaries, taken as a whole; and such descriptions, if any, fairly
summarize such restrictions.
7. LITIGATION
Each of Axicorp and Primus Australia is not aware of any actual or pending
legal proceeding in which it is a party or which is threatened against it
that would be likely, if successful, to have a material adverse effect on
the Company's business, financial condition or results of operations.
Very Truly Yours,
Rawlings & Company Solicitors
<PAGE>
EXHIBIT E
October __, 1996
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Ladies and Gentlemen:
We have acted as special Mexican counsel to Primus Telecommunications
Group, Incorporated, a Delaware corporation ("Primus"), in connection with the
execution and delivery by Primus of the Underwriting Agreement dated
_____________, 1996 (the "Underwriting Agreement") by and among Primus and you,
as representatives (the "Representatives") of the several U.S. Underwriters
listed on Schedule I attached thereto (the "U.S. Underwriters"), the
International Underwriting Agreement dated _____________, 1996 (the
"International Underwriting Agreement," and together with the U.S. Underwriting
Agreement, the "Agreements") by and among Primus and you, as Lead Managers (the
"Lead Managers") of the several International Managers listed on Schedule I
thereto (the "International Managers") and the filing by Primus with the United
States Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), of Primus' registration statement on
Form S-1 (No. 333-10875), as amended to date, relating to 6,000,000 shares (the
"Firm Shares') of Primus' common stock, $.01 par value per share (the "Common
Stock"), and an additional 900,000 shares of Common Stock which may be purchased
by the Underwriters and the International Managers solely to cover over-
allotments (the "Option Shares"). This opinion is delivered to you pursuant to
Section 7(h) of the Agreements. Capitalized terms used herein but not otherwise
defined have the meanings ascribed to them in the Agreements.
<PAGE>
E-2
In connection with this opinion, we have examined the Agreements, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of Primus and Primus Telecomunicationes
de Mexico S.A. de C.V. ("Primus Mexico") as we have deemed necessary to form the
basis for the opinions hereinafter expressed. We have also made such
examination of laws, of certificates of public officials, and of Primus and
Primus Mexico, as we have deemed necessary to enable us to render this opinion.
As to matters of fact relevant to the opinions herein expressed, we have assumed
the accuracy and completeness of, and have relied solely upon, the
representations and warranties of Primus contained in the Agreements and in such
certificates of officers of Primus and Primus Mexico, and of certificates of
public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than Primus, (ii)
the genuineness of the signatures of, and the authority of, persons signing the
Agreements on behalf of all parties other than Primus, (iii) the genuineness of
all signatures and the authenticity and completeness of all records,
certificates, instruments and documents submitted to us as originals, and (iv)
the conformity to authentic originals of all records, certificates, instruments
and documents submitted to us as certified, conformed, photostatic or facsimile
copies thereof.
This opinion is limited solely to matters governed by the laws of
Mexico.
Based upon the foregoing assumptions, and subject to the
qualifications set forth below, we are of the opinion that:
(a) Primus Mexico has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the United Mexican States
("Mexico"), is duly qualified to do business and is in good standing as a
foreign corporation in Mexico where its ownership or lease of property or
the conduct of its businesses, as now conducted, requires such
qualification and has all power and authority necessary to own or hold its
properties and conduct the businesses in which it is engaged;
(b) Primus Mexico has all necessary certificates, orders, permits, licenses,
authorizations, consents and approvals of and from, and has made all
declarations and filings with, all Mexican governmental authorities, all
self-regulatory organizations and all courts and tribunals to own, lease,
license and use its properties and assets and to conduct its business in
the manner described in the Prospectus, and Primus Mexico has not received
any notice of proceedings relating to revocation or modification of any
such certificates, orders, permits, licenses, authorizations, consents or
approvals, nor to the best of our knowledge is Primus Mexico in violation
of, or in default under, any federal, state, local, foreign, supranational,
national or regional law, regulation, rule decree, order or judgment
applicable to Primus Mexico the effect of which, singly or in the
aggregate, would have a material adverse effect on the prospects,
condition, financial or otherwise, or on the
<PAGE>
E-3
earnings, business or operations of Primus Telecommunications, Inc. and its
subsidiaries, taken as a whole, except as described in the Prospectus;
(c) The statements in the Prospectus under the captions "Risk Factors--
Potential Adverse Effects of Regulation--Other Jurisdictions; and
"Business--Government Regulation--Mexico", in each case insofar as such
statements constitute summaries of the Mexican legal matters, documents or
proceedings referred to therein, are accurate in all material respects and
fairly summarize all matters referred to therein; and
(d) There are no restrictions (legal, contractual or otherwise) on the ability
of Primus Mexico to declare and pay any dividends or make any payment or
transfer of property or assets to its stockholders other than those
described in the Prospectus and such restrictions as would not have a
material adverse effect on the prospects, condition, financial or
otherwise, or in the earnings, business or operations of Primus
Telecommunications, Inc. and its subsidiaries, taken as a whole; and such
descriptions, if any, fairly summarize such restrictions.
Very truly yours,
GALLASTEGUI Y LOZANO, S.C.
<PAGE>
EXHIBIT F
October __, 1996
LEHMAN BROTHERS INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Representatives of the Several Underwriters
named in Schedule I to the Underwriting Agreement
referred to below
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
as Lead Managers of the Several International Managers
named in Schedule I to the International Underwriting Agreement
referred to below
c/o Lehman Brothers International (Europe)
One Broadgate
London EC2M 7HA
England
Axicorp Pty., Ltd. - Share Acquisition Deed
Ladies and Gentlemen:
We have acted as special Australian counsel to Primus
Telecommunications Group, Incorporated, a Delaware corporation ("Primus"), in
connection with the execution and delivery by Primus of the Underwriting
Agreement dated _____________, 1996 (the "Underwriting Agreement") by and among
Primus and you, as representatives (the "Representatives") of the several U.S.
Underwriters listed on Schedule I attached thereto (the "U.S. Underwriters"),
the International Underwriting Agreement dated _____________, 1996 (the
"International Underwriting Agreement," and together with the U.S. Underwriting
Agreement, the "Agreements") by and among Primus and you, as Lead Managers (the
"Lead Managers") of the several International Managers listed on Schedule I
thereto (the "International Managers") and the filing by Primus with the United
States Securities and Exchange Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act"), of Primus' registration statement on
Form S-1 (No. 333-10875), as amended to date, relating to 6,000,000 shares (the
"Firm Shares") of Primus' common stock, $.01 par value per share (the "Common
Stock"), and an additional 900,000 shares of
<PAGE>
F-2
Common Stock which may be purchased by the Underwriters and the International
Managers solely to cover over-allotments (the "Option Shares"). This opinion is
delivered to you pursuant to Section 7(i) of the Agreements. Capitalized terms
used herein but not otherwise defined have the meanings ascribed to them in the
Agreements.
In connection with this opinion, we have examined the Agreements, the
Registration Statement and originals, or copies reproduced or certified to our
satisfaction, of such corporate records of Primus and Axicorp Pty., Ltd.
("Axicorp") as we have deemed necessary to form the basis for the opinions
hereinafter expressed. We have also made such examination of laws, of
certificates of public officials, and of certificates of officers of Primus and
Axicorp, as we have deemed necessary to enable us to render this opinion. As to
matters of fact relevant to the opinions herein expressed, we have assumed the
accuracy and completeness of, and have relied solely upon, the representations
and warranties of Primus contained in the Agreements and in such certificates of
officers of Primus and Axicorp, and of certificates of public officials.
We have assumed (i) the due execution and delivery, pursuant to due
authorization, of the Agreements by the parties thereto other than Primus, (ii)
the genuineness of the signatures of, and the authority of, persons signing the
Agreements on behalf of all parties other than Primus, (iii) the genuineness of
all signatures and the authenticity and completeness of all records,
certificates, instruments and documents submitted to us as originals, and (iv)
the conformity to authentic originals of all records, certificates, instruments
and documents submitted to us as certified, conformed, photostatic or facsimile
copies thereof.
This opinion is limited solely to matters governed by the laws of the
Commonwealth of Australia ("Australia") and Victoria.
We acted for Primus Telecommunications International, Inc. ("Primus") in
connection with the Share Acquisition Deed, dated 1 March 1996, between Primus,
the Original Vendors, Fujitsu and the Principals (the "Share Acquisition Deed").
Definitions in the Share Acquisition Deed apply in this opinion with the
exception that:
(a) "Documents" means the following:
(i) the Share Acquisition Deed; and
<PAGE>
F-3
(ii) the Share Mortgages given by Primus to Fujitsu and the Original
Vendors dated 1 March 1996.
and "Document" means any of the Documents.
(b) "Relevant Jurisdictions" means Australia or Victoria.
1. Documents
We have examined and rely on the Documents.
2. Assumptions
For the purpose of giving this opinion we have assumed the following:
(a) the authenticity of all seals and signatures and of any duty stamp or
marking;
(b) the completeness, and the conformity to original instruments, of all
copies submitted to or held by us, and that any document (other than a
Document) submitted to us continues in full force and effect;
(c) each power of attorney under which a Document is executed has not been
revoked or was in full force at all times during which the power was
exercised;
(d) no party is, or will be, engaging in misleading or unconscionable
conduct or seeking to conduct any relevant transaction or any
associated activity in a manner or for a purpose not evident on the
face of the Documents which might render the Documents or any relevant
transaction or associated activity illegal, void or voidable;
(e) insofar as any obligation under any Document is to be performed in any
jurisdiction other than a Relevant Jurisdiction, its performance will
not be illegal or unenforceable under the law of that jurisdiction;
and
(f) that all Documents have been duly stamped.
No assumption specified above is limited by reference to any other
assumption.
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3. Qualifications
Our opinion is subject to the following qualifications.
(a) We express no opinion as to any laws other than the laws of each
Relevant Jurisdiction as in force at the date of this opinion.
(b) Our opinion that an obligation or document is enforceable means that
the obligation or document is of a type and form which courts in the
Relevant Jurisdictions enforce. It does not mean that the obligation
or document can necessarily be enforced in accordance with its terms
in all circumstances. In particular:
(i) equitable remedies, such as injunction and specific performance,
are discretionary;
(ii) the enforceability of an obligation, document or security
interest may be affected by statutes of limitation, by estoppel
and similar principles, by laws concerning insolvency,
bankruptcy, liquidation, enforcement of security interests or
reorganization, or by other laws generally affecting creditors'
rights or duties;
(iii) particular claims may become subject to defences of set-off,
abatement or counterclaim; and
(c) We have relied on the assumptions specified in section 164 of the
Corporations Law and note that you may do so unless:
(i) you have actual knowledge that the matter that you would
otherwise be entitled to assume to be correct is not correct; or
(ii) your connection or relationship with Primus is such that you
ought to know that the matter that you would otherwise be
entitled to assume to be correct is not correct.
(d) Any provision that certain calculations, determinations or
certificates will be conclusive and binding will not apply if those
calculations, determinations or certificates are fraudulent or
manifestly inaccurate.
(e) Any clause providing for the severability of any provision of a
Document may not be enforceable in accordance with its terms, as a
court may reserve to itself a discretion as to whether any provision
is severable.
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(f) The obligation of a party under any Document to pay interest on
overdue amounts at a rate higher than the rate applying before the
amount fell due may be held to constitute a penalty and be
unenforceable.
(g) We express no opinion on any provision in any Document requiring
written amendments and waivers insofar as it suggests that oral or
other modifications, amendments or waivers could not be effectively
agreed upon or granted between or by the parties.
(h) A court may not give effect to an indemnity for legal costs incurred
by an unsuccessful litigant and may only give limited effect to an
indemnity for legal costs incurred by a successful litigant.
(i) To the extent that a provision of a Document may require a corporation
to procure another corporation to do or refrain from doing any act,
matter or thing, if it would be a breach of the duties of the
directors of the second-mentioned corporation to procure that
corporation to do or refrain from doing that act, matter or thing, or
if it would be illegal or impossible for that corporation to do or
refrain from doing that act, matter or thing, such provision may not
be enforceable.
(j) Where a party to or a person entitled to the benefit of a Document is
vested with a discretion or may determine a matter in its opinion, the
laws of a Relevant Jurisdiction may require that the discretion be
exercised reasonably or that the party or person base its opinion on
reasonable grounds.
(k) We express no opinion as to the effectiveness of any provision in a
Document that purports to waive a statutory right or to involve an
agreement not to sue or an arrangement to negotiate or to agree.
(l) We express no opinion on the enforceability of any obligation to act
in good faith.
4. Opinion
Based on the assumptions and subject to the qualifications set out above,
we are of the opinion that each of the Documents constitutes a legal, valid
and binding obligation of each of Primus and each of the Original Vendors
enforceable in accordance with its respective terms in competent courts of
the Relevant Jurisdictions.
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This opinion is addressed to you for your sole benefit. It is not to be relied
upon by any other person or for any other purpose nor is it to be quoted or
referred to in any public document or filed with any governmental agency or
other person without our written consent.
Yours faithfully,
Blake Dawson Waldron
