<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 15, 1997
REGISTRATION NO 333-30195
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------
AMENDMENT NO. 1
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 NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
2070 CHAIN BRIDGE ROAD
SUITE 425
VIENNA, VIRGINIA 22182
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
------------------
K. PAUL SINGH
2070 CHAIN BRIDGE ROAD
SUITE 425
VIENNA, VIRGINIA 22182
(NAME AND ADDRESS OF AGENT FOR SERVICE)
(703) 902-2800
(TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
ELAM M. HITCHNER, III, ESQ. DAVID J. BEVERIDGE, ESQ.
JAMES D. EPSTEIN, ESQ. SHEARMAN & STERLING
PEPPER, HAMILTON & SCHEETZ LLP 599 LEXINGTON AVENUE
3000 TWO LOGAN SQUARE NEW YORK, NY 10022
PHILADELPHIA, PA 19103-2799 (212) 848-4000
(215) 981-4000
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 MAXIMUM AMOUNT
TITLE OF EACH CLASS OF AGGREGATE OF REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1) FOR(2)
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<S> <C> <C>
Units(3)........................................ $125,000,000 $37,879
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% Senior Notes Due 2004....................... -- --
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Warrants to Purchase Shares of Common Stock... -- --
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Common Stock Issuable Upon Exercise of the
Warrants....................................... -- --
</TABLE>
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(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Calculated pursuant to Rule 457(o) based on the maximum aggregate offering
price of all of the securities offered hereby.
(3) Each Unit will consist of Senior Notes Due 2004 and Warrants to purchase
shares of Common Stock. The Senior Notes and Warrants will be offered only
in Units.
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JULY 15, 1997
PROSPECTUS
$125,000,000
[LOGO OF PRIMUS APPEARS HERE]
UNITS CONSISTING OF $ % SENIOR NOTES DUE 2004
AND WARRANTS TO PURCHASE SHARES OF COMMON STOCK
------------
Primus Telecommunications Group, Incorporated ("Primus" or the "Company") is
offering (the "Offering") units (the "Units") each consisting of $1,000
principal amount of % Senior Notes due 2004 (the "Notes") and Warrants
(each a "Warrant") to purchase shares (the "Warrant Shares") of its common
stock, par value $0.01 per share (the "Common Stock"). The Units, Notes and
Warrants are collectively referred to herein as the "Securities." The Notes and
Warrants will not be separately transferable until the Separation Date (as
defined), and the Warrants will not be exercisable until 180 days after the
Closing Date (as defined).
Interest on the Notes will be payable semi-annually in arrears on and
of each year, commencing on , 1998. The Notes will be redeemable at the
option of the Company at any time after , 2001, at the redemption prices
set forth herein, plus accrued and unpaid interest to the redemption date. In
addition, prior to , 2000 the Company may redeem up to 35% of the
aggregate principal amount of Notes at the redemption price set forth herein
plus accrued and unpaid interest through the redemption date with the net cash
proceeds of one or more Public Equity Offerings (as defined). The Notes will
not be subject to any mandatory sinking fund. In the event of a Change of
Control (as defined), holders of the Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the aggregate principal amount thereof, plus accrued and unpaid interest to
the date of purchase.
On the closing date, the Company will use a portion of the proceeds from the
Offering to purchase a portfolio of Pledged Securities (as defined), consisting
of U.S. government securities, which will be pledged as security for the first
six scheduled interest payments on the Notes.
The Notes will be unsecured (except as described above), rank senior in right
of payment to any future subordinated Indebtedness (as defined) of the Company
and pari passu in right of payment with all senior Indebtedness of the Company.
As of March 31, 1997, after giving effect to the Offering, the Company would
have had approximately $127.8 million of indebtedness. Because the Company is a
holding company that conducts its business through its subsidiaries, all
existing and future indebtedness and other liabilities and commitments of the
Company's subsidiaries, including trade payables, will be effectively senior to
the Notes. As of March 31, 1997, the Company's consolidated subsidiaries had
aggregate liabilities of approximately $72.7 million. See "Description of
Notes."
Each Warrant will entitle the holder thereof to purchase, on or after ,
1998, Warrant Shares at an exercise price of $ per share, subject to
adjustment in certain circumstances. The Warrants will, unless exercised,
automatically expire on , 2004. See "Description of Warrants" and "Shares
Eligible for Future Sale." Upon consummation of the Offering, the Warrants will
entitle the holders thereof to purchase, in the aggregate, approximately %
of the Common Stock of the Company on a fully-diluted basis, assuming exercise
of all outstanding options and warrants on the date of this Prospectus. The
Common Stock is listed on the Nasdaq National Market under the symbol "PRTL."
On July 11, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $10 per share.
------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE UNITS, SEE "RISK FACTORS" BEGINNING ON PAGE 10.
------------
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.
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<TABLE>
<CAPTION>
Price to Discounts and Proceeds to
Investors(1) Commissions(2) Company(1)(3)
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<S> <C> <C> <C>
Per Unit............................. % % %
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Total................................ $ $ $
</TABLE>
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(1) Plus accrued interest, if any, from the date of issuance to the date of
delivery.
(2) The Company has agreed to indemnify the Underwriters against, and to
provide contribution with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------
The Units offered by this Prospectus are offered by the Underwriters subject
to prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriters and to certain
further conditions. It is expected that delivery of the Units will be made at
the office of Lehman Brothers Inc., New York, New York or through the
facilities of The Depository Trust Company, on or about , 1997.
------------
LEHMAN BROTHERS DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1997
<PAGE>
In this Prospectus, unless otherwise specified or the context otherwise
requires, references to "dollars," "$" and "US $" are to United States
dollars, references to C$ are to Canadian dollars, and references to A$ are to
Australian dollars.
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company can be inspected and copied at public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549; Seven World Trade Center, 13th Floor, New York, New
York 10048; and Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661. Copies of such material can be obtained from the Public Reference
Section of the Commission, Washington, D.C. 20549 at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding the Company. The address of such
Web site is http://www.sec.gov. The Common Stock is quoted on the Nasdaq
National Market, and copies of the reports, proxy statements and other
information filed by the Company with the Commission may also be inspected at
the offices of Nasdaq Operation, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under 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 the Prospectus as to any contracts,
agreements or other documents filed as an exhibit to the Registration
Statement are not necessarily complete, and in each instance reference is
hereby made to the copy of such contract, agreement or other document filed as
an exhibit to the Registration Statement for a full statement of the
provisions thereof, and each such statement in the Prospectus is qualified in
all respects by such reference.
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.
------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, AT LEVELS WHICH MIGHT NOT OTHERWISE PREVAIL IN THE OPEN
MARKET. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE
OFFERING AND MAY BID FOR AND PURCHASE UNITS IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE "UNDERWRITING."
ii
<PAGE>
[MAP SHOWING PRIMUS' INTELLIGENT GLOBAL NETWORK (OPERATIONAL AND PLANNED),
INCLUDING SWITCH LOCATIONS, POINTS OF PRESENCE AND FIBER LINKS BETWEEN SWITCH
LOCATIONS]
<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.
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 residential 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 "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 its
strategy, the Company also has expanded its operations to include 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 three months ended March 31, 1997 and the
twelve months ended December 31, 1996, the Company had net revenue of
approximately $59 million and pro forma net revenue of approximately $199
million, after giving pro forma effect to the Company's March 1996 acquisition
of Axicorp Pty., Ltd. ("Axicorp"), the fourth largest telecommunications
provider in Australia. The Company's Australian operations generated
approximately $46.9 million, or 79%, of the Company's net revenue for the three
months ended March 31, 1997, and approximately $177.6 million, or 89%, of the
Company's pro forma net revenue for the year ended December 31, 1996. The
Company has approximately 100,000 customers and, as of May 31, 1997, had 487
full-time employees.
The Company primarily targets, on a retail basis, small- and medium-sized
businesses with significant international long distance traffic and ethnic
residential customers 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,
Canada, the United Kingdom and Australia, and toll-free services in the United
States and Canada. The Company markets its services through a variety of sales
channels, including direct sales, independent agents, direct marketing and
associations.
The Company has constructed and is implementing an international
telecommunications network (the "Network") to reduce and control costs, improve
service reliability and increase flexibility to introduce new products and
services. Management believes that as the volume of telecommunications traffic
carried on the Network increases, the Company should improve its profitability
as it realizes economies of scale. Major components of the Network include the
following:
Switches. Since December 31, 1996, when the Company operated one
international gateway switch in Washington, D.C., the Company's Network has
grown to consist of eleven switches, including seven international gateway
switches (New York, Los Angeles, Washington, D.C., Toronto, Vancouver, London,
Sydney) and four domestic switches (Adelaide, Brisbane, Melbourne and Perth).
The Company's international gateway switches will serve as the base for the
global expansion of the Network into new countries as regulatory rules permit
the Company to compete in these new markets. By the end of 1998, the Company
intends to add up to three switches in the United States (expected to be
located in Chicago, Dallas and Miami), three
1
<PAGE>
switches in Europe (expected to be located in Frankfurt, Paris and Rome), one
switch in Mexico (Mexico City) and one switch in Japan (Tokyo), and
approximately 15 points of presence in other major metropolitan areas of the
Targeted Regions.
Transmission Capacity. The Company owns and leases transmission capacity
which connects its switches to each other and to the networks of other
international and domestic telecommunications carriers, including Minimum
Assignable Ownership Units ("MAOUs") in two undersea fiber optic cable systems,
which are TAT-12/TAT-13 and TPC-5, and Indefeasible Rights of Use ("IRUs") in
three undersea fiber optic cable systems, which are CANUS-1, CANTAT-3 and TAT-
12/TAT-13. During the first quarter of 1997, the Company's Los Angeles switch
was connected to its Network in Australia via a trans-Pacific undersea fiber
optic cable system. During the second quarter of 1997, the Company's New York
switch was connected to its London switch via trans-Atlantic undersea fiber
optic cable systems. This trans-Atlantic connection follows the December 1996
receipt by the Company of a full, facilities-based United Kingdom license
which, among other things, allows the Company to own the United Kingdom half of
international circuits. In July 1997, the Company became one of five licensed
carriers permitted to own and operate transmission facilities in Australia. The
Company expects to continue to acquire additional capacity on both existing and
future international fiber optic cable systems.
Foreign Carrier Agreements. In selected countries where competition with the
local Postal, Telephone and Telegraph Operator ("PTT") is limited or not
currently permitted, the Company has entered into foreign carrier agreements
with PTTs or other authorized service providers which permit the Company to
provide traffic into and receive return traffic from these countries. The
Company has existing foreign carrier agreements with the government-controlled
PTTs in India, Iran and Honduras and, in April 1997, entered into a foreign
carrier agreement with the Cyprus Telecommunications Authority ("CyTA") to
establish a direct, fiber optic connection with the Company's London switch for
international long distance primarily to countries in the Middle East. The
Company also has entered into foreign carrier agreements in Israel, Malaysia,
New Zealand and Sri Lanka which are expected to become effective by the end of
1997. The Company views foreign carrier agreements as viable means of
transmitting traffic to countries that have yet to become deregulated. The
Company intends to enter into several other foreign carrier agreements by the
end of 1998.
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 customers
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
traffic volumes more quickly to achieve economies of scale.
. 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
2
<PAGE>
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 consists 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 owned and leased transmission facilities, resale
arrangements and foreign carrier agreements. In an effort to manage
transmission costs, the Company pursues a flexible approach with respect
to Network expansion. In most instances, the Company initially obtains
additional capacity on a variable cost, per-minute basis, next acquires
additional capacity on a fixed cost basis when traffic volumes make 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. Management believes that
the Company 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 customers that prefer a full service telecommunications
provider. The Company believes this approach strengthens its marketing
efforts and increases customer retention.
. Grow through Selected Acquisitions. As part of its business strategy,
the Company frequently evaluates potential acquisitions, joint ventures
and strategic alliances. The Company views acquisitions as a means to
enter additional markets and expand its operations within existing
markets. The Company's acquisition criteria include long-distance
service providers with an established customer base, complementary
operations, licenses to operate as an international carrier, an
experienced management team, and businesses in countries into which the
Company seeks to enter.
On April 8, 1997, the Company acquired selected assets of the Canadian long
distance provider, Cam-Net Communications Network, Inc. and its subsidiaries
("Cam-Net"), based in Vancouver, British Columbia, including its customer
base, customer contracts, customer billing and other back room support
systems, and accounts receivable, for C$6.75 million, or approximately US$5
million, in cash. As a result of this acquisition, the Company has a customer
and a sales and marketing presence in all major metropolitan areas throughout
Canada (including Vancouver, Montreal and Toronto), providing domestic and
international direct dial long-distance services to approximately 15,000
residential customers and 5,000 small- and medium-sized businesses.
In March 1996, the Company acquired Axicorp, the fourth largest
telecommunications provider in Australia. Axicorp has provided the Company
with early entry into the deregulating Australian telecommunications market
and serves as the Company's gateway to the Asia-Pacific region. 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
strategy. Prior to the acquisition, Axicorp was a switchless reseller of long
distance, local switched and cellular services. Since the acquisition, the
Company has installed and begun carrying traffic on a five-switch network in
Australia, has leased fiber capacity connecting Australia and the United
States and, in July 1997, became one of five licensed carriers permitted to
own and operate transmission facilities in Australia. The Company expects
Australian gross
3
<PAGE>
margin to increase as it migrates existing business customer traffic onto the
Network. Primus has also increased Axicorp's focus on higher margin, higher
volume business customers with significant international long-distance traffic,
and, as a result, has increased Axicorp's direct sales force and reduced its
reliance on marketing through associations. For the three months ended March
31, 1997 and for the year ended December 31, 1996, the Company's Australian
operations generated net revenue of $46.9 million and pro forma net revenue of
$177.6 million, respectively. The Company acquired Axicorp for $5.7 million in
cash, including transaction costs, 455,000 shares of Series A Convertible
Preferred Stock (which were converted into 1,538,355 shares of Common Stock)
and seller financing consisting of two notes aggregating $8.1 million, on a
discounted basis.
In November 1996, the Company completed an initial public offering of its
Common Stock that generated net proceeds of approximately $54.4 million (the
"Initial Public Offering"). In July 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, assuming the exercise on July 11, 1997 of all of their
outstanding warrants, collectively beneficially owns 13.3% of the Common Stock.
The net proceeds from the Initial Public Offering and the Private Equity Sale
are being used to expand the Company's Network and to fund operating losses,
working capital, and other general corporate purposes. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Certain Transactions."
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, and
M/A Com (subsequently acquired by Hughes Network Systems, Inc.). See
"Management--Executive Officers, Directors and Key Employees."
The Company was incorporated in Delaware in February 1994. The executive
offices of the Company are located at 2070 Chain Bridge Road, Suite 425,
Vienna, Virginia 22182 and its telephone number is (703) 902-2800.
4
<PAGE>
THE OFFERING
UNITS:
Issuer........................ Primus Telecommunications Group, Incorporated.
Securities Offered............ Units, each consisting of $1,000 principal
amount % Senior Notes due 2004 and
Warrants to purchase shares of Common
Stock.
Separation Date............... The Notes and the Warrants will not be
separately transferable until the Separation
Date which will be the earliest of (a) ,
1998, (b) an Exercise Event (as defined), and
(c) such other date as Lehman Brothers Inc.
shall determine.
Use of Proceeds............... The net proceeds from the Offering are
estimated to be approximately $120 million.
Primus intends to apply the net proceeds to
purchase the Pledged Securities, to repay
certain indebtedness, to fund capital
expenditures and operating losses, for working
capital requirements, and for other general
corporate purposes, including potential
acquisitions, joint ventures and strategic
alliances. See "Use of Proceeds."
NOTES:
Maturity...................... , 2004.
Interest Payment Dates........ and , commencing on , 1998.
Ranking....................... The Notes will rank senior in right of payment
to any future subordinated Indebtedness of the
Company, and pari passu in right of payment
with all senior Indebtedness of the Company. As
of March 31, 1997, after giving effect to the
Offering, the Company would have had
approximately $127.8 million of Indebtedness.
Because the Company is a holding company that
conducts its business through its subsidiaries,
all existing and future Indebtedness and other
liabilities and commitments of the Company's
subsidiaries, including trade payables, will be
effectively senior to the Notes. As of March
31, 1997, the Company's consolidated
subsidiaries had aggregate liabilities of
approximately $72.7 million.
Security...................... The Indenture will require the Company to
purchase and pledge to the Trustee (as
defined), as security for the benefit of the
holders of the Notes, Pledged Securities
consisting of U.S. government securities in an
amount sufficient to provide for the payment in
full of the first six scheduled interest
payments due on the Notes. The Company expects
to use approximately $38.7 million of the net
proceeds of the Offering to acquire the Pledged
Securities. However, the precise amount of the
Pledged Securities to be acquired will depend
upon interest rates prevailing on the
5
<PAGE>
Closing Date. Assuming the first six scheduled
interest payments on the Notes are made in a
timely manner, all of the Pledged Securities
will be released from the Pledge Account and
the Notes will be unsecured. See "Description
of the Notes--Security."
Optional Redemption........... The Notes are not redeemable prior to ,
2001. Thereafter, the Notes will be redeemable,
in whole or in part, at the option of the
Company, at the redemption prices set forth
herein plus accrued and unpaid interest to the
applicable redemption date. In addition, prior
to , 2000, the Company may redeem up to 35%
of the originally issued principal amount of
Notes at the redemption price set forth herein
plus accrued and unpaid interest through the
redemption date with the net cash proceeds of
one or more Public Equity Offerings; provided,
however, that at least 65% of the originally
issued principal amount of the Notes remains
outstanding after the occurrence of such
redemption. See "Description of Notes--Optional
Redemption."
Change of Control............. Upon the occurrence of a Change of Control,
each holder of Notes will have the right to
require the Company to repurchase all or any
part of such holder's Notes at a purchase price
in cash equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to
the date of purchase. See "Description of
Notes--Repurchase of Notes Upon a Change of
Control."
Covenants..................... The Indenture pursuant to which the Notes will
be issued will contain certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries to
incur additional indebtedness and issue
preferred stock, pay dividends or make other
distributions, repurchase Capital Stock or
subordinated indebtedness or make certain other
Restricted Payments, create certain liens,
enter into certain transactions with
affiliates, sell assets, issue or sell Capital
Stock of the Company's Restricted Subsidiaries
or enter into certain mergers and
consolidations. See "Description of Notes--
Covenants."
WARRANTS:
Total Number of Warrants...... Warrants, which when exercised would
entitle the holders thereof to acquire an
aggregate of Warrant Shares representing
approximately % of the Common Stock on a
fully-diluted basis, subject to adjustment,
assuming exercise of all outstanding options
and warrants on the date of this Prospectus.
See "Description of Warrants" and "Shares
Eligible for Future Sale." The Warrants will be
issued pursuant to the Warrant Agreement.
Expiration Date............... , 2004.
Exercise...................... Each Warrant will entitle the holder thereof to
purchase shares of Common Stock at an
exercise price of $ per
6
<PAGE>
share. The number of shares of Common Stock for
which, and the price per share at which, a
Warrant is exercisable are subject to
adjustment upon the occurrence of certain
events as provided in the Warrant Agreement.
The Warrants will be exercisable on or after
, 1998.
Listing Requirements.......... The Common Stock is currently quoted on the
Nasdaq National Market under the symbol "PRTL."
Application will be made to have the Warrant
Shares quoted on the Nasdaq National Market.
Neither the Units, the Warrants nor the Notes
are expected to be quoted on Nasdaq or traded
on a national securities exchange.
Registration Rights........... Pursuant to the Warrant Agreement, the Company
is required to file the Common Shelf
Registration Statement under the Securities Act
covering the issuance of shares of Common Stock
to the holders of the Warrants upon exercise of
the Warrants by the holders thereof and to use
its reasonable efforts to cause the Common
Shelf Registration Statement to be declared
effective on or before 180 days after the date
of this Prospectus and to remain effective,
subject to certain exceptions, until the
earlier of (i) such time as all Warrants have
been exercised and (ii) the Expiration Date.
See "Description of Warrants--Registration
Rights."
For additional information concerning the Notes and Warrants and the
definitions of certain capitalized terms used above, see "Description of
Units," "Description of Notes," "Description of Warrants" and "Description of
Capital Stock."
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE UNITS, SEE "RISK FACTORS" BEGINNING ON PAGE 10.
7
<PAGE>
SUMMARY UNAUDITED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary unaudited pro forma consolidated
financial and other data for the years ended December 31, 1995 and 1996 and the
three months ended March 31, 1996, adjusted to give effect to the acquisition
of Axicorp as if it had occurred on January 1, 1995, historical financial data
for the three months ended March 31, 1997 and certain actual balance sheet data
and balance sheet data as adjusted for the Offering, all of which have 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 Statement of Operations and related
notes thereto and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
-------------------------- -------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ 125,628 $ 199,340 $ 43,505 $ 59,036
Cost of revenue......... 114,639 182,601 39,284 55,034
------------ ------------ ----------- -----------
Gross margin.......... 10,989 16,739 4,221 4,002
Operating expenses:
Selling, general and
administrative....... 12,955 22,198 3,958 8,829
Depreciation and
amortization......... 1,842 2,464 526 797
------------ ------------ ----------- -----------
Total operating
expenses........... 14,797 24,662 4,484 9,626
------------ ------------ ----------- -----------
Loss from operations.... (3,808) (7,923) (263) (5,624)
Interest expense........ (885) (995) (235) (151)
Interest income......... 132 909 171 785
Other income (expense).. -- (345) (213) 119
------------ ------------ ----------- -----------
Loss before income
taxes.................. (4,561) (8,354) (540) (4,871)
Income taxes............ 124 477 648 36
------------ ------------ ----------- -----------
Net loss................ $ (4,685) $ (8,831) $ (1,188) $ (4,907)
============ ============ =========== ===========
Net loss per common and
common share
equivalent............. $ (0.41) $ (0.63) $ (0.10) $ (0.28)
============ ============ =========== ===========
Weighted average number
of common and common
share equivalents
outstanding............ 11,412 13,953 12,385 17,779
============ ============ =========== ===========
GEOGRAPHIC DATA:
Net revenue:
United States......... $ 1,167 $ 16,573 $ 1,856 $ 8,271
Australia............. 124,461 177,621 41,574 46,886
United Kingdom........ -- 5,146 75 3,879
------------ ------------ ----------- -----------
Total............... $ 125,628 $ 199,340 $ 43,505 $ 59,036
============ ============ =========== ===========
OTHER DATA:
EBITDA (1).............. $ (1,966) $ (5,459) $ 263 $ (4,827)
Capital expenditures
(actual) (2)........... $ 974 $ 15,959 $ 216 $ 9,141
Number of switches
(actual)............... 1 1 1 9 (3)
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $48,971 $119,971
Restricted cash........................................ -- 38,695
Working capital........................................ 21,347 141,347
Total assets........................................... 144,139 258,834
Total long-term obligations (including current
portion).............................................. 13,135 127,830
Stockholders' equity................................... 71,394 71,394
</TABLE>
- --------
(1) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and other income (expense). It is a measure
commonly used in the telecommunications industry and is presented to assist
in understanding the Company's operating results. Additionally, certain
covenants contained in the Indenture are based upon EBITDA. EBITDA is not
intended to represent cash flows for the period. See the Consolidated
Statement of Cash Flows contained elsewhere in the Prospectus.
(2) Capital expenditures include assets acquired through capital lease
financing and other debt.
(3) Excludes two additional switches now in operation.
(4) Adjusted to give effect to the Offering and the application of the net
proceeds thereof as if the Offering had occurred on March 31, 1997. For
purposes of this presentation, no value has been assigned to the Warrants.
Such value will be determined at the time of pricing of the Offering.
8
<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts
are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use
of forward-looking terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks
and uncertainties. In addition, from time to time, the Company or its
representatives have made or may make forward-looking statements, orally or in
writing. Furthermore, such forward-looking statements may be included in, but
are not limited to, various filings made by the Company with the Commission,
or press releases or oral statements made by or with the approval of an
authorized executive officer of any of the Company.
Management wishes to caution the reader that the forward-looking statements
referred to above and contained herein in this Prospectus regarding matters
that are not historical facts involve predictions. No assurance can be given
that the future results will be achieved; actual events or results may differ
materially as a result of risks facing the Company. Such risks include, but
are not limited to, changes in business conditions, changes in the
telecommunications industry and the general economy, competition, changes in
service offerings, and risks associated with the Company's limited operating
history, entry into developing markets, managing rapid growth, international
operations, dependence on effective information systems, and development of
its network, as well as regulatory developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied, in such forward-looking statements. See "Risk Factors."
9
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information contained elsewhere in this Prospectus,
in evaluating whether to purchase the Units offered hereby.
SUBSTANTIAL INDEBTEDNESS; AND LIQUIDITY
The Company will have substantial indebtedness after the Offering. As of
March 31, 1997, on a pro forma basis after giving effect to the Offering and
the application of the net proceeds therefrom, the Company's total
indebtedness would have been approximately $127.8 million, its stockholders'
equity would have been approximately $71.4 million and the Company's total
assets would have been approximately $258.8 million, of which approximately
$20.5 million would have been intangible assets. For the year ended December
31, 1996 and the three months ended March 31, 1997, after giving pro forma
effect to the acquisition of Axicorp and this Offering, and the application of
the net proceeds therefrom, the Company's consolidated EBITDA would have been
approximately negative $5.5 million and negative $4.8 million, respectively,
and its earnings would have been insufficient to cover fixed charges by
approximately $8.6 million and $5.1 million, respectively. The Indenture
limits, but does not prohibit, the incurrence of additional indebtedness by
the Company and certain of its subsidiaries and does not limit the amount of
indebtedness incurred to finance the cost of telecommunications equipment. The
Company anticipates that it and its subsidiaries will incur additional
indebtedness in the future. See "Selected Financial Data," "Unaudited Pro
Forma Consolidated Statements of Operations," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Description of
Notes."
The level of the Company's indebtedness could have important consequences to
holders of the Notes, including the following: (i) the debt service
requirements of any additional indebtedness could make it more difficult for
the Company to make payments of interest on the Notes; (ii) the ability of the
Company to obtain any necessary financing in the future for working capital,
capital expenditures, debt service requirements or other purposes may be
limited; (iii) a substantial portion of the Company's cash flow from
operations, if any, must be dedicated to the payment of principal and interest
on its indebtedness and other obligations and will not be available for use in
its business; (iv) the Company's level of indebtedness could limit its
flexibility in planning for, or reacting to, changes in its business; (v) the
Company is more highly leveraged than some of its competitors, which may place
it at a competitive disadvantage; and (vi) the Company's high degree of
indebtedness will make it more vulnerable in the event of a downturn in its
business.
The Company must substantially increase its net cash flow in order to meet
its debt service obligations, and there can be no assurance that the Company
will be able to meet such obligations, including its obligations under the
Notes. If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments, or if it otherwise fails to
comply with the various covenants under its indebtedness, it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company. Such defaults could result
in a default on the Notes and could delay or preclude payments of interest or
principal thereon and may cause the Warrants and Warrant Shares to have little
or no value.
HISTORICAL AND FUTURE OPERATING LOSSES; NEGATIVE EBITDA; AND NET LOSSES
Since inception through March 31, 1997, the Company had negative cash flow
from operating activities of $7.6 million and negative EBITDA of $13.6
million. In addition, the Company incurred net losses in 1995 and 1996, and in
the first quarter of 1997, of $2.4 million, $8.8 million and $4.9 million,
respectively, and had an accumulated deficit of approximately $16.7 million as
of March 31, 1997. Although the Company has experienced net revenue growth in
each of its last nine quarters, such growth should not be considered to be
indicative of future net revenue growth, if any. The Company expects to
continue to incur additional operating losses, negative EBITDA and negative
cash flow from operations as the Company expands its operations and continues
to build-out and upgrade 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 or sustain profitability or
10
<PAGE>
positive cash flow from operations in any future period. If the Company cannot
achieve and sustain operating profitability or positive cash flow from
operations, it may not be able to meet its debt service or working capital
requirements (including its obligations with respect to the Notes) and may
cause the Warrants and Warrant Shares to have little or no value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
HOLDING COMPANY STRUCTURE; AND RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS TO
REPAY NOTES
Primus is a holding company, the principal assets of which are its operating
subsidiaries in the United States, Canada, Australia and the United Kingdom.
As a holding company, the Company's internal sources of funds to meet its cash
needs, including payment of expenses and principal and interest on the Notes,
are dividends, intercompany loans and other permitted payments from its direct
and indirect subsidiaries, as well as its own credit arrangements. The
subsidiaries of the Company are legally distinct from the Company and have no
obligation, contingent or otherwise, to pay amounts due with respect to the
Notes or to make funds available for such payments and will not guarantee the
Notes. Additionally, many of the Company's subsidiaries are organized in
jurisdictions outside the United States. The ability of the Company's
operating subsidiaries to pay dividends, repay intercompany loans or make
other distributions to Primus may be restricted by, among other things, the
availability of funds, 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, repay intercompany loans or make any such other
distributions would restrict Primus's ability to repay the Notes and its
ability to utilize cash flow from one subsidiary to cover shortfalls in
working capital at another subsidiary, could cause the Warrants and the
Warrant Shares to have little or no value, and could otherwise have a material
adverse effect upon the Company's business, financial condition and results of
operations.
Because the Company is a holding company that conducts its business through
its subsidiaries, claims of creditors of such subsidiaries will generally have
priority over the assets of such subsidiaries over the claims of the Company
and the holders of the Company's indebtedness. Accordingly, the Notes will be
effectively subordinated to all existing and future indebtedness and other
liabilities and commitments of the Company's subsidiaries, including trade
payables. As of March 31, 1997, the Company's consolidated subsidiaries had
aggregate liabilities of approximately $72.7 million. Any right of the Company
to receive assets of any subsidiary upon the liquidation or reorganization of
such subsidiary (and the consequent rights of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
such subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor, in which case the claims of the Company would still
be subordinate to any security in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company. In
addition, holders of such indebtedness of the Company would have a claim on
the assets securing such indebtedness that is prior to the holders of the
Notes and would have a claim that is pari passu with the holders of the Notes
to the extent such security did not satisfy such indebtedness. The Company has
no significant assets other than the stock of its subsidiaries and it is
expected that the stock of the subsidiaries will be pledged to secure a credit
facility.
LIMITED OPERATING HISTORY; AND 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 primarily by the local PTTs.
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."
11
<PAGE>
DEVELOPMENT OF THE NETWORK; AND MIGRATION OF TRAFFIC ONTO 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, and its ability to generate and maintain traffic on the
Network. By expanding the Network, the Company will incur additional fixed
operating costs that typically are, particularly with respect to international
transmission lines, in excess of the revenue attributable to the transmission
capacity funded by such costs until the Company generates additional traffic
volume for such capacity. 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 design, implement, operate, manage or maintain
the Network, or generate or maintain traffic, could have a material adverse
effect on the Company's business, results of operations and financial
condition. In addition, the Company intends to expand the Network as more
countries deregulate their telecommunications industries, which will require
the Company to acquire additional licenses and equipment. There can be no
assurance that the Company will be able to obtain the licenses or purchase the
necessary equipment on favorable terms or, if it does, that the development of
the Network in these countries will be successful. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Business--Network."
To date, the Company's operation of the Network and the anticipated
operating improvements that are expected to result from the use of the Network
have been adversely affected by a slower than expected migration of the
Company's existing traffic in Australia from the Telstra Corporation Ltd.
("Telstra") network to the Company's Network. The Company has applied to
Telstra to convert approximately 120,000 existing telephone numbers from the
Telstra network to the Company's Network under the non-code access program
which is expected to be initiated by September 1997 and implemented over the
next 12 months. The rate at which these customer telephone numbers can be
processed and connected will significantly impact the Company's ability to
increase its gross margin percentages in Australia. See "Management's
Discussion and Analysis of Financial Conditions 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 is continuing to develop the Network by
adding switches, cable and satellite facilities, expanding its operations
within North America, Australia and the United Kingdom, and expanding 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, billings systems and
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."
ACQUISITION RISKS
A key element of the Company's business strategy is to acquire businesses
and assets of businesses that are complementary to those of the Company, and a
major portion of the Company's growth in recent years has resulted from such
acquisitions. These acquisitions involve certain operational and financial
risks. Operational risks include the possibility that an acquisition does not
ultimately provide the benefits originally anticipated by the Company's
management, while the Company continues to incur operating expenses to provide
the services
12
<PAGE>
formerly provided by the acquired company. Financial risks involve the
incurrence of indebtedness by the Company in order to effect the acquisition
(subject to the limitations contained in the Indenture) and the consequent
need to service that indebtedness. In addition, the issuance of stock in
connection with acquisitions dilutes the voting power and may dilute certain
other interests of existing shareholders. In carrying out its acquisition
strategy, the Company attempts to minimize the risk of unexpected liabilities
and contingencies associated with acquired businesses through planning,
investigation and negotiation, but such unexpected liabilities may
nevertheless accompany acquisitions. There can be no assurance that the
Company will be successful in identifying attractive acquisition candidates,
completing and financing additional acquisitions on favorable terms, or
integrating the acquired businesses or assets into its own.
NEED FOR ADDITIONAL FINANCING
The Company believes that the net proceeds from the Offering, together with
its existing cash and available capital lease financing (subject to the
limitations contained in the Indenture) will be sufficient to fund the
Company's operating losses, debt service requirements, capital expenditures
(including the development of the Network as currently contemplated) and other
cash needs for its operations for approximately 18 to 24 months. If the
Company enters into a $50 million revolving line of credit (the "Senior Credit
Facility") as contemplated by a commitment letter dated July 14, 1997, (the
"Commitment Letter") received from Lehman Commercial Paper Inc ("LCPI"), an
affiliate of one of the underwriters, the Company believes it would have
sufficient funding to cover planned expansion of the Network and operating
losses until such time as the Company begins to generate operating income;
however, this is a forward looking statement and there can be no assurance in
this regard. There can be no assurance that the Company will obtain the Senior
Credit Facility on the terms set forth in the Commitment Letter if at all. See
"Description of Senior Credit Commitment." Furthermore, there can be no
assurance that the Company would be able to obtain a substitute credit
facility or capital lease financing on commercially reasonable terms, if at
all. If the Company's plans or assumptions change (including those with
respect to the development of the Network, the level of its operations and its
operating cash flow), if its assumptions prove inaccurate, if it consummates
investments or acquisitions with companies that are complementary to the
Company's current operations or if it experiences unexpected costs or
competitive pressures, or if the net proceeds from the Offering, existing cash
and any other borrowings prove to be insufficient, the Company may need to
seek additional capital sooner than anticipated.
The Company may seek to raise such additional capital from public or private
equity or debt sources. The Indenture contains certain restrictive covenants
that will affect, and in many respects will significantly limit or prohibit,
among other things, the ability of the Company to incur additional
indebtedness and to create liens. See "Description of Notes--Covenants." There
can be no assurance that the Company will be able to raise such capital on
satisfactory terms or at all. If the Company is able to raise additional funds
through the incurrence of debt, and it does so, it would likely become subject
to additional restrictive financial covenants. If additional funds are raised
through the issuance of equity securities, the percentage ownership of the
Company's then current equity holders, including the ownership interests
represented by the Warrants and the Warrant Shares, 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. 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, its ability to compete, its ability to
meet its obligations on the Notes, and the value of the Warrants and the
Warrant Shares. 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 deregulated 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
13
<PAGE>
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. This increase in competition
could adversely affect net revenue per minute and gross margin as a percentage
of net revenue. 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. Prices for long
distance calls in several of the markets in which the Company competes have
declined in recent years and are likely to continue to decrease. 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 stronger 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 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
Network Services, Inc. ("WorldCom"), Frontier Communications Services, Inc.
("Frontier"), and LCI International, Inc. ("LCI") in the United States;
Telstra, Optus Communications Pty. Limited ("Optus"), AAPT, World Exchange and
GlobalOne in Australia; British Telecommunications plc ("British Telecom"),
Mercury Communications ("Mercury"), AT&T, WorldCom, GlobalOne, and ACC
Corporation ("ACC") in the United Kingdom; and Stentor, AT&T Canada Long
Distance Services Co. ("AT&T LDS"), fONOROLA Inc. ("fONOROLA"), Sprint Canada
and ACC in Canada.
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, the number of competitors
is likely to increase as a result of the new competitive opportunities created
by the World Trade Organization ("WTO"). Under the terms of an agreement under
the WTO (the "WTO Agreement"), the United States and 68 other participating
countries have committed to open their telecommunications markets to
competition starting on January 1, 1998. Further, as a result of the recently
enacted Telecommunications Act of 1996 (the "1996 Telecommunications Act") in
the United States, once certain conditions are met, the 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
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. In addition, with the ongoing
deregulation of the Australian telecommunications market and the granting of
additional carrier licenses which began in July 1997, the Company could
experience additional competition in the Australian market from newly licensed
telecommunications carriers. This increased competition could adversely impact
the Company's ability to expand its customer base and achieve increased
revenue growth, and consequently, 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 primarily 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
14
<PAGE>
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 these 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 foreign carrier agreements with PTTs
and other service providers. 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 United States 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 conduct
successfully 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.
15
<PAGE>
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 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. See "--Potential Adverse Effects of Regulation."
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 and undersea cable 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."
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 does not maintain any key person life insurance
on the lives of any officer, director or key employee. The Company's future
success will also depend on its ability to attract and retain additional key
management and 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."
16
<PAGE>
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 by
the 1996 Telecommunications Act (the "Communications 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 Communications Act has
opened the Company's United States market to increased competition. There can
be no assurance that future regulatory, judicial and legislative changes in
the United States will not result in 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 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"). 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 recently
reformed its regulation of LEC access charges to better account for increasing
levels of local competition. Under the new rules, LECs will be permitted to
allow certain volume discounts in the pricing of access charges. While the
import of these new rules is not yet certain, it is possible that 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.
Such requirements may delay, prevent or deter a change in control of the
Company. The FCC has established and administered a variety of international
service regulations, including the International Settlements Policy ("ISP")
which governs the settlement between U.S. carriers and their foreign
correspondents of the cost of terminating traffic over each other's networks,
the "benchmark" accounting rates for such settlement and permissible
exceptions to these policies. The FCC also regulates the nature and extent of
foreign ownership in radio licenses and foreign carrier affiliations of the
Company.
Regulatory requirements pertinent to the Company's operations have recently
changed and will continue to change as a result of the WTO Agreement, federal
legislation, court decisions, and new and revised policies of the FCC and
state public service commissions. In particular, the FCC continues to refine
its international service
17
<PAGE>
rules to promote competition, reflect and encourage liberalization in foreign
countries, and reduce international accounting rates toward cost. Among other
things, such changes may increase competition, alter the ability of the
Company to compete with other service providers, to continue providing the
same services, or to introduce services currently planned for the future. The
impact on the Company's operations of any changes in applicable regulatory
requirements cannot be predicted.
Canada. In Canada, telecommunications carriers are regulated generally by
the Canadian regulatory agency known as the Canadian Radio-television and
Telecommunications Commission ("CRTC"). The CRTC has enacted policies and
regulations that affect the Company's ability to successfully compete in the
Canadian marketplace. These policies and regulations include the establishment
of contribution charges (the equivalent of access charges in the U.S.),
deregulation of the international segment of the long-distance market,
limitations on switched hubbing, international simple resale ("ISR") and
foreign ownership rules for facilities-based carriers. Canada is expected to
deregulate many of these regulatory restrictions by October 1998. In addition,
Canada has committed in the WTO Agreement to eliminate barriers to
competition. Although these policies currently do not apply to resellers such
as the Company, this deregulatory trend will likely create new market
opportunities for telecommunications companies, thereby increasing competition
within Canada. However, there can be no assurance that any future changes in
or additions to law, regulations, government policy or administrative rulings
will not have a material adverse impact on the Company's competitive position,
growth and financial performance.
Australia. In Australia, the provision of the Company's services is subject
to federal regulation. Two primary instruments of regulation have been the
Telecommunications Act 1991 and federal regulation of anti-competitive
practices pursuant to the Trade Practices Act 1974 (the "Trade Practices
Act"). The regulatory climate changed in July 1997 with the implementation of
the Telecommunications Act 1997 (the "Telecom Act").
In connection with the Telecom Act, the Company became one of five licensed
carriers permitted to own and operate transmission facilities in Australia.
Under the new regulatory framework, the Company does not require a carriage
license in order to supply carriage services to the public using network
facilities owned by another carrier. Instead, the Company must comply with
legislated "service provider" rules contained in the Telecom Act covering
matters such as compliance with the Telecom Act, operator services, regulation
of access, directory assistance, provision of information to allow maintenance
of an integrated public number database, and itemized billing.
Also, in connection with the Telecom Act, two federal regulatory authorities
now exercise control over a broad range of issues affecting the operation of
the Australian telecommunications industry. The Australian Communications
Authority ("the ACA") regulates matters including the licensing of carriers
and technical matters, and the Australian Competition and Consumer Commission
("the ACCC") has the role of promotion of competition and consumer protection.
The Company, as a licensed carrier, will be required to comply with its own
license and will be under the regulatory control of the ACA and the ACCC.
Anti-competitive practices will also continue to be regulated by the Trade
Practices Act. In July 1997 these regulations were strengthened to encourage
greater competition in the telecommunications industry. The Australian
Government has introduced these changes on the basis that they will achieve
the Government's long-term objective of an internationally competitive
telecommunications industry in Australia through full and open competition. 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.
18
<PAGE>
United Kingdom. In the United Kingdom, the provision of the Company's
services is subject to and affected by regulations introduced by the United
Kingdom telecommunications regulatory authority, the Office of
Telecommunications ("Oftel") under the Telecommunications Act of 1984 (the
"United Kingdom Telecommunications Act"). Since the break up of the United
Kingdom 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 ISR
services to all international points from the United Kingdom and its
subsidiary, Primus Telecommunications Ltd., has recently been awarded a
license to provide international facilities-based voice services. 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 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 that
enact legislation intended to deregulate the telecommunications sector or that
have made commitments to open their markets to competition in the WTO
Agreement, 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, but without giving effect to the exercise
in full of the Warrants, the executive officers and directors of the Company
will continue to beneficially own 5,402,585 shares of Common Stock,
representing 28.7% of the Common Stock, including options to purchase 646,896
shares of Common Stock exercisable on or prior to August 15, 1997. The
executive officers and directors have also been granted options to purchase an
additional 727,026 shares of Common Stock which vest after August 15, 1997. Of
these amounts, Mr. K. Paul Singh, the Company's Chairman and Chief Executive
Officer beneficially owns 4,497,730 shares of Common Stock, including options
to purchase 112,700 shares of Common Stock exercisable on or prior to August
15, 1997. In addition, Mr. Singh has also been granted options to purchase an
additional 225,400 shares which vest after August 15, 1997. The
Soros/Chatterjee Group beneficially owns 2,590,274 shares of Common Stock
(including shares of Common Stock which may be purchased upon exercise of
warrants which may occur within 60 days of the date of this Prospectus, and
assuming such warrants were exercised on July 11, 1997). 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 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."
ABSENCE OF A PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the Securities
(with the exception of the Warrant Shares) and there can be no assurance that
an active trading market will develop or be sustained in the future.
19
<PAGE>
There may be significant volatility in the market price of the Securities due
to factors that may or may not relate to the Company's performance. The
Company does not intend to list any of the Securities (with the exception of
the Warrant Shares) on any securities exchange, and there can be no assurance
that a trading market for the Securities will develop and continue after this
Offering. The Underwriters have advised the Company that they currently intend
to make a market in the Securities but they are not obligated to do so and may
discontinue market making activities at any time. If a market for the
Securities were to develop, the Securities could trade at prices that may be
lower than the initial offering price and could be significantly affected by
various factors such as economic forecasts, financial market conditions,
acquisitions and quarterly variations in the Company's results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The liquidity of, and trading market for, the Securities also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
See "Description of Notes" and "Description of Warrants."
DEVELOPMENT AND MAINTENANCE OF PUBLIC MARKET FOR COMMON STOCK; AND POSSIBLE
VOLATILITY OF STOCK PRICE
The Company completed its Initial Public Offering of Common Stock on
November 7, 1996, prior to which there had been no public market for the
Common Stock. There can be no assurance that an active trading market for the
Common Stock will develop or, if developed, will be maintained. Historically,
the market prices for securities of emerging companies in the
telecommunications industry have been highly volatile. 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.
CONSEQUENCE OF ORIGINAL ISSUE DISCOUNT
The Notes will be issued at a discount from their principal amount.
Consequently, purchasers of the Notes generally will be required to include
amounts in gross income for federal income tax purposes in advance of receipt
of the cash payments to which the income is attributable. See "Certain Federal
Income Tax Considerations" for a more detailed discussion of the federal
income tax consequences to purchasers of the Notes.
If a bankruptcy is commenced by or against the Company under the United
States Bankruptcy Code after the issuance of the Notes, the claim of a holder
of Notes with respect to the principal amount thereof may be limited to an
amount equal to the sum of (i) the initial offering price for the Notes and
(ii) that portion of the original issue discount that is not deemed to
constitute "unmatured interest" for purposes of the United States Bankruptcy
Code. Any original issue discount that was not amortized as of any such
bankruptcy filing would constitute "unmatured interest."
ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and Amended and Restated By-Laws (the "By-
Laws") 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 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 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,
20
<PAGE>
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. Any
Change of Control (as defined) may require the Company to extend an offer to
redeem the Notes. See "Management--Classified Board of Directors,"
"Description of Capital Stock", "Business--Government Regulation," and
"Description of Notes--Repurchase of Notes Upon a Change of Control."
SHARES ELIGIBLE FOR FUTURE SALE
As of July 11, 1997, the Company had 6,057,844 shares of Common Stock
outstanding which are freely tradeable, and an additional 11,720,887 shares
which are eligible for public sale 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.
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."
21
<PAGE>
USE OF PROCEEDS
The net proceeds from the Offering are estimated to be approximately $120
million, after deducting discounts and commissions, and estimated expenses
payable by the Company. The Company will use the net proceeds from the
Offering as follows: (i) approximately $38.7 million will be used to purchase
the Pledged Securities (as defined) which will serve as security for the Notes
and will be used to fund the first six scheduled interest payments on the
Notes; (ii) approximately $10.3 million will be used to repay certain existing
indebtedness of the Company having a weighted average rate of interest of 9.7%
per annum and stated maturity dates from February 1998 through May 1998; and
(iii) the balance will be used to fund capital expenditures, operating losses,
working capital requirements and general corporate purposes, including
potential acquisitions, joint ventures and strategic alliances. Pending use of
the net proceeds as set forth in clause (iii) above, the Company may invest
such funds in short-term, investment grade securities or shares of investment
companies investing primarily in such securities.
The Company anticipates aggregate capital expenditures of approximately $88
million in 1997 and 1998. Such capital expenditures will be primarily for
international and domestic switches and points of presence, international
fiber capacity and satellite earth station facilities for new and existing
routes and other transmission equipment and support systems. The Company
intends to add up to three switches in the United States (expected to be
located in Chicago, Dallas and Miami), three switches in Europe (expected to
be located in Frankfurt, Paris and Rome), one switch in Mexico (Mexico City)
and one switch in Japan (Tokyo), and approximately 15 points of presence in
other major metropolitan areas of the Targeted Regions, all by the end of
1998. The Company also expects to continue to acquire additional capacity on
both existing and future international fiber cable systems.
As part of its business strategy, the Company evaluates potential
acquisitions, joint ventures and strategic alliances. The Company has no
definitive agreement with respect to any acquisition, joint venture, or
strategic alliance, although from time to time it has discussions with other
companies and assesses opportunities on an on-going basis. A portion of the
net proceeds from the Offering may be used to fund any such acquisitions,
joint ventures and strategic alliances, subject to the terms of the Indenture.
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<PAGE>
COMMON STOCK PRICE RANGE
Since completion of the Initial Public Offering on November 7, 1996, the
Common Stock has been traded on the Nasdaq National Market under the symbol
"PRTL." As of July 11, 1997, there were approximately 17,778,731 shares of
Common Stock outstanding. The following table sets forth, for each of the
periods indicated, the high and low sales prices per share of the Common Stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
4th Quarter (from November 7).............................. 14 5/8 10 3/8
YEAR ENDED DECEMBER 31, 1997
1st Quarter................................................ 17 7 3/8
2nd Quarter ............................................... 11 1/8 7 1/8
3rd Quarter (through July 11) ............................. 10 5/8 9 7/8
</TABLE>
On July 11, 1997, the last reported sale price of the Common Stock on the
Nasdaq National Market was $10 per share. See "Risk Factors--Development of
Public Market for Common Stock; and Possible Volatility of Stock Price."
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. Cash
distributions by the Company are restricted by covenants relating to the
Notes, and may also be restricted by covenants relating to any future
indebtedness.
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<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1997, the Company's actual
capitalization and capitalization as adjusted to give effect to the sale of
the Units offered hereby, less 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>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
Cash and cash equivalents.............................. $43,612 $119,971
Restricted cash........................................ -- 38,695
Short-term investments................................. 5,359 5,359
------- --------
Total cash, cash equivalents, restricted cash and
short-term investments............................ $48,971 $164,025
======= ========
Debt and capital lease obligations(2):
% Senior Notes due 2004............................. -- 125,000
Long-term obligations................................ 9,650 1,310
Capital lease obligations............................ 3,485 1,520
------- --------
Total debt and capital lease obligations........... 13,135 127,830
Stockholders' Equity:
Common Stock, $.01 par value--40,000,000 shares
authorized; 17,778,731 shares actual and as
adjusted, issued and outstanding.................... 178 178
Additional paid-in capital........................... 88,106 88,106
Accumulated deficit.................................. (16,674) (16,674)
Cumulative translation adjustment.................... (216) (216)
------- --------
Total stockholders' equity......................... 71,394 71,394
------- --------
Total capitalization............................... $84,529 $199,224
======= ========
</TABLE>
- --------
(1) For purposes of this presentation, no value has been assigned to the
Warrants. Such value will be determined at the time of the pricing of the
Offering.
(2) The Company has entered into a commitment letter with respect to a $50
million Senior Credit Facility. There can be no assurance that the Company
will obtain the Senior Credit Facility under the terms currently proposed,
if at all. See "Description of Senior Credit Commitment."
24
<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 statement of operations data for the Company for the period
from the Company's inception on February 4, 1994 to December 31, 1994 and the
years ended December 31, 1995 and 1996, and the balance sheet data as of
December 31, 1994, 1995 and 1996, 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
three months ended March 31, 1996 and 1997 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 fair
presentation of the financial position and results of operations for such
unaudited period. 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 NINE TWELVE PERIOD FROM THREE MONTHS
INCEPTION MONTHS MONTHS INCEPTION YEAR ENDED ENDED
THROUGH ENDED ENDED THROUGH DECEMBER 31, MARCH 31,
JUNE 30, MARCH 31, MARCH 31, DECEMBER 31, ----------------- -----------------------
1994 1995 1996 1994 1995 1996 1996 1997
---------- --------- --------- ------------ ------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenue...................... $12,587 $44,797 $144,345 -- $ 1,167 $172,972 $17,137 $59,036
Cost of revenue.................. 11,366 40,405 131,712 -- 1,384 158,845 15,528 55,034
------- ------- -------- ------ ------- -------- ------- -------
Gross margin (deficit).......... 1,221 4,392 12,633 -- (217) 14,127 1,609 4,002
Operating expenses:
Selling, general and
administrative................. 1,313 4,277 11,558 557 2,024 20,114 1,874 8,829
Depreciation and amortization... 5 43 235 12 160 2,164 226 797
------- ------- -------- ------ ------- -------- ------- -------
Total operating expenses...... 1,318 4,320 11,793 569 2,184 22,278 2,100 9,626
------- ------- -------- ------ ------- -------- ------- -------
Income (loss) from operations.... (97) 72 840 (569) (2,401) (8,151) (491) (5,624)
Interest expense................. -- -- -- (13) (59) (857) (97) (151)
Interest income.................. -- 30 219 5 35 785 47 785
Other income (expense)........... -- -- -- -- -- (345) (213) 119
------- ------- -------- ------ ------- -------- ------- -------
Income (loss) before income
taxes........................... (97) 102 1,059 (577) (2,425) (8,568) (754) (4,871)
Income taxes..................... -- 4 492 -- -- 196 367 36
------- ------- -------- ------ ------- -------- ------- -------
Net income (loss)................ $ (97) $ 98 $ 567 $ (577) $(2,425) $ (8,764) $(1,121) $(4,907)
======= ======= ======== ====== ======= ======== ======= =======
Net loss per common and common
share equivalents............... $(0.07) $ (0.22) $ (0.63) $ (0.09) $ (0.28)
====== ======= ======== ======= =======
Weighted average number of common
and common share equivalents
outstanding..................... 8,560 10,892 13,869 12,048 17,779
====== ======= ======== ======= =======
Ratio of earnings to fixed
charges(1)...................... -- -- -- -- --
====== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY
----------------------------------
DECEMBER 31,
---------------------- MARCH 31,
1994 1995 1996 1997
----- ------ -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... $ 221 $2,296 $ 60,599 $ 48,971
Working capital (deficit).................. (295) 1,295 39,282 21,347
Total assets............................... 487 5,042 140,560 144,139
Total long-term obligations (including
current portion).......................... 13 528 17,248 13,135
Stockholders' equity (deficit)............. (71) 2,562 76,440 71,394
</TABLE>
- -------
(1) The ratio of earnings to fixed charges is computed by dividing pretax
income from operations before fixed charges (other than capitalized
interest) by fixed charges. Fixed charges consist of interest charges,
whether expensed or capitalized, and that portion of rental expense the
Company believes to be representative of interest. For the years 1994,
1995, and 1996, and the three months ended March 31, 1996 and March 31,
1997, earnings were insufficient to cover fixed charges by $0.6 million,
$2.4 million, $8.6 million, $0.8 million and $5.1 million, respectively.
25
<PAGE>
UNAUDITED PROFORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma consolidated statements of operations give
effect to the March 1, 1996 acquisition of Axicorp in each case as if it
occurred on January 1, 1996. The unaudited pro forma consolidated statement of
operations for the three months ended March 31, 1996 includes the operations
of the Company for the three months ended March 31, 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
for the year ended December 31, 1996 includes the operations of the Company
for the year ended December 31, 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 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.
26
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
THE RELATED TO
COMPANY(1) AXICORP(2) ACQUISITION(3) PRO FORMA
---------- ---------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue.................... $17,137 $26,368 $ 0 $43,505
Cost of revenue................ 15,528 23,756 0 39,284
------- ------- ----- -------
Gross margin................. 1,609 2,612 0 4,221
Operating Expenses:
Selling, general and
administrative.............. 1,874 2,084 0 3,958
Depreciation and
amortization................ 226 48 252 526
------- ------- ----- -------
Total operating expenses... 2,100 2,132 252 4,484
------- ------- ----- -------
Income (loss) from operations.. (491) 480 (252) (263)
Interest expense............... (97) 0 (138) (235)
Interest income................ 47 124 0 171
Other income (expense)......... (213) 0 0 (213)
------- ------- ----- -------
Income (loss) before income
taxes......................... (754) 604 (390) (540)
Income taxes................... 367 281 0 648
------- ------- ----- -------
Net income (loss).............. $(1,121) $ 323 $(390) $(1,188)
======= ======= ===== =======
Net loss per common and common
share equivalents............. $ (0.09) $ (0.10)
======= =======
Weighted average number of
common and common share
equivalents outstanding....... 12,048 12,385
======= =======
</TABLE>
- --------
(1) Reflects the historical results of operations of the Company for the three
months ended March 31, 1996, including Axicorp's operations from March 1,
1996 (acquisition date) to March 31, 1996.
(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 using
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
valuation reserve was applied in full to the tax benefit associated
with the pro forma net loss before income taxes.
</TABLE>
27
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
THE RELATED TO
COMPANY(1) AXICORP(2) ACQUISITION(3) PRO FORMA
---------- ---------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Net revenue.................... $172,972 $26,368 $ 0 $199,340
Cost of revenue................ 158,845 23,756 0 182,601
-------- ------- ----- --------
Gross margin................. 14,127 2,612 0 16,739
Operating Expenses:
Selling, general and
administrative.............. 20,114 2,084 0 22,198
Depreciation and
amortization................ 2,164 48 252 2,464
-------- ------- ----- --------
Total operating expenses... 22,278 2,132 252 24,662
-------- ------- ----- --------
Income (loss) from operations.. (8,151) 480 (252) (7,923)
Interest expense............... (857) 0 (138) (995)
Interest income................ 785 124 0 909
Other income (expense)......... (345) 0 0 (345)
-------- ------- ----- --------
Income (loss) before income
taxes......................... (8,568) 604 (390) (8,354)
Income taxes................... 196 281 0 477
-------- ------- ----- --------
Net income (loss).............. $ (8,764) $ 323 $(390) $ (8,831)
======== ======= ===== ========
Net loss per common and common
share equivalents............. $ (0.63) $ (0.63)
======== ========
Weighted average number of
common and common share
equivalents outstanding....... 13,869 13,953
======== ========
</TABLE>
- --------
(1) Reflects the historical results of operations of the Company for the year
ended December 31, 1996, including Axicorp's operations from March 1, 1996
(acquisition date) to December 31, 1996.
(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 using
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
valuation reserve was applied in full to the tax benefit associated
with the pro forma net loss before income taxes.
</TABLE>
28
<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 residential 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 Targeted 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 its strategy, the Company also has
expanded its operations to include Canada and Mexico. In April 1997, the
Company acquired certain assets (including the customer base and accounts
receivable) of the Canadian long-distance provider, Cam-Net, based in
Vancouver, Canada, providing the Company with a customer and a sales and
marketing presence throughout Canada (including Vancouver, Montreal and
Toronto) where it operates as a switch-based reseller. In March 1997, the
Company entered into a foreign carrier agreement with CyTA to establish a
direct, fiber-optic connection with the Company's London switch for
international long distance primarily to countries in the Middle East. The
Company also has entered into foreign carrier agreements in Israel, Malaysia,
New Zealand and Sri Lanka which are expected to become effective by the end of
1997. 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 year ended December 31, 1996 and for the three months
ended March 31, 1997. The Company's Australian operations generated
approximately $46.9 million, or 79%, of the Company's net revenue for the
three months ended March 31, 1997, and approximately $177.6 million, or 89%,
of the Company's pro forma net revenue for the year ended December 31, 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 continues to invest 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 installed and begun
to carry traffic on a five-switch network in Australia, has leased fiber
capacity connecting Australia with the United States and, in July 1997, became
one of five licensed carriers permitted to own and operate transmission
facilities in Australia. In addition, the Company has focused on migrating
existing traffic onto the Company's Network while increasing the number of
higher-margin, higher-volume business customers with significant international
long distance traffic. As part of its focus on business customers, the Company
has increased Axicorp's direct sales force and reduced 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 earned based on the number of minutes billable by the Company
and is recorded upon completion of a call, adjusted for sales allowances. The
Company generally prices its services at a savings compared to the major
carriers operating in the Targeted Regions. The Company's net revenue in the
United
29
<PAGE>
States is derived from carrying a mix of business, residential and wholesale
carrier long distance traffic. In Australia, net revenue is currently derived
from the provision of long distance, local and cellular services, primarily to
small- and medium- sized businesses. In the United Kingdom, net revenue is
derived from the provision of long distance services, primarily to ethnic
residential customers, as well as to small- and medium-sized businesses. In
Canada, primarily as a result of its April 1997 acquisition of selected assets
of Cam-Net, the Company is a switch based reseller providing long-distance
services to small- and medium-sized businesses and residential customers. The
Company expects to continue to generate net revenue from internal growth
through focused sales and marketing efforts on a retail basis toward small-
and medium-sized businesses with significant international long distance
traffic and ethnic residential customers and, on a wholesale basis, to other
telecommunications carriers and resellers with international traffic in the
Company's service areas.
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-United States and non-United Kingdom
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 and ownership costs of the Network. In order to manage such
costs, the Company pursues a flexible approach with respect to Network
expansion. In most instances, 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 (i) optimizing the routing of calls over the least
cost routing, (ii) increasing volumes on its fixed cost leased and owned
lines, thereby spreading the allocation of fixed costs over a larger number of
minutes, (iii) negotiating lower variable usage based costs with domestic and
foreign service providers and negotiating additional and lower cost foreign
carrier agreements with foreign PTTs and others, and (iv) 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 as compared to its domestic long distance services and expects
to realize a higher gross margin as a percentage of net revenue on its retail
(business and residential) 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. Wholesale
services, which generate a lower gross margin as a percentage of net revenue
than retail services, are an important part of the Company's net revenue
because 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 based on its
relative volumes of international versus domestic long distance services,
wholesale versus retail long distance services, and the proportion of traffic
carried on the Company's Network versus resale of other carriers' 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
30
<PAGE>
increasing over the past 18 months, 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 in current markets as well as new
markets in the Targeted Region.
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 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.
See "--Liquidity and Capital Resources" and "Use of Proceeds."
Although the Company's functional currency is the United States dollar, the
majority of the Company's net revenue is derived from its sales and operations
outside the United States. In the future, the Company expects to continue to
derive the majority of its net revenue and incur a significant portion 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 in hedging transactions, and does not currently
contemplate engaging in hedging transactions to mitigate foreign exchange
risk. See "Risk Factors--Risk Associated with International Operations."
PRO FORMA 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 three month periods ended March 31, 1996 and 1997 and for the twelve
months ended December 31, 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 herein with
a more extensive discussion of the pro forma results of operations for the
three month period ended March 31, 1996 and for the twelve months ended
December 31, 1995 and 1996 and the pro forma quarterly results of operations
for each of the six quarters in the period ended March 31, 1997, 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
three months ended March 31, 1996 and 1997, the period from inception
(February 4, 1994) through December 31, 1994, and the years ended December 31,
1995 and 1996 follow the discussion of the Company's pro forma results of
operations.
31
<PAGE>
Pro Forma Results of Operations for the Three Months Ended March 31, 1996
Compared to the Historical Results of Operations for the Three Months Ended
March 31, 1997
The following table presents certain items from the Company's Unaudited Pro
Forma Consolidated Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------------------------------------
1996 1997
--------------------- -----------------------
$ % $ %
---------- --------- ---------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Net revenue:
North America and United
Kingdom....................... $ 1,931 4.4% $ 12,150 20.6%
Australia...................... 41,574 95.6 46,886 79.4
---------- -------- ---------- --------
Total net revenue............ 43,505 100.0 59,036 100.0
Cost of revenue:
North America and United
Kingdom....................... 2,448 126.8 11,445(1) 94.2
Australia...................... 36,836 88.6 43,589 93.0
---------- ----------
Total cost of revenue........ 39,284 90.3 55,034 93.2
---------- ----------
Gross margin:
North America and United
Kingdom....................... (517) (26.8) 705(1) 5.8
Australia...................... 4,738 11.4 3,297 7.0
---------- ----------
Gross margin, net............ 4,221 9.7 4,002 6.8
Operating expenses:
Selling, general and
administrative................ 3,958 9.1 8,829 15.0
Depreciation and amortization.. 526 1.2 797 1.3
---------- -------- ---------- --------
Total operating expenses..... 4,484 10.3 9,626 16.3
---------- -------- ---------- --------
Loss from operations............. (263) (0.6) (5,624) (9.5)
Interest expense................. (235) (0.5) (151) (0.3)
Interest income.................. 171 0.4 785 1.3
Other income (expense)........... (213) (0.5) 119 0.2
---------- -------- ---------- --------
Loss before income taxes......... (540) (1.2) (4,871) (8.3)
Income taxes..................... 648 1.5 36 0.0
---------- -------- ---------- --------
Net loss......................... $ (1,188) (2.7)% $ (4,907) (8.3)%
========== ======== ========== ========
</TABLE>
- --------
(1) Includes a one-time charge of $0.7 million resulting from non-payment of a
receivable due from a single customer.
Net revenue increased 36%, or $15.5 million, from $43.5 million for the
three months ended March 31, 1996 to $59.0 million for the three months ended
March 31, 1997. The Australian net revenue for the same period increased 13%,
or $5.3 million, from $41.6 million to $46.9 million. The increase was
attributable to growth in minutes of traffic primarily from business
customers. Non-Australian net revenue was $12.2 million for the three months
ended March 31, 1997 as compared to $1.9 million for the three months ended
March 31, 1996. The $10.3 million increase is attributable to a $3.8 million
increase in the United Kingdom, primarily reflecting additional residential
customers and traffic volumes resulting from the Company's marketing efforts
to ethnic residential customers, and a $6.5 million increase in the United
States resulting primarily from additional wholesale traffic volumes and, to a
lesser extent, from residential customers resulting from the ethnic marketing
programs and business customers following the Company's build-up of its direct
sales force. As the Company continues to build its sales and marketing staff,
establish additional carrier arrangements and expand its Network, the Company
expects the minutes of traffic and associated net revenue to continue to
increase.
32
<PAGE>
Cost of revenue increased 40.1%, or $15.7 million, from $39.3 million for
the three months ended March 31, 1996 to $55.0 million for the three months
ended March 31, 1997. The increase was a direct reflection of the increased
traffic the Company carried for customers. The Australian cost of revenue
increased 18.3%, or $6.8 million, from $36.8 million for the three months
ended March 31, 1996 to $43.6 million for the three months ended March 31,
1997 primarily as a result of an increased number of business customers and
associated traffic volumes. The Australian cost of revenue as a percentage of
Australian net revenue increased from 88.6% for three months ended March 31,
1996 to 93.0% for the three months ended March 31, 1997 primarily as the
result of a favorable settlement of claims against Telstra that generated a
one-time revenue gain of $1.0 million for the three months ended March 31,
1996. Excluding this one-time gain, the Australian cost of revenue as a
percentage of Australian net revenue would have been 90.8% for three months
ended March 31, 1996. Additionally, the Australian cost of revenue as a
percentage of net revenue was adversely affected in the quarters following the
three months ended March 31, 1996 by the lower tariff rate discounts
implemented by Telstra in March 1996. The non-Australian cost of revenue
increased $9.0 million from $2.4 million for the three months ended March 31,
1996 to $11.4 million for the three months ended March 31, 1997 as a result of
increased traffic volumes in the United States and United Kingdom. Non-
Australian cost of revenue as a percentage of non-Australian net revenue was
94.2% for the three months ended March 31, 1997 as compared to 126.8% for the
three months ended March 31, 1996 primarily as a result of the start-up nature
of the Company's network operations during early 1996 in the United States.
The non-Australian cost of revenue as a percentage of non-Australian net
revenue for the three months ended March 31, 1997 also was adversely affected
by $0.7 million resulting from a one-time, non-payment of a single customer
accounts receivable in the United States. Excluding the effect of this non-
payment, non-Australian cost of revenue as a percentage of non-Australian net
revenue would have been 88.4%. Most of the Company's costs of revenue are
variable. As the Company continues to expand its worldwide Network through
installation of switches, cable ownership and fixed circuit leases, and
migrates traffic onto its Network, the Company expects cost of revenue as a
percentage of net revenue to decrease.
Gross margin decreased 5%, or $0.2 million, from $4.2 million for the three
months ended March 31, 1996 to $4.0 million for the three months ended March
31, 1997. The Australian gross margin as a percentage of Australian net
revenue decreased from 11.4% to 7.0% for the three months ended March 31, 1996
as compared to the same period in 1997, primarily as a result of the favorable
settlement of claims against Telstra that occurred in the first quarter of
1996 and Telstra's reduction of tariff discounts beginning in March 1996.
Excluding the one-time gain, the Australian gross margin would have been 9.2%
for the three months ended March 31, 1996. The non-Australian operations
improved from a gross deficit of $0.5 million for the three months ended March
31, 1996 to a gross margin of $0.7 million for the three months ended March
31, 1997. The non-Australian gross margin for the three months ended March 31,
1997 was adversely affected by the non-payment of a $0.7 million accounts
receivable from one customer as discussed above. Excluding the effect of the
non-payment, non-Australian gross margin as a percentage of non-Australian net
revenue would have been 11.6% for the three months ended March 31, 1997 as
compared to 5.8%.
Selling, general and administrative expenses increased 123%, or $4.8
million, from $4.0 million for the three months ended March 31, 1996 to $8.8
million for the three months ended March 31, 1997. Selling, general and
administrative expenses for the Australian operations increased 53.8%, or $1.6
million, from $2.9 million for the three months ended March 31, 1996 to $4.5
million for the three months ended March 31, 1997, as a result of increased
salaries and benefits, expenses to support the continued build-out of the
Network and sales force required for continued growth, and the commencement of
a new residential marketing campaign. The Australian selling, general and
administrative expenses as a percentage of net revenue increased from 7% for
the three months ended March 31, 1996 to 10% for the same period in 1997. The
non-Australian operations account for the remaining increase of $3.2 million
which is due to the addition of employees in sales and marketing, network
operations, and customer service, along with increased marketing expenses
associated with ethnic marketing campaigns and the opening of direct sales
offices in New York and Los Angeles. The non-Australian selling, general and
administrative expenses as a percentage of non-Australian net revenue
decreased from 52.4% for the three months ended March 31, 1996 to 35.4% for
the three months ended March 31, 1997, as a result of these costs being spread
over an increasing revenue base.
33
<PAGE>
Depreciation and amortization increased 52%, or $0.3 million, from $0.5
million for the three months ended March 31, 1996 to $0.8 million for the
three months ended March 31, 1997. The increase reflects depreciation for
capital expenditures for network equipment associated with the Company's
continued network development.
Interest expense decreased 36% as a result of the partial repayment of
seller notes from the Australian acquisition and the capitalization of
interest associated with the construction of the Network.
Interest income increased from $0.2 million for the three months ended March
31, 1996 to $0.8 million for the three months ended March 31, 1997 as a result
of the interest earned on the cash balance generated from the Company's
initial public offering in November 1996.
Other income (expense) is comprised of a foreign currency transaction gain
of $0.1 million for the three months ended March 31, 1997 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 United States dollar will cause currency transaction gains or losses which
will be recognized in the current period results of operations.
Income taxes are based on the income before taxes generated by the
operations in the United Kingdom and Australia. For the three months ended
March 31, 1996 and 1997, the provision for income taxes related primarily to
taxable income generated from the Company's Australian and United Kingdom
operations.
Pro Forma Results of Operations for the Year Ended December 31, 1996 Compared
to the Year Ended December 31, 1995
The following table presents certain items from the Company's Unaudited Pro
Forma Consolidated Statements of Operations:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1995 1996
---------------------- ----------------------
$ % $ %
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Net revenue:
North America and United
Kingdom....................... $ 1,167 0.9% $ 21,719 10.9%
Australia...................... 124,461 99.1 177,621 89.1
----------- -------- ----------- --------
Total net revenue............ 125,628 100.0 199,340 100.0
Cost of revenue:
North America and United
Kingdom....................... 1,384 118.6 21,198 97.6
Australia...................... 113,255 91.0 161,403 90.9
----------- -----------
Total cost of revenue........ 114,639 91.3 182,601 91.6
----------- -----------
Gross margin:
North America and United
Kingdom....................... (217) (18.6) 521 2.4
Australia...................... 11,206 9.0 16,218 9.1
----------- -----------
Total gross margin........... 10,989 8.7 16,739 8.4
Operating expenses:
Selling, general and
administrative................ 12,955 10.3 22,198 11.1
Depreciation and amortization.. 1,842 1.5 2,464 1.2
----------- -------- ----------- --------
Total operating expenses..... 14,797 11.8 24,662 12.4
----------- -------- ----------- --------
Loss from operations............. (3,808) (3.0) (7,923) (4.0)
Interest expense................. (885) (0.7) (995) (0.5)
Interest income.................. 132 0.1 909 0.5
Other income (expense)........... -- -- (345) 0.2
----------- -------- ----------- --------
Loss before income taxes......... (4,561) (3.6) (8,354) (4.2)
Income taxes..................... 124 0.1 477 0.2
----------- -------- ----------- --------
Net loss......................... $ (4,685) (3.7)% $ (8,831) (4.4)%
=========== ======== =========== ========
</TABLE>
34
<PAGE>
Net revenue increased 59%, or $73.7 million, from $125.6 million for the
year ended December 31, 1995 to $199.3 million for the year ended December 31,
1996. The Australian net revenue increased 43%, or $53.1 million, from $124.5
million to $177.6 million. The increase was attributable to an increase in
minutes of traffic from small- to medium-sized business customers, as well as
growth in the number of customers. Non-Australian net revenue was $21.7
million for the year ended December 31, 1996 as compared to net revenue of
$1.2 million for the year ended December 31, 1995. The $20.5 million increase
is the result of an increase of $15.4 million in the United States, primarily
associated with increased wholesale traffic volume and, to a lesser extent,
from consumer customers resulting from the ethnic marketing program and
business customers resulting from the Company's build-up of its direct sales
force, and an increase of $5.1 million in the United Kingdom associated with
the commencement of operations in late 1995.
Cost of revenue increased 59%, or $68.0 million, from $114.6 million for the
year ended December 31, 1995 to $182.6 million for the year ended December 31,
1996. The increase was the direct result of increased traffic volumes the
Company carried for its customers. The Australian cost of revenue increased
43%, or $48.1 million, from $113.3 million for the year ended December 31,
1995 to $161.4 million for the year ended December 31, 1996. The Australian
cost of revenue increase is primarily driven by an increased number of
business customers and associated traffic volumes. The Australian cost of
revenue as a percentage of Australian revenue was essentially flat and
reflects the continued resale of carrier services and lack of network
facilities. The non-Australian cost of revenue increased $19.8 million from
$1.4 million for the year ended December 31, 1995 to $21.2 million for the
year ended December 31, 1996, as a result of increased traffic volumes for
business, consumer, and wholesale customers in the United States and the
commencement of operations in the United Kingdom. Non-Australian cost of
revenue as a percentage of non-Australian net revenue was 97.6% in the year
ended December 31, 1996 versus 118.6% in the year ended December 31, 1995. The
non-Australian cost of revenue as a percentage of non-Australian net revenue
reflects the start up nature of network operations in the United States and
the United Kingdom, the absence of network facilities, traffic being carried
on more expensive carriers until adequate capacity on lower cost carriers
could be established, and lack of return traffic on newly initiated foreign
carrier agreements.
Gross margin increased 52%, or $5.7 million, from $11.0 million for the year
ended December 31, 1995 to $16.7 million for the year ended December 31, 1996.
The Australian gross margin as a percentage of Australian net revenue remained
constant for the years ended December 31, 1995 and 1996. The non-Australian
gross margin increased from a deficit of $(0.2) million for the year ended
December 31, 1995 to a gross margin of $0.5 million for the year ended
December 31, 1996.
Selling, general and administrative expenses increased 71%, or $9.2 million,
from $13.0 million for the year ended December 31, 1995 to $22.2 million for
the year ended December 31, 1996. The Australian operations increased selling,
general and administrative expenses by $2.5 million as a result of increased
salaries and benefits for additional sales and operations staff to support
construction of a new five city switched network. The Australian selling,
general and administrative expenses as a percentage of Australian net revenue
decreased from 9% to 8% for the years ended December 31, 1995 and 1996,
respectively. The non-Australian operations account for the remaining increase
of $6.7 million which is due to increased staffing in sales and marketing,
network operations, and customer service. The non-Australian selling, general
and administrative expenses as a percentage of non-Australian net revenue
decreased to 40% for the year ended December 31, 1996, from 173% for the year
ended December 31, 1995, as a result of these costs being spread over an
increasing revenue base.
Depreciation and amortization increased 34%, or $0.7 million, from $1.8
million for the year ended December 31, 1995 to $2.5 million for the year
ended December 31, 1996. The increase reflects depreciation for capital
expenditures for network equipment associated with the Company's network
construction.
Interest expense increased 12% as a result of additional capital leases to
finance network switching equipment.
35
<PAGE>
Interest income increased from $0.1 million for the year ended December 31,
1995 to $0.9 million for the year ended December 31, 1996 as a result of the
interest earned on the cash balance generated from the private placements in
February 1996 and July 1996, and the initial public offering in November 1996.
Other income (expense) is comprised of a foreign currency transaction loss
of $0.3 million for the year ended December 31, 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 United States dollar will cause currency transaction gains or losses which
are recognized in the current period results of operations.
Income taxes are based on the income before taxes generated primarily by the
operations in Australia.
Quarterly Results of Operations
The following table sets forth unaudited pro forma consolidated statement of
operations and other data for each of the six fiscal quarters through the
period ended March 31, 1997 and has been prepared assuming the March 1, 1996
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.
36
<PAGE>
COMBINED PREDECESSOR AND COMPANY
<TABLE>
<CAPTION>
QUARTER ENDED:
-----------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1995(1) 1996(1) 1996 1996 1996 1997
------------ --------- -------- ------------- ------------ ---------
(DOLLAR AND MINUTE DATA IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenue:
North America and
United Kingdom........ $ 670 $1,931 $ 4,229 $ 6,468 $ 9,091 $12,150
Australia.............. 39,559 41,574 44,049 45,351 46,647 46,886
------- ------ ------- ------- ------- -------
Total net revenues... 40,229 43,505 48,278 51,819 55,738 59,036
Cost of revenue:
North American and
United Kingdom........ 880 2,448 4,516 5,968 8,265 11,445(2)
Australia.............. 36,250 36,836 40,118 41,242 43,207 43,589
------- ------ ------- ------- ------- -------
Total cost of
revenue............. 37,130 39,284 44,634 47,210 51,472 55,034
Gross margin:
North America and
United Kingdom........ (210) (517) (287) 500 826 705(2)
Australia.............. 3,309 4,738 3,931 4,109 3,440 3,297
------- ------ ------- ------- ------- -------
Total gross margin... 3,099 4,221 3,644 4,609 4,266 4,002
Operating expenses:
Selling, general and
administrative
expenses.............. 3,986 3,958 4,834 6,194 7,212 8,829
Depreciation and
amortization.......... 490 525 571 637 731 797
------- ------ ------- ------- ------- -------
Total operating
expenses............ 4,476 4,483 5,405 6,831 7,943 9,626
Operating loss.......... $(1,377) $ (262) $(1,761) $(2,222) $(3,677) $(5,624)
======= ====== ======= ======= ======= =======
Net revenue growth
percentage:
North America and
United Kingdom........ -- 188.2 % 119.0 % 52.9% 40.6% 33.6%
Australia.............. -- 5.1 % 6.0 % 3.0% 2.9% 0.5%
Total................ -- 8.1 % 11.0 % 7.3% 7.6% 5.9%
Australia (excluding
dealership and other
non-recurring
items)(3)............. -- 1.4 % 3.0 % 6.0% 3.4% 3.0%
Gross margin percentage:
North America and
United Kingdom........ (31.3)% (26.8)% (6.8)% 7.7% 9.1% 5.8%(2)
Australia.............. 8.4 % 11.4 % 8.9 % 9.1% 7.4% 7.0%
Total gross margin
percentage.......... 7.7 % 9.7 % 7.5 % 8.9% 7.7% 6.8%
Australia (excluding
dealership and other
non-recurring
items)(3)............. 7.3 % 7.2 % 5.1 % 5.3% 5.2% 5.8%
Selling, general and
administrative
expenses as a
percentage of net
revenue............... 9.9 % 9.1 % 10.0 % 12.0% 12.9% 15.0%
EBITDA(4)............... $ (887) $ 263 $(1,190) $(1,585) $(2,946) $(4,827)
Capital expenditures
(actual)(5)............ $ 205 $ 216 $ 3,767 $ 2,162 $ 9,814 $ 9,141
Number of switches
(actual)............... 1 1 1 1 1 9(6)
Full-time employees.....
* * * 285 315 369
Minutes of long distance
use:
International:
North America.......... * * * 9,199 12,160 17,693
Australia.............. * * * 1,967 1,876 2,384
United Kingdom......... * * * 1,713 3,192 4,253
------- ------- -------
Total minutes of long
distance use
(international)..... * * * 12,879 17,228 24,330
------- ------- -------
Domestic:
North America.......... * * * 3,972 5,533 6,346
Australia.............. * * * 56,932 58,336 59,481
United Kingdom......... * * * 1,512 3,051 4,533
------- ------- -------
Total minutes of long
distance use
(domestic).......... * * * 62,416 66,920 70,360
------- ------- -------
Total minutes of long
distance use........ * * * 75,295 84,148 94,690
======= ======= =======
</TABLE>
- --------
(1) Assuming the March 1, 1996 acquisition of Axicorp occurred as of the
beginning of the periods presented.
(2) Includes a one-time charge of $0.7 million resulting from non-payment of a
receivable due from a single customer. Excluding this charge, cost of
revenue, gross margin and gross margin percentage for North America and
the United Kingdom would have been $10.7 million, $1.4 million and 11.6%,
respectively.
(3) Excludes dealership revenue from discrete projects relating to marketing
and customer activities performed on behalf of Telstra, and non-recurring
settlements of claims against Telstra.
(4) EBITDA consists of earnings (loss) before interest, income taxes,
depreciation, amortization and other income (expense). It is a measure
commonly used in the telecommunications industry and is presented to
assist in understanding the Company's operating results. Additionally,
certain covenants contained in the Indenture are based upon EBITDA. EBITDA
is not intended to report cash flows for the period. See the Consolidated
Statement of Cash Flows contained elsewhere in the Prospectus.
(5) Capital expenditures include amounts acquired through capital lease
financing and other debt.
(6) Excludes two additional switches now in operation.
* Data not available.
37
<PAGE>
Quarterly net revenue increased from $40.2 million in the quarter ended
December 31, 1995 to $59.0 million in the quarter ended March 31, 1997. The
Australian net revenue growth in each quarter was due to an increase in
traffic volumes as a result of an increase in the number of small- to medium-
sized business customers. In addition, beginning in the quarter ended March
31, 1996, the Australian revenue included "dealership" revenue from marketing
and customer service activities provided on an outsourced basis by Axicorp to
Telstra. These revenues resulted from the performance of discrete projects,
and thus fluctuated significantly in each quarter. Excluding these dealership
revenues, the core Australian telephone business grew at an average rate of
approximately 3% per quarter. The lower growth rate in the quarter ended March
31, 1996 was a result of Axicorp management's focus on selling Axicorp to the
Company versus generating new sales. The lower sequential quarterly growth
rate in the quarter ended March 31, 1997 partially reflects reduced calling
volume from business customers during the summer months in January and
February in Australia. In addition, the Company's lower growth rate was a
result of its efforts to focus on moving current traffic onto the Company's
recently developed Network rather than generating new traffic which would not
have had direct access to the Company's Network until the Company realized the
benefits of deregulation beginning in July 1997. This quarter also includes,
however, beginning in March 1997, the impact of the Company's new residential
sales channel resulting from a campaign directed towards residential customers
who make a high volume of international calls. Revenue in the United Kingdom
and North America reflects increasing traffic volumes and number of customers
in those regions. In the United Kingdom, the revenue growth has been the
result of additional residential customers each quarter, and in North America,
additional wholesale, and, to a lesser extent, business and residential
traffic volumes.
Quarterly gross margin percentages have fluctuated during the six quarters
from a high of 9.7% in the quarter ended March 31, 1996 to 6.8% in the quarter
ended March 31, 1997. The historical gross margin percentages reflect the
Company's status as a "switchless" reseller and dependence upon other carriers
to switch and transport the Company's traffic. During this period, the Company
made significant investments in all three regions in switches and
international fiber cable capacity and in the construction of its own Network,
which is expected to produce higher overall gross margins as a percentage of
net revenue for the Company as traffic volumes and the proportion of on-
Network volume increases. In Australia, the Company's quarterly gross margins
during this period were favorably affected by dealership projects and non-
recurring contingency settlements that had a significantly higher gross margin
percentage than the Australian core telephone business. Excluding dealership
and non-recurring items, the Australian gross margins over the past four
quarters have been approximately 5%, increasing to 5.8% in the quarter ended
March 31, 1997 as a result of the Company beginning to carry traffic on its
Network in March 1997. The decrease in the Australian gross margin, adjusted
for dealership and non-recurring items, in the quarter ended June 30, 1996
versus the previous quarters is due to lower tariff rate discounts implemented
by Telstra in March 1996. The gross margin percentages in North America and
the United Kingdom during the six quarterly periods has steadily increased
from a negative 31.3% during the quarter ended December 31, 1995 to 5.8%
during the quarter ended March 31, 1997. This reflects the increasing volume
of traffic each quarter over which the fixed network costs can be spread, as
well as additional discounts received from underlying carriers on variable
costs due to the higher volumes. The gross margin in the quarter ended March
31, 1997 was also adversely affected by a $0.7 million charge for the non-
payment of a single customer accounts receivable. Excluding this charge, gross
margin percentages in North America and the United Kingdom operations would
have been 11.6%.
The Company's quarterly selling, general and administrative expenses have
trended upward during the six quarter period from $4.0 million in the quarter
ended December 31, 1995 to $8.8 million in the quarter ended March 31, 1997.
The quarterly selling, general and administrative expense increase is
reflective of the worldwide growth in the Company's operations, including
increased personnel costs for network operations staff in all three regions,
and additional costs, sales and marketing staffs and associated expenses.
Selling, general and administrative expenses increased as a percentage of net
revenue over the six quarter period due to substantial expenditures incurred
in developing the Network and sales forces necessary to generate increased
future revenues in all three regions. The Company's total full time employee
head count has increased from 285 at September 30, 1996 to 369 at March 31,
1997.
Quarterly depreciation and amortization reflects increases as a result of
the Company's substantial continued investment in fixed assets primarily
associated with the construction of the Network. This trend is expected to
38
<PAGE>
continue in the future as the Company continues to expand its network capacity
and scope into additional countries around the world.
HISTORICAL RESULTS OF OPERATIONS
For the Three Months Ended March 31, 1997 Compared to the Three Months Ended
March 31, 1996
Net revenue increased $41.9 million, from $17.1 million for the three months
ended March 31, 1996 to $59.0 million for the three months ended March 31,
1997. Of the increase, $31.7 million was associated with the Company's
Australian operations, which were acquired on March 1, 1996, and reflects
increased revenue from business customers as well as new residential revenue.
The Company's operations reflect the impact of seasonality in the first
quarter as the result of reduced activity in the summer months in Australia.
The remaining $10.2 million is comprised of increases of $3.8 million in the
United Kingdom reflecting additional residential customers and traffic volumes
resulting from the Company's marketing efforts to ethnic residential
customers, and $6.4 million in the United States primarily from additional
wholesale traffic volumes, and to a lesser extent from residential customers
resulting from the ethnic marketing program and business customers resulting
from the Company's build-up of its direct sales marketing force.
Cost of revenue increased $39.5 million, from $15.5 million, or 91% of net
revenue, for the three months ended March 31, 1996 to $55.0 million, or 93% of
net revenue, for the three months ended March 31, 1997. The increase in the
cost of revenue is primarily attributable to the increased traffic volumes and
associated net revenue. The increase in the percentage of cost of revenue is
attributable to a full three months of Australian operations in the first
quarter of 1997 versus one month's activity in the first quarter of 1996,
which in Australia included non-recurring higher margin dealership revenues.
Additionally, the 1997 percentage was adversely affected by a one-time, non-
payment of a single customer accounts receivable in the United States
amounting to $0.7 million in the first quarter of 1997. Without this
occurrence, cost of revenue would have been 92% of net revenue. Most of the
Company's cost of revenue are variable. However, as the Company continues to
expand its worldwide network through installation of switches, cable ownership
and fixed circuit leases, the costs as a percentage of net revenue should
decrease.
Selling, general and administrative expenses increased from $1.9 million to
$8.8 million for the three months ended March 31, 1996 to March 31, 1997.
Approximately $3.7 million of the increase was attributable to a full quarter
of activity associated with the Company's Australian operations in the 1997
results versus only one month in the 1996 results, and the remaining $3.2
million related to increased staffing levels, increased sales and marketing
activity and network operations costs in non-Australian operations. The
Australian selling, general and administrative expense as a percentage of net
revenue was 10% for the three months ended March 31, 1997 compared to 6% for
the three months ended March 31, 1996. The increase reflects additional
staffing for direct sales, marketing and network operations as well as
advertising and promotion costs for a new residential marketing campaign
launched in Australia in February 1997. The non-Australian selling, general
and administrative costs as a percentage of non-Australian net revenue for the
three months ended March 31, 1997 was 35% compared to 17% for the three months
ended March 31, 1996. The increase is reflective of the growth in the direct
sales, marketing and network operations staff necessary to ensure and support
expected future net revenue. Total full time headcount increased to 369 at the
end of March 1997.
Depreciation and amortization increased from $0.2 million for the three
months ended March 31, 1996 to $0.8 million for the three months ended March
31, 1997. The majority of the increase is a result of the acquisition of the
Australian operations and is comprised of two additional months of asset
depreciation and amortization of goodwill and customer lists which totaled
$0.4 million. The remaining depreciation is related primarily to increased
depreciation expense for the Company as a result of additional capital
expenditures for switching and network equipment in North America, United
Kingdom and Australia.
Interest income for the three months ended March 31, 1997 is the result of
the investment of the net proceeds from the initial public offering in highly
liquid United States Federal Government backed obligations.
39
<PAGE>
Other income (expense) for the three months ended March 31, 1997 related to
foreign currency transaction gains on the Australian dollar-denominated debt
incurred by the Company payable to the sellers for its acquisition of Axicorp
as a result of a decline in the exchange rate of the Australian dollar against
the United States dollar during the period.
Income taxes were fully attributable to the operations in the United
Kingdom.
For the Year Ended December 31, 1996 as Compared to the Year Ended December
31, 1995
Net revenue increased $171.8 million, from $1.2 million for the year ended
December 31, 1995 to $173.0 million for the year ended December 31, 1996. Of
the increase, $151.3 million was associated with the Company's Australian
operations, which were acquired March 1, 1996, while the remaining $20.5
million of net revenue growth was associated primarily with the commencement
and expansion of the Company's operations in the United States and the United
Kingdom.
Cost of revenue increased $157.4 million, from $1.4 million for the year
ended December 31, 1995 to $158.8 million for the year ended December 31, 1996
as a direct result of the increased net revenue. Most of the Company's cost of
revenue are variable, since the Company had limited Network during this period
and functioned primarily as a switchless reseller. The cost of revenue in the
United States reflects the start-up nature of the network operations and
traffic being carried on more expensive carriers until adequate capacity on
lower cost carriers could be established.
Selling, general and administrative expenses increased $18.1 million, from
$2.0 million to $20.1 million for the year ended December 31, 1996 as compared
to the year ended December 31, 1995. Approximately $11.4 million of the
increase was attributable to the ten months of activity associated with the
Australian operations and the remaining $6.7 million related to the non-
Australia operations as a result of increased staffing levels, increased sales
and marketing activity and network operations costs. The Australian selling,
general and administrative expense as a percentage of net revenue was 7.5% for
the ten months ended December 31, 1996. The non-Australian selling, general
and administrative costs as a percentage of net revenue for the year ended
December 31, 1996 was 40% of net revenue which reflects the growth in the
infrastructure necessary to support future net revenues.
Depreciation and amortization increased from $0.2 million for the year ended
December 31, 1995 to $2.2 million for the year ended December 31, 1996. The
majority of the increase is a result of the acquisition of Axicorp and is
comprised of amortization of goodwill and the customer lists which totaled
$1.3 million. The remaining depreciation is related primarily to Axicorp's
assets and increased depreciation expense for the Company as a result of
additional capital expenditures for switching and network related equipment.
Other income (expense) for the year ended December 31, 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 of the appreciation of the Australian dollar against the United
States dollar during the period.
Income taxes were primarily attributable to the operations of Axicorp for
the ten months from the date of purchase, and represents the amount of expense
for Australian taxes.
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.
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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 was $0.2 million in 1995. The depreciation and
amortization expense was directly related to the purchase of Network
equipment, including the Company's switch in Washington, D.C.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from net cash used in operating
activities; purchases of network equipment including switches, related
equipment, and international fiber cable capacity; and interest and principal
payments on outstanding indebtedness, including capital leases. The Company
has financed its growth through private placements, the Initial Public
Offering and capital lease financing.
Net cash provided by (used in) operating activities was $1.8 million for the
three months ended March 31, 1997, $(6.9) million for the year ended December
31, 1996, and $(2.0) million for the year ended December 31, 1995. The
increase in cash provided by operating activities for the three months ended
March 31, 1997 was primarily the result from an increase in accounts payable
associated with capital expenditures that are expected to be financed. The
increased cash usage for the years ended December 31, 1996 and 1995 was the
result of an increase in the net loss partially offset by increases in
accounts payable and accrued expenses.
Net cash provided by (used in) investing activities was $11.0 million for
the three months ended March 31, 1997, $(39.6) million for the year ended
December 31, 1996 and $(0.4) million for the year ended December 31, 1995.
Cash provided by investing activities for the three months ended March 31,
1997 was the result of the sale of investments of $19.8 million and capital
expenditures of $8.8 million primarily to expand the Network. The cash
utilized during the year ended December 31, 1996 includes $12.7 million for
capital expenditures to expand the Network and $1.7 million for the purchase
of Axicorp, net of cash acquired.
Net cash provided by (used in) financing activities was $(4.4) million for
the three months ended March 31, 1997, $79.5 million for the year ended
December 31, 1996 and $4.5 million for the year ended December 31, 1995. Net
cash used in financing activities for the three months ended March 31, 1997
resulted from payments on the Axicorp acquisition notes and payments related
to other obligations. In January 1996 and July 1996, the Company completed
private placements of Common Stock generating net proceeds of approximately
$4.7 million and $15.8 million, respectively. In November 1996, the Company
completed its Initial Public Offering of its Common Stock and generated net
proceeds of approximately $54.4 million.
The Company anticipates aggregate capital expenditures of approximately $88
million in 1997 and 1998. Such capital expenditures will be primarily for
international and domestic switches and points of presence, international
fiber capacity and satellite earth station facilities for new and existing
routes and other transmission equipment and support systems. The Company also
intends to add up to three switches in the United States (expected to be
located in Chicago, Dallas and Miami), three switches in Europe (expected to
be located in Frankfurt, Paris and Rome), one switch in Mexico (Mexico City)
and one switch in Japan (Tokyo), and approximately 15 points of presence in
other major metropolitan areas of the Targeted Regions, all by the end of
1998. The Company also expects to continue to acquire additional capacity on
both existing and future international fiber cable systems.
The Company believes that the net proceeds from the Offering, together with
its existing cash and available capital lease financing (subject to the
limitations contained in the Indenture) will be sufficient to fund the
Company's operating losses, debt service requirements, capital expenditures
(including the development of the Network as currently contemplated) and other
cash needs for its operations for approximately 18 to 24 months. If the
Company enters into the Senior Credit Facility, the Company believes it would
have sufficient funding to
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cover planned expansion of the Network and operating losses until such time as
the Company begins to generate operating income; however, this is a forward-
looking statement and there can be no assurance in this regard. There can be
no assurance that the Company will obtain the Senior Credit Facility on the
terms set forth in the Commitment Letter, if at all. See "Description of
Senior Credit Commitment." Furthermore, there can be no assurance that the
Company will be able to obtain a substitute credit facility or capital lease
financing on commercially reasonable terms, if at all. Moreover, the Company
may need to raise additional cash depending on the development of the Network
and the level of the Company's operations and its operating cash flow.
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 bank
borrowings, through other debt financing vehicles, or through the issuance of
capital stock. The Company, however, presently has no understanding,
commitment or agreement with respect to any acquisition. 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.
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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 residential 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 its strategy, the Company also
has expanded its operations to include 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 three months ended March 31, 1997 and the twelve months ended December 31,
1996, the Company had net revenue of approximately $59 million and pro forma
net revenue of approximately $199 million, after giving pro forma effect to
the Company's March 1996 acquisition of Axicorp, the fourth largest
telecommunications provider in Australia. The Company's Australian operations
generated approximately $46.9 million, or 79%, of the Company's net revenue
for the three months ended March 31, 1997, and approximately $177.6 million,
or 89%, of the Company's pro forma net revenue for the year ended December 31,
1996. The Company has approximately 100,000 customers and, as of May 31, 1997,
had 487 full-time employees.
The Company primarily targets, on a retail basis, small- and medium-sized
businesses with significant international long distance traffic and ethnic
residential customers 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, Canada, the United Kingdom and Australia, and toll-free services in
the United States and Canada. The Company markets its services through a
variety of sales channels, including direct sales, independent agents, direct
marketing and associations.
The Company has constructed and is implementing an international
telecommunications network to reduce and control costs, improve service
reliability and increase flexibility to introduce new products and services.
Management believes that as the volume of telecommunications traffic carried
on the Network increases, the Company should improve its profitability as it
realizes economies of scale. In July 1997, the Company became one of five
licensed carriers permitted to own and operate transmission facilities in
Australia. Major components of the Network include the following:
Switches. Since December 31, 1996, when the Company operated one
international gateway switch in Washington, D.C., the Company's Network has
grown to consist of eleven switches, including seven international gateway
switches (New York, Los Angeles, Washington, D.C., Toronto, Vancouver, London,
Sydney) and four domestic switches (Adelaide, Brisbane, Melbourne and Perth).
The Company's international gateway switches will serve as the base for its
global expansion of the Network into new countries as regulatory rules permit
the Company to compete in these new markets. By the end of 1998, the Company
intends to add up to three switches in the United States (expected to be
located in Chicago, Dallas and Miami), three switches in Europe (expected to
be located in Frankfurt, Paris and Rome), one switch in Mexico (Mexico City)
and one switch in Japan (Tokyo), and approximately 15 points of presence in
other major metropolitan areas of the Targeted Regions.
Transmission Capacity. The Company owns and leases transmission capacity
which connects its switches to each other and to the networks of other
international and domestic telecommunications carriers, including MAOUs in two
undersea fiber optic cable systems, which are TAT-12/TAT-13 and TPC-5, and
IRUs in three undersea fiber optic cable systems, which are CANUS-1, CANTAT-3
and TAT-12/TAT-13. During the first quarter of 1997, the Company's Los Angeles
switch was connected to its network in Australia via a trans-
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Pacific undersea fiber optic cable system. During the second quarter of 1997,
the Company's New York switch was connected to its London switch via trans-
Atlantic undersea fiber optic cable systems. This trans-Atlantic connection
follows the December 1996 receipt by the Company of a full, facilities-based
United Kingdom license which, among other things, allows the Company to own
the United Kingdom half of international circuits. In July 1997, the Company
became one of five licensed carrier's permitted to own and operate
transmission facilities in Australia. The Company expects to continue to
acquire additional capacity on both existing and future international fiber
optic cable systems.
Foreign Carrier Agreements. In selected countries where competition with the
local PTT is limited or not currently permitted, the Company has entered into
foreign carrier agreements with PTTs or other authorized service providers
which permit the Company to provide traffic into and receive return traffic
from these countries. The Company has existing foreign carrier agreements with
the government-controlled PTTs in India, Iran and Honduras and, in April 1997,
entered into a foreign carrier agreement with the CyTA to establish a direct,
fiber optic connection with the Company's London switch for international long
distance primarily to countries in the Middle East. The Company also has
entered into foreign carrier agreements in Israel, Malaysia, New Zealand and
Sri Lanka which are expected to become effective by the end of 1997. The
Company views foreign carrier agreements as viable means of transmitting
traffic to countries that have yet to become deregulated. The Company intends
to enter into several other foreign carrier agreements by the end of 1998.
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 1995, the international
long distance industry accounted for $55 billion in revenues and 60 billion
minutes of use, up from $22 billion in revenues and 17 billion minutes of use
in 1986. Industry sources estimate that by the year 2000 this market will have
expanded to $78 billion in revenues and 117 billion minutes of use,
representing compound annual growth rates from 1995 of 7.2% and 14.3%,
respectively.
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 1995, per minute settlement
payments by United States-based carriers to foreign PTTs fell 31%, from $0.70
per minute to $0.48 per minute. Over this same period, however, per minute
international billed revenue fell only 11%, from $1.02 in 1989 to $0.91 in
1995. Therefore, gross profit per international minute (before local access
charges) grew from $0.32 in 1989 to $0.43 in 1995, a 34% 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-
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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; Telstra and Optus in Australia; and Stentor in Canada) 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; AAPT in Australia;
and Call-Net and f ONOROLA in Canada) 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. In
addition, the United States and 67 other countries participating in the
recently signed WTO Agreement are expected to open their telecommunications
markets starting January 1, 1998.
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 U.S. 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 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 IRUs or 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 foreign carrier agreements
between carriers in two countries. Foreign carrier 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,
foreign carrier 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.
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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 foreign
carrier agreement at a negotiated rate (which must be the same for all U.S.-
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:
[TRADITIONAL METHOD OF TRANSPORTING INTERNATIONAL TRAFFIC - USING FOREIGN
CARRIER AGREEMENTS CHART APPEARS HERE]
Foreign carrier 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 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 the 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.
U.S. 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
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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 experiencing
increasing usage. 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 foreign carrier 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 principal jurisdictions in
which the Company provides its services:
UNITED STATES. The United States long distance market is highly
deregulated and is the largest in the world. According to the FCC, in 1995
long distance telephone revenue was $72.5 billion, including $14.0 billion
from international services (representing 19.3% of the total market). AT&T has
remained the largest long distance carrier in the United States market, with
market share of 53.0%, while MCI and Sprint have market shares of 17.8% and
10.0%, 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.
CANADA. The market for international and domestic long distance services
in Canada accounted for approximately C$8.0 billion in revenues. In Canada,
Stentor, a partnership of Canadian regional telephone companies, is the
largest provider of long distance services with a market share of
approximately 56%. Two types of long distance providers compete with Stentor.
The first, which includes AT&T LDS, f ONOROLA and Sprint Canada, own and
operate interexchange circuits and offer essentially the same services as
Stentor. The second type of competitor consists of other long distance
providers that lease but do not own interexchange circuits and sell their
services primarily to distinct niche markets, such as ethnic communities,
affinity associations or small business associations.
AUSTRALIA. In 1996, the market for international and domestic long
distance services in Australia accounted for approximately A$4.7 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 73.4% in 1995. 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 CorpTel. Australia has further deregulated its long-
distance market in recent legislation, which became effective in July 1997, by
allowing service providers other than Telstra and Optus to own domestic
transmission facilities and mandating Telstra to provide equal (non-code)
access to customers of select service providers such as the Company. As a
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result of this legislation, both the Company and AAPT are now licensed
carriers permitted to own and operate transmission facilities in Australia.
UNITED KINGDOM. Oftel estimates that the market for international and
domestic long distance services in the United Kingdom accounted for
approximately (Pounds)1.4 billion and (Pounds)2.1 billion in revenues,
respectively, for the fiscal year ended March 31, 1996. 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 29.7 billion pesos in 1996. As of January
1, 1997, the local and long distance market was opened to facilities-based
competition in Mexico. Mexico, however, imposes foreign ownership restrictions
that limit the ownership of facilities-based carriers by non-Mexican persons
to below 50%. The Mexican government has granted licenses to ten companies
(many of them affiliated with U.S.-based long distance carriers such as AT&T
and MCI) to operate as facilities-based long distance carriers. Resale of
basic switched voice long distance services, however, is still not allowed in
Mexico. Primus provides United States-Mexico cross border private line
services, but is prohibited by the private ownership limitations from
providing other 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 customers
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 traffic volumes more quickly to
achieve economies of scale.
. 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 consists 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 owned
and leased transmission facilities, resale arrangements and foreign
carrier agreements. In an effort to manage transmission costs, the
Company
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pursues a flexible approach with respect to Network expansion. In most
instances, the Company initially obtains additional capacity on a variable
cost, per-minute basis, next acquires additional capacity on a fixed cost
basis when traffic volumes make 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. Management believes that
the Company 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 customers that prefer a
full service telecommunications provider. The Company believes this
approach strengthens its marketing efforts and increases customer
retention.
. Grow through Selected Acquisitions. As part of its business strategy, the
Company frequently evaluates potential acquisitions, joint ventures and
strategic alliances. The Company views acquisitions as a means to enter
additional markets and expand its operations within existing markets. The
Company's acquisition criteria include long-distance service providers
with an established customer base, complementary operations, licenses to
operate as an international carrier, an experienced management team, and
businesses in countries into which the Company seeks to enter.
NETWORK
Network Design. Once completed, the Company's 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 owned and leased transmission facilities,
resale arrangements and foreign carrier 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 has begun
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 U.S. operations to
initiate operations with and into Mexico, and recently, the Company has
expanded its operations in Canada by acquiring certain assets of Cam-Net. The
Company intends to use its United Kingdom operations to coordinate efforts to
enter other major metropolitan European markets in the European Union 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:
[DIRECT METHOD OF TRANSPORTING INTERNATIONAL TRAFFIC - PRIMUS CONNECTION CHART
APPEARS HERE]
Network Implementation. Since December 31, 1996, when the Company operated
one international gateway switch in Washington, D.C., the Company's Network has
grown to eleven switches in 1997, including seven international gateway
switches (New York, Los Angeles, Washington, D.C., Toronto, Vancouver, London,
Sydney) and four domestic switches (Adelaide, Brisbane, Melbourne and Perth).
By the end of 1998, the Company intends to add up to three switches in the
United States (expected to be located in Chicago, Dallas and Miami), three
switches in Europe (expected to be located in Frankfurt, Paris and Rome), one
switch in Mexico (Mexico City) and one switch in Japan (Tokyo), and
approximately 15 points of presence in other major metropolitan areas of the
Targeted Regions. The Company's international gateway switches will serve as
the base for the Company's global expansion of the Network as more countries
deregulate their telecommunications industries. In addition, the Company owns
and leases transmission capacity connecting its switches with one another and
connecting its Network to the networks of other international and domestic
carriers, and has entered into foreign carrier agreements with PTTs and other
authorized service providers in other regions. The Company intends to install
additional points of presence and switches in 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
U.S.-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. Where the
Company's customer base has developed sufficient traffic, the Company has
purchased and leased transmission capacity to connect to its various switches.
Where traffic is light or moderate, the Company obtains 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
foreign carrier agreements when necessary. Assuming significant levels of
inbound and outbound traffic, foreign carrier agreements may allow the Company
to offer better value to customers calling these markets by improving the
Company's economics over these routes.
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UNITED STATES. In December 1996, the Network in the United States
consisted of one switch located in Washington, D.C. servicing a small number
of business customers. Since then, the Company's network in the United States
has expanded through the purchase of two new Northern Telecom international
gateway switches which were installed in Los Angeles for calls to the Asia-
Pacific region and the New York City area for calls to Europe. These switches
were interconnected via leased fiber optic lines within the United States, and
regional service has started in New York and Los Angeles. In the first quarter
of 1997, the Los Angeles switch was connected to Primus's network in Australia
via a trans-Pacific underseas fiber optic cable system. The New York switch
was connected to Primus's London switch during the second quarter of 1997 via
trans-Atlantic underseas fiber optic cable systems.
CANADA. In the first quarter of 1997, the Company furthered its
development of the Network in Canada by installing and activating its Siemen's
switch in Toronto. In April 1997, the Company acquired selected assets,
including the customer base and accounts receivable, of Cam-Net, expanding its
points of presence in Canada to include the Vancouver and Montreal
metropolitan areas.
AUSTRALIA. Following the acquisition of Axicorp in March 1996, the Company
has invested 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, including the acquisition
and installation of five Northern Telecom switches for use in Sydney,
Melbourne, Perth, Adelaide, and Brisbane (which became operational during the
first quarter of 1997), and has been focusing on increasing the number of
higher-margin, higher-volume business customers with significant international
long distance traffic. In the first quarter of 1997, Axicorp's switch was
connected to the Company's U.S. network through leased undersea trans-Pacific
fiber circuits. In July 1997, the Company became one of five licensed carriers
permitted to own and operate transmission facilities in Australia.
UNITED KINGDOM. The Company's start-up operation in the United Kingdom
initially provided services on a resale basis using a switch operated by
Telia, the monopoly carrier in Sweden. Recently, the Company purchased an AXE-
10 telephone switch from Ericsson which was installed in London, is
operational, and has begun carrying commercial traffic. In December 1996, the
Company's subsidiary Primus Telecommunications Ltd. was awarded a full
facilities-based telecommunication carrier license, pursuant to which the
Company may operate its own switches and own fiber optic cables. In addition,
the license allows direct access to certain satellite systems (INTELSAT,
EUTELSAT, and INMARSAT), and permits the Company to enter into direct foreign
carrier agreements with carriers in other countries. In 1997, the Company also
expects to develop its Network in the United Kingdom by securing additional
international fiber capacity to other European countries and the United
States.
OTHER REGIONS. In 1996, the Company entered into foreign carrier
agreements with PTTs in India, Iran and Honduras. In an effort to expand the
Network, the Company entered into a foreign carrier agreement in April 1997
with CyTA to establish a direct fiber-optic connection between the companies
for international long distance service. The new link will connect the
Company's international gateway switch in London with CyTA's gateway switch in
Cyprus which is linked to countries in the Middle East including Israel,
Syria, and Lebanon. The Company has also entered into foreign carrier
agreements in Israel, Malaysia, New Zealand and Sri Lanka which are expected
to become effective by the end of 1997. The Company views foreign carrier
agreements as viable means of transmitting traffic to countries that have yet
to become deregulated. The Company intends to enter into several other foreign
carrier agreements by the end of 1998.
FUTURE DEVELOPMENT OF THE NETWORK. In conjunction with the scheduled
deregulation of the telecommunication industry in certain European Union
countries in 1998, the Company intends to use its United Kingdom operations to
coordinate efforts to enter other major metropolitan European markets,
including those in Denmark, France, Germany, Ireland, Italy, Sweden and Spain.
In Mexico, the Company provides United States-Mexico cross border private line
services and, as deregulation occurs, the Company intends to add additional
services. In addition, as the telecommunications industry in Japan begins to
deregulate, the Company intends to apply for a license that will enable it to
operate as a carrier. By the end of 1998, the Company intends to add up
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to three switches in the United States (expected to be located in Chicago,
Dallas and Miami), three switches in Europe (expected to be located in
Frankfurt, Paris and Rome), one switch in Mexico (Mexico City) and one switch
in Japan (Tokyo), and approximately 15 points of presence in other major
metropolitan areas of the Targeted Regions. There can be no assurances that
Company will be able to obtain the necessary licenses or purchase the
necessary equipment on favorable terms, or if it does, that the development of
the Network in these regions will be successful.
Network Management and Control. The Company owns and operates a network
management control center (a "NMCC") in Sydney, Australia which is used to
monitor and control all switches and other transmission equipment used in its
Australia Network. This NMCC operates seven days a week, 24 hours per day, 365
days a year. In the United States, United Kingdom and Canada, the Company
currently monitors and controls each switch locally. The Company plans to use
a portion of the net proceeds of this Offering to build new NMCCs in London
and Vienna, Virginia, and to upgrade the existing Sydney NMCC. Each of the
NMCCs will be capable of monitoring and controlling the Network in all
regions.
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, Australia and Canada:
. 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. Since the Company now operates its own
switches in Australia, its services can also be accessed through the use
of toll-free, dedicated and prefix code access. Pursuant to the Telecom
Act, the Australian long distance industry is undergoing deregulation
whereby in September 1997 equal (non-code) access is expected to be
available to service providers including the Company.
. 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.
. 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. Recently, the Company has
introduced global prepaid and calling cards that enable customers to make
telephone calls in most major countries while they are outside 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.
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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:
. Cellular and Local Switched Service. The Company provides cellular and
local service in Australia on a resale basis as part of its "one-stop
shopping" marketing approach, subject to commercial feasibility and
regulatory limitations. The Company is one of four national dealers
selling Telstra analog and digital cellular services in Australia and
currently provides local service in Australia. As regulatory rules
permit, the Company may offer cellular and local services on a resale
basis in other markets.
. Toll-free Services. The Company currently provides domestic and
international toll-free services in the United States, United Kingdom and
Canada and intends to offer such services in Australia.
. Data Services. The Company intends to offer Asynchronous Transfer Mode, a
transmission standard which utilizes statistical multiplexing technology
and frame relay and other data services in selected markets. Frame relay
enables multiple users to share communication bandwidth for enhanced data
transmission. The Company also expects to introduce Internet access
services.
. Value-Added Services. The Company intends to offer enhanced facsimile
services, audio and video conferencing, and voice-mail. The Company has
introduced enhanced facsimile services in Mexico, and video and audio
conferencing in the United States.
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, Canada, the United Kingdom and Australia. As of May 31, 1997, the
Company employed 72 full-time customer service employees.
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 customers and, on a
wholesale basis, to 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
May 31, 1997, the Company had 228 sales and marketing personnel operating in
17 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 May 31, 1997, the Company employed 135 full-time direct sales
representatives focused on the business market.
Residential Customers. The Company's residential sales and marketing
strategy targets ethnic residential customers 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 May 31, 1997, the Company
employed 69 full-time direct sales representatives focused on the ethnic
residential customers.
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 May 31,
1997, the Company employed 8 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 Businesses..................... . . . . .
Residential Customers....................... . . . . .
Telecommunications Carriers/Resellers....... .
Multinational Businesses.................... .
</TABLE>
Direct Sales Force. The Company's direct sales force is comprised of 135
full-time employees who focus on small- to medium-sized business customers
with substantial international telecommunications traffic or traffic
potential. The Company also employs 69 full-time direct sales representatives
focused on ethnic residential customers and 8 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 17 sales offices,
including nine in the North America region (Washington, D.C., New York, Los
Angeles, Tampa, Toronto, Vancouver, Montreal, Ottawa and Mexico City), three
in Europe (London, Manchester and Glasgow), and five in the Asia-Pacific
region (Melbourne, Sydney, Adelaide, Brisbane, and Perth). The Company intends
to open additional offices in other major metropolitan areas. 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 customers,
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 16 full-time telemarketing sales persons
to supplement sales efforts to ethnic residential customers 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 has started to employ similar marketing programs in the United
Kingdom and the United States and expects to do so 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 customers by
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 and
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customer billing. For financial reporting, the Company utilizes a common
system in each of its markets. 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.
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, resellers 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 multi-functional 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.
Canada. In Canada, the Company utilizes an in-house proprietary system for
customer billing and customer service and support. The Company direct bills
its residential and business customers using calling data provided by the
switches.
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. The
Company believes that it is the only provider in Australia with the capability
to provide its customers with such an integrated invoice. All customers are
billed directly by Axicorp.
United Kingdom. In the United Kingdom, the Company direct bills its
residential and business customers through an in-house billing system using
calling data provided by Telia, the Company's main network provider. The
Company has also entered into an agreement with an outside service bureau to
provide billing services with respect to the wholesale carrier and reseller
customers.
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. Within each of its markets, the
Company faces 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. Prices for long distance calls in
several of the markets in which the Company competes have declined in recent
years and are likely to continue to decrease.
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;
Stentor, Sprint Canada and AT&T LDS in Canada; 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
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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. This increase in
competition could adversely affect net revenue per minute and gross margin as
a percentage of net revenue.
The following is a brief summary of the competitive environment in each of
the principal jurisdictions in which the Company provides its services:
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.
Canada. The Canadian telecommunications market is highly competitive and is
dominated by a few established carriers whose marketing and pricing decisions
have a significant impact on the other industry participants including the
Company. The Company competes with facilities-based carriers, other resellers
and rebillers, primarily on the basis of price. The principal facilities-based
competitors include the Stentor group of companies, in particular, Bell
Canada, the dominant supplier of local and long-distance services in Canada,
AT&T LDS, Sprint Canada and f ONOROLA. The Company also competes with ACC
Canada, one of the large resellers. Based upon current market share estimates,
the Stentor Companies control approximately 70% of the entire Canadian long
distance market and approximately 66% of the business long distance market.
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, AAPT and
WXL, and a number of switchless resellers, including CorpTel. The Company
believes that, with service providers other than Telstra and Optus able to
operate as carriers, 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 U.S.-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.
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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 and state regulatory
commissions. 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. Pursuant to authority granted to the FCC in the 1996
Telecommunications Act, the FCC has issued an order eliminating the
requirement that non-dominant interexchange carriers, including the Company,
maintain tariffs for their interstate, domestic interexchange services on file
at the FCC. The FCC ruled that after a nine-month transition period, non-
dominant carriers like the Company need not file domestic interstate tariffs.
During such nine-month period, the Company may maintain its interstate tariff
filed pursuant to the FCC's earlier tariff filing rules. Non-dominant carriers
will be required, however, to provide rate and service information to
customers, as well as maintain price and service information to make such
information available on a timely basis to the FCC upon request. The FCC order
establishing de-tariffing has been appealed to the U.S. Court of Appeals for
the District of Columbia, and the FCC's order has been stayed pending
resolution of the appeal.
DOMESTIC SERVICE REGULATION. The 1996 Telecommunications Act is intended
to increase competition in the U.S. 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 has been conducting a large number of
proceedings 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. The FCC is considering
several petitions for reconsideration of its order. In addition, the U.S.
Court of Appeals for the Eighth Circuit is considering a consolidated appeal
of this order and has stayed certain parts of the order.
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
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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 45 states. Applications for
certification are pending or will be filed in 3 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 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.
Non-dominant 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 foreign carrier agreements,
with the FCC within 30 days of execution. The Company has filed each of its
foreign carrier 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 ISP which
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. Unless prior approval is obtained, the amount
of payment or 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 vary the settlement rate from one-half of the accounting rate.
The ISP is also designed to eliminate foreign carriers' incentives and
opportunities to discriminate in their foreign carrier agreements among
different U.S.-based carriers through "whipsawing". Whipsawing refers to the
practice of a foreign carrier favoring one U.S.-based carrier over another in
exchange for an accounting and/or other terms that benefits the foreign
carrier, but may otherwise be inconsistent with the U.S. public interest.
Under the ISP, U.S.-based carriers can only enter into foreign carrier
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
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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 waiver of notification letter with the FCC. If a
U.S.-based carrier varies the terms and conditions of its foreign carrier
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.
The FCC continues to refine its international service rules, including ISP
requirements, to promote competition, reflect and encourage liberalization in
foreign countries and reduce accounting rates toward cost. In that regard, the
FCC has determined that it would permit U.S. carriers to enter into "flexible"
international termination arrangements where such arrangements promote
competition. Under this new policy, the FCC has allowed the Company to enter
into an alternative termination arrangement with its Australian subsidiary
Axicorp, which allows the Company and Axicorp to terminate each other's
traffic under favorable terms that deviate from the ISP.
FOREIGN OWNERSHIP AFFILIATIONS AND 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. The
United States commitment in the WTO may effectively repeal the United States
foreign ownership requirements as of January 1, 1998 and legislation has been
proposed to amend the Communications Act to reflect relaxation of foreign
ownership limits. The FCC has also proposed new rules that will reflect the
WTO policies relating to the entry and participation of foreign entities in
the United States telecommunications market. Under existing rules, the FCC
scrutinizes ownership interests 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. FCC 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%. The proposed new rules, if adopted, would eliminate the ECO test for
foreign carriers from WTO countries proposing to enter the U.S. market,
establish certain safeguards, and substantially relax the foreign ownership
rules. The effect on the Company of the WTO Agreement or other new
legislation, or the outcome of the FCC's rulemaking regarding implementing WTO
regulations which may become applicable to the Company, cannot be determined.
CHANGING UNITED STATES REGULATIONS. Regulation of the telecommunications
industry is changing rapidly. As mentioned, the FCC is considering a number of
international service issues in the context of several policy rule making
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.
Canada. In Canada, telecommunications carriers are regulated generally by
the CRTC which has enacted policies and regulations that include the
establishment of contribution charges (the equivalent of access charges
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in the U.S.), deregulation of the international segment of the long-distance
market, limitations on switched hubbing, ISR and foreign ownership rules for
facilities-based carriers. Canada is expected to deregulate many of these
regulatory restrictions by October 1998. Teleglobe Canada, Inc. ("Teleglobe"),
which currently has a monopoly over international services until October 1,
1998, offers international carrier service on a nondiscriminatory basis to
both facilities-based carriers and resellers, who may have direct access to
its international gateways. The Company is not permitted to provide
international services other than transborder service to the United States.
The Company also is permitted to provide ISR of private leased lines to carry
switched traffic to certain countries, such as the United States, the United
Kingdom, Australia, New Zealand and Sweden on a reciprocal basis. Routing of
basic intra-Canada traffic or basic traffic destined to third countries
through U.S. facilities is, however, prohibited. Facilities-based long
distance competition became a reality in 1992, when the CRTC mandated
interconnection of competitive networks.
Despite these restrictions, Primus as a reseller is virtually unregulated by
the CRTC. In order to enter the Canadian resale market, resellers need only to
file a brief registration letter. Primus is a registered reseller in Canada
and, as such, is authorized to provide resold Canadian long distance service
without rate, price or tariff regulation, ownership limitations, or other
regulatory requirements.
As the global deregulatory trend continues, Canada is expected to deregulate
further as demonstrated by the recent adoption of several CRTC decisions to
open the local telecommunications market to competition. Although these
policies currently do not apply to foreign resellers such as the Company, this
deregulatory trend will likely create new market opportunities for the Company
to acquire facilities and expand its services as October 1998 approaches.
COMPETITION. Long distance competition has been in place in Canada since
1990 for long distance resellers and since 1992 for facilities-based carriers.
Since 1994, the ILECs have been required to provide "equal access" which
eliminated the need for customers of competitive long distance providers to
dial additional digits when placing long distance calls. In June 1992, the
CRTC issued its ground-breaking Telecom Decision CRTC 92-12 requiring the
largest telephone companies to interconnect their networks with their
facilities-based as well as resale competitors. The dominant Stentor group of
companies, including Bell Canada, offers both local and long distance services
in the respective regions of each of the group's member telephone companies.
Other nationwide providers are AT&T LDS, Sprint Canada and fONOROLA, Inc.
Additional long distance services competition is provided by a substantial
resale long distance industry in Canada. Although resellers such as the
Company do not own facilities, they are able to provide the same range of
domestic services and long distances as facilities-based carriers by leasing
capacity and other services from the facilities-based carriers.
The Canadian government had granted Teleglobe a 10-year exclusive monopoly
over international traffic, which Teleglobe advised the government should be
allowed to expire in April 1997. However, based on Canada's commitment in the
WTO Agreement on Telecommunications, Teleglobe's monopoly will extend until
October 1, 1998, whereupon an international license regime will be adopted. As
a result, Primus along with other competitors may be allowed to provide
international switched voice and other services.
FOREIGN OWNERSHIP RESTRICTIONS. As a result of legislation enacted in
1993, foreign ownership restrictions are applicable to facilities-based
carriers (known as "Canadian carriers"), but not resellers such as Primus,
which may be wholly foreign-owned. Where applicable, the law limits direct
foreign investment in Canadian facilities-based carriers to 20%, and indirect
investment to 33 1/3%.
Under the implementing regulations, if nonvoting stock is utilized, foreign
investors could apparently hold a majority of the equity in a Canadian
carrier, so long as the interest is carefully structured so that it would not
be deemed to otherwise convey control to non-Canadians. In order to maintain
the requisite "Canadian" status under the law, the non-Canadian investor must
not have "control in fact" of the carrier. Based on Canada's commitment in the
WTO Agreement, the restriction on foreign investment in facilities-based
telecommunications
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service providers remains largely intact, but will be eliminated as of October
1, 1998 for operations conducted under an international submarine cable
license and for certain satellites.
Australia. In Australia, the provision of the Company's services is subject
to federal regulation. Two primary instruments of regulation have been the
Telecommunications Act 1991 and federal regulation of anti-competitive
practices pursuant to the Trade Practices Act. The regulatory climate changed
in July 1997 with the implementation of the Telecom Act. These latest changes
to the regulatory framework have been described by the Australian Government
as the achievement of the Government's long-term objective of an
internationally competitive telecommunications industry in Australia through
full and open competition.
In connection with the Telecom Act, the Company became one of five licensed
carriers permitted to own and operate transmission facilities in Australia.
Under the new regulatory framework, the Company does not require a carriage
license in order to supply carriage services to the public using network
facilities owned by another carrier. Instead, with respect to carriage
services, the Company must comply with legislated "service provider" rules
contained in the Telecom Act covering matters such as compliance with the
Telecom Act, operator services, regulation of access, directory assistance,
provision of information to allow maintenance of an integrated public number
database, and itemized billing.
Also, in connection with the Telecom Act, two federal regulatory authorities
now exercise control over a broad range of issues affecting the operation of
the Australian telecommunications industry. The ACA is the authority
regulating matters including the licensing of carriers and technical matters,
and the ACCC has the role of promotion of competition and consumer protection.
The Company will be required to comply with the terms of its own license, will
be subject to the greater controls applicable to licensed facilities based
carriers and will be under the regulatory control of the ACA and the ACCC.
Anti-competitive practices will continue to be regulated by The Trade
Practices Act. These regulations were strengthened by the Telecom Act to
encourage greater competition in the telecommunications industry. 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.
In the Australian context, a distinction is drawn in the Telecom Act between
carriers and other providers of telecommunications services. However
distinctions are no longer drawn between types of carriers such as fixed or
mobile. Carriers are the providers of telecommunications infrastructure and
carriage service providers extend service to the end-users. In practice, most
carriers are expected also to be carriage service providers. There is now no
limit to the number of carriers who may be licensed. Under the Telecom Act,
Telstra, Optus and Vodafone Pty Ltd. have automatically remained as licensed
carriers. New carriers seeking a licence must provide an industry development
plan approved by the Australian Government. Carriers are licensed
individually, are subject to charges that are intended to cover the costs of
regulating the telecommunications industry, and are obliged to comply with
licence conditions (including obligations to comply with the Telecom Act, with
certain commitments made in their industry development plan and with the
telecommunications access regime and related facilities access obligations).
The Company has submitted its industry development plan to the Australian
Government. The plan includes relevant particulars of the carrier's strategic
commercial relationships, R&D activities, export development plans, and
arrangements aimed at encouraging employment in industries involved in the
manufacture, development or supply of facilities. A summary of the plan must
be made available to the public. Carriers must also meet the universal service
obligation, to assist in providing all Australians, particularly in remote
areas, with reasonable access to standard telephone services. The costs
required to be paid by the Company in connection with this obligation have not
yet been determined by the Australian government, but they are not expected to
be material.
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TARIFFS. The ACCC has access to various information on market conduct. The
ACCC's information gathering powers include a requirement on Telstra to
continue to file tariffs with the ACCC about its basic carriage services,
unless the ACCC exempts it from this obligation; an ability to direct any
carrier or carriage service provider with a substantial degree of market power
to file tariff information; and an ability to set rules regarding the way
carriers or carriage service providers keep records so that, e.g., information
is kept in a form that will assist the ACCC in determining terms and
conditions of access under the telecommunications access regime.
Tariff filing will essentially be an information gathering tool to
supplement the ACCC's general information gathering powers, and to assist in
identifying anti-competitive conduct such as predatory pricing and
preferential pricing to a related person. If, on the basis of the information
provided in a tariff filing, the ACCC forms the view that a carrier is
engaging in anti-competitive conduct, it may use its powers to stop that
conduct.
The ACCC may make tariff information publicly available if it is satisfied
there would be a public benefit (e.g., by enabling other industry players to
scrutinise the tariffs for anti-competitive purpose or effect, or to inform
the public). The ACCC will balance concerns about commercial confidentiality
and the promotion of competition against dealing with anti-competitive conduct
and informing the public.
FAIR TRADING PRACTICES. The ACCC will enforce legislation for the
promotion of competition and consumer protection, particularly rights of
access (including pricing for access) and interconnection. The ACCC will be
able to issue a competition notice to a carrier which has engaged in anti-
competitive conduct. Where a competition notice has been issued, the ACCC will
be able to seek pecuniary penalties, and other carriers will be able to seek
damages, if the carrier continues to engage in the specified conduct.
The Telecom Act package of legislation includes a telecommunications access
regime that provides a framework for regulating access rights for specific
carriage services and related services. The regime establishes mechanisms
within which the terms and conditions of access can be determined. The
Australian Government intends the access regime to reduce the power of Telstra
and Optus (as the former protected fixed line carriers) and other carriers who
may come to own or control important infrastructure or services necessary for
competition.
The regime establishes access rights through the declaration of services by
the ACCC. The ACCC may declare services to be the subject of regulated
access--either on the recommendation of the industry self-regulatory body or
where, following a public inquiry, the ACCC is satisfied that a declaration
would be in the long-term interests of end-users of telecommunications
services. Once a service is declared, carriers supplying that service are,
unless otherwise exempt, under an obligation to supply the declared service to
other carriers and service providers.
Access providers must comply with their access obligations on conditions
negotiated between the access provider and access seeker; as detailed in an
access undertaking; or as determined by the ACCC through arbitration.
It is expected that in many areas, the industry will negotiate, on a
multilateral basis, standard terms and conditions for access to declared
services. The access regime establishes a mechanism for the industry to
develop an access code containing model terms and conditions for access to
particular declared services. Once approved by the ACCC, those model terms and
conditions may be adopted in an undertaking by individual carriers who are
under an access obligation.
Carrier licence conditions will include an obligation to provide other
carriers with access to certain facilities and network information. A carrier
must provide other carriers with access to its facilities for the purpose of
enabling the other carriers to provide competitive facilities and competitive
carriage services or to establish their own facilities; to certain information
relating to the operation of its telecommunications network; and to its
infrastructure, including transmission towers, the sites of transmission
towers and underground facilities that are designed to hold lines, if
technically feasible.
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In July 1997, the Australian government mandated that Telstra provide access
to its facilities at specified rates to other service providers including the
Company. The Company is negotiating various access arrangements with Telstra
which will be substituted for the mandated arrangements.
FOREIGN OWNERSHIP LIMITATIONS. Foreign investment in Australia is
regulated by the Foreign Acquisitions and Takeovers Act 1975. Administration
of the Australian Government's policy on foreign investment is based on
guidelines published in 1992 providing for notification of proposals for the
establishment of new businesses involving total investment of at least A$10
million and proposals for the acquisition of existing business with total
assets valued at more than A$5 million. The Company notified the Australian
Government of its proposed acquisition of Axicorp in 1996 and was informed at
that time that there were no objections to the investment in terms of
Australia's foreign investment policy. There can be no assurance, however,
that additional foreign ownership restrictions will not be imposed on the
telecommunications industry or other foreign investors, including the Company,
in the future.
United Kingdom. In the United Kingdom, the provision of the Company's
services is subject to the provisions of the United Kingdom Telecommunications
Act. The Secretary of State for Trade and Industry, acting on the advice of
the United Kingdom 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
anti-competitive 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
United Kingdom Telecommunications Act to run 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 recommends 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
United Kingdom 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's
subsidiary, Primus Telecommunications Limited, has received a license from the
United Kingdom Secretary for Trade and Industry to provide international
facilities-based voice services to all international points from the United
Kingdom. This license also allows the holder to acquire ownership interests in
or construct the United Kingdom half circuit of any IRU as well as backhaul
facilities. The international facilities-based license together with the
international simple resale license authorize the provision of every voice and
data service, except the provision of broadcasting and mobile services. While
the international facilities-based license authorizes the Company to acquire
ownership interests in the United Kingdom half-circuit of international cables
as well as satellite space segment in order to provide satellite based
services, it is also necessary to apply for a Wireless Telegraphy Act 1949
License which authorizes the use of the spectrum.
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's 10
major retail services
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expire at the end of July 1997 and the revised price caps will apply effective
August 1, 1997. The current retail price cap on British Telecom requires
British Telecom to reduce prices on a basket of the 10 major retail services
by the Retail Price Index ("RPI") minus 7.5%. However, effective August 1,
1997, the number of retail services in the basket to which the price cap
applies has been reduced and applies to line rental, local, international and
operator assisted calls. British Telecom is required to reduce its pricing on
the revised basket by RPI minus 4.5%. However, this basket does not apply to
the 20% highest spending customers in respect of which Oftel has deemed the
market to be competitive. Oftel is considering whether it will be able to
police anti-competitive behavior effectively and is currently conducting a
price control review of the United Kingdom 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.
Oftel has initiated five stages of consultation as to the pricing
methodology to be used to calculate British Telecom's costs of providing
interconnection services. Oftel's consultative document of March 1996
indicated that costs should be calculated on an incremental, as opposed to an
historical cost basis. That document identified two models--"top down"
developed by British Telecom and "bottom up" favored by a broader portion of
the industry. In May 1997 in what is expected to be the fifth and final
consultative document on this issue, Oftel set out its proposals to use
incremental costs calculated by means of a hybrid of the "top down" and
"bottom up" models. The interconnection charges calculated by means of this
hybrid model are due to become effective in October 1997. At present, British
Telecom charges for interconnection on a fully-allocated historic cost basis.
The forward-looking long run incremental cost basis that is to become
effective in October 1997, is expected by Oftel, but it is by no means
certain, to impose lower interconnection charges. There is a risk that if
agreement as to the costing methodology to be used by British Telecom is
further delayed or does not occur the matter will be referred to the
Monopolies and Mergers Commission. If so, this could mean that the
implementation of proper transparency and allocation of costs for operators
seeking interconnection with British Telecom could be further delayed.
FAIR TRADING PRACTICES. Oftel is the principal regulator of the
competitive aspects of the United Kingdom telecommunications industry. Oftel's
limited authority in this area is derived from the powers given to Oftel under
the United Kingdom Telecommunications Act and from the terms of the licenses
granted under the United Kingdom Telecommunications Act. Any dispute between
Oftel and a telecommunications service provider may be referred on appeal to
the United Kingdom 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 United Kingdom 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. Oftel
has, however, been successful in its efforts to introduce a general
competition provision into British Telecom's license and those of all other
Telecommunications Act licensees modeled on European law so as to better
police any potential anti-competitive conduct harmful to the Company. The Fair
Trading condition is already incorporated in all international facilities-
based licenses and will be incorporated in all international simple resale
licenses beginning in July 1997. There are no foreign ownership restrictions
that apply to telecommunication company licensing in the United Kingdom
although the DTI does have a discretion as to whether to award licenses on a
case by case basis. 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
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entrusted with the principal 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.
European Union. Finland, Sweden and the United Kingdom all enjoy competition
for telecommunications services generally and the Netherlands is due to
undergo deregulation in July 1997. Starting in January 1998, the remaining
member states of the European Union will be obligated to permit competition
for the provision of voice telephony services to the public which, to date,
have been reserved to the respective national monopoly carriers (the "Reserved
Services"), except that there are derogations of more than one year in
implementing competition in Ireland, Luxembourg, Greece and Portugal, and
Spain is due to undergo deregulation in December 1998. Applications to provide
Reserved Services in those member states where competition is required, may be
made currently, and it is expected that licenses will be granted to providers
which will become effective starting in January 1998. However, Austria has not
yet finalized its procedures for license applications to provide Reserved
Services. Non-Reserved Services, such as closed user group services and value-
added services, are already subject to competition throughout the European
Union, although in most member states it is necessary to file a registration
with the applicable regulatory authority for the provision of these non-
Reserved Services.
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 serves 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 year ended December 31, 1996 and for the three months ended March 31,
1997, Axicorp generated net revenue of approximately $151.3 million and $46.9
million, respectively.
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 invested 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 and installed five
switches for use in Australia, which became operational during the first
quarter of 1997, has focused on increasing the number of higher-margin,
higher-volume business customers with significant international long distance
traffic and, in July 1997, became one of five licensed carriers permitted to
own and operate transmission facilities in Australia. As part of its
increasing focus on business customers, the Company has increased Axicorp's
direct sales force and reduced its reliance on marketing through associations.
Since January 1, 1997, the Company has increased Axicorp's direct sales force
by a total of 36 persons to 94 persons at May 31, 1997. In addition, Axicorp's
switch network has been integrated into the Network through leased undersea
trans-Pacific fiber optic cable systems. Additionally, the Company has
expanded Axicorp's service offerings in Australia, including prepaid and
calling cards.
The Company believes that the integration of Axicorp into the Company's
operations and strategy will be enhanced by certain Australian regulatory
changes that became effective in July 1997. Only Telstra, Optus, AAPT and the
Company are licensed as full service facilities-based carriers. The Australian
government, however, has begun implementing plans to deregulate the Australian
telecommunications market which would permit others to own transmission
facilities. See "--Government Regulation."
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The Company acquired Axicorp for $5.7 million in cash, including transaction
costs, 455,000 shares of Series A Stock (which were converted into 1,538,355
shares of Common Stock upon the Initial Public 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 stockholder sellers. As security for payment of the Seller
Financing, the sellers currently have collateral security interests in all of
the outstanding Axicorp shares, 13.3% as registered owner, which will be
registered in the Company's name upon payment of the Seller Financing, and
86.7% pursuant to a share mortgage. Upon completion of the Offering, the
Seller Financing will be repaid, the security will be released, and Axicorp
will become a wholly-owned subsidiary of the Company.
EMPLOYEES
The following table summarizes the number of full-time employees of the
Company as of May 31, 1997, by region and classification:
<TABLE>
<CAPTION>
UNITED KINGDOM/ ASIA-
NORTH AMERICA EUROPE PACIFIC TOTAL
------------- --------------- ------- -----
<S> <C> <C> <C> <C>
Management and Administrative...... 44 6 22 72
Sales and Marketing................ 63 69 96 228
Customer Service and Support....... 33 15 24 72
Technical.......................... 43 11 61 115
--- --- --- ---
Total............................ 183 101 203 487
=== === === ===
</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 currently leases its corporate headquarters which is located in
Vienna, Virginia. Additionally, the Company also leases administrative and
sales office space in Washington D.C., New York, Los Angeles, Tampa, Mexico
City, Toronto, Melbourne, Sydney, Brisbane, Perth, Adelaide, and London. Total
leased space approximates 110,000 square feet and the total annual lease costs
are approximately $1.7 million. The operating leases expire at various times
through 2006.
Certain communications equipment which includes network switches and
transmission lines are leased through operating and capital leases.
Management believes that the Company's present administrative and sales
office facilities are adequate for its anticipated operations, and that
similar space can readily be obtained as needed. The Company believes the
current leased facilities to house the communications equipment is adequate.
However, as the Company's network of switches grows, the Company will have to
lease additional locations to house the new equipment.
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.
66
<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
---- --- -------- -------------------
<C> <C> <S> <C>
K. Paul Singh(1)............ 46 Chairman of the Board of 1999
Directors, President,
and Chief Executive
Officer
Neil L. Hazard.............. 45 Executive Vice President N/A
and Chief Financial
Officer
John F. DePodesta........... 52 Executive Vice 1999
President, Law and
Regulatory Affairs, and
Director
George E. Mattos............ 47 Vice President of N/A
Operations
John Melick................. 38 Vice President of Sales N/A
and Marketing
Ravi Bhatia................. 48 Chief Operating Officer, N/A
Axicorp
Yousef Javadi............... 41 President and Chief N/A
Operating Officer of
Primus North America
Herman Fialkov(2)(3)........ 75 Director 1997
David E. Hershberg(2)....... 60 Director 1997
John Puente(1)(3)........... 67 Director 1998
Thomas R. Kloster........... 37 Corporate Controller N/A
Sim Thiam Soon.............. 43 General Manager of N/A
Operations, Axicorp
Ali Yazdanpanah............. 40 Managing Director, N/A
Primus U.K.
</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 llp, where he
was previously a partner since 1979. Before joining Pepper, Hamilton & Scheetz
llp, Mr. DePodesta served as the General Counsel of Consolidated Rail
Corporation. See "Certain Transactions."
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
67
<PAGE>
switching and network intelligence facilities where be 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
the 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.
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.
Yousef Javadi joined the Company in March 1997 as President and Chief
Operating Officer of Primus North America. Prior to joining the Company, Mr.
Javadi was Vice President of Business Development at GE America (a GE Capital
company). Prior to joining GE, Mr. Javadi served as Director of Global
Services at MCI from 1991 to 1995. From 1985-1991 he was at OTI as Vice
President of Sales and Marketing. Prior to OTI, Mr. Javadi worked at Hughes
Network Systems.
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 GlobeComm 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.
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.
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.
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.
Ali Yazdanpanah joined the Company in 1995, and is the Managing Director of
Primus U.K. Prior to joining the Company, Mr. Yazdanpanah was an independent
telecommunications consultant from 1992 to 1994, and from 1986 to 1991, he
served as Controller of OTI. Prior to OTI, Mr. Yazdanpanah was with Coopers
and Lybrand in their London office. He is both a Chartered Accountant and a
Certified Public Accountant.
68
<PAGE>
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 Stock Option 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
Stock Option 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 currently consists of Mr. Puente
and Mr. Fialkov, 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.
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,
deciding other compensation matters such as those relating to the operation of
the Company's Employee Stock Option Plan and Director Stock Option Plan,
including the award of options under the Employee Stock Option Plan, 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, for the fiscal years ended December 31, 1996
and 1995 certain compensation information with respect to the Company's Chief
Executive Officer and the other Company officers named therein.
69
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -----------------------------
AWARDS PAYOUTS
--------------------- -------
SECURITIES
OTHER UNDER-
ANNUAL RESTRICTED LYING ALL OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H) (I)
- --------------------------- ---- ------- ------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
K. Paul Singh--Chairman 1996 185,000 100,000 -- -- 338,100 -- --
of the Board of 1995 185,000(1) -- -- -- -- -- --
Directors, President
and Chief Executive
Officer
Neil L. Hazard-- 1996 118,461 60,000 -- -- 304,290 -- --
Executive Vice
President and Chief
Financial Officer
1995 -- -- -- -- -- -- --
Ravi Bhatia--Chief 1996 96,740 30,000 -- -- 33,810 -- --
Operating Officer--
Axicorp Pty., Ltd.
1995 21,580 -- -- -- 67,620 -- --
George E. Mattos--Vice 1996 89,615 25,000 -- -- -- -- --
President of Operations
1995 79,808 15,000 -- -- 111,573 -- --
John Melick--Vice 1996 101,538 10,000 -- -- -- -- --
President of Sales and
Marketing
1995 90,000 -- -- -- 114,954 -- --
</TABLE>
- --------
(1) Of this amount, payment of $77,200 was deferred and subsequently paid on
July 31, 1996.
STOCK PLANS
Employee Stock Option Plan. The Company established the Employee Stock
Option Plan for its employees and consultants on January 2, 1995. The Board
has adopted and will submit for the approval of the stockholders at the next
annual meeting amendments to the Employee Stock Option Plan that, among other
things, increases the number of options available for grant and expands the
category of plan participants. The Employee Stock Option Plan provides for the
grant to selected full and part-time employees and consultants 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"); provided, however, that consultants
are eligible for the grant of NQSOs only. The total number of shares of Common
Stock for which options may be granted pursuant to the Employee Stock Option
Plan is 1,690,500 (3,690,500 if the amendment is approved), of which 86,961
(2,086,961 if the amendment is approved) are available for future grants,
subject to certain adjustments reflecting changes in the Company's
capitalization. No individual may receive, over the term of the Employee Stock
Option Plan, Options for more than an aggregate of 25 percent of the shares
authorized for grant under the Employee Stock Option Plan. The Employee Stock
Option Plan is currently administered by the Compensation Committee of the
Board which is comprised of directors who are not also employees of the
Company. The Compensation Committee determines, among other things, which
employees and consultants will receive options under the Employee Stock Option
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 Stock Option 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.
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<PAGE>
The exercise price of the options granted under the Employee Stock Option
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 Stock Option 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. The Board of Directors, in
its sole discretion, may cooperate with an optionee to complete a cashless
exercise transaction.
Options are not assignable or transferrable other than by will or the laws
of descent and distribution. In general, if an employee's employment with or a
consultants's engagement by the Company is terminated for any reason, such
employee's or consultant'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 or consultant
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 or consultant terminate upon the earlier of the date of such
determination or the date of termination. If the employment or service of an
employee or consultant terminates because of disability or death, such
employee's or consultant's options that are exercisable on the date of
disability or death will remain exercisable for 12 months following the date
of disability or death; provided, however, that if a disabled employee or
consultant commences employment or service with a competitor of the Company
during that 12-month period, all options held by the employee or consultant
terminate immediately.
Options issued pursuant to the Employee Stock Option 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 Stock Option 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 stockholders of a merger, reorganization or consolidation of the
Company in which the Company's stockholders 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 stockholders of an agreement of sale of all or
substantially all of the Company's assets, and the acceptance by the Company's
stockholders of a share exchange in which the Company's stockholders 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 or consultant, 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
71
<PAGE>
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.
The Employee Stock Option Plan allows an employee or consultant 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 or
consultant. The exercise of a NQSO requires an employee or consultant 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 an employee's wages
on account of this income. The employee's or consultant'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 or consultant 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 whether the employee or consultant has held the shares for more
than one year. There are no tax consequences to an employee or consultant if a
NQSO lapses before exercise or is forfeited. If an employee or consultant uses
previously owned Common Stock as payment for the exercise price of a NQSO, to
the extent the employee or consultant 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 will
include the period the employee or consultant held the surrendered shares. To
the extent the employee or consultant 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 or consultant'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 Stock Option 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
Stock Option Plan, change the
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<PAGE>
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
Stock Option Plan after January 2, 2005.
Director Stock Option Plan. The Company also established a Director Stock
Option Plan on July 27, 1995. The purpose of the Director Stock Option 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 Stock Option Plan are NQSOS. The Director
Stock Option 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 Stock Option Plan is 338,100. On the
effective date of the Director Stock Option Plan or the first date thereafter
that any director becomes eligible to receive an award under the Director
Stock Option Plan, each eligible director will 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 Stock Option 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 Stock
Option 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.
Employee Stock Purchase Plan. On March 21, 1997, the Board adopted, subject
to stockholder approval as described herein, an Employee Stock Purchase Plan
(the "ESP Plan"). The Board will submit the ESP Plan to the Company's
stockholders for consideration at the next annual meeting. The ESP Plan
provides employees with the right to purchase shares of Common Stock through
payroll deduction. A total of 2,000,000 shares of Common Stock are available
for purchase under the ESP Plan, subject to adjustment in the number and price
of shares of Common Stock available for purchase in the event the outstanding
shares of Common Stock are increased or decreased through stock dividends,
recapitalizations, reorganizations or similar changes. The Plan is to be
administered by the Board, which may delegate responsibility for such
administration to a committee of the Board (the "Committee"). Subject to the
terms of the ESP Plan, the Board or the Committee shall have authority to
interpret the ESP Plan, to prescribe, amend and rescind rules and regulations
relating to it, and to make all other determinations deemed necessary or
advisable in administering the ESP Plan.
An employee of the Company or a Participating Company is eligible to
participate in the ESP Plan if the employee, as of the last day of the month
immediately preceding the effective date of an election to purchase shares of
Common Stock pursuant to the ESP Plan: (1) has been employed on a full-time
basis for at least six consecutive months; or (2) has been employed on a part-
time basis for at least 24 consecutive months. An employee is considered to be
a part-time employee if the employee is scheduled to work at least 20 hours
per
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<PAGE>
week. Notwithstanding the foregoing, any employee who, after purchasing Common
Stock under the ESP Plan, would own five percent or more of the total combined
voting power or value of all classes of stock of the Company or any parent
corporation or subsidiary corporation thereof is not eligible to participate.
Ownership of stock is determined in accordance with the provisions of Section
424(d) of the Internal Revenue Code. Further, an employee is not eligible to
participate if such participation would permit such employee's rights to
purchase stock under all employee stock purchase plans of the Participating
Companies which meet the requirements of section 423(b) of the Code to accrue
at a rate which exceeds $25,000 in fair market value (as determined pursuant
to section 423(b)(8) of the Code) for each calendar year in which such option
is outstanding.
Eligible employees may elect to participate in the ESP Plan during an
offering which starts on the first day of each month beginning on or after
adoption of the ESP Plan by the Board ("Offering Commencement Date") and ends
on the last day of each month ("Offering Termination Date"). Shares will be
deemed to have been purchased on the Offering Termination Date. The purchase
price per share offered under the ESP Plan will be 85 percent of the lesser
of: (1) the fair market value per share on the Offering Commencement Date, or
if such date is not a trading day, then on the next trading day thereafter; or
(2) the fair market value per share on the Offering Termination Date, or if
such date is not a trading day, then on the next trading day thereafter.
An eligible employee who wishes to participate in the ESP Plan shall file an
election form with the Board or Committee at least 15 days before the Offering
Commencement Date for the first offering for which such election form is
effective, on which he may elect to have payroll deductions made from his
compensation on each regular payday during the time he is a participant in the
ESP Plan. All payroll deductions shall be credited to the participant's
account under the ESP Plan. A participant who is on an approved leave of
absence may authorize continuing payroll deductions.
If the total number of shares of Common Stock for which purchase rights are
exercised on any Offering Termination Date exceeds the maximum number of
shares of Common Stock available, the Board or Committee shall make a pro rata
allocation of shares available for delivery and distribution in as nearly a
uniform manner as practicable, and as it shall determine to be fair and
equitable, and the unapplied account balances shall be returned to
participants as soon as practicable following the Offering Termination Date.
A participant may discontinue his participation in the ESP Plan at any time,
but no other change can be made during an offering, including, but not limited
to, changes in the amount of payroll deductions for such offering. A
participant may change the amount of payroll deductions for subsequent
offerings by giving written notice of such change to the Board or Committee on
or before the 15th day of the month immediately preceding the Offering
Commencement Date for the offering for which such change is effective.
A participant may elect to withdraw the balance credited to the
participant's account by providing a termination form to the Board or the
Committee at any time before the Offering Termination Date applicable to any
offering. A participant may withdraw all, but not less than all, of the
amounts credited to the participant's account. All amounts credited to such
participant's account shall be paid as soon as practicable following the
Committee's receipt of the participant's termination form, and no further
payroll deductions will be made with respect to the participant. A participant
who elects to withdraw from an offering shall be deemed to have elected not to
participate in each of the four succeeding offerings following the date on
which the participant gives a termination form to the Committee.
Upon termination of a participant's employment for any reason other than
death, including termination due to disability or continuation of a leave of
absence beyond 90 days, all amounts credited to such participant's account
shall be returned to the participant. In the event of a participant's (1)
termination of employment due to death or (2) death after termination of
employment but before the participant's account has been returned, all amounts
credited to such participant's account shall be returned to the participant's
successor-in-interest. A participant who is on an approved leave of absence
shall remain eligible to participate in the ESP Plan until the end of the
first offering ending after commencement of such approved leave of absence. A
participant who has been on an approved leave of absence for more than 90 days
shall not be eligible to participate in any offering that begins on or after
the commencement of such approved leave of absence so long as such leave of
absence continues.
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All funds held or received by the Company under the ESP Plan may be used for
any corporate purpose until applied to the purchase of shares of Common Stock
or refunded to employees and shall not be segregated from the general assets
of the Company. Shares of Common Stock purchased under the ESP Plan will be
issued from the Company's treasury stock or from the Company's authorized but
unissued shares. The Participating Companies shall pay all fees and expenses
incurred (excluding individual Federal, state, local or other taxes) in
connection with the ESP Plan.
An employee's rights under the ESP Plan belong to the employee alone and may
not be transferred or assigned to any other person during the employee's
lifetime. After the shares of Common Stock have been issued under the ESP
Plan, such shares may be assigned or transferred the same as any other shares.
The Plan is not qualified under Section 401(a) of the Internal Revenue Code.
The Company generally will not be entitled to a deduction with respect to
stock purchased under the ESP Plan, unless the stock is disposed of less than
one year after the Common Stock is purchased by the employee, or less than two
years after each Offering Commencement Date.
Generally, no tax consequences arise at the time the participant purchases
shares of Common Stock. If a participant does not dispose of shares of Common
Stock purchased under the ESP Plan for at least one year after the date of
purchase and at least two years after the grant of the purchase right, he will
be deemed to have received compensation taxable as ordinary income for the
taxable year in which the disposition occurs in an amount equal to the lesser
of (a) the 15% discount originally allowed, or (b) the excess over the
purchase price of (i) the amount actually received for the shares if sold or
exchanged or (ii) the fair market value of the shares on the date of any other
termination of his ownership (such as by gift). The amount of such ordinary
income is then added to the participant's basis in his shares for purposes of
determining capital gain or loss.
If a participant disposes of shares of Common Stock purchased under the ESP
Plan less than one year after the date of purchase, or more than one year
after the date of purchase but within two years after the grant of the
purchase right, he will be deemed to have received compensation taxable as
ordinary income in the amount of the difference between the amount paid for
the shares and the value of the shares at the time of purchase. If the shares
are sold or exchanged, the amount of such ordinary income is added to the
participant's basis in his shares for purposes of determining capital gain or
loss. If a participant dies before disposing of the shares purchased under the
ESP Plan, he will be deemed to have realized compensation income taxable as
ordinary income in the taxable year closing with his death in an amount equal
to the lesser of clauses (a) and (b)(ii) as set forth in the immediately
preceding paragraph. He is deemed not to have realized any capital gain or
loss because of death.
The Board or the Committee shall have the right to amend, modify or
terminate the ESP Plan at any time without notice, provided that no employee's
then existing rights are adversely affected without his or her consent, and
provided further, that upon any amendment of the ESP Plan, stockholder
approval will be obtained if required by law.
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 $250,000 effective January 1, 1997 (which amount is
reviewed annually by the Board of Directors and is subject to increase at
their discretion). Mr. Singh 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
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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.
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 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 624,275
additional shares of Common Stock (the "Soros/Chatterjee Warrants"). The
Soros/Chatterjee Warrants are exercisable 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. 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.
Additionally, members of the Soros/Chatterjee Group are entitled to tagalong
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. 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
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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 in January 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 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). The Company will prepay this balance of this loan with proceeds from
this Offering. 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 parties
to a stockholders' agreement (the "Teleglobe Agreement") providing Teleglobe
the same consent, preemptive and registration rights as may be granted in the
future to other stockholders 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 stockholders 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 stockholders 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.
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 $1.0 million. 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 $105,828 for the performance of such services during 1995 and
1996. 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
officers of the Company, including Paul Keenan, Sim Thiam
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Soon and Peter Slaney. Mr. Keenan and Mr. Slaney are no longer employed by the
Company. 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 llp, of which John F. DePodesta, a director and an Executive Vice
President of the Company, is "of counsel," to perform legal services for the
Company.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of June 15, 1997 (except as
otherwise noted), with respect to the beneficial ownership of shares of the
Common Stock by each person or group who is known to the Company to be the
beneficial owner of more than five percent of the outstanding Common Stock, by
each director or nominee for director, by each of the officers named on the
Summary Compensation Table, and by all directors and executive officers as a
group. Unless otherwise indicated, each person has sole voting power and sole
investment power.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF
BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OF CLASS
--------------------------------------- ----------------- --------
<S> <C> <C>
K. Paul Singh....................................... 4,497,730(3) 25.1%
Quantum Industrial Partners LDC..................... 796,950(4) 4.4%
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
S-C Phoenix Holdings, L.L.C. ....................... 478,169(5) 2.7%
c/o The Chatterjee Group
888 Seventh Avenue
New York, New York 10106
Winston Partners II LLC............................. 99,618(6) *
c/o Chatterjee Advisors LLC
c/o The Chatterjee Group
888 Seventh Avenue
New York, New York 10106
Winston Partners II LDC ............................ 215,537(7) 1.1%
c/o Curacao Corporation Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
John F. DePodesta................................... 319,690(8) 1.8%
Herman Fialkov...................................... 50,175(9) *
David E. Hershberg.................................. 42,262(10) *
John Puente......................................... 152,855(11) *
Neil L. Hazard...................................... 103,430(12) *
Ravi Bhatia......................................... 36,309(13) *
George E. Mattos.................................... 97,920(14) *
John Melick......................................... 99,674(15) *
All executive officers and directors as a group (10
people)............................................ 5,402,585(16) 28.7%
</TABLE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) Except as otherwise indicated, the address of each person named in the
table is: c/o Primus Telecommunications Group, Incorporated, 2070 Chain
Bridge Road, Suite 425, Vienna, Virginia, 22182.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange 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 August 15, 1997 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.
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(3) Includes 377,786 shares of Common Stock owned by Mr. Singh's spouse and
children, 500,000 shares of Common Stock held by a private foundation of
which Mr. Singh is the president and a director, and 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. Also includes 112,700 shares of
Common Stock issuable upon the exercise of options granted to Mr. Singh
and exercisable on or prior to August 15, 1997.
(4) Based on an amended Schedule 13D dated June 1, 1997, Quantum Industrial
Partners LDC ("Quantum Industrial") has reported that it may be deemed to
be the beneficial owner of 652,050 shares of Common Stock. QIH Management
Investor, L.P., the sole general partner of which is QIH Management, Inc.
("QIH Management"), is vested with investment discretion with respect to
portfolio assets held for the account of Quantum Industrial. Mr. George
Soros, the sole shareholder of QIH Management, has entered into an
agreement with Soros Fund Management LLC, a Delaware limited liability
company ("SFM LLC"), pursuant to which Mr. Soros has, among other things,
agreed to use his best efforts to cause QIH Management to act at the
direction of SFM LLC (the "QIP Contract"). Mr. Soros is Chairman of SFM
LLC and as a result of such position and the QIP Contract, may be deemed
to be the beneficial owner of shares of Common Stock held for the account
of Quantum Industrial. Mr. Stanley F. Druckenmiller, the Lead Portfolio
Manager of SFM LLC, by virtue of such position and the QIP Contract, also
may be deemed to be the beneficial owner of the shares of Common Stock
held for the account of Quantum Industrial. Dr. Purnendu Chatterjee may
be deemed to be the beneficial owner of the shares of Common Stock held
for the account of Quantum Industrial by virtue of his position as a sub-
investment manager to Quantum Industrial with respect to its shares of
Common Stock. Excludes an indeterminate number of shares having a fair
market value of $5 million as of the date of exercise.
(5) Based on an amended Schedule 13D dated June 1, 1997, S-C Phoenix
Holdings, L.L.C. ("Phoenix Holdings") has reported that it may be deemed
to be the beneficial owner of 391,230 shares of Common Stock. According
to the Schedule 13D, George Soros and Winston Partners, L.P. are the
managing members of Phoenix Holdings with respect to its investment in
the shares of Common Stock, and as a result of their ability to exercise
investment discretion, each may be deemed to be a beneficial owner of the
shares of Common Stock. Dr. Chatterjee, who is the sole general partner
of Chatterjee Fund Management ("CFM"), and CFM, which is the sole general
partner of Winston Partners, L.P., each may be deemed to have beneficial
ownership in the shares of Common Stock held by Phoenix Holdings.
Excludes an indeterminate number of shares having a fair market value of
$3 million as of the date of exercise.
(6) Based on an amended Schedule 13D dated June 1, 1997, Winston Partners II
LLC ("Winston LLC") has reported that it may be deemed to be the
beneficial owner of 81,506 shares of Common Stock. According to the
Schedule 13D, Chatterjee Management Company ("Chatterjee Management"), an
entity over which Dr. Chatterjee may be deemed to have sole and ultimate
control, has investment discretion over the shares of Common Stock held
by Winston LLC, and as such may be deemed to have beneficial ownership
over such shares. In addition, Chatterjee Advisors LLC ("Chatterjee
Advisors"), which also may be deemed under the management and control of
Dr. Chatterjee, as manager of Winston LLC and by reason of its ability to
terminate the contract between Winston LLC and Chatterjee Management may
be deemed to be the beneficial owner of the shares of Common Stock held
by Winston LLC. Excludes an indeterminate number of shares having a fair
market value of $625,000 as of the date of exercise.
(7) Based on an amended Schedule 13D dated June 1, 1997, Winston Partners II
LDC ("Winston LDC") has reported that it may be deemed to be the
beneficial owner of 179,313 shares of Common Stock. According to the
Schedule 13D, Chatterjee Management has investment discretion over the
shares of Common Stock held by Winston LDC, and as such may be deemed to
have beneficial ownership over such shares. In addition, Chatterjee
Advisors, as manager of Winston LDC and by reason of its ability to
terminate the contract between Winston LDC and Chatterjee Management, may
be deemed to be the beneficial owner of the shares of Common Stock held
by Winston LDC. Excludes an indeterminate number of shares having a fair
market value of $1.375 million as of the date of exercise.
(8) Includes 101,430 shares of Common Stock issuable upon the exercise of
options granted to Mr. DePodesta and exercisable on or prior to August
15, 1997.
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(9) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Fialkov and exercisable on or prior to August 15,
1997.
(10) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Hershberg and exercisable on or prior to August
15, 1997 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 August 15,
1997.
(12) Includes 101,430 shares of Common Stock issuable upon the exercise of
options granted to Mr. Hazard and exercisable on or prior to August 15,
1997.
(13) Includes 33,810 shares of Common Stock issuable upon the exercise of
options granted to Mr. Bhatia and exercisable on or prior to August 15,
1997.
(14) Includes 96,920 shares of Common Stock issuable upon the exercise of
options granted to Mr. Mattos and exercisable on or prior to August 15,
1997.
(15) Includes 99,174 shares of Common Stock issuable upon the exercise of
options granted to Mr. Melick and exercisable on or prior to August 15,
1997.
(16) Includes 646,896 shares of Common Stock issuable upon the exercise of
options granted to directors and executive officers and exercisable on or
prior to August 15, 1997.
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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 June 15, 1997, the Company had 17,778,731
shares outstanding and 2,028,600 shares of Common Stock reserved for issuance
upon exercise of options granted pursuant to the Employee Stock Option Plan
and the Director Stock Option Plan. If the Employee Stock Option Plan is
amended as provided herein and the ESP Plan is adopted, the Company will have
an additional 4,000,000 shares of Common Stock reserved for issuance under
such plans. An additional shares of Common Stock will be reserved for
issuance upon the exercise of the Warrants issued in this Offering at $ per
share. An additional 1,624,275 shares of Common Stock may be issued pursuant
to the Soros/Chatterjee Warrants assuming such warrants were exercised on July
11, 1997. The actual number of shares of Common Stock issuable under the
Soros/Chatterjee Warrants will be up to 624,275 shares, plus an indeterminate
number of shares of Common Stock 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'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."
WARRANTS
As of March 31, 1997, there were outstanding Soros/Chatterjee Warrants
granting the Soros/Chatterjee Group the right to receive, upon exercise, up to
624,275 shares of Common Stock plus an indeterminate number of shares having a
fair market value of $10 million as of 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 are 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
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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 stockholders' 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 stockholders of an equal or
lesser percentage ownership in the Company. No such rights have been granted
to other stockholders other than in one instance in which Teleglobe waived its
rights. The stockholders' agreement also provides Teleglobe participation and
tag-along rights whereby Teleglobe is entitled to sell its shares of Common
Stock when certain other stockholders 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
stockholders 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.
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 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 66.3% 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.
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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. In addition, the Company's Certificate of Incorporation
provides that stockholders may only act at stockholders' meetings and that
stockholders may not act by written consent.
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 Articles of Incorporation may provide.
Options under the Employee Stock Option 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
stockholders of a merger, reorganization or consolidation of the Company in
which the Company's stockholders 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 stockholders of an agreement of sale of all or substantially all of
the Company's assets, and the acceptance by the Company's stockholders of a
share exchange in which the Company's stockholders do not own 50% or more of
the voting power of the stock of the entity surviving such exchange. See "Risk
Factors--Anti-Takeover Provisions."
FOREIGN OWNERSHIP RESTRICTIONS
The Company's Certificate of Incorporation, as amended, permits the Company
to limit the number of shares of capital stock which may be owned by non-U.S.
citizens or entities. Under the Certificate of Incorporation, the Board of
Directors is empowered to implement such limitations as it deems necessary.
Under the Communications Act, non-U.S. citizens or their representatives,
foreign governments or their representatives, or corporations organized under
the laws of a foreign country may not own, in the aggregate, more than 20% of
a common carrier radio licensee, or more than 25% of the parent of a common
carrier radio licensee if the FCC determines that the public interest would be
served by prohibiting such ownership. The Company does not hold any radio
licenses. See "Business--Government Regulation."
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
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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.
LISTING
The Company's Common Stock is quoted on the Nasdaq National Market under the
symbol "PRTL."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is StockTrans, Inc.
SHARES ELIGIBLE FOR FUTURE SALE
As of July 11, 1997, the Company had 17,778,731 shares of Common Stock
outstanding. Of these shares, 5,750,000 shares of Common Stock issued in the
Initial Public Offering and 307,844 shares of Common Stock sold by
stockholders pursuant to the exemption provided by Rule 144 under the
Securities Act are 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, which may be
sold subject to the resale limitations of Rule 144 under the Securities Act
and the regulations promulgated thereunder. The remaining 11,720,887 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.
In general, Rule 144 allows a person who has beneficially owned Restricted
Shares for at least one year, 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 two
years would be entitled to sell such Restricted Shares without regard to the
volume limitations described above and certain other conditions of Rule 144.
Under Rule 701, any employee, officer or director or consultant to the
Company who purchased shares pursuant to a written compensatory plan or
contract before the initial public offering, including the Employee Stock
Option Plan and the Director Stock Option 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.
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
Stock Option Plan and the Director Stock Option Plan and pursuant to the ESP
Plan.
The holders of approximately 5,418,891 shares of Common Stock, and the
holders of the Soros/Chatterjee Warrants and their permitted transferees, are
entitled to certain demand and piggyback registration rights in respect of
their shares of Common Stock. The holders of Units are also entitled to obtain
registration rights. See "Description of Capital Stock--Registration Rights."
Prior to the completion of the Company's initial public offering in November
1996, there was 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 stockholders could have a negative impact on the market price of the Common
Stock.
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DESCRIPTION OF SENIOR CREDIT COMMITMENT
The Company has entered into the Commitment Letter with LCPI, an affiliate
of one of the underwriters, pursuant to which LCPI has indicated its
commitment, subject to the terms and conditions set forth in the Commitment
Letter (including the consummation of the Offering and the negotiation of
definitive loan documents), to provide to the Company the Senior Credit
Facility of initially $50 million to be used for working capital and other
purposes, including capital expenditures and permitted acquisitions. In the
event the Offering is not consummated (or until such time as the Offering is
consummated), the Commitment Letter contemplates that the size of the Senior
Credit Facility will be $31 million. There can be no assurance that the
Company will obtain the Credit Facility on the terms set forth in the
Commitment Letter, if at all. The following summary of the material provisions
of the Commitment Letter does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Commitment Letter, a
copy of which is filed as an exhibit to the registration statement of which
this prospectus forms a part. Because the terms, conditions and covenants of
the Senior Credit Facility are subject to the negotiation, execution and
delivery of the definitive loan documents, certain of the actual terms,
conditions and covenants thereof may differ from that described below.
The Commitment Letter contemplates that the Senior Credit Facility will be
due and payable in full on the fifth anniversary of its closing, with
availability thereunder to be reduced in quarterly installments of $1.25
million in year three, $2.5 million in year four and $8.75 million in year
five. Amounts drawn under the Senior Credit Facility will bear interest, at
the Company's option, at either the Base Rate (as defined in the Commitment
Letter) or the Eurodollar Rate (as defined in the Commitment Letter), plus an
Applicable Margin (as defined in the Commitment Letter) which will be an
annual percentage rate (between 1.50% and 2.00% for the Base Rate borrowings
and between 2.50% and 3.00% for the Eurodollar Rate borrowings) which will
fluctuate based on the Company's Total Leverage Ratio (as defined in the
Commitment Letter).
The Commitment Letter contemplates that the Company will be required to
repay indebtedness outstanding under the Senior Credit Facility with the net
cash proceeds from sales of assets other than in the ordinary course of the
business and from certain issuances of debt by the Company or its
subsidiaries, and that the Company's obligations will be guaranteed by the
Company's domestic subsidiaries and foreign subsidiaries (subject to there not
being any adverse tax consequences), and will be secured by a first priority
lien on all domestic assets, as well as the assets of each foreign subsidiary
of Primus that is a borrower under the Credit Facility, and a first priority
pledge of the stock of the Company's domestic subsidiaries and foreign
subsidiaries (subject to there not being any adverse tax consequences).
The Commitment Letter also contemplates that the Senior Credit Facility will
contain a number of covenants, including, among others, covenants limiting the
ability of the Company and the Company's present and future subsidiaries to
incur debt, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, change their business,
engage in transactions with affiliates, sell assets and engage in mergers and
acquisitions. In addition, the Commitment Letter contemplates that the Senior
Credit Facility will contain affirmative covenants, including, among others,
covenants requiring compliance with laws, maintenance of corporate existence,
licenses and insurance, payment of taxes and performance of other material
obligations, and the delivery of financial and other information.
The Commitment Letter also contemplates that the Company will be required to
comply with certain financial tests and to maintain certain financial ratios
on a consolidated basis. The Company must: (i) maintain a Total Leverage Ratio
no greater than 7.0:1.0 beginning in 2000 and 5.0:1.0 in 2001 and thereafter;
(ii) maintain an Interest Coverage Ratio (as defined in the Commitment Letter)
no less than 2.0:1.0 beginning in 2000 and 3.0:1.0 in 2001 and thereafter;
(iii) have net revenue of at least $45 million, $56 million and $62.5 million
for the second, third and fourth quarters of 1997, respectively, and have net
revenue of at least $75 million, $81 million and $87.5 million for the first,
second and third quarters of 1998, respectively; and (iv) have EBITDA of at
least $2 million for the fourth quarter of 1998, and at least $3.125 million,
$3.75 million, $4.38 million and $5 million for the first, second, third and
fourth quarters of 1999, respectively.
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Failure to satisfy any of the financial covenants would constitute an event
of default under the Senior Credit Facility, notwithstanding the ability of
the Company to meet its debt service obligations. The Commitment Letter
contemplates that the Senior Credit Facility also will include other customary
events of default, including, without limitation, a cross-default to other
indebtedness, material undischarged judgments, bankruptcy and a change of
control.
DESCRIPTION OF UNITS
Each Unit consists of $1,000 principal amount of Notes and Warrants to
purchase shares of Common Stock of the Company. The issue price of a
Unit has been allocated $ to the Notes and $ to the Warrants. The Notes
and the Warrants will not be separately transferable until the Separation Date
which will be the earliest of (i) , 1998, (ii) an Exercise Event and
(iii) such other date as Lehman Brothers Inc. shall determine.
DESCRIPTION OF NOTES
The Notes will be issued pursuant to an Indenture, to be dated as of
, 1997 (the "Indenture"), between the Company, as issuer, and First
Union National Bank of Virginia, as Trustee (the "Trustee"). The Notes are
secured by the Pledged Securities pursuant to the Pledge Agreement between the
Company and the Trustee. The Indenture and the Pledge Agreement are subject
to, and governed by, the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"). The following summary of certain provisions of the Indenture
and the Pledge Agreement do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all the provisions of the
Indenture and the Pledge Agreement, including the definitions of certain terms
therein and those terms made a part thereof by the Trust Indenture Act.
Whenever particular Sections or defined terms of the Indenture not otherwise
defined herein are referred to, such Sections or defined terms are
incorporated herein by reference. A copy of the proposed forms of the
Indenture and the Pledge Agreement have been filed as exhibits to the
Registration Statement of which this Prospectus is a part and are available as
set forth under "Available Information." The definitions of certain terms used
in the following summary are set forth below under "--Certain Definitions."
GENERAL
The Notes will be senior obligations of the Company, limited to $125 million
aggregate principal amount, and will mature on , 2004. The Notes
bear interest at the rate of % per annum, payable semiannually on
and of each year, commencing , 1998 to the Person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the preceding or , as the case may be.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company (which initially will be the corporate trust office of the Trustee at
901 East Cary Street, 2nd Floor, Richmond, Virginia 23219; provided that, at
the option of the Company, payment of interest may be made by check mailed to
the address of the holders as such address appears in the Note Register.
(Section 202)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity and any integral
multiple thereof. See "Book-Entry; Delivery and Form." No service charge will
be made for any registration of transfer or exchange of Notes, but the Company
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection therewith. (Section 203)
OPTIONAL REDEMPTION
The Notes will be redeemable, at the Company's option, in whole or in part,
at any time or from time to time, on or after , 2001 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each holders' last address as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount thereof), plus accrued and unpaid
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interest thereon to the Redemption Date (subject to the right of holders of
record on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period commencing on , of the years set forth
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001 %
2002 %
2003 (and thereafter) 100.00%
</TABLE>
Notwithstanding the foregoing, during the first 36 months after the date of
the Indenture, the Company may on any one or more occasions redeem up to 35%
of the originally issued principal amount of Notes at a redemption price of
% of the principal amount thereof, plus accrued and unpaid interest
thereon to the redemption date, with the Net Cash Proceeds of one or more
Public Equity Offerings; provided that at least 65% of the originally issued
principal amount of Notes remains outstanding immediately after the occurrence
of such redemption; and provided further that notice of such redemption shall
be given within 60 days of the closing of such Public Equity Offerings of
common stock of the Company. (Sections 203 and 1103)
In the case of any partial redemption, selection of the Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not listed on a national securities exchange, on a pro
rata basis, by lot or by such other method as the Trustee in its sole
discretion shall deem to be fair and appropriate; provided that no Note of
$1,000 in principal amount at maturity or less shall be redeemed in part. If
any Note is to be redeemed in part only, the notice of redemption relating to
such Note shall state the portion of the principal amount thereof to be
redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the holder thereof upon cancellation of
the original Note.
SECURITY
The Indenture provides that upon the closing of the Offering, the Company
must purchase and pledge to the Trustee as security for the benefit of the
holders of the Notes the Pledged Securities in such amount as will be
sufficient upon scheduled interest and principal payments of such securities,
in the opinion of a nationally recognized firm of independent public
accountants selected by the Company, to provide for payment in full of the
first six scheduled interest payments due on the Notes. The Company expects to
use $38.7 million of the net proceeds of the Offering to acquire the Pledged
Securities; however, the precise amount of securities to be acquired will
depend upon the interest rates on Government Securities prevailing on the
Closing Date. See "Use of Proceeds." The Pledged Securities will be pledged by
the Company to the Trustee for the benefit of the holders of Notes pursuant to
the Pledge Agreement and will be held by the Trustee in the Pledge Account.
Pursuant to the Pledge Agreement, immediately prior to an interest payment
date on the Notes, the Company may either deposit with the Trustee from funds
otherwise available to the Company cash sufficient to pay the interest
scheduled to be paid on such date or the Company may direct the Trustee to
release from the Pledge Account proceeds sufficient to pay interest then due.
In the event that the Company exercises the former option, the Company may
thereafter direct the Trustee to release to the Company proceeds or Pledged
Securities from the Pledge Account in like amount. A failure by the Company to
pay interest on the Notes in a timely manner through the first six scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally
recognized firm of independent public accountants selected by the Company, to
provide for payment in full of the first six scheduled interest payments due
on the Notes (or, in the event an interest payment or payments have been made,
an amount sufficient to provide for payment in full of any interest payments
remaining, up to and
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including the sixth scheduled interest payment) the Trustee will be permitted
to release to the Company at the Company's request any such excess amount.
The Notes are secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and, accordingly, the Pledged Securities
and the Pledge Account will also secure repayment of the principal amount of
the Notes to the extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, all of the
Pledged Securities will be released from the Pledge Account.
RANKING
The Indebtedness evidenced by the Notes will rank senior in right of payment
to any subordinated Indebtedness of the Company and pari passu in right of
payment with all other unsubordinated Indebtedness of the Company, including
trade payables. After giving pro forma effect to the offering of the Notes and
the application of the proceeds thereof, as of March 31, 1997, the Company (on
a consolidated basis) would have had approximately $127.8 million of
Indebtedness. Because the Company is a holding company that conducts its
business through its subsidiaries, all existing and future Indebtedness and
other liabilities and commitments of the Company's subsidiaries including
trade payables, will be effectively senior to the Notes. As of March 31, 1997,
the Company's consolidated subsidiaries had aggregate liabilities of
approximately $72.7 million.
COVENANTS
Limitation on Indebtedness
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Existing
Indebtedness); provided, however, that the Company may Incur Indebtedness, and
any Restricted Subsidiary may Incur Acquired Indebtedness, if immediately
thereafter the ratio of (i) the aggregate principal amount (or accreted value,
as the case may be) of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding as of the Transaction Date to
(ii) the Pro Forma Consolidated Cash Flow for the preceding two full fiscal
quarters multiplied by two, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been applied at
the beginning of such two fiscal quarters, would be greater than zero and less
than 5.0 to 1.
(b) Notwithstanding the foregoing, the Company and (except for Indebtedness
under subsections (v) and (vii) below) any Restricted Subsidiary may Incur
each and all of the following:
(i) Indebtedness, including Acquired Indebtedness and Indebtedness under
one or more Credit Facilities, in an aggregate principal amount at any one
time outstanding not to exceed $75 million, subject to any permanent
reductions required by any other terms of the Indenture;
(ii) Indebtedness (other than Acquired Indebtedness) Incurred to finance
the cost (including the cost of design, development, construction,
acquisition, installation or integration) of equipment used in the
telecommunications business or ownership rights with respect to
indefeasible rights of use or minimum investment units (or similar
ownership interests) in transnational fiber optic cable or other
transmission facilities, in each case purchased or leased by the Company or
a Restricted Subsidiary after the Closing Date;
(iii) Indebtedness of any Restricted Subsidiary to the Company or
Indebtedness of the Company or any Restricted Subsidiary to any other
Restricted Subsidiary; provided that any subsequent issuance or transfer of
any Capital Stock which results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of such
Indebtedness not permitted by this clause (iii) (other than to the Company
or another Restricted Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness, and provided further that
Indebtedness of the Company to a Restricted Subsidiary must be subordinated
in right of payment to the Notes;
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(iv) Indebtedness of the Company or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of the Company or a Restricted Subsidiary,
other than Indebtedness Incurred under clauses (i), (iii), (v), (vi),
(viii) and (ix) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, and reasonable fees and expenses); provided that such new
Indebtedness shall only be permitted under this clause (iv) if (A) in case
the Notes are refinanced in part or the Indebtedness to be refinanced is
pari passu with the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made pari passu
with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment
to the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is issued
or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced
is subordinated to the Notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness, does not mature prior
to the Stated Maturity of the Indebtedness to be refinanced or refunded,
and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded;
and provided further that in no event may Indebtedness of the Company be
refinanced by means of any Indebtedness of any Restricted Subsidiary
pursuant to this clause (iv);
(v) Indebtedness of the Company not to exceed, at any one time
outstanding, 2.00 times the Net Cash Proceeds from the issuance and sale,
other than to a Subsidiary, of Common Stock (other than Redeemable Stock)
of the Company (less the amount of such proceeds used to make Restricted
Payments as provided in clause (C)(2) of the first paragraph or clause
(iii) or (iv) of the second paragraph of the "Limitation on Restricted
Payments" covenant); provided that such Indebtedness does not mature prior
to the Stated Maturity of the Notes and the Average Life of such
Indebtedness is longer than that of the Notes;
(vi) Indebtedness of the Company or any Restricted Subsidiary (A) in
respect of performance, surety or appeal bonds or letters of credit
supporting trade payables, in each case provided in the ordinary course of
business, (B) under Currency Agreements and Interest Rate Agreements;
provided that such agreements do not increase the Indebtedness of the
obligor outstanding at any time other than as a result of fluctuations in
foreign currency exchange rates or interest rates or by reason of fees,
indemnities and compensation payable thereunder; and (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in any case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition;
(vii) Indebtedness of the Company, to the extent that the net proceeds
thereof are promptly (A) used to repurchase Notes tendered in a Change of
Control Offer or (B) deposited to defease all of the Notes as described
below under "Defeasance or Covenant Defeasance of Indenture";
(viii) Indebtedness of a Restricted Subsidiary represented by a Guarantee
of the Notes permitted by and made in accordance with the "Limitation on
Issuances of Guarantees of Indebtedness by Restricted Subsidiaries"
covenant; and
(ix) Indebtedness of the Company or any Restricted Subsidiary under one
or more Credit Facilities, provided that if any Indebtedness is incurred
pursuant to this clause (ix), total Indebtedness under this clause (ix) and
clause (i) above does not exceed 65% of Eligible Accounts Receivable at any
one time outstanding.
(c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included
in the determination of such particular amount shall not be included. For
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purposes of determining compliance with this "Limitation on Indebtedness"
covenant, (A) in the event that an item of Indebtedness meets the criteria of
more than one of the types of Indebtedness described in the above clauses, the
Company, in its sole discretion, shall classify such item of Indebtedness and
only be required to
include the amount and type of such Indebtedness in one of such clauses and
(B) the principal amount of Indebtedness issued at a price that is less than
the principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in conformity with GAAP. (Section 1011)
Limitation on Restricted Payments
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) (A) declare or pay any dividend or make any
distribution in respect of the Company's Capital Stock to the holders thereof
(other than dividends or distributions payable solely in shares of Capital
Stock (other than Redeemable Stock) of the Company or in options, warrants or
other rights to acquire such shares of Capital Stock) or (B) declare or pay
any dividend or make any distribution in respect of the Capital Stock of any
Restricted Subsidiary to any Person other than dividends and distributions
payable to the Company or any Restricted Subsidiary or to all holders of
Capital Stock of such Restricted Subsidiary on a pro rata basis, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of the Company (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person or any shares of Capital
Stock of any Restricted Subsidiary (including options, warrants and other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a wholly owned Restricted Subsidiary) or any holder (or
any Affiliate thereof) of 5% or more of the Company's Capital Stock, (iii)
make any voluntary or optional principal payment, or voluntary or optional
redemption, repurchase, defeasance, or other acquisition or retirement for
value, of Indebtedness of the Company that is subordinated in right of payment
to the Notes, or (iv) make any Investment, other than a Permitted Investment,
in any Person (such payments or any other actions described in clauses (i)
through (iv) being collectively "Restricted Payments") if, at the time of, and
after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) the Company could not Incur at least $1.00 of Indebtedness under the
first paragraph of the "Limitation on Indebtedness" covenant; or
(C) the aggregate amount expended for all Restricted Payments (the amount
so expended, if other than in cash, to be determined in good faith by the
Board of Directors, whose determination shall be conclusive and evidenced
by a Board Resolution) after the date of the Indenture shall exceed the sum
of (1) the remainder of (a) 100% of the aggregate amount of the
Consolidated Cash Flow (determined by excluding income resulting from
transfers of assets received by the Company or a Restricted Subsidiary from
an Unrestricted Subsidiary) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the last
fiscal quarter immediately preceding the Closing Date and ending on the
last day of the last fiscal quarter preceding the Transaction Date minus
(b) the product of 2.00 times cumulative Consolidated Fixed Charges accrued
on a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the last fiscal quarter immediately preceding
the Closing Date and ending on the last day of the last fiscal quarter
preceding the Transaction Date plus (2) the aggregate Net Cash Proceeds
received by the Company after the Closing Date from the issuance and sale
permitted by the Indenture of its Capital Stock (other than Redeemable
Stock) to a Person who is not a Subsidiary of the Company (except to the
extent such Net Cash Proceeds are used to incur new Indebtedness
outstanding pursuant to clause (v) of the paragraph (b) of the "Limitation
on Indebtedness" covenant) plus (3) the aggregate Net Cash Proceeds
received after the date of the Indenture by the Company from the issuance
or sale of debt securities that have been converted into or exchanged for
Capital Stock of the Company (other than Redeemable Stock) together with
the aggregate cash received by the Company at the time of such conversion
or exchange plus (4) without duplication of any amount included in the
calculation of Consolidated Cash Flow, in the case of repayment of, or
return of capital in respect of, any Investment constituting a Restricted
Payment made after the Closing Date, an amount equal to the lesser of the
return
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of capital with respect to such Investment and the cost of such Investment,
in either case less the cost of the disposition of such Investment.
The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
said date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iv)
of paragraph (b) of the "Limitation on Indebtedness" covenant; (iii) the
repurchase, redemption or other acquisition of Capital Stock of the Company in
exchange for, or out of the proceeds of a substantially concurrent offering
of, shares of Capital Stock (other than Redeemable Stock) of the Company
(except to the extent such proceeds are used to incur new Indebtedness
outstanding pursuant to clause (v) of paragraph (b) of the "Limitation on
Indebtedness" covenant); (iv) the acquisition of Indebtedness of the Company
which is subordinated in right of payment to the Notes in exchange for, or out
of the proceeds of, a substantially concurrent offering of, shares of the
Capital Stock of the Company (other than Redeemable Stock) (except to the
extent such proceeds are used to incur new Indebtedness outstanding pursuant
to clause (v) of paragraph (b) of the "Limitation on Indebtedness" covenant);
(v) payments or distributions, to dissenting stockholders pursuant to
applicable law, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company; (vi) cash payments in lieu of
the issuance of fractional shares issued in connection with the exercise of
any of the Warrants; and (vii) other Restricted Payments not to exceed $2.5
million; provided that, except in the case of clause (i), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth therein. (Section 1012)
Each Restricted Payment permitted pursuant to the immediately preceding
paragraph (other than the Restricted Payment referred to in clause (ii)
thereof) and the Net Cash Proceeds from any issuance of Capital Stock referred
to in clauses (iii) and (iv), shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, then the Net Cash Proceeds of such issuance shall be included in
clause (C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of the Notes.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
So long as any of the Notes are outstanding, the Company will not, and will
not permit any Restricted Subsidiary to, create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction of any
kind on the ability of any Restricted Subsidiary to (i) pay dividends or make
any other distributions permitted by applicable law on any Capital Stock of
such Restricted Subsidiary owned by the Company or any other Restricted
Subsidiary, (ii) pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (iii) make loans or advances to the Company or any
other Restricted Subsidiary, or (iv) transfer any of its property or assets to
the Company or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances
and restrictions in any such extensions, refinancings, renewals or
replacements are no less favorable in any material respect to the holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced; (ii) contained in the terms of any
Indebtedness or any agreement pursuant to which such Indebtedness was issued
if the encumbrance or restriction applies only in the event of a default with
respect to a financial covenant contained in such Indebtedness or agreement
and such encumbrance or restriction is not materially more disadvantageous to
the holders of the Notes than is customary in comparable financings (as
determined by the
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Company) and the Company determines that any such encumbrance or restriction
will not materially affect the Company's ability to make principal or interest
payments on the Notes; (iii) existing under or by reason of applicable law;
(iv) existing with respect to any Person or the property or assets of such
Person acquired by the Company or any Restricted Subsidiary, existing at the
time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person
or the property or assets of any Person other than such Person or the property
or assets of such Person so acquired; (v) in the case of clause (iv) of the
first paragraph of this "Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries" covenant, (A) that restrict in a customary
manner the subletting, assignment or transfer of any property or asset that
is, or is subject to, a lease, purchase mortgage obligation, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do
not, individually or in the aggregate, detract from the value of property or
assets of the Company or any Restricted Subsidiary in any manner material to
the Company or any Restricted Subsidiary; or (vi) with respect to a Restricted
Subsidiary and imposed pursuant to an agreement that has been entered into for
the sale or disposition of all or substantially all of the Capital Stock of,
or property and assets of, such Restricted Subsidiary. Nothing contained in
this "Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries" covenant shall prevent the Company or any Restricted
Subsidiary from (1) creating, incurring, assuming or suffering to exist any
Liens otherwise permitted in the "Limitation on Liens" covenant or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company
or any of its Restricted Subsidiaries. (Section 1013)
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
The Company will not, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue, transfer, convey, sell, lease or otherwise
dispose of any shares of Capital Stock (including options, warrants or other
rights to purchase shares of such Capital Stock) of such or any other
Restricted Subsidiary to any Person (other than to the Company or a Restricted
Subsidiary) unless (A) the Net Cash Proceeds from such issuance, transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the provisions of the "Limitation on Asset Sales" covenant, (B) immediately
after giving effect to such issuance, transfer, conveyance, sale, lease or
other disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary, and (C) any Investment in such Person remaining after
giving effect to such issuance, transfer, conveyance, sale, lease or other
disposition would have been permitted to be made under the "Limitation on
Restricted Payments" covenant if made on the date of such issuance, transfer,
conveyance, sale, lease or other disposition (valued as provided in the
definition of "Investment"). (Section 1014)
Limitation on Transactions with Shareholders and Affiliates
The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
unless (i) such transaction or series of transactions is on terms no less
favorable to the Company or such Restricted Subsidiary than those that could
be obtained in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate, (ii) if such transaction or series of
transactions involves aggregate consideration in excess of $2.0 million, then
such transaction or series of transactions is approved by a majority of the
Board of Directors of the Company, including the approval of a majority of the
independent, disinterested directors, and is evidenced by a resolution of the
Board of Directors of the Company, and (iii) if such transaction or series of
transactions involves aggregate consideration in excess of $10.0 million, then
the Company or such Restricted Subsidiary will deliver to the Trustee a
written opinion as to the fairness to the Company or such Restricted
Subsidiary of such transaction from a financial point of view from a
nationally recognized investment banking firm (or, if an investment banking
firm is generally not qualified to give such an opinion, by a nationally
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recognized appraisal firm or accounting firm). Any such transaction or series
of transactions shall be conclusively deemed to be on terms no less favorable
to the Company or such Restricted Subsidiary than those that could be obtained
in an arm's-length transaction if such transaction or transactions are
approved by a majority of the Board of Directors of the Company, including a
majority of the independent disinterested directors, and are evidenced by a
resolution of the Board of Directors of the Company.
The foregoing limitation does not limit, and will not apply to (i) any
transaction between the Company and any of its Restricted Subsidiaries or
between Restricted Subsidiaries; (ii) the payment of reasonable and customary
regular fees to directors of the Company who are not employees of the Company;
(iii) any Restricted Payments not prohibited by the "Limitation on Restricted
Payments" covenant; (iv) transactions provided for in the Employment
Agreements as in effect on the Closing Date; and (v) loans and advances to
employees of the Company not exceeding at any one time outstanding $1.0
million in the aggregate, in the ordinary course of business and in accordance
with past practice. (Section 1015)
Limitation on Liens
Under the terms of the Indenture, the Company will not, and will not permit
any Restricted Subsidiary to, create, incur, assume or suffer to exist any
Lien (other than Permitted Liens) on any of its assets or properties of any
character (including, without limitation, licenses and trademarks), or any
shares of Capital Stock or Indebtedness of any Restricted Subsidiary, without
making effective provision for all of the Notes and all other amounts due
under the Indenture to be directly secured equally and ratably with (or prior
to) the obligation or liability secured by such Lien. (Section 1016)
Limitation on Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to, make
any Asset Sale unless (i) the Company or the Restricted Subsidiary, as the
case may be, receives consideration at the time of such sale or other
disposition at least equal to the fair market value of the assets sold or
disposed of as determined by the good-faith judgment of the Board of Directors
evidenced by a Board Resolution and (ii) at least 85% of the consideration
received for such sale or other disposition consists of cash or cash
equivalents or the assumption of unsubordinated Indebtedness.
The Company shall, or shall cause the relevant Restricted Subsidiary to,
within 270 days after the date of receipt of the Net Cash Proceeds from an
Asset Sale (A), (i) apply an amount equal to such Net Cash Proceeds to
permanently repay unsubordinated Indebtedness of the Company or Indebtedness
of any Restricted Subsidiary, in each case owing to a Person other than the
Company or any of its Restricted Subsidiaries or (B) invest an equal amount,
or the amount not so applied pursuant to clause (A) in property or assets of a
nature or type or that are used in a business (or in a company having property
and assets of a nature or type, or engaged in a business) similar or related
to the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such
investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and
(ii) apply (no later than the end of the 270-day period referred to above)
such excess Net Cash Proceeds (to the extent not applied pursuant to clause
(i)) as provided in the following paragraphs of this "Limitation on Asset
Sales" covenant. The amount of such Net Cash Proceeds required to be applied
(or to be committed to be applied) during such 270-day period referred to
above in the preceding sentence and not applied as so required by the end of
such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as
defined below) totals at least $10.0 million, the Company must, not later than
the thirtieth Business Day thereafter, make an offer (an "Excess Proceeds
Offer") to purchase from the holders on a pro rata basis an aggregate
principal amount of Notes equal to the Excess Proceeds on such date, at a
purchase price equal to 100% of the principal amount of the Notes, plus, in
each case, accrued and unpaid interest to the date of purchase (the "Excess
Proceeds Payment").
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The Company shall commence an Excess Proceeds Offer by mailing a notice to
the Trustee and each holder stating: (i) that the Excess Proceeds Offer is
being made pursuant to this "Limitation on Asset Sales" covenant and that all
Notes validly tendered will be accepted for payment on a pro rata basis; (ii)
the purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date
such notice is mailed) (the "Excess Proceeds Payment Date"); (iii) that any
Note not tendered will continue to accrue interest pursuant to its terms; (iv)
that, unless the Company defaults in the payment of the Excess Proceeds
Payment, any Note accepted for payment pursuant to the Excess Proceeds Offer
shall cease to accrue interest on and after the Excess Proceeds Payment Date;
(v) that holders electing to have a Note purchased pursuant to the Excess
Proceeds Offer will be required to surrender the Note, together with the form
entitled "Option of the holder to Elect Purchase" on the reverse side of the
Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Excess Proceeds Payment Date; (vi) that holders will be entitled to withdraw
their election if the Paying Agent receives, not later than the close of
business on the third Business Day immediately preceding the Excess Proceeds
Payment Date, a telegram, facsimile transmission or letter setting forth the
name of such holder, the principal amount of Notes delivered for purchase and
a statement that such holder is withdrawing his election to have such Notes
purchased; and (vii) that holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall (i) accept for
payment on a pro rata basis Notes or portions thereof tendered pursuant to the
Excess Proceeds Offer; (ii) deposit with the Paying Agent money sufficient to
pay the purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an Officers' Certificate specifying the
Notes or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail to the holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of
the Excess Proceeds Offer as soon as practicable after the Excess Proceeds
Payment Date. For purposes of this "Limitation on Asset Sales" covenant, the
Trustee shall act as the Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable, in the event that such Excess Proceeds are
received by the Company under this "Limitation on Asset Sales" covenant and
the Company is required to repurchase Notes as described above. (Section 1017)
Limitation on Issuances of Guarantees of Indebtedness by Restricted
Subsidiaries
The Company will not permit any Restricted Subsidiary, directly or
indirectly, to guarantee, assume or in any other manner become liable with
respect to any Indebtedness of the Company, other than Indebtedness under
Credit Facilities incurred under clauses (i) and (ix) in the "Limitation on
Indebtedness" covenant, unless (i) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for
a Guarantee of the Notes on terms substantially similar to the guarantee of
such Indebtedness, except that if such Indebtedness is by its express terms
subordinated in right of payment to the Notes, any such assumption, Guarantee
or other liability of such Restricted Subsidiary with respect to such
Indebtedness shall be subordinated in right of payment to such Restricted
Subsidiary's assumption, Guarantee of other liability with respect to the
Notes substantially to the same extent as such Indebtedness is subordinated to
the Notes and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against the
Company or any other Restricted Subsidiary as a result of any payment by such
Restricted Subsidiary under its Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may
provide by its terms that it will be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any
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Person not an Affiliate of the Company, of all of the Company's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all of the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture) or (ii) the release or discharge of the guarantee
which resulted in the creation of such Guarantee, except a discharge or
release by or as a result of payment under such guarantee. (Section 1018)
Business of the Company; Restriction on Transfers of Existing Business
The Company will not, and will not permit any Restricted Subsidiary to, be
principally engaged in any business or activity other than a Permitted
Business. In addition, the Company and any Restricted Subsidiary will not be
permitted to, directly or indirectly, transfer to any Unrestricted Subsidiary
(i) any of the licenses, permits or authorizations used in the Permitted
Business of the Company and any Restricted Subsidiary on the Closing Date or
(ii) any material portion of the "property and equipment" (as such term is
used in the Company's consolidated financial statements) of the Company or any
Restricted Subsidiary used in the licensed service areas of the Company and
any Restricted Subsidiary as they exist on the Closing Date. (Section 1019)
Limitation on Investments in Unrestricted Subsidiaries
The Company will not make, and will not permit any of its Restricted
Subsidiaries to make, any Investments in Unrestricted Subsidiaries if, at the
time thereof, the aggregate amount of such Investments would exceed the amount
of Restricted Payments then permitted to be made pursuant to the "Limitation
on Restricted Payments" covenant. Any Investments in Unrestricted Subsidiaries
permitted to be made pursuant to this covenant (i) will be treated as the
making of a Restricted Payment in calculating the amount of Restricted
Payments made by the Company or a Subsidiary and (ii) may be made in cash or
property (if made in property, the Fair Market Value thereof as determined by
the Board of Directors of the Company (whose determination shall be conclusive
and evidenced by a Board Resolution) shall be deemed to be the amount of such
Investment for the purpose of clause (i)). (Section 1020)
Provision of Financial Statements and Reports
The Company will file on a timely basis with the Commission, to the extent
such filings are accepted by the Commission and whether or not the Company has
a class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to
file if it were subject to Section 13 or 15 of the Exchange Act. All such
annual reports and quarterly reports shall include the geographic segment
financial information currently disclosed by the Company in its public filings
with the Commission. The Company will also be required (a) to file with the
Trustee, and provide to each holder, without cost to such holder, copies of
such reports and documents within 15 days after the date on which the Company
files such reports and documents with the Commission or the date on which the
Company would be required to file such reports and documents if the Company
were so required, and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Company's cost copies of such reports and
documents to any prospective holder promptly upon request. (Section 1009)
REPURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder shall have the right
to require the Company to repurchase all or any part of its Notes at a
purchase price in cash pursuant to the offer described below (the "Change of
Control Offer") equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of purchase (subject to the right of holders
of record to receive interest on the relevant interest payment date) (the
"Change of Control Payment").
Within 30 days of the Change of Control, the Company will mail a notice to
the Trustee and each holder stating: (i) that a Change of Control has
occurred, that the Change of Control Offer is being made pursuant to
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this "Repurchase of Notes upon a Change of Control" covenant and that all
Notes validly tendered will be accepted for payment; (ii) the purchase price
and the date of purchase (which shall be a Business Day no earlier than 30
days nor later than 60 days from the date such notice is mailed) (the "Change
of Control Payment Date"); (iii) that any Note not tendered will continue to
accrue interest pursuant to its terms; (iv) that, unless the Company defaults
in the payment of the Change of Control Payment, any Note accepted for payment
pursuant
to the Change of Control Offer shall cease to accrue interest on and after the
Change of Control Payment Date; (v) that holders electing to have any Note or
portion thereof purchased pursuant to the Change of Control Offer will be
required to surrender such Note, together with the form entitled "Option of
the holder to Elect Purchase" on the reverse side of such Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the Business Day immediately preceding the Change of Control
Payment Date; (vi) that holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter setting forth the name of
such holder, the principal amount of Notes delivered for purchase and a
statement that such holder is withdrawing his election to have such Notes
purchased; and (vii) that holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
On the Change of Control Payment Date, the Company shall: (i) accept for
payment Notes or portions thereof tendered pursuant to the Change of Control
Offer; (ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and (iii) deliver, or
cause to be delivered, to the Trustee, all Notes or portions thereof so
accepted together with an Officers' Certificate specifying the Notes or
portions thereof accepted for payment by the Company. The Paying Agent shall
promptly mail, to the holders of Notes so accepted, payment in an amount equal
to the purchase price, and the Trustee shall promptly authenticate and mail to
such holders a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered; provided that each Note purchased and each new Note
issued shall be in a principal amount of $1,000 or integral multiples thereof.
The Company will publicly announce the results of the Change of Control Offer
on or as soon as practicable after the Change of Control Payment Date. For
purposes of this "Repurchase of Notes upon a Change of Control" covenant, the
Trustee shall act as Paying Agent.
The Company will comply with Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in the event that a Change of Control occurs and
the Company is required to repurchase the Notes under this "Repurchase of
Notes Upon a Change of Control" covenant. (Section 1010)
If the Company is unable to repay all of its indebtedness that would
prohibit repurchase of the Notes or is unable to obtain the consents of the
holders of indebtedness, if any, of the Company outstanding at the time of a
Change of Control whose consent would be so required to permit the repurchase
of Notes, then the Company will have breached such covenant. This breach will
constitute an Event of Default under the Indenture if it continues for a
period of 30 consecutive days after written notice is given to the Company by
the Trustee or the holders of at least 25% in aggregate principal amount of
the Notes outstanding. In addition, the failure by the Company to repurchase
Notes at the conclusion of the Change of Control Offer will constitute an
Event of Default without any waiting period or notice requirements.
There can be no assurances that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) required by the foregoing covenant (as well
as may be contained in other securities of the Company which might be
outstanding at the time). The above covenant requiring the Company to
repurchase the Notes will, unless the consents referred to above are obtained,
require the Company to repay all indebtedness then outstanding which by its
terms would prohibit such Note repurchase, either prior to or concurrently
with such Note repurchase.
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CONSOLIDATION, MERGER AND SALE OF ASSETS
The Company will not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company and the Company will not permit any
of its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in the sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Company or the Company
and its Restricted Subsidiaries, taken as a whole, to any other Person or
Persons, unless: (i) the Company will be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of the
Company will be a corporation organized and validly existing under the laws of
the United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee,
all of the obligations of the Company with respect to the Notes and under the
Indenture; (ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction on a pro forma basis, the
Company or any Person becoming the successor obligor of the Notes shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
the Company immediately prior to such transaction; (iv) immediately after
giving effect to such transaction on a pro forma basis the Company, or any
Person becoming the successor obligor of the Notes, as the case may be, could
Incur at least $1.00 of Indebtedness under the first paragraph of part (a) of
the "Limitation on Indebtedness" covenant; and (v) the Company delivers to the
Trustee an Officers' Certificate (attaching the arithmetic computations to
demonstrate compliance with clauses (iii) and (iv)) and Opinion of Counsel, in
each case stating that such consolidation, merger or transfer and such
supplemental indenture complies with this provision and that all conditions
precedent provided for herein relating to such transaction have been complied
with; provided, however, that clauses (iii) and (iv) above do not apply if, in
the good faith determination of the Board of Directors of the Company, whose
determination shall be evidenced by a Board Resolution, the principal purpose
of such transaction is to change the state of incorporation of the Company;
and provided further that any such transaction shall not have as one of its
purposes the evasion of the foregoing limitations. (Section 801)
EVENTS OF DEFAULT
The following events will be defined as "Events of Default" in the
Indenture: (a) default in the payment of interest on the Notes when due and
payable as to any interest payment date falling on or prior to ,
2000, and any such failure continued for a period of 30 days as to any
interest payment date thereafter; (b) default in the payment of principal of
(or premium, if any, on) any Note when the same becomes due and payable at
maturity, upon acceleration, redemption or otherwise; (c) default in the
payment of principal or interest on Notes required to be purchased pursuant to
an Excess Proceeds Offer as described under "Limitation on Asset Sales" or
pursuant to a Change of Control Offer as described under "Repurchase of Notes
upon a Change of Control"; (d) failure to perform or comply with the
provisions described under "Consolidation, Merger and Sale of Assets"; (e)
default in the performance of or breach of any other covenant or agreement of
the Company in the Indenture or under the Notes and such default or breach
continues for a period of 30 consecutive days after written notice by the
Trustee or the holders of 25% or more in aggregate principal amount of the
Notes; (f) there occurs with respect to any issue or issues of Indebtedness of
the Company or any Restricted Subsidiary having an outstanding principal
amount of $5.0 million or more in the aggregate for all such issues of all
such Persons, whether such Indebtedness now exists or shall hereafter be
created, (I) an event of default that has caused the holder thereof to declare
such Indebtedness to be due and payable prior to its Stated Maturity and such
Indebtedness has not been discharged in full or such acceleration has not been
rescinded or annulled by the earlier of (x) the expiration of any applicable
grace period or (y) the thirtieth day after such default and/or (II) the
failure to make a principal payment at the final (but not any interim) fixed
maturity and such defaulted payment shall not have been made, waived or
extended by the earlier of (x) the expiration of any applicable grace period
or (y) the thirtieth day after such default; (g) any final judgment or order
(not covered by insurance)
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for the payment of money in excess of $5.0 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Restricted Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5.0 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; (h) a
court having jurisdiction in the premises enters a decree or order for (A)
relief in respect of the Company or any of its Significant Subsidiaries in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, (B) appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any of its Significant Subsidiaries or for all or substantially all of the
property and assets of the Company or any of its Significant Subsidiaries or (C)
the winding up or liquidation of the affairs of the Company or any of its
Significant Subsidiaries and, in each case, such decree or order shall remain
unstayed and in effect for a period of 30 consecutive days; (i) the Company or
any of its Significant Subsidiaries (A) commences a voluntary case under any
applicable bankruptcy, insolvency or other similar law now or hereafter in
effect, or consents to the entry of an order for relief in an involuntary case
under any such law, (B) consents to the appointment of or taking possession by a
receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official of the Company or any of its Significant Subsidiaries or for all or
substantially all of the property and assets of the Company or any of its
Significant Subsidiaries or (C) effects any general assignment for the benefit
of creditors; or (j) the Company asserts in writing that the Pledge Agreement
ceases to be in full force and effect before payment in full of the obligations
thereunder. (Section 501)
If an Event of Default (other than an Event of Default specified in clause
(h) or (i) above) occurs and is continuing under the Indenture, the Trustee or
the holders of at least 25% in aggregate principal amount of the Notes, then
outstanding, by written notice to the Company (and to the Trustee if such
notice is given by the holders), may, and the Trustee at the request of such
holders shall, declare the principal of, premium, if any, and accrued but
unpaid interest on the Notes to be immediately due and payable. Upon a
declaration of acceleration, such principal of, premium, if any, and accrued
interest shall be immediately due and payable. In the event of a declaration
of acceleration because an Event of Default set forth in clause (f) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (f) shall be remedied or cured by the
Company and/or the relevant Significant Subsidiaries or waived by the holders
of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(h) or (i) above occurs, the principal of, premium, if any, and accrued
interest on the Notes then outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any holder. The holders of at least a majority in principal
amount of the outstanding Notes by written notice to the Company and to the
Trustee, may waive all past defaults and rescind and annul a declaration of
acceleration and its consequences if (i) all existing Events of Default, other
than the nonpayment of the principal of, premium, if any, and accrued and
unpaid interest on the Notes that have become due solely by such declaration
of acceleration, have been cured or waived and (ii) the rescission would not
conflict with any judgment or decree of a court of competent jurisdiction. For
information as to the waiver of defaults, see "--Modification and Waiver."
(Section 502)
The holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from holders of Notes. No
holder may pursue any remedy with respect to the Indenture or the Notes
unless: (i) the holder gives the Trustee written notice of a continuing Event
of Default; (ii) the holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
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(iii) such holder or holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the holder. (Sections 507 and 508)
The Indenture will require certain officers of the Company to certify, on or
before a date not more than 120 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and the Company's
performance under the Indenture and that the Company has fulfilled all
obligations thereunder or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company will also be obligated to notify the Trustee of any
default or defaults in the performance of any covenants or agreements under
the Indenture. (Section 1008)
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company upon the Notes discharged with respect to the
outstanding Notes ("defeasance"). Such defeasance means that the Company will
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes and to have satisfied all its other obligations under
such Notes and the Indenture insofar as such Notes are concerned except for
(i) the rights of holders of outstanding Notes to receive payments (solely
from monies deposited in trust) in respect of the principal of, premium, if
any, and interest on such Notes when such payments are due, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of any
Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an office
or agency for payments in respect of the Notes and segregate and hold such
payments in trust, (iii) the rights, powers, trusts, duties and immunities of
the Trustee and (iv) the defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations
of the Company released with respect to certain covenants set forth in the
Indenture, and any omission to comply with such obligations will not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). (Sections 1301, 1302, and 1303)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit or cause to be deposited with the Trustee, as
trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay and
discharge the principal of, premium, if any, and interest on the outstanding
Notes on the Stated Maturity (or upon redemption, if applicable) of such
principal, premium, if any, or installment of interest; (ii) no Default or
Event of Default with respect to the Notes will have occurred and be
continuing on the date of such deposit or, insofar as an event of bankruptcy
under clause (x) of "Events of Default" above is concerned, at any time during
the period ending on the 123rd day after the date of such deposit; (iii) such
defeasance or covenant defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the Indenture) to which the Company is a party or by which it is bound; (iv)
in the case of defeasance, the Company shall have delivered to the Trustee an
Opinion of Counsel stating that the Company has received from, or there has
been published by, the Internal Revenue Service a ruling, or since 1997,
there has been a change in applicable federal income tax law, in either case
to the effect that, and based thereon such opinion shall confirm that, the
holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (v) in
the case of covenant defeasance, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the holders of the Notes
outstanding will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant
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defeasance and will be subject to federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such
covenant defeasance had not occurred; and (vi) the Company shall have
delivered to the Trustee an Officer's Certificate and an Opinion of Counsel,
each stating that all conditions precedent provided for relating to either the
defeasance or the covenant defeasance, as the case may be, have been complied
with. (Section 1304)
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes;
provided, however, that no such modification or amendment may, without the
consent of each holder affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Note, (ii) reduce the
principal amount of, or premium, if any, or interest on any Note or extend the
time for payment of interest on any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on any Note, (iv)
impair the right of any holder of the Notes to receive payment of, principal
of and interest on such holder's Notes on or after the due dates therefor or
to institute suit for the enforcement of any payment on or after the Stated
Maturity (or, in the case of a redemption, on or after the Redemption Date) of
any Note, (v) reduce the above-stated percentage of outstanding Notes the
consent of whose holders is necessary to modify or amend the Indenture, (vi)
waive a default in the payment of principal of, premium, if any, or accrued
and unpaid interest on the Notes, (vii) modify any provisions of any
Guarantees in a manner adverse to the holders or (viii) reduce the percentage
or aggregate principal amount of outstanding Notes the consent of whose
holders is necessary for waiver of compliance with certain provisions of the
Indenture or for waiver of certain defaults.
GOVERNING LAW AND SUBMISSION TO JURISDICTION
The Notes and the Indenture will be governed by the laws of the State of New
York. The Company will submit to the jurisdiction of the U.S. federal and New
York state courts located in the Borough of Manhattan, City and State of New
York for purposes of all legal actions and proceedings instituted in
connection with the Notes and the Indenture.
CURRENCY INDEMNITY
U.S. dollars are the sole currency of account and payment for all sums
payable by the Company under or in connection with the Notes, including
damages. Any amount received or recovered in a currency other than
dollars (whether as a result of, or of the enforcement of, a judgment or order
of a court of any jurisdiction, in the winding-up or dissolution of the
Company or otherwise) by any holder of a Note in respect of any sum expressed
to be due to it from the Company shall only constitute a discharge to the
Company to the extent of the dollar amount which the recipient is able to
purchase with the amount so received or recovered in that other currency on
the date of that receipt or recovery (or, if it is not practicable to make
that purchase on that date, on the first date on which it is practicable to do
so). If that dollar amount is less than the dollar amount expressed to be due
to the recipient under any Note, the Company shall indemnify the recipient
against any loss sustained by it as a result. In any event, the Company shall
indemnify the recipient against the cost of making any such purchase. For the
purposes of this paragraph, it will be sufficient for the holder of a Note to
certify in a satisfactory manner (indicating the sources of information used)
that it would have suffered a loss had an actual purchase of dollars been made
with the amount so received in that other currency on the date of receipt or
recovery (or, if a purchase of dollars on such date had not been practicable,
on the first date on which it would have been practicable, it being required
that the need for a change of date be certified in the manner mentioned
above). These indemnities constitute a separate and independent obligation
from the Company's other obligations, shall give rise to a separate and
independent cause of action, shall apply irrespective of any indulgence
granted by any holder of a Note and shall continue in full force and effect
despite any other judgment, order, claim or proof for a liquidated amount in
respect of any sum due under any Note.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Issuers, to obtain payment of claims in
certain cases or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if the Trustee acquires any conflicting
interest, it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
The holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the full definition of all terms as well as any other
capitalized term used herein for which no definition is provided.
"Acquired Indebtedness" is defined to mean Indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or assumed in
connection with an Asset Acquisition by the Company or a Restricted Subsidiary
and not incurred in connection with, or in anticipation of, such Person
becoming a Restricted Subsidiary or such Asset Acquisition; provided that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon the consummation of the transactions
by which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Indebtedness.
"Affiliate" is defined to mean, as applied to any Person, any other Person
directly or indirectly controlling, controlled by, or under direct or indirect
common control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, is defined to
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such Person, whether through
the ownership of voting securities, by contract or otherwise. For purposes of
the Indenture "Affiliate" shall be deemed to include Mr. K. Paul Singh.
"Asset Acquisition" is defined to mean (i) an investment by the Company or
any of its Restricted Subsidiaries in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or shall be merged
into or consolidated with the Company or any of its Restricted Subsidiaries or
(ii) an acquisition by the Company or any of its Restricted Subsidiaries of
the property and assets of any Person other than the Company or any of its
Restricted Subsidiaries that constitute substantially all of a division or
line of business of such Person.
"Asset Disposition" is defined to mean the sale or other disposition by the
Company or any of its Restricted Subsidiaries (other than to the Company or
another Restricted Subsidiary of the Company) of (i) all or substantially all
of the Capital Stock of any Restricted Subsidiary of the Company or (ii) all
or substantially all of the assets that constitute a division or line of
business of the Company or any of its Restricted Subsidiaries.
"Asset Sale" is defined to mean any sale, transfer or other disposition
(including by way of merger, consolidation or sale-leaseback transactions) in
one transaction or a series of related transactions by the Company or any of
its Restricted Subsidiaries to any Person other than the Company or any of its
Restricted Subsidiaries of (i) all or any of the Capital Stock of any
Subsidiary, (ii) all or substantially all of the property and assets of an
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operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and assets of the Company or any of
its Restricted Subsidiaries outside the ordinary course of business of the
Company or such Restricted Subsidiary and, in each case, that is not governed
by the provisions of the Indenture applicable to mergers, consolidations and
sales of assets of the Company and which, in the case of any of clause (i),
(ii) or (iii) above, whether in one transaction or a series of related
transactions, (a) have a fair market value in excess of $1.0 million or (b)
are for net proceeds in excess of $1.0 million; provided that sales or other
dispositions of inventory, receivables and other current assets in the
ordinary course of business shall not be included within the meaning of "Asset
Sale."
"Average Life" is defined to mean, at any date of determination with respect
to any debt security, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(b) the amount of such principal payment by (ii) the sum of all such principal
payments.
"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all Common Stock and Preferred Stock.
"Capitalized Lease" is defined to mean, as applied to any Person, any lease
of any property (whether real, personal or mixed) of which the discounted
present value of the rental obligations of such Person as lessee, in
conformity with GAAP, is required to be capitalized on the balance sheet of
such Person; and "Capitalized Lease Obligation" is defined to mean the
discounted present value of the rental obligations under such lease.
"Change of Control" is defined to mean such time as (i) a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 50% of the total voting power of the then
outstanding Voting Stock of the Company on a fully diluted basis; (ii)
individuals who at the beginning of any period of two consecutive calendar
years constituted the Board of Directors (together with any directors who are
members of the Board of Directors on the date hereof and any new directors
whose election by the Board of Directors or whose nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds of
the members of the Board of Directors then still in office who either were
members of the Board of Directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the members of such board of directors then
in office; (iii) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Subsidiaries taken as a whole to any such "person" or "group" (other than to
the Company or a Restricted Subsidiary); (iv) the merger or consolidation of
the Company with or into another corporation or the merger of another
corporation with or into the Company with the effect that immediately after
such transaction any such "person" or "group" of persons or entities shall
have become the beneficial owner of securities of the surviving corporation of
such merger or consolidation representing a majority of the total voting power
of the then outstanding Voting Stock of the surviving corporation; or (v) the
adoption of a plan relating to the liquidation or dissolution of the Company.
"Closing Date" is defined to mean the date on which the Notes are originally
issued under the Indenture.
"Common Stock" is defined to mean, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's common stock, whether now
outstanding or issued after the date of the Indenture, including, without
limitation, all series and classes of such common stock.
"Consolidated Cash Flow" is defined to mean, for any period, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted
in calculating Consolidated Net Income (other than income taxes (either
positive or negative)
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attributable to extraordinary and non-recurring gains or losses or sales of
assets), (iv) depreciation expense, to the extent such amount was deducted in
calculating Consolidated Net Income, (v) amortization expense, to the extent
such amount was deducted in calculating Consolidated Net Income, and (vi) all
other non-cash items reducing Consolidated Net Income (excluding any non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period), less all non-cash items increasing Consolidated
Net Income, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period,
Consolidated Interest Expense plus dividends declared and payable on Preferred
Stock.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including capitalized
interest, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and interest on Indebtedness that is Guaranteed or secured by the Company or
any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by the Company and its Restricted Subsidiaries
during such period.
"Consolidated Net Income" is defined to mean, for any period, the aggregate
net income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Consolidated Net Income (without duplication):
(i) solely for the purposes of calculating the amount of Restricted Payments
that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described above, the net income
(or loss) of any Person accrued prior to the date it becomes a Restricted
Subsidiary or is merged into or consolidated with the Company or any of its
Restricted Subsidiaries or all or substantially all of the property and assets
of such Person are acquired by the Company or any of its Restricted
Subsidiaries; (ii) any gains or losses (on an after-tax basis) attributable to
Asset Sales; (iii) except for purposes of calculating the amount of Restricted
Payments that may be made pursuant to clause (C) of the first paragraph of the
"Limitation on Restricted Payments" covenant described above, any amount paid
or accrued as dividends on Preferred Stock of the Company or Preferred Stock
of any Restricted Subsidiary owned by Persons other than the Company and any
of its Restricted Subsidiaries; (iv) all extraordinary gains and extraordinary
losses; and (v) the net income (or loss) of any Person (other than net income
(or loss) attributable to a Restricted Subsidiary) in which any Person (other
than the Company or any of its Restricted Subsidiaries) has a joint interest,
except to the extent of the amount of dividends or other distributions
actually paid to the Company or any of its Restricted Subsidiaries by such
other Person during such period.
"Consolidated Net Worth" is defined to mean, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of the Company and its Restricted
Subsidiaries (which shall be as of a date not more than 90 days prior to the
date of such computation), less any amounts attributable to Redeemable Stock
or any equity security convertible into or exchangeable for Indebtedness, the
cost of treasury stock and the principal amount of any promissory notes
receivable from the sale of the Capital Stock of the Company or any of its
Restricted Subsidiaries, each item to be determined in conformity with GAAP
(excluding the effects of foreign currency exchange adjustments under
Financial Accounting Standards Board Statement of Financial Accounting
Standards No. 52).
"Credit Facilities" is defined to mean, with respect to the Company, one or
more debt facilities or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, term loans,
receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
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"Currency Agreement" is defined to mean foreign exchange contracts, currency
swap agreements and other arrangements and agreements designed to provide
protection against fluctuations in currency values.
"Default" is defined to mean any event that is, or after notice or passage
of time or both would be, an Event of Default.
"Eligible Accounts Receivable" is defined to mean the accounts receivables
(net of any reserves and allowances for doubtful accounts in accordance with
GAAP) of any Person that are not more than 60 days past their due date and
that were entered into in the ordinary course of business on normal payment
terms as shown on the most recent consolidated balance sheet of such Person
filed with the Commission, all in accordance with GAAP.
"Eligible Institution" is defined to mean a commercial banking institution
that has combined capital and surplus of not less than $500 million or its
equivalent in foriegn currency, whose debt is rated "A-3" or higher or "A-" or
higher according to Moody's Investors Services, Inc. or Standard & Poor's
Ratings Group (or such similar equivalent rating by at least one "nationally
recognized statistical rating organization" (as defined in Rule 436 under the
Securities Act) respectively, at the time as of which any investment or
rollover therein is made.
"Employment Agreements" is defined to mean the employment agreements between
the Company and Mr. K. Paul Singh, dated June 1994.
"Existing Indebtedness" is defined to mean Indebtedness outstanding on the
date of the Indenture.
"Fair Market Value" is defined to mean, with respect to any asset or
property, the sale value that would be obtained in an arm's length transaction
between an informed and willing seller under no compulsion to sell and an
informed and willing buyer.
"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect from time to time, including, without
limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved
by a significant segment of the accounting profession.
"Government Securities" is defined to mean direct obligations of, or
obligations guaranteed by, the United States of America for the payment of
which obligations or guarantee the full faith and credit of the United States
is pledged.
"Guarantee" is defined to mean any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or other obligation of such other
Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or
(ii) entered into for purposes of assuring in any other manner the obligee of
such Indebtedness or other obligation of the payment thereof or to protect
such obligee against loss in respect thereof (in whole or in part); provided
that the term "Guarantee" shall not include endorsements for collection or
deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with
respect to, or become responsible for, the payment of, contingently or
otherwise, such Indebtedness, including an Incurrence of Indebtedness by
reason of the acquisition of more than 50% of the Capital Stock of any Person;
provided that neither the accrual of interest nor the accretion of original
issue discount shall be considered an Incurrence of Indebtedness.
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"Indebtedness" is defined to mean, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the fair market value of such asset at
such date of determination and
(B) the amount of such Indebtedness, (vii) all Indebtedness of other Persons
Guaranteed by such Person to the extent such Indebtedness is Guaranteed by
such Person, (viii) the maximum fixed redemption or repurchase price of
Redeemable Stock of such Person at the time of determination and (ix) to the
extent not otherwise included in this definition, obligations under Currency
Agreements and Interest Rate Agreements. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency
giving rise to the obligation, provided (i) that the amount outstanding at any
time of any Indebtedness issued with original issue discount is the face
amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP and (ii) that Indebtedness shall not include any
liability for federal, state, local or other taxes.
"Interest Rate Agreement" is defined to mean interest rate swap agreements,
interest rate cap agreements, interest rate insurance, and other arrangements
and agreements designed to provide protection against fluctuations in interest
rates.
"Investment" in any Person is defined to mean any direct or indirect
advance, loan or other extension of credit (including, without limitation, by
way of Guarantee or similar arrangement; but excluding advances to customers
in the ordinary course of business that are, in conformity with GAAP, recorded
as accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person.
For purposes of the definition of "Unrestricted Subsidiary", the "Limitation
on Restricted Payments" covenant and the "Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the fair market value of the assets (net of
liabilities) of any Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary
and shall exclude the fair market value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (b) the fair market
value, in the case of a sale of Capital Stock in accordance with the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant such that a Person no longer constitutes a Restricted
Subsidiary, of the remaining assets (net of liabilities) of such Person after
such sale, and shall exclude the fair market value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary of the Company and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its fair market value at the time of such transfer, in each case as determined
by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Marketable Securities" is defined to mean: (i) Government Securities which
have a remaining weighted average life to maturity of not more than one year
from the date of Investment therein; (ii) any time deposit
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account, money market deposit and certificate of deposit maturing not more
than 180 days after the date of acquisition issued by, or time deposit of, an
Eligible Institution; (iii) commercial paper maturing not more than 90 days
after the date of acquisition issued by a corporation (other than an Affiliate
of the Company) with a rating, at the time as of which any investment therein
is made, of "P-1" or higher according to Moody's Investors Service, Inc., "A-
1" or higher according to Standard & Poor's Rating Group (or such similar
equivalent rating by at least one "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act)); (iv) any
banker's acceptance or money market deposit accounts issued or offered by an
Eligible Institution; (v) repurchase obligations with a term of not more than
7 days for Government Securities entered into with an Eligible Institution;
and (vi) any fund investing exclusively in investments of the types described
in clauses (i) through (v) above.
"Net Cash Proceeds" is defined to mean, (a) with respect to any Asset Sale,
the proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary of the Company) and proceeds from the conversion of
other property received when converted to cash or cash equivalents, net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of counsel and investment bankers) related to such Asset Sale, (ii) provisions
for all taxes (whether or not such taxes will actually be paid or are payable)
as a result of such Asset Sale without regard to the consolidated results of
operations of the Company and its Restricted Subsidiaries, taken as a whole,
(iii) payments made to repay Indebtedness or any other obligation outstanding
at the time of such Asset Sale that either (A) is secured by a Lien on the
property or assets sold or (B) is required to be paid as a result of such sale
and (iv) appropriate amounts to be provided by the Company or any Restricted
Subsidiary of the Company as a reserve against any liabilities associated with
such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale, all as determined in conformity with GAAP and (b) with respect to
any issuance or sale of Capital Stock, the proceeds of such issuance or sale
in the form of cash or cash equivalents, including payments in respect of
deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to the Company or any Restricted Subsidiary of the Company) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of attorney's fees, accountants' fees, underwriters'
or placement agents' fees, discounts or commissions and brokerage, consultant
and other fees incurred in connection with such issuance or sale and net of
taxes paid or payable as a result thereof.
"Permitted Business" is defined to mean any business involving voice, data
and other telecommunications services.
"Permitted Investment" is defined to mean (i) an Investment in a Restricted
Subsidiary or a Person which will, upon the making of such Investment, become
a Restricted Subsidiary or be merged or consolidated with or into or transfer
or convey all or substantially all its assets to, the Company or a Restricted
Subsidiary; (ii) any Investment in Marketable Securities or Pledged
Securities; (iii) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP; (iv) loans or advances to employees made in the
ordinary course of business in accordance with past practice of the Company or
its Restricted Subsidiaries and that do not in the aggregate exceed $1.0
million at any time outstanding; (v) stock, obligations or securities received
in satisfaction of judgments; (vi) Investments in any Person received as
consideration for Asset Sales to the extent permitted under the "Limitation on
Asset Sales" covenant; and (vii) Investments in any Person at any one time
outstanding (measured on the date each such Investment was made without giving
effect to subsequent changes in value) in an aggregate amount not to exceed
5.0% of the Company's total consolidated assets.
"Permitted Liens" is defined to mean (i) Liens for taxes, assessments,
governmental charges or claims that are being contested in good faith by
appropriate legal proceedings promptly instituted and diligently conducted
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and for which a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made; (ii) statutory Liens of
landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the Company or
any of its Restricted Subsidiaries; (vi) Liens (including extensions and
renewals thereof) upon real or personal property purchased or leased after the
Closing Date; provided that (a) such Lien is created solely for the purpose of
securing Indebtedness Incurred in compliance with the "Limitation on
Indebtedness" covenant (1) to finance the cost (including the cost of design,
development, construction, acquisition, installation or integration) of the item
of property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and
(c) any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (vii) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of the Company and its Restricted Subsidiaries,
taken as a whole; (viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets; (ix) any interest
or title of a lessor in the property subject to any Capitalized Lease or
operating lease; (x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases; (xi) Liens on property of, or on shares of stock or
Indebtedness of, any corporation existing at the time such corporation becomes,
or becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired and were not created in
contemplation of such transaction; (xii) Liens in favor of the Company or any
Restricted Subsidiary; (xiii) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary of the
Company that does not give rise to an Event of Default; (xiv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xv) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvi) Liens encumbering customary initial
deposits and margin deposits and other Liens that are either within the general
parameters customary in the industry or incurred in the ordinary course of
business, in each case, securing Indebtedness under Interest Rate Agreements and
Currency Agreements; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of the Company and its
Restricted Subsidiaries prior to the Closing Date; (xxviii) Liens existing on
the Closing Date or securing the Notes or any Guarantee of the Notes; (xxix)
Liens granted after the Closing Date on any assets or Capital Stock of the
Company or its Restricted Subsidiaries created in favor of the holders; (xxx)
Liens securing Indebtedness which is incurred to refinance secured Indebtedness
which is permitted to be Incurred under clause (iv) of the second paragraph of
part (b) of the "Limitation on Indebtedness" covenant; provided that such Liens
do not extend to or cover any property or assets of the Company or any
Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced; and (xxxi) Liens securing Indebtedness under
Credit Facilities incurred in compliance with clauses (i) and (ix) of the
"Limitation on Indebtedness" covenant.
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"Pledge Account" is defined to mean an account established with the Trustee
pursuant to the terms of the Pledge Agreement for the deposit of the Pledged
Securities purchased by the Company with a portion of the net proceeds from
the Offering.
"Pledge Agreement" is defined to mean the Collateral Pledge and Security
Agreement, dated as of the date of the Indenture, by and between the Trustee
and the Company, governing the disbursement of funds from the Pledge Account.
"Pledged Securities" is defined to mean the securities purchased by the
Company with a portion of the net proceeds from the Offering, which shall
consist of Government Securities, to be deposited in the Pledge Account.
"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however
designated, whether voting or non-voting) of such Person's preferred or
preference stock, whether now outstanding or issued after the date of the
Indenture, including, without limitation, all series and classes of such
preferred or preference stock.
"Pro Forma Consolidated Cash Flow" is defined to mean, for any period, the
Consolidated Cash Flow of the Company for such period calculated on a pro
forma basis to give effect to any Asset Disposition or Asset Acquisition not
in the ordinary course of business (including acquisitions of other Persons by
merger, consolidation or purchase of Capital Stock) during such period as if
such Asset Disposition or Asset Acquisition had taken place on the first day
of such period.
"Public Equity Offering" is defined to mean an underwritten primary public
offering of Common Stock of the Company pursuant to an effective registration
statement under the Securities Act.
"Purchase Money Obligations" is defined to mean, with respect to each
Person, obligations, other than those under Capitalized Leases, Incurred or
assumed in the ordinary course of business in connection with the purchase of
property to be used in the business of such Person.
"Redeemable Stock" is defined to mean any class or series of Capital Stock
of any Person that by its terms or otherwise is (i) required to be redeemed
prior to the Stated Maturity of the Notes, (ii) redeemable at the option of
the holder of such class or series of Capital Stock at any time prior to the
Stated Maturity of the Notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the Notes; provided that
any Capital Stock that would not constitute Redeemable Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Redeemable Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable to
the holders of such Capital Stock than the provisions contained in "Limitation
on Asset Sales" and "Repurchase of Notes upon a Change of Control" covenants
described above and such Capital Stock specifically provides that such Person
will not repurchase or redeem any such stock pursuant to such provision prior
to the Company's repurchase of such Notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described above.
"Restricted Subsidiary" is defined to mean any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"Significant Subsidiary" is defined to mean, at any date of determination,
any Subsidiary of the Company that, together with its Subsidiaries, (i) for
the most recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company or (ii) as of the end of such fiscal
year, was the owner of more than 10% of the consolidated assets of the
Company, all as set forth on the most recently available consolidated
financial statements of the Company for such fiscal year.
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"Stated Maturity" is defined to mean, (i) with respect to any debt security,
the date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of
the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Transaction Date" is defined to mean, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary of the Company) to be an Unrestricted Subsidiary
unless such Subsidiary owns any Capital Stock of, or owns or holds any Lien on
any property of, the Company or any Restricted Subsidiary; provided that
either (A) the Subsidiary to be so designated has total assets of $1,000 or
less, (B) if such Subsidiary has assets greater than $1,000, that such
designation would be permitted under the "Limitation on Restricted Payments"
covenant described above, or (C) such Subsidiary is not liable, directly or
indirectly, with respect to any Indebtedness other than Unrestricted
Subsidiary Indebtedness. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of the Company; provided that
immediately after giving effect to such designation (x) the Company could
Incur $1.00 of additional Indebtedness under the first paragraph of the
"Limitation on Indebtedness" covenant described above and (y) no Default or
Event of Default shall have occurred and be continuing. Any such designation
by the Board of Directors shall be evidenced to the Trustee by promptly filing
with the Trustee a copy of the Board Resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean Indebtedness of
any Unrestricted Subsidiary (i) as to which neither the Company nor any
Subsidiary is directly or indirectly liable (by virtue of the Company or any
such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit
any holder of any Indebtedness of the Company or any Subsidiary to declare, a
default on such Indebtedness of the Company or any Subsidiary or cause the
payment thereof to be accelerated or payable prior to its Stated Maturity.
"U.S. Subsidiary" is defined to mean any corporation or other entity
incorporated or organized under the laws of the United States or any state
thereof.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock
of any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned," with respect to any Subsidiary, is defined to mean a
Subsidiary of the Company if all of the outstanding Capital Stock in such
Subsidiary (other than any director's qualifying shares or Investments by
foreign nationals mandated by applicable law) is owned by the Company or one
or more Wholly Owned Subsidiaries of the Company.
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DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and First Union National Bank of Virginia, as
Warrant Agent (the "Warrant Agent"). The following summary of certain
provisions of the Warrant Agreement does not purport to be complete and is
qualified in its entirety by reference to the Warrants and the Warrant
Agreement, including the definitions therein of certain terms used below.
Capitalized terms used in this Description of Warrants and not otherwise
defined herein have the meanings ascribed to such terms in the Warrant
Agreement. A copy of the proposed form of the Warrant Agreement has been filed
as an exhibit to the Registration Statement of which this Prospectus is a part
and is available as set forth under "Available Information."
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to receive
fully paid and non-assessable shares of Common Stock of the Company (the
"Warrant Shares") at an exercise price of $ per share (the "Exercise
Price"). The Exercise Price and the number of shares of Common Stock issuable
upon exercise of a Warrant are both subject to adjustment in certain
circumstances described below. The Warrants will be exercisable to purchase an
aggregate of shares of Common Stock representing, (on a fully diluted
basis, assuming all outstanding options and warrants are exercised on the date
of this Prospectus) approximately % of the shares of Common Stock to be
outstanding upon consummation of the offering of the Units. See "Shares
Eligible for Future Sale."
The Warrants may be exercised at any time six months after the Closing Date;
provided, however, that in such case, holders of Warrants will be able to
exercise their Warrants only if the Common Shelf Registration Statement (as
defined below) relating to the Common Stock underlying the Warrants is
effective or the exercise of such Warrants is exempt from the registration
requirements of the Securities Act, and such securities are qualified for sale
or exempt from qualification under the applicable securities laws of the
states or other jurisdictions in which such holders reside. The Warrants may
also be exercised upon an Exercise Event pursuant to an effective Demand
Registration Statement (as defined below). Unless earlier exercised, the
Warrants will expire on , 2004 (the "Expiration Date"). The Company will
give notice of expiration not less than 90 nor more than 120 days prior to the
Expiration Date to the registered holders of the then outstanding Warrants. If
the Company fails to give such notice, the Warrants will nevertheless expire
and become void on the Expiration Date. The Warrants will not trade separately
from the Notes until the Separation Date.
In order to exercise all or any of the Warrants, the holder thereof is
required to surrender to the Warrant Agent the related registered certificate
issued by the Company representing the Warrants (the "Warrant Certificate")
with the accompanying form of election to purchase properly completed and
executed, and to pay in full the Exercise Price for each share of Common Stock
or other securities issuable upon exercise of such Warrants. The Exercise
Price may be paid (i) in cash or by certified or official bank check or by
wire transfer to an account designated by the Company for such purpose or (ii)
without the payment of cash, by reducing the number of shares of Common Stock
that would be obtainable upon the exercise of a Warrant and payment of the
Exercise Price in cash so as to yield a number of shares of Common Stock upon
the exercise of such Warrant equal to the product of (a) the number of shares
of Common Stock for which such Warrant is exercisable as of the date of
exercise (if the Exercise Price were being paid in cash) and (b) the Cashless
Exercise Ratio (the "Cashless Exercise"). The "Cashless Exercise Ratio" shall
equal a fraction, the numerator of which is the excess of the Current Market
Value per share of Common Stock on the Exercise Date over the Exercise Price
per share as of the Exercise Date and the denominator of which is the Current
Market Value per share of the Common Stock on the Exercise Date. Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with the holder's option to elect a Cashless Exercise, the number
of shares of Common Stock deliverable upon a Cashless Exercise shall be equal
to the number of shares of Common Stock issuable upon the exercise of Warrants
that the holder specifies are to be exercised pursuant to a Cashless Exercise
multiplied by the Cashless Exercise Ratio. All provisions of the Warrant
Agreement shall be applicable with respect to a surrender of a Warrant
Certificate pursuant to a Cashless Exercise for less than the full number of
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Warrants represented thereby. Upon surrender of the Warrant Certificate and
payment of the Exercise Price, the Company will deliver or cause to be
delivered to or upon the written order of such holder, a stock certificate
representing shares of Common Stock of the Company for each Warrant
evidenced by such Warrant Certificate, subject to adjustment as described
herein. If less than all of the Warrants evidenced by a Warrant Certificate
are to be exercised, a new Warrant Certificate will be issued for the
remaining number of Warrants. No fractional shares of Common Stock will be
issued upon exercise of the Warrants. The Company will pay to the holder of
the Warrant at the time of exercise an amount in cash equal to the Current
Market Value (as defined below) of any such fractional share of Common Stock.
The holders of unexercised Warrants are not entitled, by virtue of being
such holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as stockholders of the Company in
respect of any stockholders meeting for the election of directors of the
Company or any other purpose, or to exercise any other rights whatsoever as
stockholders of the Company.
No service charge will be made for registration of transfer or exchange upon
surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration or transfer or exchange of Warrant
Certificates.
In the event a bankruptcy or reorganization is commenced by or against the
Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of
the bankruptcy court. As a result, holders of the Warrants may not, even if
sufficient funds are available, be entitled to receive any consideration or
may receive an amount less than they would be entitled to receive if they had
exercised their Warrants prior to the commencement of any such bankruptcy or
reorganization.
NOTWITHSTANDING THE FOREGOING, THE EXERCISE OF THE WARRANTS (AND THE
OWNERSHIP OF COMMON STOCK ISSUABLE UPON THE EXERCISE THEREOF) MAY BE LIMITED
BY THE COMPANY IN ORDER TO ENSURE COMPLIANCE WITH THE FCC'S RULES AND THE
WARRANTS WILL NOT BE EXERCISABLE BY ANY HOLDER IF SUCH EXERCISE WOULD CAUSE
THE COMPANY TO BE IN VIOLATION OF THE COMMUNICATIONS ACT OR THE FCC'S RULES,
REGULATIONS OR POLICIES. SEE "RISK FACTORS--POTENTIAL ADVERSE EFFECTS OF
REGULATION."
ADJUSTMENTS
The number of shares of Common Stock of the Company issuable upon the exercise
of the Warrants and the Exercise Price will be subject to adjustment in
certain circumstances, including:
(i) the payment by the Company of dividends and other distributions on
its Common Stock payable in Common Stock or other equity interests of the
Company;
(ii) subdivisions, combinations and certain reclassifications of the
Common Stock of the Company;
(iii) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for additional shares of Common Stock,
or of securities convertible into or exercisable or exchangeable for
additional shares of Common Stock at an offering price (or with an initial
conversion, exercise or exchange price plus such offering price) which is
less than the current market value per share of Common Stock;
(iv) the distribution to all holders of Common Stock of any assets of the
Company (including cash), debt securities of the Company or any rights or
warrants to purchase any securities (excluding those rights and warrants
referred to in clause (iii) above and cash dividends and other cash
distributions from current or retained earnings);
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(v) the issuance of shares of Common Stock for a consideration per share
which is less than the Current Market Value per share of Common Stock; and
(vi) the issuance of securities convertible into or exercisable or
exchangeable for Common Stock for a conversion, exercise or exchange price
per share which is less than the current market value per share of Common
Stock.
The events described in clauses (i) and (vi) above are subject to certain
exceptions described in the Warrant Agreement, including, without limitation,
certain bona fide public offerings and private placements and certain
issuances of Common Stock pursuant to employee stock incentive plans.
No adjustment in the Exercise Price will be required unless such adjustment
would result in an increase or decrease of at least 1% in the Exercise Price;
provided, however, that any adjustment that is not made as a result of this
paragraph will be carried forward and taken into account in any subsequent
adjustment. In addition, the Company may at any time reduce the Exercise Price
(but not to an amount that is less than the par value of the Common Stock) for
any period of time (but not less than 20 business days) as deemed appropriate
by the Board of Directors of the Company.
In case of certain consolidations or mergers of the Company, or the sale of
all or substantially all of the assets of the Company to another Person, each
Warrant will thereafter be exercisable for the right to receive the kind and
amount of shares of stock or other securities or property to which such holder
would have been entitled as a result of such consolidation, merger or sale had
the Warrants been exercised immediately prior thereto. However, if (i) the
Company consolidates, merges or sells all or substantially all of its assets
to another person and, in connection therewith, the consideration payable to
the holders of Common Stock in exchange for their shares is payable solely in
cash or (ii) there is a dissolution, liquidation or winding-up of the Company,
then the holders of the Warrants will be entitled to receive distributions on
an equal basis with the holders of Common Stock or other securities issuable
upon exercise of the Warrants. as if the Warrants had been exercised
immediately prior to such event, less the Exercise Price. Upon receipt of such
payment, if any, the Warrants will expire and the rights of holders thereof
will cease. In the case of any such consolidation, merger or sale of assets,
the surviving or acquiring person and, in the event of any dissolution,
liquidation or winding-up of the Company, the Company must deposit promptly
with the Warrant Agent the funds, if any, required to pay the holders of the
Warrants. After such funds and the surrendered Warrant Certificates are
received, the Warrant Agent is required to deliver a check in such amount as
is appropriate (or, in the case of consideration other than cash, such other
consideration as is appropriate) to such Persons as it may be directed in
writing by the holders surrendering such Warrants.
In the event of a taxable distribution to holders of Common Stock of the
Company which results in an adjustment to the number of shares of Common Stock
or other consideration for which a Warrant may be exercised, the holders of
the Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain Federal Income Tax Considerations--Tax Treatment of the Warrants."
RESERVATION OF SHARES
The Company has authorized and will reserve for issuance such number of
shares of Common Stock as will be issuable upon the exercise of all
outstanding Warrants. Such shares of Common Stock, when issued and paid for in
accordance with the Warrant Agreement, will be duly and validly issued, fully
paid and nonassessable, free of preemptive rights and free from all taxes,
liens, charges and security interests.
PROVISION OF FINANCIAL STATEMENTS AND REPORTS
The Company will be required (a) to provide to each holder, without cost to
such holder, copies of such annual and quarterly reports and documents that
the Company files with the Commission, (to the extent such
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filings are accepted by the Commission and whether or not the Company has a
class of securities registered under the Exchange Act) or that the Company
would be required to file were it subject to Section 13 or 15 of the Exchange
Act, within 15 days after the date of such filing or the date on which the
Company would be required to file such reports or documents, and all such
annual reports or quarterly reports shall include the geographic segment
financial information currently disclosed by the Company in its public filings
with the Commission, and (b) if filing such reports and documents with the
Commission is not accepted by the Commission or is prohibited under the
Exchange Act, to supply at the Company's cost copies of such reports and
documents to any prospective holder promptly upon request.
AMENDMENT
Any amendment or supplement to the Warrant Agreement that has an adverse
effect on the interests of the holders of the Warrants will require the
written consent of the holders of a majority of the then outstanding Warrants
(excluding any Warrants held by the Company or any of its Affiliates).
Notwithstanding the foregoing, from time to time, the Company and the Warrant
Agent, without the consent of the holders of the Warrants, may amend or
supplement the Warrant Agreement for certain purposes, including to cure any
ambiguities, defects or inconsistencies or to make any change that does not
adversely affect the rights of any holder. The consent of
each holder of the Warrants affected will be required for any amendment
pursuant to which the Exercise Price would be increased or the number of
shares of Common Stock issuable upon exercise of the Warrants would be
decreased (other than pursuant to adjustments provided for in the Warrant
Agreement) or the exercise period with respect to the Warrants would be
shortened.
REGISTRATION RIGHTS
Registration of Underlying Common Stock
The Company is required under the Warrant Agreement to file a shelf
registration statement under the Securities Act covering the issuance of
shares of Common Stock to the holders of the Warrants upon exercise of the
Warrants by the holders thereof (the "Common Shelf Registration Statement")
and to use its reasonable efforts to cause the Common Shelf Registration
Statement to be declared effective on or before 180 days after the Closing
Date and to remain effective until the earlier of (i) such time as all
Warrants have been exercised and (ii) the Expiration Date.
During any consecutive 365-day period, the Company shall be entitled to
suspend the availability of the Common Shelf Registration Statement for up to
two 45 consecutive-day periods (except for the 45 consecutive-day period
immediately prior to the Expiration Date) if the Board of Directors determines
in the exercise of its reasonable judgment that there is a valid business
purpose for such suspension and provides notice that such determination was
made to the holders of the Warrants; provided, however, that in no event shall
the Company be required to disclose the business purpose for such suspension
if the Company determines in good faith that such business purpose must remain
confidential. There can be no assurance that the Company will be able to file,
cause to be declared effective, or keep a registration statement continuously
effective until all of the Warrants have been exercised or have expired.
Demand Registration Rights
Upon the occurrence of an Exercise Event, the Holders of at least 25% of the
Warrants will be entitled to require the Company to use its best efforts to
effect one registration under the Securities Act in respect of an underwritten
sale of Warrant Shares (a "Demand Registration"), subject to certain
limitations, unless an exemption from the registration requirements of the
Securities Act is then available for the sale of such Warrant Shares. Upon a
demand, the Company will prepare, file and use its best efforts to cause to be
effective within 120 days of such demand a registration statement in respect
of all Warrant Shares (a "Demand Registration Statement"); provided that in
lieu of filing such registration statement the Company may make an offer to
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purchase all of the Warrant Shares underlying Warrants being offered in the
Demand Registration at the Current Market Value.
"Current Market Value" per share of Common Stock or any other security at
any date is defined to mean: (i) if the security is not registered under the
Exchange Act, (a) the value of the security, determined in good faith by the
Board and certified in a board resolution, based on the most recently
completed arm's-length transaction between the Company and a Person other than
an Affiiliate of the Company, the closing of which occurred on such date or
within the six-month period preceding such date, or (b) if no such transaction
shall have occurred on such date or within such six-month period, the value of
the security as determined by an Independent Financial Expert (as defined in
the Warrant Agreement); or (ii) if the security is registered under the
Exchange Act, the average of the last reported sale price of the Common Stock
(or the equivalent in an over-the-counter market) for each Business Day (as
defined in the Warrant Agreement) during the period commencing 15 Business
Days before such date and ending on the date one day prior to such date, or if
the security has been registered under the Exchange Act for less than 15
consecutive Business Days before such date, the average of the daily closing
bid prices (or such equivalent) for all of the Business Days before such date
for which daily closing bid prices are available (provided, however, that if
the closing bid price is not determinable for at least 10 Business Days in
such period, the "Current Market Value" of the security shall be determined as
if the security were not registered under the Exchange Act).
"Exercise Event" is defined to mean, with respect to each Warrant as to
which such event is applicable, the earlier of: (i) a Change of Control and
(ii) any date when the Company (A) consolidates or merges into or with another
Person (but only where holders of Common Stock receive consideration in
exchange for all or part of such Common Stock other than common stock in the
surviving Person) if the Common Stock (or other securities) thereafter
issuable upon exercise of the Warrants is not registered under the Exchange
Act or (B) sells all or substantially all of its assets to another Person if
the Common Stock (or other securities) thereafter issuable upon exercise of
the Warrants is not registered under the Exchange Act; provided, that the
events in (A) and (B) will not be deemed to have occurred if the consideration
for the Common Stock in either such transaction consists solely of cash.
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BOOK-ENTRY, DELIVERY AND FORM
GENERAL
The Units, Notes or Warrants will initially be issued in the form of one or
more fully registered Units in global form ("Global Units"), each comprised of
one or more Notes in global form ("Global Notes") and one or more Warrants in
global form ("Global Warrants"). Units, Notes and Warrants issued in
certificated fully registered form are referred to herein as "Certificated
Units," "Certificated Notes" and "Certificated Warrants," respectively, and
collectively as "Certificated Securities" and Global Units, Global Notes and
Global Warrants are collectively referred to herein as "Global Securities."
Upon issuance of the Global Securities, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the number of
Units represented by such Global Securities to the accounts of institutions
that have accounts with the Depositary or its nominee ("participants"). The
accounts to be credited shall be designated by the Underwriters. Ownership of
beneficial interests in the Global Securities will be limited to participants
or persons that may hold interests through participants. Ownership of
beneficial interest in such Global Securities will be shown on, and the
transfer of that ownership will be effected only through, records maintained
by the Depositary or its nominee (with respect to participants' interests) for
such Global Securities, or by participants or persons that hold interests
through participants (with respect to beneficial interests of persons other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such limits and laws may impair the ability to transfer or pledge
beneficial interests in the Global Securities.
So long as the Depositary, or its nominee, is the registered holder of any
Global Securities, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and holder of such Units, Notes or Warrants,
as the case may be, represented by such Global Securities for all purposes
under the Indenture and the Warrant Agreement and the Units, Notes and
Warrants, as the case may be. Except as set forth below, owners of beneficial
interests in Global Securities will not be entitled to have such Global
Securities or any Units, Notes or Warrants represented thereby registered in
their names, will not receive or be entitled to receive physical delivery or
Certificated Securities in exchange therefor and will not be considered to be
the owners or holders of such Global Securities or any Units, Notes or
Warrants represented thereby for any purpose under the Units, Notes or
Warrants or the Indenture or the Warrant Agreement. The Company understands
that under existing industry practice, in the event an owner of a beneficial
interest in a Global Security desires to take any action that the Depositary,
as the holder of such Global Security, is entitled to take, the Depositary
would authorize the participants to take such action, and that the
participants would authorize beneficial owners owning through such
participants to take such action or would otherwise act upon the instructions
of beneficial owners owning through them.
Any payment of principal or interest due on the Notes on any interest
payment date or at maturity will be made available by the Company to the
Trustee by such date. As soon as possible thereafter, the Trustee will make
such payments to the Depositary or its nominee, as the case may be, as the
registered owner of the Global Notes representing such Notes in accordance
with existing arrangements between the Trustee and the Depositary.
The Company expects that the Depositary or its nominee, upon receipt of any
payment of principal or interest in respect of the Global Notes, will credit
immediately the accounts of the related participants with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note as shown on the records of the Depositary. The Company
also expects that payments by participants to owners of beneficial interests
in the Global Securities held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in
"street name," and will be the responsibility of such participants.
None of the Company, the Trustee or any payment agent for the Global
Securities will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial
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ownership interests in any of the Global Securities or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests or for other aspects of the relationship between the Depositary and
its participants or the relationship between such participants and the owners
of beneficial interests in the Global Securities owning through such
participants.
As long as the Notes are represented by a Global Note, DTC's nominee will be
the holder of the Notes and therefore will be the only entity that can
exercise a right to repayment or repurchase of the Notes. See "Description of
the Notes -- Change of Control" and "-- Certain Covenants -- Limitation on
Sales of Assets and Subsidiary Stock." Notice by participants or by owners of
beneficial interests in a Global Note held through such participants of the
exercise of the option to elect repayment of beneficial interests in Notes
represented by a Global Note must be transmitted to DTC in accordance with its
procedures on a form required by DTC and provided to participants. In order to
ensure that DTC's nominee will timely exercise a right to repayment with
respect to a particular Note, the beneficial owner of such Note must instruct
the broker or other participant to exercise a right to repayment. Different
firms have cut-off times for accepting instructions from their customers and,
accordingly, each beneficial owner should consult the broker or other
participant through which it holds an interest in a Note in order to ascertain
the cut-off time by which such an instruction must be given in order for
timely notice to be delivered to DTC. The Company will not be liable for any
delay in delivery of notices of the exercise of the option to elect repayment.
Unless and until exchanged in whole or in part for Notes in definitive form
in accordance with the terms of the Notes, the Global Notes may not be
transferred except as a whole by the Depositary to a nominee of the Depositary
or by a nominee of the Depositary to the Depositary or another nominee of the
Depositary or by the Depositary of any such nominee to a successor of the
Depositary or a nominee of each successor.
Although the Depositary has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Securities among participants
of the Depositary, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Company will have any responsibility for the performance
by the Depositary or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations. The Company and the Trustee may conclusively rely on, and shall be
protected in relying on, instructions from the Depositary for all purposes.
CERTIFICATED SECURITIES
Global Units, Global Notes and Global Warrants shall be exchangeable for
corresponding Certificated Securities registered in the name of persons other
than the Depositary or its nominee only if (A) the Depositary (i) notifies the
Company that it is unwilling or unable to continue as Depositary for any of
the Global Securities or (ii) at any time ceases to be a clearing agency
registered under the Exchange Act, (B) there shall have occurred and be
continuing an Event of Default (as defined in the Indenture) with respect to
the Notes or (C) the Company executes and delivers to the Trustee or the
Warrant Agent, as appropriate, an order that the Global Units, Global Notes or
Global Warrants shall be so exchangeable. Any Certificated Securities will be
issued only in fully registered form, and in the case of Certificated Notes,
shall be issued without coupons in denominations of $1,000 and integral
multiples thereof. Any Certificated Securities so issued will be registered in
such names and in such denominations as the Depositary shall request.
THE CLEARING SYSTEM
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the laws of the State of New
York, a member of the Federal Reserve System, a clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depositary was created to hold securities of institutions that have accounts
with the Depositary ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry
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changes in accounts of participants, thereby eliminating the need for physical
movement of securities certificates. The Depositary's participants include
securities brokers and dealers (which may include the Underwriters), banks,
trust companies, clearing corporations and certain other organizations. Access
to the Depositary's book-entry system is also available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, whether directly or indirectly.
SETTLEMENT
Initial settlement in the Units will be in same-day funds. Investors holding
their Units through the Depositary will follow settlement practices applicable
to United States corporate debt obligations. The Indenture will require that
payments in respect of Notes (including principal, premium and accrued and
unpaid interest) be made by wire transfer of same-day funds to the accounts
specified by the holders thereof or, if no such account is specified, by
mailing a check to each such holder's registered address.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain material federal income tax
considerations relevant to the acquisition, ownership and disposition of the
Units, Notes and Warrants by initial holders acquiring Units, Notes and
Warrants at original issue for cash as part of the initial offering. This does
not purport to be a complete analysis or listing of all potential tax
considerations that may be relevant to initial holders, and does not purport
to discuss tax considerations that may be relevant to subsequent holders
(which considerations may differ from those described herein) of the Units,
Notes, or Warrants. The discussion does not include the special rules that may
apply to certain holders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the United States), and does
not address the tax consequences of the laws of any state, locality or foreign
jurisdiction. The discussion is based upon currently existing provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed Treasury regulations promulgated thereunder, and current practice,
administrative rulings, and court decisions, all of which are subject to
change and any such change could affect the continuing validity of this
discussion. The Company has not sought and will not seek any rulings from the
Internal Revenue Service ("IRS") with respect to the positions of the Company
discussed below. There can be no assurance that the IRS will not take a
different position concerning the tax consequences of the acquisition,
ownership or disposition of the Units, Notes or Warrants or that any such IRS
position would not be sustained. This discussion applies only to a holder that
will hold Units, Notes and Warrants as "capital assets" within the meaning of
Section 1221 of the Code.
EACH PURCHASER IS URGED TO CONSULT HIS OWN TAX ADVISER AS TO THE PARTICULAR
TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE UNITS, NOTES AND
WARRANTS, INCLUDING THE APPLICABILITY AND EFFECT OF ANY FEDERAL, STATE OR
FOREIGN INCOME AND OTHER TAX LAWS.
UNITED STATES FEDERAL INCOME TAXATION OF U.S. HOLDERS
This section discusses certain rules applicable to a holder of Notes,
Warrants and shares of stock received upon exercise of the Warrants ("Warrant
Shares") that is a U.S. Holder. For purposes of this discussion, a "U.S.
Holder" means a holder of Notes, Warrants or Warrant Shares who or which is
(i) an individual who is a citizen or resident of the United States for U.S.
Federal income tax purposes, (ii) a corporation or other entity taxable as a
corporation created or organized in the United States or under the laws of the
United States or any political subdivision thereof (including the States and
the District of Columbia), (iii) any trust if a court within the United States
is able to exercise primary supervision over the administration of such trust
and one or more U.S. fiduciaries have the authority to control all substantial
decisions of such trust, or (iv) a person whose income or gain with respect to
a Note, Warrant or Warrant Share is otherwise subject to U.S. Federal income
taxation on a net income basis.
ALLOCATION OF ISSUE PRICE
For federal income tax purposes, each Unit will be treated as an investment
unit, consisting of a Note and Warrant. The issue price of a Unit will be the
first price at which a substantial amount of the Units are sold to purchasers
for money (excluding sales to bond houses, brokers, or similar persons acting
in the capacity of an underwriter, placement agent or wholesaler).
The issue price of a Unit has been allocated between the Notes and the
Warrants, $ to each Note and $ to each Warrant, based on the Company's
best judgment of the relative fair market values of each such component of the
Units on the issue date. This allocation will be used to determine the
holders' income tax basis in the Warrants and the issue price of the Notes, as
discussed below. The Company's allocation is not binding on the IRS, which may
challenge such allocation. A holder of a Unit is bound by the Company's
allocation unless the holder discloses a different allocation on a statement
attached to the holder's timely filed federal income tax return for the
holder's taxable year that includes the acquisition date of the Unit.
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TAX TREATMENT OF THE NOTES
Original Issue Discount. The Notes will be issued with original issue
discount for federal income tax purposes. The amount of original issue
discount ("OID") on a Note is the excess of the stated redemption price at
maturity over its issue price. The "issue price" of each Note will be that
portion of the issue price of the investment unit allocated to the Note, as
described above. The "stated redemption price at maturity" of each Note will
include all payments to be made in respect thereof, including payments of
principal, but not including (i) qualified stated interest (defined generally
as stated interest that is unconditionally payable in cash or property (other
than debt instruments of the issuer) at least annually at a single fixed rate
that appropriately takes into account the length of intervals between
payments) and (ii) payments subject to remote or incidental contingencies
(which include certain redemption premiums). Each holder (whether a cash or
accrual method taxpayer) will be required to include in income such OID as it
accrues, in advance of the receipt of some or all of the related cash
payments.
The amount of OID includable in income by the initial holder of a Note is
the sum of the "daily portions" of OID with respect to the Note for each day
during the taxable year or portion of the taxable year on which such holder
held such Note ("accrued OID"). The daily portion is determined by allocating
to each day in any accrual period a ratable portion of the OID allocable to
that accrual period. The amount of OID allocable to any accrual period other
than the initial short accrual period and the final accrual period is an
amount equal to the excess of (i) the product of a Note's adjusted issue price
at the beginning of such accrual period and its yield to maturity (determined
on the basis of compounding at the close of each accrual period and properly
adjusted for the length of the accrual period) over (ii) the amount of any
qualified stated interest payments allocable to such accrual period. The
"yield to maturity" is the discount rate that, when applied to all payments
under a Note, results in a present value equal to the issue price. The amount
of OID allocable to the final accrual period is the difference between the
amount payable at maturity (other than qualified stated interest) and the
adjusted issue price of the Note at the beginning of the final accrual period.
The amount of OID allocable to the initial short accrual period may be
computed under any reasonable method. The adjusted issue price of the Note at
the start of any accrual period is equal to its issue price increased by the
accrued OID for each prior accrual period. The Issuer is required to report to
the IRS and record holders other than corporations and other exempt holders
the amount of OID accrued on Notes.
Sale, Retirement or Other Taxable Disposition. A holder of a Note will
recognize gain or loss upon the sale, retirement or other taxable disposition
of such Note. Such gain or loss will generally be equal to the difference
between (i) the amount of cash and the fair market value of property received
for such Note (other than amounts representing accrued but unpaid stated
interest) and (ii) the holder's adjusted tax basis in the Note. The adjusted
tax basis of a Note in the hands of an original holder generally will be equal
to the Note's issue price, increased by the amount of OID, if any, on the Note
that is previously includable in the holder's income pursuant to these rules.
Such gain or loss generally will be capital gain or loss, and will be long-
term capital gain or loss if the holder has held such Notes for more than one
year.
TAX TREATMENT OF THE WARRANTS
A holder of a Warrant will recognize gain or loss upon the sale or other
taxable disposition of a Warrant in an amount equal to the difference between
the amount of cash and fair market value of property received and the holder's
adjusted tax basis in the Warrant. An initial holder's tax basis in a Warrant
will be the portion of the initial offering price of a Unit allocable to a
Warrant, as described above, adjusted as described below. Such gain or loss
generally will be capital gain or loss if the gain or loss from a taxable
disposition of Common Stock received upon exercise of a Warrant would be
capital gain or loss, and will be long-term capital gain or loss if the holder
has held the Warrant for more than one year.
In general, upon redemption or repurchase by the Company of the Warrants, a
holder will recognize capital gain or loss in an amount equal to the
difference between the amount realized in the redemption or repurchase and the
holder's adjusted tax basis in such Warrants.
120
<PAGE>
The exercise of a Warrant will not result in a taxable event to the holder
of a Warrant (except (i) with respect to the receipt of cash in lieu of a
fractional share of Common Stock or (ii) subject to the discussion below,
where a cashless exercise occurs). The receipt of cash in lieu of a fractional
share of Common Stock will be taxable as if the fractional share had been
issued and then redeemed for cash. As a result, a holder would recognize gain
or loss in an amount equal to the difference between the amount of cash
received for the fractional share and the holder's tax basis (described below)
in the fractional share. It is unclear whether a cashless exercise of a
Warrant will result in the recognition of gain or loss to the holder.
Accordingly, holders should consult with their own tax advisors before
exercising the Warrants in such manner.
A holder's federal income tax basis in the Common Stock received upon
exercise of a Warrant pursuant to the payment of the exercise price (including
any fractional share interest) will be equal to the sum of the holder's
federal income tax basis in the Warrant immediately prior to exercise plus the
amount of any cash paid upon exercise. The holder's holding period for the
Common Stock (including any fractional share interest) would begin on the day
after the date of exercise.
Upon the expiration of an unexercised Warrant, a holder will generally
recognize a capital loss equal to the adjusted tax basis of such Warrant. Such
loss generally will be long-term capital loss if the holder has held the
Warrant for more than one year.
An adjustment in the exercise price or conversion ratio with respect to the
Warrants made pursuant to the anti-dilution provisions of the Warrants may, in
certain circumstances, result in constructive distributions to the holders of
the Warrants which could be taxable as dividends to the holders under section
305 of the Code. A holder's federal income tax basis in a Warrant would
generally be increased by the amount of any such dividend.
BACKUP WITHHOLDING
Under certain circumstances, the failure of a holder of a Note to provide
sufficient information to establish that such holder is exempt from the backup
withholding provisions of the Code will subject such holder to backup
withholding at a rate of 31 percent. In general, backup withholding applies if
a holder fails to furnish a correct taxpayer identification number, fails to
report dividend and interest income in full, or fails to certify that such
holder has provided a correct taxpayer identification number and that the
holder is not subject to withholding. An individual's taxpayer identification
number is such person's Social Security number.
Any amount withheld from a payment to a holder under the backup withholding
rules is allowable as a credit against such holder's U.S. Federal income tax
liability, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and foreign individuals
who comply with certain certification requirements) are not subject to backup
withholding. Holders should consult their tax advisors as to their
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption.
REPORTING REQUIREMENTS
The Company will provide annual information statements to holders other than
corporations and other exempt holders of the Notes and to the IRS, setting
forth the amount of original issue discount determined to be attributable to
the Notes for that year.
121
<PAGE>
UNDERWRITING
The underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions of the underwriting agreement (the form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part) (the "Underwriting Agreement"), to purchase from the
Company, and the Company has agreed to sell to the Underwriters, the number of
Units set forth opposite their respective names below.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
UNDERWRITERS OF UNITS
------------ ----------------
<S> <C>
Lehman Brothers Inc......................................... $
Donaldson, Lufkin & Jenrette Securities Corporation.........
------------
Total..................................................... $125,000,000
============
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase the Units are subject to the approval of certain legal matters by
their counsel and to certain conditions, and that if any Units are purchased
by the Underwriters pursuant to the Underwriting Agreement, all of the Units
agreed to be purchased by the Underwriters pursuant to the Underwriting
Agreement must be so purchased.
The Company has been advised by the Underwriters that they propose to offer
the Units offered hereby initially at the public offering price set forth on
the cover page of this Prospectus and to certain selected dealers (who may
include the Underwriters) at such public offering price less a concession not
to exceed $ per Unit. The Underwriters or such selected dealers may reallow
a commission to certain other dealers not to exceed $ per Unit. After the
initial public offering of the Units the public offering price, the concession
to selected dealers and the reallowance to other dealers may be changed by the
Underwriters.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The offering price for the Units and the provisions of the Notes and the
Warrants have been determined by negotiations between the Company and the
Underwriters. Among the factors considered in such negotiations were
prevailing market conditions, the results of operations of the Company in
recent periods, the market capitalizations and stages of development of other
companies which the Company and the Underwriters believed to be comparable to
the Company, estimates of business potential of the Company and the present
stage of the Company's development.
In order to facilitate the Offering of the Units, the Underwriters may
engage in transactions that stabilize, maintain, or otherwise affect the price
of the Units. Specifically, the Underwriters may overallot in connection with
the Offering, creating a short position in the Units for their own account. In
addition, to cover overallotments or to stabilize the price of the Units, the
Underwriters may bid for and purchase Units in the open market. Any of these
activities may stabilize or maintain the market price of the Units above
independent market levels.
The Company has agreed, subject to certain exceptions, not to, directly or
indirectly, offer for sale, sell or otherwise dispose of or announce the
offering of, any securities which are substantially similar to the Units,
Notes or Warrants for a period of 180 days after the date of this Prospectus,
without the prior written consent of Lehman Brothers Inc.
Certain of the Underwriters have provided certain financial advisory and
investment banking services to the Company in the past. Lehman Brothers Inc.
was the lead underwriter for the Initial Public Offering by the Company of its
Common Stock in November 1996 for which it received customary commissions.
122
<PAGE>
LEGAL MATTERS
The validity of the Notes and Warrants offered hereby and certain United
States tax matters are being passed upon for the Company by Pepper, Hamilton &
Scheetz llp, Philadelphia, Pennsylvania. The validity of the Notes and
Warrants offered hereby are being passed upon for the Underwriters by Shearman
& Sterling, New York, New York. Mr. John DePodesta, "of counsel" to Pepper,
Hamilton & Scheetz llp, 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, 1995
and 1996, and for the period from inception (February 4, 1994) to December 31,
1994, and the years ended December 31, 1995 and 1996 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 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 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.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheet as of December 31, 1995 and 1996 and March
31, 1997 (unaudited)................................................... F-3
Consolidated Statement of Operations for the period from February 4,
1994 (inception) to December 31, 1994, the years ended December 31,
1995 and 1996 and the three months ended March 31, 1996 (unaudited) and
1997 (unaudited)....................................................... F-4
Consolidated Statement of Stockholders' Equity (Deficit) for the period
from February 4, 1994 (inception) to December 31, 1994, the years ended
December 31, 1995 and 1996 and the three months ended March 31, 1997
(unaudited)............................................................ F-5
Consolidated Statement of Cash Flows for the period from February 4,
1994 (inception) to December 31, 1994, the years ended December 31,
1995 and 1996 and the three months ended March 31, 1996 (unaudited) and
1997 (unaudited)....................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
AXICORP PTY., LTD.:
Report of Independent Accountants....................................... F-17
Balance Sheet as of March 31, 1995 and 1996............................. F-18
Statement of Operations for the nine months ended March 31, 1995 and for
the twelve months ended March 31, 1996................................. F-19
Statement of Stockholders' Equity for the nine months ended March 31,
1995 and for the twelve months ended March 31, 1996.................... F-20
Statement of Cash Flows for the nine months ended March 31, 1995 and for
the twelve months ended March 31, 1996................................. F-21
Notes to Financial Statements........................................... F-22
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Primus Telecommunications Group, Incorporated:
We have audited the accompanying consolidated balance sheet of Primus
Telecommunications Group, Incorporated and subsidiaries (the "Company") as of
December 31, 1995 and 1996, 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 the years
ended December 31, 1995 and 1996. 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 the Company as of December
31, 1995 and 1996, 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 years ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 5, 1997, except for Note 15, as to which
the date is April 8, 1997
F-2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- MARCH 31,
1995 1996 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 2,296 $ 35,474 $ 43,612
Short term investments........................ -- 25,125 5,359
Accounts receivable (net of allowance of $132
and $2,585 at December 31, 1995 and 1996,
respectively, and $3,227 (unaudited) at March
31, 1997).................................... 665 35,217 41,626
Prepaid expenses and other current assets..... 388 910 1,560
------- -------- --------
Total current assets........................ 3,349 96,726 92,157
PROPERTY AND EQUIPMENT--Net..................... 949 16,596 25,262
INTANGIBLES--Net................................ -- 21,246 20,546
DEFERRED INCOME TAXES........................... -- 4,951 4,951
OTHER ASSETS.................................... 744 1,041 1,223
------- -------- --------
TOTAL ASSETS.................................... $ 5,042 $140,560 $144,139
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................. $ 1,284 $ 32,675 $ 44,190
Accrued expenses and other current
liabilities.................................. 668 8,778 10,060
Deferred income taxes......................... -- 5,419 5,359
Current portion of long-term obligations...... 102 10,572 11,200
------- -------- --------
Total current liabilities................... 2,054 57,444 70,809
LONG-TERM OBLIGATIONS........................... 426 6,676 1,935
------- -------- --------
Total liabilities........................... 2,480 64,120 72,744
------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value--2,455,000
shares authorized; none issued and
outstanding.................................. -- -- --
Common stock, $.01 par value--authorized
16,905,000 shares at December 31, 1995 and
40,000,000 shares at December 31, 1996 and
March 31, 1997 (unaudited); issued and
outstanding, 7,063,491 shares at December 31,
1995; 17,778,731 shares at December 31, 1996
and March 31, 1997 (unaudited)............... 71 178 178
Additional paid-in capital.................... 5,496 88,106 88,106
Accumulated deficit........................... (3,002) (11,766) (16,673)
Cumulative translation adjustment............. (3) (78) (216)
------- -------- --------
Total stockholders' equity.................. 2,562 76,440 71,395
------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...... $ 5,042 $140,560 $144,139
======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 4, THREE MONTHS ENDED
1994 TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------- --------------------
1994 1995 1996 1996 1997
------------ ----------- ------------ --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET REVENUE................ $ -- $ 1,167 $ 172,972 $ 17,137 $ 59,036
COST OF REVENUE............ -- 1,384 158,845 15,528 55,034
------ ----------- ------------ --------- ---------
GROSS MARGIN (DEFICIT)..... -- (217) 14,127 1,609 4,002
OPERATING EXPENSES:
Selling, general, and
administrative.......... 557 2,024 20,114 1,874 8,829
Depreciation and
amortization............ 12 160 2,164 226 797
------ ----------- ------------ --------- ---------
Total operating
expenses.............. 569 2,184 22,278 2,100 9,626
------ ----------- ------------ --------- ---------
LOSS FROM OPERATIONS....... (569) (2,401) (8,151) (491) (5,624)
INTEREST EXPENSE........... (13) (59) (857) (97) (151)
INTEREST INCOME............ 5 35 785 47 785
OTHER INCOME (EXPENSE)..... -- -- (345) (213) 119
------ ----------- ------------ --------- ---------
LOSS BEFORE INCOME TAXES... (577) (2,425) (8,568) (754) (4,871)
INCOME TAXES............... -- -- 196 367 36
------ ----------- ------------ --------- ---------
NET LOSS................... $ (577) $ (2,425) $ (8,764) $ (1,121) $ (4,907)
====== =========== ============ ========= =========
NET LOSS PER COMMON AND
COMMON SHARE EQUIVALENTS.. $(0.07) $ (0.22) $ (0.63) $ (0.09) $ (0.28)
====== =========== ============ ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON SHARE
EQUIVALENTS OUTSTANDING... 8,560 10,892 13,869 12,048 17,779
====== =========== ============ ========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<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.......... -- -- 179 2 (1) -- -- 1
Investment made by
Chairman and Chief
Executive Officer..... -- -- 3,393 34 216 -- -- 250
Common shares issued
for services
performed............. -- -- 71 1 4 -- -- 5
Shares purchased by
outside investors in
the form of a trust... -- -- 397 4 246 -- -- 250
Net loss............... -- -- -- -- -- (577) -- (577)
------- -------- ------ ---- ------- -------- ----- -------
BALANCE, DECEMBER 31,
1994................... -- -- 4,040 41 465 (577) -- (71)
Common shares sold
through private
placement, net of
transaction costs..... -- -- 2,234 22 3,996 -- -- 4,018
Conversion of related
party debt to common
stock................. -- -- 556 6 344 -- -- 350
Common shares issued
for services
performed............. -- -- 234 2 691 -- -- 693
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (3) (3)
Net loss............... -- -- -- -- -- (2,425) -- (2,425)
------- -------- ------ ---- ------- -------- ----- -------
BALANCE, DECEMBER 31,
1995................... -- -- 7,064 71 5,496 (3,002) (3) 2,562
Common shares sold
through private
placement, net of
transaction costs..... -- -- 3,148 31 21,837 -- -- 21,868
Common shares issued
for services performed
...................... -- -- 279 3 987 -- -- 990
Preferred shares issued
for Axicorp Pty., Ltd.
acquisition........... 455 5 -- -- 5,455 -- -- 5,460
Common shares sold
through initial public
offering, net of
transaction costs..... -- -- 5,750 58 54,341 -- -- 54,399
Conversion of preferred
shares to common
shares................ (455) (5) 1,538 15 (10) -- -- --
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (75) (75)
Net loss............... -- -- -- -- -- (8,764) -- (8,764)
------- -------- ------ ---- ------- -------- ----- -------
BALANCE, DECEMBER 31,
1996................... -- -- 17,779 178 88,106 (11,766) (78) 76,440
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (138) (138)
Net loss............... -- -- -- -- -- (4,907) -- (4,907)
------- -------- ------ ---- ------- -------- ----- -------
BALANCE, MARCH 31, 1997
(UNAUDITED)............ -- $ -- 17,779 $178 $88,106 $(16,673) $(216) $71,395
======= ======== ====== ==== ======= ======== ===== =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 4, YEAR ENDED THREE MONTHS ENDED
1994 TO DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------- --------------------
1994 1995 1996 1996 1997
------------ ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss............... $(577) $(2,425) $ (8,764) $ (1,121) $ (4,907)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 12 160 2,164 226 797
Sales allowance...... -- 132 1,960 302 716
Foreign currency
transaction (gain)
loss................ -- -- 345 213 (119)
Deferred income
taxes............... -- -- 196 -- --
Changes in assets and
liabilities:
(Increase) decrease
in accounts
receivable........ -- (797) (19,405) (5,963) (7,522)
(Increase) decrease
in prepaid
expenses and other
current assets.... (68) (62) (227) 250 (661)
(Increase) decrease
in other assets... (81) (533) (1,621) (3,602) (247)
Increase (decrease)
in accounts
payable........... 92 1,195 11,729 3,219 11,876
Increase (decrease)
in accrued
expenses and other
liabilities....... 136 322 6,683 5,354 1,886
----- ------- -------- --------- ---------
Net cash provided
by (used in)
operating
activities...... (486) (2,008) (6,940) (1,122) 1,819
----- ------- -------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property
and equipment......... (106) (396) (12,745) (216) (8,774)
Sale (purchase) of
investments........... -- -- (25,125) -- 19,766
Cash used in business
acquisition, net of
cash acquired......... -- -- (1,701) (1,667) --
----- ------- -------- --------- ---------
Net cash provided
by (used in)
investing
activities...... (106) (396) (39,571) (1,883) 10,992
----- ------- -------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on
capital lease......... (2) (64) (112) (25) (55)
Principal payments on
long-term
obligations........... -- -- (396) -- (4,356)
Principal borrowed from
Chairman and Chief
Executive Officer..... 315 -- --
Sale of common stock,
net of transaction
costs................. 500 4,543 77,576 7,058 --
Proceeds from notes
payable............... -- -- 2,407 2,000 --
----- ------- -------- --------- ---------
Net cash provided
by (used in)
financing
activities...... 813 4,479 79,475 9,033 (4,411)
----- ------- -------- --------- ---------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH AND CASH
EQUIVALENTS............. -- -- 214 129 (262)
----- ------- -------- --------- ---------
NET INCREASE IN CASH AND
CASH EQUIVALENTS........ 221 2,075 33,178 6,157 8,138
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD............... 0 221 2,296 2,296 35,474
----- ------- -------- --------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD.................. $ 221 $ 2,296 $ 35,474 $ 8,453 $ 43,612
===== ======= ======== ========= =========
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid for
interest.............. $ -- $ 36 $ 149 $ 20 $ --
----- ------- -------- --------- ---------
Non-cash investing and
financing activities:
Common stock issued
for services........ $ 5 $ 693 $ 990 $ 990 $ --
----- ------- -------- --------- ---------
Conversion of related
party debt to common
stock............... $ -- $ 350 $ -- $ -- $ --
----- ------- -------- --------- ---------
Increase in capital
lease liability for
acquisition of
equipment........... $ 15 $ 578 $ 3,214 $ -- $ 367
----- ------- -------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Primus Telecommunications Group, Incorporated (the "Company") is a
multinational telecommunications company providing domestic and international
long-distance switched voice, private network and value-added services.
Incorporated in Delaware in February 1994, the Company's customers include,
small- and medium-sized businesses, residential consumers and other
telecommunication carriers in North America, Europe and the Pacific Rim. The
company operates as a holding company and has wholly-owned subsidiaries in the
United States, United Kingdom, Australia, and Mexico.
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 to be cash and cash equivalents.
Short Term Investments--Highly liquid investments in U.S. Federal Government
backed obligations with original maturities in excess of three months are
classified as available-for-sale and reported at fair value. Cost approximates
fair value for all components of short-term investments; unrealized gains and
losses are reflected in stockholders' equity and are not material.
Property and Equipment--Property and equipment, which consists of furniture,
leasehold improvements, purchased software, fiber optic cable 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 twenty-five years, or for leasehold improvements and
leased equipment, over the terms of the leases, whichever is shorter.
Intangible Assets--At December 31, 1996 and March 31, 1997, intangible
assets, net of accumulated amortization, consist of goodwill of $17,434,000
and $16,963,000 (unaudited) and customer list of $3,812,000 and $3,583,000
(unaudited), respectively. Goodwill is being amortized over 30 years on a
straight-line basis and
F-7
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
customer list over the estimated run-off of the customer base not to exceed
five years. Accumulated amortization at December 31, 1996 and March 31, 1997,
was $498,000 and $647,000 (unaudited) and $762,000 and $991,000 (unaudited),
related to goodwill and customer list, respectively. The Company periodically
evaluates the realizability of intangible assets. In making such evaluations,
the Company compares certain financial indicators such as expected
undiscounted future revenues and cash flows to the carrying amount of
goodwill. The Company believes that no impairments of intangible assets
existed at December 31, 1996 or March 31, 1997.
Stock-Based Compensation--In 1996, the Company adopted Statement of
Financial Accounting Standard No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. Upon adoption of SFAS 123, the Company continues to measure
compensation expense for its stock-based employee compensation plans using the
intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and has provided in Note 10 pro
forma disclosures of the effect on net loss and loss per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
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 customer receivables account
for approximately 6% and 52% of gross accounts receivable as of December 31,
1996 and 1995, respectively. As of March 31, 1997, 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.
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 based on enacted tax rates. 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.
Net Loss Per Share--Net loss per common and common share equivalent has been
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 treasury stock method.
Primary and fully diluted loss per share are approximately the same. Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and options to purchase common stock issued within one year prior to the
original filing of the initial public offering Registration Statement at
prices below the initial public offering price are included as outstanding for
all periods through the date of the initial public offering, using the
treasury stock method at the initial public offering price per share even
though the effect is to reduce the net loss per share. After the date of the
initial public offering, earnings per share calculations exclude anti-dilutive
common share equivalents.
Interim Financial Information--The interim financial data as of March 31,
1997 and for the three-month periods ended March 31, 1996 and 1997, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share," was recently issued by the Financial Accounting Standards Board. SFAS
No. 128 is effective for periods ending after December 15, 1997 and early
adoption is not permitted. SFAS No. 128 requires the company to compute and
present basic and diluted earnings per share. Had the company computed
earnings per share in accordance with SFAS No. 128 the basic and diluted
amounts would have been the same as the reported amounts in all periods.
3. ACQUISITION OF AXICORP
On March 1, 1996, the Company completed the acquisition of the outstanding
capital stock of Axicorp Pty., Ltd. ("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 which were subsequently converted to 1,538,355
common shares. The Company also issued two notes to the sellers. One note is
for $4.1 million due in February 1997, and the other note is for a total of
$4.0 million 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%. As security for payment of the
seller financing, the sellers have collateral security interests in the
outstanding Axicorp shares.
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 years ended December 31, 1995 and 1996
and for the three months ended March 31, 1996, as if Axicorp had been acquired
as of January 1, 1995, are as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
------------------ MARCH 31,
1995 1996 1996
-------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Net revenue.................................... $125,628 $199,340 $43,505
Net loss....................................... $ (4,685) $ (8,832) $(1,188)
Loss per share................................. $ (0.41) $ (0.63) $ (0.10)
</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 (in thousands):
<TABLE>
<S> <C>
Current assets........................................................ $ 20,136
Customer lists........................................................ 4,574
Goodwill.............................................................. 17,932
Other assets.......................................................... 1,506
--------
44,148
Liabilities assumed................................................... (24,863)
Notes payable......................................................... (8,110)
--------
Cash paid and preferred shares issued................................. $ 11,175
========
</TABLE>
F-9
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Network equipment............................. $ 849 $ 4,109 $ 4,138
Furniture and equipment....................... 161 1,272 2,470
Leasehold improvements........................ 89 508 843
Construction in progress...................... -- 12,008 19,514
------ ------- -------
1,099 17,897 26,965
Less: Accumulated depreciation and
amortization................................. (150) (1,301) (1,703)
------ ------- -------
$ 949 $16,596 $25,262
====== ======= =======
</TABLE>
Equipment under capital leases totaled $578,000, $966,000 and $1,334,000
(unaudited) with accumulated depreciation of $76,000, $207,000 and $261,000
(unaudited) at December 31, 1995 and 1996 and March 31, 1997, respectively.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
----- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Obligations under capital leases and
equipment financing......................... $ 528 $ 3,614 $ 3,485
Note payable--stockholder.................... -- 2,000 2,000
Notes payable relating to Axicorp
acquisition................................. -- 8,455 6,340
Settlement obligation........................ 3,179 1,310
----- -------- --------
Subtotal..................................... 528 17,248 13,135
Less: Current portion of long-term
obligations................................. (102) (10,572) (11,200)
----- -------- --------
$ 426 $ 6,676 $ 1,935
===== ======== ========
</TABLE>
At March 31, 1997, the following describes the components of long-term
obligations:
Obligations under capital leases and equipment financing include vendor
financing of network switching equipment for use in the Company's Australian
network. Beginning in January 1997, sixteen monthly payments of approximately
$100,000 are due to the vendor. In addition, a payment of approximately $1.3
million is due in May 1998. Interest will accrue at the Corporate Overdraft
Reference Rate plus 1%. At March 31, 1997, the Corporate Overdraft Reference
Rate was 9.25%. 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 $2.0 million 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 $8.5 million which have been
recorded on a discounted basis at a rate of 10.18%.
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. Payments of $400,000 and
F-10
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$1,583,000 were made in December 1996 and January 1997, respectively. The
remaining balance is due in 12 equal monthly payments beginning in February
1997.
6. INCOME TAXES
The tax expense recorded of $196,000, $367,000 (unaudited) and $36,000
(unaudited) for the year ended December 31, 1996 and the three months ended
March 31, 1996 and 1997, respectively, results from foreign taxes on earnings
at the Company's Australian and United Kingdom subsidiaries. During the three
months ended March 31, 1997 a valuation allowance was recorded equal to the
United States net operating loss carryforward.
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 (in thousands):
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
-----------------------
1994 1995 1996
------ ----- --------
<S> <C> <C> <C>
Tax benefit at federal statutory rate............... $ (196) $(825) $ (2,913)
State income tax, net of federal benefit............ (23) (91) (491)
Foreign taxes....................................... -- -- 196
Unrecognized benefit of net operating losses........ 219 911 3,387
Other............................................... -- 5 17
------ ----- --------
Income taxes........................................ $ -- $ -- $ 196
====== ===== ========
</TABLE>
The significant components of the Company's deferred tax asset and liability
are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax asset (non-current):
Cash to accrual basis adjustments (U.S.)................. $ 367 $ 168
Accrued expenses......................................... -- 1,456
Net operating loss carryforward.......................... 720 6,055
Valuation allowance...................................... (1,087) (2,728)
------- -------
$ -- $ 4,951
======= =======
Deferred tax liability (current):
Accrued income........................................... $ -- $ 4,934
Other.................................................... -- 139
Depreciation............................................. -- 346
------- -------
$ -- $ 5,419
======= =======
</TABLE>
At December 31, 1995 and 1996 and March 31, 1997, the Company had a U.S.
Federal net operating loss carryforward of approximately $2.0, $6.4 and $8.1
million (unaudited), respectively, that may be applied against future U.S.
taxable income until it expires between the years 2009 and 2011. The Company
also has an Australian Federal net operating loss carryforward of
approximately $12.2 and $14.1 (unaudited) million at December 31, 1996 and
March 31, 1997, respectively.
Due to a deemed "ownership change" of the Company as a result of the
Company's initial public offering and private placements, pursuant to Section
382 of the Internal Revenue Code, the utilization of the net operating loss
carryforwards of approximately $4.0 million that expire in the year 2009 will
be limited to approximately $1.3 million per year during the carryforward
period.
F-11
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets for cash and cash
equivalents, investments, accounts receivable, accounts payable and long term
obligations approximates fair value.
8. COMMITMENTS AND CONTINGENCIES
The Company has entered into an employment contract with its Chairman and
Chief Executive Officer through May 30, 1999. Total minimum payments over the
remaining period approximate $604,000 as of December 31, 1996.
Future minimum lease payments under capital lease obligations and operating
leases as of December 31, 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31 LEASES LEASES
----------------------- ------- ---------
<S> <C> <C>
1997....................................................... $ 303 $1,685
1998....................................................... 297 1,570
1999....................................................... 291 1,479
2000....................................................... 53 485
2001....................................................... -- 326
Thereafter................................................. -- 986
----- ------
Total minimum lease payments............................... 944 $6,531
======
Less: Amount representing interest......................... (156)
-----
$ 788
=====
</TABLE>
Rent expense under operating leases was $38,000, $215,000 and $1,050,000 for
the periods ended December 31, 1994, 1995 and 1996, respectively.
9. STOCKHOLDERS' EQUITY
On November 7, 1996, the Company completed an initial public offering of
5,000,000 shares of its Common Stock and on November 21, 1996 sold an
additional 750,000 shares to satisfy the Underwriter's overallotment. The net
proceeds to the Company (after deducting Underwriter discounts and offering
expenses) was $54.4 million.
In connection with the Company's initial public offering, the Board approved
a split of all shares of Common Stock at a ratio of 3.381 to one as of
November 7, 1996 and amended the Company's Amended and Restated Certificate of
Incorporation (the "Certificate") to increase the authorized Common Stock to
40,000,000 shares.
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.
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. On March 1, 1996, 455,000 shares of Series A Convertible Preferred
Stock were issued in connection with the purchase of Axicorp. The outstanding
Preferred Stock was converted to Common Stock prior to the date of the
Company's initial public offering.
F-12
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In January 1996, the Company raised approximately $4.7 million 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.
Also, in January 1996, the Company entered into an agreement with Teleglobe
USA, Inc., sold 410,808 shares of Common Stock for approximately $1.4 million
and borrowed $2.0 million (see Note 5).
In December 1995, $359,000 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.
Effective March 13, 1995, the Company's 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.
All share amounts have been restated to give effect to the November 7, 1996
and the March 13, 1995 stock splits.
10. STOCK-BASED COMPENSATION
During 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 is 1,690,500. 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 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.
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 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------ THREE MONTHS ENDED
1995 1996 MARCH 31, 1997
---------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--
beginning of period... -- $ -- 722,013 $2.64 1,583,661 $3.14
Exercised during the
period................. -- $ -- -- $ -- -- $ --
Forfeitures during the
period................. -- $ -- (51,898) $3.55 (6,762) $3.55
Granted during the
period................. 722,013 $ 2.64 913,546 $3.35 229,500 $8.25
------- --------- ---------
Outstanding--end of
period................. 722,013 $ 2.64 1,583,661 $3.14 1,806,399 $3.68
======= ========= =========
Eligible for exercise--
end of period......... 219,765 $ 2.96 511,149 $2.81 829,923 $2.90
======= ========= =========
</TABLE>
F-13
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------ --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
TOTAL LIFE EXERCISE TOTAL EXERCISE
EXERCISE PRICES OUTSTANDING IN YEARS PRICE EXERCISABLE PRICE
--------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.67................... 101,430 3.0 $0.67 33,810 $0.67
$2.96................... 924,873 4.0 $2.96 477,339 $2.96
$3.55................... 557,358 4.3 $3.55 -- $3.55
--------- -------
Total................. 1,583,661 511,149
========= =======
</TABLE>
If compensation cost for the Company's 1995 and 1996 grants for stock-based
compensation had been determined consistent with the fair value-based method
of accounting per SFAS 123, the Company's pro forma net loss, and pro forma
net loss per share for the years ending December 31, would be as follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net loss (amounts in thousands)
As reported............................................. $(2,425) $(8,764)
Pro forma............................................... $(2,702) $(9,242)
Net loss per share
As reported............................................. $ (0.22) $ (0.63)
Pro forma............................................... $ (0.25) $ (0.67)
</TABLE>
The weighted average fair value at date of grant for options granted during
1995 and 1996 was $1.04 and $1.38 per option, respectively. The fair value of
the option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Expected dividend yield...................................... 0% 0%
Expected stock price volatility.............................. 49% 49%
Risk-free interest rate...................................... 5.8% 6.0%
Expected option term......................................... 4 years 4 years
</TABLE>
11. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) employee benefit plan (the "401(k) Plan") that
covers substantially all U.S. based employees. The 401(k) Plan provides that
employees may contribute amounts not to exceed statutory limitations. No
employer contributions were made during 1995 or 1996.
12. RELATED PARTIES
In connection with the Company's private placements, 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 $542,000 in connection with the Company's
first private placement. Commissions due to the former director under the
first private placement was $41,000 at December 31, 1995. Consulting fees
earned under this placement equal $169,000. During early 1996, the same former
director received 82,774 shares of common stock and fees equal to $425,000
which relate to a second private placement. Consulting fees earned in
connection with this second placement equal $157,000. Total
F-14
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
consulting fees due the former director are $220,000 and $145,000 at December
31, 1996 and 1995, respectively. 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 $331,000
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, 1995, deferred salary owed to the Company's Chairman and
Chief Executive Officer was $201,000. This was subsequently paid in 1996.
Deferred salary of $40,000 owed to an officer of the Company for services
performed during 1995 was accrued at December 31, 1995. This balance was paid
in early 1996.
13. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance accounts for the year ended December 31,
1995 and 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
DOUBTFUL ACCOUNTS
------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
PERIOD BEGINNING OF PERIOD COSTS AND EXPENSES DEDUCTIONS OTHER(1) END OF PERIOD
- ------ ------------------- ------------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
1995......................... $ -- $ 132 $ -- $-- $ 132
1996......................... $ 132 $1,960 $(377) $870 $2,585
<CAPTION>
DEFERRED TAX ASSET VALUATION
------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
PERIOD BEGINNING OF PERIOD COSTS AND EXPENSES DEDUCTIONS OTHER END OF PERIOD
- ------ ------------------- ------------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
1995......................... $ -- $1,087 $ -- $-- $1,087
1996......................... $1,087 $1,641 $ -- $-- $2,728
</TABLE>
- --------
(1) Other additions represent the balance of Axicorp's allowance for doubtful
accounts, which was recorded March 1, 1996 in conjunction with the
acquisition.
F-15
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. GEOGRAPHIC DATA
The company has subsidiaries in various foreign countries that provide
domestic and international long-distance operations in these regions. Summary
information with respect to the Company's geographic operations for the
periods ended December 31, 1994, 1995 and 1996 and for the three months ended
March 31, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
PERIOD ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1994 1995 1996 1996 1997
---------------- --------- --------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Revenue
North America................. $ -- $ 1,167 $ 16,573 $ 1,856 $ 8,271
Europe........................ -- -- 5,146 75 3,879
Pacific Rim................... -- -- 151,253 15,206 46,886
------ -------- --------- -------- ---------
Total....................... $ -- $ 1,167 $ 172,972 $ 17,137 $ 59,036
====== ======== ========= ======== =========
Operating Income (Loss)
North America................. $ (569) $ (2,276) $ (6,364) $ (1,385) $ (2,926)
Europe........................ -- (125) (2,312) (210) (892)
Pacific Rim................... -- -- 525 1,104 (1,806)
------ -------- --------- -------- ---------
Total....................... $ (569) $ (2,401) $ (8,151) $ (491) $ (5,624)
====== ======== ========= ======== =========
Assets
North America................. $ 487 $ 4,996 $ 72,526 $ 7,337 $ 63,963
Europe........................ -- 46 5,211 531 7,446
Pacific Rim................... -- -- 62,823 53,002 72,730
------ -------- --------- -------- ---------
Total....................... $ 487 $ 5,042 $ 140,560 $ 60,870 $ 144,139
====== ======== ========= ======== =========
</TABLE>
15. SUBSEQUENT EVENT
On April 8, 1997, the Company acquired selected assets, including the
customer base and accounts receivable, of Cam-Net Communications Network, Inc.
and its subsidiaries, a provider of domestic and international long distance
services in Canada for approximately $5,000,000 in cash. The Company intends
to account for this transaction as a purchase business combination.
F-16
<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-17
<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-18
<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-19
<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-20
<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-21
<PAGE>
The accompanying notes are an integral part of these statements.
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>
F-22
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The accompanying notes are an integral part of these statements.
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>
F-23
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The accompanying notes are an integral part of these statements.
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
F-24
<PAGE>
AXICORP PTY., LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The accompanying notes are an integral part of these statements.
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.
F-25
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS, IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE SECURI-
TIES IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT WOULD BE UNLAW-
FUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COM-
PANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... ii
Summary.................................................................. 1
Note Regarding Forward-Looking Statements................................ 9
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 22
Common Stock Price Range................................................. 23
Dividend Policy.......................................................... 23
Capitalization........................................................... 24
Selected Financial Data.................................................. 25
Unaudited Pro Forma Consolidated Statements of Operations................ 26
Management's Discussion and Analysis of Financial Condition and Results
of Operation............................................................ 29
Business................................................................. 43
Management............................................................... 67
Certain Transactions..................................................... 76
Principal Stockholders................................................... 79
Description of Capital Stock............................................. 82
Shares Eligible for Future Sale.......................................... 85
Description of Senior Credit Commitment.................................. 86
Description of Units..................................................... 87
Description of Notes..................................................... 87
Description of Warrants.................................................. 111
Book Entry Delivery and Form............................................. 116
Certain Federal Income Tax Considerations................................ 119
Underwriting............................................................. 122
Legal Matters............................................................ 123
Experts.................................................................. 123
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$125,000,000
[LOGO OF PRIMUS APPEARS HERE]
UNITS CONSISTING OF $
% SENIOR NOTES DUE 2004 AND
WARRANTS TO PURCHASE SHARES
OF COMMON STOCK
------------------
PROSPECTUS
, 1997
------------------
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............................................ $ 37,879
NASD Filing Fee................................................. 13,000
Printing and engraving fees..................................... 150,000
Registrant's counsel fees and expenses.......................... 175,000
Accounting fees and expenses.................................... 75,000
Blue Sky expenses and counsel fees.............................. 12,000
Trustee and Warrant Agent fees.................................. 3,000
Miscellaneous................................................... 159,121
--------
TOTAL......................................................... $625,000
========
</TABLE>
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 has obtained 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.
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
II-1
<PAGE>
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 totaled $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, former
stockholders of Axicorp received 455,000 shares of the Company's Series A
Convertible Preferred Stock, par value $.01 per share. No underwriter or
placement agent participated in any of the foregoing issuances of securities
and no commission were paid.
In addition, on July 31, 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/Chaterjee Group also purchased, for an additional $8.0
million, warrants ("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. No underwriter or placement agent
participated in any of the foregoing issuances of securities and no commission
were paid.
The Company believes that the transactions described above were exempt from
registration under Section 4 (2) of the Securities Act because the subject
securities were, respectively sold to a limited group of persons, each of whom
was believed to have been a sophisticated investor or to have had a
preexisting business or personal relationship with the Company or its
management and was purchasing for investment without a view to further
distribution.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended Certificate of Incorporation (Incorporated herein by
reference to Exhibit 3.1 to the Company's Registration Statement
No. 333-10875 on Form S-1).
3.2 Certificate of Amendment to the Certificate of Incorporation
(Incorporated herein by reference to Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996).
3.3 Amended and Restated By-Laws (Incorporated herein by reference to
Exhibit 3.2 of the Company's Registration Statement No. 333-10875
on Form S-1).
3.4 Amendment No. 1 to Amended and Restated By-Laws.**
4.1 Form of Indenture. *
4.2 Form of Warrant Agreement. *
5.1 Opinion of Pepper, Hamilton & Scheetz llp.*
10.1 Share Acquisition Deed, dated March 1, 1996, between the Company
and the shareholders of Axicorp Pty., Ltd. (Incorporated herein
by reference to Exhibit 10.1 of the Company's Registration
Statement No. 333-10875 on Form S-1).
10.2 Switched Transit Agreement, dated June 5, 1995, between Teleglobe
USA, Inc. and the Company for the provision of services to India
(Incorporated herein by reference to Exhibit 10.2 to the
Company's Registration Statement No. 333-10875 on Form S-1).
10.3 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA, Inc. and the Company for the provision of services
to Iran (Incorporated herein by reference to Exhibit 10.3 to the
Company's Registration Statement No. 333-10875 on Form S-1).
10.4 Agreement for Billing and Related Services, dated February 23,
1995, between the Company and Electronic Data System Inc.
(Incorporated herein by reference to Exhibit 10.4 to the
Company's Registration Statement No. 333-10875 on Form S-1).
10.5 Employment Agreement, dated June 1, 1994, between the Company and
K. Paul Singh (Incorporated herein by reference to Exhibit 10.5
to the Company's Registration Statement No. 333-10875 on Form S-
1).
10.6 Primus Telecommunications Group, Incorporated Stock Option Plan--
Amended and Restated Effective March 21, 1997.***
10.7 Primus Telecommunications Group, Incorporated 1995 Director Stock
Option Plan (Incorporated herein by reference to Exhibit 10.7 to
the Company's Registration Statement No. 333-10875 on Form S-1).
10.8 Shareholders Agreement dated February 22, 1996, among Teleglobe
USA, Inc., K. Paul Singh and the Company (Incorporated herein by
reference to Exhibit 10.9 to the Company's Registration Statement
No. 333-10875 on Form S-1).
10.9 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 (Incorporated herein by reference to Exhibit 10.10
to the Company's Registration Statement No. 333-10875 on Form S-
1).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.10 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
(Incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement No. 333-10875 on Form S-1).
10.11 Service Provider Agreement between Telstra Corporation Limited and
Axicorp Pty., Ltd. dated May 3, 1995 (Incorporated herein by
reference to Exhibit 10.12 to the Company's Registration
Statement No. 333-10875 on Form S-1).
10.12 Dealer Agreement between Telstra Corporation Limited and Axicorp
Pty., Ltd. dated January 8, 1996 (Incorporated herein by
reference to Exhibit 10.13 to the Company's Registration
Statement No. 333-10875 on Form S-1).
10.13 Hardpatch Transit Agreement dated October 5, 1995 between
Teleglobe USA, Inc. and the Company for the provision of services
to India (Incorporated herein by reference to Exhibit 10.14 to
the Company's Registration Statement No. 333-10875 on Form S-1).
10.14 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
(Incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement No. 333-10875 on Form S-1).
10.15 Primus Telecommunications Group, Inc. Employee Stock Purchase
Plan.***
10.16 Commitment Letter dated July 14, 1997 with Lehman Brothers
Commercial Paper Inc.*
11.1 Statement re Computation of Earnings Per Share (Incorporated
herein by reference to Exhibit 11 to the Company's Annual Report
on Form 10-K for the year ended December 31, 1996).
11.2 Statement re Computation of Earnings Per Share (Incorporated
herein by reference to Exhibit 11 to the Company's Quarterly
Report on Form 10-Q for the Three Months Ended March 31, 1997).
12.1 Schedule of Earnings to Fixed Charges.***
21.1 Subsidiaries of the Registrant.***
23.1 Consent of Deloitte & Touche llp (included on page II-6 of this
Registration Statement).
23.2 Consent of Price Waterhouse (included on page II-7 of this
Registration Statement).
23.3 Consent of Pepper, Hamilton & Scheetz llp (to be included in
Exhibit 5.1).*
24.1 Power of Attorney (see Signature Page at pages II-8 and II-9).
25.1 Statement of Eligibility of Trustee.*
</TABLE>
* To be filed by amendment.
** Filed herewith.
*** 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 or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit
II-4
<PAGE>
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.
II-5
<PAGE>
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to the Registrant Statement of
Primus Telecommunications Group, Incorporated on Form S-1 (No. 333-30195) of
our report dated February 5, 1997, except for Note 15, as to which the date is
April 8, 1997, appearing in the Prospectus, which is part of this Registration
Statement, and to the references to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Washington, D.C.
July 14, 1997
II-6
<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. 333-30195) 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
July 11, 1997
II-7
<PAGE>
SIGNATURE AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amendment to its
Registration Statement (No. 333-30195) to be signed on its behalf by the
undersigned, thereunto duly authorized, in Vienna, Virginia, on July 10, 1997.
Primus Telecommunications Group,
Incorporated
By: /s/ K. Paul Singh
---------------------------------
K. PAUL SINGH
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ K. Paul Singh Chairman, President July 10, 1997
- ------------------------------------- and Chief Executive
K. PAUL SINGH Officer (principal
executive officer)
and Director
/s/ Neil L. Hazard Executive Vice July 10, 1997
- ------------------------------------- President and Chief
NEIL L. HAZARD Financial Officer
(principal
financial officer
and principal
accounting officer)
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John F. DePodesta Director July 10, 1997
- -------------------------------------
JOHN F. DEPODESTA
/s/ Herman Fialkov Director July 10, 1997
- -------------------------------------
HERMAN FIALKOV
/s/ David E. Hershberg Director July 10, 1997
- -------------------------------------
DAVID E. HERSHBERG
/s/ John Puente Director July 10, 1997
- -------------------------------------
JOHN PUENTE
/s/ K. Paul Singh
By:----------------------------------
K. Paul Singh
Attorney-in-fact
</TABLE>
II-9
<PAGE>
Exhibit 3.4
AMENDMENT TO AMENDED AND
RESTATED BYLAWS
Article VII of the amended and restated by-laws of Primus Telecommunications
Group, Incorporated is hereby deleted in its entirety and the words
"Intentionally Omitted" are hereby inserted in its place.
