<PAGE>
As filed with the Securities and Exchange Commission on July 14, 1998
Registration No. 333-58547
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
AMENDMENT NO. 1
TO
FORM S-4
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 (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION) INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION
CODE NUMBER)
-----------------
1700 OLD MEADOW ROAD,
MCLEAN, VIRGINIA 22102
(703)902-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------
K. PAUL SINGH
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
1700 OLD MEADOW ROAD
MCLEAN, VIRGINIA 22102
(703)902-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-----------------
WITH A COPY TO:
JAMES D. EPSTEIN, ESQUIRE
BRIAN M. KATZ, ESQUIRE
PEPPER HAMILTON LLP
3000 TWO LOGAN SQUARE
18TH AND ARCH STREETS
PHILADELPHIA, PENNSYLVANIA 19103
(215) 981-4000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, 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, 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(d)
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. [_]
-----------------
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<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 14, 1998
PROSPECTUS
OFFER TO EXCHANGE
9 7/8% SERIES B SENIOR NOTES DUE 2008
($150,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR ANY AND ALL OUTSTANDING
9 7/8% SENIOR NOTES DUE 2008 OF
[LOGO OF PRIMUS TELECOMMUNICATIONS GROUP, INC.]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST
14, 1998 (AS SUCH DATE MAY BE EXTENDED, THE "EXPIRATION DATE").
Primus Telecommunications Group, Incorporated, a Delaware corporation (the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal (the "Letter of Transmittal") to exchange its outstanding 9 7/8%
Senior Notes Due 2008 (the "Initial Notes"), of which $150,000,000 aggregate
principal amount is outstanding as of the date hereof, for a like aggregate
principal amount of its newly issued 9 7/8% Series B Senior Notes Due 2008,
which have been registered under the Securities Act of 1933, as amended (the
"Exchange Notes"). The Exchange Notes are being offered hereby in order to
satisfy certain obligations of the Company under the Registration Rights
Agreement (the "Registration Rights Agreement"), dated as of May 19, 1998,
among Lehman Brothers Inc., as representative of the Initial Purchasers (the
"Initial Purchasers"), and the Company. The form and terms of the Exchange
Notes will be the same as those of the Initial Notes except that the Exchange
Notes will have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), and, consequently, will not be subject to certain
transfer restrictions, registration rights and related liquidated damages
provisions applicable to the Initial Notes. The Exchange Notes will evidence
the same debt as the Initial Notes and will be entitled to the benefits of an
indenture (the "Indenture"), dated as of May 19, 1998, among the Company and
First Union National Bank, as trustee (the "Trustee"). The Indenture provides
for the issuance of both the Initial Notes and the Exchange Notes. The Initial
Notes and the Exchange Notes are referred to herein collectively as the "Notes"
and holders of the Notes are sometimes referred to herein as the "Holders."
The Company will accept for exchange any and all Initial Notes that are
validly tendered prior to 5:00 p.m., New York City time, on the Expiration
Date. Tenders of Initial Notes may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of the Initial Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
customary conditions, which may be waived by the Company, and to the terms and
provisions of the Registration Rights Agreement. The Initial Notes may be
tendered only in multiples of $1,000. See "The Exchange Offer."
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SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR INITIAL NOTES IN
THE EXCHANGE OFFER.
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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.
The date of this Prospectus is July , 1998.
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THE
INFORMATION CONTAINED HEREIN IS AS OF THE DATE HEREOF AND IS SUBJECT TO
CHANGE, COMPLETION OR AMENDMENT WITHOUT NOTICE. NEITHER DELIVERY OF THIS
PROSPECTUS AT ANY TIME NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE
IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE NOTES TO ANY PERSON IN ANY JURISDICTION WHERE IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
NOTES MAY NOT BE OFFERED OR SOLD IN OR INTO THE UNITED KINGDOM EXCEPT IN
CIRCUMSTANCES THAT DO NOT CONSTITUTE AN OFFER TO THE PUBLIC WITHIN THE MEANING
OF THE PUBLIC OFFERS OF SECURITIES REGULATION 1996. ALL APPLICABLE PROVISIONS
OF THE FINANCIAL SERVICES ACT 1986 MUST BE COMPLIED WITH IN RESPECT OF
ANYTHING DONE IN RELATION TO NOTES IN, FROM OR OTHERWISE INVOLVING THE UNITED
KINGDOM.
SPECIAL 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 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 (such as, with the recent completion of
the TresCom Merger (as defined below), the Caribbean, Central America and
South America), managing rapid growth, acquisitions and strategic investments,
international operations, dependence on effective information and billing
systems, and development of the 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."
ii
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any
amendments thereto) on Form S-4 under the Securities Act (the "Registration
Statement") with respect to the securities offered by this Prospectus. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, including
the exhibits and schedules thereto, to which reference is hereby made. Each
statement made in this Prospectus referring to a document filed as an exhibit
or schedule to the Registration Statement is not necessarily complete and is
qualified in its entirety by reference to the exhibit or schedule for a
complete statement of its terms and conditions.
In addition, Primus is and, prior to June 9, 1998, TresCom International,
Inc. ("TresCom") was subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file (or have filed) reports and other information with
the Commission, which reports include the financial information of Primus and
TresCom set forth in full. Such reports and other information filed by either
Primus or TresCom can be inspected and copied at public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549;
Seven World Trade Center, 13th Floor, New York, New York 10048; and 500 West
Madison Street, Chicago, Illinois 60661. The Commission also maintains a Web
site that contains reports, proxy and information statements, and other
information regarding registrants that file electronically with the
Commission. The site may be accessed at http://www.sec.gov. Anyone who
receives this Prospectus may obtain a copy of the Indenture without charge by
writing to Primus Telecommunications Group, Incorporated, 1700 Old Meadow
Road, McLean, VA 22102, Attention: Robert F. Stankey, Secretary.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Primus pursuant to the
Exchange Act are incorporated herein by reference: (a) the Company's Joint
Proxy Statement/Prospectus dated May 4, 1998 (the "Joint Proxy Statement");
and (b) all documents filed pursuant to sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to
termination of the Exchange Offer. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any document or part thereof that is incorporated
herein by reference is available at no charge by making a request to Robert F.
Stankey, Secretary, at the address listed above.
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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, references to "DM" are to
deutsche marks, references to "(Yen)" are to Japanese yen and references to
"A$" are to Australian dollars.
iii
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in, or incorporated by reference into, 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 (including TresCom), and the term "TresCom" refers to TresCom
International, Inc. and all of its subsidiaries, the operations of such
entities which are now conducted through the Company as a result of the TresCom
Merger. As used in this Prospectus, the term "TresCom Merger" refers to the
merger between a wholly-owned subsidiary of Primus and TresCom consummated on
June 9, 1998, the "TelePassport/USFI Acquisition" refers to the October 1997
acquisition by Primus of TelePassport L.L.C. and USFI, Inc., and the "Axicorp
Acquisition" refers to the March 1996 acquisition by Primus of Axicorp Pty.,
Ltd. which changed its name to Primus Telecommunications (Australia) Pty. Ltd.
in October 1997 ("Axicorp").
THE COMPANY
OVERVIEW
Primus is a facilities-based global telecommunications company that offers
international and domestic long distance and other telecommunications services
to business, residential and carrier customers in North America and selected
markets within the Asia-Pacific region and Europe. Primus has expanded its
geographic presence in the Caribbean, Central America and South America
(collectively "Latin America") through its recent acquisition of TresCom, which
provides international long distance service primarily for calls originating in
the United States. The Company seeks to capitalize on the increasing demand for
high-quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation. Primus provides these services over its global
intelligent telecommunications network (the "Network"), which includes (i)
eleven international gateway switches in the United States, Australia, Canada,
Germany, Puerto Rico and the United Kingdom, (ii) four domestic switches in
Australia, (iii) a switching platform in Japan and (iv) both owned and leased
transmission capacity on undersea and land-based fiber optic cable systems. The
Network, along with resale arrangements and foreign carrier agreements, allows
the Company to offer quality service to its approximately 275,000 customers.
Primus is a full-service carrier and has licenses and operations in the
United States, Australia, the United Kingdom, Japan, Germany and Canada,
enabling it to complete calls to more than 230 countries. The United States,
Australia and the United Kingdom are the most deregulated countries within the
Company's service regions (the "Service Regions"), which include North America,
the Asia-Pacific region, Europe and, with the consummation of the TresCom
Merger, Latin America. The United States, Australia and the United Kingdom will
serve as regional hubs for Primus's intended expansion into additional markets
as worldwide deregulation of telecommunications markets continues. During the
years ended December 31, 1996 and 1997, and the three months ended March 31,
1998, Primus had net revenue of $173.0 million, $280.2 million and $80.1
million, respectively. After giving pro forma effect to the TresCom Merger and
the TelePassport/USFI Acquisition, for the year ended December 31, 1997, the
Company would have had net revenue of $448.9 million and, after giving pro
forma effect to the TresCom Merger, for the three months ended March 31, 1988
the Company would have had net revenue of $114.7 million.
The Company primarily targets, on a retail basis, small- and medium-sized
businesses and ethnic residential customers with significant international long
distance traffic and, on a wholesale basis, other telecommunications carriers
and resellers with substantial international traffic. The Company provides a
broad array of competitively priced telecommunications services, including
international and domestic long distance services and private networks,
reorigination services, prepaid and calling cards and toll-free services, as
well as local, data, Internet and cellular services in Australia. The Company
markets its services through a variety of channels, including through its
direct sales force and independent agents, and through direct marketing.
1
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NETWORK
The Company has constructed and is expanding 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
continue to improve its profitability as it more fully utilizes its Network
capacity and realizes economies of scale. As customer demand justifies the
capital investment, Primus will seek to expand the Network through additional
investment in undersea and domestic fiber optic cable systems, international
gateway and domestic switching facilities, and international satellite earth
stations. 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 Network has grown to
consist of 15 switches, including eleven international gateway switches (New
York, Los Angeles, Washington, D.C., Toronto, Vancouver, London, Frankfurt and
Sydney, and as a result of the recently completed TresCom Merger, Fort
Lauderdale, New York City and Guaynabo, Puerto Rico) and four domestic switches
(Adelaide, Brisbane, Melbourne and Perth), and a switching platform in Japan.
The Company also has 15 points of presence ("Pops") in additional markets
within its Service Regions. The Company's international gateway switches will
serve as the base for its global expansion of the Network into new countries
when customer demand justifies such investment and as regulatory rules permit
the Company to compete in new markets. The Company intends to add, by the end
of 1999, up to three switches in North America, two switches in Europe, one
switch in the Asia-Pacific region, and three switches in Latin America.
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. The Company's ownership
interests consist of Minimum Assignable Ownership Units ("MAOUs") and
indefeasible rights of use ("IRUs") in 12 undersea fiber optic cable systems,
including the CANTAT-3, TAT-12/TAT-13, TPC-5 and Gemini systems. As a result of
the recently completed TresCom Merger, the Company has acquired additional
MAOUs and IRUs in 11 cable systems, including the Americas 1, Columbus 2, PTAT-
1 and Taino Carib systems. The Company expects to continue to acquire
additional capacity on both existing and future international and domestic
fiber optic cable systems as anticipated customer demand justifies such
investments.
Foreign Carrier Agreements. In selected countries where competition with the
traditional incumbent post, telephone and telegraph operators ("PTTs") is
limited or is not currently permitted, the Company has entered into foreign
carrier agreements with PTTs or other service providers which permit the
Company to carry traffic into and receive return traffic from these countries.
The Company has existing foreign carrier agreements with PTTs in Cyprus,
Greece, Honduras, India, Iran, Italy and New Zealand, and additional carrier
agreements with foreign service providers in five other countries. As a result
of the recently completed TresCom Merger, the Company has acquired 27
additional foreign carrier agreements, providing access to various countries in
Latin America.
STRATEGY
Primus's objective is to become a leading global provider of international
and domestic long distance voice, data and other services in its Service
Regions. Key elements of Primus's strategy to achieve this objective include:
. Focus on Customers with Significant International Long Distance
Usage. 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, 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.
2
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. Pursue Early Entry into Selected Deregulating Markets. The Company seeks
to be an early entrant into selected deregulating telecommunications
markets where it believes there is significant demand for international
long distance services as well as substantial growth and profit
potential. The Company believes that early entrance into deregulating
markets provides it with competitive advantages as it develops sales
channels, establishes a customer base, hires personnel experienced in
the telecommunications industry and achieves name recognition, prior to
the entry into these markets of a large number of competitors. The
Company focuses its expansion efforts on major metropolitan areas with
high concentrations of potential customers with international traffic.
. Expand Global Intelligent Network. Primus expects that continued
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
Company owns and operates its own switching facilities, and purchases
fiber optic cable capacity on an end-to-end basis when current and
expected 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 those of
major carriers in the Service Regions. In addition, the Company intends
to maintain strong customer relationships through the use of trained and
experienced sales and service representatives, and through the provision
of customized billing services.
. Expand Service Offerings as Markets Deregulate. The Company typically
enters markets which are in the initial stages of deregulation by first
providing international long-distance services and, as the market
deregulates further, expanding its portfolio of service offerings within
the particular market. Management believes that international long
distance generally offers attractive margins in markets in the early
stages of deregulation and provides a platform for capturing customers
for additional services. Subsequent additions to service offerings
include, among other services, domestic long distance, data and Internet
access.
. Growth through Selected Acquisitions and Strategic Investments. As part
of its business strategy, the Company frequently evaluates potential
acquisitions, joint ventures and strategic investments. The Company
views acquisitions, joint ventures and strategic investments as a means
to enter additional markets and expand its operations within existing
markets, thereby facilitating an acceleration of its business plan.
Potential candidates include voice and data service providers with an
established customer base, complementary operations, telecommunications
licenses, experienced management or network facilities in countries into
which the Company seeks to enter.
RECENT DEVELOPMENTS
TresCom Merger. On June 9, 1998, pursuant to an Agreement and Plan of Merger
(as amended, the "Merger Agreement"), the Company acquired all of the
outstanding shares of TresCom, a facilities-based long distance
telecommunications carrier focused on international long distance traffic
originating in the United States and terminating in Latin America. The TresCom
Merger provides Primus with accelerated entry into the Latin American
international long distance markets and expands the scope and coverage of the
Network, thereby providing additional opportunities to migrate traffic onto the
Network, resulting in better utilization of the Network. The Company believes
that, in addition to providing transmission facilities, the TresCom Merger adds
foreign carrier agreements, direct connections to foreign telecommunications
carriers and experienced management, enabling the combined Company to realize
synergies in sales, marketing and administration.
3
<PAGE>
TresCom markets wholesale telecommunications services to other long distance
carriers who utilize the TresCom network to transmit international calls to
Latin America. TresCom's customers also include businesses with sales or
operations in Latin America, as well as the growing Hispanic population in the
United States. For the years ended December 31, 1995, 1996 and 1997, TresCom
had revenue of $102.6 million, $139.6 million and $157.6 million, respectively.
Pursuant to the Merger Agreement, each of the approximately 12.7 million
outstanding shares of TresCom common stock were exchanged for shares of
Primus's common stock ("Common Stock") at an exchange ratio equal to 0.6147.
See "Recent Developments--TresCom Merger" and "Business--TresCom."
Other Acquisitions and Investments. In March 1998, the Company purchased a
controlling interest in Hotkey Internet Services Pty., Ltd. ("Hotkey"), an
Australia-based Internet service provider, for a cash purchase price of
approximately $1.3 million (the "Hotkey Investment"). Thereafter, in April
1998, the Company acquired all of the outstanding stock of Eclipse
Telecommunications Pty. Ltd. ("Eclipse"), an Australia-based data
communications service provider, for a purchase price of approximately $2.5
million comprised of cash and shares of Common Stock (the "Eclipse
Acquisition"). The combination of these two transactions, together with the
Company's existing Australian operations, positions the Company to offer a
complete range of telecommunications services to corporate customers in
Australia, including fully integrated voice and data networks, as well as
Internet access. See "Recent Developments--Hotkey Investment" and "--Eclipse
Acquisition."
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As of June 29, 1998, Primus had an equity market capitalization of
$559,052,316 million, based upon a closing price of $20 1/16 per share and
approximately 27,865,536 shares of Common Stock outstanding (including shares
of Common Stock issued pursuant to the recently completed TresCom Merger).
------------------
ISSUANCE OF THE INITIAL NOTES
The Initial Notes were issued in an offering to the Initial Purchasers (the
"Offering") of an aggregate of $150.0 million in principal amount of the
Initial Notes pursuant to a Purchase Agreement, dated May 14, 1998 (the
"Purchase Agreement") among the Company and the Initial Purchasers. The net
proceeds of the Offering, after deducting discounts and commissions and
offering expenses, were approximately $145.0 million and were received by the
Company on May 19, 1998 (the "Closing Date"). The Company intends to use the
net proceeds of the Offering to fund capital expenditures to expand and develop
the Company's Network. The Initial Purchasers subsequently resold the Initial
Notes in reliance on Rule 144A under the Securities Act and certain other
exemptions under the Securities Act. The Company and the Initial Purchasers
also entered into the Registration Rights Agreement, pursuant to which the
Company granted certain registration rights for the benefit of the holders of
the Initial Notes. The Exchange Offer is intended to satisfy certain of the
Company's obligations under the Registration Rights Agreement with respect to
the Initial Notes. See "The Exchange Offer--Purpose and Effect."
------------------
The executive offices of the Company are located at 1700 Old Meadow Road,
McLean, Virginia 22102, and its telephone number is (703) 902-2800.
4
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer............ The Company is offering, upon the terms and
subject to the conditions set forth herein and
in the accompanying Letter of Transmittal, to
exchange $1,000 in principal amount of its 9
7/8% Series B Senior Notes due 2008 (the
"Exchange Notes," and together with the Initial
Notes, sometimes collectively referred to
herein as the "Notes") for each $1,000 in
principal amount of the outstanding Initial
Notes. As of the date of this Prospectus,
$150.0 million in aggregate principal amount of
the Initial Notes is outstanding, the maximum
amount authorized by the Indenture for all
Notes. As of July 13, 1998, CEDE & Co. ("CEDE")
was the sole registered holder of the Initial
Notes and held $150.0 million of aggregate
principal amount of the Initial Notes for 24 of
its participants. See "The Exchange Offer--
Terms of the Exchange Offer."
Expiration Date............... 5:00 p.m., New York City time, on August 14,
1998, as the same may be extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Conditions of the Exchange
Offer......................... The Exchange Offer is not conditioned upon any
minimum principal amount of Initial Notes being
tendered for exchange. However, the Exchange
Offer is subject to the condition that it does
not violate any applicable law or
interpretation of the staff of the Commission.
In addition, as a condition to its
participation in the Exchange Offer, each
Holder of Initial Notes will be required to
furnish certain written representations to the
Company. See "The Exchange Offer--Conditions of
the Exchange Offer."
Termination of Certain
Rights........................ Pursuant to the Registration Rights Agreement
and the Initial Notes, Holders of Initial Notes
(i) have rights to receive Liquidated Damages
(as defined herein) and (ii) have certain
rights intended for the holders of unregistered
securities. "Liquidated Damages" means an
amount equal to .50% per annum of the principal
amount of Notes held by such Holder commencing
upon a Registration Default (as defined herein)
and continuing for the first 90-day period
immediately following the occurrence of such
Registration Default. The amount of the
Liquidated Damages shall increase by an
additional .50% per annum of the principal
amount of Notes with respect to each subsequent
90-day period until all Registration Defaults
have been cured, up to a maximum amount of
Liquidated Damages of 1.50% per annum of the
principal amount of Notes. Following the cure
of all Registration Defaults, the accrual of
Liquidated Damages will cease. See "The
Exchange Offer--Termination of Certain Rights,"
"--Procedures for Tendering Initial Notes" and
"Description of Exchange Notes--Registration
Rights."
5
<PAGE>
Accrued Interest on the
Initial Notes................. The Exchange Notes will bear interest at a rate
equal to 9 7/8% per annum from and including
their date of issuance. Holders whose Initial
Notes are accepted for exchange will have the
right to receive interest accrued thereon from
the date of original issuance of the Initial
Notes or the last Interest Payment Date, as
applicable, to, but not including, the date of
issuance of the Exchange Notes, such interest
to be payable with the first interest payment
on the Exchange Notes. Interest on the Initial
Notes accepted for exchange, which accrues at
the rate of 9 7/8% per annum, will cease to
accrue on the day prior to the issuance of the
Exchange Notes.
Procedures for Tendering
Initial Notes................. Unless a tender of Initial Notes is effected
pursuant to the procedures for book-entry
transfer as provided herein, each Holder
desiring to accept the Exchange Offer must
complete and sign the Letter of Transmittal,
have the signature thereon guaranteed if
required by the Letter of Transmittal, and mail
or deliver the Letter of Transmittal, together
with the Initial Notes and any other required
documents (such as evidence of authority to
act, if the Letter of Transmittal is signed by
someone acting in a fiduciary or representative
capacity), to the Exchange Agent (as defined)
at the address set forth on the back cover page
of this Prospectus prior to 5:00 p.m., New York
City time, on the Expiration Date. Any
Beneficial Owner (as defined herein) of the
Initial Notes whose Initial Notes are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust
company and who wishes to tender Initial Notes
in the Exchange Offer, should instruct such
entity or person to promptly tender on such
Beneficial Owner's behalf. See "The Exchange
Offer-- Procedures for Tendering Initial
Notes." By tendering Initial Notes for
exchange, each registered holder will represent
to the Company that, among other things, (i)
neither the Holder nor any Beneficial Owner is
an affiliate of the Company within the meaning
of Rule 405 under the Securities Act, (ii) any
Exchange Notes to be received by the Holder or
any Beneficial Owner are being acquired in the
ordinary course of business, and (iii) neither
the Holder nor any Beneficial Owner has an
arrangement or understanding with any person to
participate in the distribution of the Exchange
Notes.
Guaranteed Delivery
Procedures.................... Holders of Initial Notes who wish to tender
their Initial Notes and (i) whose Initial Notes
are not immediately available or (ii) who
cannot deliver their Initial Notes or any other
documents required by the Letter of Transmittal
to the Exchange Agent prior to the Expiration
Date (or complete the procedure for book-entry
transfer on a timely basis) may tender their
Initial Notes according to the guaranteed
delivery procedures set forth in the Letter of
Transmittal. See "The Exchange Offer--
Procedures for Tendering Initial Notes--
Guaranteed Delivery Procedures."
6
<PAGE>
Acceptance of Initial Notes
and Delivery of Exchange
Notes......................... Upon satisfaction or waiver of all conditions
of the Exchange Offer, the Company will accept
any and all Initial Notes that are properly
tendered in the Exchange Offer prior to 5:00
p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the
Exchange Offer will be delivered as soon as
practicable after acceptance of the Initial
Notes. See "The Exchange Offer--Acceptance of
Initial Notes for Exchange; Delivery of
Exchange Notes."
Withdrawal Rights............. Tenders of Initial Notes may be withdrawn at
any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The Exchange
Offer--Withdrawal Rights."
Certain Federal Income Tax
Considerations................ Generally, the exchange pursuant to the
Exchange Offer will not be a taxable event for
federal income tax purposes. See "Certain
Federal Income Tax Considerations--The Exchange
Offer."
The Exchange Agent............ First Union National Bank is the exchange agent
(in such capacity, the "Exchange Agent"). The
address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--The
Exchange Agent; Assistance."
Fees and Expenses............. All expenses incident to the Company's
consummation of the Exchange Offer and
compliance with the Registration Rights
Agreement will be borne by the Company. See
"The Exchange Offer--Solicitation of Tenders;
Fees and Expenses."
Resales of the Exchange
Notes......................... Based on interpretations by the staff of the
Commission set forth in no-action letters
issued to third parties, the Company believes
that Exchange Notes issued pursuant to the
Exchange Offer to a Holder in exchange for
Initial Notes may be offered for resale, resold
and otherwise transferred by such Holder (other
than (i) a broker-dealer who purchased the
Initial Notes directly from the Company for
resale pursuant to Rule 144A under the
Securities Act or any other available exemption
under the Securities Act or (ii) a person that
is an affiliate of the Company within the
meaning of Rule 405 under the Securities Act),
without compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that the Holder is
acquiring the Exchange Notes in the ordinary
course of business and is not participating,
and has no arrangement or understanding with
any person to participate, in a distribution of
the Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account in
exchange for Initial Notes, where such Initial
Notes were acquired by such broker as a result
of market making or other trading activities,
must acknowledge that it will deliver a
prospectus in connection with any resale of
such Exchange Notes. See "Plan of
Distribution."
7
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
The Initial Notes were issued under an indenture, dated as of May 19, 1998
(the "Indenture"), between the Company and the Trustee. The Exchange Notes will
be issued under the Indenture as it relates to the Exchange Notes. The form and
terms of the Exchange Notes will be identical in all material respects to the
form and terms of the Initial Notes, except that (i) the Exchange Notes have
been registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, (ii) subject to certain limited exceptions,
holders of Exchange Notes will not be entitled to Liquidated Damages otherwise
payable under the terms of the Registration Rights Agreement in respect of
Initial Notes held by such holders during any period in which a Registration
Default is continuing, and (iii) holders of Exchange Notes will not be, and
upon the consummation of the Exchange Offer Holders of Initial Notes will no
longer be, entitled to certain rights under the Registration Rights Agreement
intended for the holders of unregistered securities. The Exchange Offer shall
be deemed consummated upon the delivery of Exchange Notes by the Company to the
Registrar under the Indenture in the same aggregate principal amount as the
aggregate principal amount of Initial Notes that are validly tendered by
holders thereof pursuant to the Exchange Offer. See "The Exchange Offer--
Termination of Certain Rights" and "--Procedures for Tendering Initial Notes"
and "Description of Exchange Notes."
Issuer........................ Primus Telecommunications Group, Incorporated
Exchange Notes Offered........
$150,000,000 in aggregate principal amount of 9
7/8% Series B Senior Notes due 2008.
Maturity...................... May 15, 2008.
Interest Payment Dates........ May 15 and November 15, commencing on November
15, 1998.
Ranking....................... The indebtedness evidenced by the Exchange
Notes will rank senior in right of payment to
any existing and future obligations of the
Company expressly subordinated in right of
payment to the Exchange Notes and will be pari
passu in right of payment with all other
existing and future senior unsecured
obligations of the Company including trade
payables. As of March 31, 1998, after giving
pro forma effect to the Offering and the
application of the net proceeds thereof, the
Company (on a consolidated basis) would have
had outstanding approximately $382.2 million of
indebtedness ($387.6 million after giving
effect to the TresCom Merger). 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 Exchange Notes. As of March 31,
1998, the Company's consolidated subsidiaries
had outstanding aggregate liabilities of
approximately $101.0 million ($132.4 million
after giving effect to the TresCom Merger),
which includes $9.5 million of indebtedness
($14.9 million after giving effect to the
TresCom Merger).
Optional Redemption........... The Exchange Notes will be redeemable at the
option of the Company at any time after May 15,
2003, in whole or in part at the redemption
prices set forth herein plus accrued and unpaid
interest and Liquidated Damages, if any, to the
date of
8
<PAGE>
redemption. In addition, prior to May 15, 2001,
the Company may redeem from time to time up to
25% of the originally issued aggregate
principal amount of Exchange Notes at the
redemption price set forth herein plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of redemption with the Net
Cash Proceeds of one or more Public Equity
Offerings; provided, that at least 75% of the
originally issued aggregate principal amount of
the Exchange Notes remains outstanding after
such redemption. See "Description of Exchange
Notes--Optional Redemption."
Change of Control............. Upon the occurrence of a Change of Control,
each holder of Exchange Notes will have the
right to require the Company to purchase all or
any part of such holder's Exchange Notes at a
purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any,
to the date of purchase. See "Description of
Exchange Notes--Repurchase of Notes Upon a
Change of Control."
Covenants..................... The Indenture pursuant to which the Exchange
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 Exchange
Notes--Covenants."
Exchange Offer; Registration Pursuant to the Registration Rights Agreement,
Rights........................ the Company agreed to file within the
prescribed time periods a registration
statement (the "Exchange Offer Registration
Statement") with the Commission with respect to
an offer to exchange the Initial Notes (the
"Exchange Offer") for a new issue of debt
securities of the Company with terms
substantially identical to the Notes (the
"Exchange Notes") (except that the Exchange
Notes will not contain terms with respect to
transfer restrictions). In the event that
applicable law or Commission policy does not
permit the Company to effect the Exchange
Offer, the Exchange Offer is not consummated
within the prescribed periods, or certain
holders of the Initial Notes notify the Company
they are not permitted to participate in, or
would not receive freely tradable Exchange
Notes pursuant to, the Exchange Offer, the
Company will use its reasonable best efforts to
cause to be declared effective within the
prescribed periods a registration statement
(the "Shelf Registration Statement") with
respect to resale of the Notes and to keep the
Shelf Registration Statement continuously
9
<PAGE>
effective until up to two years after the date
on which the Initial Notes were sold. If the
Company fails to satisfy these registration
obligations, it will be required to pay
Liquidated Damages to the holders of the Notes
under certain circumstances. See "Description
of Exchange Notes--Registration Rights."
Absence of a Public Market
for the Exchange Notes........ The Exchange Notes are new securities for which
there is currently no established trading
market. The Company does not intend to apply
for listing of the Exchange Notes on any
securities exchange or for quotation through
The Nasdaq Stock Market. Accordingly, there can
be no assurance as to the development or
liquidity of any market for the Exchange Notes.
For additional information concerning the Notes and the definitions of
certain capitalized terms used above, see "Description of Exchange Notes."
FOR A DISCUSSION OF CERTAIN RISKS THAT SHOULD BE CONSIDERED IN CONNECTION
WITH AN INVESTMENT IN THE EXCHANGE NOTES, SEE "RISK FACTORS" BEGINNING ON PAGE
14.
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA DATA
Primus. Set forth below is summary selected historical financial, geographic
and other data and summary unaudited pro forma financial and other data for
Primus. The summary selected financial data should be read in conjunction with
the consolidated financial statements of Primus, and the notes thereto,
contained elsewhere herein, and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The summary historical
statement of operations data for Primus for the years ended December 31, 1995,
1996 and 1997 have been derived from the audited financial statements of
Primus. The summary historical statement of operations data for Primus for the
three months ended March 31, 1997 and 1998, and the balance sheet data as of
March 31, 1998, have been derived from the unaudited financial statements of
Primus, which, in management's opinion include all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The summary unaudited pro forma financial data
of Primus have been derived from the audited and unaudited financial statements
of Primus, the audited and unaudited financial statements of TresCom, and the
audited financial statements of USFI, Inc., and should be read in conjunction
with the Unaudited Pro Forma Financial Data included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
THREE
THREE MONTHS PRO FORMA MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31, YEAR ENDED ENDED
--------------------------- ----------------- DECEMBER 31, MARCH 31,
1995 1996 1997 1997 1998 1997(1) 1998(2)
------- -------- -------- ------- -------- ------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue (3)......... $ 1,167 $172,972 $280,197 $59,036 $ 80,051 $448,929 $114,664
Cost of revenue......... 1,384 158,845 252,731 55,034 68,722 387,453 97,986
------- -------- -------- ------- -------- -------- --------
Gross margin
(deficit)............ (217) 14,127 27,466 4,002 11,329 61,476 16,678
Operating expenses:
Selling, general and
administrative....... 2,024 20,114 50,622 8,829 15,377 95,420 22,822
Depreciation and
amortization......... 160 2,164 6,733 797 3,478 20,308 6,894
------- -------- -------- ------- -------- -------- --------
Total operating
expenses........... 2,184 22,278 57,355 9,626 18,855 115,728 29,716
------- -------- -------- ------- -------- -------- --------
Loss from operations.... (2,401) (8,151) (29,889) (5,624) (7,526) (54,252) (13,038)
Interest expense (4).... (59) (857) (12,914) (151) (7,175) (28,958) (11,008)
Interest income......... 35 785 6,238 785 2,384 6,238 2,384
Other income (expense).. -- (345) 407 119 -- 594 (20)
------- -------- -------- ------- -------- -------- --------
Loss before income
taxes.................. (2,425) (8,568) (36,158) (4,871) (12,317) (76,378) (21,682)
Income taxes............ -- (196) (81) (36) -- (81) --
------- -------- -------- ------- -------- -------- --------
Net loss................ $(2,425) $ (8,764) $(36,239) $(4,907) $(12,317) $(76,459) $(21,682)
======= ======== ======== ======= ======== ======== ========
Basic and diluted net
loss per common share.. $(0.48) $(0.75) $(1.99) $(0.28) $(0.62) $(2.93) $(0.79)
======= ======== ======== ======= ======== ======== ========
Weighted average number
of common shares
outstanding............ 5,019 11,660 18,250 17,779 19,717 26,086 27,553
======= ======== ======== ======= ======== ======== ========
Ratio of earnings to
fixed charges (5)...... -- -- -- -- -- -- --
======= ======== ======== ======= ======== ======== ========
GEOGRAPHIC DATA:
Net revenue:
North America (6)..... $ 1,167 $ 16,573 $ 74,359 $ 8,271 $ 26,310
Asia-Pacific (7)...... -- 151,253 183,126 46,886 44,659
Europe (8)............ -- 5,146 22,712 3,879 9,082
------- -------- -------- ------- --------
Total............... $ 1,167 $172,972 $280,197 $59,036 $ 80,051
======= ======== ======== ======= ========
OTHER DATA:
EBITDA (9).............. $(2,241) $ (5,987) $(23,156) $(4,827) $ (4,048) $(33,944) $(6,144)
Capital expenditures
(10)................... $ 974 $ 15,951 $ 43,457 $ 8,771 $ 12,044 $ 52,506 $ 13,493
Number of switches...... 1 1 11 8 11 14 14
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------
PRO FORMA
ACTUAL AS ADJUSTED (11)
------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $97,381 $226,675
Restricted investments (including current and
long term)...................................... 61,478 61,478
Working capital (12)............................. 104,726 236,100
Total assets..................................... 355,563 692,554
Long-term obligations (including current
portion)........................................ 232,238 387,571
Stockholders' equity............................. 31,828 187,417
</TABLE>
- --------
(1) Gives pro forma effect to the TelePassport/USFI Acquisition, the TresCom
Merger and the sale of the Initial Notes in the Offering, less discounts,
commissions and estimated expenses of the Offering payable by the Company,
and the application of the estimated net proceeds therefrom, as if they
had occurred on January 1, 1997.
(2) Gives pro forma effect to the TresCom Merger and the sale of the Initial
Notes, less discounts, commissions and expenses of the Offering payable by
the Company, and the application of the net proceeds therefrom, as if they
occurred on January 1, 1998.
(3) Net revenue is after provision for bad debt.
(4) Pro forma interest expense includes interest expense on the Notes and
amortization of deferred financing costs.
(5) The ratio of earnings to fixed charges is computed by dividing pre-tax
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 ended
December 31, 1995, 1996 and 1997, and for the three months ended March 31,
1997 and 1998, earnings were insufficient to cover fixed charges by $2.4
million, $8.6 million, $36.4 million, $5.1 million and $12.3 million,
respectively. On a pro forma basis for the year ended December 31, 1997
and for three months ended March 31, 1998, earnings were insufficient to
cover fixed charges by $76.5 million and $21.7 million, respectively.
(6) Consists primarily of net revenue from operations in the United States for
all periods prior to 1997. Net revenue for 1997 and for the three months
ended March 31, 1998 reflects commencement of operations in Canada in
April 1997.
(7) Consists solely of net revenue from operations in Australia for 1996. Net
revenue for 1997 and for the three months ended March 31, 1998 reflects
commencement of operations in Japan in October 1997.
(8) Consists solely of net revenue from operations in the United Kingdom.
(9) As used herein, "EBITDA" is defined as net income or loss plus
depreciation expense, amortization expense, interest expense and income
taxes, minus extraordinary income and gains, if any, and plus
extraordinary losses, if any. While EBITDA should not be construed as a
substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information regarding the ability of Primus to meet its future
debt service, capital expenditures and working capital requirements.
EBITDA is not necessarily a measure of Primus's ability to fund its cash
needs and is not necessarily comparable to similarly titled measures of
other companies.
(10) Capital expenditures include assets acquired, committed to be acquired and
leased under capital lease agreements.
(11) Gives pro forma effect to the TresCom Merger and the sale of the Initial
Notes in the Offering, less discounts, commissions and expenses of the
Offering payable by the Company, and the application of the net proceeds
therefrom, as if they had occurred on March 31, 1998.
(12) Consists of total current assets minus total current liabilities.
12
<PAGE>
TresCom. Set forth below is summary selected historical financial and other
data of TresCom which should be read in conjunction with the consolidated
financial statements of TresCom, and the notes thereto, included elsewhere
herein, and with "Management's Discussion and Analysis of Financial Condition
and Results of Operations--TresCom". The summary statement of operations data
for the years ended December 31, 1995, 1996 and 1997 have been derived from the
audited financial statements of TresCom. The summary statement of operations
data for the three months ended March 31, 1997 and 1998 have been derived from
the unaudited financial statements of TresCom.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................ $102,641 $139,621 $157,641(1) $ 36,143 $ 38,137
Gross profit............ 27,962 32,693 33,276 8,331 7,166
Operating loss (2)...... (8,436) (3,043) (9,709) (1,278) (4,040)
Interest and other
(income)
expenses, net.......... 3,191 578 1,146 (2) 435
Net loss................ (11,627) (5,577)(3) (10,855) (1,276) (4,475)
OTHER DATA:
EBITDA (4).............. $ (4,336) $ (3,149) $ (2,853) $ 385 $ (1,936)
Capital expenditures
(5).................... 5,528 12,796 9,049 1,080 1,449
</TABLE>
- --------
(1) In 1997, TresCom recognized $543,000 of revenue from the sale of excess IRU
capacity on undersea digital fiber optic transmission cables.
(2) Operating loss is revenue less selling, general and administrative
expenses, cost of services and depreciation and amortization.
(3) Includes an extraordinary loss on the early extinguishment of debt of $2.0
million.
(4) As used herein, "EBITDA" is defined as net income or loss plus depreciation
expense, amortization expense, interest expense and income taxes, minus
extraordinary income and gains, if any, and plus extraordinary losses, if
any. While EBITDA should not be construed as a substitute for operating
income or a better measure of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information regarding the ability of TresCom to contribute to the payment
of the Company's future debt service, capital expenditures and working
capital requirements. EBITDA is not necessarily a measure of the ability to
fund cash needs and is not necessarily comparable to similarly titled
measures of other companies.
(5) Capital expenditures includes assets acquired through capital lease
financing and other debt.
13
<PAGE>
RISK FACTORS
Prospective investors should carefully consider the following risk factors,
in addition to the other information contained elsewhere in this Offering
Memorandum, in evaluating whether to purchase the Notes offered hereby.
SUBSTANTIAL INDEBTEDNESS; LIQUIDITY
The Company has substantial indebtedness. As of March 31, 1998, on a pro
forma basis after giving effect to the Offering, the Company's total
indebtedness would have been approximately $382.2 million ($387.6 million
after giving pro forma effect to the TresCom Merger). For the three months
ended March 31, 1998, after giving pro forma effect to the Offering, the
Company's consolidated EBITDA would have been approximately negative $4.0
million (negative $6.1 million after giving pro forma effect to the TresCom
Merger), and its earnings would have been insufficient to cover fixed charges
by approximately $16.1 million ($21.7 million after giving pro forma effect to
the TresCom Merger). 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 that can be
incurred to finance the cost of telecommunications equipment. The Company
anticipates that it and its subsidiaries will incur additional indebtedness in
the future. See "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 its outstanding debt, including
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.
HISTORICAL AND FUTURE OPERATING LOSSES; NEGATIVE EBITDA; NET LOSSES
Since inception through March 31, 1998, the Company had negative cash flow
from operating activities of $41.3 million and negative EBITDA of $35.9
million. In addition, the Company incurred net losses in 1995, 1996, 1997 and
the three months ended March 31, 1998, of $2.4 million, $8.8 million, $36.2
million and $12.3 million, respectively, and had an accumulated deficit of
approximately $60.3 million as of March 31, 1998. On a pro forma basis, after
giving effect to the Offering, the TelePassport/USFI Acquisition and the
TresCom Merger, for the year ended December 31, 1997, the Company would have
had a net loss of $76.5 million. On a pro forma basis, after giving effect to
the Offering and the TresCom Merger, for the three months ended March 31,
1998, the Company would have had a net loss of $21.7 million. Although the
Company has experienced net revenue growth in each of its last 13 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 it expands
its operations and continues to build-out and upgrade the Network. There can
be no assurance that the Company's net revenue will grow or be sustained in
future periods or that it will be able to achieve or sustain profitability or
generate positive cash flow from operations in any
14
<PAGE>
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). See "Selected Financial Data,"
"Unaudited Pro Forma Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL FINANCING
The Company will not receive any proceeds from the Exchange Offer. The
Company believes that the net proceeds from the Offering, together with its
existing cash and available capital lease financing (subject to limitations in
the Indenture) will be sufficient to fund the Company's operating losses, debt
service requirements, capital expenditures and other cash needs for its
operations for at least the next 18 to 24 months. The Company is continually
evaluating the expansion of the Network and plans to accelerate its investment
in international and domestic fiber optic cable capacity and other
transmission facilities. In addition, the Company expects to make additional
investments in the TresCom network in order to expand its services in Latin
America. In order to fund these additional cash requirements, including the
expansion of the combined Network, Primus anticipates that it will be required
to raise a significant amount of cash in excess of its existing cash and cash
equivalents and the proceeds from the Offering. Consequently, the Company
expects to raise additional capital from public or private equity or debt
sources to meet its new financing needs, including for the continued buildout
of the Network. Additionally, if the Company's plans or assumptions change
(including those with respect to the development of the Network, the scope of
its operations and its operating cash flow), if its assumptions prove
inaccurate, if it consummates additional investments or acquisitions, if it
experiences unexpected costs or competitive pressures, or if existing cash and
any other borrowings prove to be insufficient, the Company may be required to
seek additional capital sooner than expected. Both the Indenture and the
indenture (the "1997 Indenture") relating to the 1997 Senior Notes (as
defined) contain certain restrictive covenants that will affect, and in many
respects will significantly limit or prohibit, among other things, its ability
to incur additional indebtedness and to create liens. See "Description of
Notes." 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. In the event that the Company is
unable to obtain such additional capital or is unable to obtain such
additional capital on acceptable terms, it may be required to reduce the scope
of its expansion, which could adversely affect its business, results of
operations and financial condition, its ability to compete and its ability to
meet its obligations on the Notes. There can be no assurance that the Company
will be able to raise equity capital, obtain capital lease or bank financing
or incur other borrowings on commercially reasonable terms, if at all, to fund
any such Network expansion or otherwise. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
HOLDING COMPANY STRUCTURE; RELIANCE ON SUBSIDIARIES FOR DISTRIBUTIONS TO REPAY
NOTES
Primus is a holding company, the principal assets of which are its operating
subsidiaries. As a holding company, the Company's 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, including Australia, Canada, the
United Kingdom and Japan. The ability of the Company's operating subsidiaries
to pay dividends, repay intercompany loans or make other distributions to the
Company 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 the Company'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, and could otherwise have a material adverse effect upon
the Company's business, financial condition and results of operations.
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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, 1998, the Company's consolidated subsidiaries had
outstanding aggregate liabilities of approximately $101.0 million ($132.4
million after giving pro forma effect to the TresCom Merger). 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 that is 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, if the Company were to enter into a
bank credit facility or similar arrangement, the stock of the subsidiaries
would be pledged to secure any such credit facility or arrangement.
LIMITED OPERATING HISTORY
The Company and TresCom have limited operating histories and limited
experience in operating their respective businesses. Primus 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.
TresCom was founded in December 1993. In addition, the Company intends to
enter markets where it has limited or no operating experience such as, due to
the recently completed TresCom Merger, Latin America. 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,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Unaudited Pro Forma Financial Data."
DEVELOPMENT OF THE NETWORK; MIGRATION OF TRAFFIC ONTO 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 its management 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 Company will generate sufficient traffic to economically
utilize its capacity or that the Network can be completed in a timely manner
or operated efficiently. Any failure in design, or any failure to 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
"Business--Strategy" and "--Network."
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 its management,
operational and financial resources, and increased demands on its systems and
controls. The Company is continuing to develop the Network by adding switches
and fiber optic
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cable, expanding its operations within North America, the Asia-Pacific region
and Europe, and when business and/or regulatory conditions warrant, expanding
into selected additional markets such as, due to the recently completed
TresCom Merger, Latin America. 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 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 further develop its facilities-based Network or expand at the
rate presently planned, 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 its customer support, billing
and management information 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; Year 2000
Problem" and "--Acquisition and Strategic Investment Risks."
ACQUISITION AND STRATEGIC INVESTMENT RISKS
A key element of the Company's business strategy is to acquire or make
strategic investments in assets and businesses that are complementary to the
Company's operations, and a major portion of the Company's growth in recent
years has resulted from such acquisitions. These acquisitions involve certain
financial and operational risks. Financial risks include the possible
incurrence of indebtedness by the Company in order to effect an acquisition
(subject to the limitations contained in the Indenture) and the consequent
need to service that indebtedness. Operational risks include the possibility
that an acquisition does not ultimately provide the benefits originally
anticipated by management while the Company continues to incur operating
expenses to provide the services formerly provided by the acquired company,
and the difficulty of integrating the service offerings, distribution channels
and networks gained through acquisitions and strategic investments with those
of the Company. In addition, if the Company makes a strategic investment by
acquiring a minority interest in a company, the Company may lack control over
the operations and strategy of the business in which the Company invested.
There can be no assurance that such lack of control will not interfere with
the integration of services and distribution channels of the business in which
the Company invested. In addition, there can be no assurance that the Company
will be successful in identifying attractive acquisition and strategic
investment candidates, completing and financing additional acquisitions on
favorable terms, or integrating the acquired businesses or assets into its
own. In carrying out its acquisition and strategic investment 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 such strategic investments and acquisitions.
For example, achieving the anticipated benefits of the TresCom Merger will
depend in part upon whether the integration of the two companies' businesses
is accomplished in an efficient and effective manner, and there can be no
assurance as to the extent that this will occur, if at all. The combination of
the two companies will require, among other things, integration of the
companies' respective services, technologies, billing and management
information systems, distribution channels and key personnel, and the
coordination of their sales, marketing and development efforts. There can be
no assurance that such integration will be accomplished smoothly or
successfully, if at all. If significant difficulties are encountered in the
integration of the existing services or technologies or the development of new
technologies, resources could be diverted from new service development, and
delays in new service introductions could occur. There can be no assurance
that the Company will be able to take full advantage of the combined sales
forces' efforts. The integration of operations and technologies following the
TresCom Merger will require the dedication of management and other personnel
which may distract their attention from the day-to-day business of the
Company, the development or acquisition of new technologies, and the pursuit
of other business acquisition opportunities. Failure to accomplish
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successfully the integration and development of the two companies' operations
and technologies could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, as
commonly occurs with mergers of telecommunications companies, during the pre-
merger and integration phases, aggressive competitors may undertake
initiatives to attract the Company's customers through various incentives
which could have a material adverse effect on the business, results of
operations and financial condition of the Company.
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 more 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, customers can switch carriers at any time. The Company
believes that competition in all of its markets is likely to increase and that
competition in non-United States markets is likely to become more similar to
competition in the United States market over time as such 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. 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 than the Company,
have (i) substantially greater financial, technical and marketing resources,
(ii) larger networks, (iii) a broader portfolio of services, (iv) controlled
transmission lines, (v) stronger name recognition and customer loyalty, and
(vi) 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., Frontier
Communications Services, Inc., Pacific Gateway Exchange, Inc., Qwest
Communications Intl., Inc. and LCI International, Inc. in the United States;
Telstra, Optus Communications Pty. Limited, AAPT, World Exchange and GlobalOne
in Australia; British Telecommunications plc, Mercury Communications, AT&T,
WorldCom, GlobalOne, ACC Corporation, Colt, Energis, Esprit Telecom Group, and
RSL Communications in the United Kingdom; Deutsche Telekom, O.tel.o
Communications, Mannesmann ARCOR, Colt, WorldCom, PlusNet, and RSL
Communications in Germany; Stentor, AT&T Canada Long Distance Services Co.,
fONOROLA Inc., Sprint Canada and ACC in Canada; Telmex, the other PTTs in
Latin America, AT&T, MCI and Sprint in Latin America; Kokusai Denshin Denwa
Co., Ltd. ("KDD"), Nippon Telegraph and Telephone Corporation, Japan Telecom,
IDC and a number of second tier carriers such as Cable & Wireless, WorldCom
and ATNet in Japan.
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
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 are allowed to enter the
local telephone
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services market, and any entity (including cable television companies and
utilities) is 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, the
Company could experience additional competition in the Australian market from
newly licensed telecommunications carriers. Further deregulation in other
countries such as Canada, the United Kingdom, Germany and Japan, could result
in greater competition in telecommunications services offered in these
countries. 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 its business, results of
operations and financial condition. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--Competition."
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 other facilities-based long distance carriers, many of which
are, or may become, competitors of the Company. The Company's ability to
maintain and expand its business is dependent upon whether it continues to
maintain favorable relationships with the facilities-based carriers from which
it leases transmission lines. Although the Company believes that its
relationships with carriers generally are satisfactory, the deterioration or
termination of its relationships with one or more of these carriers could have
a material adverse effect upon its 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 between these markets 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 planned expansion in
international markets. In many international markets, the existing carrier
controls access to the local networks, enjoys better brand recognition and
brand and customer loyalty, and has significant operational economies,
including a larger backbone network and foreign carrier agreements with other
PTTs and other service providers. Moreover, the incumbent may take many months
to allow competitors 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
its own transmission facilities or switches, obtain access to local
transmission facilities or to market, sell and deliver competitive services in
these markets or that such permits and operating licenses, if obtained, will
be obtained in the time currently contemplated by the Company.
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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 and holiday periods, 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 its 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. In
addition, the Company's business could be adversely affected by a reversal in
the current trend toward deregulation of telecommunications markets. In
certain countries into which the Company may choose to expand in the future,
the Company may need to enter into joint venture or other strategic
relationships with one or more third parties in order to conduct its
operations (often with the PTT or other dominant carrier in a developing
country). There can be no assurance that such factors will not have a material
adverse effect on the Company's future operations and, consequently, on its
business, results of operations and financial condition, or that the Company
will not have to modify its business practices.
DEPENDENCE ON EFFECTIVE INFORMATION SYSTEMS; YEAR 2000 PROBLEM
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. Any
such delay or other malfunction of the Company's management information
systems could have a material adverse effect on its business, financial
condition and results of operations.
The Company is reviewing its computer systems and operations to identify and
determine the extent to which any systems will be vulnerable to potential
errors and failures as a result of the "Year 2000" problem. The Year 2000
problem is the result of computer programs being written using two digits,
rather than four digits, to define the applicable year. Any of the Company's
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations. The management of each operating unit within the
Company is responsible for identifying systems requiring modification or
conversion (both internal systems and those provided by or otherwise available
from outside vendors), and for periodically reporting its progress in meeting
milestones toward compliance. TresCom management has determined that TresCom
will need to modify or replace significant portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 and beyond. The majority of the software which needs to be replaced by
Primus and TresCom is under license from third party software manufacturers
who have indicated that they will provide the necessary upgrades. There can be
no assurance that any such upgrades will be successfully implemented or that
additional steps will not be necessary. A failure of the Company's computer
systems or the failure of the Company's vendors or customers to upgrade
effectively their software and systems for transition to the year 2000 could
have a material adverse effect on the Company's business and financial
condition or results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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RISKS OF INDUSTRY CHANGES AFFECTING COMPETITIVENESS AND FINANCIAL RESULTS
The international telecommunications industry is changing rapidly due to
deregulation, privatization of PTTs, technological improvements, expansion of
telecommunications infrastructure and the globalization of the world's
economies. There can be no assurance that one or more of these factors will
not vary in a manner that could have a material adverse effect on the Company.
In addition, deregulation in any particular market may cause such market to
shift unpredictably. There can be no assurance that the Company will be able
to compete effectively or adjust its contemplated plan of development to meet
changing market conditions.
The telecommunications industry generally is in a period of rapid
technological evolution, marked by the introduction of new product and service
offerings and increasing satellite 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, assess 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 assess 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.
EFFECTS OF NATURAL DISASTERS
Areas in which the Company conducts its business may be affected by natural
disasters (including hurricanes and tropical storms) as evidenced by Hurricane
Marilyn, which struck certain Caribbean islands, including St. Thomas and
Puerto Rico, in September 1995 and disrupted telecommunications services in
the Caribbean. Hurricanes, tropical storms and other natural disasters could
have a material adverse effect on the Company's business as a result of damage
to the Company's Network facilities or from curtailed telephone traffic
resulting from effects of such events, such as destruction of homes and
businesses.
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. Primus
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 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 its results of operations, development
efforts and ability to expand.
POTENTIAL ADVERSE EFFECTS OF REGULATION
As a multinational telecommunications company, the Company is subject to
varying degrees of regulation in each of the jurisdictions in which it
currently provides, or expects to provide, 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
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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 Company's services are 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 1996 Telecommunications Act has opened the
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 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, long distance carriers such as the Company
must purchase "access" from the LECs, including Competitive Local Exchange
Carriers. 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 could find that, absent a waiver,
certain terms of the Company's foreign carrier agreements do not meet the
requirements of the ISP or that certain actions do not constitute permissible
deviations from these policies. Although the FCC generally has not issued
penalties in this area, it could, among other things, issue a cease and desist
order or impose fines if it finds that these agreements conflict with the ISP.
The Company does not believe that any such fine or order would have a material
adverse effect on it. 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 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 and
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.
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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 (roughly the equivalent of access charges in the
U.S.), deregulation of the international segment of the long-distance market,
limitations on switched hubbing through the United States, international
simple resale ("ISR") and foreign ownership rules for facilities-based
carriers. In addition, Canada has committed in the WTO Agreement to eliminate
a number of barriers to competition, some of which are expected to be
eliminated in October 1998. The regulatory framework for the introduction of
competition in the provision of international services in Canada is currently
under active CRTC review. There can be no assurance that the regulatory
environment ultimately adopted for Canada will allow Primus to compete
effectively in offering telecommunications services. In addition, 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").
The Company is licensed under the Telecom Act 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, it 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.
As a licensed carrier, the Company is required to comply with its own license
and is 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
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.
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's subsidiary, Primus Telecommunications
Limited, holds an ISVR license that authorizes it to provide switched voice
services over leased private lines to all international points. In addition,
Primus Telecommunications Limited has received a license from the United
Kingdom's Secretary for Trade and Industry to provide international
facilities-based voice services to all international points from the
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United Kingdom. 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.
Japan. The Company's services in Japan are subject to regulation by the
Ministry of Post and Telecommunications (the "Japanese Telecom Ministry")
under the Telecommunications Business Law (the "Japanese Telecom Law"). The
Company has obtained a license as a Special Type II business, which allows it
to provide telecommunications services over international circuits leased from
another carrier, or domestic service in Japan over leased circuits if the
volume of traffic exceeds a certain amount. The Company may also provide over
leased lines basic telecommunications services, value-added services and
services to closed user groups. The Company is preparing to apply for a
license to operate as a Type I business, which would allow the Company to
provide telecommunications services using their own facilities. There can be
no guarantee that the Company will be able to obtain any required licenses or
that once it obtains a license, the Japanese regulatory environment will allow
it to provide services in Japan at competitive rates.
Germany. The Company's services in Germany are governed by the German
Telecommunications Act of 1996 (the "German Telecom Act"), which, with respect
to most of its provisions, became effective at the end of July 1996, while all
of its market liberalizing provisions took effect on January 1, 1998. Under
the German Telecom Act, the Company must obtain a license if it (i) operates
transmission infrastructure for the provision of telecommunications services
to the public ("Class 3 License"); or (ii) offers voice telephony services to
the public through telecommunications networks operated by the Company ("Class
4 License"). The Company has obtained a Class 4 license and has entered into
an interconnection agreement with Deutsche Telekom, currently the dominant
operator in Germany, to be able to offer long-distance services on a retail
and wholesale basis. No license is required for the provision of value-added
services such as the reorigination services that the Company currently
provides in Germany, or services to closed user groups using leased lines. A
change in regulatory policy or court decisions could result in the Company
either being required to invest further in the German market in order to
continue to receive the lowest available interconnection rates or having to
pay less favorable interconnection prices. Moreover, the Company is subject to
certain regulatory requirements when it operates under its license, including
the requirement that it present its standard terms and conditions to German
regulators and possibly that it contribute to universal service mechanisms.
There can be no assurance that the regulatory environment in Germany generally
or the applicable interconnection rates with Deutsche Telekom will allow the
Company to provide telecommunications services competitively with other
providers.
Latin America. The recently completed TresCom Merger has provided the
Company with operations on several Caribbean islands and with customers in
several countries in Central America and South America. The Company may decide
to install switches and other network equipment in several of these countries.
Some countries allow only limited competition to the incumbent telephone
carrier, and others require prior authorization before providing competitive
services. Others, such as El Salvador and Guatemala, do not require prior
authorization but would require the Company to obtain numbers or
interconnection with the incumbent carrier. The Company initially will provide
to customers in several Latin American countries international call
reorigination or similar types of services that do not require the Company to
have a presence in the foreign country. Some of these countries may prohibit
some or all forms of call reorigination. There can be no guarantee that the
Company will be able to obtain any authorizations or otherwise take the
actions necessary to provide services in these countries. See "Business--
Government Regulation."
Other Jurisdictions. The Company intends to expand its operations into other
jurisdictions as such markets deregulate and it 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 is dependent upon
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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 it will be able to provide a full range of
services in such market, that it will not have to modify significantly 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
its business, results of operations or financial condition.
CONTROL OF PRIMUS
The executive officers and directors of Primus beneficially own 9,543,539
shares of Primus Common Stock, representing 33.3% of the Common Stock. The
executive officers and directors have also been granted options to purchase an
additional 758,720 shares of Common Stock which vest after August 30, 1998. Of
these amounts, Mr. K. Paul Singh, Primus's Chairman and Chief Executive
Officer, beneficially owns 4,616,946 shares of Common Stock, including options
to purchase 225,400 shares of Common Stock. The Soros/Chatterjee Group (as
defined) beneficially owns 2,808,940 shares of Common Stock. Warburg, Pincus
(as defined) beneficially owns 3,875,689 shares of Common Stock. As a result,
the executive officers, directors, the Soros/Chatterjee Group and Warburg,
Pincus exercise significant influence over such matters as the election of the
Company's directors, 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.
Additionally, under the terms of a shareholders' agreement entered into in
connection with the TresCom Merger among Primus, Warburg, Pincus and Mr.
Singh, Primus has agreed to nominate one individual selected by Warburg,
Pincus and reasonably acceptable to the non-employee directors of Primus, to
serve as a member of the Primus board of directors. The foregoing nomination
right remains effective so long as Warburg, Pincus is the beneficial owner of
10% or more of the outstanding Common Stock. In June 1998, Douglas Karp joined
the Primus board of directors pursuant to the foregoing arrangement. See
"Management--Executive Officers and Directors," "Security Ownership of Certain
Beneficial Owners and Management," and "Certain Transactions--Private Equity
Sale," "Recent Developments--TresCom Merger."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Exchange Notes are a new issue of securities, have no established
trading market, and may not be widely distributed. The Company does not intend
to list the Exchange Notes on any national securities exchange or to seek the
admission thereof to trading in The Nasdaq Stock Market. No assurance can be
given that an active public or other market will develop for the Exchange
Notes or as to the liquidity of or the trading market for the Exchange Notes.
If a trading market does not develop or is not maintained, holders of the
Exchange Notes may experience difficulty in reselling the Exchange Notes or
may be unable to sell them at all. If a market for the Exchange Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the Exchange Notes, future trading prices of the Exchange
Notes will depend on many factors, including, among other things, prevailing
interest rates, the Company's results of operations and the market for similar
securities, and the price at which the holders of Exchange Notes will be able
to sell such Exchange Notes is not assured and the Exchange Notes could trade
at a premium or discount to their purchase price or face value. Depending on
prevailing interest rates, the market for similar securities and other facts,
including the financial condition of the Company, the Exchange Notes may trade
at a discount from their principal amount.
ABSENCE OF REGISTRATION UNDER STATE SECURITIES LAWS
The Exchange Notes have not been registered or qualified under any state
securities laws. The Exchange Offer is being made both to U.S. institutional
investors, pursuant to exemptions from such laws for sales to such investors,
and to non-U.S. persons (within the meaning of Regulation S under the
Securities Act), as state securities laws do not apply to sales to persons who
are not residents of any state. In order to acquire the Initial Notes, each
Holder of Initial Notes was required to represent to the Company that it was
either (i) a "qualified institutional buyer" within the meaning of the Rule
144A under the Securities Act, (ii) an institutional "accredited investor"
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under
the Securities
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<PAGE>
Act or (iii) a non-U.S. person within the meaning of Regulation S under the
Securities Act. Holders who wish to exchange their Initial Notes for Exchange
Notes pursuant to the Exchange Offer will be required to represent to the
Company that they remain institutional investors or non-U.S. persons, as they
represented at the time they acquired their Initial Notes. Any Holder who no
longer qualifies as such an institutional investor (e.g., a bank whose charter
has been revoked) or who is no longer a non-U.S. person, as the case may be,
will not be entitled to exchange such Initial Notes for Exchange Notes in the
Exchange Offer, unless another state securities law exemption is available. If
no such exemption is available, the Holder will continue to hold the Initial
Notes, which will continue to be subject to the restrictions on transfer as
set forth in the legend thereon.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the issuance of the Initial Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Initial Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Initial Notes
for resale under the Securities Act. Exchange Notes issued pursuant to the
Exchange Offer in exchange for Initial Notes may be offered for resale, resold
or otherwise transferred by holders thereof (other than any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act and other than any broker-dealer who purchased Initial Notes
directly from the Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in the distribution of such Notes. Each broker-
dealer that acquired Initial Notes for its own account as a result of market
making or other trading activities and that receives Exchange Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that, by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, as it
may be amended or supplemented from time to time, may be used by a broker-
dealer in connection with resales of Exchange Notes received in exchange for
Initial Notes where such Initial Notes were acquired by such broker-dealer as
a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the effective date of this
Prospectus, it will make this Prospectus, as it may be amended or supplemented
from time to time, available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." However, to comply with the
securities laws of certain jurisdictions, if applicable, the Exchange Notes
may not be offered or sold unless they have been registered or qualified for
sale in such jurisdictions or an exemption from registration or qualification
is available and is complied with. To the extent that Initial Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Initial Notes will be adversely affected.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT
The Initial Notes were sold by the Company to the Initial Purchasers on May
19, 1998, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Initial Notes in reliance on Rule 144A under the
Securities Act and certain other exemptions under the Securities Act. The
Company and the Initial Purchasers also entered into the Registration Rights
Agreement, pursuant to which the Company agreed, with respect to the Initial
Notes, to (i) cause to be filed, on or prior to July 18, 1998, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its reasonable best efforts to cause such registration
statement to be declared effective by the Commission on or prior to September
16, 1998 and (iii) to use its reasonable best efforts to cause the Exchange
Offer to remain open for a period of not less than 30 days. This Exchange
Offer is intended to satisfy the Company's exchange offer obligations under
the Registration Rights Agreement.
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the Exchange Notes for each $1,000 in principal amount
of the outstanding Initial Notes. The Company will accept for exchange any and
all Initial Notes that are validly tendered on or prior to 5:00 p.m., New York
City time, on the Expiration Date. Tenders of the Initial Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Initial Notes being tendered for exchange. However, the
Exchange Offer is subject to the conditions, terms and provisions of the
Registration Rights Agreement. The form and terms of the Exchange Notes will
be identical in all material respects to the form and terms of the Initial
Notes, except that (i) the Exchange Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of Exchange Notes
will not be entitled to Liquidated Damages, and (iii) holders of Exchange
Notes will not be, and upon consummation of the Exchange Offer, Holders of
Initial Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for holders of unregistered securities.
See "--Conditions of the Exchange Offer."
Initial Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Initial Notes held by them, provided that they
appropriately indicate this fact on the Letter of Transmittal accompanying the
tendered Initial Notes (or so indicate pursuant to the procedures for book-
entry transfer).
As of the date of this Prospectus, $150.0 million in aggregate principal
amount of the Initial Notes is outstanding, the maximum amount authorized by
the Indenture for all Notes. As of July 13, 1998, CEDE was the sole registered
holder of the Initial Notes and held $150.0 million of aggregate principal
amount of the Initial Notes for 24 of its participants. Solely for reasons of
administration (and for no other purpose), the Company has fixed the close of
business on July 15, 1998, as the record date (the "Record Date") for purposes
of determining the persons to whom this Prospectus and the Letter of
Transmittal will be mailed initially. Only a Holder of the Initial Notes (or
such Holder's legal representative or attorney-in-fact) may participate in the
Exchange Offer. There will be no fixed record date for determining Holders of
the Initial Notes entitled to participate in the Exchange Offer. The Company
believes that, as of the date of this Prospectus, no such the Holder is an
affiliate (as defined in Rule 405 under the Securities Act) of the Company.
The Company shall be deemed to have accepted validly tendered Initial Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Holders
of Initial Notes and for the purposes of receiving the Exchange Notes from the
Company.
If any tendered Initial Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Initial Notes will be
returned, without expense, to the tendering Holder thereof as promptly as
practicable after the Expiration Date.
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The Expiration Date shall be August 14, 1998 at 5:00 p.m., New York City
time, unless the Company, in its sole discretion, extends the Exchange Offer,
in which case the Expiration Date shall be the latest date and time to which
the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Initial Notes, (ii) to extend the Exchange Offer, (iii) if any
of the conditions set forth below under "Conditions of the Exchange Offer"
shall not have been satisfied, to terminate the Exchange Offer by giving oral
or written notice of such delay, extension or termination to the Exchange
Agent, and (iv) to amend the terms of the Exchange Offer in any manner. If the
Exchange Offer is amended in a manner determined by the Company to constitute
a material change, the Company will, in accordance with applicable law, file a
post-effective amendment to the registration statement (a "Post-effective
Amendment") and resolicit the registered holders of the Initial Notes. If the
Company files a Post-effective Amendment, it will notify the Exchange Agent of
an extension of the Exchange Offer by oral or written notice, and will make a
public announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the effectiveness of such Post-effective
Amendment. Such notice and public announcement shall set forth the new
Expiration Date, which new Expiration Date shall be no less than five days
after the then applicable Expiration Date.
CONDITIONS OF THE EXCHANGE OFFER
The Exchange Offer is not conditioned upon any minimum principal amount of
Initial Notes being tendered for exchange. However, the Exchange Offer is
subject to the condition that it does not violate any applicable law or
interpretation of the staff of the Commission.
Further, as a condition to its participation in the Exchange Offer, each
Holder of Initial Notes (including, without limitation, any Holder who is a
Broker-Dealer) will be required to furnish a written representation to the
Company (which may be contained in the Letter of Transmittal to the effect
that such Holder (i) is not an affiliate of the Company, (ii) is not engaged
in, or does not intend to engage in, and has no arrangement or understanding
with any person to participate in, a distribution of the Exchange Notes to be
issued in the Exchange Offer and (iii) is acquiring the Exchange Notes in its
ordinary course of business. Each Holder using the Exchange Offer to
participate in a distribution of the Exchange Notes will be required to
acknowledge and agree that, if the resales are of Exchange Notes obtained by
such Holder in exchange for Initial Notes acquired directly from the Company
or an affiliate thereof, it (1) could not, under Commission policy as in
effect on the date of the Registration Rights Agreement, rely on the position
of the Commission enunciated in Morgan Stanley and Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1988), as interpreted in the Commission's letter to Shearman & Sterling
(available July 2, 1993) and K-III Communications Corporation (available May
14, 1993), or similar no-action or interpretive letters, and (2) must comply
with the registration and prospectus delivery requirements of the Exchange Act
in connection with a secondary resale transaction and that such a secondary
sale transaction must be covered by an effective registration statement
containing the selling security holder information required by Item 507 or
508, as applicable, of Regulation S-K, unless an exemption from registration
is otherwise available.
In addition, each Holder of Initial Notes will be required to furnish a
written representation to the Company (which may be contained in the Letter of
Transmittal to the effect that such Holder is either (A) a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act,
(B) an institutional "accredited
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investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule
501 under the Securities Act or (C) a non-U.S. person within the meaning of
Regulation S under the Securities Act.
TERMINATION OF CERTAIN RIGHTS
The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default, Holders of Initial Notes
are entitled to receive Liquidated Damages. If (i) the Company fails to file
with the Commission any of the Registration Statements required by the
Registration Rights Agreement on or before the date specified therein for such
filing, (ii) any of such Registration Statement is not declared effective by
the Commission on or prior to the date specified for such effectiveness in the
Registration Rights Agreement (the "Effectiveness Target Date"), (iii) the
Exchange Offer has not been consummated within 30 days after the Effectiveness
Target Date with respect to the Exchange Offer Registration Statement or (iv)
any Registration Statement required by the Registration Rights Agreement is
filed and declared effective but thereafter ceases to be effective or fails to
be usable for its intended purpose without being succeeded within five
business days by a post-effective amendment to such Registration Statement
that cures such failure and that is itself immediately declared effective
(each such event referred to in clauses (i) through (iv) above, a
"Registration Default"), additional cash interest ("Liquidated Damages") shall
accrue to each Holder of the Notes commencing upon the occurrence of such
Registration Default in an amount equal to .50% per annum of the principal
amount of Notes held by such Holder. The amount of Liquidated Damages will
increase by an additional .50% per annum of the principal amount of Notes with
respect to each subsequent 90-day period (or portion thereof) until all
Registration Defaults have been cured, up to a maximum rate of Liquidated
Damages of 1.50% per annum of the principal amount of Notes. All accrued
Liquidated Damages will be paid to Holders by the Company in the same manner
as interest is paid pursuant to the Indenture. Following the cure of all
Registration Defaults relating to any particular Transfer Restricted
Securities, the accrual of Liquidated Damages with respect to such Transfer
Restricted Securities will cease.
ACCRUED INTEREST ON THE INITIAL NOTES
The Exchange Notes will bear interest at a rate equal to 9 7/8% per annum
from and including their date of issuance. Holders whose Initial Notes are
accepted for exchange will have the right to receive interest accrued thereon
from the date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the Exchange Notes,
such interest to be payable with the first interest payment on the Exchange
Notes. Interest on the Initial Notes accepted for exchange, which interest
accrued at the rate of 9 7/8% per annum, will cease to accrue on the day prior
to the issuance of the Exchange Notes. See "Description of Exchange Notes--
General."
PROCEDURES FOR TENDERING INITIAL NOTES
The tender of a Holder's Initial Notes as set forth below and the acceptance
thereof by the Company will constitute a binding agreement between the
tendering Holder and the Company upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal.
Except as set forth below, a Holder who wishes to tender Initial Notes for
exchange pursuant to the Exchange Offer must transmit such Initial Notes,
together with a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to the
Exchange Agent at the address set forth on the back cover page of this
Prospectus prior to 5:00 p.m., New York City time, on the Expiration Date.
THE METHOD OF DELIVERY OF INITIAL NOTES, LETTERS OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT IS
RECOMMENDED THAT THE HOLDER USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL
CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY.
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Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Initial Notes surrendered for
exchange pursuant hereto are tendered (i) by a registered holder of the
Initial Notes who has not completed either the box entitled "Special Exchange
Instructions" or the box entitled "Special Delivery Instructions" in the
Letter of Transmittal or (ii) by an Eligible Institution (as defined). In the
event that a signature on a Letter of Transmittal or a notice of withdrawal,
as the case may be, is required to be guaranteed, such guarantee must be by a
firm which is a member of a registered national securities exchange or The
Nasdaq Stock Market, a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(collectively, "Eligible Institutions"). If the Letter of Transmittal is
signed by a person other than the registered holder of the Initial Notes, the
Initial Notes surrendered for exchange must either (i) be endorsed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution or (ii) be accompanied by a bond power, in satisfactory form as
determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution. The term "registered holder" as used herein with respect to the
Initial Notes means any person in whose name the Initial Notes are registered
on the books of the Registrar.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Initial Notes tendered for exchange
will be determined by the Company in its sole discretion, which determination
shall be final and binding. The Company reserves the absolute right to reject
any and all Initial Notes not properly tendered and to reject any Initial
Notes the Company's acceptance of which might, in the judgment of the Company
or its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
particular Initial Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any holder who seeks to tender Initial
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer (including the Letter of Transmittal and the
instructions thereto) by the Company shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Initial Notes for exchange must be cured within such period of time
as the Company shall determine. The Company will use reasonable efforts to
give notification of defects or irregularities with respect to tenders of
Initial Notes for exchange but shall not incur any liability for failure to
give such notification. Tenders of the Initial Notes will not be deemed to
have been made until such irregularities have been cured or waived.
If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, corporation or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company, in
its sole discretion, of such person's authority to so act must be submitted.
Any beneficial owner of the Initial Notes (a "Beneficial Owner") whose
Initial Notes are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to tender Initial Notes in the
Exchange Offer should contact such registered holder promptly and instruct
such registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior
to completing and executing the Letter of Transmittal and tendering Initial
Notes, make appropriate arrangements to register ownership of the Initial
Notes in such Beneficial Owner's name. Beneficial Owners should be aware that
the transfer of registered ownership may take considerable time.
By tendering, each registered holder will represent to the Company that,
among other things (i) the Exchange Notes to be acquired in connection with
the Exchange Offer by the Holder and each Beneficial Owner of the Initial
Notes are being acquired by the Holder and each Beneficial Owner in the
ordinary course of business of the Holder and each Beneficial Owner, (ii) the
Holder and each Beneficial Owner are not participating, do not intend to
participate, and have no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes, (iii) the Holder and
each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the Exchange Notes
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must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot rely on the position of the
staff of the Commission set forth in no-action letters that are discussed
herein under "Resales of Exchange Notes," (iv) that if the Holder is a broker-
dealer that acquired Initial Notes as a result of market making or other
trading activities, it will deliver a prospectus in connection with any resale
of Exchange Notes acquired in the Exchange Offer, (v) the Holder and each
Beneficial Owner understand that a secondary resale transaction described in
clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the Holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the
Securities Act, of the Company except as otherwise disclosed to the Company in
writing. In connection with a book-entry transfer, each participant will
confirm that it makes the representations and warranties contained in the
Letter of Transmittal.
Guaranteed Delivery Procedures. Holders who wish to tender their Initial
Notes and (i) whose Initial Notes are not immediately available or (ii) who
cannot deliver their Initial Notes or any other documents required by the
Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or
complete the procedure for book-entry transfer on a timely basis), may tender
their Initial Notes according to the guaranteed delivery procedures set forth
in the Letter of Transmittal. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution and a Notice of Guaranteed
Delivery (as defined in the Letter of Transmittal) must be signed by such
Holder, (ii) on or prior to the Expiration Date, the Exchange Agent must have
received from the Holder and the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail
or hand delivery) setting forth the name and address of the Holder, the
certificate number or numbers of the tendered Initial Notes, and the principal
amount of tendered Initial Notes, stating that the tender is being made
thereby and guaranteeing that, within three business days after the date of
delivery of the Notice of Guaranteed Delivery, the tendered Initial Notes, a
duly executed Letter of Transmittal and any other required documents will be
deposited by the Eligible Institution with the Exchange Agent, and (iii) such
properly completed and executed documents required by the Letter of
Transmittal and the tendered Initial Notes in proper form for transfer (or
confirmation of a book-entry transfer of such Initial Notes into the Exchange
Agent's account at the Depositary) must be received by the Exchange Agent
within three business days after the Expiration Date. Any Holder who wishes to
tender Initial Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery and Letter of Transmittal relating to such Initial Notes prior to
5:00 p.m., New York City time, on the Expiration Date.
Book-Entry Delivery. The Exchange Agent will establish an account with
respect to the Initial Notes at the Depositary ("Book-Entry Transfer
Facility") for purposes of the Exchange Offer promptly after the date of this
Prospectus. Any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of the Initial Notes
by causing such facility to transfer Initial Notes into the Exchange Agent's
account in accordance with such facility's procedure for such transfer. Even
though delivery of Initial Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal (or a manually
signed facsimile thereof), with any required signature guarantees, or an
Agent's Message (as defined below) in connection with a book-entry transfer,
and other documents required by the Letter of Transmittal, must, in any case,
be transmitted to and received by the Exchange Agent at one of its addresses
set forth on the back cover of this Prospectus before the Expiration Date, or
the guaranteed delivery procedure set forth above must be followed. Delivery
of the Letter of Transmittal and any other required documents to the Book-
Entry Transfer Facility does not constitute delivery to the Exchange Agent.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part
of a book-entry confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering the Initial Notes that such participant
has received and agrees to be bound by the terms of the Letter of Transmittal
and that the Company may enforce such agreement against such participant.
31
<PAGE>
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all the conditions to the Exchange Offer, the
Company will accept any and all Initial Notes that are properly tendered in
the Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Notes issued pursuant to the Exchange Offer will be
delivered as soon as practicable after acceptance of the Initial Notes. For
purposes of the Exchange Offer, the Company shall be deemed to have accepted
validly tendered Initial Notes, when, as, and if the Company has given oral or
written notice thereof to the Exchange Agent.
In all cases, issuances of Exchange Notes for Initial Notes that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of such Initial Notes, a properly
completed and duly executed Letter of Transmittal and all other required
documents (or of confirmation of a book-entry transfer of such Initial Notes
into the Exchange Agent's account at the Depositary); provided, however, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Initial
Notes are not accepted for any reason, such unaccepted Initial Notes will be
returned without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
WITHDRAWAL RIGHTS
Tenders of the Initial Notes may be withdrawn by delivery of a written
notice to the Exchange Agent, at its address set forth on the back cover page
of this Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Initial Notes to be withdrawn (the
"Depositor"), (ii) identify the Initial Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Initial Notes, as
applicable), (iii) be signed by the Holder in the same manner as the original
signature on the Letter of Transmittal by which such Initial Notes were
tendered (including any required signature guarantees) or be accompanied by a
bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution together with the other documents required upon transfer by the
Indenture, and (iv) specify the name in which such Initial Notes are to be re-
registered, if different from the Depositor, pursuant to such documents of
transfer. Any questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, in its
sole discretion and such determination shall be final and binding. The Initial
Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Initial Notes which have been
tendered for exchange but which are withdrawn will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal.
Properly withdrawn Initial Notes may be retendered by following one of the
procedures described under "The Exchange Offer--Procedures for Tendering
Initial Notes" at any time on or prior to the Expiration Date.
THE EXCHANGE AGENT; ASSISTANCE
First Union National Bank is the Exchange Agent. All tendered Initial Notes,
executed Letters of Transmittal and other related documents should be directed
to the Exchange Agent. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other
related documents should be addressed to the Exchange Agent as follows:
BY MAIL, HAND OR OVERNIGHT DELIVERY: FACSIMILE TRANSMISSION:
First Union Customer Information Center (704) 590-7628
Reorganization Department, 3C3-NC 1153 To confirm receipt: (704) 590-7408
1525 West W.T. Harris Boulevard
Charlotte, N.C. 28262
32
<PAGE>
SOLICITATION OF TENDERS; FEES AND EXPENSES
No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those
contained in this Prospectus. If given or made, such information or
representations should not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange made
hereunder shall, under any circumstances, create any implication that there
has been no change in the affairs of the Company since the respective dates as
of which information is given herein. The Exchange Offer is not being made to
(nor will offers be accepted from or on behalf of) holders of Notes in any
jurisdiction in which the making of the Exchange Offer or the acceptance
thereof would not be in compliance with the laws of such jurisdiction.
However, the Company may, at its discretion, take such action as it may deem
necessary to make the Exchange Offer in any such jurisdiction and extend the
Exchange Offer to holders of Notes in such jurisdiction.
All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities laws), (ii) printing expenses (including, without limitation,
expenses of printing certificates for the Exchange Notes in a form eligible
for deposit with The Depositary and of printing Prospectuses), (iii)
messenger, telephone and delivery expenses, (iv) fees and disbursements of
counsel for the Company, (v) fees and disbursements of independent certified
public accountants, (vi) rating agency fees, (vii) internal expenses of the
Company (including, without limitation, all salaries and expenses of officers
and employees of the Company performing legal or accounting duties), and (ix)
fees and expenses incurred in connection with the listing, if any, of the
Exchange Notes on a securities exchange.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Initial Notes, as reflected in the Company's accounting records on the date of
the exchange. Accordingly, no gain or loss will be recognized by the Company
for accounting purposes. The expenses of the Exchange Offer will be amortized
over the term of the Exchange Notes.
RESALES OF THE EXCHANGE NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer to a Holder in exchange for
Initial Notes may be offered for resale, resold and otherwise transferred by
such Holder (other than (i) a broker-dealer who purchased Initial Notes
directly from the Company for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act, or
(ii) a person that is an affiliate of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the Holder
is acquiring the Exchange Notes in the ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the Exchange Notes. The Company has not
requested or obtained an interpretive letter from the Commission staff with
respect to this Exchange Offer, and the Company and the Holders are not
entitled to rely on interpretive advice provided by the staff to other
persons, which advice was based on the facts and conditions represented in
such letters. However, the Exchange Offer is being conducted in a manner
intended to be consistent with the facts and conditions represented in such
letters. If any Holder acquires Exchange Notes in the Exchange Offer for the
purpose of distributing or participating in a distribution of the Exchange
Notes, such Holder cannot rely on the position of the staff of the Commission
enunciated in
33
<PAGE>
Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), as interpreted in the
Commission's letters to Shearman and Sterling (available July 2, 1993) and K-
III Communications Corporation (available May 14, 1993), or similar no-action
or interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction, unless an exemption from registration is otherwise
available. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Initial Notes, where such Initial Notes were acquired by such
broker-dealer as a result of market making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Company has agreed that for a period of 180 days
after the effective date of this Prospectus, it will make this Prospectus, as
amended and supplemented, available to any broker-dealer who receives Exchange
Notes in the Exchange Offer for use in connection with any such resale. See
"Plan of Distribution."
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Initial Notes who do not exchange their Initial Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Initial Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Initial Notes pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Initial Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exception from, or in a transaction
not subject to, the Securities Act and applicable states securities laws. The
Company does not currently anticipate that it will register the Initial Notes
under the Securities Act. See "Risk Factors--Consequences of Failure to
Exchange."
OTHER
Participation in the Exchange Offer is voluntary, and holders of Initial
Notes should carefully consider whether to participate. Holders of the Initial
Notes are urged to consult their financial and tax advisers in making their
own decisions on what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Initial Notes pursuant to the terms of, this Exchange Offer,
the Company will have fulfilled a covenant contained in the Registration
Rights Agreement. Holders of Initial Notes who do not tender their Initial
Notes in the Exchange Offer will continue to hold such Initial Notes and will
be entitled to all the rights, and limitations applicable thereto, under the
Indenture, except for any such rights under the Registration Rights Agreement
that by their terms terminate or cease to have further effectiveness as a
result of the making of this Exchange Offer. See "Description of Exchange
Notes." All untendered Initial Notes will continue to be subject to the
restrictions on transfer set forth in the Indenture. To the extent that
Initial Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered Initial Notes could be adversely affected.
The Company may in the future seek to acquire untendered Initial Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plan to acquire any Initial
Notes which are not tendered in the Exchange Offer.
34
<PAGE>
RECENT DEVELOPMENTS
TRESCOM MERGER
On June 9, 1998, pursuant to the Merger Agreement, the Company acquired all
of the outstanding shares of TresCom, a facilities-based long distance
telecommunications carrier focused on international long distance traffic
originating in the United States and terminating in Latin America. The TresCom
Merger has provided Primus with accelerated entry into the Latin American
international long distance markets and expanded scope and coverage of the
Network, thereby providing additional opportunities to migrate traffic onto
the Network, resulting in better utilization of the Network and reduced
variable costs per minute of use. The Company believes that, in addition to
providing transmission facilities, and adding foreign carrier agreements and
direct connection to foreign telecommunications carriers, the TresCom Merger
adds experienced management, and will enable the combined Company to realize
synergies in selling, general and administrative expenses. Under the terms of
the Merger Agreement, TresCom shareholders received approximately 0.6147
shares of Common Stock for each share of TresCom common stock exchanged in the
TresCom Merger.
TELEPASSPORT/USFI ACQUISITION
In October 1997, Primus completed the acquisition of all of the equity and
ownership interests of TelePassport and substantially all of the assets of
USFI for an aggregate purchase price of $11.5 million in cash. TelePassport
and USFI were under common control and engaged in the business of providing
international and domestic long distance and reorigination services in Europe,
Asia, and South Africa. The acquisition gave Primus a customer base in Germany
and a facilities-based carrier in Japan.
HOTKEY INVESTMENT
In March 1998, Primus purchased a controlling interest in Hotkey, a
Melbourne, Australia based Internet service provider. The Company's 60%
ownership of Hotkey was purchased for approximately $1.3 million in cash and,
under certain circumstances, the Company has the right to acquire 100% of the
equity interest in Hotkey. Hotkey will allow Primus to offer Internet access
to its customers in Australia and will serve as the Company's entrance into
Internet protocol based telephony. Prior to the Hotkey investment, Primus's
chairman, K. Paul Singh, owned approximately 14% of Hotkey. As a result of the
transaction, Mr. Singh owns approximately 4% of Hotkey. See "Certain
Transactions."
ECLIPSE ACQUISITION
In April 1998, Primus acquired all of the outstanding stock of Eclipse, a
data communications service provider based in Sydney, Australia. Eclipse
commenced operations in early 1996 and has approximately 100 business
customers, annualized revenues of approximately $4 million and data switches
and operational centers in all five capital cities in Australia. Primus paid
approximately $2.5 million for the stock of Eclipse, comprised of cash and
27,500 shares of Common Stock. With the acquisition of Eclipse, Primus now
offers a complete range of telecommunications services for corporate customers
in Australia, including fully integrated voice and data networks, as well as
Internet access services.
35
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1998: (i) the actual
capitalization of the Company; and (ii) the actual capitalization of the
Company after giving pro forma effect to the TresCom Merger and the sale of
the Initial Notes in the Offering, less discounts, commissions, and expenses
of the Offering payable by the Company, and the application of the 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 Unaudited Consolidated Financial Statements of each of
Primus and TresCom, and notes thereto, and the Unaudited Pro Forma Financial
Data, and the notes thereto, all of which are included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
ACTUAL PRO FORMA
------------ ---------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
Cash and cash equivalents.................. $ 97,381 $ 226,675
Restricted investments (including current
and long-term)............................ 61,478 61,478
------------ ------------
Total cash, cash equivalents and
restricted investments.................. $ 158,859 $ 288,153
============ ============
Debt and capital lease obligations:
11 3/4% Senior Notes due 2004............ $ 222,706 $ 222,706
9 7/8% Senior Notes due 2008............. -- 150,000
Notes payable............................ 189 189
Long-term obligations.................... -- 396
Capital lease obligations................ 9,343 14,280
------------ ------------
Total debt and capital lease
obligations........................... 232,238 387,571
Stockholders' Equity:
Common Stock, $.01 par value--40,000,000
shares actual and pro forma authorized;
19,822,945 shares actual and 27,659,311
shares pro forma, issued and
outstanding............................. 198 277
Additional paid-in capital............... 92,696 248,206
Accumulated deficit...................... (60,322) (60,322)
Cumulative translation adjustment........ (744) (744)
------------ ------------
Total stockholders' equity............. 31,828 187,417
------------ ------------
Total capitalization................... $ 264,066 $ 574,988
============ ============
</TABLE>
36
<PAGE>
SELECTED FINANCIAL DATA
PRIMUS
The following selected financial data should be read in conjunction with the
consolidated financial statements of Primus, and the notes thereto, contained
elsewhere in this Prospectus, and with "Management's Discussion and Analysis
of Financial Condition and Results of Operations." The statement of operations
data for Primus from inception to December 31, 1994, for the years ended
December 31, 1995, 1996, 1997, and the balance sheet data as of December 31,
1994, 1995, 1996 and 1997 have been derived from the consolidated financial
statements of Primus, which have been audited by Deloitte & Touche LLP,
independent auditors. The statement of operations data for Primus for the
three months ended March 31, 1997 and 1998, and the balance sheet data as of
March 31, 1998, has been derived from the unaudited consolidated financial
statements of Primus, which, in management's opinion, include all adjustments
(consisting of only normal recurring adjustments) necessary for a fair
presentation of the information set forth therein.
<TABLE>
<CAPTION>
THREE MONTHS
PERIOD FROM YEAR ENDED ENDED
INCEPTION THROUGH DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------- -----------------
1994 1995 1996 1997 1997 1998
----------------- ------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenue............. $ -- $ 1,167 $172,972 $280,197 $59,036 $ 80,051
Cost of revenue......... -- 1,384 158,845 252,731 55,034 68,722
------ ------- -------- -------- ------- --------
Gross margin
(deficit)............. -- (217) 14,127 27,466 4,002 11,329
------ ------- -------- -------- ------- --------
Operating expenses:
Selling, general and
administrative........ 557 2,024 20,114 50,622 8,829 15,377
Depreciation and
amortization.......... 12 160 2,164 6,733 797 3,478
------ ------- -------- -------- ------- --------
Total operating
expenses............ 569 2,184 22,278 57,355 9,626 18,855
------ ------- -------- -------- ------- --------
Loss from operations.... (569) (2,401) (8,151) (29,889) (5,624) (7,526)
Interest expense........ (13) (59) (857) (12,914) (151) (7,175)
Interest income......... 5 35 785 6,238 785 2,384
Other income (expense).. -- -- (345) 407 119 --
------ ------- -------- -------- ------- --------
Loss before income
taxes.................. (577) (2,425) (8,568) (36,158) (4,871) (12,317)
Income taxes............ -- -- (196) (81) (36) --
------ ------- -------- -------- ------- --------
Net loss................ $ (577) $(2,425) $ (8,764) $(36,239) $(4,907) $(12,317)
====== ======= ======== ======== ======= ========
Basic and diluted net
loss per common share.. $(0.22) $ (0.48) $ (0.75) $ (1.99) $ (0.28) $ (0.62)
====== ======= ======== ======== ======= ========
Weighted average number
of common shares
outstanding............ 2,620 5,019 11,660 18,250 17,779 19,717
====== ======= ======== ======== ======= ========
Ratio of earnings to
fixed charges (1)...... -- -- -- -- -- --
====== ======= ======== ======== ======= ========
GEOGRAPHIC DATA:
Net revenue
North America (2)...... $ -- $ 1,167 $ 16,573 $ 74,359 $ 8,271 $ 26,310
Asia Pacific (3)....... -- -- 151,253 183,126 46,886 44,659
Europe (4)............. -- -- 5,146 22,712 3,879 9,082
------ ------- -------- -------- ------- --------
Total.................. $ -- $ 1,167 $172,972 $280,197 $59,036 $ 80,051
====== ======= ======== ======== ======= ========
OTHER DATA:
EBITDA (5).............. $ (557) $(2,241) $ (5,987) $(23,156) $(4,827) $ (4,048)
Capital expenditures
(6).................... $ 124 $ 974 $ 15,951 $ 43,457 $ 8,771 $ 12,044
Number of switches...... -- 1 1 11 8 11
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
------------------------------ ---------
1994 1995 1996 1997 1998
---- ------ -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short term
investments......................... $221 $2,296 $ 60,599 $115,232 $ 97,381
Restricted investments (including
current and long-term).............. -- -- -- 73,550 61,478
Working capital (deficit)............ (295) 1,295 39,282 115,995 104,726
Total assets......................... 487 5,042 140,560 358,013 355,563
Total debt (including current
portion)............................ 13 528 17,248 231,211 232,238
Stockholders' equity ................ 71 2,562 76,440 42,526 31,828
</TABLE>
- --------
(1) The ratio of earnings to fixed charges is computed by dividing pre-tax
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 1994, 1995, 1996
and 1997, and for the three months ended March 31, 1997 and 1998, earnings
were insufficient to cover fixed charges by $0.6 million, $2.4 million,
$8.6 million, $36.4 million, $5.1 million and $12.3 million, respectively.
(2) Consists primarily of net revenue from operations in the United States for
all periods prior to April 1997. Net revenue for 1997 and for the three
months ended March 31, 1998 reflects commencement of operations in Canada
beginning in April, 1997.
(3) Consists solely of net revenue from operations in Australia for 1996. Net
revenue for 1997 and for the three months ended March 31, 1998 reflects
commencement of operations in Japan beginning in October 1997.
(4) Consists solely of net revenue from operations in the United Kingdom.
(5) As used herein, "EBITDA" is defined as net income or loss plus
depreciation expense, amortization expense, interest expense and income
taxes, minus extraordinary income and gains, if any, and plus
extraordinary losses, if any. While EBITDA should not be construed as a
substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information regarding the ability of Primus to meet its future
debt service, capital expenditures and working capital requirements.
EBITDA is not necessarily a measure of Primus's ability to fund its cash
needs and is not necessarily comparable to similarly titled measures of
other companies.
(6) Capital expenditures include assets acquired, committed to be acquired and
leased under capital lease agreements.
38
<PAGE>
TRESCOM
The following selected consolidated financial data for TresCom and its
predecessors should be read in conjunction with the consolidated financial
statements of TresCom, and the notes thereto, contained elsewhere herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--TresCom." The selected consolidated financial data of (i) St.
Thomas and San Juan Telephone Company, Inc. ("SJTC") and Total
Telecommunications, Inc. ("TTI"), TresCom's combined predecessors, (ii)
TresCom's combined predecessors and TresCom and (iii) TresCom alone presented
below under "Statement of Operations Data" for the year ended December 31,
1993, the period from January 1, 1994 to November 30, 1994, the year ended
December 31, 1994 for both TresCom's combined predecessors and TresCom, the
years ended December 31, 1995, 1996 and 1997, for TresCom and "Balance Sheet
Data" as of December 31, 1994, 1995, 1996 and 1997 have been derived from the
audited consolidated financial statements of TresCom and its predecessors. The
statement of operations data for TresCom for the three months ended March 31,
1997 and 1998, and the balance sheet data as of March 31, 1998, has been
derived from the unaudited consolidated financial statements of TresCom which,
in management's opinion, include all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation of the information
set forth therein. The selected consolidated financial data as of December 31,
1993 have been derived from the unaudited financial statements of TresCom and
its predecessors, which the Company believes include all adjustments TresCom
considers necessary for a fair presentation of the financial information set
forth therein.
<TABLE>
<CAPTION>
COMBINED
COMBINED PREDECESSORS
PREDECESSORS AND TRESCOM TRESCOM
------------------------- ------------ -------------------------------------------------------------
PERIOD THREE
FROM MONTHS
YEAR JANUARY 1, YEAR YEAR ENDED ENDED
ENDED 1994 TO ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, NOVEMBER 30, DECEMBER 31, ----------------------------------------- ----------------
1993(1) 1994(2) 1994(3) 1994(4) 1995 1996 1997 1997 1998
------------ ------------ ------------ -------- -------- -------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Revenues......... $27,900 $18,871 $ 50,290 $ 31,419 $102,641 $139,621 $157,641(5) $36,143 $38,137
Cost of
services........ 15,994 11,802 32,603 20,801 74,679 106,928 124,365 27,812 30,971
------- ------- -------- -------- -------- -------- -------- ------- -------
Gross profit..... 11,906 7,069 17,687 10,618 27,962 32,693 33,276 8,331 7,166
Selling, general
and
administrative.. 11,078 7,222 29,432 22,210 32,437 30,808 36,386 8,108 9,262
Depreciation and
amortization.... 602 252 2,156 1,904 3,961 4,928 6,599 1,501 1,944
------- ------- -------- -------- -------- -------- -------- ------- -------
Operating income
(loss).......... 226 (405) (13,901) (13,496) (8,436) (3,043) (9,709) (1,278) (4,040)
Interest and
other (income)
expense, net.... 130 134 693 559 3,191 578 1,146 (2) 435
------- ------- -------- -------- -------- -------- -------- ------- -------
Net income (loss)
before taxes and
extraordinary
item............ 96 (539) (14,594) (14,055) (11,627) (3,621) (10,855) (1,276) (4,475)
Provision for
income taxes.... 99 13 13 -- -- -- -- -- --
------- ------- -------- -------- -------- -------- -------- ------- -------
Loss before
extraordinary
item............ (3) (552) (14,607) (14,055) (11,627) (3,621) (10,855) (1,276) (4,475)
Extraordinary
item............ -- -- -- -- -- 1,956 -- -- --
------- ------- -------- -------- -------- -------- -------- ------- -------
Net loss......... $ (3) $ (552) $(14,607) $(14,055) $(11,627) $ (5,577)(6) $(10,855) $(1,276) $(4,475)
======= ======= ======== ======== ======== ======== ======== ======= =======
OTHER DATA:
EBITDA(7)........ $ 828 $ (153) $ (6,299) $ (6,146) $ (4,336) $ (3,149) $ (2,853) $ 385 $(1,936)
Capital
expenditures.... N/A N/A N/A $ 5,612 $ 5,528 $ 12,796 $ 9,049 $ 1,080 $ 1,449
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
COMBINED
PREDECESSORS
COMBINED AND
PREDECESSORS TRESCOM TRESCOM TRESCOM
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
---------------- ----------------- ----------------- ---------
1993 1994 1994 1995 1996 1997 1998
------- ------- ------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash.................... $ 1,786 $ -- $ -- $ 2,052 $ 6,020 $ 1,481 $ 102
Working capital
(deficiency)........... 122 (8,674) (8,674) (30,012) 8,201 5,744 2,182
Total assets............ 13,718 61,565 61,565 72,630 101,610 108,429 101,991
Long-term obligations
due within one year.... 1,408 174 174 25,290 817 1,098 1,299
Long-term obligations... 8,817 26,114 26,114 702 3,965 19,593 19,842
Stockholders' (deficit)
equity................. (2,147) 14,875 14,875 21,508 67,322 58,950 54,781
</TABLE>
- --------
(1) Includes approximately $25,000 of start-up costs incurred by TresCom from
its formation on December 8, 1993 through December 31, 1993.
(2) Includes operations for St. Thomas and SJTC from January 1, 1994 through
February 22, 1994 and operations for TTI from January 1, 1994 through
November 30, 1994.
(3) Includes results of operations or period-end amounts, as applicable, for
each of TresCom and the Predecessors, as if the acquisition of each of the
TresCom predecessors had occurred on January 1, 1994.
(4) Includes results of operations for STSJ from February 23, 1994 through
December 31, 1994 and results of operations for TTI from December 1, 1994
through December 31, 1994.
(5) In 1997, TresCom recognized $543,000 of revenue from the sale of excess
IRU capacity on undersea digital fiber optic transmission cables.
(6) Includes an extraordinary loss on the early extinguishment of debt of $2.0
million.
(7) As used herein, "EBITDA" is defined as net income or loss plus
depreciation expense, amortization expense, interest expense and income
taxes, minus extraordinary income, if any, and plus extraordinary losses,
if any. EBITDA also includes an adjustment of $5.4 million associated with
the revaluation of an acquired customer base for the combined Predecessors
and TresCom during 1994. While EBITDA should not be construed as a
substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, it is included herein to provide
additional information regarding the ability of TresCom to contribute to
the payment of the Company's future debt service, capital expenditures and
working capital requirements. EBITDA is not necessarily a measure of the
ability to fund cash needs and is not necessarily comparable to similarly
titled measures of other companies.
40
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial statements are
based on the historical presentation of the consolidated financial statements
of the Company and TresCom. The Unaudited Pro Forma Consolidated Statement of
Operations for the three months ended March 31, 1998 gives effect to the
TresCom Merger and the Offering as if they had occurred on January 1, 1998.
The Unaudited Pro Forma Consolidated Statement of Operations for the year
ended December 31, 1997, gives effect to the TresCom Merger, the
TelePassport/USFI Acquisition and the Offering as if they had occurred on
January 1, 1997. The Unaudited Pro Forma Consolidated Balance Sheet as of
March 31, 1998 gives effect to the TresCom Merger and the Offering, as if they
had occurred on March 31, 1998. The unaudited pro forma consolidated financial
statements should be read in conjunction with the historical financial
statements, including notes thereto, of Primus, TresCom, and USFI, Inc.
included elsewhere herein.
The TresCom Merger has been accounted for using the purchase method of
accounting. In the unaudited pro forma consolidated balance sheet the total
purchase price of TresCom has been allocated to tangible and intangible assets
and liabilities based upon management's preliminary estimate of their
respective fair values, with the excess of purchase price over the fair value
of net assets acquired allocated to goodwill.
The unaudited pro forma consolidated financial statements may not be
indicative of the results that actually would have occurred if the
transactions had been in effect on the dates indicated or which may be
obtained in the future.
41
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED
NOTES AS ADJUSTED TRESCOM AND
OFFERING NOTES TRESCOM NOTES
PRIMUS ADJUSTMENTS OFFERING TRESCOM ADJUSTMENTS OFFERING
-------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue............. $ 80,051 $ -- $ 80,051 $38,137 $(1,817)(2) $114,664
(1,707)(3)
Cost of revenue......... 68,722 -- 68,722 30,971 (1,707)(3) 97,986
-------- ------- -------- ------- ------- --------
Gross margin............ 11,329 -- 11,329 7,166 (1,817) 16,678
Operating expenses:
Selling, general and
administrative........ 15,377 -- 15,377 9,262 (1,817)(2) 22,822
Depreciation and
amortization.......... 3,478 -- 3,478 1,944 (587)(4) 6,894
2,083 (5)
(24)(7)
-------- ------- -------- ------- ------- --------
Total operating
expenses.............. 18,855 -- 18,855 11,206 (345) 29,716
-------- ------- -------- ------- ------- --------
Loss from operations.... (7,526) -- (7,526) (4,040) (1,472) (13,038)
Interest expense........ (7,175) (3,828)(1) (11,003) (415) 410 (6) (11,008)
Interest income......... 2,384 -- 2,384 -- -- 2,384
Other income (expense).. -- -- -- (20) -- (20)
-------- ------- -------- ------- ------- --------
Loss before income
taxes.................. (12,317) (3,828) (16,145) (4,475) (1,062) (21,682)
Income taxes............ -- -- -- -- -- (8) --
-------- ------- -------- ------- ------- --------
Net loss................ $(12,317) $(3,828) $(16,145) $(4,475) $(1,062) $(21,682)
======== ======= ======== ======= ======= ========
Basic and diluted loss
per common share....... $ (0.62) $ (0.79)
======== ========
Weighted average number
of common shares
outstanding............ 19,717 7,836 (9) 27,553
======== ======= ========
</TABLE>
- --------
Notes Offering:
(1) To reflect interest expense on the Notes, at an interest rate of 9.875%,
and amortization on $5.0 million of deferred financing costs.
TresCom Adjustments:
(2) To reflect the reclassification of TresCom's bad debt costs from SG&A to a
reduction of revenue to conform to Primus's accounting policies.
(3) To eliminate the effects of intercompany transactions between Primus and
TresCom.
(4) To reverse amortization expense associated with TresCom's previously
acquired customer list and the excess of purchase price over the fair
value of assets acquired.
(5) To record amortization expense associated with acquired customers list and
the excess of purchase price over the fair value of net assets acquired.
(6) To reflect reduction in interest expense related to the repayment of
TresCom's credit line in connection with the TresCom Merger.
(7) To reflect reduction in amortization of deferred financing costs resulting
from repayment of credit line in connection with the TresCom Merger.
(8) 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.
(9) To reflect the issuance of Primus Common Stock in exchange for the
outstanding shares of TresCom.
42
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
AS ADJUSTED,
PRO FORMA AS ADJUSTED TRESCOM, USFI/
USFI/TELEPASSPORT AND TELEPASSPORT AND
NOTES OFFERING NOTES OFFERING
-------------------------------------- -----------------------
USFI/ NOTES
USFI, TELEPASSPORT TELEPASSPORT OFFERING TRESCOM
PRIMUS INC.(1) L.L.C.(1) ADJUSTMENTS ADJUSTMENTS COMBINED TRESCOM ADJUSTMENTS COMBINED
-------- ------- ------------ ------------ ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue......... $280,197 $27,040 $ 3,108 $(9,673)(2) $ -- $300,672 $157,641 $(4,159)(6) $448,929
(5,225)(7)
Cost of revenue..... 252,731 20,907 2,704 (8,029)(2) -- 268,313 124,365 (5,225)(7) 387,453
-------- ------- ------- ------- -------- -------- -------- ------- --------
Gross margin........ 27,466 6,133 404 (1,644) -- 32,359 33,276 (4,159) 61,476
Operating expenses:
Selling, general
and
administrative.... 50,622 11,182 1,389 -- -- 63,193 36,386 (4,159)(6) 95,420
Depreciation and 6,733 674 74 409 (3) -- 7,890 6,599 (2,167)(8) 20,308
amortization...... 8,109 (9)
(123)(10)
-------- ------- ------- ------- -------- -------- -------- ------- --------
Total operating
expenses.......... 57,355 11,856 1,463 409 -- 71,083 42,985 1,660 115,728
-------- ------- ------- ------- -------- -------- -------- ------- --------
Loss from
operations......... (29,889) (5,723) (1,059) (2,053) -- (38,724) (9,709) (5,819) (54,252)
Interest expense.... (12,914) -- (18) -- (15,313)(5) (28,245) (1,146) 433 (11) (28,958)
Interest income..... 6,238 -- -- -- -- 6,238 -- -- 6,238
Other income
(expense).......... 407 25 162 -- 594 -- -- 594
-------- ------- ------- ------- -------- -------- -------- ------- --------
Loss before income
taxes.............. (36,158) (5,698) (915) (2,053) (15,313) (60,137) (10,855) (5,386) (76,378)
Income taxes........ (81) -- -- -- (4) -- (81) -- -- (12) (81)
-------- ------- ------- ------- -------- -------- -------- ------- --------
Net loss............ $(36,239) $(5,698) $ (915) $(2,053) $(15,313) $(60,218) $(10,855) $(5,386) $(76,459)
======== ======= ======= ======= ======== ======== ======== ======= ========
Basic and diluted
net loss per common
share.............. $ (1.99) $ (2.93)
======== ========
Weighted average
number of common
shares
outstanding........ 18,250 7,836 (13) 26,086
======== ======= ========
</TABLE>
- -------
(1) Represents the historical results of operations of USFI, Inc. and
TelePassport L.L.C. for the period from January 1, 1997 through the
Company's acquisition on October 20, 1997.
USFI/TelePassport adjustments:
(2) To eliminate net revenue and cost of revenue for a portion of the
customer base which was not purchased by Primus.
(3) To record amortization expense associated with acquired customer list and
the excess of purchase price over the fair value of net assets acquired.
(4) The pro forma adjustment to the income tax provision is zero because a
valuation reserve was applied in full to the tax benefit associated with
the pro forma loss before income taxes.
Notes Offering:
(5) To reflect estimated interest expense on the Notes, at an interest rate
of 9.875%, and amortization on $5.0 million of deferred financing costs.
TresCom adjustments:
(6) To reflect the reclassification of TresCom's bad debt costs from selling,
general and administrative expense to a reduction of net revenue to
conform to Primus's accounting policies.
(7) To eliminate the effects of intercompany transactions between Primus and
TresCom.
(8) To reverse amortization expense associated with TresCom's previously
acquired customer list and the excess of purchase price over the fair
value of net assets acquired.
(9) To record amortization expense associated with acquired customer list and
the excess of purchase price over the fair value of net assets acquired.
(10) To reflect reduction in amortization of deferred financing costs
resulting from the expected repayment of credit line in connection with
the acquisition.
(11) To reflect reduction in interest expense related to the expected
repayment of TresCom's credit line in connection with the acquisition.
(12) The pro forma adjustment to the income tax provision is zero because a
valuation reserve was applied in full to the tax benefit associated with
the pro forma loss before income taxes.
(13) To reflect the issuance of Primus Common Stock in exchange for the
outstanding shares of TresCom.
43
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA AS ADJUSTED,
AS ADJUSTED TRESCOM TRESCOM AND
PRIMUS NOTES OFFERING TRESCOM ADJUSTMENTS NOTES OFFERING
-------- -------------- -------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash
Equivalents.......... $ 97,381 $242,381 $ 102 $(15,808)(1) $226,675
Restricted
investments.......... 23,795 23,795 -- -- 23,795
Accounts receivable,
net.................. 69,124 69,124 26,956 -- 96,080
Prepaid expenses and
other current
assets............... 7,048 7,048 2,492 -- 9,540
-------- -------- -------- -------- --------
Total current
assets............. 197,348 342,348 29,550 (15,808) 356,090
RESTRICTED INVESTMENTS.. 37,683 37,683 -- -- 37,683
PROPERTY AND EQUIPMENT--
Net.................... 70,023 70,023 29,895 -- 99,918
INTANGIBLES--Net........ 36,436 36,436 41,606 100,808 (2) 178,850
DEFERRED INCOME TAXES... 2,667 2,667 -- -- 2,667
OTHER ASSETS............ 11,406 16,406 940 -- 17,346
-------- -------- -------- -------- --------
TOTAL ASSETS............ $355,563 $505,563 $101,991 $ 85,000 $692,554
======== ======== ======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable...... $ 69,116 $ 69,116 $ 19,574 $ -- $ 88,690
Accrued expenses,
interest and other
current liabilities.. 18,797 18,797 6,495 -- 25,292
Deferred income
taxes................ 3,057 3,057 -- -- 3,057
Current portion of
long-term
obligations.......... 1,652 1,652 1,299 -- 2,951
-------- -------- -------- -------- --------
Total current
liabilities........ 92,622 92,622 27,368 -- 119,990
LONG-TERM OBLIGATIONS... 230,586 380,586 19,842 (15,808)(1) 384,620
OTHER LIABILITIES....... 527 527 -- -- 527
-------- -------- -------- -------- --------
Total liabilities... 323,735 473,735 47,210 (15,808) 505,137
-------- -------- -------- -------- --------
COMMITMENTS AND
CONTINGENCIES
TOTAL STOCKHOLDERS'
EQUITY................. 31,828 31,828 54,781 100,808 (3) 187,417
-------- -------- -------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY... $355,563 $505,563 $101,991 $ 85,000 $692,554
======== ======== ======== ======== ========
</TABLE>
- --------
(1) To reflect the expected repayment of TresCom's credit line.
(2) To reflect the elimination of TresCom's intangibles and to establish
intangibles for customer list and excess of purchase price over the fair
value of net assets acquired.
(3) To eliminate the equity of TresCom and to reflect the issuance of
approximately 7.8 million shares of Common Stock based upon an exchange
ratio of 0.6147 for each share of TresCom common stock.
44
<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
applicable consolidated financial statements and notes thereto contained
elsewhere in this Prospectus.
OVERVIEW
Primus is a facilities-based global telecommunications company that offers
international and domestic long distance and other telecommunications services
to business, residential and carrier customers in North America and selected
markets within the Asia-Pacific region and Europe. Primus has recently
expanded its geographic presence in Latin America through its acquisition of
TresCom, which currently provides international long distance service
primarily for calls originating in the United States. The Company seeks to
capitalize on the increasing demand for high-quality international
telecommunications services resulting from the globalization of the world's
economies and the worldwide trend toward telecommunications deregulation.
Primus provides these services over its global intelligent network and through
resale arrangements and foreign carrier agreements. Currently the Company
serves approximately 275,000 customers in its Service Regions. The United
States, Australia and the United Kingdom are the most deregulated countries
within the Company's Service Regions and will serve as regional hubs for
Primus's intended expansion into additional markets as worldwide deregulation
of telecommunications markets continues.
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. The Company's Australian
operations generated approximately $177.6 million, or 89%, of the Company's
pro forma net revenue for the year ended December 31, 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. 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 the initial 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 trade and professional 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. The Company expects
to continue to upgrade Axicorp's facilities, increase its traffic capacity and
introduce new products and services. In that regard, the Company expanded its
service offerings in Australia with its acquisition in March 1998 of a
controlling interest in Hotkey, an Australia-based Internet service provider,
and its acquisition in April 1998 of all the outstanding stock of Eclipse, an
Australia-based data communications service provider.
On June 9, 1998, pursuant to the Merger Agreement, the Company acquired the
operations of TresCom. After giving pro forma effect to the TresCom Merger and
the TelePassport/USFI Acquisition, for the year ended December 31, 1997, the
Company would have had net revenue of $448.9 million. After giving pro forma
effect to the TresCom Merger, for the three months ended March 31, 1998, the
Company would have had net revenue of $114.7 million. The TresCom Merger
provides Primus with accelerated entry into the Latin American international
long distance markets and expands the scope and coverage of the Network,
thereby providing
45
<PAGE>
additional opportunities to migrate traffic onto the Network, resulting in
better utilization of the Network and reduced variable costs. The Company
believes that, in addition to providing transmission facilities, the TresCom
Merger adds foreign carrier agreements, direct connections to foreign
telecommunications carriers and experienced management, and enables the
combined Company to realize synergies in sales, marketing and administration.
See "Unaudited Pro Forma Financial Data."
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 allowance. The
Company generally prices its services at a savings compared to the major
carriers operating in the Service Regions. The Company's net revenue is
derived from carrying a mix of business, residential and wholesale carrier
long distance traffic and, in Australia, also from the provision of local and
cellular services. The Company expects to continue to generate net revenue
from internal growth through sales and marketing efforts focused, 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 originate, 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 leased or owned facilities, cost of revenue
increasingly will be comprised of fixed costs. 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 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.
46
<PAGE>
Selling, general and administrative expenses are comprised primarily of
salaries and benefits, commissions, occupancy costs, sales and marketing
expenses, advertising and administrative costs. These expenses have been
increasing consistent with the expansion of the Company's 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
Service Regions.
Since its inception, the Company has made, and expects to continue to make,
significant investments in the development of its operations in its Service
Regions and the development and expansion of the Network. The TresCom Merger
is expected to accelerate the timing, as well as the extent, of the 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 "Use of Proceeds" and "--Liquidity and Capital
Resources."
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."
Other Operating Data. The following information for the seven quarters ended
March 31, 1998 is provided for informational purposes and should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto contained elsewhere herein.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1997 1997 1997 1997 1998
------------- ------------ --------- -------- ------------- ------------ ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MINUTES OF LONG DISTANCE USE:
International:
North America................. 9,199 12,160 17,629 45,784 57,199 75,950 78,950
Asia-Pacific.................. 1,967 1,876 2,384 6,222 11,844 18,944 24,596
Europe........................ 1,713 3,192 4,253 5,131 9,852 17,403 22,944
------ ------ ------ ------- ------- ------- -------
Total international........... 12,879 17,228 24,266 57,137 78,895 112,297 126,490
------ ------ ------ ------- ------- ------- -------
Domestic:
North America................. 3,972 5,533 6,346 18,498 17,131 17,653 20,138
Asia-Pacific.................. 56,932 58,336 59,481 61,304 61,544 61,496 61,151
Europe........................ 1,512 3,051 4,533 5,775 6,973 9,626 11,462
------ ------ ------ ------- ------- ------- -------
Total domestic................ 62,416 66,920 70,360 85,577 85,648 88,775 92,751
------ ------ ------ ------- ------- ------- -------
Total minutes of long
distance use................. 75,295 84,148 94,626 142,714 164,543 201,072 219,241
====== ====== ====== ======= ======= ======= =======
</TABLE>
47
<PAGE>
RESULTS OF OPERATIONS
For the three months ended March 31, 1998 as compared to the three months
ended March 31, 1997
Net revenue increased $21.1 million or 36%, from $59.0 million for the three
months ended March 31, 1997 to $80.1 million for the three months ended March
31, 1998. Of the increase, $18 million was associated with the North American
operations, which represents a growth rate of approximately 218%
(approximately 167% exclusive of net revenue associated with the
Telepassport/USFI operations acquired in the fourth quarter of 1997), as a
result of increased traffic volumes primarily in its wholesale carrier
operations and, to a lesser extent, in its business and residential customer
base. The European operations contributed $5.2 million to the period-over-
period net revenue growth, which represents a growth rate of approximately
134%. The European net revenue increased from $3.9 million for the three
months ended March 31, 1997 to $9.1 million for the three months ended March
31, 1998, resulting primarily from wholesale traffic being carried in 1998,
and to a lesser extent, growth in retail customer traffic. The Company's Asia-
Pacific net revenue decreased by $2.2 million or 5%, from $46.9 million for
the three months ended March 31, 1997 to $44.7 million for the three months
ended March 31, 1998. The decrease in the Asia-Pacific net revenue was
primarily a result of a 14% drop in the Australian dollar's average exchange
rate and, to a lesser extent, a change in traffic mix away from lower-margin
local traffic in favor of higher-margin long distance traffic.
Cost of revenue increased $13.7 million, from $55.0 million, or 93% of net
revenue, for the three months ended March 31, 1997 to $68.7 million, or 86% of
net revenue, for the three months ended March 31, 1998. The increase in the
cost of revenue is attributable to the increase in traffic volumes. The
decrease in the cost of revenue as a percentage of net revenue is reflective
of the expansion of the Company's global network, the continuing migration of
existing and newly generated customer traffic onto the Company's network,
especially in Australia with the advent of equal access, and a change in the
Australian traffic mix away from lower-margin local traffic.
Gross margin increased $7.3 million, from $4.0 million, or 6.8% of net
revenue, for the three months ended March 31, 1997 to $11.3 million, or 14.2%
of net revenue, for the three months ended March 31, 1998. The approximately
740 basis point increase in the gross margin as a percentage of net revenue is
due to the reduction in cost of revenue factors stated above.
Selling, general and administrative expenses increased $6.6 million, from
$8.8 million to $15.4 million for the three months ended March 31, 1997 and
1998, respectively. The increase is attributable to the hiring of additional
sales and marketing staff and engineering personnel, the addition of expenses
from acquired operations, and increased advertising and promotional expenses
associated primarily with the Company's residential marketing campaigns in
Australia.
Depreciation and amortization expense increased from $0.8 million for the
three months ended March 31, 1997 to $3.5 million for the three months ended
March 31, 1998. The increase is associated with increased depreciation expense
from capital expenditures for fiber, switching and other network equipment
being placed into service and increased amortization expense associated with
intangible assets acquired in the Company's acquisitions.
Interest expense increased from $0.2 million for the three months ended
March 31, 1997 to $7.2 million for the three months ended March 31, 1998. The
increase is primarily attributable to the interest expense associated with the
Company's 1997 Senior Notes and Warrants Offering.
Interest income of $2.4 million for the three months ended March 31, 1998 is
attributable to the investment of the Company's cash, cash equivalents and
restricted investment balances.
48
<PAGE>
For the year ended December 31, 1997 as compared to the year ended December
31, 1996
Net revenue increased $107.2 million or 62%, from $173.0 million for the
year ended December 31, 1996 to $280.2 million for the year ended December 31,
1997 (the net revenue increase in 1997 was $80.9 million or 40.6% when
compared to the Company's net revenue during 1996 after giving pro forma
effect to the acquisition of Axicorp as of January 1, 1996). Of the increase,
$57.8 million was associated with the Company's North American operations and
reflects a growth rate of approximately 350% (approximately 300% exclusive of
net revenue associated with the TelePassport/USFI Acquisition and operations
acquired in Canada during 1997). The growth is a result of increased traffic
volumes in wholesale carrier operations and, to a lesser extent, in ethnic
residential and business customer traffic. The Asia-Pacific operations
contributed $31.9 million to the year-over-year net revenue growth, resulting
primarily from the residential customer marketing campaigns commenced in early
1997. The 1997 results also reflect a full year of the Australian operations
as compared to ten months in 1996 as a result of the March 1, 1996 acquisition
of these operations. The Asia-Pacific net revenue growth was negatively
impacted by weakness in the Australian dollar during 1997 as compared to 1996.
The remaining net revenue growth of $17.6 million, a year-over-year growth
rate in excess of 300%, came from the European operations as a result of
expansion into the wholesale carrier marketplace during the third quarter of
1997 and continued growth in the ethnic residential and business marketplaces.
Cost of revenue increased $93.9 million, from $158.8 million, or 91.8% of
net revenue, for the year ended December 31, 1996 to $252.7 million, or 90.2%
of net revenue, for the year ended December 31, 1997. The increase in the cost
of revenue is a direct reflection of the increase in traffic volumes. The
decrease in the cost of revenue as a percentage of net revenue reflects the
investments made by the Company in its Network and the associated migration of
customer traffic onto the Network, particularly in Australia with the
introduction of equal access in the second half of 1997.
Gross margin increased $13.3 million, from $14.1 million, or 8.2% of net
revenue, for the year ended December 31, 1996 to $27.5 million, or 9.8% of net
revenue, for the year ended December 31, 1997.
Selling, general and administrative expenses increased $30.5 million, from
$20.1 million or 11.6% of net revenue for the year ended December 31, 1996 to
$50.6 million or 18.1% of net revenue for the year ended December 31, 1997, as
compared to the year ended December 31, 1996 (the increase in 1997 was $28.4
million when compared to the Company's selling, general and administrative
expenses during 1996 after giving pro forma effect to the acquisition of
Axicorp as of January 1, 1996). The increase is attributable to the hiring of
additional sales and marketing staff, additional operations and engineering
personnel to operate the Company's Network; the TelePassport/USFI Acquisition
and operations acquired in Canada during 1997; a full year of the Company's
Australian operations versus ten months in the prior year; and increased
advertising and promotional expenses associated with the Company's residential
marketing campaigns.
Depreciation and amortization increased $4.5 million or 211.1%, from $2.2
million for the year ended December 31, 1996 to $6.7 million for the year
ended December 31, 1997. The majority of the increase is associated with
capital expenditures for international fiber, telephone switches and related
transmission equipment being placed into service. Additionally, amortization
expense increased as a result of the additional intangible assets associated
with the Company's acquisitions during 1997.
Interest expense increased $12.0 million, from $0.9 million for the year
ended December 31, 1996 to $12.9 million for the year ended December 31, 1997.
The increase is attributable to the interest expense associated with the
Company's 1997 Senior Notes issued in August 1997.
Interest income increased $5.4 million, from $0.8 million for the year ended
December 31, 1996 to $6.2 million for the year ended December 31, 1997. The
increase is due to investment of the proceeds from the Company's 1997 Senior
Notes offering and its initial public equity offering.
Other income (expense) for the year ended December 31, 1997 was $0.4 million
compared to an expense of $0.3 million for the year ended December 31, 1996.
Other income (expense) is the result of foreign currency
49
<PAGE>
transaction gains/losses on Australian dollar-denominated debt incurred by the
Company for its acquisition of Axicorp, due to the fluctuations of the
Australian dollar against the United States dollar during the year. This debt
was paid in full during 1997.
Income taxes were attributable to the operations of the Company's United
Kingdom and Australian subsidiaries.
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 increase in traffic volume. Most of the Company's
costs of revenue are variable, since the Company had a 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-
Australian operations was a result of increased staffing levels, increased
sales and marketing activity and network operations costs. The non-Australian
selling, general and administrative costs as a percentage of non-Australian
net revenue for the year ended December 31, 1996 was 40%, which is reflective
of the growth in the infrastructure necessary to support future non-Australian
net revenues. The Australian selling, general and administrative expense as a
percentage of Australian net revenue was 7.5% for the 10 months ended December
31, 1996.
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 list 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 U.S.
dollar during the period.
Income taxes were primarily attributable to the operations of Axicorp for
the 10 months from the date of purchase, and represent the amount of expense
for Australian taxes.
Pro Forma Results of Operations for the Year Ended December 31, 1996 Compared
to the Year Ended December 31, 1995
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 discussion of the pro forma results of operations for
the 12 months ended December 31, 1995 and 1996, which results give effect to
the acquisition of Axicorp as if it had occurred on January 1, 1995, is
helpful to an understanding of the Company's results of operations.
50
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1996
---------------------- ----------------------
$ % $ %
----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PERCENTAGE DATA)
<S> <C> <C> <C> <C>
Net revenue:
United States 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 ............... 114,639 91.3 182,601 91.6
----------- -------- ----------- --------
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>
Net revenue increased $73.7 million or 59%, 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 $68.0 million or 59%, 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.
51
<PAGE>
Gross margin increased $5.7 million or 52%, 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 $9.2 million or 71%,
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 $0.7 million or 34%, 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.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from net cash used in operating
activities; purchases of network equipment including switches, related
transmission equipment, and international and domestic fiber cable capacity;
interest and principal payments on outstanding indebtedness; and acquisitions
of and strategic investments in businesses. The Company has financed its
growth to date through the August 1997 offering of the 1997 Senior Notes, the
November 1996 initial public offering of Common Stock, several private
placements of Common Stock, and capital lease financing. The semi-annual
interest payments due under the 1997 Senior Notes through August 1, 2000 have
been pre-funded and will be paid from restricted investments.
Net cash used in operating activities was $17.1 million for the three months
ended March 31, 1998, and net cash provided by operating activities was $1.8
million for the three months ended March 31, 1997. Net cash used in operating
activities was $14.8 million for the year ended December 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 used in operating activities for
the three month period ended March 31, 1998 is primarily comprised of $7.4
million for an increase in the net loss and a $6.3 million increase in accrued
interest payable related to the 1997 Senior Notes. The increase in cash used
in operating activities for the year ended December 31, 1997 was primarily the
result of the increase in the negative operating cash flow for the period as
compared to the same period in 1996.
52
<PAGE>
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 used in investing activities was $0.9 million for the three months
ended March 31 1998 and net cash provided by investing activities was $11.0
million for the three months ended March 31, 1997. Net cash used in investing
activities was $104.2 million for the year ended December 31, 1997, $39.6
million for the year ended December 31, 1996 and $0.4 million for the year
ended December 31, 1995. Net cash used in investing activities during the
three months ended March 31, 1998 includes $11.4 million of capital
expenditures primarily for the expansion of the Company's global network, and
$1.6 million for business acquisitions and investments, partially offset by
cash provided by the sale of restricted investments used to fund interest
payments on the 1997 Senior Notes. Cash used in investing activities for the
year ended December 31, 1997 was the result of capital expenditures made
during the year of $39.5 million to expand the Network, the TelePassport/USFI
Acquisition and the acquisition of the Company's Canadian operations net of
cash acquired, and the purchase of $73.6 million of restricted investments
with proceeds from the offering of the 1997 Senior Notes for escrowed interest
payments, offset by the sale of $25.1 million of short term cash investments.
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 financing activities was $0.1 million for the three
months ended March 31, 1998 and net cash used by financing activities of $4.4
million during the three months ended March 31, 1997. Net cash provided by
financing activities was $200.1 million for the year ended December 31, 1997,
$79.5 million for the year ended December 31, 1996 and $4.5 million for the
year ended December 31, 1995. Cash provided by financing activities in the
three months ended March 31, 1998 resulted from the issuance of the Company's
Common Stock through the exercise of employee options. Net cash provided by
financing activities for the year ended December 31, 1997 resulted primarily
from the proceeds of the offering of 1997 Senior Notes less deferred financing
costs. In 1996, the Company completed private placements of Common Stock
generating net proceeds of approximately $21.9 million, and in November 1996,
the Company completed an initial public offering of its Common Stock and
generated net proceeds of approximately $54.4 million.
The Company anticipates aggregate capital expenditures of approximately $225
million during 1998 and 1999 (of which approximately $11.4 million was
expended in the three months ended March 31, 1998). Such capital expenditures
will be primarily for international and domestic switches and Pops,
international and domestic fiber optic cable capacity and satellite earth
station facilities for new and existing routes, and other transmission
equipment and support systems. The Company is currently installing an
additional international gateway switch in Frankfurt, Germany and, by the end
of 1999, intends to add up to three switches in North America, two switches in
Europe, one switch in the Asia-Pacific region, and three switches in Latin
America.
The Company believes that the net proceeds from the Offering, together with
its existing cash and available capital lease financing (subject to
limitations in the Indenture) will be sufficient to fund the Company's
operating losses, debt service requirements, capital expenditures and other
cash needs for its operations for at least the next 18 to 24 months. The
Company is continually evaluating the expansion of the Network and plans to
accelerate its investment in international and domestic fiber optic cable
capacity and other transmission facilities. In addition, the Company expects
to make additional investments in the TresCom network in order to expand
services in Latin America. In order to fund these additional cash
requirements, including the expansion of the combined Network, Primus
anticipates that it will be required to raise a significant amount of cash in
excess of its existing cash and cash equivalents. Consequently, the Company
expects to raise additional capital from public or private equity or debt
sources to meet its new financing needs, including for the continued buildout
of the Network. Additionally, 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 additional investments or acquisitions or if it
experiences unexpected costs or competitive pressures, or if existing cash and
any other borrowings prove to be insufficient, the Company may be required to
seek additional capital sooner than expected. See "Risk Factors--Need for
Additional Financing."
53
<PAGE>
Since inception through March 31, 1998, the Company had negative cash flow
from operating activities of $41.3 million and negative EBITDA of $35.9
million. In addition, the Company incurred net losses in 1995, 1996, 1997 and
the three months ended March 31, 1998, of $2.4 million, $8.8 million, $36.2
million and $12.3 million, respectively, and had an accumulated deficit of
approximately $60.3 million as of March 31, 1998. On a pro forma basis, after
giving effect to the Offering, TelePassport/USFI Acquisition and the TresCom
Merger, for the year ended December 31, 1997, the Company would have had a net
loss of $76.5 million. On a pro forma basis, after giving effect to the
Offering and the TresCom Merger, for the three months ended March 31, 1998,
the Company would have had a net loss of $21.7 million. Although the Company
has experienced net revenue growth in each of its last 13 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 it 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 it will be able to achieve or sustain profitability or
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).
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.
Year 2000 Compliance. In accordance with Securities and Exchange Commission
Staff Legal Bulletin No. 5, dated October 8, 1997, the Company has begun a
review and assessment of the anticipated costs, problems and uncertainties
associated with Year 2000 issues. The Company is implementing a Year 2000
compliance plan whereby each operating unit is responsible for identifying
systems requiring modification or conversion (both internal systems and those
provided by or otherwise available from outside vendors) and periodically
reporting its progress in meeting milestones toward compliance. The Company
believes that Year 2000 issues will not materially affect its products,
services, or competitive conditions and that its costs of addressing Year 2000
compliance will not materially impact future operating results or financial
condition. See "Risk Factors--Dependence on Effective Information Systems;
Year 2000 Problem."
TRESCOM
Summary. TresCom is a facilities-based long distance telecommunications
carrier focused on international long distance traffic originating in the
United States. TresCom offers a broad array of competitively priced services,
including long distance, calling cards, prepaid debit cards, domestic and
international toll-free calling, frame relay and bilingual operator services.
TresCom derives its revenues by providing international and domestic long
distance services on a wholesale basis to other telecommunications carriers
and resellers and on a retail basis to residential and commercial customers,
ranging in size from small businesses to Fortune 500 companies. Service
revenues are based on minutes of use and charged at a rate per minute which
varies according to the termination point of the traffic and time of day. All
revenues are billed in United States dollars.
Since its formation, TresCom has expanded its revenues, customer base and
network through internal growth and acquisitions. TresCom seeks to continue to
expand its revenues from internal growth through four distinct sales channels:
(i) direct sales efforts; (ii) an agent sales network; (iii) ethnic focused
telemarketing programs; and (iv) wholesale sales activities. TresCom believes
that it has established the network, operations, customer service,
infrastructure and systems necessary to support its expanding sales and
customer base for the foreseeable future. A substantial portion of TresCom's
revenues are derived from wholesale sales. Increased worldwide competition has
continued to drive down wholesale prices.
54
<PAGE>
Cost of services includes those costs associated with the transmission and
termination of services over TresCom's international network. Transmission and
termination costs are TresCom's most significant expense, and TresCom seeks to
lower these costs through: (i) increasing volume on its owned facilities,
thereby spreading the allocation of fixed costs over a larger number of
minutes; (ii) negotiating lower cost direct operating and transit agreements
with PTTs and foreign telecommunications administrations ("TAs"); and (iii)
optimizing the routing of calls over the least cost route on its international
network. Consistent with its strategy of maximizing traffic carried on
TresCom's own network, TresCom significantly expanded the network switch
capacity in 1997.
The majority of TresCom's cost of services is variable and consists of
payments for leased capacity from other carriers and payments to PTTs and TAs
with which TresCom has direct operating and transit agreements. Under its
direct operating agreements, TresCom agrees to send United States originated
traffic to the PTTs or TAs and the PTTs or TAs agree to send a proportionate
amount of return traffic at agreed upon accounting rates. If there is an
imbalance in the volume of traffic sent and received in return, the carrier
that originates more traffic pays for the difference to compensate the other
carrier. The difference is the settlement payment. Under TresCom's direct
operating agreements, TresCom's net settlement revenues and payments are
denominated in United States dollars.
TresCom's profitability is driven by the difference between net revenues and
the cost of leased capacity and settlement payments to PTTs and TAs. In order
to minimize the costs of leased capacity and settlement payments, TresCom
utilizes a Least Cost Routing System designed to transmit TresCom's traffic
over the least cost route choice on the network. Based on FCC data for the
period from 1989 through 1996, per minute settlement payments from United
States carriers to PTTs and TAs have declined at a significantly faster rate
than per minute billed revenues. Due to the WTO Agreement, TresCom expects
this trend to continue.
For the three months ended March 31, 1998 compared to the three months ended
March 31, 1997
Revenues. Revenues increased 5.5%, or $2.0 million, from $36.1 million in
the first quarter of 1997, to $38.1 million in the first quarter of 1998.
Minutes of use increased 11.5%, or 13.4 million minutes, from 116.8 million in
the first quarter of 1997, to 130.2 million in the first quarter of 1998.
International traffic accounted for approximately 79% of total revenue in the
first quarter of 1997, and approximately 77% of total revenue in the first
quarter of 1998. This, combined with continued international wholesale price
pressures and changes within the mix of international terminations, caused the
overall rate per minute to decline from approximately $0.31 in the first
quarter of 1997, to $0.29 in the first quarter of 1998. Historically,
international traffic has commanded a higher per minute rate than domestic
traffic; however, this gap has been decreasing due to increased international
competition and declining international termination costs.
Costs of Services. Costs of services increased 11.5%, or $3.2 million, from
$27.8 million in the first quarter of 1997, to $31.0 million in the first
quarter of 1998. Costs of services increased instep with the increased volume
of traffic carried. On a per minute basis, however, the variable portion of
the cost per minute decreased from approximately $0.23 in the first quarter of
1997, to approximately $0.21 in the first quarter of 1998. This decline was
offset by TresCom's investment in the expansion of its network, represented by
higher fixed per minute costs of services.
Gross Profit. Gross profit decreased 13.3%, or $1.1 million, from $8.3
million in the first quarter of 1997, to $7.2 million in the first quarter of
1998. As a percentage of revenues, gross profit decreased from approximately
23% in the first quarter of 1997 to approximately 19% in the first quarter of
1998.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 14.8%, or $1.2 million, from $8.1 million in
the first quarter of 1997, to $9.3 million in the first quarter of 1998. This
increase was due primarily to increased expenses, such as additional reserves
for bad debt. Bad debt expense was $1.0 million and $1.8 million in the first
quarter of 1997 and 1998, respectively.
Depreciation and Amortization. Depreciation and amortization expense
increased 26.7%, or $0.4 million, from $1.5 million in the first quarter of
1997, to $1.9 million in the first quarter of 1998. This increased expense
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is due to the depreciation of assets acquired to support continued expansion
of TresCom's network and amortization related to acquired businesses and
customer bases.
Interest Expense, Net. Interest expense, net, increased to $0.4 million in
the first quarter of 1998 due to interest associated with TresCom's capital
leases and borrowings under the revolving credit agreement.
Net Loss. Net loss increased 71.1%, or $3.2 million, from $1.3 million in
the first quarter of 1997, to $4.5 million in the first quarter of 1998, due
to the above factors.
For the year ended December 31, 1997 compared to year ended December 31, 1996
Revenues. Revenues increased 12.9%, or $18.0 million, from $139.6 million in
1996 to $157.6 million in 1997 due to an increase in the volume of traffic
carried, offset, in part, by a decrease in average revenue per minute. Minutes
of use increased 18.1%, or 82.4 million, from 455.5 million in 1996 to 537.9
million in 1997. Although international traffic accounted for approximately
80.0% of TresCom's revenue in both 1997 and 1996, the overall revenue per
minute decreased to approximately $0.29 in 1997 from approximately $0.31 in
1996 as a result of continued international wholesale price pressures and a
change in the mix of international terminations.
Costs of Services. Costs of services increased 16.4%, or $17.5 million, from
$106.9 million in 1996 to $124.4 million in 1997. The increased costs are a
factor of increased minutes of use, the costs of which are variable in nature,
partially offset by a fractional decrease in the overall cost per minute
resulting from changes in the mix of international terminations and lower
termination costs derived from certain direct operating agreements.
Gross Profit. Gross profit increased 1.8%, or $0.6 million, from $32.7
million in 1996 to $33.3 million in 1997. As a percentage of revenues, gross
profit decreased from 23.4% in 1996 to 21.1% in 1997 reflecting the impact of
the international wholesale price pressures referred to above.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased 18.2%, or $5.6 million, from $30.8 million in
1996 to $36.4 million in 1997. After giving effect to a one-time $1.5 million
promotional credit for services rendered by a vendor in 1996, selling, general
and administrative expense, as a percentage of revenues, was approximately
23.1% for both 1997 and 1996. On an absolute basis, the increase was primarily
due to variable costs associated with growth in the retail business, such as
advertising, commissions and billing costs.
Depreciation and Amortization. Depreciation and amortization expense
increased 34.7%, or $1.7 million, from $4.9 million in 1996 to $6.6 million in
1997. The increased expense is due to depreciation of assets acquired to
support continued expansion of TresCom's network and amortization related to
acquired businesses and customer bases.
Interest and other expenses, net. Interest and other expenses, net,
increased 83.3%, or $0.5 million, from $0.6 million in 1996 to $1.1 million in
1997. The increase is primarily due to additional borrowings under TresCom's
revolving credit agreement.
Extraordinary Item. Extraordinary expense decreased 100%, or $2.0 million,
from 1996 to 1997. The extraordinary expense in 1996 of $2.0 million was a
result of the early extinguishment of $35.8 million of indebtedness in
February of such year. Approximately $1.5 million was attributable to debt and
warrants payable to a major shareholder of TresCom and approximately $0.5
million was related to the write-off of deferred financing costs associated
with TresCom's bank facility.
Net Loss. Net loss increased 94.6%, or $5.3 million, from $5.6 million in
1996 to $10.9 million in 1997 due to the above factors.
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For the year ended December 31, 1996 compared to year ended December 31, 1995
Revenues. Revenues increased 36.1%, or $37.0 million, from $102.6 million in
1995 to $139.6 million in 1996 due to a 37.9% increase in minutes of use from
330.3 million in 1995 to 455.5 million in 1996, offset in part by a fractional
decrease in average revenue per minute resulting from pricing pressures and a
change in the mix of international terminations. In 1996, approximately 80.0%
of TresCom's revenue was derived from international traffic compared with
approximately 75.0% in 1995. Historically, international traffic has commanded
a higher per minute rate than domestic traffic, however this gap is decreasing
due to increased international competition.
Costs of Services. Costs of services increased 43.1%, or $32.2 million, from
$74.7 million in 1995 to $106.9 million in 1996. This increase resulted from a
greater percentage of international traffic in 1996 (approximately 80.0%)
compared to 1995 (approximately 75.0%) as discussed above. The cost per minute
also increased in absolute terms due to higher cost countries within the
international mix.
Gross Profit. Gross profit increased 16.8%, or $4.7 million, from $28.0
million in 1995 to $32.7 million in 1996. As a percentage of revenues, gross
profit decreased from 27.3% in 1995 to 23.4% in 1996. The primary factors
contributing to the increase in gross profit are TresCom's mix of business and
continued international competitive pressures as described above.
Selling, General and Administrative Expense. Selling, general and
administrative expense decreased 4.9%, or $1.6 million, from $32.4 million in
1995 to $30.8 million in 1996. The 1995 selling, general and administrative
expense reflects a $4.1 million charge for a settlement with a major customer,
and a $1.7 million charge for expenses relating to Hurricane Marilyn (which
hit St. Thomas, a significant base of operations for TresCom, in September
1995). The 1996 expense reflects a $1.5 million promotional credit for
services rendered by a vendor and $0.6 million associated with a one-time cash
compensation charge relating to changes in executive management during the
year. After giving effect to these items, selling, general and administrative
expense, as a percentage of revenues, decreased from 26.0% in 1995 to 22.7% in
1996.
Depreciation and Amortization. Depreciation and amortization expense
increased 22.5%, or $0.9 million, from $4.0 million in 1995 to $4.9 million in
1996. The increased expense is due to depreciation of assets acquired during
1996 to support continued expansion of TresCom's network and corporate
infrastructure.
Interest and other expenses, net. Interest and other expense, net, decreased
81.3%, or $2.6 million, from $3.2 million in 1995 to $0.6 million in 1996. The
decrease is primarily due to the repayment of borrowings under a bank facility
between TresCom Network Services, Inc., a wholly-owned subsidiary of TresCom,
and a commercial bank and due to the repayment of borrowings from a major
shareholder, each in February 1996.
Extraordinary Item. The extraordinary expense in 1996 of $2.0 million was a
result of the early extinguishment of $35.8 million of indebtedness in
February. Approximately $1.5 million was attributable to debt and warrants
payable to a major shareholder of TresCom and approximately $0.5 million was
related to the write-off of deferred financing costs associated with the Bank
Facility.
Net Loss. Net loss decreased 51.7%, or $6.0 million, from $11.6 million in
1995 to $5.6 million in 1996 due to the above factors.
Year 2000
TresCom has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. The majority of the
software which needs to be replaced by TresCom is under license from third-
party software manufacturers who have indicated that they will provide the
necessary upgrades. TresCom also has initiated discussions with its
significant suppliers, large customers and financial institutions to ensure
that those parties have appropriate plans to remediate Year 2000 issues where
their systems interface with TresCom's systems or otherwise impact its
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operations. TresCom is assessing the extent to which its operations are
vulnerable should the organizations fail to remediate properly their computer
systems.
TresCom's comprehensive Year 2000 initiative is being managed by a team of
internal staff and outside consultants. The team's activities are designed to
ensure that there is no adverse effect on TresCom's core business operations
and that transactions with suppliers, customers and financial institutions are
fully supported. TresCom is well under way with these efforts, which are
scheduled to be completed in early 1999. While TresCom believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
assurance that the systems of other companies on which TresCom's systems and
operations rely will be converted on a timely basis and that such conversion
will not have a material effect on TresCom. The cost of the Year 2000
initiatives is not expected to be material to TresCom's results of operations
or financial position.
Liquidity and Capital Resources
A separate liquidity and capital resources section has not been presented
for TresCom on a stand-alone basis as it would not be meaningful to an
understanding of the operations of Primus subsequent to consummation of the
recently completed TresCom Merger. See"--Liquidity and Capital Resources."
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BUSINESS
GENERAL
Primus
Primus is a facilities-based global telecommunications company that offers
international and domestic long distance and other telecommunications services
to business, residential and carrier customers in North America, and selected
markets within the Asia-Pacific region and Europe. Primus has expanded its
geographic presence in Latin America through its recent acquisition of
TresCom, which provides international long distance service primarily for
calls originating in the United States. The Company seeks to capitalize on the
increasing demand for high-quality international telecommunications services
resulting from the globalization of the world's economies and the worldwide
trend toward telecommunications deregulation. Primus provides these services
over its Network, which includes (i) eleven international gateway switches in
the United States, Australia, Canada, Germany, Puerto Rico and the United
Kingdom, (ii) four domestic switches in Australia, (iii) a switching platform
in Japan and (iv) both owned and leased transmission capacity on undersea and
land-based fiber optic cable systems. The Network, along with resale
arrangements and foreign carrier agreements, allows the Company to offer
quality service to approximately 275,000 customers.
Primus is a full-service carrier and has licenses and operations in the
United States, Australia, the United Kingdom, Japan, Germany and Canada,
enabling it to complete calls to more than 230 countries. The United States,
Australia and the United Kingdom are the most deregulated countries within the
Company's Service Regions and will serve as regional hubs for Primus's
intended expansion into additional markets as worldwide deregulation of
telecommunications markets continues. During the years ended December 31, 1996
and 1997, Primus had net revenue of $173.0 million and $280.2 million,
respectively. After giving pro forma effect to the TresCom Merger and the
TelePassport/USFI Acquisition, for the year ended December 31, 1997, the
Company would have had net revenue of $448.9 million.
The Company primarily targets, on a retail basis, small- and medium-sized
businesses and ethnic residential customers with significant international
long distance traffic and, on a wholesale basis, other telecommunications
carriers and resellers with substantial international traffic. The Company
provides a broad array of competitively priced telecommunications services,
including international and domestic long distance services and private
networks, reorigination services, prepaid and calling cards and toll-free
services, as well as local, data, Internet and cellular services in Australia.
The Company markets its services through a variety of channels, including
through its direct sales force and independent agents, and through direct
marketing.
The Company has constructed and is expanding 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 continue to improve its profitability as it more fully utilizes its
Network capacity and realizes economies of scale. As customer demand justifies
the capital investment, Primus will seek to expand the Network through
additional investment in undersea and domestic fiber optic cable systems,
international gateway and domestic switching facilities, and international
satellite earth stations. 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 Network has grown to
consist of 15 switches, including eleven international gateway switches (New
York, Los Angeles, Washington, D.C., Toronto, Vancouver, London, Frankfurt and
Sydney, and as a result of the recently completed TresCom Merger, Fort
Lauderdale, New York City and Guaynabo, Puerto Rico) and four domestic
switches (Adelaide, Brisbane, Melbourne and Perth), and a switching platform
in Japan. The Company also has 15 Pops in additional markets within its
Service Regions. The Company's international gateway switches will serve as
the base for its global expansion of the Network into new countries when
customer demand justifies such investment and as regulatory rules permit the
Company to compete in new markets. The Company intends to add, by the end of
1999, up to three switches in North America, two switches in Europe, one
switch in the Asia-Pacific region, and three switches in Latin America.
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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. The Company's
ownership interests consist of MAOUs and IRUs in 12 undersea fiber optic cable
systems, including the CANTAT-3, TAT-12/TAT-13, TPC-5 and Gemini systems. As a
result of the recently completed TresCom Merger, the Company has acquired
additional MAOUs and IRUs in 11 cable systems, including the Americas 1,
Columbus 2, PTAT-1 and Taino Caribe systems. The Company expects to continue
to acquire additional capacity on both existing and future international and
domestic fiber optic cable systems as anticipated customer demand justifies
such investments.
Foreign Carrier Agreements. In selected countries where competition with the
traditional incumbent PTTs is limited or is not currently permitted, the
Company has entered into foreign carrier agreements with PTTs or other service
providers which permit the Company to carry traffic into and receive return
traffic from these countries. The Company has existing foreign carrier
agreements with PTTs in Cyprus, Greece, Honduras, India, Iran, Italy and New
Zealand, and additional carrier agreements with foreign service providers in
five other countries. As a result of the recently completed TresCom Merger,
the Company has acquired 27 additional foreign carrier agreements, providing
access to various countries in Latin America.
TresCom Merger
On June 9, 1998, pursuant to the Merger Agreement, the Company acquired all
of the outstanding shares of TresCom. The TresCom Merger provides Primus with
accelerated entry into the Latin American international long distance markets
and expands the scope and coverage of the Network, thereby providing
additional opportunities to migrate traffic onto the Network, obtaining better
utilization of the Network and variable costs. The Company believes that, in
addition to providing transmission facilities, the TresCom Merger adds foreign
carrier agreements, direct connections to foreign telecommunications carriers
and experienced management, enabling the combined Company to realize synergies
in sales, marketing and administration.
TresCom
TresCom is a facilities-based long-distance telecommunications carrier
focused on international long distance traffic originating in the United
States and terminating in Latin America. TresCom offers a broad array of
services, including long distance, calling cards, prepaid debit cards,
domestic and international toll-free calling and frame relay. TresCom provides
its customers with international long distance service and is able to complete
calls to approximately 230 countries and territories through an international
network consisting of: (i) owned facilities, concentrated in a Caribbean hub
linking the United States, the Caribbean, South America and Central America;
(ii) direct operating and transit agreements with various PTTs and TAs; and
(iii) owned and leased transmission capacity. TresCom also provides local
service in Puerto Rico and the United States Virgin Islands ("U.S.V.I.").
A substantial portion of TresCom's business is providing services on a
wholesale basis to other telecommunications carriers and resellers. TresCom
also markets on a retail basis to residential and commercial customers,
ranging in size from small businesses to Fortune 500 companies. To take
advantage of the benefits associated with its network, TresCom targets its
United States mainland sales and marketing efforts towards customers with
significant international long distance traffic to Latin America. These
customers include businesses with sales or operations in Latin America, as
well as the growing Hispanic population in the United States. During 1997,
TresCom further increased its sales and marketing efforts directed towards
residential and commercial customers, while maintaining its carrier and
reseller customer base. In emerging markets in Latin America, TresCom has
teamed up with local agents and has begun generating international traffic
originating from those markets.
TresCom transmits customer calls through an international network consisting
of ownership interests in undersea digital fiber optic transmission cables and
leased capacity from other carriers linking the United States, Europe and
Latin America. TresCom's owned network also includes wholly-owned microwave
relay and satellite
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earth station equipment linking the mainland United States, Puerto Rico and
the U.S.V.I. TresCom's international network is further composed of leased
capacity from other carriers and direct operating and transit agreements with
PTTs and TAs. TresCom uses leased capacity to provide long-distance services
in areas where it does not own transmission facilities and to provide
redundancy where it does own such facilities. TresCom's contracts with PTTs
and TAs typically have terms ranging from one to five years, with clauses
providing for negotiated renewals.
TresCom employs a direct sales force, numbering approximately 80 individuals
as of June 15, 1998, and independent sales and telemarketing agents to market
its services. TresCom maintains sales offices in Florida, New York, Puerto
Rico and St. Thomas, U.S.V.I. As part of TresCom's marketing activities to
residential customers, TresCom has entered into joint marketing and
promotional arrangements with other companies, including Coca-Cola, Shell Oil
Company, Seagrams and Walgreens Drug Stores. Additionally, TresCom utilizes
direct mail, participates in a variety of promotional activities which target
specified customers, and sponsors various civic and charity activities.
INDUSTRY OVERVIEW
General. The international long distance industry, which involves the
transmission of voice and data from 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. According to TeleGeography, in 1996, the international long distance
industry accounted for $61 billion in revenues and 70 billion minutes of use,
up from $22 billion in revenues and 17 billion minutes of use in 1986.
According to TeleGeography, it is estimated that by the year 2000 this market
will have expanded to $86 billion in revenues and 122 billion minutes of use,
representing compound annual growth rates from 1996 of 9.0% and 15.0%,
respectively.
The Company believes the growth in international long distance services is
being driven by (i) globalization of the world's economies and the worldwide
trend toward telecommunications deregulation, (ii) declining prices and a
wider choice of products and services driven by greater competition resulting
from privatization and deregulation, (iii) increased telephone 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 Company
believes that growth of traffic originated in markets outside the United
States will be higher than growth in traffic originated within the United
States due to recent deregulation in many foreign markets and increasing
access to telecommunications facilities in emerging markets.
The competition spurred by privatization and deregulation, which in turn has
prompted carriers to offer a wider choice of products and services, has
resulted in lower prices. In recent years, prices for long distance services
have decreased substantially and are expected to continue to decrease in most
of the markets in which Primus currently competes. Several long distance
carriers in the United States have introduced pricing strategies that provide
fixed, low rates for both domestic and international calls originating in the
United States. The Company believes that the lower-price environment and
resulting revenue losses from increased competition have been more than offset
by cost decreases, as well as an increase in telecommunications usage. For
example, based on the most current FCC data which management believes is
publicly available, for the period 1989 through 1996, per minute settlement
payments by United States-based carriers to foreign PTTs fell 38.6%, from
$0.70 per minute to $0.43 per minute while, over this same period, per minute
international billed revenue fell only 27.5%, from $1.02 in 1989 to $0.74 in
1996. 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."
Facilities-based Carriers. International long distance carriers generally
can be categorized according to ownership and use of transmission facilities
and switches. Although no carrier utilizes exclusively owned facilities for
the transmission of all of its long distance traffic, carriers vary from being
primarily facilities-based
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(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.
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, NTT in Japan, Teleglobe in Canada 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
governmental authorization of multiple carriers. In the United States, one of
the first highly 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 Australia, and is being implemented in other countries,
including most European Union countries, Japan and several Latin American
countries, including Chile, Brazil and Argentina.
On February 15, 1997, the United States and 68 other countries, including
Australia, the United Kingdom, Canada, Germany and Japan, signed the WTO
Agreement and agreed to open their telecommunications markets to competition
and foreign ownership starting January 1, 1998. These 69 countries generate a
substantial majority of worldwide telecommunications traffic. The Company
believes that the WTO Agreement will provide it with significant opportunities
to compete in markets where it did not previously have access, and allow it to
provide end-to-end, facilities-based services to and from these countries.
In addition, the FCC recently released an order that significantly changes
United States regulation of international services in order to implement the
United States' "open market" commitments under the WTO Agreement. Among other
measures, the FCC's order (i) eliminated the FCC's Effective Competitive
Opportunities ("ECO") test for applicants affiliated with carriers in WTO
member countries, while imposing new conditions on participation by dominant
foreign carriers, (ii) allowed nondominant United States carriers to enter
into exclusive arrangements with nondominant foreign carriers and scaled back
the prohibition on exclusive arrangements with dominant carriers and (iii)
adopted rules that will facilitate approval of flexible alternative settlement
payment arrangements. The Company believes that the recent FCC order will have
the following effects on United States carriers: (i) reduce impediments to
investment in United States carriers by foreign entities, (ii) increase
opportunities to enter into innovative traffic arrangements with foreign
carriers located in WTO member countries, (iii) add new opportunities to
engage in ISR to additional foreign countries and (iv) modify settlement rates
offered by foreign affiliates of United States carriers to United States
carriers to comply with the FCC's settlement rate benchmarks.
International Traffic 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, which in many countries is the same
as the local 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 with the first
carrier transporting the call from the country of origination, and the second
carrier terminating the call in the country of termination. These long
distance telephone calls are classified as one of three types of traffic:
outbound, inbound and international transit. Outbound traffic is calls going
from a country of origination, and inbound traffic is calls going into a
country of destination. For example, a call made from the United States to the
United Kingdom is referred to as outbound traffic for the United States
carrier and inbound traffic for the United Kingdom carrier. The third type of
traffic, international transit traffic, originates and terminates outside a
particular country, but is transported through that country on a carrier's
network. Since most major international fiber optic cable systems are
connected to the United States, and international long distance prices are
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 via
satellites. A carrier can obtain voice circuits on cable systems either
through ownership or leases. Ownership in cables is acquired either through
IRUs
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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
may generally 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 Mechanism. Under the accounting rate mechanism ("ARM"),
which is the traditional model for handling long distance traffic between
international carriers, traffic is exchanged under bilateral carrier
agreements, or operating 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 costs and expenses related to
operating their respective halves of the end-to-end international connection.
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to a foreign
carrier agreement at a negotiated rate (which must be the same for all United
States-based carriers, unless the FCC approves an exception). For example, if
a foreign carrier charges a United States carrier $0.30 per minute to
terminate a call in the foreign country, the United States 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.
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 within country. 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 is
being deregulated, long distance companies have devised alternative calling
procedures ("ACPs") in order to complete calls more economically than under
the ARM. Some of the more significant ACPs include (i) transit, (ii) refiling
or "hubbing," (iii) ISR and (iv) reorigination. 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
particular country to be treated as if it originated in another country that
enjoys lower settlement rates with the destination country, thereby resulting
in lower overall costs on an end-to-end basis. United States-based carriers
generally are beneficiaries of refiling on behalf of other carriers because of
low international rates. The difference between transit and refiling is that,
with respect to transit, the carrier in the destination country has a direct
relationship with the originating carrier, while with refiling, the carrier in
the destination country is likely not to even know the identity of the
originating carrier. The choice between transit and refiling is determined
primarily by cost. With ISR, a carrier may completely bypass the settlement
system by connecting an international leased or owned line directly to the
public-switched telephone network of a foreign country or directly to a
customer premise through an international gateway switch deployed in the
foreign country. ISR currently is allowed by applicable regulatory authorities
between a limited number of international
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routes, including Canada-United Kingdom, United States-United Kingdom, United
States-Sweden and United Kingdom-Australia and is currently experiencing
increasing usage. Reorigination 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, which
largely utilize their own network facilities, primarily utilize foreign
carrier agreements in order to provide international service. Second-tier
carrier and new entrants which, to a greater extent must rely on the network
facilities of other carriers, primarily are utilizing ACPs and are developing
networks to compete with the first-tier carriers and gain market share. Other
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. In response,
first-tier carriers have formed alliances to provide seamless services and
one-stop shopping on a global basis.
STRATEGY
Primus's objective is to become a leading global provider of international
and domestic long distance voice, data and other services in its Service
Regions. Key elements of Primus's strategy to achieve this objective include:
. Focus on Customers with Significant International Long Distance
Usage. 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, 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.
. Pursue Early Entry into Selected Deregulating Markets. The Company seeks
to be an early entrant into selected deregulating telecommunications
markets where it believes there is significant demand for international
long distance services as well as substantial growth and profit
potential. The Company believes that early entrance into deregulating
markets provides it with competitive advantages as it develops sales
channels, establishes a customer base, hires personnel experienced in the
telecommunications industry and achieves name recognition, prior to the
entry into these markets by a large number of competitors. The Company
focuses its expansion efforts on major metropolitan areas with high
concentrations of potential customers with international traffic.
. Expand Global Intelligent Network. Primus expects that continued
strategic development of its 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
Company owns and operates its own switching facilities, and purchases
fiber optic cable capacity on an end-to-end basis when current and
expected 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 those of
major carriers in the Service Regions. In addition, the Company intends
to maintain strong customer relationships through the use of trained and
experienced sales and service representatives, and through the provision
of customized billing services.
. Expand Service Offerings as Markets Deregulate. The Company typically
enters markets which are in the initial stages of deregulation by first
providing international long-distance services and, as the market
deregulates further, expanding its portfolio of service offerings within
the particular market. Management believes that international long
distance generally offers attractive margins in markets in the early
stage
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of deregulation and provides a platform for capturing customers for
additional services. Subsequent additions to service offerings may
include, among other services, domestic long distance, data and Internet
access.
. Growth through Selected Acquisitions and Strategic Investments. As part
of its business strategy, the Company frequently evaluates potential
acquisitions, joint ventures and strategic investments. The Company
views acquisitions, joint ventures and strategic investments as a means
to enter additional markets and expand its operations within existing
markets, thereby facilitating an acceleration of its business plan.
Potential candidates include voice and data service providers with an
established customer base, complementary operations, telecommunications
licenses, experienced management or network facilities in countries into
which the Company seeks to enter.
DESCRIPTION OF OPERATING MARKETS
The following is a summary of the market size, competitive dynamics and
regulatory environments of the domestic and international long distance
industries in the principal jurisdictions in which the Company provides its
services and a description of the Company's operations in each of its four
Service Regions:
North America. The United States long distance market is highly deregulated
and is the largest in the world. According to the FCC, in 1996 long distance
telephone revenue in the United States was approximately $99.7 billion,
including approximately $17.1 billion from international services
(representing 17.2% of the total market). AT&T is the largest long distance
carrier in the United States market, with market share of approximately 50.2%
of international outgoing minutes in 1996. MCI and Sprint had market shares of
28.4% and 13.2%, respectively in 1996. 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.
In the United States, Primus provides long distance services to small- and
medium-sized businesses, residential customers, and other telecommunication
carriers. The Company operates international gateway telephone switches in the
New York City area, Washington D.C. and Los Angeles which are connected with
European countries and countries in the Asia-Pacific region through owned and
leased international fiber cable systems. The Company maintains a direct sales
organization in each of these cities to sell to business customers, and has a
telemarketing center for small business sales in Tampa. To reach residential
customers, the Company advertises nationally in ethnic newspapers and other
publications, offering discounted rates for international calls to targeted
countries. The Company utilizes independent agents to reach and enhance sales
to both business and residential customers and has established a direct sales
force for marketing wholesale international services to other long distance
carriers. The Company maintains a national customer service center staffed
with multi-lingual representatives and operates a global Network Management
Center that monitors the Network from its McLean, Virginia location.
As a result of the recently completed TresCom Merger, the Company has
acquired all of the operations and facilities of TresCom. In the United
States, TresCom markets wholesale telecommunications services to other long
distance carriers who utilize the TresCom network to transmit international
calls to Latin America. TresCom's customers also include businesses with sales
or operations in Latin America, as well as the growing Hispanic population in
the United States. TresCom employs a direct sales force, numbering
approximately 80 individuals as of June 15, 1998, and independent sales and
telemarketing agents to market its services. TresCom maintains sales offices
in Florida, New York, California, Georgia, Puerto Rico and St. Thomas,
U.S.V.I. As part of TresCom's marketing activities to residential customers,
TresCom has entered into joint marketing and promotional arrangements with
other companies, including Coca-Cola, Shell Oil Company, Seagrams and
Walgreens Drug Stores. Additionally, TresCom utilizes direct mail,
participates in a variety of promotional activities which target specified
customers, and sponsors various civic and charity activities.
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According to the International Telecommunications Union ("ITU"), the total
telecommunications market in Canada accounted for approximately $13.2 billion
in revenues in 1996. In Canada, Stentor, a partnership of Canadian regional
telephone companies, is the largest provider of long distance services with a
market share of approximately 67% in 1997. Two types of long distance
providers compete with Stentor. The first, which includes AT&T LDS, fONOROLA
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. In Canada, Primus Canada provides long distance services to
small- and medium-sized businesses, residential customers and other
telecommunication carriers. Primus Canada operates switches in Toronto and
Vancouver, maintains points-of-presence in Ottawa, Montreal and Calgary, and
has sales and customer service offices in Vancouver, Toronto, and Montreal.
According to the ITU, the total telecommunications market in Mexico
accounted for approximately $6.9 billion 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 10 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 customers with United States-Mexico cross border private line
services, but is prohibited by the private ownership limitations from
providing other services.
As of June 15, 1998, the Company had approximately 25,000 business customers
and 95,000 residential customers in North America, including the recently
acquired TresCom customer base.
Asia-Pacific. According to the ITU, in 1996, the total telecommunications
market in Australia accounted for approximately $13.4 billion in revenues.
Telstra and Optus, the leading full-service carriers in Australia, own and
operate local, national and international transmission networks. Telstra,
which is majority-owned by the Australian government, is a traditional
facilities-based carrier with a market share of approximately 62.0% in 1996.
In addition to the Company and Optus, Telstra currently competes against other
facilities-based carriers such as AAPT, several switchless resellers and call-
back service providers, including CorpTel, and mobile telecommunications
carriers, such as Vodafone. Australia has further deregulated its long-
distance market 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. The Company is a licensed carrier permitted to own and operate
transmission facilities in Australia.
Primus is the fourth largest long distance company in Australia, providing
domestic and international long distance services, data and Internet access
services, as well as local and cellular service on a resale basis, to small-
and medium-sized business customers and ethnic residential customers. The
Company has invested substantial resources over the past two years to build a
domestic and international long distance network to transform its Australian
operations into a full facilities-based telecommunications carrier. During
1997, the Company installed and began operating a five-city switched network
using Northern Telecom switches in Sydney, Melbourne, Perth, Adelaide, and
Brisbane. The Company purchased international fiber cable capacity during 1997
and linked the Australian network to the United States via the TPC-5, APCN,
and Jassaurus cable systems, as well as to New Zealand. Primus Australia
became a fully licensed facilities-based telecommunications carrier on July 1,
1997. In August 1997, equal access was introduced in Australia, and the
Company began the process of migrating and connecting customers directly to
its own Network. In 1998, the Company completed the Hotkey Investment and the
Eclipse Acquisition, positioning it to offer a complete range of
telecommunications services for corporate customers in Australia, including
fully integrated voice and data networks, as well as Internet access. The
Company markets its services through a combination of direct sales to small-
and medium-sized business customers, independent agents which market to
business and residential customers, and media advertising aimed at ethnic
residential customers living in Australia who make a high
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volume of international calls. As of June 15, 1998, the Company had
approximately 25,000 business customers and 105,000 residential customers in
Australia.
The Company entered the Japanese market in late 1997 through the
TelePassport/USFI Acquisition. According to the ITU, in 1996, the total
telecommunications market in Japan accounted for approximately $93.6 billion
in revenues. The Company maintains an office in downtown Tokyo and a switching
platform to provide international calling services to resellers and small
businesses. The Company has interconnected its Tokyo switch to Los Angeles via
the TPC-5 fiber cable system. The Company plans to apply for a full Class-I
carrier license in Japan. The Company plans to market its services in Japan
through direct sales and relationships that it is establishing with business
partners.
Europe. Oftel estimates that the market for international and domestic long
distance services in the United Kingdom accounted for approximately $6.6
billion in revenues in the 12 months 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.
Primus Telecommunications, Ltd. is a fully licensed carrier in the United
Kingdom and provides domestic and international long distance services to
residential customers, small businesses, and other telecommunications
carriers. The Company operates an Ericsson AXE-10 international gateway
telephone switch in London, which is directly connected to the United States
and will be directly connected to the international gateway switch currently
being installed in Frankfurt, Germany. Primus's European operations are
headquartered in London, where it also maintains a 24-hour customer service
call center. The Company markets its services in the United Kingdom using a
combination of direct sales, agents, and direct media advertising primarily to
ethnic customers who make a higher-than-average percentage of international
calls. As of June 15, 1998, Primus Telecommunications, Ltd. had approximately
25,000 residential customers in the United Kingdom.
The Company is in the process of expanding its services and Network to
continental Europe which has recently begun the process of deregulation of its
telecommunications markets. For example, the Company was recently awarded a
Class-4 switched voice telephone license in Germany. According to the ITU, in
1996, the German telecommunications market generated approximately $44.6
billion in revenues. Through the TelePassport/USFI Acquisition, Primus
acquired a base of small business customers in Germany to whom it provides
reorigination services, establishing a platform for the Company's expansion
into that market. Additionally, the Company has opened its first sales office
in Frankfurt, and has purchased an Ericsson AXE-10 international gateway
switch which has been installed. The Company has also applied for a license
and expects to begin operations in France during 1998.
Latin America. As a result of the recently completed TresCom Merger, the
Company will accelerate the targeting of businesses and residential customers
in Latin America to capitalize on the existing TresCom relationships with
customers having operations in those countries. TresCom offers international
inbound calling services which provide collect calling from parts of Latin
America to the United States and calling card services with United States
terminations. In 1997, TresCom began marketing these services in Honduras,
Nicaragua and Panama. Additionally, TresCom began providing international
callthrough services from portions of Latin America enabling its customers
located in that region to place international calls at reduced rates. TresCom
maintains a multi-lingual customer service department available through "toll-
free" access, as well as a "Trouble Reporting Center" which caters to its
wholesale customers. In addition to international long distance services,
TresCom provides local service in Puerto Rico, and the U.S.V.I.
SERVICES
The Company offers a broad array of telecommunications services through the
Network and through interconnection with the networks of other carriers. The
Company's decision to offer certain services in a market
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is based on competitive factors and regulatory restraints within the market.
Below is a summary of services offered by the Company:
. International and Domestic Long Distance. The Company provides
international long distance voice services terminating in approximately
230 countries, and provides domestic long distance voice services within
selected countries within its Service Regions. Access methods required to
originate a call vary according to regulatory requirements and the
existing domestic telecommunications infrastructure.
. 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.
. Prepaid Cards, Calling Cards and Collect Calling. The Company offers
prepaid and calling cards that may be used by customers for domestic and
international telephone calls both within and outside of their home
country. If the TresCom Merger is consummated, the Company will offer
customers in selected Latin American markets collect calling services to
the United States and calling card services for calls terminating in the
United States. TresCom is currently marketing such services in Honduras,
Nicaragua and Panama.
. Reorigination and Callthrough Services. In selected countries, including
Germany and Japan, the Company provides call reorigination services which
allow non-United States country to country calling to originate from the
United States, thereby taking advantage of lower United States accounting
rates. As a result of the recently completed TresCom Merger, the Company
also offers international callthrough services from selected countries in
Latin America.
. Local Switched Services. The Company in the future intends to provide
local service on a resale basis as part of its "multi-service" marketing
approach, subject to commercial feasibility and regulatory limitations.
The Company currently provides local service in Australia and, as a
result of the recently completed TresCom Merger, provides competitively-
priced local calling services within Puerto Rico and the U.S.V.I.
. Toll-free Services. The Company offers domestic and international toll-
free services.
. Data Services. With the Hotkey Investment and the Eclipse Acquisition,
the Company is positioned to offer ATM, a transmission standard which
utilizes statistical multiplexing technology, and frame relay and other
data services, including Internet access services, in Australia.
. Cellular Services. The Company resells Telstra analog and digital
cellular services in Australia.
NETWORK
General. Since its inception in 1994, the Company has been deploying a
global intelligent telecommunications network consisting of international and
domestic switches, related peripheral equipment, undersea fiber optic cable
systems and leased satellite and cable capacity. Primus believes that the
Network allows it to control both the quality and cost of the on-net
telecommunications services it provides to its customers. To ensure high-
quality telecommunications services, the Network employs digital switching and
fiber optic technologies, uses SS7 signaling and is supported by comprehensive
monitoring and technical services. The Company's Network consists of (i) a
global backbone network connecting intelligent gateway switches in the Service
Regions, (ii) a domestic long distance network presence within certain
countries within the Service Regions, and (iii) a combination of owned and
leased transmission facilities, resale arrangements and foreign carrier
agreements.
Each of the international gateway switches will be connected to the domestic
and international networks of both the Company and other carriers in a
particular market, allowing the Company to (i) provide seamless service, (ii)
package and market the voice and data services purchased from other carriers
under the "Primus" brand name and (iii) divert a portion of that market's
United States-bound return traffic through the Company's switches in the
United States. In addition, until the Company's customer base grows and it
penetrates other
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deregulating telecommunications markets, the Company intends to transit a
significant portion of its traffic through the United States.
The Company has targeted North America, the Asia-Pacific region, Europe and,
as a result of the recently completed TresCom Merger, Latin America, for the
development of the Network. The Company has selected the United States,
Australia and the United Kingdom as regional hubs for expansion into
additional markets within North America, the Asia-Pacific region and Europe,
respectively. These countries were selected based on their market size,
potential growth and favorable regulatory environments. 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 is using its United Kingdom operations to coordinate
efforts to enter other major metropolitan European markets in the European
Union in conjunction with the deregulation of the telecommunications industry
in certain European Union countries which began in 1998. The initial step in
this expansion involves the Company's current installation of an international
gateway switch in Frankfurt, Germany.
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:
[GRAPH APPEARS HERE]
International Gateway and Domestic Switches. As of March 31, 1998, the
Company operated 11 switches, including seven international gateway switches
(New York, Los Angeles, Washington, D.C., Toronto, Vancouver, London, Sydney),
four domestic switches (Adelaide, Brisbane, Melbourne and Perth) and a
switching platform in Japan. As a result of the recently completed TresCom
Merger, the Company has acquird three additional international gateway
switches located in Fort Lauderdale, New York City and Guaynabo, Puerto Rico.
The Company also currently operates approximately 15 Pops in other major
metropolitan areas of its Service Regions. The equipment deployed in the
Network, including the switches, consists primarily of equipment manufactured
by Nortel, Ericsson and Siemens.
Fiber Optic Cable Systems. Where the Company's customer base has developed
sufficient traffic, the Company has purchased and leased undersea and land-
based fiber optic cable 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
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economic interests in transmission capacity through MAOUs and IRUs to
international traffic destinations. The following chart sets forth a listing
of the undersea fiber optic cable systems in which the Company has capacity
after the recently completed TresCom Merger (which includes both MAOUs and
IRUs):
<TABLE>
<CAPTION>
CABLE SYSTEM COUNTRIES SERVED STATUS
----------------- ---------------------------- --------
<C> <S> <C>
PRIMUS:
United States--United
TAT 12/13 Kingdom Existing
United States--United
Gemini Kingdom Existing
CANTAT United States--Germany Existing
United States--Canada Existing
CANUS United States--Canada Existing
Flag United Kingdom--Italy Existing
Italy--Japan Existing
UK--France 5 United Kingdom--France Existing
Arianne France--Greece Existing
CIOS Greece--Cyprus Existing
Aphrodite Greece--Italy Existing
TPC 5 United States--Japan Existing
APCN Japan--Indonesia Existing
Jasaurus Indonesia--Australia Existing
Southern Cross United States--Australia Planned
JPN--US United States--Japan Planned
SEA ME WE Italy--Japan Planned
TRESCOM:
Columbus II United States--Mexico Existing
Americas I United States--Brazil Existing
United States--U.S.V.I. Existing
U.S.V.I.--Trinidad Existing
PTAT-1 United States--U.S.V.I. Existing
CARAC United States--U.S.V.I. Existing
Taino--Carib U.S.V.I.--Puerto Rico Existing
Bahamas I United States--Bahamas Existing
U.S.V.I.--Antigua--St.
ECFS Martin-- Existing
St. Kitts--Martinique--
Guyana
Americas II United States--Argentina Planned
Columbus II United States--Spain Planned
Pan American U.S.V.I.--Aruba--Venezuela-- Planned
Panama--Columbia--Ecuador--
Peru--Chile--Panama
Bahamas 2 United States--Bahamas Planned
Puerto Rico--Dominican
MONA Republic Planned
Puerto Rico--Dominican
Antilles 1 Republic Planned
CANTAT 3 United States--Denmark Existing
CANUS United States--Canada Existing
ODIN Netherlands--Denmark Existing
RIOJA Netherlands--Belgium Existing
</TABLE>
Foreign Carrier Agreements. In selected countries where competition with the
traditional incumbent PTTs is limited or is not currently permitted, the
Company has entered into foreign carrier agreements with PTTs or other 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 PTTs in Cyprus, Greece, Honduras, India,
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Iran, Italy and New Zealand, and additional agreements with other foreign
carriers in 5 other countries. As a result of the recently completed TresCom
Merger, the Company has acquired 27 additional foreign carrier agreements,
providing access to various countries in Latin America.
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 has begun to
construct a NMCC in McLean, Virginia, and plans to use a portion of the net
proceeds of this Offering to build a new NMCC in London and to upgrade the
existing Sydney NMCC. Each of the NMCCs will be capable of monitoring and
controlling the Network in all regions.
Planned Expansion of Network. The Company is currently installing an
additional international gateway switch in Frankfurt, Germany and, by the end
of 1999, intends to add up to three switches in North America, two switches in
Europe, one switch in Asia-Pacific and three switches in Latin America.
Additionally, the Company intends to continue to invest in additional switches
and Pops in major metropolitan areas of the Service Regions as the traffic
usage warrants the expenditure. The Company also intends to acquire capacity
in land based fiber optic cable systems in its Service Regions, particularly
in North America and Europe. To augment the Network, the Company intends to
construct and own international satellite earth stations to connect the
Network to developing countries in which fiber optic cable connections are
unavailable or uneconomical.
CUSTOMERS
The Company's primary focus is providing telecommunications services, on a
retail basis, to small- and medium-sized businesses with significant
international long distance traffic and ethnic residential consumers and, on a
wholesale basis, other carriers and resellers with international traffic. As
of June 15, 1998, Primus had in excess of 275,000 customers, including the
recently acquired TresCom customer base.
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 the Company
primarily due to its price savings compared to first-tier carriers and,
secondarily, its personalized approach to customer service and support,
including customized billing and bundled service offerings.
Residential Consumers. The Company's residential sales and marketing
strategy targets ethnic residential consumers who generate high international
traffic volumes. The Company believes that they are attracted to the Company
because of price savings as compared to first-tier carriers, simplified
pricing structure, and multilingual customer service and support.
Telecommunications Carriers and Resellers. The Company competes for the
business of other telecommunications carriers and resellers primarily on the
basis of price and service quality. Sales to other carriers and resellers help
the Company maximize the utilization of the Network and thereby reduce the
Company's fixed costs per minute of use.
Customer Service. 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
June 15, 1998, the Company employed approximately 190 full-time customer
service employees, many of whom are multi-lingual. The Company intends to
integrate the TresCom staff of operators fluent in English and Spanish, which
can be accessed to complete collect, third party, person-to-person, station-
to-station and credit card validation calls. The TresCom Merger will
accelerate the Company's ability to offer wholesale and retail traffic
repricing for international and domestic traffic, as well as advanced personal
computer billing services. TresCom also maintains a "Trouble Reporting Center"
for its wholesale customers.
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SALES AND MARKETING
The Company markets its services through a variety of sales channels, as
summarized below:
Direct Sales Force. The Company's direct sales force is comprised of full-
time employees who focus on small- to medium-sized business customers with
substantial international traffic or traffic potential. The Company also
employs full-time direct sales representatives focused on ethnic residential
consumers and 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 commissions.
The Company's direct sales efforts are organized into regional sales
offices. The Company currently has offices in Washington, D.C., New York City,
Los Angeles, Tampa, Toronto, Vancouver, Montreal, Mexico City, London,
Frankfurt, Melbourne, Sydney, Adelaide, Brisbane, Perth and Tokyo. With the
recent completion of the TresCom Merger, the Company has additional sales
offices in Fort Lauderdale, Puerto Rico and St. Thomas, U.S.V.I.
Agents and Independent Sales Representatives. The Company supplements its
direct sales efforts with agents and independent sales representatives. These
agents and representatives, who typically focus on small- and medium-sized
businesses, as well as ethnic residential consumers, are paid commissions
based on long distance revenue generated. Within major metropolitan regions,
the Company usually grants only nonexclusive sales rights, requires its agents
and representatives to maintain minimum quotas and prohibits them from selling
competitors' products.
Telemarketing. The Company employs full-time telemarketing sales personnel
to supplement sales efforts to ethnic residential consumers and small- and
medium-sized business customers.
Media and Direct Mail. The Company uses a variety of print, television and
radio advertising to increase name recognition and generate new customers. The
Company reaches ethnic residential consumers by print advertising campaigns in
ethnic newspapers, and advertising on select 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 customer
billing. For financial reporting, Primus utilizes a common system in each of
its markets. It is expected that TresCom's financial reporting will be
integrated with that of the Company. For its billing requirements in the
United States, the Company uses a customer billing system developed by
Electronic Data Systems Inc. ("EDS") which 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. Elsewhere, the
Company uses advanced systems to handle its billing requirements. The Company
direct bills all of its business, resellers and residential customers in all
of its Service Regions.
Management believes that its financial reporting and billing systems are
adequate to meet the Company's needs in the near term, including integration
of TresCom's operations, but as the Company continues to grow, it will need to
invest additional capital to purchase hardware and software, license more
specialized software, increase capacity and link its systems among different
countries. The Company is reviewing its computer systems and operations to
identify and determine the extent to which any systems will be vulnerable to
potential errors and failures as a result of the Year 2000 problem. See "Risk
Factors--Dependence on Effective Information Systems; Year 2000 Problem" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
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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. In each country of operation, the
Company has numerous competitors. The Company believes that as the
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 the markets in which the Company competes
have declined historically 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. See
"Risk Factors--Intense Domestic and International Competition."
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 enacted in the United States, RBOCs will be allowed to
enter the long distance market, AT&T, MCI and other long distance carriers
will be allowed to enter the local telephone services market, and cable
television companies and utilities will be allowed to enter both the local and
long distance telecommunications markets. In addition, competition has begun
to increase in the European Union telecommunications markets in connection
with the deregulation of the telecommunications industry in most European
Union countries, which began in January 1998. 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 selected
countries within each of the Service Regions:
North America. 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, Sprint and WorldCom 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. 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 Companies, in particular, Bell Canada, the dominant
supplier of local and long-distance services in Canada, AT&T LDS, Sprint
Canada and fONOROLA. 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.
Asia-Pacific. 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 and AAPT and
a number of other switchless resellers. 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. The Company believes that competition in Australia will increase as
more companies are awarded carrier licenses in the future. The Company's
principal competitor in Japan is KDD, the dominant carrier, as well as Japan
Telecom, IDC and a number of second tier carriers, including Cable & Wireless,
WorldCom and ATNet.
Europe. The Company's principal competitors in the United Kingdom are
British Telecom, the dominant supplier of telecommunications services in the
United Kingdom, and Cable & Wireless Communications. Other competitors in the
United Kingdom include Colt, Energis, Esprit Telecom Group and RSL
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Communications. The Company competes in the United Kingdom, and expects to
compete in other European countries, by offering competitively-priced bundled
and stand-alone services, personalized customer service and value-added
services. The Company's principal competitor in Germany is Deutsche Telekom,
the dominant carrier. The Company also competes with O.tel.o Communications,
Mannesmann ARCOR, VIAG Interkom, MobilCom, Talkline, MFS/Colt, WorldCom,
PlusNet, and RSL Communications. Additionally, the Company also faces
competition from other licensed public telephone operators that are
constructing their own facilities-based networks, cable companies and switch-
based resellers, including the emerging German local exchange carriers known
as "City Carriers".
Latin America. The Company's principal competitors in Latin America are the
traditional PTTs in each country within this region, including Telmex in
Mexico.
GOVERNMENT REGULATION
As a global telecommunications company, the Company 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."
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. The FCC is considering a number of international
service issues in the context of several policy rulemaking proceedings in
response to specific petitions and applications filed by other international
carriers. The Company is unable to predict how the FCC will resolve the
pending international policy issues or how such resolution will effect its
international business. In addition, the WTO Agreement, which reflects efforts
to dismantle government-owned telecommunications monopolies throughout Europe
and Asia may affect the Company. Although the Company believes that these
deregulation efforts will create opportunities for new entrants in the
telecommunications service industry, there can be no assurance that they will
be implemented in a manner that would benefit the Company.
The regulatory framework in certain jurisdictions in which the Company
provides its services is described below:
United States
In the United States, the Company's services are subject to the provisions
of the Communications Act, FCC regulations thereunder, as well as the
applicable laws and regulations of the various states and state regulatory
commissions.
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.
International Service Regulation. International common carriers, including
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.
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In addition to the general common carrier principles, the Company must
conduct its international business in compliance with the FCC's international
settlements policy, the rules that establish the permissible boundaries for
U.S.-based carriers and their foreign correspondents to settle the cost of
terminating each others' traffic over their respective networks. Under the
ISP, absent approval from the FCC, international telecommunications service
agreements with foreign carriers must provide that settlement rates paid to
each party are one-half of the accounting rate, and U.S. carriers may not
accept more than a proportionate share of return traffic. The ISP also
provides for a mechanism by which the FCC can review the rates contained in
such foreign carrier agreements. The FCC could find that the Company does not
meet certain ISP requirements with respect to certain of the Company's foreign
carrier agreements. Although the FCC generally has not issued penalties in
this area, it could, among other things, issue a cease and desist order,
impose fines or allow the collection of damages if it finds that the Company
is not in compliance with the ISP. The Company does not believe that any such
fine or order would have a material adverse effect on the Company.
The Company is also subject to other FCC requirements regarding the routing
of telecommunications services between the United States and foreign
countries. These requirements include compliance with the FCC's limitations on
the routing of international traffic via international private lines and on
accepting "special concessions" from certain carriers, as well as the filing
of periodic reports with the FCC. In implementing the WTO Agreement, the FCC
recently reduced the applicability of some of these requirements to the
activities of telecommunications carriers such as the Company. Moreover, the
Company has a number of customers in foreign countries that access the
Company's services through international call reorigination. In providing
service to these customers, the Company is required by the FCC to offer such
services in compliance with the laws of foreign countries where its customers
are located. Certain countries prohibit some or all forms of call
reorigination. For example, Honduras and Nicaragua have informed the
International Telecommunications Union that they prohibit call reorigination.
The Company may be prevented in the future from providing such services or
penalized either by the foreign country or, in certain circumstances, by the
FCC.
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.
Domestic Service Regulation. The Company is considered a non-dominant
domestic interstate carrier subject to minimal regulation by the FCC. The
Company is not required to obtain FCC authority to expand its domestic
interstate operations, but is required to maintain a tariff on file at the
FCC. 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 incumbent LECs such as 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
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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. 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.
Portions of that order were vacated by the U.S. Court of Appeals for the
Eighth Circuit. The U.S. District court for the Northern District of Texas
recently ruled that the long distance conditions in Sections 271-275 of the
1996 Telecommunications Act are unconstitutional. Higher courts, including the
U.S. Supreme Court, will be reviewing some of these decisions. The result of
such review cannot be predicted and the Company could be adversely affected to
the extent that conditions of RBOC entry into the long distance market are
relaxed or eliminated.
The Company's costs of providing long distance services will be affected by
changes in the access charge rates imposed by incumbent LECs for origination
and termination of calls over local facilities. The FCC has significantly
revised its access charge rules in recent years to permit incumbent LECs
greater pricing flexibility and relaxed regulation of new switched access
services in those markets where there are other providers of access services.
The FCC continues to adjust its access charge rules and has indicated that it
will promulgate additional rules sometime in 1998 that may grant certain LECs
further flexibility.
The FCC has also significantly revised the universal service subsidy regime
to be funded by interstate carriers and certain other entities. The FCC
recently established new universal service funds to support qualifying
schools, libraries, and rural health care providers and expanded subsidies for
low income consumers. The FCC is continuing to revise its universal service
rules which may result in further substantial increases in the overall cost of
the subsidy program. The outcome of these proceedings or its effect on the
Company cannot be predicted.
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 Company has
received the necessary certificate and tariff approvals to provide intrastate
long distance service in 48 states. Certificates of authority can generally be
conditioned, modified, canceled, terminated, or revoked by state regulatory
authorities for failure to comply with state law and/or the rules,
regulations, and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations. 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 which, if
granted, could subject the Company to increased price competition. The Company
may also be required to contribute to universal service funds in some states.
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. Through
TresCom, the Company holds common carrier wireless licenses. In its order
implementing the U.S. commitments under the WTO Agreement, the FCC established
new rules that effectively relax the foreign ownership limits for common
carrier wireless licensees. The new rules permit up to 100% foreign indirect
ownership of wireless licenses by foreign interests from members of the WTO.
FCC rules also require international carriers to notify the FCC 60 days in
advance of an acquisition of a 25% or greater controlling interest by a
foreign carrier in that U.S. carrier or an acquisition by the U.S. carrier of
a 25% or greater controlling interest in a foreign carrier. After receiving
this notification, the FCC can require the Company to meet certain "dominant
carrier" reporting and other conditions if the Commission finds that the
acquisition creates an affiliation with a dominant foreign carrier. In
addition, if the Company becomes affiliated with a dominant carrier from a
country that is not a member of the WTO, the FCC will apply an "effective
competitive opportunities" test and could prevent the Company from providing
services between the United States and that country. 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.
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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 in the U.S.),
deregulation of the international segment of the long-distance market,
limitations on switched hubbing through the United States and restrictions on
foreign ownership for facilities-based carriers. In addition, Canada has
committed in the WTO Agreement to eliminate a number of barriers to
competition, some of which are expected to be eliminated in October 1998.
Teleglobe Canada, Inc. ("Teleglobe"), which currently has a monopoly over
international transmission 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 permitted to provide ISR of private leased lines to
any country which permits such arrangements on a reciprocal basis. Routing of
basic intra-Canada traffic or basic traffic destined to third countries
through U.S. facilities is, however, prohibited. Despite these restrictions,
Primus as a reseller is virtually unregulated by the CRTC. In particular,
because the Company does not own and operate transmission facilities in
Canada, it is not subject to the Canadian Telecommunications Act or the
regulatory authority of the CRTC. The Company may therefore provide resold
Canadian long distance service without rate, price or tariff regulation,
ownership limitations, or other regulatory requirements.
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 Canada Long Distance Services, Sprint
Canada and fONOROLA, Inc. Additional long distance services competition is
provided by a substantial resale long distance industry in Canada. Although
resellers do not own facilities, they are able to provide the same range of
domestic services and long distance services as facilities-based carriers by
leasing capacity and other services from facilities-based carriers.
Foreign Ownership Restrictions. Under Canada's Telecommunications Act and
certain regulations promulgated pursuant to such Act, foreign ownership
restrictions are applicable to facilities-based carriers (known as "Canadian
carriers"), but not resellers, which may be wholly foreign-owned and
controlled. These restrictions limit the amount of direct foreign investment
in Canadian carriers to no more than 20% of the voting equity of a Canadian
carrier operating company and no more than 33 1/3% of the voting equity of a
Canadian carrier holding company. The restrictions also limit the number of
seats which may be occupied by non-Canadians on the Board of Directors of a
Canadian carrier operating company to 20%. In addition, under Canadian
companies law, a majority of Canadians must occupy the seats on the Board of
Directors of a Canadian carrier holding company. Although it is possible for
foreign investors to also hold non-voting equity in a Canadian carrier, the
law requires that the Canadian carrier not be "controlled in fact" by non-
Canadians. Based on Canada's commitment in the WTO Agreement, the restriction
on foreign investment in facilities-based telecommunications service providers
remains largely intact, but will be eliminated as October 1, 1998 for
operations conducted under an international submarine cable license and for
certain satellites.
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.
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The Company is licensed under the Telecom Act 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 is required to comply with the terms of its own license, is
subject to the greater controls applicable to licensed facilities-based
carriers and is 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 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.
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, and it is expected that
additional licenses will be granted. As a result of the Telecom Act, any
company that meets the relevant financial and technical standards and complies
with the license application process can become a licensed carrier permitted
to own and operate transmission facilities in Australia. New carriers seeking
a license 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 license 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.
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 anticompetitive 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
anticompetitive 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
scrutinize the tariffs for anticompetitive purpose or effect, or to inform
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the public). The ACCC will balance concerns about commercial confidentiality
and the promotion of competition against dealing with anticompetitive 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 anticompetitive
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 license 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.
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.
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Japan
The Company's services in Japan are or will be subject to regulation by the
Japanese Telecom Ministry under the Japanese Telecom Law. The Company has
obtained a license as a Special Type II business, which allows it to provide
telecommunications services over international circuits leased from another
carrier, or domestic service in Japan over leased circuits if the volume of
traffic exceeds a certain amount. The Company may also provide over leased
lines basic telecommunications services, value-added services and services to
closed user groups. The Company is preparing to apply for a license to operate
as a Type I business, which would allow the Company to provide
telecommunications services using their own facilities. The Company only must
notify the Japanese Telecom Ministry as a General Type II business if it
provides domestic service in Japan over leased circuits and does not exceed
the traffic threshhold applicable to Special Type II businesses. Although the
Japanese government until recently prohibited greater than 33% foreign
ownership of a Type I business, as well as the resale of international private
lines interconnected to the public switched network at both ends, the Japanese
Telecom Ministry recently has begun awarding authorizations to foreign-
affiliated carriers to provide telecommunications services using their own
facilities and to resell interconnected international private lines. The
Japanese Telecom Ministry also regulates the interconnection charges imposed
by Type I businesses, and must approve intercarrier agreements between Type I
carriers or between Type I and Special Type II carriers.
European Union
In Europe, the regulation of the telecommunications industry is governed at
a supra national level by the European Commission, consisting of members from
the following countries: Austria, Belgium, Denmark, Finland, France, Germany,
Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden
and the United Kingdom (the "EU"), which is responsible for creating pan-
European policies and, through legislation, developing a regulatory framework
to ensure an open, competitive telecommunications market.
In 1990, the European Commission issued the Services Directive requiring
each EU member state to abolish existing monopolies in telecommunications
services with the exception of real time two-way voice telephony to
the public, which was still reserved to the PTT. The intended effect of the
Services Directive was to permit the competitive provision of all services,
including value-added services and voice services to closed user groups
("CUG"), other than such reserved public voice telephony services. However, as
a consequence of local implementation of the Services Directive through the
adoption of national legislation, there are differing interpretations of the
definition of such reserved voice telephony services and permitted value-added
and CUG services. Other voice services accessed by customers through leased
lines were permissible in all EU member states. The European Commission has
generally taken a narrow view of the services classified as reserved voice
telephony, declaring that voice services may not be reserved to the PTTs if
(i) dedicated customer access is used to provide the service, (ii) the service
essentially consists of new value-added benefits on users (such as alternative
billing methods) or (iii) calling is limited by a service provider to a group
having legal, economic or professional ties.
In March 1996, the EU adopted the Full Competition Directive containing two
provisions which required EU member states to allow the creation of
alternative telecommunications infrastructures by July 1, 1996, and which
reaffirmed the obligations of EU member states to abolish the PTTs' monopolies
in voice telephony by 1998. To date, Denmark, Finland, the Netherlands,
Sweden, Germany, France, Austria and the U.K. have liberalized facilities-
based competition. Certain EU countries may delay the abolition of the voice
telephony monopoly based on derogations established in the Full Competition
Directive. These countries include Luxembourg (July 1, 1998), Spain (November
30, 1998), Ireland (December 31, 1998), Portugal (January 1, 2000) and Greece
(December 31, 2000).
Each EU member state in which the Company currently conducts or plans to
conduct its business has a different regulatory regime and such differences
have continued beyond January 1998. The requirements for the Company to obtain
necessary approvals vary considerably from country to country and are likely
to change as competition is permitted in new service sectors. Most EU member
states require companies to obtain a license in order to provide voice
telephony services or construct and operate telecommunications networks.
However, the
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EU generally does not permit its member states to require individual licenses
for other types of services. In addition, the Company has obtained and will
continue to seek to obtain interconnection agreements with other carriers
within the EU. While EU directives require that dominant carriers offer cost-
based and nondiscriminatory interconnection to competitors, individual EU
member states have implemented and may implement this requirement differently.
As a result, the Company may be delayed in obtaining or may not be able to
obtain interconnection in certain countries that would allow the Company to
compete effectively. Moreover, there can be no guarantee that long distance
providers such as the Company will be able to afford their customers "equal
access" to their networks, and the absence of such equal access could put such
long distance companies at a disadvantage with respect to existing PTTs.
United Kingdom
The Company's services are 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
anticompetitive behavior.
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 Limited, holds an ISVR
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's 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 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. British Telecom has advocated and will likely
continue to advocate for greater pricing flexibility, including flexibility
for pricing toll free and other services. Greater pricing flexibility could
allow British Telecom to charge the Company higher prices for certain services
or to charge end user customers prices that are lower than the Company is able
to charge.
Interconnection and Indirect Access. The Company must interconnect its U.K.
network to networks of other service providers in the United Kingdom and allow
its end user customers to obtain access to its services in order to compete
effectively in the United Kingdom. In the United Kingdom, licensed long
distance carriers such as the Company can obtain interconnection to British
Telecom at cost-based rates. However, while
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customers of British Telecom's long distance service can access that service
automatically (i.e., without dialing additional digits), customers of other
long distance carriers generally must dial additional digits to access their
chosen carrier's services.
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. At present,
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
anticompetitive conduct harmful to the Company. The Fair Trading condition is
already incorporated in all international facilities-based licenses and has
been incorporated in all international simple voice resale licenses beginning
in July 1997. There are no foreign ownership restrictions that apply to
telecommunications 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 Anticompetitive agreements and abuses of dominant
market positions through Articles 85 and 86 of the Treaty of Rome. The
European Commission is entrusted with the principal 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.
Germany
The German Telecom Act liberalized all telecommunications activities, except
for the voice telephony monopoly which was abolished on January 1, 1998. The
German Telecom Act has been complemented by several ordinances. The most
significant ordinances concern network access, rate regulation, universal
service, frequencies and customer protection.
Under the German regulatory scheme, licenses are required for the operation
of infrastructure and the provision of voice telephony services. Licenses
required for the operation of infrastructure are divided into 3 license
classes: mobile telecommunications (license class 1); satellite (license class
2); and other telecommunications services for the general public (license
class 3). In addition to the infrastructure licenses, a separate license is
required for provision of voice telephony services to the general public on
the basis of self-operated telecommunications networks (license class 4). A
class 4 license does not include the right to operate transmission
infrastructure. All other telecommunications services (e.g. value-added, data,
etc.) are only subject to a notification requirement.
The Regulierungsbehorde fur Telekommunikation und Post ("RegTP") has granted
the Company a class 4 license which, according to RegTP's current reading of
the German Telecom Act, gives Primus the ability to originate and terminate
calls throughout Germany. However, the RegTP may reinterpret the German
Telecom Act with regard to license requirements for Germany-wide origination
and termination. If that occurs the Company may have to extend its licenses
and may incur additional license fees.
Companies that desire to connect with Deutsche Telekom's network must enter
into an interconnection agreement which specifies certain interconnection
tariffs. Changes in German regulatory policy may require network providers
requesting the lowest available interconnection tariffs from Deutsche Telekom
to either substantially invest in network technology (i.e. by installing more
points of interconnection) or pay higher prices. If a provider does not agree
with the tariff rates offered by Deutsche Telekom, the provider can take the
case to
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<PAGE>
the RegTP which determines the applicable rates. Since the Company is not a
dominant carrier, it is not subject to the same interconnection obligations
toward third parties.
Several complaints, the outcome of which may affect the Company's business,
are currently pending before the RegTP or German courts concerning
interconnection with Deutsche Telekom. Since Deutsche Telekom and some of its
major competitors in Germany have been unable to reach agreement on
interconnection rates, the RegTP established provisional interconnection
tariffs in September 1997 which Deutsche Telekom has since challenged in
court. These rates are now part of the standard offer of Deutsche Telekom and
valid for all interconnected and licensed carriers for as long as the matter
is pending before the German courts. Court review of these rates may result in
higher rates being imposed on network operators retroactively as the standard
interconnection agreement provides for retroactive effect of the court's final
decision. Other pending complaints concern the costs of billing services
provided by Deutsche Telekom to other carriers and rates for direct access to
the end-user lines of Deutsche Telekom. It is expected that a final resolution
to these matters will take several years.
The Company has entered into an interconnection agreement with Deutsche
Telekom at the regulated standard interconnection rates presently under court
review. The Company's interconnection agreement with Deutsche Telekom permits
the parties to renegotiate interconnection rates or other provisions of the
agreement in the event of a change in the German regulatory environment or
other circumstances which have a bearing on the economic basis of the
interconnection agreement, a party's license situation or those which are
considered by both parties to materially affect the interconnection agreement
in any other way. In addition, Deutsche Telekom has the right under the
agreement to apply to the RegTP for a ruling regarding (i) whether the
Company's German network structure, in particular the number and locations of
points of interconnection with Deutsche Telekom, entitles the Company to
interconnection as defined by Section 35 of the German Telekom Act and
(ii) whether the structure entitles the Company to the switching of calls
originating Germany-wide. If Deutsche Telekom requests such a ruling, the
interconnection agreement will have to be amended to reflect this ruling.
Deutsche Telekom has informed the Company by letter dated May 29, 1998 that it
will request such a ruling from the RegTP in accordance with the
interconnection agreement. The request is presently being reviewed by the
RegTp. An unfavorable decision by the RegTP overturning its current policy
could potentially adversely affect the Company's German business by requiring
additional investments into points of interconnection or switching facilities,
the payment of higher connection prices or a geographic restriction on the
switching of calls.
The Company is or may become subject to certain other requirements as a
licensed telecommunications provider in Germany. For example, licensed
providers are under an obligation to present their standard terms and
conditions to the RegTP. The RegTP may, based upon certain criteria, decide
not to accept these terms and conditions. The Company may also become subject
to universal service financing obligations. Currently, it is unlikely that the
universal service financing system will be implemented in Germany in the
foreseeable future. However, in the event that the system is implemented,
Primus could be subject to such universal service requirements and financing
schemes if the Company has a market share in Germany of at least 4%.
Latin America
Various countries in Latin America have taken initial steps towards
deregulation in their telecommunications markets. Each Latin American country
has a different national regulatory regime and each country is in a different
stage of liberalization. Historically, Latin American countries have reserved
the provision of voice services to the state-owned PTT. In the last few years,
several Latin American countries have completely or partially privatized their
national carriers, including Argentina, Chile, Mexico, Peru and Venezuela. In
addition, certain countries have partially or completely opened their local
and/or long distance markets, most notably Chile, which has competitive
operators in all sectors. Argentina has liberalized certain telecommunications
services, such as value-added, paging, data transmission, and Personal
Communications Services (PCS). Brazil currently is in the process of opening
its telecommunications market to competition. Brazil intends to privatize
Telecomunicacoes Brasileras S.A. ("Telebras"), which, through its 28 regional
subsidiaries, hold a monopoly over the provision of local telephone services,
as well as Empresa Brasiliera de Telecomunicacoes, S.A. the monopoly provider
of long distance and international telephone services. Moreover,
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Columbia has recently opened national and international long distance services
to competition, and has awarded two new concessions for the provision of these
services to two major local exchange carriers in Colombia--Empresas de
Telecomunicaciones de Bogota and Orbitel, S.A. In Colombia the provision of
value-added services and voice services to closed-user groups is open to
competition. Mexico initiated competition in the domestic and international
long distance services market on January 1, 1996, which are subject to a
concession requirement. In addition, the Mexican government has recently
opened basic telephony, and is currently auctioning radioelectric spectrum
frequencies for the provision of PCS and LMDS. Value-added services are also
fully open to competition in Mexico. Finally, in the Central American region,
Guatemala and El Salvador have recently opened their telecommunications market
to competition, abolishing all restrictions on foreign investment in this
sector. Other countries in Central America, such as Nicaragua and Honduras,
are in the process of privatizing their state-owned carriers, and have not
fully opened their markets to competition.
EMPLOYEES
The following table summarizes the number of full-time employees of the
Company (including those employees added as a result of the TresCom Merger) as
of June 15, 1998, by region and classification:
<TABLE>
<CAPTION>
NORTH ASIA-
AMERICA PACIFIC EUROPE TOTAL
------- ------- ------ -----
<S> <C> <C> <C> <C>
Management and Administrative................... 123 55 9 187
Sales and Marketing............................. 192 106 15 313
Customer Service and Support.................... 106 66 17 189
Technical....................................... 92 79 12 183
--- --- --- ---
Total......................................... 513 306 53 872
=== === === ===
</TABLE>
The Company has never experienced a work stoppage, and none of the Company's
employees, including the employees of TresCom, are represented by a labor
union or covered by a collective bargaining agreement. The Company considers
its employee relations to be excellent.
PROPERTIES
The Company currently leases its corporate headquarters which is located in
McLean, Virginia. Additionally, the Company also leases administrative,
technical and sales office space in Washington, D.C., the New York City
metropolitan area, Los Angeles and Tampa in the United States; Melbourne,
Sydney, Brisbane, Perth and Adelaide in Australia; London in the United
Kingdom; Vancouver, Toronto and Montreal in Canada; Tokyo in Japan; Mexico
City in Mexico; and Frankfurt in Germany. Total leased space approximates
130,000 square feet and the total annual lease costs are approximately $2.9
million. The operating leases expire at various times through 2006.
TresCom leases all of its facilities, including its administrative and sales
offices, and its switch locations. TresCom's headquarters in Fort Lauderdale,
Florida consist of approximately 20,600 square feet of office space under
leases that expire through April 2003. In addition, TresCom leases an
aggregate of approximately 70,000 square feet where it maintains its sales
offices or switches.
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 existing communications equipment are adequate.
However, as the Company's Network of switches grows, the Company expects 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. The Company believes the outcome of pending legal
proceedings to which the Company is a party will not have a material adverse
effect on the Company's business, financial condition, results of operations,
or cash flows.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table and biographies set forth information concerning the
individuals who serve as directors and executive officers of the Primus:
<TABLE>
<CAPTION>
YEAR OF EXPIRATION
NAME AGE POSITION OF TERM AS DIRECTOR
- ---- --- -------- -------------------
<S> <C> <C> <C>
K. Paul Singh(1)............ 47 Chairman of the Board of Directors, 1999
President, and Chief Executive Officer
Neil L. Hazard.............. 46 Executive Vice President and Chief N/A
Financial Officer
John F. DePodesta........... 53 Executive Vice President, and Director 1999
Ravi Bhatia................. 49 Chief Operating Officer, Primus N/A
Australia
Yousef Javadi............... 42 Chief Operating Officer, Primus North N/A
America
John Melick................. 39 Vice President of International N/A
Business Development
Jay Rosenblatt.............. 33 Vice President, Global Carrier N/A
Services
Herman Fialkov(2)(3)........ 76 Director 2000
David E. Hershberg(2)....... 61 Director 2000
Douglas Karp................ 42 Director 2001
John G. Puente(1)(3)........ 68 Director 2001
</TABLE>
- --------
(1) Member of Nominating Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
K. Paul Singh co-founded Primus in 1994 with Mr. DePodesta and serves as its
Chairman, President and Chief Executive Officer. From 1991 until he co-founded
Primus, 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 Overseas Telecommunications, Inc. ("OTI"), a provider of private digital
communications in over 26 countries which he founded in 1984 and was purchased
by MCI in 1991.
Neil L. Hazard joined Primus in 1996 as its Executive Vice President and
Chief Financial Officer. Prior to joining Primus, 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 Primus in 1994 with Mr. Singh, and serves as a
director and its Executive Vice President. In addition to his position with
Primus, Mr. DePodesta currently serves as the Chairman of the Board of Iron
Road Railways Incorporated, which he co-founded in 1994, and served as Senior
Vice President, Law and Public Policy of Genesis Health Ventures, Inc. from
January 1996 through March 1998. Additionally, since 1994 he has been "of
counsel" to the law firm of Pepper Hamilton LLP, where he was previously a
partner since 1979. Before joining Pepper Hamilton LLP, Mr. DePodesta served
as the General Counsel of Consolidated Rail Corporation. See "Certain
Transactions."
Ravi Bhatia joined Primus in October 1995 as the Managing Director of Primus
Telecommunications Pty., Ltd. (Australia). In March 1996 Mr. Bhatia became the
Chief Operating Officer of Primus Australia and as such is responsible for
implementing Primus's business strategy in Australia. Mr. Bhatia has over 26
years of international experience in the telecommunications industry, which
includes nine 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.
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<PAGE>
Yousef Javadi joined Primus in March 1997 as Chief Operating Officer of
Primus North America. Prior to joining Primus, Mr. Javadi was Vice President
of Business Development at GE Americom (a GE Capital company) from 1995-1997.
From 1991-1995 Mr. Javadi was at MCI, as Director of Global Services. From
1985-1991 he was at OTI as Vice President of Sales and Marketing. Prior to
OTI, Mr. Javadi worked at Hughes Network Systems.
John Melick joined Primus in 1994 as its Vice President of Sales and
Marketing, and since 1996, has served as Vice President of International
Business Development of the Company. Prior to joining Primus, Mr. Melick was a
Senior Manager with MCI responsible for the day-to-day management of its
global product portfolio in Latin America 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.
Jay Rosenblatt has served as Primus' Vice President of Global Carrier
Services since January 1996 and previously was Director of Marketing and Sales
responsible for Primus' commercial programs from September 1994 to January
1996. Prior to joining Primus in 1994, Mr. Rosenblatt was with MCI as the
marketing manager responsible for private network services in the Americas and
Caribbean.
Herman Fialkov became a director of Primus in 1995. Mr. Fialkov is a
consultant to Newlight Management LLC and a 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 Primus 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.
Douglas M. Karp became a director Primus in June 1998. Mr. Karp has been a
Managing Director of E.M. Warburg, Pincus & Co., LLC (or its predecessor, E.M.
Warburg, Pincus & Co., Inc.) since May 1991. Prior to joining E.M. Warburg,
Pincus & Co., LLC, Mr. Karp held several positions with Salomon Inc. including
Managing Director from January 1990 to May 1991, Director from January 1989 to
December 1989 and Vice President from October 1986 to December 1988. Mr. Karp
is a director of LCI International, Inc., TV Filme, Inc., Journal Register
Company and several privately held companies.
John G. Puente became a director of Primus 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.
Under the terms of a shareholders' agreement entered into in connection with
the TresCom Merger among Primus, Warburg, Pincus and Mr. Singh, Primus has
agreed to nominate one individual selected by Warburg, Pincus and reasonably
acceptable to the non-employee directors of Primus, to serve as a member of
the Primus board of directors. The foregoing nomination right remains
effective so long as Warburg, Pincus is the beneficial owner of 10% or more of
the outstanding Common Stock. In June 1998, Mr. Karp joined the Primus board
of directors pursuant to the foregoing arrangement.
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
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<PAGE>
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.
COMPENSATION OF DIRECTORS
During 1997, Primus paid each director $500 for each Primus Board meeting
and each Primus Committee meeting attended by such director in person.
Commencing with 1998, Primus pays directors an annual fee of $10,000 and will
reimburse their expenses for attending meetings, but has discontinued paying
any meeting fees. In addition, Primus grants each person who becomes an
Eligible Director (as defined in the Director Option Plan) options to purchase
15,000 shares of the Common Stock pursuant to Primus's Director Option Plan
which vest one-third upon the grant date, and one-third on each of the first
and second anniversary of the grant dates. Primus did not grant any such
options in 1997.
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
The Compensation Committee of the Primus Board consists of Messrs. Fialkov
and Hershberg, who were not at any time officers or employees of Primus. No
executive officer of Primus serves as a member of the board of directors or
compensation committee of another entity which has one or more executive
officers that will serve as a member of the Primus Board or the Primus
Compensation Committee.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth, for the years ended December 31, 1997, 1996
and 1995 certain compensation information with respect to Primus's Chief
Executive Officer and the other Company officers named therein (the "Named
Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -----------------------------
AWARDS PAYOUTS
--------------------- -------
OTHER SECURITIES ALL
ANNUAL RESTRICTED UNDERLYING OTHER
COMPEN- STOCK OPTIONS/ LTIP COMPEN-
SALARY BONUS SATION AWARD(S) SARS PAYOUTS SATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------- ---- ------- ------- ------- ---------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
K. Paul Singh--Chairman 1997 247,692 160,000 -- -- 100,000 -- --
of
the Board of Directors, 1996 185,000 100,000 -- -- 338,100 -- --
President and Chief 1995 185,000(1) -- -- -- -- -- --
Executive Officer
Neil L. Hazard--Executive 1997 159,231 100,000 -- -- 40,000 -- --
Vice President and Chief 1996 118,461 60,000 -- -- 304,290 -- --
Financial Officer 1995 -- -- -- -- -- -- --
Yousef B. Javadi--Chief 1997 121,154 60,000 -- -- 170,000 -- --
Operating Officer, 1996 -- -- -- -- -- -- --
Primus
North America 1995 -- -- -- -- -- -- --
John F. DePodesta-- 1997 100,000 -- -- -- 180,000 -- --
Executive
Vice President 1996 -- 10,000 -- -- -- -- --
1995 -- -- -- -- 101,430 -- --
Ravi Bhatia--Chief 1997 105,004 50,000 -- -- 30,000 -- --
Operating
Officer, Primus 1996 96,740 30,000 -- -- 33,810 -- --
Australia
1995 21,580 -- -- -- 67,620 -- --
</TABLE>
- --------
(1) Of this amount, payment of $77,200 was deferred and subsequently paid on
July 31, 1996.
STOCK OPTIONS GRANTED TO CERTAIN EXECUTIVE OFFICERS DURING LAST FISCAL YEAR
Under the Stock Option Plan, options to purchase Common Stock are available
for grant to selected employees of Primus. Options are also available for
grant to eligible directors under Primus's Director Stock Option Plan. The
following table sets forth certain information regarding options for the
purchase of Common Stock that were awarded to the Named Executive Officers
during 1997.
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OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
---------------------------------------------- -----------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/
OPTIONS/ SARS
SARS GRANTED TO EXERCISE OF
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
NAME (#) FISCAL YEAR ($/SH) DATE ($) ($)
- ---- ---------- ------------ ----------- ---------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
K. Paul Singh--Chairman 100,000 9% $14.00 12/22/02 386,820 854,700
of the
Board of Directors,
President
and Chief Executive
Officer
Neil L. Hazard-- 40,000 4% $14.00 12/22/02 154,728 341,880
Executive Vice
President and Chief
Financial Officer
Yousef B. Javadi--Chief 14%
Operating 150,000 $ 8.25 3/21/02 341,921 755,494
Officer, Primus North
America 20,000 2% $14.00 12/22/02 77,364 170,940
John F. DePodesta-- 180,000 17% $14.00 12/22/02 696,276 1,538,460
Executive Vice
President
Ravi Bhatia--Chief 30,000 3% $14.00 12/22/02 116,046 256,410
Operating Officer,
Primus Australia
</TABLE>
There were no options exercised by Primus's Chief Executive Officer or the
Named Executive Officers during the year ended December 31, 1997.
STOCK PLANS
Employee Stock Option Plan. The Company established the Employee Stock
Option Plan for its employees and consultants on January 2, 1995. Recently,
the Board adopted and the stockholders approved an amendment to the Employee
Stock Option Plan that, among other things, increased the number of options
available for grant and expanded 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
3,690,500, of which 917,522 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% 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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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 consultant'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
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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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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.
TresCom International Stock Option Plan. In connection with the TresCom
Merger, the Company assumed a stock option plan previously sponsored by
TresCom. Pursuant to the terms of the TresCom Merger Agreement, each
outstanding option to acquire one share of TresCom common stock was converted
into an option to acquire 0.6147 shares of Company Common Stock. As assumed by
the Company, options to acquire 374,361 shares of Company Common Stock are
outstanding under this stock option plan (the "Primus- TresCom Option Plan").
The Primus-TresCom Option Plan provides for an equitable adjustment in the
number and price of shares of Common Stock with respect to outstanding Options
in the event the outstanding shares of Common Stock are increased or decreased
through stock dividends, recapitalizations, reorganizations or similar things.
The Primus-TresCom Option Plan is intended as an incentive and to encourage
stock ownership by the officers, key employes, consultants and directors of
TresCom prior to the TresCom Merger in order to increase their proprietary
interest in the success of the Company and to encourage them to continue to
provide services to the Company. No additional stock options will be granted
under the Primus-TresCom Option Plan.
The Primus-TresCom Option Plan is administered by the board of directors of
the Company or by a committee appointed by the board of directors and
consisting of not less than two members of the board of directors who are not
also employees of the Company or any of its subsidiaries (the "Committee").
The Primus-TresCom Option Plan does not limit the length of time a director
may serve as part of the Committee. Subject to the terms of the Primus-TresCom
Option Plan, the board of directors or the Committee will have the exclusive
authority to interpret, administer and make determinations under the Primus-
TresCom Option Plan.
All Options granted under the Primus-TresCom Option Plan are in the form of
ISOs. Payment for the shares of Common Stock purchased under an Option must be
made in full upon exercise of the Option, by certified or bank cashier's check
payable to the order of the Company or by any other means acceptable to the
Company, including, without limitation, tender of shares of Common Stock then
owned by the optionee.
Each grant of an Option under the Primus-TresCom Option has been evidenced
by an Option Agreement which sets forth the number of shares of Common Stock
subject to the Option and includes other terms and conditions applicable to
the Option. Options are not assignable or transferable except by will or by
the laws of descent and distribution, and, during the lifetime of the
optionee, the Option may be exercised only by the optionee.
All Options issued under the Primus-TresCom Option Plan are entirely vested
and exercisable in full.
The tax consequences to the Company and the recipient of the Option upon the
grant and exercise of either a NQSO or ISO, and the sale of Common Stock
acquired upon exercise thereof, are identical to those described for NQSOs and
ISOs under "--Employee Stock Option Plan" above.
Director Stock Option Plan. The Company also established a Director Stock
Option Plan on July 27, 1995, as amended. 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 affiliated with or
employees of the Company or any subsidiary and who have not been nominated to
serve as directors pursuant to an agreement with the Company) 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
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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 15,000 shares of Common Stock,
exercisable for 5,000 shares immediately, and 5,000 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
transferable 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. During 1997, the Board adopted and the
stockholders approved an Employee Stock Purchase Plan (the "ESP Plan"). 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 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. Presently, only employees of the Company residing in
the United States are eligible to participate in the ESP Plan. An employee is
considered to be a part-time employee if the employee is scheduled to work at
least 20 hours per 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.
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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.
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.
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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 AGREEMENTS
K. Paul Singh. Primus 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 Primus as
Chairman of the Board, President and Chief Financial Officer. Primus is
required to compensate Mr. Singh at an annual rate of $250,000 effective
January 1, 1997 (which amount is reviewed annually by the Primus Board and is
subject to increase at their discretion). Mr. Singh, however, agreed to defer
payment of his base salary from June 1, 1994 through May 31, 1995, which was
subsequently paid to him on July 31, 1996. Primus is also obligated to (i)
allow Mr. Singh to participate in any bonus or incentive compensation plan
approved for senior management of Primus, (ii) provide life insurance in an
amount equal to three times Mr. Singh's base salary and disability insurance
which provides monthly payments in an amount equal to one-twelfth of his then
applicable base salary, (iii) provide medical insurance and (iv) pay up to
$2,500 annually for Mr. Singh's personal tax and financial planning services.
Primus 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 Primus at any time without penalty (other than the non-competition
obligations discussed below). If Primus terminates the Singh Agreement for
disability or cause, Primus will have no further obligations to Mr. Singh. If,
however, Primus terminates the Singh Agreement other than for disability or
cause, Primus will have the following obligations: (i) if the termination is
after May 30,
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1999, Primus 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, Primus
must pay to Mr. Singh, as they become due, all amounts otherwise payable if he
had remained employed by Primus until June 1, 1999. If Mr. Singh resigns, he
may not directly or indirectly compete with Primus's business until six months
after his resignation. If Primus terminates Mr. Singh's employment for any
reason, Mr. Singh may not directly or indirectly compete with Primus's
business until six months after the final payment of any amounts owed to him
under the Singh Agreement become due.
Wesley T. O'Brien. TresCom entered into an employment agreement with Mr.
Wesley T. O'Brien (the "O'Brien Agreement") which was amended and restated on
February 15, 1997 and was further amended on February 3, 1998. The O'Brien
Agreement was to terminate in June 1999 (the "Term"); however, it was
terminated by Mr. O'Brien for "Good Reason" (as such term is defined in the
O'Brien Agreement) as of June 22, 1998. Mr. O'Brien was required to devote his
full time efforts to TresCom as its President and Chief Executive Officer for
which he received an annual base salary of $231,000.
Pursuant to the terms of the O'Brien Agreement, Mr. O'Brien will receive any
unpaid salary and bonus, as well as an additional amount equal to the salary
remaining for the balance of the Term of the O'Brien Agreement. In addition,
Mr. O'Brien agreed to a customary confidentiality clause and to a non-
competition clause which prohibits Mr. O'Brien from competing with TresCom for
one year from the date of the termination of the O'Brien Agreement.
The consummation of the TresCom Merger constituted a Change in Control as
defined in the O'Brien Agreement, making Mr. O'Brien eligible for a one-time
special bonus of $1.5 million (the "O'Brien Special Bonus"). The first
installment of the O'Brien Special Bonus was paid contemporaneously with the
closing of the TresCom Merger, with the remainder paid upon Mr. O'Brien's
termination.
Other Agreements. TresCom has also entered into agreements with Mr. Dan
O'Connor and Ms. Denise Boerger, (the "O'Connor/Boerger Agreements"). The
O'Connor/Boerger Agreements each provide for a one-time special bonus of
$500,000 in the event of a Change in Control, which was triggered by the
recently completed TresCom Merger. The first installment of these bonuses was
paid contemporaneously with the closing of the TresCom Merger. The second and
third installments are due on the first and second anniversary, respectively,
of the change in control so long as Mr. O'Connor or Ms. Boerger, as the case
may be, remains employed by the Company.
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CERTAIN TRANSACTIONS
PRIVATE EQUITY SALE
In July 1996, Primus completed the sale of 965,999 shares of Common Stock to
the (i) Quantum Industrial Partners LDC, the principal operating subsidiary of
Quantum Industrial Holdings Ltd., an investment fund advised by Soros Fund
Management, a private investment firm owned by Mr. George Soros, (ii) Winston
Partners II LDC, the principal operating subsidiary of Winston Partners II
Offshore Ltd., an investment fund advised by Chatterjee Management Company, a
private entity owned by Dr. Purnendu Chatterjee, (iii) Winston Partners II
LLC, an investment fund advised by Chatterjee Management Company and (iv) S-C
Phoenix Holdings, L.L.C., an investment vehicle owned by affiliates of Mr.
Soros and Dr. Chatterjee (collectively, the "Soros/Chatterjee Group"), for an
aggregate purchase price of approximately $8.0 million. The Soros/Chatterjee
Group also purchased, for an additional $8.0 million, the 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 (the "Soros/Chatterjee Warrants"). The
Soros/Chatterjee Warrants have been exercised in full.
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 Company. The
Securityholders Agreement provides that members of the Soros/Chatterjee Group
will not transfer shares of Common Stock to a company, or any affiliate, that
competes with the Company to a material extent in the provision of
telecommunications services in the United States, Australia, the United
Kingdom, France, Germany, Mexico, Canada, Italy or Hong Kong.
TELEGLOBE
The Company entered into an agreement on January 12, 1996 with Teleglobe,
pursuant to which Teleglobe purchased 410,808 shares of Common Stock (the
"Teleglobe Shares") 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 was repaid in full with the proceeds from the offering of
the 1997 Senior Notes. 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.
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
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Primus, served as a broker-dealer in the private placements through an
affiliation with NSI. In connection with these offerings, the Company paid Mr.
Krieger cash commissions aggregating approximately $1,007,000. The Company
also retained Krieger Associates, of which Mr. Krieger is the President and
Chief Executive Officer, to perform certain financial and other consulting
services and paid a total of approximately $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 OFFICER
In connection with the initial organization of the Company, K. Paul Singh,
the Company's Chairman of the Board, President 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.
LEGAL SERVICES
From time to time, the Company has retained the law firm of Pepper Hamilton
LLP to perform legal services for the Company. John F. DePodesta, a director
and an Executive Vice President of the Company, is "of counsel" to such firm.
HOTKEY INVESTMENT
In March 1998, Primus purchased a controlling interest in Hotkey, a
Melbourne, Australia-based Internet service provider. The Company's 60%
ownership of Hotkey was purchased for approximately $1.3 million in cash.
Prior to the Hotkey Investment, Primus's chairman, K. Paul Singh, owned
approximately 14% of Hotkey. As a result of the transaction, Mr. Singh owns
approximately 4% of Hotkey.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of June 30, 1998, 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 Named Executive Officers, 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
NAME AND ADDRESS OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS(2)
- ------------------- ------------ -----------
<S> <C> <C>
K. Paul Singh (3)....... 4,616,946 16.4%
1700 Old Meadow Road
McLean, VA 22102
Warburg, Pincus
Investors, L.P. (4).... 3,875,689 13.9%
466 Lexington Avenue
New York, New York
10017
Quantum Industrial
Partners LDC (5)....... 1,406,283 5.5%
c/o Curacao Corporation
Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
Franklin Resources, Inc.
(6).................... 1,366,750 5.4%
777 Mariners Island
Boulevard
San Mateo, CA 94404
S-C Phoenix Holdings,
L.L.C. (7)............. 843,769 3.3%
c/o The Chatterjee
Group
888 Seventh Avenue
New York, NY 10106
Winston Partners II LLC
(8).................... 175,785 *
c/o Chatterjee Advisors
LLC
c/o The Chatterjee
Group
888 Seventh Avenue
New York, NY 10106
Winston Partners II LDC
(9).................... 383,103 1.5%
c/o Curacao Corporation
Company N.V.
Kaya Flamboyan 9
Willemstad, Curacao
Netherlands Antilles
John F. DePodesta (10).. 320,436 1.1%
Herman Fialkov.......... 30,000 *
David E. Hershberg
(11)................... 51,667 *
Douglas M. Karp (12).... 3,875,689 13.9%
John G. Puente.......... 166,760 *
Neil L. Hazard (13)..... 207,281 *
Yousef B. Javadi (14)... 52,307 *
Ravi Bhatia............. 70,120 *
All executive officers
and directors as a
group (15)............. 9,543,539 33.3%
</TABLE>
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<PAGE>
- --------
* Less than 1% of the outstanding Common Stock.
(1) 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 become
exercisable on or prior to 60 days from June 30, 1998 are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants, but are not deemed outstanding for computing
the percentage ownership of any other person.
(2) Based upon 27,870,860 shares of Common Stock outstanding as of June 30,
1998.
(3) Includes 377,786 shares of Common Stock owned by Mr. Singh's wife and
children, 500,000 shares of Common Stock held by a private foundation of
which Mr. Singh is the president and a director, 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, and 691 shares held in a 401(k) plan of which
Mr. Singh is a beneficiary. Also includes 225,400 shares of Common Stock
issuable upon the exercise of options granted to Mr. Singh.
(4) Calculated by multiplying 6,305,010, the number of shares of TresCom
common stock beneficially owned by Warburg, Pincus at the Effective Time
of the TresCom Merger, by 0.6147, the exchange ratio for conversion of
TresCom common stock into shares of Common Stock pursuant to the TresCom
Merger. E.M. Warburg, Pincus & Co., LLC, a New York limited liability
company ("E.M. Warburg"), manages Warburg, Pincus. Warburg, Pincus & Co.,
a New York general partnership ("WP"), the sole general partner of
Warburg, Pincus, has a 20% interest in the profits of Warburg, Pincus as
the general partner. Lionel I. Pincus is the managing partner of WP and
the managing member of E.M. Warburg and may be deemed to control both WP
and E.M. Warburg.
(5) Based on a Schedule 13G dated March 6, 1998, Quantum Industrial Partners
LDC ("Quantum Industrial") has reported that it may be deemed to be the
beneficial owner of 1,406,283 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.
(6) Based on a Schedule 13G dated February 6, 1998, Franklin Resources, Inc.
("Franklin") has reported that it may be deemed to be the beneficial
owner of 1,366,750 shares of Common Stock. According to the Schedule 13G,
such shares are also beneficially owned by Franklin Advisers, Inc., an
investment advisory subsidiary (the "Adviser") of Franklin, which has all
investment and/or voting power over the shares pursuant to an advisory
contract. In addition, Charles B. Johnson and Rupert H. Johnson, Jr. each
own in excess of 10% of the outstanding common stock of Franklin and are
the principal shareholders of FRI and may, therefore, be deemed to be the
beneficial owner of the shares of Common Stock held by Franklin.
Franklin, the Adviser, and Messrs. Charles and Rupert Johnson disclaim
any economic interest or beneficial ownership in such shares.
(7) Based on a Schedule 13G dated March 6, 1998, S-C Phoenix Holdings, L.L.C.
("Phoenix Holdings") has reported that it may be deemed to be the
beneficial owner of 843,769 shares of Common Stock. According to the
Schedule 13G, 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
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<PAGE>
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.
(8) Based on a Schedule 13G dated March 6, 1998, Winston Partners II LLC
("Winston LLC") has reported that it may be deemed to be the beneficial
owner of 175,785 shares of Common Stock. According to the Schedule 13G,
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.
(9) Based on a Schedule 13G dated March 6, 1998, Winston Partners II LDC
("Winston LDC") has reported that it may be deemed to be the beneficial
owner of 383,103 shares of Common Stock. According to the Schedule 13G,
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.
(10) Includes 101,430 shares of Common Stock issuable upon the exercise of
options granted to Mr. DePodesta.
(11) Includes 50,715 shares of Common Stock issuable upon the exercise of
options granted to Mr. Hershberg and 953 shares of Common Stock owned by
a partnership of which Mr. Hershberg is a general partner.
(12) All shares shown as being beneficially owned by Mr. Karp are owned
directly by Warburg, Pincus and are included because of Mr. Karp's
affiliation with Warburg, Pincus. Mr. Karp disclaims "beneficial
ownership" of these shares within the meaning of Rule 13d-3 of the
Exchange Act. See Note 9 above.
(13) Includes 202,860 shares of Common Stock issuable upon the exercise of
options granted to Mr. Hazard.
(14) Includes 50,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Javadi.
(15) Consists of 11 persons and includes 775,788 shares of Common Stock
issuable upon the exercise of options granted to directors and executive
officers. Includes 3,875,689 shares deemed to be beneficially owned by
Mr. Karp which are owned directly by Warburg, Pincus and are included
because of Mr. Karp's affiliation with Warburg, Pincus. Mr. Karp
disclaims "beneficial ownership" of these shares within the meaning of
Rule 13d-3 of the Exchange Act. See Notes 9 and 12 above.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
1997 SENIOR NOTES
General. The 1997 Senior Notes are senior obligations of the Company,
limited to $225 million in principal amount, and mature on August 1, 2004. The
1997 Senior Notes, which were issued pursuant to the 1997 Indenture, accrue
interest at a rate of 11 3/4% per annum. Interest is payable each February 1
and August 1, commencing on February 1, 1998.
Ranking. The Notes will rank senior in right of payment to any future
subordinated Indebtedness (as defined in the 1997 Indenture) of the Company,
and pari passu in right of payment with all senior indebtedness of the
Company. 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 1997 Senior Notes.
Security. The Indenture required the Company to purchase and pledge to First
Union National Bank, as security for the benefit of the holders of the 1997
Senior Notes, 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 1997 Senior Notes (the "Pledged Securities"). The
Company used approximately $71.8 million of the net proceeds of the 1997
Senior Notes to acquire the Pledged Securities. Assuming the first six
scheduled interest payments on the 1997 Senior Notes are made in a timely
manner, all remaining Pledged Securities will be released.
Optional Redemption. The 1997 Senior Notes are not redeemable prior to
August 1, 2001. Thereafter, the 1997 Senior Notes will be redeemable, in whole
or in part, at the option of the Company, at the redemption prices set forth
in the Indenture, plus accrued and unpaid interest to the applicable
redemption date. Specifically, if redeemed during, the 12-month period
commencing on August 1 of the years set forth below, the redemption price will
be that amount, expressed as a percentage of the principal amount of the 1997
Senior Notes, set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2001 105.875%
2002 102.938%
2003 (and thereafter) 100.000%
</TABLE>
In addition, prior to August 1, 2000, the Company may redeem up to 35% of
the originally issued principal amount of the 1997 Senior Notes at 111.750% of
the principal amount thereof, plus accrued and unpaid interest through the
redemption date, with the net cash proceeds of one or more Public Equity
Offerings (as defined in the 1997 Indenture); provided, however, that at least
65% of the originally issued principal amount of the 1997 Senior Notes remains
outstanding after the occurrence of such redemption.
Change of Control. Upon the occurrence of a Change of Control (as defined in
the 1997 Indenture), each holder of 1997 Senior Notes will have the right to
require the Company to repurchase all or any part of such holder's 1997 Senior
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.
Covenants. The 1997 Indenture contains certain covenants that, among other
things, limit the ability of the Company and its Restricted Subsidiaries (as
defined in the 1997 Indenture) to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase Capital
Stock (as defined in the 1997 Indenture) or subordinated indebtedness or make
certain other Restricted Payments as defined in the 1997 Indenture, 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.
Events of Default. The 1997 Indenture contains customary events of default,
including (i) defaults in the payment of principal, premium or interest, (ii)
defaults in the compliance with covenants contained in the 1997 Indenture,
(iii) cross defaults on more than $5 million of other indebtedness, (iv)
failure to pay more than $5 million of judgments that have not been stayed by
appeal or otherwise and (v) the bankruptcy of Primus or certain of its
subsidiaries.
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<PAGE>
DESCRIPTION OF EXCHANGE NOTES
The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Initial Notes, except that (i) the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, (ii) holders of the
Exchange Notes, except in limited circumstances, will not be entitled to
Liquidated Damages, and (iii) holders of the Exchange Notes will not be, and
upon consummation of the Exchange Offer, Holders of the Initial Notes will no
longer be, entitled to certain rights under the Registration Rights of the
Initial Notes will no longer be, entitled to certain rights under the
Registration Rights Agreement intended for the holders of unregistered
securities. The Exchange Offer shall be deemed consummated upon the occurrence
of the delivery by the Company to the Registrar under the Indenture of
Exchange Notes in the same aggregate principal amount as the aggregate
principal amount of Initial Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer. See "The Exchange Offer--Termination of
Certain Rights" and "--Procedures for Tendering Initial Notes".
Set forth below is a summary of certain provisions of the Exchange Notes.
The Exchange Notes will be issued pursuant to an Indenture, to be dated as of
May 19, 1998 (the "Indenture"), between the Company, as issuer, and First
Union National Bank, as Trustee (the "Trustee"). Upon the issuance of the
Exchange Notes, if any, or the effectiveness of the Shelf Registration
Statement, the Indenture will be 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 does not purport to be complete
and are subject to, and are qualified in their entirety by reference to, all
the provisions of the Indenture, 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. Copies of the proposed forms of the
Indenture are available upon request from the Company or the Trustee. The term
"Note" or "Notes" includes the Initial Notes and the Exchange Notes. 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 $150 million
aggregate principal amount, and will mature on May 15, 2008. The Notes will
bear interest at the rate of 9 7/8% per annum, payable semiannually on May 15
and November 15 of each year, commencing November 15, 1998 to the Person in
whose name the Note (or any predecessor Note) is registered at the close of
business on the preceding May 1 or November 1, 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 by
wire transfer of immediately available funds to the holder of the Global Note
and with respect to the holder of Certificated Notes at the office or agency
of the Company (which initially will be the corporate trust operations office
of the Trustee at NC 1153, 1125 West W.T. Harris Boulevard, Charlotte, North
Carolina 28262); 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 May 15, 2003 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice
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<PAGE>
mailed by first class mail to each holders' last address as it appears in the
Note Register, at the following Redemption Prices (expressed in percentages of
principal amount thereof), plus accrued and unpaid 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 May 15, of the years set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2003................................................... 104.938%
2004................................................... 103.208%
2005................................................... 101.604%
2006 (and thereafter).................................. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to May 15, 2001, the Company may on any
one or more occasions redeem up to 25% of the originally issued principal
amount of Notes at a redemption price of 109.875% 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 (i)
that at least 75% of the originally issued principal amount of Notes remains
outstanding immediately after the occurrence of such redemption and (ii) that
notice of such redemption is mailed within 60 days of the closing of each such
Public Equity Offering. (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.
RANKING
The indebtedness evidenced by the Notes will rank senior in right of payment
to any existing and future obligations of the Company expressly subordinated
in right of payment to the Notes and will be pari passu in right of payment
with all other existing and future senior unsecured obligations of the Company
including trade payables. As of March 31, 1998, after giving pro forma effect
to the offering of the Initial Notes and the application of the net proceeds
thereof, the Company (on a consolidated basis) would have had outstanding
approximately $382.2 million of indebtedness ($387.6 million after giving
effect to the TresCom Merger). 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, 1998, the Company's consolidated subsidiaries had
aggregate liabilities of approximately $101.0 million ($132.4 million after
giving effect to the TresCom Merger), which includes $9.5 million of
indebtedness ($14.9 million after giving effect to the TresCom Merger).
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); provided,
however, that the Company may Incur 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
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pro forma basis as if any such Indebtedness that 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 6.0 to 1.
(b) Notwithstanding the foregoing, the Company and (except for Indebtedness
under subsections (v), (vii) and (xi) below) any Restricted Subsidiary may
Incur each and all of the following: (i) Indebtedness of the Company or any
Restricted Subsidiary under one or more Credit Facilities in an aggregate
principal amount at any one time outstanding not to exceed the greater of (a)
$50 million and (b) 65% of Eligible Accounts Receivable, subject to any
permanent reductions required by any other terms of the Indenture; (ii)
Indebtedness (including Guarantees) Incurred by the Company or a Restricted
Subsidiary after the Closing Date 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 domestic or transnational fiber optic cable or other
transmission facilities, in each case purchased or leased by the Company
(including acquisitions by way of Capitalized Leases and acquisitions of the
Capital Stock of a Person that becomes a Restricted Subsidiary to the extent
of the Fair Market Value of such equipment, ownership rights or minimum
investment units so acquired); (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; (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), (vi), (viii), (ix) and (xii) 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 (A) the Net Cash Proceeds received by the Company after the Closing
Date from the issuance and sale of its Common Stock (other than Redeemable
Stock) to a Person that is not a Subsidiary of the Company, to the extent such
Net Cash Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clauses (iii), (iv) and (vii) of the second paragraph of the
"Limitation on Restricted Payments" covenant described below to make a
Restricted Payment and (B) the Fair Market Value (as determined in good faith
by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) of property (other than cash and cash
equivalents) used in a Permitted Business or common equity interests in a
Person (the property and assets of such Person consisting primarily of
telecommunications assets) that becomes a Restricted Subsidiary (such Fair
Market Value being that of the common equity interests received pursuant to
the transaction resulting in such Person becoming a Restricted Subsidiary),
and, in each case, received by the Company after the Closing Date from the
issuance or sale of its Common Stock (other than Redeemable Stock) to a Person
that is not a Subsidiary of the Company to the extent such sale of Common
Stock has not been used pursuant to clauses (iii), (iv) and (vii) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a
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Restricted Payment; 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 (a) are designed solely to protect
the Company or any Restricted Subsidiary against fluctuation in foreign
currency exchange rates or interest rates and (b) 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 and any other Indebtedness
of the Company permitted by and made in accordance with the "Limitation on
Issuances of Guarantees of Indebtedness by Restricted Subsidiaries" covenant;
(ix) Indebtedness of the Company or any Restricted Subsidiary not otherwise
permitted hereunder in an aggregate principal amount, when aggregated with the
principal amount of all other Indebtedness then outstanding and incurred
pursuant to this clause (ix), does not exceed $200 million at any one time
outstanding; (x) Acquired Indebtedness; (xi) Strategic Subordinated
Indebtedness; and (xii) Indebtedness of the Company or any Restricted
Subsidiary arising from the honoring by a bank or other financial institution
of a check or similar instrument inadvertently (except in the case of daylight
overdrafts) drawn against insufficient funds in the ordinary course of
business, provided that such Indebtedness is extinguished within three
business days of Incurrence.
(c) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded with respect to any outstanding
Indebtedness due solely to the result of fluctuations in the exchange rates of
currencies.
(d) 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
purposes of determining compliance with this "Limitation on Indebtedness"
covenant, 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 and from time to time may
reclassify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of such clauses. (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
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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 Subordinated
Indebtedness, 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 1.75 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
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 and reducing
the amount of Restricted Payments otherwise permitted under this clause
(C), an amount equal to the lesser of the return 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
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 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 Common Stock
warrants;
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(vii) Investments in Permitted Businesses acquired in exchange for Common
Stock (other than Redeemable Stock) of the Company or the Net Cash Proceeds
from the issuance and sale of such Common Stock (except to the extent such
proceeds are used to incur new Indebtedness pursuant to clause (v) of
paragraph (b) of the "Limitation on Indebtedness" covenant); provided that
such proceeds are so used within 270 days of the receipt thereof; (viii) the
purchase of any Subordinated Indebtedness at a purchase price not greater than
101% of the principal amount thereof, together with accrued interest, if any,
thereof in the event of a Change of Control in accordance with provisions
similar to the "Repurchase of Notes upon a Change of Control" covenant;
provided that prior to such purchase the Company has made the Change of
Control offer as provided in such covenant with respect to the Notes and has
purchased all Notes validly tendered for payment in connection with such
Change of Control Offer; and (ix) other Restricted Payments not to exceed $5.0
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 a Restricted Payment referred to in clause (ii) thereof,
and an exchange of Capital Stock for Capital Stock, Indebtedness or an
Investment referred to in clause (iii), (iv) or (vii) thereof) and the Net
Cash Proceeds from any issuance of Capital Stock referred to in clauses (iii),
(iv) and (vii) 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 or
Indebtedness that is pari passu with 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
Indebtedness.
Any Restricted Payments made other than in cash shall be valued at Fair
Market Value. The amount of any Investment "outstanding" at any time shall be
deemed to be equal to the amount of such Investment on the date made, less the
return of capital, repayment of loans, and release of Guarantees, in each case
of or to the Company and its Restricted Subsidiaries with respect to such
Investment (up to the amount of such Investment on the date made).
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 payment
default or 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 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
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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 sell, transfer, convey or otherwise dispose of 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 except
(i) to the Company or a Restricted Subsidiary, (ii) issuances of director's
qualifying shares or sales to foreign nationals of shares of Capital Stock of
non-U.S. Restricted Subsidiaries to the extent required by law and (iii)
issuances and sales of Capital Stock of Restricted Subsidiaries if (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 $5.0 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 $25.0 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
recognized appraisal firm or accounting firm). Any such transaction or series
of transactions shall be conclusively
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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 or any Restricted Subsidiary not exceeding at any one
time outstanding $2.0 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, which determination, in each case where such Fair Market Value is
greater than $5.0 million, will be evidenced by a Board Resolution and (ii) at
least 75% 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 360 days after the date of receipt of the Net Cash Proceeds from an
Asset Sale (i), (A) 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 long-term 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 360-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 360-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 30th 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 Proportionate Share of 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 up to the Proportionate Share of such Excess Proceeds;
(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 (ii) of 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 or
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.
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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 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
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.
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 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
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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 third 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 of 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.
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
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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, as the case may be, could Incur at least $1.00
of Indebtedness under paragraph (a) of the "Limitation on Indebtedness"
covenant; and (iv) the Company delivers to the Trustee an Officers'
Certificate (attaching the arithmetic computations to demonstrate compliance
with clause (iii)) and Opinion of Counsel 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 clause (iii)
above does 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 and continuance of such default for a period of 30 days; (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
(other than a default specified in clause (a), (b), (c) or (d) above) 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 $10.0 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) for the payment of money in
excess of $10.0 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
$10.0 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
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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; or (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. (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;
(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
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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 May 14,
1998, 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 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
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the principal amount of, or premium, if any, or interest on any Note or extend
the time for payment of interest on, or alter the redemption provisions of,
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 or (vii) 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.
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
Commission 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
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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
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 (x) sales or
other dispositions of inventory, receivables and other current assets in the
ordinary course of business and (y) sales or other dispositions of assets for
consideration at least equal to the Fair Market Value (as determined in good
faith by the Board of Directors, whose determination shall be conclusive and
evidenced by a Board Resolution) of the assets sold or disposed of, to the
extent that the consideration received would constitute property or assets of
the kind described in clause (i)(B) of the second paragraph of the "Limitation
on Asset Sales" covenant, shall not be included within the meaning of "Asset
Sale."
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"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) 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.
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"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
consolidated 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.
"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 form time to time.
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement and agreement 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 foreign currency, whose debt is rated "A-3" or higher or "A-" or
higher according to Moody's Investors Service, 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.
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"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.
"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
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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 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., or "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 95% of the assets of which consist of 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
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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 the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) constructing, creating,
developing or marketing communications related network equipment, software and
other devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in clause (i) or (ii) above; provided that the
determination of what constitutes a Permitted Business shall be made in good
faith by the Board of Directors of the Company, whose determination shall be
conclusive and evidenced by a Board Resolution.
"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; (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 10.0% 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 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
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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; (xviii)
Liens existing on the Closing Date or securing the Notes or any Guarantee of
the Notes; (xix) 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; (xx) Liens securing Indebtedness which is incurred to refinance
secured Indebtedness which is permitted to be Incurred under clause (iv) of
paragraph (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; (xxi) Liens on the property or assets of a
Restricted Subsidiary securing Indebtedness of such Subsidiary which
Indebtedness is permitted under the Indenture; and (xxii) Liens securing
Indebtedness under Credit Facilities incurred in compliance with clauses (i)
and (ii) of paragraph (b) of the "Limitation on Indebtedness" covenant.
"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.
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"Proportionate Share" is defined to mean, as of any date of calculation, an
amount equal to (i) the outstanding principal amount of Notes as of such date,
divided by (ii) the sum of the outstanding principal amount of Notes as of
such date plus the outstanding principal amount as of such date of all other
Indebtedness (other than Subordinated Indebtedness) of the Issuer the terms of
which obligate the Issuer to make a purchase offer in connection with the
relevant Excess Proceeds or the Asset Sale giving rise thereto.
"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 offer to repurchase 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.
"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.
"Strategic Subordinated Indebtedness" is defined to mean Indebtedness of the
Company Incurred to finance the acquisition of a Person engaged in a business
that is related, ancillary or complementary to the business conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its
terms, or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of
payment to the Notes and (ii) provides that no payment of principal, premium
or interest on, or any other payment with respect to, such Indebtedness may be
made prior to the payment in full of all of the Company's obligations under
the Notes; provided that such Indebtedness may provide for and be repaid at
any time from the proceeds of a capital contribution, the sale of Common Stock
(other than Redeemable Stock) of the Company, or other Strategic Subordinated
Indebtedness Incurred, after the Incurrence of such Indebtedness.
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"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.
"Subordinated Indebtedness" is defined to mean Indebtedness of the Company
subordinated in right of payment to the Notes.
"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 (A)
either (I) the Subsidiary to be so designated has total assets of $1,000 or
less or (II) if such Subsidiary has assets greater than $1,000, that such
designation would be permitted under the "Limitation on Restricted Payments"
covenant described above, and (B) 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 Officer's 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
Restricted Subsidiary is directly or indirectly liable (by virtue of the
Company or any such Restricted 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
Restricted Subsidiary to declare, a default on such Indebtedness of the
Company or any Restricted 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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BOOK ENTRY, DELIVERY AND FORM
The Initial Notes were offered and sold to "qualified institutional buyers"
in reliance on Rule 144A and, to certain non-U.S. Holders, Regulation S under
the Securities Act. The Initial Notes were issued in registered, global form
in minimum denominations of $1,000 and integral multiples of $1,000 in excess
thereof.
The Initial Notes are represented by one or more Notes in registered, global
form without interest coupons (the "Restricted Global Note"), and, except as
set forth below, the Exchange Notes will be represented by one or more Notes
in registered, global form without interest coupons (the "Unrestricted Global
Note," and together with the Restricted Global Note, the "Global Note"). The
Restricted Global Note was, and the Unrestricted Global Note will be,
deposited upon issuance with the Trustee as custodian for the Depository in
Richmond, Virginia and registered in the name of the Depositary or its
nominee, in each case for credit to an account of a direct or indirect
participant in the Depositary as described below.
Except as set forth below, the Global Note may be transferred, in whole and
not in part, only to another nominee of The Depositary or to a successor of
the Depositary or its nominee. Beneficial interests in the Global Note may not
be exchanged for Notes in certificated form except in the limited
circumstances described below. See "Exchange of Book-Entry Notes for
Certificated Notes."
The Trustee will act as Registrar.
DEPOSITARY PROCEDURES
The Depositary has advised the Company that the Depositary is a limited-
purpose trust company created to hold securities for its participating
organizations (collectively, the "Participants") and to facilitate the
clearance and settlement of transactions in those securities between
Participants through electronic book-entry changes in accounts of
Participants. The Participants include securities brokers and dealers
(including the Initial Purchasers), banks, trust companies, clearing
corporations and certain other organizations. Access to the Depositary's
system is also available to other entities such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of the Depositary only through Participants or
Indirect Participants. The ownership interest and transfer of ownership
interest of each actual purchaser of each security held by or on behalf of the
Depositary are recorded on the records of the Participants and Indirect
Participants.
The Depositary has also advised the Company that pursuant to procedures
established by it, (i) upon deposit of the Global Note, the Depositary will
credit the accounts of Participants designated by the Initial Purchasers with
portions of the principal amount of the Global Note and (ii) ownership of such
interests in the Global Note will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by the Depositary
(with respect to Participants) or by Participants and the Indirect
Participants (with respect to other owners of beneficial interest in the
Global Note).
Investors in the Global Note may hold their interests therein directly
through the Depositary, if they are participants in such system, or indirectly
through organizations that are Participants in such system. All interests in a
Global Note may be subject to the procedures and requirements of the
Depositary.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in a Global Note to such persons may be limited
to that extent. Because the Depositary can act only on behalf of Participants,
which in turn act on behalf of Indirect Participants and certain banks, the
ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that do not participate in the Depositary
system, or otherwise take actions in respect of such interests may be affected
by the lack of physical certificate evidencing such interests. For certain
other restrictions on the transferability of the Notes, see "--Exchange of
Book-Entry Notes for Certificated Notes."
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EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTE WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal and premium and Liquidated Damages, if
any, and interest on a Global Note registered in the name of the Depositary or
its nominee will be payable by the paying agent to the Depositary or its
nominee in is capacity as the registered holder of a Global Note under the
Indenture. Under the terms of the Indenture, the Company and the Trustee will
treat the persons in whose names the Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments
and for any and all other purposes whatsoever. Consequently, neither the
Company, the Trustee nor any agent of the Company or the Trustee has or will
have any responsibility or liability for (i) any aspect of the Depositary's
records or any participant's or Indirect Participant's records relating to or
payments made on account of beneficial ownership interests in the Global Note,
or for maintaining, supervising or reviewing any of the Depositary's records
or any participant's or Indirect Participant's records relating to the
beneficial ownership interests in the Global Note or (ii) any other matter
relating to the actions and practices of the Depositary or any of its
Participants or Indirect Participants.
The Depositary has advised the Company that its current practices, upon
receipt of any payment in respect of securities such as the Notes (including
principal and interest), is to credit the accounts of the relevant
Participants with the payment on the payment date, in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant security such as the Global Note as shown on the records of the
Depositary. Payments by Participants and the Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practices and will not be the responsibility of the Depositary, the
Trustee or the Company. Neither the Company nor the Trustee will be liable for
any delay by the Depositary or its Participants in identifying the beneficial
owners of the Notes, and the Company and the Trustee may conclusively rely on
and will be protected in relying on instructions from the Depositary or its
nominee as the registered owner of the Notes for all purposes.
Interests in the Global Note will trade in the Depositary's Same-Day Funds
Settlement System and secondary market trading activity in such interests
will, therefore, settle in immediately available funds, subject in all cases
to the rules and procedures of the Depositary and its Participants. Transfers
between Participants in the Depositary will be effective in accordance with
the Depositary's procedures, and will be settled in same-day funds.
The Depositary has advised the Company that it will take any action
permitted to be taken by a Holder of Notes only at the direction of one or
more Participants to whose account the Depositary interests in the Global Note
are credited and only in respect of such portion of the aggregate principal
amount of the Notes as to which such Participant or Participants has or have
given direction. However, if there is an Event of Default under the Notes, the
Depositary reserves the right to exchange the Global Note for legended Notes
in certificated form, and to distribute such Notes to its Participants.
The information in this section concerning the Depositary and its book-entry
systems has been obtained from sources that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.
Neither the Company nor the Trustee will have any responsibility for the
performance by the Depositary or its respective Participants or Indirect
Participants of its respective obligations under the rules and procedures
governing its operations.
Exchange of Book-Entry Notes for Certificated Notes.
A Global Note is exchangeable for definitive Notes in registered
certificated form if (i) the Depositary (A) notifies the Company that it is
unwilling or unable to continue as depository for the Global Note and the
Company thereupon fails to appoint a successor depository or (B) has ceased to
be a clearing agency registered under the Exchange Act, (ii) upon the
continuance of an Event of Default or (iii) the Company, at its option,
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notifies the Trustee in writing that it elects to cause issuance of the Notes
in certificated form. In addition, beneficial interests in a Global Note may
be exchanged for certificated Notes upon request but only upon at least 20
days' prior written notice given to the Trustee by or on behalf of the
Depositary in accordance with customary procedures. In all cases, certificated
Notes delivered in exchange for any Global Note or beneficial interest therein
will be registered in names, and issued in any approved denominations,
requested by or on behalf of the Depositary (in accordance with its customary
procedures) and will bear, the restrictive legend referred to in "Notice to
Investors," unless the Company determines otherwise in compliance with
applicable law.
Same Day Settlement and Payment.
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, interest and
Liquidated Damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
certificated Notes, the Company will make all payments of principal, premium,
if any, interest and Liquidated Damages, if any, by wire transfer of
immediately available 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. The Company expects that secondary trading in the
certificated Notes will also be settled in immediately available funds.
REGISTRATION RIGHTS
The holders of the Exchange Notes are not entitled to any registration
rights with respect to the Exchange Notes. The Company has entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which
the Company agreed to file with the Commission, subject to the provisions
described below, the Exchange Offer Registration Statement on an appropriate
form permitting registration of the Exchange Notes to be offered in exchange
for the Transfer Restricted Securities and to permit resales of Exchange Notes
held by broker-dealers as contemplated by the Registration Rights Agreement.
The Registration Statement of which this Prospectus forms a part constitutes
the Exchange Offer Registration Statement.
The Registration Rights Agreement provides that if (i) the Company is not
permitted to file the Exchange Offer Registration Statement or to consummate
the Exchange offer because the Exchange Offer is not permitted by applicable
law or Commission policy, (ii) the Exchange Offer is not for any other reason
consummated by October 16, 1998 or (iii) the Exchange Offer has been completed
and in the written opinion of counsel for the Initial Purchasers a
Registration Statement must be filed and a prospectus must be delivered by the
Initial Purchasers in connection with any offering or sale of Transfer
Restricted Securities, the Company will use its reasonable best efforts to:
(A) file a Shelf Registration Statement within 60 days of the earliest to
occur of (i) through (iv) above and (B) cause the Shelf Registration Statement
to be declared effective by the Commission on or prior to the 120th day after
such obligation arises. The Company shall use its reasonable best efforts to
keep such Shelf Registration Statement continuously effective, supplemented
and amended to ensure that it is available for resales of Notes by the holders
of Transfer Restricted Securities entitled to this benefit and to ensure that
such Shelf Registration Statement conforms and continues to conform with the
requirements of the Registration Rights Agreement, the Securities Act and the
policies, rules and regulations of the Commission, as announced from time to
time, until the second anniversary of the Closing Date; provided, however,
that during such two-year period the holders may be prevented or restricted by
the Company from effecting sales pursuant to the Shelf Registration Statement
as more fully described in the Registration Rights Agreement. A Holder of
Notes that sells its Notes pursuant to the Shelf Registration Statement
generally will be required to be named as a selling security holder in the
related prospectus and to deliver a prospectus to purchasers, will be subject
to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such Holder (including
certain indemnification and contribution obligations).
For purposes of the foregoing, "Transfer Restricted Securities" means each
Note until the earliest to occur of (i) the date on which such Note has been
exchanged by a person other than a broker-dealer for Exchange Notes in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of such Note
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for one or more Exchange Notes, the date on which such Exchange Notes are sold
to a purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the Exchange Offer
Registration Statement, (iii) the date on which such Note has been effectively
registered under the Securities Act and disposed of in accordance with the
Shelf Registration Statement or (iv) the date on which such Note is eligible
for distribution to the public pursuant to Rule 144 under the Securities Act.
If (i) the Company fails to file with the Commission any of the Registration
Statements required by the Registration Rights Agreement on or before the date
specified therein for such filing, (ii) any of such Registration Statements is
not declared effective by the Commission on or prior to the date specified for
such effectiveness in the Registration Rights Agreement (the "Effectiveness
Target Date"), (iii) the Exchange Offer has not been consummated within 30
days after the Effectiveness Target Date with respect to the Exchange Offer
Registration Statement or (iv) any Registration Statement required by the
Registration Rights Agreement is filed and declared effective but thereafter
ceases to be effective or fails to be usable for its intended purpose without
being succeeded within five business days by a post-effective amendment to
such Registration Statement that cures such failure and that is itself
immediately declared effective (each such event referred to in clauses (i)
through (iv) above, a "Registration Default"), additional cash interest
(Liquidated Damages") shall accrue to each Holder of the Notes commencing upon
the occurrence of such Registration Default in an amount equal to .50% per
annum of the principal amount of Notes held by such Holder. The amount of
Liquidated Damages will increase by an additional .50% per annum of the
principal amount of Notes with respect to each subsequent 90-day period (or
portion thereof) until all Registration Defaults have been cured, up to a
maximum rate of Liquidated Damages of 1.50% per annum of the principal amount
of Notes. All accrued Liquidated Damages will be paid to Holders by the
Company in the same manner as interest is paid pursuant to the Indenture.
Following the cure of all Registration Defaults relating to any particular
Transfer Restricted Securities, the accrual of Liquidated Damages with respect
to such Transfer Restricted Securities will cease.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospectus constitutes a part, will be made available
to prospective purchasers of the Notes upon request to the Company.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain material United States
federal income tax consequences of the purchase, ownership and disposition of
Notes by holders that acquire Notes at original issuance for cash at their
face value. This discussion is limited to holders who hold the Notes as
capital assets, within the meaning of Section 1221 of the Internal Revenue
Code of 1986, as amended (the "Code"). Furthermore, this discussion does not
address all aspects of United States federal income taxation that may be
applicable to investors in light of their particular circumstances, or to
investors subject to special treatment under United States federal income tax
law (including, without limitation, certain financial institutions, insurance
companies, tax-exempt entities, dealers in securities, persons who have
acquired Notes as part of a straddle, hedge, conversion transaction or other
integrated investment or persons whose functional currency is not the United
States dollar). This discussion is based on provisions of the Code, Treasury
regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly with retroactive effect.
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH INVESTOR OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE OR
GIFT TAX LAWS, ANY STATE, LOCAL OR FOREIGN TAX LAWS, ANY CHANGES IN APPLICABLE
TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
As used herein, the term "U.S. Holder" means a holder of a Note that is, for
United States federal income tax purposes, (i) a citizen or resident of the
United States, (ii) a corporation or partnership created or organized under
the laws of the United States or of any political subdivision thereof, (iii)
an estate the income of which is subject to United States federal income
taxation regardless of its source or (iv) a trust, if a United States court is
able to exercise primary supervision over the administration of such trust and
one or more United States persons have the authority to control all
substantial decisions of such trust. The term "Non-U.S. Holder", means a
holder of a Note other than a U.S. Holder.
U.S. TAXATION OF U.S. HOLDERS
Payments of Interest. Stated interest payable on the Notes generally will be
included in the gross income of a U.S. Holder as ordinary interest income at
the time accrued or received, in accordance with such U.S. Holder's method of
accounting for United States federal income tax purposes.
Payments of Additional Interest/Redemption Premium. Because the Notes
provide for the payment of additional interest or redemption premium under
certain circumstances, the Notes may be subject to Treasury regulations
applicable to debt instruments that provide for one or more contingent
payments. Under such Treasury regulations, if the payment of such liquidated
damages is, as of the date the Notes are issued, either a "remote" or
"incidental" contingency, the payment would not be considered a contingent
payment and such amounts would be accounted for under the holder's normal
method of accounting for tax purposes. The Company intends, solely for these
purposes, to treat the possibility of the payment of such liquidated damages
as a remote or incidental contingency. Such determination is binding on a
holder unless such holder discloses to the Internal Revenue Service (the
"IRS") that it is taking a contrary position.
Disposition of the Notes. Upon the sale, exchange, redemption, retirement at
maturity or other disposition of a Note (collectively, a "Disposition"), a
U.S. Holder generally will recognize capital gain or loss equal to the
difference between the amount realized by such U.S. Holder (except to the
extent such amount is attributable to accrued interest, which will be treated
as ordinary interest income) and such U.S. Holder's adjusted tax basis in the
Note. A holder's adjusted tax basis in the Notes will generally be equal to
the amount such holder paid for the Note. Such capital gain or loss generally
will be long-term capital gain or loss if the holding period for the Note
exceeds one year at the time of the Disposition. Generally, the maximum tax
rate for individuals on long term capital gain is 28% for capital assets held
for more than one year but for 18 months or less, and 20% for capital assets
held for more than 18 months.
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The exchange of an Initial Note for an Exchange Note will not be a taxable
event for a Holder.
U.S. TAXATION OF NON-U.S. HOLDERS
Payments of Interest. In general, payments of interest received by a Non-
U.S. Holder will not be subject to United States withholding tax, provided
that the Non-U.S. Holder (i) does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) is not a controlled foreign corporation that is related
to the Company actually or constructively through stock ownership, and (iii)
either (x) the beneficial owner of the Note provides the Company or its paying
agent with a properly executed certification on IRS form W-8 (or suitable
substitute form), signed under penalties of perjury, that the beneficial owner
is not a "U.S. person" for U.S. federal income tax purposes and that provides
the beneficial owner's name and address, or (y) a securities clearing
organization, bank or other financial institution that holds customer's
securities in the ordinary course of its business holds the Note and certifies
to the Company or its agent under penalties of perjury that the IRS form W-8
(or a suitable substitute form) has been received by it from the beneficial
owner of the Note or a qualifying intermediary and furnishes the payor a copy
thereof. Payments of interest not exempt from U.S. federal withholding tax as
described above will be subject to such withholding tax at the rate of 30%,
unless reduced or eliminated under an applicable income tax treaty, and the
required documentation to claim the treaty benefit is provided.
Treasury regulations that will be effective with respect to payments made
after December 31, 1999 (the "Withholding Regulations") provide alternative
methods for satisfying the certification requirements described in the
preceding paragraph. The Withholding Regulations also will require, in the
case of Notes held by a foreign partnership, that the certification described
above be provided by each partner.
Disposition of the Notes. A Non-U.S. Holder generally will not be subject to
U.S. federal income tax (and generally no tax will be withheld) with respect
to gain realized on the Disposition of a Note, unless (i) the gain is
effectively connected with a U.S. trade or business conducted by the Non-U.S.
Holder or (ii) the Non-U.S. Holder is an individual who is present in the
United States for 183 or more days during the taxable year of the Disposition
and certain other requirements are satisfied.
Effectively Connected Income. If interest and other payments received by a
Non-U.S. Holder with respect to the Notes (including proceeds from the
Disposition of the Notes) are effectively connected with the conduct by the
Non-U.S. Holder of a trade or business within the United States (or the Non-
U.S. Holder is otherwise subject to U.S. federal income taxation on a net
basis with respect to such holder's ownership of the notes), such Non-U.S.
Holder will generally be subject to the rules described above under "U.S.
Taxation of U.S. Holders" (subject to any modification provided under an
applicable income tax treaty). Such Non-U.S. Holder may also be subject to the
U.S. "branch profits tax" if such holder is a corporation.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain non-corporate U.S. Holders may be subject to backup withholding at a
rate of 31% on payments of principal, premium and interest on, and the
proceeds of the Disposition of, the Notes. In general, backup withholding only
will be imposed on a U.S. Holder if he, she or it (i) fails to furnish a
taxpayer identification number ("TIN") which, for an individual, would be his
or her Social Security number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that he, she or it has failed to report payments of
interest or dividends or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that he, she or it (a) has furnished a correct TIN
and (b) has not been notified by the IRS that he, she or it is subject to
backup withholding tax for failure to report interest or dividend payments.
Backup withholding generally will not apply to payments made to a Non-U.S.
Holder of a Note who provides the certification described under "U.S. Taxation
of Non-U.S. Holders--Payments of Interest" or otherwise establishes an
exemption from backup withholding, provided that the payor does not have
actual knowledge that the holder is a U.S. person.
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THE EXCHANGE OFFER
The exchange of Initial Notes for Exchange Notes pursuant to the Exchange
Offer will not constitute a significant modification of the terms of the
Initial Notes and, therefore, such exchange will not constitute an exchange
for United States federal income tax purposes. Accordingly, such exchange will
have no United States federal income tax consequences to U.S. holders of the
Initial Notes and the holding period of the Exchange Notes will include the
holding period of the Initial Notes and the basis of the Exchange Notes will
be the same as the basis of the Initial Notes immediately before the exchange.
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
The Initial Notes were issued and the Exchange Notes will be issued without
original issue discount. Stated interest on the Initial and Exchange Notes
will be taxable to a holder as ordinary interest income at the time it is
accrued or paid in accordance with such holder's method of accounting for tax
purposes.
BOND PREMIUM ON THE EXCHANGE NOTES
If a holder of an Exchange Note purchased the Initial Notes for an amount in
excess of the amount payable at the maturity date (or a call date, if
appropriate) of the Initial Notes, the holder may deduct such excess as
amortizable bond premium over the aggregate terms of the Initial Notes and the
Exchange Notes (taking into account earlier call dates, as appropriate), under
a yield-to-maturity formula. The deduction is available only if an election is
made by the purchaser or is in effect. This election is revocable only with
the consent of the IRS. The election applies to all obligations owned or
subsequently acquired by the holder. The holder's adjusted tax basis in the
Initial Notes and the Exchange Notes will be reduced to the extent of the
deduction of amortizable bond premium. Except as may otherwise be provided in
future regulations, under the Code the amortizable bond premium is treated as
an offset to interest income on the Initial Notes and the Exchange Notes
rather than as a separate deduction item.
MARKET DISCOUNT ON THE EXCHANGE NOTES
Tax consequences of a disposition of the Exchange Notes may be affected by
the market discount provisions of the Code. These rules generally provide that
if a holder acquired the Initial Notes (other than in an original issue) at a
market discount which equals or exceeds 1/4 of 1% of the stated redemption
price of the Initial Notes at maturity multiplied by the number of remaining
complete years to maturity and thereafter recognizes gain upon a disposition
(or makes a gift) of the Exchange Notes, the lesser of (i) such gain (or
appreciation, in the case of a gift) or (ii) the portion of the market
discount which accrued while the Initial or Exchange Notes were held by such
holder will be treated as ordinary income at the time of the disposition (or
gift). For these purposes, market discount means the excess (if any) of the
stated redemption price at maturity over the basis of such Initial or Exchange
Notes immediately after their acquisition by the holder. A holder of the
Exchange Notes may elect to include any market discount (whether accrued under
the Initial Notes or the Exchange Notes) in income currently rather than upon
disposition of the Exchange Notes. This election once made applies to all
market discount obligations acquired on or after the first taxable year to
which the election applies, and may not be revoked without the consent of the
IRS.
A holder of any Exchange Note who acquired the Initial Note at a market
discount generally will be required to defer the deduction of a portion of the
interest on any indebtedness incurred or maintained to purchase or carry such
Initial or Exchange Note until the market discount is recognized upon a
subsequent disposition of such Exchange Note. Such a deferral is not required,
however if the holder elects to include accrued market discount in income
currently.
REDEMPTION OR SALE OF THE EXCHANGE NOTES
Generally, any redemption or sale of the Exchange Notes by a holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the
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extent that such cash or property received is attributable to accrued, but
previously untaxed, interest) and the holder's tax basis in the Exchange
Notes. The tax basis of a holder of the Exchange Notes should generally be
equal to the price paid for the Initial Notes exchanged therefor, plus any
accrued market discount on the Exchange Notes (and the Initial Notes exchanged
therefor) included in the holder's income prior to sale or redemption of the
Exchange Notes, or reduced by any amortizable bond premium applied against the
holder's income prior to sale or redemption of the Exchange Notes. Such gain
or loss generally would be long-term capital gain or loss if the holding
period exceeded one year, except to the extent it constitutes accrued market
discount.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF
THE INITIAL NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION
OF THE EXCHANGE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL,
FOREIGN AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that holds Initial Notes that were acquired for its own
account as a result of market making or other trading activities (other than
Initial Notes acquired directly from the Company), may exchange Initial Notes
for Exchange Notes in the Exchange Offer. However, any such broker-dealer may
be deemed to be an "underwriter" within the meaning of such term under the
Securities Act and must, therefore, acknowledge that it will deliver a
prospectus in connection with any resale of Exchange Notes received in the
Exchange Offer. This prospectus delivery requirement may be satisfied by the
delivery by such broker-dealer of this Prospectus, as it may be amended or
supplemented from time to time. The Company has agreed that, for a period of
180 days after the effective date of this Prospectus, it will make this
Prospectus, as amended or supplemented, available to any broker-dealer who
receives Exchange Notes in the Exchange Offer for use in connection with any
such sale. The Company will not receive any proceeds from any sales of
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers
for their own accounts pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices at the time of resale,
at prices related to such prevailing market prices or negotiated prices. Any
such resale of Exchange Notes by broker-dealers may be made directly to a
purchaser or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Company has agreed to
pay all expenses incident to the Exchange Offer other than commissions or
concessions of any brokers or dealers and will indemnify Holders (including
any broker-dealer) against certain liabilities, including liabilities under
the Securities Act.
By acceptance of the Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer hereby agrees to notify the
Company prior to using the Prospectus in connection with the sale or transfer
of Exchange Notes, and acknowledges and agrees that, upon receipt of notice
from the Company of the happening of any event which makes any statement in
the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements herein not
misleading (which notice the Company agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the Prospectus until
the Company has amended or supplemented the Prospectus to correct such
misstatement or omission and has furnished copies of the amended or
supplemented prospectus to such broker-dealer.
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LEGAL MATTERS
The validity of the Exchange Notes offered hereby is being passed upon for
the Company by Pepper Hamilton LLP. Mr. John DePodesta, "of counsel" to Pepper
Hamilton LLP, is a director and an Executive Vice President of the Company,
and the beneficial owner of 320,240 shares of Common Stock.
EXPERTS
The Consolidated Financial Statements of Primus as of December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997
included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as set forth in their report appearing herein and
incorporated by reference from the Joint Proxy Statement, and have been so
included in reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The Consolidated Financial Statements of USFI, Inc. at December 31, 1996 and
1995, and for the years then ended are included in this Prospectus and
incorporated by reference from the Joint Proxy Statement and have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere and incorporated by reference herein (which as to
the report dated September 30, 1997 contains an explanatory paragraph
describing conditions that raise substantial doubt about USFI Inc.'s ability
to continue as a going concern as described in Note 2 to the consolidated
financial statements), and have been included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The Consolidated Financial Statements of TresCom at December 31, 1996 and
1997, and for each of the three years in the period ended December 31, 1997,
included in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein
and incorporated by reference from the Joint Proxy Statement, and have been
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
136
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED:
Consolidated Financial Statements:
Independent Auditors' Report.......................................... F-3
Consolidated Statement of Operations for the years ended December 31,
1997, 1996 and 1995.................................................. F-4
Consolidated Balance Sheet as of December 31, 1997 and 1996........... F-5
Consolidated Statement of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995............................... F-6
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996 and 1995.................................................. F-7
Notes to Consolidated Financial Statements............................ F-8
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Statement of Operations for the three months
ended March 31, 1998 and 1997........................................ F-18
Unaudited Consolidated Balance Sheet as of March 31, 1998............. F-19
Unaudited Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1997........................................ F-20
Notes to Unaudited Consolidated Financial Statements.................. F-21
USFI, INC.
Report of Independent Auditors.......................................... F-23
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995.......... F-24
Consolidated Statements of Operations for the years ended December 31,
1996 and 1995........................................................ F-25
Consolidated Statements of Stockholders' Deficit for the years ended
December 31, 1996 and 1995........................................... F-26
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1995........................................................ F-27
Notes to Consolidated Financial Statements............................ F-28
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheet as of September 30, 1997......... F-32
Unaudited Consolidated Statements of Operations for the nine months
ended September 30, 1997 and 1996.................................... F-33
Unaudited Consolidated Statement of Stockholders' Deficit for the nine
months ended September 30, 1997...................................... F-34
Unaudited Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996.................................... F-35
Notes to Unaudited Consolidated Financial Statements.................. F-36
TELEPASSPORT L.L.C.
Unaudited Balance Sheet as of September 30, 1997........................ F-39
Unaudited Statement of Operations for the nine months ended September
30, 1997 .............................................................. F-40
Unaudited Statement of Cash Flows for the nine months ended September
30, 1997............................................................... F-41
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
TRESCOM INTERNATIONAL, INC.:
Consolidated Financial Statements and Schedules:
Financial Statements:
Report of Independent Auditors...................................... F-42
Consolidated Balance Sheets as of December 31, 1997 and 1996........ F-43
Consolidated Statements of Operations for the years ended December
31, 1997, 1996 and 1995............................................ F-44
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................... F-45
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995............................................ F-46
Notes to Consolidated Financial Statements.......................... F-47
Financial Statement Schedule:
Report of Independent Auditors...................................... S-1
Schedule II--Valuation and Qualifying Accounts...................... S-2
Unaudited Consolidated Financial Statements:
Unaudited Consolidated Balance Sheet as of March 31, 1998 ............ F-58
Unaudited Consolidated Statement of Operations for the three months
ended March 31, 1998 and 1997........................................ F-59
Unaudited Consolidated Statement of Stockholders' Equity (Deficit) for
the three months ended March 31, 1998 and 1997....................... F-60
Unaudited Consolidated Statement of Cash Flows for the three months
ended March 31, 1998 and 1997........................................ F-61
Notes to Unaudited Consolidated Financial Statements.................. F-61
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Primus Telecommunications Group, Incorporated
We have audited the accompanying consolidated balance sheets of Primus
Telecommunications Group, Incorporated and subsidiaries (the "Company") as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Primus Telecommunications
Group, Incorporated and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Washington, D.C.
February 12, 1998, except for Note 15
as to which the date is March 8, 1998
F-3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
NET REVENUE...................................... $280,197 $172,972 $1,167
COST OF REVENUE.................................. 252,731 158,845 1,384
-------- -------- -------
GROSS MARGIN (DEFICIT)........................... 27,466 14,127 (217)
-------- -------- -------
OPERATING EXPENSES:
Selling, general and administrative............ 50,622 20,114 2,024
Depreciation and amortization.................. 6,733 2,164 160
-------- -------- -------
Total operating expenses..................... 57,355 22,278 2,184
-------- -------- -------
LOSS FROM OPERATIONS............................. (29,889) (8,151) (2,401)
INTEREST EXPENSE................................. (12,914) (857) (59)
INTEREST INCOME ................................. 6,238 785 35
OTHER INCOME (EXPENSE)........................... 407 (345) --
-------- -------- -------
LOSS BEFORE INCOME TAXES......................... (36,158) (8,568) (2,425)
INCOME TAXES..................................... (81) (196) --
-------- -------- -------
NET LOSS......................................... $(36,239) $ (8,764) $(2,425)
======== ======== =======
BASIC AND DILUTED NET LOSS PER SHARE............. $ (1.99) $ (0.75) $ (0.48)
======== ======== =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING..................................... 18,250 11,660 5,019
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
ASSETS 1997 1996
------ ------------ ------------
(IN THOUSANDS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $115,232 $ 35,474
Restricted investments............................. 22,774 --
Short-term investments............................. -- 25,125
Accounts receivable (net of allowance of $5,044 and
$2,585)........................................... 58,172 35,217
Prepaid expenses and othe current assets........... 5,152 910
-------- --------
Total current assets............................. 201,330 96,726
RESTRICTED INVESTMENTS............................... 50,776 --
PROPERTY AND EQUIPMENT--Net.......................... 59,241 16,596
INTANGIBLES--Net..................................... 33,164 21,246
DEFERRED INCOME TAXES................................ 2,620 4,951
OTHER ASSETS......................................... 10,882 1,041
-------- --------
TOTAL ASSETS....................................... $358,013 $140,560
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable................................... $ 56,358 $ 32,675
Accrued expenses and other current liabilities..... 12,468 7,931
Accrued interest................................... 11,016 847
Deferred income taxes.............................. 4,434 5,419
Current portion of long-term obligations........... 1,059 10,572
-------- --------
Total current liabilities........................ 85,335 57,444
LONG TERM OBLIGATIONS................................ 230,152 6,676
-------- --------
Total liabilities................................ 315,487 64,120
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value--authorized
2,455,000 shares; none issued and outstanding .... -- --
Common stock, $.01 par value--authorized 40,000,000
shares; issued and outstanding, 19,662,233 and
17,778,731 shares................................. 197 178
Additional paid-in capital......................... 92,181 88,106
Accumulated deficit................................ (48,005) (11,766)
Cumulative foreign currency translation
adjustment........................................ (1,847) (78)
-------- --------
Total stockholders' equity....................... 42,526 76,440
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $358,013 $140,560
======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<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, 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 unused
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
acquisition........... 455 5 -- -- 5,455 -- -- 5,460
Common shares sold, 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
Common shares issued
upon exercise of
warrants.............. -- -- 1,843 19 1,453 -- -- 1,472
Common shares issued
for 401(k) employer
matching
contribution.......... -- -- 5 0 45 -- -- 45
Common shares issued
upon exercise of
employee stock
options............... -- -- 35 0 42 -- -- 42
Senior notes offering--
warrants.............. -- -- -- -- 2,535 -- -- 2,535
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (1,769) (1,769)
Net loss............... -- -- -- -- -- (36,239) -- (36,239)
---- ----- ------ ---- ------- -------- ------- --------
BALANCE, DECEMBER 31,
1997................... -- $ -- 19,662 $197 $92,181 $(48,005) $(1,847) $ 42,526
==== ===== ====== ==== ======= ======== ======= ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
--------- -------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss....................................... $ (36,239) $ (8,764) $(2,425)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 6,733 2,164 160
Sales allowance............................... 6,185 1,960 132
Foreign currency transaction (gain) loss ..... (407) 345 --
Stock issuance--401(k) plan employer match.... 45 -- --
Changes in assets and liabilities, net of
effects of acquisitions:
(Increase) decrease in accounts receivable... (34,240) (19,405) (797)
(Increase) decrease in prepaid expenses and
other current assets........................ (4,080) (227) (62)
(Increase) decrease in other assets.......... 1,147 (1,621) (533)
Increase (decrease) in accounts payable...... 30,247 11,729 1,195
Increase (decrease) in accrued expense and
other current liabilities................... 5,000 6,032 322
Increase (decrease) in accrued interest
payable..................................... 10,852 847 0
--------- -------- -------
Net cash used in operating activities..... (14,757) (6,940) (2,008)
--------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (39,465) (12,745) (396)
(Purchase) sale of short-term investments...... 25,125 (25,125) --
Purchase of restricted investments............. (73,550) -- --
Cash used in business acquisitions, net of cash
acquired...................................... (16,349) (1,701) --
--------- -------- -------
Net cash used in investing activities..... (104,239) (39,571) (396)
--------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease............ (529) (112) (64)
Principal payments on long-term obligations.... (16,352) (396) --
Sale of common stock, net of transaction
costs......................................... 1,514 77,576 4,543
Proceeds from long-term obligations............ 225,000 2,407 --
Deferred financing costs....................... (9,500) -- --
--------- -------- -------
Net cash provided by financing
activities............................... 200,133 79,475 4,479
--------- -------- -------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS............................... (1,379) 214 --
--------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS....... 79,758 33,178 2,075
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.. 35,474 2,296 221
--------- -------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD........ $ 115,232 $ 35,474 $ 2,296
========= ======== =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest......................... $ 2,745 $ 149 $ 36
Non-cash investing and financing activities
Common stock issued for services.............. -- $ 990 $ 693
Conversion of related party debt to common
stock........................................ -- -- $ 350
Increase in capital lease liability for
acquisition of equipment..................... $ 8,228 $ 388 $ 578
Increase in notes payable for acquisition of
equipment.................................... -- $ 2,826 --
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Primus Telecommunications Group, Incorporated (the "Company") is a global
telecommunications company that focuses on the provision of international and
domestic long distance telecommunications services. Incorporated in Delaware
in February 1994, the Company's customers include small-and medium-sized
businesses, residential consumers and other telecommunication carriers,
primarily located in North America, Asia-Pacific, and Europe. The Company
operates as a holding company and has wholly-owned operating subsidiaries in
the United States, Canada, Mexico, Australia, Japan, Germany and the United
Kingdom. The Company intends to enter the Caribbean, and the Central and South
American markets with its pending acquisition of TresCom International, Inc.
("TresCom"). See Note 15 below.
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 and are presented net of
estimated uncollectible amounts.
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 the primary components of Other
Income (Expense) in the consolidated statement 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.
Restricted Investments--Restricted investments consist of United States
Federal Government-backed obligations which are reflected at amortized cost.
These securities are classified as held-to-maturity and are restricted to
satisfy certain interest obligations on the Company's senior notes.
Short Term Investments--Highly liquid investments in United States 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
and computer equipment, leasehold improvements, 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 expense is computed using the straight-
line method over the estimated useful lives of the assets 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, 1997 and 1996 intangible assets, net of
accumulated amortization, consist of goodwill of $27,848,000 and $17,434,000,
respectively, and customer lists of $5,316,000 and $3,812,000, respectively.
Goodwill is being amortized over 30 years on a straight-line basis and
customer lists
F-8
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
over the estimated run-off of the customer bases not to exceed five years.
Accumulated amortization at December 31, 1997 and 1996, was $1,152,000 and
$498,000 related to goodwill and $1,939,000 and $762,000 related to customer
lists, 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 the intangibles. The Company believes that no
impairments of intangible assets exist as of December 31, 1997.
Deferred Financing Costs--Deferred financing costs incurred in connection
with the 1997 Senior Notes and Warrants Offering are reflected within other
assets on the balance sheet and are being amortized over the life of the
senior notes using the straight-line method, which does not differ materially
from the effective interest method.
Stock-Based Compensation--In 1996, the Company adopted Statement of
Financial Accounting Standards 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 basic and diluted
net 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 and
disclosures of contingent 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 consist of trade
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 financial
reporting purposes following the asset and liability approach for computing
deferred income taxes. Under this method, the deferred tax assets and
liabilities are determined based on the difference between financial reporting
and tax bases 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--During 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, Earnings Per Share and has computed basic
and diluted net loss per share based on the weighted average number of shares
of common stock and potential common stock outstanding during the period,
after giving effect to stock splits (Note 9). Potential common stock, for
purposes of determining diluted net loss per share, would include, where
applicable, the effects of dilutive stock options, warrants, and convertible
securities, and the effect of such potential common stock would be computed
using the treasury stock method or the if-converted method. None of the
Company's outstanding options and warrants are considered to be dilutive.
Comparative net loss per share data have been restated for prior periods. In
connection therewith, common stock, options and warrants issued within one
year prior to the original filing of the Company's initial public offering
(IPO) at prices below the IPO price, which had previously been considered
outstanding for all periods presented even though antidilutive, have been
reflected in the computations of basic and diluted net loss per share in
accordance with SFAS No. 128 and Securities and Exchange Commission Staff
Accounting Bulletin No. 98, issued February 3, 1998. Such common stock has
been treated as outstanding only since issuance, and options and warrants have
been excluded from the computations as they are considered antidilutive.
F-9
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
New Accounting Pronouncements--In 1998, the Company will be required to
adopt the provisions of Statement of Financial Accounting Standards (SFAS) No.
130, Reporting Comprehensive Income, and SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company will report
comprehensive income in a separate statement which will show the effects of
the foreign currency translation adjustment as a component of comprehensive
income. The Company believes its segment disclosures under SFAS No. 131 will
be consistent with those currently presented.
Reclassifications--Certain prior year amounts have been reclassified to
conform with certain current year presentation.
3. ACQUISITIONS
On October 20, 1997, the Company completed the acquisition of the equity and
ownership interests in Telepassport L.L.C. ("Telepassport") for a purchase
price of $6.0 million. Additionally, on October 20, 1997, the Company
purchased substantially all of the assets of USFI, Inc. ("USFI") for $ 5.5
million. Telepassport and USFI were under common control and engaged in the
business of providing international and domestic telecommunication services,
including long distance and reorigination services in Europe, Asia, and South
Africa. The purchase price was allocated on a preliminary basis to the net
assets acquired based upon the estimated fair value of such net assets, which
resulted in an allocation of $7.75 million to goodwill.
On April 8, 1997, the Company acquired the assets of Cam-Net Communications
Network, Inc. and its subsidiaries, a Canadian based provider of domestic and
international long distance service. The purchase price was approximately $5.0
million in cash.
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 aggregating $8.1 million to
the sellers, both of which were repaid in full during 1997.
The Company has accounted for all of the referenced acquisitions using the
purchase method. Accordingly, the results of operations of the acquired
companies are included in the consolidated results of operations of the
Company, as of the date of their respective acquisition.
Pro forma operating results for the years ended December 31, 1997 and 1996,
as if the acquisitions of Telepassport, USFI and Axicorp had occurred as of
January 1, 1996, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net revenue.......................................... $300,672 $227,311
Net loss............................................. $(44,905) $(17,555)
Basic and diluted net loss per share................. $ (2.46) $ (1.26)
</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 acquisitions been consummated as of the above dates, nor
are they necessarily indicative of future operations.
F-10
<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,
----------------
1997 1996
------- -------
<S> <C> <C>
Network equipment....................................... $48,246 $ 4,109
Furniture and equipment................................. 9,334 1,272
Leasehold improvements.................................. 1,845 508
Construction in progress................................ 5,147 12,008
------- -------
64,572 17,897
Less: Accumulated depreciation and amortization......... (5,331) (1,301)
------- -------
$59,241 $16,596
======= =======
</TABLE>
Equipment under capital leases totaled $9,194,000 and $966,000 with
accumulated depreciation of $835,000 and $207,000 at December 31, 1997 and
1996, respectively.
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Obligations under capital leases......................... $ 8,487 $ 788
Senior Notes............................................. 222,616 --
Note payable--equipment financing........................ -- 2,826
Note payable--stockholder................................ -- 2,000
Notes payable relating to Axicorp acquisition............ -- 8,455
Settlement obligation.................................... 108 3,179
-------- --------
Subtotal............................................. 231,211 17,248
Less: Current portion of long-term obligations........... (1,059) (10,572)
-------- --------
$230,152 $ 6,676
======== ========
</TABLE>
On August 4, 1997 the Company completed the sale of $225 million 11 3/4%
senior notes and warrants to purchase 392,654 shares of the Company's common
stock. The senior notes are due August 1, 2004 with early redemption at the
option of the Company at any time after August 1, 2001. Dividends are
currently restricted by the senior notes indenture. Interest payments are due
semi-annually on February 1st and August 1st. A portion of the proceeds from
this offering have been pledged to secure the first six semi-annual interest
payments on the senior notes and are reflected on the balance sheet as
restricted investments. A portion of the proceeds of this offering, $2.535
million, was allocated to the warrants, and the resulting debt discount is
being amortized over the life of the debt on the straight-line method which
does not differ materially from the effective interest method.
Notes payable-equipment financing represents vendor financing of network
switching equipment for use in the Company's Australian network. This
obligation was paid in full in connection with the Company's senior notes and
warrants offering.
In relation to an investment agreement, in February 1996 the Company issued
a $2.0 million note payable to Teleglobe. This obligation was paid in full in
connection with the Company's senior notes and warrants offering.
F-11
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In association with the acquisition of Axicorp on March 1, 1996, the Company
issued two notes to the sellers for a total of $8.5 million. These obligations
were paid in full in connection with the Company's senior notes and warrants
offering.
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
$1,583,000 were made in December 1996 and January 1997, respectively. The
remaining balance is due in 12 equal monthly payments which began in February
1997.
6. INCOME TAXES
The income tax expense recorded results from current foreign taxes on
earnings at the Company's Australian and United Kingdom subsidiaries.
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>
FOR THE YEAR ENDED
DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -----
<S> <C> <C> <C>
Tax benefit at federal statutory rate............. $(12,294) $(2,913) $(825)
State income tax, net of federal benefit.......... (2,100) (491) (91)
Foreign taxes..................................... 81 196 --
Unrecognized benefit of net operating losses...... 14,394 3,387 911
Other............................................. -- 17 5
-------- ------- -----
Income taxes...................................... $ 81 $ 196 $ --
======== ======= =====
</TABLE>
The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax asset (non-current):
Cash to accrual basis adjustments (U.S.)................. $ 590 $ 168
Accrued expenses......................................... 936 1,456
Net operating loss carryforwards......................... 17,856 6,055
Valuation allowance...................................... (16,762) (2,728)
------- -------
$ 2,620 $ 4,951
======= =======
Deferred tax liability (current):
Accrued income........................................... $ 3,523 $ 4,934
Other.................................................... 385 139
Depreciation............................................. 526 346
------- -------
$ 4,434 $ 5,419
======= =======
</TABLE>
At December 31, 1997, the Company had United States Federal net operating
loss carryforwards of approximately $24 million that may be applied against
future United States. taxable income until they expire between the years 2009
and 2012. The Company also has Australian Federal net operating loss
carryforwards of approximately $26 million at December 31, 1997.
F-12
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for cash and cash
equivalents, restricted and short-term investments, accounts receivable and
accounts payable approximate fair value. The estimated fair value of the
Company's senior notes (carrying value of $222.6 million) at December 31, 1997
was $241.9 million based upon market quotation.
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease payments under capital lease obligations and operating
leases as of December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31, LEASES LEASES
------------------------ ------- ---------
<S> <C> <C>
1998...................................................... $ 1,942 $2,907
1999...................................................... 1,686 2,218
2000...................................................... 2,211 929
2001...................................................... 2,378 779
2002...................................................... 3,096 336
Thereafter................................................ -- 560
------- ------
Total minimum lease payments.............................. 11,313 $7,729
======
Less: Amount representing interest........................ (2,826)
-------
$ 8,487
=======
</TABLE>
Rent expense under operating leases was $2,574,000, $1,050,000 and $215,000
for the years ended December 31, 1997, 1996 and 1995, respectively.
9. STOCKHOLDERS' EQUITY
On October 1, 1997, the Company issued 1,842,941 shares of its common stock
pursuant to the exercise of certain warrants, which had been issued in
connection with the Company's July 1996 private equity sale of $16 million. In
connection with such exercise, the Company received approximately $1.5
million.
On August 4, 1997 the Company completed a senior notes and warrants
offering. Warrants valued at $2,535,000 to purchase 392,654 shares of the
Company's common stock at a price of $9.075 per share were issued.
In November 1996, the Company completed an initial public offering of
5,750,000 shares of its common stock. The net proceeds to the Company (net of
underwriter discounts and offering expenses) were $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.
F-13
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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., under which it 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.
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
The Company has established an Employee Stock Option Plan (the "Employee
Plan"). The total number of shares of common stock authorized for issuance
under the Employee Plan is 3,690,500. 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% 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.
The Company has established a Director Stock Option Plan (the "Director
Plan") for nonemployee directors. Under the Director Plan, an option is
granted to each nonemployee director to purchase 50,715 shares of common
stock, which vests over a two-year period. The option price per share is the
fair market value of a share of common stock on the date the option is
granted. No option will be exercisable more than ten years from the date of
grant. An aggregate of 338,100 shares of common stock were reserved for
issuance under the Director Plan.
A summary of stock option activity during the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--Be-
ginning of year........ 1,583,661 $ 3.14 722,013 $2.64 -- $ --
Granted................. 1,062,500 $12.59 913,546 $3.35 722,013 $2.64
Exercised............... (35,724) $ 1.19 -- $ -- -- $ --
Forfeitures............. (63,002) $ 6.03 (51,898) $3.55 -- $ --
--------- --------- -------
Outstanding--end of
year................... 2,547,435 $ 6.96 1,583,661 $3.14 722,013 $2.64
========= ====== ========= ===== ======= =====
Eligible for exercise--
End of year............ 894,944 $ 3.00 511,149 $2.81 219,765 $2.96
========= ====== ========= ===== ======= =====
</TABLE>
F-14
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
TOTAL REMAINING EXERCISE TOTAL EXERCISE
OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C>
72,128 2.0 $ 0.67 38,318 $0.67
924,873 3.0 $ 2.96 684,200 $2.96
507,184 3.3 $ 3.55 168,426 $3.55
226,750 4.3 $ 8.25 4,000 $8.25
83,500 4.8 $12.25 --
733,000 5.0 $14.00 --
--------- -------
2,547,435 894,944
========= =======
</TABLE>
The weighted average fair value at date of grant for options granted during
1997, 1996 and 1995 was $5.45, $1.38 and $1.04 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>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield.............................. 0% 0% 0%
Expected stock price volatility...................... 80% 49% 49%
Risk-free interest rate.............................. 5.7% 6.0% 5.8%
Expected option term................................. 4 years 4 years 4 years
</TABLE>
If compensation cost for the Company's grants for stock-based compensation
had been recorded consistent with the fair value-based method of accounting
per SFAS 123, the Company's pro forma net loss, and pro forma basic and
diluted net loss per share for the years ending December 31, would be as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Net loss (amounts in thousands)
As reported................................... $(36,239) $(8,764) $(2,425)
Pro forma..................................... $(37,111) $(9,242) $(2,702)
Basic and diluted net loss per share
As reported................................... $ (1.99) $ (0.75) $ (0.48)
Pro forma..................................... $ (2.03) $ (0.79) $ (0.54)
</TABLE>
11. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) employee benefit plan (the "401(k) Plan") that
covers substantially all United States based employees. The 401(k) Plan
provides that employees may contribute amounts not to exceed statutory
limitations. During 1997, the shareholders adopted an employer matching
contribution of 50% of the first 6% of employee annual salary contributions.
The employer match is made in common stock of the Company and is subject to 3-
year cliff vesting. The Company contributed Primus common stock valued at
approximately $45,000 during 1997.
During 1997, the Company's shareholders approved the adoption of an Employee
Stock Purchase Plan ("ESPP"). The ESPP allows employees to contribute up to
15% of their compensation to be used toward purchasing the Company's common
stock at 85% of the fair market value. The Plan commenced on January 1, 1998.
An aggregate of 2,000,000 shares of common stock were reserved for issuance
under the ESPP.
F-15
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. RELATED PARTIES
During 1995, a former director received commissions of 110,944 shares of
common stock and $542,000 in connection with the Company's first private
placement. Consulting fees earned by the former director under the 1995
private placement totaled $169,000. During 1996, the same former director
received commissions of 82,774 shares of common stock and $425,000 which
related to a second private placement. Consulting fees earned in connection
with this second private placement totaled $157,000. Total consulting fees due
the former director are $134,000 and $220,000 at December 31, 1997 and 1996,
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.
13. VALUATION AND QUALIFYING ACCOUNTS
Activity in the Company's allowance accounts for the years ended December
31, 1997, 1996 and 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
DOUBTFUL ACCOUNTS
- --------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE AT
PERIOD BEGINNING OF PERIOD OPERATIONS DEDUCTIONS OTHER(1) END OF PERIOD
- ------ ------------------- ------------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
1995 $ -- $ 132 $ -- $ -- $ 132
1996 $ 132 $ 1,960 $ (377) $870 $ 2,585
1997 $2,585 $ 6,185 $(4,309) $583 $ 5,044
<CAPTION>
DEFERRED TAX ASSET VALUATION
- --------------------------------------------------------------------------------
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 $ -- $ 1,087 $ -- $ -- $ 1,087
1996 $1,087 $ 1,641 $ -- $ -- $ 2,728
1997 $2,728 $14,034 $ -- $ -- $16,672
</TABLE>
- --------
(1) Other additions represent the allowances for doubtful accounts, which were
recorded in connection with business acquisitions.
F-16
<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 telecommunications services. Summary
information with respect to the Company's geographic operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
NET REVENUE
North America................................... $ 74,359 $ 16,573 $ 1,167
Asia-Pacific.................................... 183,126 151,253 --
Europe.......................................... 22,712 5,146 --
-------- -------- -------
Total......................................... $280,197 $172,972 $ 1,167
======== ======== =======
OPERATING INCOME (LOSS)
North America................................... $(17,036) $ (6,364) $(2,276)
Asia-Pacific.................................... (9,463) 525 --
Europe.......................................... (3,390) (2,312) (125)
-------- -------- -------
Total......................................... $(29,889) $ (8,151) $(2,401)
======== ======== =======
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
ASSETS
North America................................... $251,729 $ 72,526 $ 4,996
Asia-Pacific.................................... 83,476 62,823 --
Europe.......................................... 22,808 5,211 46
-------- -------- -------
Total......................................... $358,013 $140,560 $ 5,042
======== ======== =======
</TABLE>
15. SUBSEQUENT EVENTS
On March 8, 1998 the Company purchased a controlling interest in Hotkey
Internet Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia based internet
service provider. The Company's 60% ownership of Hotkey was purchased for
approximately $1.3 million. Prior to the Company's investment in Hotkey,
Primus' chairman, K. Paul Singh, owned approximately 14% of Hotkey. As a
result of the transaction Mr. Singh owns 4% of Hotkey.
On February 4, 1998 the Company entered into an Agreement and Plan of Merger
("the Agreement") with TresCom International, Inc. ("TresCom"), a facilities-
based international telecommunications provider specializing in traffic to the
Caribbean and Central and South America. The Agreement calls for the Company
to acquire all of the approximately 12.1 million outstanding TresCom shares at
a value of $10 per share, subject to certain potential adjustments, through an
exchange of the Company's shares of common stock. The transaction is subject
to, among other things the approval of both Primus and TresCom stockholders
and certain regulatory authorities.
F-17
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
NET REVENUE............................................... $ 80,051 $ 59,036
COST OF REVENUE........................................... 68,722 55,034
--------- --------
GROSS MARGIN.............................................. 11,329 4,002
--------- --------
OPERATING EXPENSES
Selling, general and administrative..................... 15,377 8,829
Depreciation and amortization........................... 3,478 797
--------- --------
Total operating expenses.............................. 18,855 9,626
--------- --------
LOSS FROM OPERATIONS...................................... (7,526) (5,624)
INTEREST EXPENSE.......................................... (7,175) (151)
INTEREST INCOME........................................... 2,384 785
OTHER INCOME.............................................. -- 119
--------- --------
LOSS BEFORE INCOME TAXES.................................. (12,317) (4,871)
INCOME TAXES.............................................. -- (36)
--------- --------
NET LOSS.................................................. $ (12,317) $ (4,907)
========= ========
BASIC AND DILUTED NET LOSS PER COMMON SHARE............... $ (0.62) $ (0.28)
========= ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING...... 19,717 17,779
========= ========
</TABLE>
See notes to consolidated financial statements.
F-18
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
ASSETS ----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 97,381 $115,232
Restricted investments.............................. 23,795 22,774
Accounts receivable (net of allowance of $5,762 and
$5,044)............................................ 69,124 58,172
Prepaid expenses and other current assets........... 7,048 5,152
-------- --------
Total current assets.............................. 197,348 201,330
RESTRICTED INVESTMENTS................................ 37,683 50,776
PROPERTY AND EQUIPMENT--Net........................... 70,023 59,241
INTANGIBLES--Net...................................... 36,436 33,164
DEFERRED INCOME TAXES................................. 2,667 2,620
OTHER ASSETS.......................................... 11,406 10,882
-------- --------
TOTAL ASSETS...................................... $355,563 $358,013
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 69,116 $ 56,358
Accrued expenses and other current liabilities...... 14,391 13,898
Accrued interest.................................... 4,406 11,016
Deferred income taxes............................... 3,057 3,004
Current portion of long-term obligations............ 1,652 1,059
-------- --------
Total current liabilities......................... 92,622 85,335
LONG TERM OBLIGATIONS................................. 230,586 230,152
OTHER LIABILITIES..................................... 527 --
-------- --------
Total liabilities................................. 323,735 315,487
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value--authorized
2,455,000 shares; none issued and outstanding...... -- --
Common stock, $.01 par value--authorized 40,000,000
shares; issued and outstanding, 19,822,945 and
19,662,233 shares.................................. 198 197
Additional paid-in capital.......................... 92,696 92,181
Accumulated deficit................................. (60,322) (48,005)
Accumulated other comprehensive loss................ (744) (1,847)
-------- --------
Total stockholders' equity........................ 31,828 42,526
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $355,563 $358,013
======== ========
</TABLE>
See notes to consolidated financial statements.
F-19
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................ $ (12,317) $ (4,907)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation, amortization and accretion............... 3,567 797
Sales allowance........................................ 1,724 716
Stock issuance--401(k) plan employer match............. 20 --
Foreign currency transaction gain...................... -- (119)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable............ (11,020) (7,522)
(Increase) decrease in prepaid expenses and other
current assets....................................... (1,576) (661)
(Increase) decrease in other assets................... (325) (247)
Increase (decrease) in accounts payable............... 9,876 11,876
Increase (decrease) in accrued expense and other
current liabilities.................................. (413) 2,212
Increase (decrease) in accrued interest payable....... (6,609) (326)
--------- ---------
Net cash provided by (used in) operating
activities........................................ (17,073) 1,819
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...................... (11,369) (8,774)
(Purchase) sale of short-term investments............... -- 19,766
(Purchase) sale of restricted investments............... 12,072 --
Cash used in business acquisitions, net of cash
acquired............................................... (1,627) --
--------- ---------
Net cash provided by (used in) investing
activities........................................ (924) 10,992
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital lease..................... (316) (55)
Principal payments on long-term obligations............. (114) (4,356)
Sale of common stock, net of transaction costs.......... 496 --
--------- ---------
Net cash provided by (used in) financing activi-
ties.............................................. 66 (4,411)
--------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS............................................. 80 (262)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS.................. (17,851) 8,138
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD........... 115,232 35,474
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................. $ 97,381 $ 43,612
========= =========
</TABLE>
See notes to consolidated financial statements.
F-20
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission ("SEC")
regulations. Certain information and footnote disclosures normally included in
the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the financial statements
reflect all adjustments (of normal and recurring nature) which are necessary
to present fairly the financial position, results of operations and cash flows
for the interim periods. The results for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
The financial statements should be read in conjunction with the Company's
audited consolidated financial statements included in the Company's most
recently filed Form 10-K.
(2) MERGER, ACQUISITION AND INVESTMENT
In February 1998 the Company entered into an Agreement and Plan of Merger
("the Agreement") with TresCom International, Inc. ("TresCom"), a facilities-
based long distance telecommunications carrier focused on international long
distance traffic originating in the United States and terminating in the
Caribbean and Central and South America. The Agreement was subsequently
amended in April 1998. The amended Agreement calls for the Company to acquire
all of the approximately 12.3 million TresCom common shares outstanding at a
value of $12 per share, through the exchange of the Company's shares of common
stock. The transaction is subject to, among other things, the approval of both
Primus and TresCom stockholders and certain regulatory authorities. The
transaction is expected to be completed by the end of the second quarter of
1998.
Effective March 1, 1998 the Company purchased a controlling interest in
Hotkey Internet Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia based
internet service provider. The Company's 60% ownership of Hotkey was purchased
through an investment in Hotkey of approximately $1.3 million.
Effective March 1, 1998 the Company acquired all of the outstanding stock of
Eclipse Telecommunications Pty., Ltd. ("Eclipse"), a data communications
provider based in Sydney, Australia. The Company paid approximately $1.8
million in cash and 27,500 shares of the Company's Common Stock for Eclipse.
(3) SUBSEQUENT EVENTS
On April 27, 1998 the Company announced a proposed offering of senior notes
("1998 Senior Notes Offering") to be privately placed in reliance on an
exemption from the registration requirements of the Securities Act of 1934, as
amended. The Company expects to close such offering of $150 million principal
amount of its 9 7/8% Senior notes due 2008 on May 19, 1998, generating net
proceeds of approximately $145 million.
(4) LONG TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------- ------------
<S> <C> <C>
Obligations under capital leases....................... $ 9,343 $ 8,487
Senior Notes........................................... 222,706 222,616
Notes payable.......................................... 189 --
Settlement obligation.................................. -- 108
-------- --------
Subtotal............................................. 232,238 231,211
Less: Current portion of long term obligations......... (1,652) (1,059)
-------- --------
$230,586 $230,152
======== ========
</TABLE>
F-21
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 4, 1997 the Company completed the sale of $225 million 11 3/4%
senior notes and warrants to purchase 392,654 shares of the Company's common
stock ("1997 Senior Notes and Warrants Offering"). The senior notes are due
August 1, 2004 with early redemption at the option of the Company at any time
after August 1, 2001. Dividends are currently restricted by the senior notes
indenture. Interest payments are due semi-annually on February 1st and August
1st. A portion of the proceeds from this offering have been pledged to secure
the first six semi-annual interest payments on the senior notes and are
reflected on the balance sheet as restricted investments. A portion of the
proceeds of this offering, $2.535 million, was allocated to the warrants, and
the resulting debt discount is being amortized over the life of the debt on
the straight-line method which does not materially differ from the effective
interest method.
(5) NEW ACCOUNTING PRONOUNCEMENTS
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
No. 130). Under SFAS No. 130, the Company's foreign currency translation
adjustments are considered to be components of other comprehensive income
(loss), and the stockholders' equity section of the accompanying balance sheet
has been reclassified accordingly. During the quarters ended March 31, 1998
and 1997, the Company's foreign currency translation adjustment totaled $ 1.1
million and $ (0.1) million, respectively. For the year ending December 31,
1998, the Company will report its net income (loss) and its foreign currency
translation income or loss within a separate statement of comprehensive income
(loss).
(6) RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-22
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
USFI, Inc.
We have audited the accompanying consolidated balance sheets of USFI, Inc.
and subsidiary as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. 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 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of USFI, Inc.
and subsidiary at December 31, 1996 and 1995, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that USFI,
Inc. will continue as a going concern. As more fully described in Note 2, the
Company has incurred recurring operating losses and has a working capital
deficiency and a deficit in stockholders' equity. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of this uncertainty.
/s/ Ernst & Young LLP
September 30, 1997
F-23
<PAGE>
USFI, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
(IN THOUSANDS,
EXCEPT SHARE
INFORMATION)
<S> <C> <C>
ASSETS
------
Current assets:
Cash...................................................... $ 884 $ 420
Accounts receivable:
Customers, less allowance of $790 in 1996 and $683 in
1995................................................... 4,620 3,852
Affiliates.............................................. 1,703 304
Prepaid expenses and other current assets................. 112 75
-------- -------
Total current assets........................................ 7,319 4,651
Property and equipment, net (Note 4)........................ 2,702 1,974
Deferred costs, net of accumulated amortization of $22 in
1996 and $4 in 1995........................................ 88 77
Goodwill, net of accumulated amortization of $5 in 1995..... 122
Deposits.................................................... 161 123
-------- -------
Total assets................................................ $ 10,270 $ 6,947
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable.......................................... $ 10,885 $ 4,624
Accrued liabilities and other current liabilities......... 1,828 1,844
Reseller deposits and deferred revenue.................... 310 263
Capital lease obligations................................. 3
Due to affiliates (Note 7)................................ 1,412 1,523
-------- -------
Total current liabilities................................... 14,435 8,257
Commitments and contingencies (Note 5)
Stockholders' deficit:
Common stock, no par value, authorized 5,000 shares in
1996 and 2,500 shares in 1995; issued and outstanding 536
shares in 1996 and 100 shares in 1995....................
Additional paid-in capital................................ 9,126 5,126
Accumulated deficit....................................... (13,275) (6,434)
Foreign currency translation adjustment................... (16) (2)
-------- -------
Total stockholders' deficit................................. (4,165) (1,310)
-------- -------
Total liabilities and stockholders' deficit................. $ 10,270 $ 6,947
======== =======
</TABLE>
See accompanying notes.
F-24
<PAGE>
USFI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications revenue................................... $36,550 $27,643
Costs and expenses:
Costs of telecommunications services (Note 6).............. 30,205 19,901
Selling, general and administrative........................ 12,524 7,917
Depreciation and amortization (Note 3)..................... 679 379
------- -------
Total costs and expenses..................................... 43,408 28,197
------- -------
Loss from operations......................................... (6,858) (554)
Other income................................................. 17 19
------- -------
Loss before minority interest................................ (6,841) (535)
Minority interest............................................ 19
------- -------
Net loss..................................................... $(6,841) $ (516)
======= =======
</TABLE>
See accompanying notes.
F-25
<PAGE>
USFI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1995.......... $4,325 $ (5,918) $(1,593)
Capital contributions............. 801 801
Net loss for 1995................. (516) (516)
Foreign currency translation...... $ (2) (2)
------ -------- ---- -------
Balance at December 31, 1995........ 5,126 (6,434) (2) (1,310)
Capital contributions............. 4,000 4,000
Net loss for 1996................. (6,841) (6,841)
Foreign currency translation...... (14) (14)
------ -------- ---- -------
Balance at December 31, 1996........ $9,126 $(13,275) $(16) $(4,165)
====== ======== ==== =======
</TABLE>
See accompanying notes.
F-26
<PAGE>
USFI, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(6,841) $ (516)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 679 379
Write-off of goodwill..................................... 113
Provisions for losses on receivables...................... 352 184
Minority interest......................................... (19)
Changes in operating assets and liabilities:
Increase in accounts receivable from customers and
affiliates............................................. (2,519) (2,788)
(Increase) decrease in other current assets............. (37) 28
Increase in deposits.................................... (38) (76)
Increase in accounts payable and accrued expenses....... 6,245 2,471
Increase (decrease) in reseller deposits and deferred
revenue................................................ 47 (6)
Increase in due to affiliates........................... 1,147 201
------- -------
Net cash used in operating activities....................... (852) (142)
INVESTING ACTIVITIES
Purchase of interest in Mastercall (net of cash acquired)... (70)
Purchase of equipment....................................... (1,380) (1,654)
Increase in deferred costs.................................. (29) (67)
------- -------
Net cash used in investing activities....................... (1,409) (1,791)
FINANCING ACTIVITIES
Capital contributions....................................... 2,742 801
Advances from affiliates.................................... 1,258
Repayment of capital lease obligation....................... (3) (22)
------- -------
Net cash provided by financing activities................... 2,739 2,037
Effect of exchange rate changes on cash..................... (14) (2)
------- -------
Increase in cash............................................ 464 102
Cash at beginning of year................................... 420 318
------- -------
Cash at end of year......................................... $ 884 $ 420
======= =======
</TABLE>
See accompanying notes.
F-27
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND NATURE OF BUSINESS
USFI, Inc. (the "Company") which was incorporated in New York on February
12, 1993, provides least cost routing for international long distance
telecommunication services, which primarily originate and terminate outside of
the United States. Substantially, all billings for service are denominated in
U.S. currency.
Customers are principally located in Western Europe, Japan and South Africa.
No individual customer represents a significant percentage of revenues,
however, the Company utilizes outside agents to sell its services in certain
geographic areas, with agents in Germany and South Africa representing
customers with revenues aggregating 18% and 15%, and 13% and 10%,
respectively, of total 1996 and 1995 revenues. The Company performs a credit
evaluation of all new customers and requires certain customers to provide
collateral in the form of a cash deposit or letter of credit. At December 31,
1996 and 1995, the Company had letters of credit issued on its behalf from
customers in the amount of approximately $327,000 and $525,000, respectively.
On May 15, 1995 the Company acquired a 51% interest in Mastercall, Ltd.
("Mastercall"), a joint venture that resells the Company's international
telecommunications services in the United Kingdom, for a purchase price of
approximately $148,000. The acquisition was accounted for using the purchase
method of accounting and the results of operations have been included in the
financial statements of the Company from the date of acquisition.
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses since inception and has a working
capital deficiency and a deficit in stockholders' equity as of December 31,
1996. All of these matters raise substantial doubt about the Company's ability
to continue as a going concern. The Company plans on selling its assets and
ceasing its operations (see Note 10) and, on September 11, 1997, the Company
entered into a letter of intent to sell all of its assets, except for cash and
accounts and notes receivable. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts or classifications of liabilities that
may result from the outcome of this uncertainty.
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SIGNIFICANT ACCOUNT POLICIES
Depreciation
Furniture and equipment are recorded at cost and are depreciated over the
estimated useful lives of three to five years, utilizing the straight-line
method. Assets acquired pursuant to capital lease arrangements and leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the terms of the leases. Depreciation expense for
the years ended December 31, 1996 and 1995 was $652,000 and $371,000,
respectively.
F-28
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Costs and Goodwill
Deferred costs include costs to obtain trademarks and certain organizational
costs. Goodwill includes approximately $127,000 relating to the 1995
acquisition of Mastercall (see Note 1). Such deferred costs are amortized on
the straight-line basis generally as follows:
<TABLE>
<CAPTION>
PERIOD OF
ASSET AMORTIZATION
----- ------------
<S> <C>
Trademarks...................................................... 5 years
Organization costs.............................................. 5 years
Goodwill........................................................ 15 years
</TABLE>
The carrying amount of goodwill is reviewed if facts and circumstances
suggest that it may be impaired. Due to recurring losses of Mastercall, the
Company evaluated the ongoing value of goodwill, as determined based on the
estimated undiscounted cash flows of the entity over the remaining
amortization period and determined that goodwill with a carrying value of
$113,000 is impaired. As a result, the Company has recorded a charge in 1996
to write-off the full amount of goodwill associated with Mastercall, which is
included in selling, general and administrative expenses.
Revenue Recognition
The Company recognizes revenue from services and the related costs at the
time the services are rendered.
Income Tax
Income taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and Mastercall. All significant intercompany accounts and transactions have
been eliminated.
Basis of Presentation
Certain amounts in the 1995 financial statements have been reclassified to
conform with the 1996 presentation.
4. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Furniture and equipment..................................... $ 1,131 $ 892
Switching equipment......................................... 2,888 1,717
Leasehold improvements...................................... 60 89
------- -------
4,079 2,698
Less accumulated depreciation and amortization.............. 1,377 724
------- -------
$ 2,702 $ 1,974
======= =======
</TABLE>
F-29
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and switch site space under noncancellable
operating leases. The future minimum annual rental commitments under leases
having terms in excess of one year are as follows:
<TABLE>
<S> <C>
1997................................................................ $346,000
1998................................................................ 399,000
1999................................................................ 399,000
2000................................................................ 213,000
2001................................................................ 116,000
</TABLE>
Rent expense for the years ended December 31, 1996 and 1995 was $284,000 and
$256,000, respectively.
Litigation
During 1994, the Company was involved in a contract dispute which was
presented to an arbitrator and, in August 1995, an award in the amount of
$333,450 representing damages and administrative fees and costs was determined
to be payable by the Company. The award amount was recorded as an expense in
1994 and was paid in 1996.
The Company is involved in litigation in the normal course of business. In
the opinion of management, such litigation will not have a material effect on
the Company's cash flows, financial condition or results of operations.
Incentive Plans
The Company maintains incentive plans which entitle certain key employees to
participate in certain distributions, if any, by the Company of cash or
property to two of the Company's principal stockholders. Participation
commences when the amount of distributions paid exceeds certain stipulated
amounts. No such distributions have been made or are expected.
6. MAJOR SUPPLIERS
During 1996 and 1995, MCI, World Com, Inc. (formerly IDB) and Cable and
Wireless International, Inc. provided the Company with a majority of its
international telecommunications network services. Charges for such services
are included in cost of telecommunications services in the accompanying
statement of operations.
7. RELATED PARTIES
In March 1995, the Company entered into an agreement with TelePassport Japan
Co., Ltd. ("TelePassport Japan"), an affiliated joint venture formed in 1995,
to provide international telecommunication services and to lease switching
equipment to TelePassport Japan. Telecommunication revenue for 1996 and 1995
includes $3,400,000 and $371,000, respectively, for services provided to
TelePassport Japan. The equipment under lease has a net book value of $140,000
and $186,000 at December 31, 1996 and 1995, respectively, and is included in
property and equipment. The joint venture was terminated in 1997 and the
equipment was transferred to an affiliate.
Included in due to affiliates at December 31, 1995 is a $1,258,000 note due
to US Cable Corporation ("US Cable"), an affiliate of certain stockholders.
During 1996, US Cable transferred the note to such stockholders who
contributed the outstanding balance to capital.
F-30
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in due to affiliates at December 31, 1996 and 1995 are amounts due
to TelePassport Japan for carrier charges paid by TelePassport Japan on behalf
of the Company and amounts due to US Cable for expenses paid on behalf of the
Company.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors a defined contribution plan that qualifies as a
deferred salary arrangement under Section 401(a) of the Internal Revenue Code.
All full-time employees meeting minimum service requirements are eligible to
participate and may contribute up to 18% of their pre-tax earnings subject to
certain Internal Revenue Code restrictions. The Company matches 50% of each
employee's contribution up to an annual maximum of $500 per employee. Total
Company contributions for 1996 and 1995 of $16,000 and $14,000, respectively,
are included in selling, general and administrative expenses.
9. INCOME TAXES
The Company has elected to be taxed as an "S" Corporation for federal income
tax purposes. For New York City income tax purposes, the Company is taxed as a
"C" corporation and at December 31, 1996 the Company has available New York
City net operating loss carryforwards of $8,488,000, which principally expire
in the year 2011. At December 31, 1996, the Company had deferred city income
tax assets of $1,132,000, which are primarily attributable to temporary
differences which are not currently deductible for income tax purposes,
including net operating loss carryforwards, accrued liabilities and certain
other reserves. The Company has recorded a full valuation allowance against
its deferred tax assets at December 31, 1996.
10. SUBSEQUENT EVENTS
On March 10, 1997, the Company acquired the remaining 49% interest in
Mastercall for a purchase price of approximately $15,000.
During 1997, the Company and certain affiliates planned an initial public
offering of common stock. The initial public offering was postponed in April
1997 and subsequently abandoned, and accordingly, the initial public offering
was not completed. Costs incurred as of December 31, 1996 related to the
initial public offering of $284,000 are included in 1996 selling, general and
administrative expenses.
On September 11, 1997, the Company entered into a letter of intent to sell
all of its assets, except for cash and accounts and notes receivable to Primus
Telecommunications Group, Incorporated. Subsequent to the sale, the Company
intends to cease operations.
F-31
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents............................................ $ 1,024
Restricted cash and cash equivalents................................. --
Short term investments............................................... --
Accounts receivable.................................................. 7,141
Prepaid expenses and other current assets............................ 690
-------
Total current assets............................................... 8,855
Property and equipment--net 3,940
Intangibles--net....................................................... 82
Deferred income taxes.................................................. --
Other assets........................................................... 188
-------
Total assets....................................................... $13,065
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable..................................................... $11,862
Accrued expenses and other current liabilities....................... 5,770
Deferred income taxes ............................................... --
Accrued Interest .................................................... --
Current portion of long-term obligations ............................ --
-------
Total current liabilities.......................................... 17,632
-------
Long-term obligations.................................................. --
-------
Total liabilities.................................................. 17,632
-------
Commitments and contingencies
Stockholders' equity (deficit)......................................... (4,567)
-------
Total liabilities and stockholders' equity......................... $13,065
=======
</TABLE>
See accompanying notes.
F-32
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
Net revenue................................................ $ 25,231 $ 27,764
Cost of revenue............................................ 19,508 22,475
-------- --------
Gross margin............................................... 5,723 5,289
Operating expenses:
Selling, general and administrative...................... 10,434 8,677
Depreciation and amortization............................ 629 502
-------- --------
Total operating expenses............................... 11,063 9,179
-------- --------
Loss from operations....................................... (5,340) (3,890)
Interest expense........................................... -- --
Interest income............................................ -- --
Other income (expense)..................................... 23 (12)
-------- --------
Loss before income taxes................................... (5,317) (3,902)
Income taxes............................................... -- --
-------- --------
Net loss............................................... $ (5,317) $ (3,902)
======== ========
</TABLE>
See accompanying notes.
F-33
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY
PAID-IN ACCUMULATED TRANSLATION
CAPITAL DEFICIT ADJUSTMENT TOTAL
---------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Balance at December 31, 1996....... $ 9,126 $(13,275) $(16) $(4,165)
Capital contributions............ 4,918 -- -- 4,918
Net loss for the nine months
ended September 30, 1997........ -- (5,317) -- (5,317)
Foreign currency translation..... -- -- (3) (3)
------- -------- ---- -------
Balance at September 30, 1997...... $14,044 $(18,592) $(19) $(4,567)
======= ======== ==== =======
</TABLE>
See accompanying notes.
F-34
<PAGE>
USFI, INC. AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------
1997 1996
-------- --------
<S> <C> <C>
Operating Activities
Net loss................................................. $ (5,317) $ (3,902)
Adjustments to reconcile net loss to net cash used in op-
erating activities:
Depreciation and amortization.......................... 626 502
Provisions for losses on receivables................... 96 320
Changes in operating assets and liabilities:
Increase in accounts receivable from customers and
affiliates.......................................... (914) (2,601)
Increase in other current assets..................... (578) (276)
Increase in deposits................................. (27) (15)
Increase in accounts payable and accrued expenses.... 589 3,872
(Decrease) increase in reseller deposits and deferred
revenue............................................. (173) 62
(Decrease) increase in due to affiliates............. (1,412) 723
-------- --------
Net cash used in operating activities...................... (7,110) (1,315)
Investing Activities
Purchase of equipment.................................... (1,863) (2,052)
Decrease in deferred costs............................... 5 81
-------- --------
Net cash used in investing activities...................... (1,858) (1,971)
Financing Activities
Capital contributions.................................... 4,918 3,025
Advances from affiliates................................. 4,193 --
Repayment of capital lease obligation.................... -- (3)
-------- --------
Net cash provided by financing activities.................. 9,111 3,022
Effect of exchange rate changes on cash.................... (3) 3
-------- --------
Increase (decrease) in cash................................ 140 (261)
Cash at beginning of period................................ 884 420
-------- --------
Cash at end of period...................................... $ 1,024 $ 159
======== ========
</TABLE>
See accompanying notes.
F-35
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTH PERIOD ENDED
SEPTEMBER 30, 1997 AND 1996)
1. ORGANIZATION AND NATURE OF BUSINESS
USFI, Inc. (the "Company") which was incorporated in New York on February
12, 1993, provides least cost routing for international long distance
telecommunication services, which primarily originate and terminate outside of
the United States. Substantially, all billings for service are denominated in
U.S. currency.
On September 11, 1997, the Company entered into a letter of intent to sell
most of its assets, except for cash and accounts and notes receivable to
Primus Telecommunications Group, Inc. ("Primus"). (See Note 7.)
2. BASIS OF PRESENTATION
The accompanying financial statements have been prepared on the basis that
the Company will continue as a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses since inception and has a working
capital deficiency and a deficit in stockholders' equity as of September 30,
1997. On October 20, 1997, the Company sold most of its assets (see Note 7) to
Primus and began to terminate its business. All of these matters raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts or classifications of liabilities that may result from the outcome
of this uncertainty.
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
Depreciation
Furniture and equipment are recorded at cost and are depreciated over the
estimated useful lives of three to five years, utilizing the straight-line
method. Assets acquired pursuant to capital lease arrangements and leasehold
improvements are amortized on a straight-line basis over the shorter of their
estimated useful lives or the terms of the leases. Depreciation expense for
the nine months ended September 30, 1997 and 1996 was $626,000 and $496,000,
respectively.
Deferred Costs
Deferred costs include costs to obtain trademarks and certain organizational
costs. Such deferred costs are amortized on the straight-line basis generally
as follows:
<TABLE>
<CAPTION>
PERIOD OF
ASSET AMORTIZATION
----- ------------
<S> <C>
Trademarks...................... 5 years
Organization costs.............. 5 years
</TABLE>
Revenue Recognition
The Company recognizes revenue from services and the related costs at the
time the services are rendered.
F-36
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Tax
Income taxes are accounted for under the liability method in accordance with
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and Mastercall. All significant intercompany accounts and transactions have
been eliminated.
Interim Financial Statements
The accompanying unaudited consolidated interim financial statements as of
September 30, 1997 and for each of the nine month periods ended September 30,
1997 and 1996 include all adjustments which, in the opinion of management, are
necessary for a fair presentation of the Company's consolidated financial
position and results of operations and cash flows for the periods presented.
All such adjustments are of a normal recurring nature. The results of the
Company's operations for the nine months ended September 30, 1997 and 1996 are
not necessarily indicative of the results of operations for a full fiscal
year.
4. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in litigation in the normal course of business. In
the opinion of management, such liabilities will not have a material effect on
the Company's cash flow, financial condition or results of operations.
5. MAJOR SUPPLIERS
During the nine month period ended September 30, 1997, MCI, Cable and
Wireless International, Inc. and Pacific Gateway Exchange provided the Company
with a majority of its international telecommunications network services.
During the nine month period ended September 30, 1996, MCI, World Com, Inc.
(formerly IDB) and Cable and Wireless International, Inc. provided the Company
with a majority of its international telecommunications network services.
Charges for such services are included in cost of telecommunications
services in the accompanying statements of operations.
6. RELATED PARTIES
In March 1995, the Company entered into an agreement with TelePassport Japan
Co., Ltd. ("TelePassport Japan"), an affiliated joint venture formed in 1995,
to provide international telecommunication services. Telecommunication revenue
for the nine month period ended September 30, 1997 and 1996 include $200,000
and $1,941,000, respectively, for services provided to TelePassport Japan. The
joint venture was terminated in 1997.
The Company continued to provide international telecommunication services in
Japan to TelePassport Network KK ("Network KK"), an affiliated company.
Telecommunication revenue for the nine month period ended September 30, 1997
includes $574,000 for service provided to Network KK.
F-37
<PAGE>
USFI, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Loans from affiliates at September 30, 1997 represents a note due to US
Cable Corporation, an affiliate of certain stockholders which is secured by
the assets of the Company and accrues interest at prime plus one percent.
7. SUBSEQUENT EVENTS
On October 20, 1997, the Company sold most of its assets to Primus for $5.5
million. Cash, accounts receivable and notes receivable were excluded from the
assets sold. Subsequent to closing, the Company plans to terminate its
business.
Subsequent to September 30, 1997, the Company entered into agreements with
certain vendors to settle existing liabilities with such vendors at reduced
amounts.
F-38
<PAGE>
TELEPASSPORT L.L.C.
UNAUDITED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
------
Current Assets:
Cash and cash equivalents............................................. $ 163
Restricted cash and cash equivalents.................................. --
Short term investments................................................ --
Accounts receivable................................................... 627
Prepaid expenses and other current assets............................. 255
------
Total current assets................................................ 1,044
Property and equipment--net............................................. 663
Intangibles--net........................................................ 157
Deferred income taxes................................................... --
Other assets............................................................ 214
------
Total assets........................................................ $2,078
======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Accounts payable...................................................... $ 375
Accrued expenses and other current liabilities........................ 332
Deferred income taxes................................................. --
Accrued Interest...................................................... --
Current portion of long-term obligations.............................. --
------
Total current liabilities........................................... 707
Long-term obligations................................................... 841
------
Total liabilities................................................... 1,548
------
Commitments and contingencies
Stockholders' equity (deficit) ......................................... 530
------
Total liabilities and stockholders' equity.......................... $2,078
======
</TABLE>
F-39
<PAGE>
TELEPASSPORT L.L.C.
UNAUDITED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Net revenue............................................................ $2,900
Cost of revenue........................................................ 2,523
------
Gross margin........................................................... 377
Operating expenses:
Selling, general, and administrative................................. 1,296
Depreciation and amortization........................................ 69
------
Total operating expenses........................................... 1,365
------
Loss from operations................................................... (988)
Interest expense....................................................... (17)
Interest income........................................................ --
Other income (expense)................................................. 151
------
Loss before income taxes............................................... (854)
Income taxes........................................................... --
------
Net loss........................................................... $ (854)
======
</TABLE>
F-40
<PAGE>
TELEPASSPORT L.L.C.
UNAUDITED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
Operating Activities
Net loss............................................................ $ (854)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization..................................... 69
Changes in operating assets and liabilities....................... (545)
-------
Net cash used in operating activities................................. (1,330)
Investing Activities
Purchase of equipment............................................... (732)
-------
Net cash used in investing activities................................. (732)
Financing Activities
Capital contributions............................................... 1,384
Advances from affiliates............................................ 841
-------
Net cash provided by financing activities............................. 2,225
Effect of exchange rate changes on cash............................... --
-------
Increase (decrease) in cash........................................... 163
Cash at beginning of period........................................... --
-------
Cash at end of period................................................. $ 163
=======
</TABLE>
F-41
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TresCom International, Inc.
We have audited the accompanying consolidated balance sheets of TresCom
International, Inc. and its subsidiaries ("TresCom") as of December 31, 1997
and 1996 and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of TresCom's
management. Our responsibility is to express an opinion on these 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 audits 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of TresCom
International, Inc. and subsidiaries at December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
F-42
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 1,481 $ 6,020
Accounts receivable, net of allowance for doubtful
accounts of $8,149 and $7,588, respectively............. 31,743 29,063
Other current assets..................................... 2,406 3,441
-------- --------
Total current assets....................................... 35,630 38,524
Property and equipment, at cost:
Transmission and communications equipment................ 29,720 24,691
Furniture, fixtures and other............................ 9,620 5,600
-------- --------
39,340 30,291
Less accumulated depreciation and amortization............. (9,668) (5,755)
-------- --------
29,672 24,536
Other assets:
Customer bases, net of accumulated amortization of $2,385
and $1,358, respectively................................ 3,274 3,806
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $3,508 and $2,368,
respectively............................................ 38,826 34,260
Other.................................................... 1,027 484
-------- --------
Total assets............................................... $108,429 $101,610
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 1,237 $ 2,758
Accrued network costs.................................... 19,497 19,546
Other accrued expenses................................... 6,365 5,395
Long-term obligations due within one year................ 1,098 817
Deferred revenue and other current liabilities........... 1,689 1,807
-------- --------
Total current liabilities.................................. 29,886 30,323
Long-term obligations (Notes 3 and 4)...................... 19,593 3,965
Shareholders' equity:
Preferred stock, $.01 par value per share; 1,000,000
shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.0419 par value per share; 50,000,000
shares authorized; 12,104,960 and 11,804,675 shares
issued and outstanding, respectively.................... 505 493
Deferred compensation.................................... (551) (808)
Additional paid-in capital............................... 108,354 106,140
Accumulated deficit...................................... (49,358) (38,503)
-------- --------
Total shareholders' equity................................. 58,950 67,322
-------- --------
Total liabilities and shareholders' equity................. $108,429 $101,610
======== ========
</TABLE>
See accompanying notes.
F-43
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER
31,
---------------------------------
1997 1996 1995
---------- ---------- ---------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Revenues................................... $ 157,641 $ 139,621 $ 102,641
Cost of services........................... 124,365 106,928 74,679
---------- ---------- ---------
Gross profit............................... 33,276 32,693 27,962
Selling, general and administrative (Notes
2, 9 and 12).............................. 36,386 30,808 32,437
Depreciation and amortization.............. 6,599 4,928 3,961
---------- ---------- ---------
Operating loss............................. (9,709) (3,043) (8,436)
Interest and other expenses, net........... 1,146 578 3,191
---------- ---------- ---------
Loss before extraordinary item............. (10,855) (3,621) (11,627)
Extraordinary loss on early extinguishment
of debt................................... -- 1,956 --
---------- ---------- ---------
Net loss................................... $ (10,855) $ (5,577) $ (11,627)
========== ========== =========
Net loss applicable to common stock........ $ (10,855) $ (6,267) $ (16,504)
========== ========== =========
Basic and diluted per share data:
Loss before extraordinary item........... $ (.91) $ (.41) $ (5.29)
Extraordinary item....................... -- (.18) --
---------- ---------- ---------
Net loss per share of common stock......... $ (.91) $ (.59) $ (5.29)
========== ========== =========
Weighted average number of shares of common
stock outstanding......................... 11,890,047 10,671,096 3,119,590
========== ========== =========
</TABLE>
See accompanying notes.
F-44
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK TRESCOM COMMON STOCK
-------------------------------------------- ----------------------------
ACCRUED ADDITIONAL
UNDECLARED STOCK PAID-IN DEFERRED ACCUMULATED
SHARES AMOUNT DIVIDENDS SUBSCRIPTIONS SHARES AMOUNT CAPITAL COMPENSATION DEFICIT
-------- -------- ---------- ------------- ---------- ------ ---------- ------------ -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1994............. 283,594 $ 28,359 $ 1,652 $ 511 202,864 $ 9 $ 76 $ -- $(15,732)
Issuance of
Common Stock..... -- -- -- -- 2,183,799 91 824 -- --
Issuance of
Preferred Stock:
Series A........ 1,467 147 -- -- -- -- -- -- --
Series C........ 151,421 15,142 -- (511) -- -- -- -- --
Accrued dividends
on Preferred
Stock............ -- -- 4,877 -- -- -- -- -- (4,877)
Grant of stock
options.......... -- -- -- -- -- -- 796 (796) --
Non-cash
compensation..... -- -- -- -- -- -- -- 139 --
Issuance of
Common Stock
Warrants......... -- -- -- -- -- -- 2,428 -- --
Net loss......... -- -- -- -- -- -- -- -- (11,627)
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1995............. 436,482 43,648 6,529 -- 2,386,663 100 4,124 (657) (32,236)
Conversion of
Preferred Stock
to Common Stock
and accrued
dividends........ (436,482) (43,648) (7,219) -- 4,558,155 191 50,676 -- --
Accrued dividends
on Preferred
Stock............ -- -- 690 -- -- -- -- -- (690)
Initial public
offering of
Common Stock..... -- -- -- -- 4,545,455 190 50,537 -- --
Costs associated
with initial
public offering
of Common Stock.. -- -- -- -- -- -- (2,160) -- --
Grant of stock
options.......... -- -- -- -- -- -- 1,701 (1,701) --
Non-cash
compensation
expense.......... -- -- -- -- -- -- -- 1,264 --
Exercise of stock
options.......... -- -- -- -- 141,988 6 54 -- --
Forfeiture of
stock options.... -- -- -- -- -- -- (286) 286 --
Net loss......... -- -- -- -- -- -- -- -- (5,577)
Common Stock
issued in
connection with
acquisitions..... -- -- -- -- 172,414 6 1,494 -- --
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1996............. -- -- -- -- 11,804,675 493 106,140 (808) (38,503)
Non-cash
compensation
expense.......... -- -- -- -- -- -- -- 257 --
Exercise of stock
options.......... -- -- -- -- 16,769 1 6 -- --
Common stock
issued in
connection with
acquisitions..... -- -- -- -- 283,516 11 2,208 -- --
Net loss......... -- -- -- -- -- -- -- -- (10,855)
-------- -------- ------- ----- ---------- ---- -------- ------- --------
Balance at
December 31,
1997............. -- $ -- $ -- $ -- 12,104,960 $505 $108,354 $ (551) $(49,358)
======== ======== ======= ===== ========== ==== ======== ======= ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1994............. $ 14,875
Issuance of
Common Stock..... 915
Issuance of
Preferred Stock:
Series A........ 147
Series C........ 14,631
Accrued dividends
on Preferred
Stock............ --
Grant of stock
options.......... --
Non-cash
compensation..... 139
Issuance of
Common Stock
Warrants......... 2,428
Net loss......... (11,627)
-------------
Balance at
December 31,
1995............. 21,508
Conversion of
Preferred Stock
to Common Stock
and accrued
dividends........ --
Accrued dividends
on Preferred
Stock............ --
Initial public
offering of
Common Stock..... 50,727
Costs associated
with initial
public offering
of Common Stock.. (2,160)
Grant of stock
options.......... --
Non-cash
compensation
expense.......... 1,264
Exercise of stock
options.......... 60
Forfeiture of
stock options.... --
Net loss......... (5,577)
Common Stock
issued in
connection with
acquisitions..... 1,500
-------------
Balance at
December 31,
1996............. 67,322
Non-cash
compensation
expense.......... 257
Exercise of stock
options.......... 7
Common stock
issued in
connection with
acquisitions..... 2,219
Net loss......... (10,855)
-------------
Balance at
December 31,
1997............. $ 58,950
=============
</TABLE>
See accompanying notes.
F-45
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before extraordinary item............. $ (10,855) $ (3,621) $ (11,627)
Extraordinary loss on early extinguishment
of debt................................... -- (1,956) --
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 6,599 4,928 3,961
Non-cash interest expense................ -- 431 607
Non-cash interest expense on note to
shareholder............................. -- 297 --
Non-cash compensation.................... 257 1,264 139
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable.................... (2,118) (11,770) (5,511)
Other current assets................... 1,045 (2,139) (943)
Accounts payable....................... (2,805) 564 (2,307)
Accrued network costs.................. (49) 7,911 1,180
Other accrued expenses................. (772) 754 (1,942)
Deferred revenue and other current
liabilities........................... (1,427) 1,513 --
---------- ---------- ----------
Net cash used in operating activities...... (10,125) (1,824) (16,443)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment........ (6,914) (8,086) (5,637)
Expenditures for line installations........ (577) (144) (418)
Cash paid for purchases of businesses,
net....................................... (1,201) (522) --
---------- ---------- ----------
Net cash used in investing activities...... (8,692) (8,752) (6,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common
stock..................................... -- 50,727 915
Costs relating to initial public offering.. -- (2,160) --
Proceeds from the issuance of preferred
stock..................................... -- -- 14,778
Proceeds from debt......................... -- -- 7,572
Proceeds from issuance of warrants
associated with debt...................... -- -- 2,428
Proceeds from revolving credit agreement,
net....................................... 15,645 -- --
Payment of loan acquisition costs.......... (482) (86) (533)
Repayment of cash overdraft................ -- -- (382)
Repayment of revolving credit facility..... -- (24,173) --
Repayment of sellers' note................. -- (1,000) --
Repayment of notes payable to stockholder.. -- (8,476) --
Repayment of debt.......................... (15) (18) (27)
Proceeds from stock option exercise........ 7 60 --
Principal payments on capital lease
obligations............................... (877) (330) (201)
---------- ---------- ----------
Net cash provided by financing activities.. 14,278 14,544 24,550
---------- ---------- ----------
Net change in cash and cash equivalents.... (4,539) 3,968 2,052
Cash and cash equivalents at beginning of
period.................................... 6,020 2,052 --
---------- ---------- ----------
Cash and cash equivalents at end of
period.................................... $ 1,481 $ 6,020 $ 2,052
========== ========== ==========
Interest paid.............................. $ 806 $ 1,352 $ 2,257
========== ========== ==========
Capital lease obligations incurred......... $ 1,156 $ 4,310 $ --
========== ========== ==========
</TABLE>
See accompanying notes.
F-46
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BUSINESS
Organization and Basis of Presentation
TresCom International, Inc. ("TresCom") was incorporated in Florida on
December 8, 1993 as TeraCom Communications, Inc. Effective June 30, 1994,
TresCom changed its name to TresCom International, Inc.
TresCom is a facilities-based long-distance telecommunications carrier
focused on international long- distance traffic. TresCom offers
telecommunications services, including direct dial "1 plus" and toll-free long
distance, calling and debit cards, international toll-free service, 24-hour
bilingual operator services, intra-island local service in Puerto Rico,
private lines, frame relay, international inbound service, international
country to country calling services and international callthrough from
selected markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
TresCom and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
TresCom considers all highly liquid investments with original maturities of
three months or less to be cash equivalents. Cash equivalents are recorded at
cost, which approximates fair market value.
Property and Equipment
Property and equipment is recorded at cost. Depreciation and amortization is
provided for financial reporting purposes using the straight-line method over
the following estimated useful lives:
<TABLE>
<S> <C>
Transmission and communications equipment.................... 3 to 20 years
Furniture, fixtures and other................................ 3 to 7 years
</TABLE>
The costs of software and software upgrades purchased for internal use are
capitalized. Significant capital projects are constantly being initiated as
TresCom continues to expand its network. Beginning in 1996, a substantial
amount of employee time was required to properly plan, install, test and
certify the equipment associated with these projects. In connection with these
projects, TresCom capitalized $1,229 and $1,450 in direct and indirect
employee costs during 1997 and 1996, respectively.
Change in Accounting Estimate
During the first quarter of 1997, TresCom changed the estimated useful life
of fiber optic undersea cables from 10 to 20 years to conform to the
predominant industry standard. The change in depreciation expense associated
with the revised estimated useful life of fiber optic undersea cables was
approximately $120 for 1997.
Advertising
Pursuant to American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 93-7, "Reporting on Advertising Costs," TresCom
expenses advertising costs as incurred except for direct-
F-47
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
response advertising costs, which are capitalized and amortized over the
expected period of future benefit. Direct-response advertising programs were
implemented during 1996 and consist of fees paid to various telemarketing
entities and internal costs of performing telemarketing activities. The
capitalized costs are amortized over a nine month period beginning in the
month revenues associated with those costs are first generated.
At December 31, 1997 and 1996, advertising costs totaling $770 and $1,390,
respectively, were recorded as other current assets. Advertising expense for
the years ended December 31, 1997, 1996 and 1995 were $4,865, $2,047 and
$1,359, respectively.
Other Assets
The excess of cost over net assets of businesses acquired represents the
excess of the consideration paid over the fair value of the net assets
acquired and is amortized on a straight-line basis over 35 years. Customer
bases are recorded based on the estimated value of the customer bases acquired
in the acquisition of businesses and are amortized on a straight-line basis
over periods ranging from three to seven years.
Other assets are periodically reviewed by TresCom for impairments where the
fair value is less than the carrying value.
Legal expenses and other direct costs incurred in connection with obtaining
financing agreements are deferred and amortized over the life of the financing
agreements. Such capitalized costs amounted to $482 and $86 during the years
ended December 31, 1997 and 1996, respectively. Accumulated amortization of
deferred financing costs was $133 and $10 at December 31, 1997 and 1996,
respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenues
Revenues are derived primarily from the provision of long-distance
telecommunications services and are recognized when the services are provided.
In 1997, TresCom recognized $543 of revenue from the sale of excess
Indefeasible Rights of Use ("IRU") on undersea digital fiber optic
transmission cables.
Cost of Services
Cost of services include payments to local exchange carriers ("LECs"),
interexchange carriers, post, telegraph and telephone organizations ("PTTs")
and telecommunications administrations ("TAs") primarily for access and
transport charges.
Concentrations of Credit Risk and Major Customers
TresCom derives a majority of its operating revenues from wholesale
customers as well as commercial customers in Florida, New York, St. Thomas and
Puerto Rico. Financial instruments which potentially subject TresCom to
concentrations of credit risk consist principally of accounts receivable.
TresCom's allowance for doubtful accounts is based upon management's estimates
and historical experience. In situations where TresCom deems appropriate,
prepayment and/or cash deposits or letters of credit are required for the
provision of services.
F-48
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Income Taxes
TresCom accounts for income taxes under the liability method. Under the
liability method, deferred income taxes are recorded to reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting and the amounts used for income tax
purposes.
New Accounting Pronouncements
In 1996, TresCom adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). The adoption of SFAS 121 did not have
any effect on the financial statements. In 1996, TresCom also adopted the
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") (See Note 5).
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" (see Note 13). Statement No. 128 replaced the calculation
of primary and fully diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to conform to
the Statement No. 128 requirements.
Comparative net loss per share data have been restated for prior periods. In
connection therewith, common stock, options and warrants issued within one
year prior to the original filing of TresCom's initial public offering (the
"IPO") at prices below the IPO price, which had previously been considered
outstanding for all periods presented even though antidilutive, have been
reflected in the computations of basic and diluted net loss per share in
accordance with Statement of Financial Accounting Standards No. 128 and
Securities and Exchange Commission Staff Accounting Bulletin No. 98, issued
February 3, 1998. Such common stock has been treated as outstanding only since
issuance, and options and warrants have been excluded from the computations as
they are considered antidilutive.
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income" and Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" which are both effective for fiscal years beginning after
December 15, 1997. Management believes that the adoption of SFAS 130 and SFAS
131 will not have a material adverse effect on TresCom's consolidated
financial statements.
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
F-49
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. LONG-TERM OBLIGATIONS
A summary of long-term obligations is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------- ------
<S> <C> <C>
Revolving Credit Agreement
Interest payable monthly at rates based upon the lender's
commercial lending rate plus .50% (8.75% at December 31,
1997), maturing in July 2002................................ $15,645 $ --
Loans payable to the Small Business Administration,
bearing interest at 4%, due in monthly principal and
interest payments of $3 through February 2015,
collateralized by a security agreement covering certain
assets ..................................................... 401 416
Capital leases bearing interest at rates ranging from 9% to
11% and payable in monthly installments totaling $129....... 4,645 4,366
------- ------
20,691 4,782
Less amounts due within one year............................. 1,098 817
------- ------
$19,593 $3,965
======= ======
</TABLE>
In November 1994, a wholly-owned subsidiary of TresCom obtained from a bank
a revolving credit facility (the "Bank Facility") with an aggregate commitment
of $27,000, which expired on June 30, 1996. On February 16, 1996, TresCom
repaid all outstanding amounts borrowed under the Bank Facility. Extraordinary
expense of $432 was recognized to write-off the remaining deferred financing
costs associated with the Bank Facility.
Under the terms of the Bank Facility, TresCom was required to maintain at
least 50% of its debt on a fixed rate basis and, as a result, entered into an
interest rate swap agreement and interest rate cap agreement (the
"Instruments") with the lending bank to convert variable interest rate
payments to fixed payments. The estimated fair value (i.e., the net present
value of the amount TresCom was required to pay the counterpart over the
remaining term of the agreement) of the Instruments, based upon the quoted
market price provided by the financial institution was $562 at December 31,
1995. On September 18, 1996, when the net settlement value was $302, the
Instruments were paid off in full.
In October and November 1995, TresCom borrowed $7,000 and $3,000,
respectively, under one-year notes bearing interest at 12% compounded
quarterly from a major shareholder of TresCom. In connection with these notes,
TresCom issued a warrant to purchase 358,034 shares of common stock at an
exercise price of $0.42 per share. The warrants are exercisable immediately
and expire on October 2, 2007. Of the $10,000 in borrowings, approximately
$2,400 has been allocated to the value of the warrants. On February 14, 1996,
TresCom repaid the entire balance relating to the notes. Accordingly,
extraordinary interest expense in the amount of $1,524 was recognized in the
first quarter of 1996.
During the third quarter of 1996, TresCom established a relationship with a
commercial bank to provide asset financing. TresCom utilized approximately
$4,310 in the fourth quarter of 1996 for capital projects. An additional
$1,156 was utilized in the second quarter of 1997.
During the fourth quarter of 1996, TresCom established a $5,000 line of
credit with a commercial bank (the "Credit Facility") secured by certain
accounts receivable. The Credit Facility, as amended on March 27, 1997,
contained standard debt covenants relating to financial position and
performance, as well as restrictions on
F-50
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
the declaration and payment of dividends. Through July 31, 1997, TresCom was
either in compliance or received waivers with respect to all covenants under
the Credit Facility.
On July 31, 1997, TresCom entered into a Revolving Credit and Security
Agreement (the "Revolving Credit Agreement") secured by TresCom's accounts
receivable and certain intangible assets. The maximum borrowing under this
agreement is $25,000; however, the amount available to be borrowed is based
upon TresCom's pledged accounts receivable and intangible assets.
On July 31, 1997, all borrowings under the Credit Facility were repaid in
full with borrowings under the Revolving Credit Agreement and the Credit
Facility was terminated. As of December 31, 1997, availability under the
Revolving Credit Agreement was approximately $19,702, of which $15,645
(including approximately $600 of letters of credit) had been utilized. At
December 31, 1997, TresCom was in compliance with all covenants under the
Revolving Credit Agreement.
Principal payments on all debt obligations are:
<TABLE>
<S> <C>
1998............................................................ $ 17
1999............................................................ 17
2000............................................................ 18
2001............................................................ 19
2002............................................................ 20
Thereafter...................................................... 310
Revolving Credit Agreement...................................... 15,645
-------
Total......................................................... $16,046
=======
</TABLE>
4. LEASE OBLIGATIONS
TresCom occupies office facilities and leases certain equipment and software
under noncancelable operating leases. Rental expense for the years ended
December 31, 1997, 1996 and 1995 was $ 1,703, $1,421 and $1,341, respectively.
During the years ended December 31, 1997 and 1996, TresCom acquired
communication equipment of approximately $1,156 and $4,310, respectively,
under capital lease obligations. Asset balances for property acquired under
capital leases consist of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ ------
<S> <C> <C>
Transmission and communication equipment................... $5,871 $4,715
Furniture, fixtures and other.............................. 213 270
------ ------
6,084 4,985
Accumulated depreciation................................... (916) (311)
------ ------
$5,168 $4,674
====== ======
</TABLE>
F-51
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Depreciation expense associated with assets acquired under capital leases is
included with depreciation and amortization expense on the Statements of
Operations. The present value of minimum capital lease payments are included
in the balance sheet as a part of long-term obligations. Future minimum lease
payments for all noncancelable leases at December 31, 1997 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
------- --------- ------
<S> <C> <C> <C>
1998............................................... $1,637 $1,168 $2,805
1999............................................... 1,471 915 2,386
2000............................................... 1,419 731 2,150
2001............................................... 1,073 566 1,639
2002............................................... 90 507 597
Thereafter......................................... -- 138 138
------ ------ ------
Total future minimum lease payments................ 5,690 $4,025 $9,715
====== ======
Less amounts representing interest................. 1,045
------
Present value of net minimum lease payments........ $4,645
======
</TABLE>
5. CAPITALIZATION
Preferred Stock
The Board of Directors of TresCom is authorized to issue up to one million
shares of preferred stock, par value $.01 per share, in one or more series and
to fix the powers, voting rights, designations and preferences of each series.
Common Stock
On February 13, 1996, TresCom sold 4,545,455 shares of its common stock at
$12 per share in its IPO. The net proceeds of this sale were approximately
$48,600. The net proceeds were used to retire debt and accrued interest of
approximately $35,800.
Stock Option Plan
TresCom has a stock option plan under which 936,432 options to purchase
shares of common stock may be granted to officers, key employees, consultants
and directors. The plan allows the granting of incentive stock options, which
may not have an exercise price below the greater of par value or the market
value on the date of grant, and non-qualified stock options, which may not
have an exercise price below par value. All options must be exercised no later
than 10 years from the date of grant. No option may be granted under the plan
after February 22, 2004.
Options generally vest as to 20% on the first anniversary of the vesting
commencement date or grant date and as to an additional 20% on each
anniversary thereafter. All options expire on the tenth anniversary of the
grant date, unless sooner terminated under the terms of the stock option plan.
In the event of certain changes in control of TresCom, all options become
fully vested.
F-52
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes all options activity for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS EXERCISABLE EXERCISE
GRANTED OPTIONS PRICE
--------- ----------- --------
<S> <C> <C> <C>
Outstanding as of December 31, 1994........... 110,840 $0.42
Canceled...................................... 110,840 0.42
Granted....................................... 484,955 0.42
Forfeited..................................... 12,749 0.42
------- ------- -----
Outstanding as of December 31, 1995........... 472,206 19,826 0.42
Canceled...................................... 220,622 0.42
Granted....................................... 534,119 12.53
Forfeited..................................... 147,452 10.82
Exercised..................................... 141,988 0.42
------- ------- -----
Outstanding as of December 31, 1996........... 496,263 23,713 10.37
Canceled...................................... 2,000 7.50
Granted....................................... 447,000 7.76
Forfeited..................................... 61,790 9.48
Exercised..................................... 16,769 0.42
------- ------- -----
Outstanding as of December 31, 1997........... 862,704 103,733 $9.28
======= ======= =====
</TABLE>
The following table summarizes options at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS
OPTIONS OUTSTANDING EXERCISABLE
------------------------------ ----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE NUMBER AVERAGE
NUMBER OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OF EXERCISE PRICE OPTIONS PRICE LIFE (YEARS) OPTIONS PRICE
----------------------- --------- -------- ----------- ------- --------
<S> <C> <C> <C> <C> <C>
$0.42..................... 75,585 $ 0.42 7.66 24,309 $ 0.42
12.00--17.63............. 372,119 12.76 8.26 74,424 12.00
7.50--12.00.............. 415,000 7.76 9.13 5,000 12.00
</TABLE>
Non-cash compensation expense was recorded over the vesting period of the
options. Accordingly, $257, $1,264 and $139 of non-cash compensation expense
was recorded in the years ended December 31, 1997, 1996 and 1995,
respectively.
TresCom follows the requirements of Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" to account for its stock option
plan and, accordingly, compensation cost is recognized in the consolidated
statements of operations for the stock option plan to the extent the options
are granted at prices below fair market value. TresCom adopted SFAS 123, which
requires certain disclosures about stock-based employee compensation
arrangements. SFAS 123 requires pro forma disclosure of the impact on net
income and earnings per share if the fair value method defined in SFAS 123 had
been used. The fair value for these options was estimated at the date of grant
using a minimum value option valuation method for options granted prior to the
IPO and a Black-Scholes option valuation model for options granted after the
IPO with the following weighted-average assumptions: a risk-free interest rate
of 6.1%; a dividend yield of 0%; a volatility factor of the expected market
price of the TresCom common stock of 1.207 for options granted during 1997 and
.729 for options granted during 1996 and 1995, and an expected life of five
years.
F-53
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because TresCom's stock options have characteristics significantly different
from those of traded options, and because change in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The weighted average grant date fair value of options granted in 1997, 1996
and 1995 is $6.46, $7.88 and $10.50 per share, respectively. The options
granted during 1995 had exercise prices below market value and the options
granted during 1997 and 1996 had exercise prices at or above fair market
value.
For purposes of pro-forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
SFAS 123 pro-forma information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
<S> <C> <C> <C>
Pro forma net loss............................. $(12,583) $(5,713) $(11,627)
Pro forma basic and diluted loss per share..... (1.06) (0.60) (5.29)
</TABLE>
6. INCOME TAXES
The significant components of TresCom's deferred tax assets and liabilities
are:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Deferred tax assets
Allowance for bad debts....................... $ 3,251 $ 2,975 $ 1,139
Net operating loss carry-forward.............. 12,256 6,229 6,311
Accruals...................................... 218 566 279
Depreciation and amortization................. -- 101 873
Other......................................... 15 11 270
Valuation allowance........................... (14,053) (8,479) (8,793)
-------- ------- -------
1,687 1,403 79
Deferred tax liabilities
Depreciation and amortization................. (1,558) -- --
Acquisition basis differences................. (129) (1,403) (79)
-------- ------- -------
$ -- $ -- $ --
======== ======= =======
</TABLE>
The net change in TresCom's valuation allowance was $5,574, $(314) and
$3,056 for the years ended December 31, 1997, 1996 and 1995, respectively.
On July 17, 1989, the Industrial Development Commission of the U.S. Virgin
Islands ("U.S.V.I.") granted STSJ tax benefits to cover long-distance
telecommunications services in the U.S. Virgin Islands. These benefits include
a 90% exemption from income taxes for a ten-year period effective January 1,
1989.
F-54
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The reconciliation of income tax attributable to operations computed at the
U.S. federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Tax at U.S. statutory rate......................... (34.0)% (34.0)% (34.0)%
State taxes, net of federal benefit................ (3.6) (2.0) (2.0)
Amortization of excess of cost over net assets of
businesses acquired............................... 3.8 6.5 2.7
Foreign tax rate differences....................... 2.0 7.1 3.7
Unrecognized benefit of net operating loss......... 31.8 22.4 29.6
----- ----- -----
-- -- --
===== ===== =====
</TABLE>
At December 31, 1997, TresCom has U.S. and foreign net operating loss
carryforwards for tax purposes of $24,335 and $12,354, respectively. These net
operating loss carryforwards expire in the years 1997 through 2012.
7. RETIREMENT PLAN
TresCom maintains the TresCom 401(k) Savings and Retirement Plan for all
U.S. and U.S.V.I. subsidiaries and the TresCom 165(e) Savings and Retirement
Plan for the Puerto Rican subsidiary. Employees age 21 or older are eligible
to participate six months after their date of hire and to elect to defer a
percentage of his/her salary. TresCom has the discretion to make contributions
to the TresCom 401(k) Savings and Retirement Plan and TresCom 165(e) Saving
and Retirement Plan. In 1996, 25,000 shares of stock in TresCom were
authorized as retirement plan contributions. In 1997 and 1996, 4,439 and 2,065
shares, respectively, were allocated to the TresCom 401(k) Savings and
Retirement Plan and the TresCom 165(e) Savings and Retirement Plan for
aggregate amounts of approximately $31 and $16, respectively.
8. COMMITMENTS AND CONTINGENCIES
TresCom is involved in various claims and is subject to possible actions
arising out of the normal course of its business. Although the ultimate
outcome of these claims cannot be ascertained at this time, it is the opinion
of TresCom's management, based on knowledge of the facts and advice of
counsel, that the resolution of such claims and actions will not have a
material adverse effect on TresCom's financial condition or results of
operations.
TresCom has commitments under various types of agreements for the purchase
of property and equipment to continue expansion of its network. Portions of
such agreements not completed at year end are not reflected in the
consolidated financial statements. These commitments were approximately $1,000
at year end 1997.
9. SETTLEMENTS
In the past, TresCom incurred some significant charges as a result of
disputes with carriers. These charges amounted to $4,100 and $900 in the first
and second quarter of 1995, respectively. In addition, significant losses
resulting from settlements with customers totaled $4,069 during the first
quarter of 1995.
F-55
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
accounts receivable, accounts payable and accrued expenses approximate the
respective fair values due to the short-term nature of these items. The fair
values for long-term obligations at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
-------------- --------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Loans payable to the Small Business Adminis-
tration.................................... $401 $323 $416 $335
==== ==== ==== ====
</TABLE>
The fair values of all other long-term obligations approximate the carrying
values and are therefore not disclosed.
11. RELATED PARTY TRANSACTIONS
During 1996, an affiliate of a major shareholder of TresCom owned
approximately 20% of LCI International, Inc. ("LCI"). TresCom buys network
services from and provides network services to LCI. At December 31, 1996, the
net amount due to LCI was $1,935. During 1996, $7,140 of services were
provided and $5,453 were used. During 1997, the affiliate of TresCom's major
shareholder reduced their ownership stake to an insignificant percentage.
In December 1996, TresCom acquired 100% of the common stock of Intex
Telecommunications, Inc. from LCI. The purchase price consideration was
394,095 shares of TresCom common stock.
12. NATURAL DISASTER
On September 16, 1995, Hurricane Marilyn damaged the island of St. Thomas
where TresCom has significant operations. TresCom's Property and Business
Interruption Insurance covered a significant portion of the damages to
equipment and certain losses from operations. At September 30, 1995, TresCom
estimated its exposure relating to the hurricane to be $2,500. Based on visits
to the affected area, review of accounts receivable and actual settlements
with customers, management revised its estimate of losses resulting from the
hurricane to $1,717. Accordingly, the net loss for the quarter ended December
31, 1996 included this change in estimate of $783.
F-56
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item............ $ (10,855) $ (3,621) $ (11,627)
Extraordinary loss on early extinguishment
of debt.................................. -- 1,956 --
---------- ---------- ---------
Net loss.................................. (10,855) (5,577) (11,627)
Preferred stock dividends................. -- 690 4,877
---------- ---------- ---------
Numerator for basic and diluted earnings
per share--net loss applicable to common
stock.................................... $ (10,855) $ (6,267) $ (16,504)
========== ========== =========
Denominator:
Denominator for basic and diluted earnings
per share--weighted average shares....... 11,890,047 10,671,096 3,119,590
========== ========== =========
Basic and diluted per share data:
Loss before extraordinary item............ $ (0.91) $ (0.41) $ (5.29)
Extraordinary item........................ -- (0.18) --
---------- ---------- ---------
Net loss per share of common stock ....... $ (0.91) $ (0.59) $ (5.29)
========== ========== =========
</TABLE>
The earnings per share amounts in the above table have been calculated in
compliance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share." For further information regarding earnings per share and
capitalization of TresCom, see Notes 2 and 5.
14. SUBSEQUENT EVENTS
In February 1998, TresCom entered into a definitive Agreement and Plan of
Merger with Primus Telecommunications Group, Inc. ("Primus") and Taurus
Acquisition Corporation, a wholly-owned subsidiary of Primus ("Taurus").
Pursuant to the terms of the Agreement and Plan of Merger, as amended, it is
contemplated that Taurus will merge with and into TresCom, that TresCom will
be the surviving corporation and that Primus will acquire 100% of the issued
and outstanding shares of TresCom common stock. The transaction is expected to
be completed during the second quarter of 1998 and is subject to, among other
things, the approval of both Primus's and TresCom's shareholders and certain
regulatory authorities.
F-57
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE
DATA)
<S> <C> <C>
ASSETS
------
Current assets:
Cash................................................ $ 102 $ 1,481
Accounts and notes receivable, net of allowance for
doubtful accounts of $7,918 and $8,149,
respectively....................................... 26,956 31,743
Other current assets................................ 2,492 2,406
-------- --------
Total current assets.............................. 29,550 35,630
Property and equipment, at cost:
Transmission and communications equipment........... 30,517 29,720
Furniture, fixtures and other....................... 10,272 9,620
-------- --------
40,789 39,340
Less accumulated depreciation and amortization...... (10,894) (9,668)
-------- --------
29,895 29,672
Other assets:
Customer bases, net of accumulated amortization of
$2,650 and $2,385, respectively.................... 3,010 3,274
Excess of cost over net assets of businesses
acquired, net of accumulated amortization of $3,830
and $3,508, respectively .......................... 38,596 38,826
Other............................................... 940 1,027
-------- --------
Total assets...................................... $101,991 $108,429
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable.................................... $ 907 $ 1,237
Accrued network costs............................... 18,667 19,497
Other accrued expenses.............................. 4,733 6,365
Long-term obligations due within one year........... 1,299 1,098
Deferred revenue and other current liabilities...... 1,762 1,689
-------- --------
Total current liabilities......................... 27,368 29,886
Long-term obligations................................. 19,842 19,593
Shareholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued and outstanding ...... -- --
Common stock, $.0419 par value; 50,000,000 shares
authorized; 12,161,844 shares issued and
outstanding; 12,104,960 shares issued and
outstanding ....................................... 508 505
Deferred compensation............................... (391) (551)
Additional paid-in capital.......................... 108,497 108,354
Accumulated deficit................................. (53,833) (49,358)
-------- --------
Total shareholders' equity........................ 54,781 58,950
-------- --------
Total liabilities and shareholders' equity............ $101,991 $108,429
======== ========
</TABLE>
See accompanying notes.
F-58
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.............................................. $ 38,137 $ 36,143
Cost of services...................................... 30,971 27,812
---------- ----------
Gross profit.......................................... 7,166 8,331
Selling, general and administrative................... 9,262 8,108
Depreciation and amortization......................... 1,944 1,501
---------- ----------
Operating loss...................................... (4,040) (1,278)
Interest expense (income), net...................... 415 (2)
Other expense, net.................................. 20 --
---------- ----------
Net loss.............................................. $ (4,475) $ (1,276)
========== ==========
Basic and diluted net loss per share of common stock.. $ (0.37) $ (0.11)
========== ==========
Weighted average number of shares of common stock
outstanding.......................................... 12,146 11,816
========== ==========
</TABLE>
See accompanying notes.
F-59
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
---------- ------ ---------- ------------ ----------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1997................... 12,104,960 $505 $108,354 $(551) $(49,358) $58,950
Exercise of stock
options.............. 56,884 3 143 -- -- 146
Non-cash compensation
expense.............. -- -- -- 160 -- 160
Net loss.............. -- -- -- -- (4,475) (4,475)
---------- ---- -------- ----- -------- -------
Balance at March 31,
1998................... 12,161,844 $508 $108,497 $(391) $(53,833) $54,781
========== ==== ======== ===== ======== =======
</TABLE>
See accompanying notes.
F-60
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $ (4,475) $ (1,276)
Adjustments to reconcile net loss to net cash used in op-
erating activities:
Depreciation and amortization.......................... 1,944 1,501
Non-cash compensation.................................. 160 162
Changes in operating assets and liabilities, net of ef-
fects of acquisitions:
Accounts and notes receivable........................ 4,787 (1,770)
Other current assets................................. (117) (355)
Accounts payable..................................... (330) (1,195)
Accrued network costs................................ (830) 2,263
Other accrued expenses............................... (1,632) (1,142)
Deferred revenue and other current liabilities....... (20) (1,611)
--------- ---------
Net cash used in operating activities.................... (513) (3,423)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment...................... (840) (1,080)
Expenditures for line installations...................... (13) (72)
--------- ---------
Net cash used in investing activities.................... (853) (1,152)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt....................................... -- 2,500
Proceeds from revolving credit agreement, net............ 162 --
Repayment of debt........................................ (4) (4)
Proceeds from stock option exercise...................... 146 7
Principal payments on capital lease obligations.......... (317) (176)
--------- ---------
Net cash (used in) provided by financing activities...... (13) 2,327
--------- ---------
Net change in cash....................................... (1,379) (2,248)
Cash at beginning of period.............................. 1,481 6,020
--------- ---------
Cash at end of period.................................... $ 102 $ 3,772
========= =========
Interest paid............................................ $ 466 $ 163
========= =========
Capital lease obligations incurred....................... $ 609 $ --
========= =========
</TABLE>
See accompanying notes.
F-61
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. GENERAL
Organization and Basts of Presentation
TresCom International, Inc. (together with its subsidiaries collectively
referred to as the "Company") is a facilities-based long-distance
telecommunications carrier focused on international long-distance traffic. The
Company offers telecommunications services, including direct dial "1 plus" and
toll-free long distance, calling and debit cards, international toll-free
service, 24-hour bilingual operator services, intra-island local service in
Puerto Rico, private lines, frame relay, international inbound service,
international country to country calling services and international
callthrough from selected markets.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial reporting and Securities
and Exchange Commission regulations. Certain information and footnote
disclosures normally included to financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such regulations. In the opinion of management, the information
contained herein reflects all adjustments necessary to make the financial
position, results of operations and cash flows for the interim periods a fair
representation. All such adjustments are of a normal recurring nature. 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
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates. These financial statements
should be read in conjunction with the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997. The results of operations for the
interim periods shown are not necessarily indicative of results of operations
to be expected for the entire fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reference should be made to the Notes to Consolidated Financial Statements
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, specifically Note 2, for a summary of the Company's significant
accounting policies.
Reclassification
Certain prior year amounts have been reclassified to conform with current
year presentation.
New Accounting Pronouncement
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings
per share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share is very similar to the previously reported fully
diluted earnings per share. All earnings per share amounts for all periods
have been presented, and where appropriate, restated to conform with SFAS 128.
F-62
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
3. LONG-TERM OBLIGATIONS
A summary of long-term obligations is as follows;
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Revolving Credit Agreement, interest payable monthly
at rates based upon the lender's commercial lending
rate plus 0.5% (9.0% at March 31, 1998), maturing in
July 2002........................................... $15,808 $15,645
Loans payable to the Small Business Administration,
bearing interest at 4%, due in monthly principal and
interest payments of $3 through February 2015,
collateralized by a security agreement covering
certain assets...................................... 396 401
Capital leases bearing interest at rates ranging from
9% to 11% and payable in monthly installments
totaling $167....................................... 4,937 4,645
------- -------
21,141 20,691
Less amounts due within one year..................... 1,299 1,098
------- -------
$19,842 $19,593
======= =======
The Company has a $25,000 revolving credit and security agreement (the
"Revolving Credit Agreement") with a commercial bank secured by the Company's
accounts receivable. As of March 31, 1998, availability under the Revolving
Credit Agreement was approximately $19,400 of which approximately $16,494
(including approximately $686 of letters of credit) had been utilized. As of
March 31, 1998, the Company was in compliance with all covenants contained in
the Revolving Credit Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Assets totaling $609 were acquired via a capital lease during the first
quarter of 1998.
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1997
--------- ------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per
share--net loss applicable to common stock........ $(4,475) $(1,276)
======= =======
Denominator:
Denominator for basic and diluted earnings per
share--weighted average shares.................... 12,146 11,816
======= =======
Basic and diluted net loss per share of common
stock............................................... $ (0.37) $ (0.11)
======= =======
</TABLE>
F-63
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
5. PROPOSED MERGER
In February 1998, the Company entered into a definitive Agreement and Plan
of Merger, which was subsequently amended by Amendments No. 1 and 2, dated as
of April 8, 1998 and as of April 16, 1998, respectively, with Primus
Telecommunications Group, Incorporated ("Primus") and Taurus Acquisition
Corporation, a wholly-owned subsidiary of Primus ("Taurus"). Pursuant to the
terms of the Agreement and Plan of Merger, as amended, it is contemplated that
Taurus will merge with and into the Company, that the Company will be the
surviving corporation and that Primus will acquire 100% of the issued and
outstanding shares of the Company's common stock. The transaction is expected
to be completed during the second quarter of 1998 and is subject to, among
other things, the approval of both Primus' and the Company's shareholders and
certain regulatory authorities.
F-64
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TresCom International, Inc.
We have audited the consolidated financial statements of TresCom
International, Inc. and its subsidiaries ("TresCom") as of December 31, 1997
and 1996, and for each of the three years in the period ended December 31,
1997, and have issued our report thereon dated February 27, 1998. Our audit
also included the accompanying financial statement schedule of TresCom. This
schedule is the responsibility of TresCom's management. Our responsibility is
to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TRESCOM INTERNATIONAL, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ------------------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. $7,588 $4,159 $500(1) $4,098(3) $8,149
Valuation allowance
for deferred taxes... 8,479 5,574 -- -- 14,053
Year ended December 31,
1996:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 4,140 5,036 -- 1,588(3) 7,588
Valuation allowance
for deferred taxes... 8,793 -- -- 314(2) 8,479
Year ended December 31,
1995:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 3,761 1,791 700(4) 2,112(3) 4,140
Valuation allowance
for deferred taxes... 5,737 3,056 -- -- 8,793
</TABLE>
- --------
(1) In connection with acquisitions.
(2) Change in deferred taxes.
(3) Write-off of uncollectible accounts.
(4) Uncollectible accounts in U.S. Virgin Islands resulting from Hurricane
Marilyn.
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE NOTES OFFERED HEREBY NOR
DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
OF THE NOTES TO ANY PERSON IN ANY JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO
MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN
THIS PROSPECTUS OR INCORPORATED BY REFERENCE HEREIN OR IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information.................................................... iii
Incorporation of Certain Documents by Reference.......................... iii
Summary.................................................................. 1
Risk Factors............................................................. 14
The Exchange Offer....................................................... 27
Recent Developments...................................................... 35
Capitalization........................................................... 36
Selected Financial Data.................................................. 37
Unaudited Pro Forma Financial Data....................................... 41
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 45
Business................................................................. 59
Management............................................................... 85
Certain Transactions..................................................... 97
Principal Stockholders................................................... 99
Description of Certain Indebtedness...................................... 102
Description of Exchange Notes............................................ 103
Certain Federal Income Tax Considerations................................ 131
Plan of Distribution..................................................... 135
Legal Matters............................................................ 136
Experts.................................................................. 136
Index to Financial Statements............................................ F-1
Financial Statement Schedule of TresCom.................................. S-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFER TO EXCHANGE ALL OUTSTANDING
9 7/8% SENIOR NOTES DUE 2008
($150,000,000 PRINCIPAL AMOUNT)
FOR 9 7/8% SERIES B SENIOR NOTES DUE 2008
[LOGO OF PRIMUS TELECOMMUNICATIONS GROUP, INC.]
-----------------
PROSPECTUS
July , 1998
-----------------
All tendered Initial Notes, executed Letters of Transmittal and other related
documents should be directed to the Exchange Agent. Questions and requests for
assistance and requests for additional copies of the Prospectus, the Letter of
Transmittal and other related documents should be addressed to the Exchange
Agent as follows:
BY MAIL, HAND OR OVERNIGHT DELIVERY:
First Union Customer Information Center
Reorganization Department, 3C3-NC 1153
1525 West W.T. Harris Boulevard
Charlotte, N.C. 28262
FACSIMILE TRANSMISSION:
(704) 590-7628
TO CONFIRM RECEIPT:
(704) 590-7408
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of 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 Primus's Amended and Restated By-Laws provides that
Primus, to the full extent permitted by Section 145 of the DGCL, shall
indemnify all past and present directors or officers of Primus and may
indemnify all past or present employees or other agents of Primus. To the
extent that a director, officer, employee or agent of Primus 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 Primus against actually and
reasonably incurred expenses in connection therewith. Such expenses may be
paid by Primus 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 Primus's
Amended and Restated Certificate of Incorporation provides that no director of
Primus shall be liable to Primus 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 Primus 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
Primus's capital stock or (iv) for any transaction from which the director
derived an improper personal benefit.
Primus has obtained a policy insuring it and its directors and officers
against certain liabilities, including liabilities under the 1933 Act.
Pursuant to Section 5(h) of the Merger Agreement, Primus will provide each
individual who served as a director or officer of TresCom at any time prior to
the Effective Time of the TresCom Merger (the "Effective Time") with liability
insurance for a period of six years after the Effective Time, having no less
favorable coverage than any applicable insurance of TresCom in effect
immediately prior to the Effective Time; provided, however, if the existing
liability insurance expires, or is terminated or canceled by the insurance
carrier during such six-year period, the Surviving Corporation will use its
best efforts to obtain as much liability insurance as can be obtained for the
remainder of such period for a premium not in excess (on an annualized basis)
of 150% of the last annual premium paid prior to the date of the Merger
Agreement.
ITEM 21. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger by and among Primus, TresCom and TAC,
dated as of February 3, 1998; Incorporated by reference to Exhibit 2.1
of the Registration Statement on Form S-4, No. 333-51797 (the "Proxy
Registration Statement"). The schedules to the Agreement and Plan of
Merger have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of such schedules shall be furnished
supplementally to the Commission upon request.)
2.2 Asset Purchase Agreement by and among USFI, Inc. Primus
Telecommunications, Inc., Primus and US Cable Corporation dated as of
October 20, 1997; Incorporated by reference to Exhibit 2.1 of Primus's
Current Report on Form 8-K dated November 3, 1997. (The exhibits and
schedules listed in the table of contents to the Asset Purchase
Agreement have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of such exhibits and schedules shall be
furnished supplementally to the Commission upon request.)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
2.3 Equity Purchase Agreement by and among Messrs. James D. Pearson,
Stephen E. Myers, Michael C. Anderson, Primus Telecommunications,
Inc., and Primus, dated as of October 20, 1997; Incorporated by
reference to Exhibit 2.2 of Primus's Current Report on Form 8-K dated
November 3, 1997. (The exhibits and schedules listed in the table of
contents to the Equity Purchase Agreement have been omitted in
accordance with Item 601(b)(2) of Regulation S-K. A copy of such
exhibits and schedules shall be furnished supplementally to the
Commission upon request.
2.4 Amendment No. 1 to Agreement and Plan of Merger among Primus, TresCom
and TAC, dated as of April 8, 1998; Incorporated by reference to
Exhibit 2.1 of the Primus Current Report on Form 8-K dated April 10,
1998.
2.5 Amendment No. 2 to Agreement and Plan of Merger among Primus, TresCom
and TAC, dated as of April 16, 1998; Incorporated by reference to
Exhibit 2.1 of the Primus Current Report on Form 8-K dated April 23,
1998 (the "Form 8-K for Amendments"), as amended by the Primus Current
Report on Form 8-K/A dated April 23, 1998.
3.1 Amended and Restated Certificate of Incorporation of Primus;
Incorporated by reference to Exhibit 3.1 of the Registration Statement
on Form S-8, No. 333-56557 (the "S-8 Registration Statement").
3.2 Amended and Restated Bylaws of Primus; Incorporated by reference to
Exhibit 3.2 of the IPO Registration Statement.
4.1 Specimen Certificate of Primus Common Stock; Incorporated by reference
to Exhibit 4.1 of the IPO Registration Statement.
4.2 Form of Indenture of Primus; Incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-1, No 333-30195 (the "1997
Senior Note Registration Statement").
4.3 Form of Warrant Agreement of Primus; Incorporated by reference to
Exhibit 4.2 of the Senior Note Registration Statement.
4.4 Indenture, dated May 19, 1998, between Primus Telecommunications
Group, Incorporated and First Union Nation Bank.+
4.5 Specimen 9 7/8% Senior Note due 2008 (contained in Exhibit 4.4 as
Exhibit A).+
5.1 Opinion of Pepper Hamilton LLP regarding the validity of the
securities being registered.*
10.1 Stockholder Agreement among Warburg, Pincus, K. Paul Singh and Primus,
dated as of February 3, 1998; Incorporated by reference to Exhibit
10.1 of the Primus Current Report on Form 8-K dated February 6, 1998
(the "Form 8-K")
10.2 Voting Agreement between Primus and Wesley T. O'Brien, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.4 of the
Form 8-K.
10.3 Voting Agreement between Primus and Rudy McGlashan, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.5 of the
Form 8-K.
10.4 Voting Agreement between TresCom and K. Paul Singh, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.2 of the
Form 8-K.
10.5 Voting Agreement between TresCom and John F. DePodesta, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.3 of the
Form 8-K.
10.6 Switched Transit Agreement, dated June 5, 1995, between Teleglobe USA,
Inc. and Primus for the provision of services to India; Incorporated
by reference to Exhibit 10.2 of the IPO Registration Statement.
10.7 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA, Inc. and Primus for the provision of services to Iran;
Incorporated by reference to Exhibit 10.3 of the IPO Registration
Statement.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.8 Agreement for Billing and Related Services, dated February 23, 1995,
between Primus and Electronic Data System Inc.; Incorporated by
reference to Exhibit 10.4 of the IPO Registration Statement.
10.9 Employment Agreement, dated June 1, 1994, between Primus and K. Paul
Singh, Inc.; Incorporated by reference to Exhibit 10.5 of the IPO
Registration Statement.
10.10 Primus 1995 Stock Option Plan; Incorporated by reference to Exhibit
10.6 of the IPO Registration Statement.
10.11 Primus 1995 Director Stock Option Plan; Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement.
10.12 Registration Rights Agreement, dated July 31, 1996, among Primus,
Quantum Industrial Partners LDC, S-C Phoenix Holdings, L.L.C., Winston
Partners II LDC and Winston Partners LLC; Incorporated by reference to
Exhibit 10.11 of the IPO Registration Statement.
10.13 Service Provider Agreement between Telstra Corporation Limited and
Axicorp Pty., Ltd., dated May 3, 1995; Incorporated by reference to
Exhibit 10.12 of the IPO Registration Statement.
10.14 Dealer Agreement between Telstra Corporation Limited and Axicorp Pty.,
Ltd. dated January 8, 1996; Incorporated by reference to Exhibit 10.13
of the IPO Registration Statement.
10.15 Hardpatch Transit Agreement dated October 5, 1995 between Teleglobe
USA, Inc. and Primus the provision of services to India; Incorporated
by reference to Exhibit 10.14 of the IPO Registration Statement.
10.16 Master Lease Agreement dated as of November 21, 1997 between NTFC
Capital Corporation and Primus Telecommunications, Inc.; Incorporated
by reference to Exhibit 10.17 of Primus's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 10-K"), as amended on
Form 10-K/A dated April 30, 1998.
10.17 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement.
10.18 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4 of the
Primus Registration Statement on Form S-8 (No. 333-35005).
10.19 Amendment No. 1 to Stockholder Agreement among Warburg, Pincus, K.
Paul Singh, Primus, and TresCom, dated as of April 16, 1998;
Incorporated by reference to Exhibit 10.1 of the Form 8-K for
Amendments.
10.20 Amendment No. 1 to Voting Agreement between Wesley T. O'Brien and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.2 of the Form 8-K for Amendments.
10.21 Amendment No. 1 to Voting Agreement between Rudolph McGlashan and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.3 of the Form 8-K for Amendments.
10.22 Purchase Agreement, dated May 14, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.+
10.23 Registration Rights Agreement, dated May 19, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.+
10.24 Primus Telecommunications Group, Incorporated-TresCom International
Stock Option Plan Incorporated by reference to the S-8 Registration.
Incorporated by reference to Exhibit 4.1 of the S-8 Registration
Statement.
10.25 Amended and Restated Employment Agreement between the Company and
Wesley T. O'Brien. Incorporated by reference to Exhibit 10.3 to the
TresCom 1996 Form 10-K.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.26 First Amendment to Amended and Restated Employment Agreement between
the Company and Wesley T. O'Brien. Incorporated by reference to
Exhibit 10.2 to the TresCom 1997 Form 10-K).
10.27 Employment Agreement between the Company and Rudolph McGlashan.
Incorporated by reference to Exhibit 10.4 to the TresCom Registration
Statement on Form S-1, No. 33-99738, filed on November 22, 1995 (the
"TresCom Form S-1").
10.28 Amendment to Employment Agreement between the Company and Rudolph
McGlashan. Incorporated by reference to Exhibit 10.5 to the TresCom
Form S-1.
10.29 Warrant Agreement between the Company and Warburg, Pincus Investors,
L.P. Incorporated by reference to Exhibit 10.6 to the TresCom Form
S-1.
10.30 Form of Indemnification Agreement between the Company and its
directors and executive officers Incorporated by reference to Exhibit
10.23 to the TresCom Form S-1.
10.31 Revolving Credit and Security Agreement, among TresCom International,
Inc., TresCom U.S.A., Inc., Intex Telecommunications, Inc., The St.
Thomas and San Juan Telephone Company, Inc., STSJ Overseas Telephone
Company, Inc., PNC Bank, National Association (as lender and as agent)
and the other lenders a party thereto (the "Loan Agreement").
Incorporated by reference to Exhibit 10.22 to the TresCom Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1997.
10.32 Revolving Credit Note, dated July 31, 1997, payable to PNC Bank,
National Association and the other lenders a party to the Loan
Agreement. Incorporated by reference to Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997.
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 Ernst & Young LLP (included on page II-7 of this
Registration Statement).
23.3 Consent of Ernst & Young LLP (included on page II-8 of this
Registration Statement).
23.4 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on page II-9 of this Registration
Statement).+
25 Form T-1.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
* Filed herewith.
+ Previously filed.
(B) 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 22. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned registrant hereby undertakes: (1) to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement: (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high and of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective registration
statement; and (iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement; (2)
that, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and (3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Primus
Telecommunications Group, Incorporated on Form S-4 of our report dated
February 12, 1998, except for Note 15 as to which the date is March 8, 1998,
included herein and incorporated by reference from the Company's Joint Proxy
Statement/Prospectus dated May 4, 1998, and to the reference to us under the
headings "Selected Financial Data" and "Experts" in the Prospectus, which is
part of this Registration Statement.
Deloitte & Touche LLP
Washington, DC
July 13, 1998
II-6
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated September 30, 1997 with respect to the
consolidated financial statements of USFI, Inc. included in Amendment No. 1 to
the Registration Statement (Form S-4 No. 333-58547) and related Prospectus of
Primus Telecommunications Group, Inc. for the Exchange Offer of its 9 7/8%
Senior Notes due 2008 and to the incorporation by reference therein of our
reports dated September 30, 1997 and January 31, 1996, with respect to the
consolidated financial statements of USFI, Inc. included in the Current Report
on Form 8-K dated November 3, 1997, and the amendments to such Current Report
dated January 5, 1998 and January 7, 1998, of Primus Telecommunications Group,
Inc., filed with the Securities and Exchange Commission and incorporated by
reference in the Joint Proxy Statement/Prospectus dated May 4, 1998 of Primus
Telecommunications Group, Inc.
Ernst & Young LLP
Hackensack, New Jersey
July 13, 1998
II-7
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated February 27, 1998, with respect to the
consolidated financial statements and schedule of TresCom International, Inc.
included in the Registration Statement (Form S-4 No. 333-58547) and related
Prospectus of Primus Telecommunications Group, Incorporated for Exchange Offer
of its 9 7/8% Senior Notes due 2008 and incorporated by reference in the Joint
Proxy Statement/Prospectus dated May 4, 1998 of Primus Telecommunications
Group, Incorporated.
Ernst & Young LLP
Atlanta, Georgia
July 13, 1998
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in McLean, Virginia on July 14, 1998.
Primus Telecommunications Group,
Incorporated
/s/ K. Paul Singh
By: _________________________________
K. PAUL SINGH President, Chairman
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>
<S> <C> <C>
SIGNATURE TITLE
DATE
/s/ K. Paul Singh Chairman, President July 14, 1998
- ------------------------------------- and Chief Executive
K. PAUL SINGH Officer (principal
executive officer
and Director
* Executive Vice July 14, 1998
- ------------------------------------- President and Chief
NEIL L. HAZARD Financial Officer
(principal
financial officer
and principal
accounting officer)
* Executive Vice July 14, 1998
- ------------------------------------- President and
JOHN F. DEPODESTA Director
</TABLE>
II-9
<PAGE>
SIGNATURE TITLE DATE
* Director July 14, 1998
- -------------------------------------
HERMAN FIALKOV
* Director July 14, 1998
- -------------------------------------
DAVID E. HERSHBERG
* Director July 14, 1998
- -------------------------------------
JOHN PUENTE
* Director July 14, 1998
- -------------------------------------
DOUGLAS M. KARP
*By: /s/ K. Paul Singh
- -------------------------------------
K. Paul Singh
Attorney-in-Fact
II-10
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 Agreement and Plan of Merger by and among Primus, TresCom and TAC,
dated as of February 3, 1998; Incorporated by reference to Exhibit 2.1
of the Registration Statement on Form S-4, No. 333-51797 (the "Proxy
Registration Statement"). The schedules to the Agreement and Plan of
Merger have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of such schedules shall be furnished
supplementally to the Commission upon request.)
2.2 Asset Purchase Agreement by and among USFI, Inc. Primus
Telecommunications, Inc., Primus and US Cable Corporation dated as of
October 20, 1997; Incorporated by reference to Exhibit 2.1 of Primus's
Current Report on Form 8-K dated November 3, 1997. (The exhibits and
schedules listed in the table of contents to the Asset Purchase
Agreement have been omitted in accordance with Item 601(b)(2) of
Regulation S-K. A copy of such exhibits and schedules shall be
furnished supplementally to the Commission upon request.)
2.3 Equity Purchase Agreement by and among Messrs. James D. Pearson,
Stephen E. Myers, Michael C. Anderson, Primus Telecommunications,
Inc., and Primus, dated as of October 20, 1997; Incorporated by
reference to Exhibit 2.2 of Primus's Current Report on Form 8-K dated
November 3, 1997. (The exhibits and schedules listed in the table of
contents to the Equity Purchase Agreement have been omitted in
accordance with Item 601(b)(2) of Regulation S-K. A copy of such
exhibits and schedules shall be furnished supplementally to the
Commission upon request.
2.4 Amendment No. 1 to Agreement and Plan of Merger among Primus, TresCom
and TAC, dated as of April 8, 1998; Incorporated by reference to
Exhibit 2.1 of the Primus Current Report on Form 8-K dated April 10,
1998.
2.5 Amendment No. 2 to Agreement and Plan of Merger among Primus, TresCom
and TAC, dated as of April 16, 1998; Incorporated by reference to
Exhibit 2.1 of the Primus Current Report on Form 8-K dated April 23,
1998 (the "Form 8-K for Amendments"), as amended by the Primus Current
Report on Form 8-K/A dated April 23, 1998.
3.1 Amended and Restated Certificate of Incorporation of Primus;
Incorporated by reference to Exhibit 3.1 of the Registration Statement
on Form S-8, No. 333-56557 (the "S-8 Registration Statement").
3.2 Amended and Restated Bylaws of Primus; Incorporated by reference to
Exhibit 3.2 of the IPO Registration Statement.
4.1 Specimen Certificate of Primus Common Stock; Incorporated by reference
to Exhibit 4.1 of the IPO Registration Statement.
4.2 Form of Indenture of Primus; Incorporated by reference to Exhibit 4.1
of the Registration Statement on Form S-1, No 333-30195 (the "Senior
Note Registration Statement").
4.3 Form of Warrant Agreement of Primus; Incorporated by reference to
Exhibit 4.2 of the Senior Note Registration Statement.
4.4 Indenture, dated May 19, 1998, between Primus Telecommunications
Group, Incorporated and First Union Nation Bank.+
4.5 Specimen 9 7/8% Senior Note due 2008 (contained in Exhibit 4.4 as
Exhibit A).+
5.1 Opinion of Pepper Hamilton LLP regarding the validity of the
securities being registered.
10.1 Stockholder Agreement among Warburg, Pincus, K. Paul Singh and Primus,
dated as of February 3, 1998; Incorporated by reference to Exhibit
10.1 of the Primus Current Report on Form 8-K dated February 6, 1998
(the "Form 8-K")
10.2 Voting Agreement between Primus and Wesley T. O'Brien, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.4 of the
Form 8-K.
<PAGE>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.3 Voting Agreement between Primus and Rudy McGlashan, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.5 of the
Form 8-K.
10.4 Voting Agreement between TresCom and K. Paul Singh, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.2 of the
Form 8-K.
10.5 Voting Agreement between TresCom and John F. DePodesta, dated as of
February 3, 1998; Incorporated by reference to Exhibit 10.3 of the
Form 8-K.
10.6 Switched Transit Agreement, dated June 5, 1995, between Teleglobe USA,
Inc. and Primus for the provision of services to India; Incorporated
by reference to Exhibit 10.2 of the IPO Registration Statement.
10.7 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA, Inc. and Primus for the provision of services to Iran;
Incorporated by reference to Exhibit 10.3 of the IPO Registration
Statement.
10.8 Agreement for Billing and Related Services, dated February 23, 1995,
between Primus and Electronic Data System Inc.; Incorporated by
reference to Exhibit 10.4 of the IPO Registration Statement.
10.9 Employment Agreement, dated June 1, 1994, between Primus and K. Paul
Singh, Inc.; Incorporated by reference to Exhibit 10.5 of the IPO
Registration Statement.
10.10 Primus 1995 Stock Option Plan; Incorporated by reference to Exhibit
10.6 of the IPO Registration Statement.
10.11 Primus 1995 Director Stock Option Plan; Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement.
10.12 Registration Rights Agreement, dated July 31, 1996, among Primus,
Quantum Industrial Partners LDC, S-C Phoenix Holdings, L.L.C., Winston
Partners II LDC and Winston Partners LLC; Incorporated by reference to
Exhibit 10.11 of the IPO Registration Statement.
10.13 Service Provider Agreement between Telstra Corporation Limited and
Axicorp Pty., Ltd., dated May 3, 1995; Incorporated by reference to
Exhibit 10.12 of the IPO Registration Statement.
10.14 Dealer Agreement between Telstra Corporation Limited and Axicorp Pty.,
Ltd. dated January 8, 1996; Incorporated by reference to Exhibit 10.13
of the IPO Registration Statement.
10.15 Hardpatch Transit Agreement dated October 5, 1995 between Teleglobe
USA, Inc. and Primus the provision of services to India; Incorporated
by reference to Exhibit 10.14 of the IPO Registration Statement.
10.16 Master Lease Agreement dated as of November 21, 1997 between NTFC
Capital Corporation and Primus Telecommunications, Inc.; Incorporated
by reference to Exhibit 10.17 of Primus's Annual Report on Form 10-K
for the year ended December 31, 1997 (the "1997 10-K"), as amended on
Form 10-K/A dated April 30, 1998.
10.17 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement.
10.18 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4 of the
Primus Registration Statement on Form S-8 (No. 333-35005).
10.19 Amendment No. 1 to Stockholder Agreement among Warburg, Pincus, K.
Paul Singh, Primus, and TresCom, dated as of April 16, 1998;
Incorporated by reference to Exhibit 10.1 of the Form 8-K for
Amendments.
10.20 Amendment No. 1 to Voting Agreement between Wesley T. O'Brien and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.2 of the Form 8-K for Amendments.
10.21 Amendment No. 1 to Voting Agreement between Rudolph McGlashan and
Primus, dated as of April 16, 1998; Incorporated by reference to
Exhibit 10.3 of the Form 8-K for Amendments.
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<C> <S>
10.22 Purchase Agreement, dated May 14, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.+
10.23 Registration Rights Agreement, dated May 19, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.+
10.24 Primus Telecommunications Group, Incorporated-TresCom International
Stock Option Plan Incorporated by reference to the S-8 Registration.
Incorporated by reference to Exhibit 4.1 of the S-8 Registration
Statement.
10.25 Amended and Restated Employment Agreement between the Company and
Wesley T. O'Brien. Incorporated by reference to Exhibit 10.3 to the
TresCom 1996 Form 10-K.
10.26 First Amendment to Amended and Restated Employment Agreement between
the Company and Wesley T. O'Brien. Incorporated by reference to
Exhibit 10.2 to the TresCom 1997 Form 10-K).
10.27 Employment Agreement between the Company and Rudolph McGlashan.
Incorporated by reference to Exhibit 10.4 to the TresCom Registration
Statement on Form S-1, No. 33-99738, filed on November 22, 1995 (the
"TresCom Form S-1").
10.28 Amendment to Employment Agreement between the Company and Rudolph
McGlashan. Incorporated by reference to Exhibit 10.5 to the TresCom
Form S-1.
10.29 Warrant Agreement between the Company and Warburg, Pincus Investors,
L.P. Incorporated by reference to Exhibit 10.6 to the TresCom Form
S-1.
10.30 Form of Indemnification Agreement between the Company and its
directors and executive officers Incorporated by reference to Exhibit
10.23 to the TresCom Form S-1.
10.31 Revolving Credit and Security Agreement, among TresCom International,
Inc., TresCom U.S.A., Inc., Intex Telecommunications, Inc., The St.
Thomas and San Juan Telephone Company, Inc., STSJ Overseas Telephone
Company, Inc., PNC Bank, National Association (as lender and as agent)
and the other lenders a party thereto (the "Loan Agreement").
Incorporated by reference to Exhibit 10.22 to the TresCom Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1997.
10.32 Revolving Credit Note, dated July 31, 1997, payable to PNC Bank,
National Association and the other lenders a party to the Loan
Agreement. Incorporated by reference to Exhibit 10.23 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997.
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 Ernst & Young LLP (included on page II-7 of this
Registration Statement).
23.3 Consent of Ernst & Young LLP (included on page II-8 of this
Registration Statement).
23.4 Consent of Pepper Hamilton LLP (included in Exhibit 5.1).*
24.1 Power of Attorney (included on page II-9 of this Registration
Statement).+
25 Form T-1.*
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
</TABLE>
- --------
* Filed herewith.
+ Previously filed.
3
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF PEPPER HAMILTON LLP]
3000 Two Logan Square
Eighteenth and Arch Streets
Philadelphia, PA 19103-2799
215.981.4000
Fax 215.981.4750
July 14, 1998
Primus Telecommunications Group, Incorporated
1700 Old Meadow
McLean, VA 22102
Re: Registration Statement on Form S-4
----------------------------------
Dear Gentlemen:
You have requested our opinion, as special counsel for Primus
Telecommunications Group, Incorporated, a Delaware corporation (the "Company"),
in connection with a registration statement on Form S-4 (the "Registration
Statement") which is being filed by the Company under the Securities Act of
1933, as amended (the "Act"), with the Securities and Exchange Commission on or
about the date hereof. Capitalized terms not otherwise defined herein shall have
the meanings ascribed to them in the Registration Statement.
The Registration Statement relates to an offer to exchange (the
"Exchange Offer") for an equal principal amount of the Company's outstanding 9
7/8% Senior Notes due 2008 (the "Notes") for an equal principal amount of the
Company's outstanding 9 7/8% Senior Notes due 2008 (the "Notes").
The Notes were issued, and the Exchange Notes will be issued, under
an Indenture dated as of May 19, 1998 (the "Indenture") between the Company and
First Union National Bank, as Trustee (the "Trustee").
In connection with this opinion, we have examined the Registration
Statement, the Indenture (included as Exhibit 4.4 to the Registration
Statement), the form of the Exchange Notes (set forth as Exhibit A to the
Indenture) and such other documents, records and other matters as we have deemed
necessary or appropriate in order to give the opinions set forth herein.
We have, with your approval, assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
documents submitted to us as certified, facsimile, conformed, electronic, or
photostatic copies and the authenticity of the originals of such copies. As to
all questions of fact material to this opinion that have not been independently
established, we have relied upon certificates or comparable documents, and oral
and written statements and representations, of officers and representatives of
the Company. We have not independently verified such information and
assumptions.
<PAGE>
Based upon and subject to the foregoing, assuming that the
Indenture has been duly authorized, executed and delivered by, and represents
the valid and binding obligation of, the Trustee, and when the Registration
Statement, including any amendment thereto, shall have become effective under
the Securities Act and the Indenture shall have been duly qualified under the
Trust Indenture Act of 1939, as amended, it is our opinion that:
1. the Company has been duly incorporated, and is validly existing
and in good standing under the laws of the State of Delaware with the corporate
power and authority to execute, deliver, and perform its obligations under the
Exchange Notes and the Indenture: and each of the Indenture and the Exchange
Notes has been duly authorized by the Company;
2. the Indenture constitutes the legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms;
3. the Exchange Notes, when duly executed and delivered by or on
behalf of the Company in the form contemplated by the Indenture upon the terms
set forth in the Exchange Offer and authenticated by the Trustee or an
authenticating agent appointed by the Trustee in accordance with the terms of
the Indenture, will constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their terms;
subject, in the case of the opinions set forth in paragraphs numbered 2 and 3
hereof, to (i) bankruptcy, insolvency, moratorium, reorganization, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights from time to time in effect; (ii) application of general
principles of equity (regardless of whether considered in proceedings in equity
or at law) and the discretion of the court before which any proceedings therefor
may be brought; (iii) standards of commercial reasonableness and the implied
covenant of good faith; and (iv) public policy.
We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the Firm under the caption "Legal Opinions" in
the Registration Statement. In doing so, we do not admit that we are in the
category of persons whose consent it required under Section 7 of the Act, or
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
/s/ Pepper Hamilton LLP
----------------------------
PEPPER HAMILTON LLP
<PAGE>
EXHIBIT 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM T-1
----------------------
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT FOR 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a trustee pursuant to
Section 305(b)(2)___________
----------------------
FIRST UNION NATIONAL BANK
(Exact name of Trustee as specified in its charter)
230 SOUTH TRYON STREET, 9TH FL.
CHARLOTTE, NC 28288-1179 22-1147033
(Address of principal (Zip Code) (I.R.S. Employer
executive office) Identification No.)
DANTE M. MONAKIL, (804) 343-6057
800 E. MAIN STREET, RICHMOND, VIRGINIA 23219
----------------------
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(Exact name of obligor as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
54-1708481
(I.R.S. Employer Identification No.)
1700 OLD MEADOW ROAD
MCLEAN, VA
(Address of principal executive offices)
22102
(Zip Code)
9 7/8% SENIOR NOTES DUE 2008
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. General Information.
(a) The following are the names and addresses of each examining
supervising authority to which the Trustee is subject:
The Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Richmond, Richmond, Virginia.
Federal Deposit Insurance Corporation, Washington, D.C.
Securities and Exchange Commission, Division of Market Regulation,
Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
2. Affiliations with obligor.
The obligor is not an affiliate of the Trustee.
3. Voting Securities of the Trustee.
Not applicable
(See answer to Item 13)
4. Trusteeships under other indentures.
Not applicable
(See answer to Item 13)
5. Interlocking directorates and similar relationships with the obligor or
underwriters.
Not applicable
(See answer to Item 13)
6. Voting securities of the Trustee owned by the obligor or its officials.
Not applicable
(See answer to Item 13)
7. Voting securities of the Trustee owned by underwriters or their officials.
Not applicable
(See answer to Item 13)
8. Securities of the obligor owned or held by the Trustee.
Not applicable
(See answer to Item 13)
9. Securities of underwriters owned or held by the Trustee.
Not applicable
(See answer to Item 13)
10. Ownership or holdings by the Trustee of voting securities of certain
affiliates or security holders of the obligor.
Not applicable
(See answer to Item 13)
2
<PAGE>
11. Ownership of holders by the Trustee of any securities of a person owning
50 percent or more of the voting securities of the obligor.
Not applicable
(See answer to Item 13)
12. Indebtedness of the obligor of the Trustee.
Not applicable
(See answer to Item 13)
13. Defaults by the obligor.
A. None
B. None
14. Affiliations with the underwriters.
Not applicable
(See answer to Item 13)
15. Foreign trustee.
Trustee is a national banking association organized under the laws
of the United States.
16. List of Exhibits.
(1) Articles of Incorporation. (Incorporated by reference from Exhibit 25
to Registration 333-25575, filed June 5, 1997.)
(2) Certificate of Authority of the Trustee to conduct business.
(Incorporated by reference from Exhibit 25 to Registration 333-25575,
filed June 5, 1997.)
(3) Certificate of Authority of the Trustee to exercise corporate trust
powers. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(4) By-Laws. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(5) Inapplicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939. Included at Page 4 of this Form T-1 Statement.
(7) Report of condition of Trustee.
(8) Inapplicable.
(9) Inapplicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK, a national association
organized and existing under the laws of the United States of America, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Richmond, and Commonwealth of Virginia on the 10th day of July, 1998.
FIRST UNION NATIONAL BANK
(Trustee)
BY: /s/ Dante M. Monakil
--------------------------------
Dante M. Monakil, Vice President
EXHIBIT T-1 (6)
CONSENTS OF TRUSTEE
Under section 321(b) of the Trust Indenture Act of 1939 and in connection
with the proposed issuance by Primus Telecommunications Group, Incorporated
Senior Notes due 2008, First Union National Bank, as the Trustee herein named,
hereby consents that reports of examinations of said Trustee by Federal, State,
Territorial or District authorities may be furnished by such authorities to the
Securities and Exchange Commission upon requests therefor.
FIRST UNION NATIONAL BANK
BY: /s/ John M. Turner
------------------------------
John M. Turner, Vice President
Dated: July 10, 1998
<PAGE>
<TABLE>
<CAPTION>
Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031
Address: Two First Union Center Page RI-1
City, State Zip: Charlotte, NC 28288-0201 Printed 4/30/98 at 15:28
FDIC Certificate No.: 33869
CONSOLIDATED REPORT OF INCOME
FOR THE PERIOD JANUARY 1, 1998 - MARCH 31, 1998
All report of Income Schedules are to be reported on a calender year-to-date basis in thousands of dollars.
SCHEDULE RI -- INCOME STATEMENT I480
-------------------
Dollars Amounts in Thousands RIAD Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest Income: ///////////////////
a. Interest and fee income on loans: ///////////////////
(1) In domestic offices: ///////////////////
(a) Loans secured by real estate................................................. 4011 1,030,197 1.a.(1)(a)
(b) Loans to depository institutions............................................. 4019 9,070 1.a.(1)(b)
(c) Loans to finance agricultural production and other loans to farmers.......... 4024 5,647 1.a.(1)(c)
(d) Commercial and industrial loans.............................................. 4012 413,424 1.a.(1)(d)
(e) Acceptances of other banks................................................... 4026 597 1.a.(1)(e)
(f) Loans to individuals for household, family, and other personal
expenditures: ///////////////////
(1) Credit cards and related plans.......................................... 4054 113,072 1.a.(1)(f)(1)
(2) Other................................................................... 4055 168,742 1.a.(1)(f)(2)
(g) Loans to foreign governments and official institutions....................... 4056 3,816 1.a.(1)(g)
(h) Obligations (other than securities and leases) of states and political ///////////////////
subdivisions in the U.S.: ///////////////////
(1) Taxable obligations..................................................... 4503 0 1.a.(1)(h)(1)
(2) Tax-exempt obligations.................................................. 4504 17,745 1.a.(1)(h)(2)
(i) All other loans in domestic offices.......................................... 4058 40,219 1.a.(1)(i)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBF's................... 4059 16,388 1.a.(2)
b. Income from lease financing receivables: ///////////////////
(1) Taxable leases................................................................... 4505 207,354 1.b.(1)
(2) Tax-exempt leases................................................................ 4307 5,035 1.b.(2)
c. Interest income on balances due from depository institutions: (1) ///////////////////
(1) In domestic offices.............................................................. 4105 1,573 1.c.(1)
(2) In foreign offices, Edge and Agreement subsidiaries, and IBF's................... 4106 1,262 1.c.(2)
d. Interest and dividend income on securities: ///////////////////
(1) U.S. Treasury securities and U.S. Government agency obligations.................. 4027 379,035 1.d.(1)
(2) Securities issued by states and political subdivisions in the U.S.: ///////////////////
(a) Taxable securities........................................................... 4506 27 1.d.(2)(a)
(b) Tax-exempt securities........................................................ 4507 14,427 1.d.(2)(b)
(3) Other domestic debt securities................................................... 3657 65,702 1.d.(3)
(4) Foreign debt securities.......................................................... 3658 29,067 1.d.(4)
(5) Equity securities (including investments in mutual funds)........................ 3659 7,602 1.d.(5)
e. Interest income from trading assets.................................................. 4069 47,396 1.e.
</TABLE>
- -------------------------
(1) Includes interest income on time certificates of deposit not held for
trading.
<PAGE>
<TABLE>
<CAPTION>
Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031
Address: Two First Union Center Page RI-3
City, State Zip: Charlotte, NC 28288-0201 Printed 4/30/98 at 15:28
FDIC Certificate No.: 33869
SCHEDULE RI -- CONTINUED I481
-------------------
Year-to-date
-------------------
Dollar Amounts in Thousands RIAD Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases acquired after ///////////////////
August 7, 1986, that is not deductible for federal income purposes.......................... 4513 3,733 M.1.
2. Income from the sale and servicing of mutual funds and annuities in domestic offices ///////////////////
(including in Schedule RI. item 8).......................................................... 8431 125,191 M.2.
3.-4. Not applicable ///////////////////
5. Number of full-time equivalent employees at end of current period (round to //// Number
nearest whole number)....................................................................... 4150 44,386 M.5.
6. Not applicable ///////////////////
7. If the reporting bank has restated its balance sheet as a result of applying down RIAD CC YY MM DD
accounting this calendar year, report the date of the bank's acquisition(1)..........9106 00 00 00 00 M.7.
8. Trading revenue (from cash instruments and off-balance sheet derivative instruments) ///////////////////
(sum of Memorandum items 8.a through 8.d must equal Schedule RI, item 5.c) //// Bil Mil Thou
a. Interest rate exposures.................................................................. 8757 16,978 M.8.a.
b. Foreign exchange exposures............................................................... 8758 (2,606) M.a.b.
c. Equity security and index exposures...................................................... 8759 0 M.8.c.
d. Commodity and other exposures............................................................ 8760 (3) M.8.d.
9. Impact on income of off-balance sheet derivatives held for purposes other than trading: ///////////////////
a. Net increase (decrease) to interest income............................................... 8761 9,609 M.9.a.
b. Net (increase) decrease to interest expense.............................................. 8762 21,986 M.9.b.
c. Other (noninterest) allocations.......................................................... 8763 0 M.9.c.
10. Credit losses on off-balance sheet derivatives (see instructions)........................... 8251 0 M.10.
YES NO
11. Does the reporting bank have a Subchapter S election in effect for federal income tax
purposes for the current tax year?.......................................................... A530 /// X M.11.
12. Deferred portion of total applicable income taxes included in Schedule RI, //// Bil Mil Thou
items 9 and 11 (to be reported with the December Report of Income).......................... 4772 N/A M.12.
</TABLE>
- -------------------------
(1) For example, a bank acquired on June 1, 1997, would report 19970601.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031
Address: Two First Union Center Page RC-1
City, State Zip: Charlotte, NC 28288-0201 Printed 4/30/98 at 15:28
FDIC Certificate No.: 33869
</TABLE>
Consolidated Report of Condition for Insured Commercial and State-Chartered
Savings Banks for March 31, 1998
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
<TABLE>
<CAPTION>
SCHEDULE RC -- BALANCE SHEET
C400
Dollar Amounts in Thousands Rcfd Bil Mil Thou
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS ///////////////////
1. Cash and balances due from depository institutions (from Schedule RC-A): ///////////////////
a. Noninterest-bearing balances and currency and coin (1)..................................... 0081 7,346,667 1.a.
b. Interest-bearing balances (2).............................................................. 0071 12,481 1.b.
2. Securities: ///////////////////
a. Held-to-maturity securities (from Schedule RC-B, column A)................................. 1754 1,937,159 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)............................... 1773 31,508,601 2.b.
3. Federal funds sold and securities purchased under agreement to resell......................... 1350 4,501,133 3.
4. Loans and lease financing receivables: ///////////////////
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 98,043,231 /////////////////// 4.a.
b. LESS: Allowance for loan and lease losses RCFD 3123 1,213,121 /////////////////// 4.b.
c. LESS: Allocated transfer risk reserve RCFD 3128 0 /////////////////// 4.c.
d. Loans and leases, net of unearned income, allowance, and reserve ///////////////////
(item 4.a minus 4.b and 4.c)............................................................... 2125 96,830,110 4.d.
5. Trading assets (from Schedule RC-D)........................................................... 3545 3,818,431 5.
6. Premises and fixed assets (including capitalized leases)...................................... 2145 2,660,908 6.
7. Other real estate owned (from Schedule RC-M).................................................. 2150 112,869 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M)...... 2130 269,234 8.
9. Customers' liability to this bank on acceptances outstanding.................................. 2155 575,447 9.
10. Intangible assets (from Schedule RC-M)........................................................ 2143 2,896,263 10.
11. Other assets (from Schedule RC-F)............................................................. 2160 7,274,331 11.
12. Total assets (sum of items 1 through 11)...................................................... 2170 159,743,634 12.
- --------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Legal Title of Bank: First Union National Bank Call Date: 3/31/98 ST-BK: 37-0351 FFIEC 031
Address: Two First Union Center Page RC-2
City, State Zip: Charlotte, NC 28288-0201 Printed 4/30/98 at 15:28
FDIC Certificate No.: 33869
SCHEDULE RC -- CONTINUED
-----------------------
Dollar Amounts in Thousands ////////// Bil Mil Thou
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
LIABILITIES //////////////////////
13. Deposits //////////////////////
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E //////////////////////
part I).................................................................................... RCON 2200 101,438,219 13.a
-----------------------
(1) Noninterest-bearing(1).......................................... RCON 6631 19,061,893 ////////////////////// 13.a.(1)
(2) Interest-bearing................................................ RCON 6636 82,376,326 ////////////////////// 13.a.(2)
-----------------------
b. In foreign offices, Edge and Agreement subsidiaries, and IBF's (from Schedule RC-E //////////////////////
part II)................................................................................... RCFN 2200 5,487,257 13.b.
-----------------------
(1) Noninterest-bearing............................................. RCFN 6631 29,619 ////////////////////// 13.b.(1)
(2) Interest-bearing................................................ RCFN 6636 5,457,638 ////////////////////// 13.b.(2)
-----------------------
14. Federal funds purchased and securities sold under agreements to repurchase...................... RCFD 2800 24,525,123 14.
15. a. Demand notes issued to the U.S. Treasury..................................................... RCON 2840 426,758 15.a.
b. Trading liabilities (from Schedule RC-D)..................................................... RCFD 3548 4,547,787 15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized leases):. //////////////////////
a. With a remaining maturity of one year or less................................................ RCFD 2332 3,391,194 16.a.
b. With a remaining maturity of more than one year through three years.......................... RCFD A547 635,109 16.b.
c. With a remaining maturity of more than three years........................................... RCFD A548 416,618 16.c.
17. Not applicable.................................................................................. //////////////////////
18. Bank's liability on acceptances executed and outstanding........................................ RCFD 2920 575,222 18.
19. Subordinated notes and debentures (2)........................................................... RCFD 3200 2,797,773 19.
20. Other liabilities (from Schedule RC-G).......................................................... RCFD 2930 3,662,892 20.
21. Total liabilities (sum of items 13 through 20).................................................. RCFD 2948 147,903,952 21.
22. Not applicable.................................................................................. //////////////////////
EQUITY CAPITAL //////////////////////
23. Perpetual preferred stock and related surplus................................................... RCFD 3838 160,540 23.
24. Common stock.................................................................................... RCFD 3230 82,795 24.
25. Surplus (exclude all surplus related to preferred stock)........................................ RCFD 3839 8,532,323 25.
26. a. Undivided profits and capital reserves....................................................... RCFD 3632 2,823,904 26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities....................... RCFD 8434 240,120 26.b.
27. Cumulative foreign currency translation adjustments............................................. RCFD 3284 0 27.
28. Total equity capital (sum of items 23 through 27)............................................... RCFD 3210 11,839,682 28.
29. Total liabilities and equity capital (sum of items 21 and 28)................................... RCFD 3300 159,743,634 29.
----------------------
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the most Number
comprehensive level of auditing work performed for the bank by independent external auditors as. --------------
of any date during 1997......................................................................... RCFD 6724 2 M.1.
</TABLE>
1. = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2. = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3. = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4. = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5. = Review of the bank's financial statements by external auditors
6. = Compilation of the bank's financial statements by external auditors
7. = Other audit procedures (excluding tax preparation work)
8. = No external audit work
- ---------------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
8
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
9 7/8% SENIOR NOTES DUE 2008
FOR A NEW SERIES OF ITS
9 7/8% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED JULY 16, 1998
----------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON AUGUST 14, 1998,
UNLESS EXTENDED.
----------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST UNION NATIONAL BANK
By Mail, Hand or Overnight Delivery: By Facsimile:
First Union Customer Information (704) 590-7628
Center
To confirm by Telephone
Reorganization Department, 3C3-NC or for Information call:
1153
1525 West W.T. Harris Boulevard
(704) 590-7408
Charlotte, NC 28262-1153
<PAGE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN
SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus, dated July 16, 1998
("Exchange Offer"), of Primus Telecommunications Group, Inc., a Delaware
corporation (the "Company"), relating to the offer of the Company, upon the
terms and subject to the conditions set forth in the Exchange Offer and in
this Letter of Transmittal and the instructions hereto (which together with
the Exchange Offer and the instructions hereto constitute the "Offer"), to
exchange a new series of its 9 7/8% Senior Notes due 2008 (the "Exchange
Notes") which have been registered under the Securities Act of 1933 (the
"Securities Act") for any and all of its outstanding 9 7/8% Senior Notes due
2008 ("Initial Notes"), at the rate of $1,000 principal amount of the Exchange
Notes for each $1,000 principal amount of the Initial Notes. Capitalized terms
used but not defined herein have the meanings given to them in the Exchange
Offer.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Offer.
This Letter of Transmittal is to be used whether the Initial Notes are to be
physically delivered herewith, or whether guaranteed delivery procedures or
book-entry delivery procedures are being used, pursuant to the procedures set
forth under "The Exchange Offer" in the Exchange Offer. If delivery of Initial
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company ("DTC"), this Letter of
Transmittal need not be manually executed, provided, however, that tenders of
Initial Notes must be effected in accordance with the procedures mandated by
DTC and the procedures set forth in the Exchange Offer under the caption "The
Exchange Offer--Procedures for Tendering Initial Notes--Book-Entry Delivery."
If a person or entity in whose name Initial Notes are registered on the books
of the Registrar (a "Registered Holder") desires to tender Initial Notes and
such Initial Notes are not immediately available or time will not permit all
documents required by the Offer to reach the Exchange Agent (or such
Registered Holder is unable to complete the procedure for book-entry transfer
on a timely basis) prior to 5:00 P.M. New York City time on August 14, 1998
(the "Expiration Date"), a tender may be effected in accordance with the
guaranteed delivery procedures set forth in the Exchange Offer under the
caption "The Exchange Offer--Procedures for Tendering Initial Notes--
Guaranteed Delivery Procedures." See Instruction 1.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
2
<PAGE>
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Offer, the undersigned
hereby tenders to the Company the principal amount of the Initial Notes
indicated below. Subject to, and effective upon, the acceptance for exchange
of the Initial Notes tendered hereby, the undersigned hereby irrevocably
sells, assigns and transfers to or upon the order of the Company all right,
title and interest in and to such Initial Notes and hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that said exchange
agent also acts as the agent of the Company) with respect to such Initial
Notes, with full power of substitution (such power of attorney being deemed to
be an irrevocable power coupled with an interest), to take such further action
as may be required in connection with the delivery, tender and exchange of the
Initial Notes.
The undersigned acknowledges that this Offer is being made in reliance on an
interpretation by the staff of the Securities and Exchange Commission (the
"SEC") that the Exchange Notes issued pursuant to the Exchange Offer in
exchange for the Initial Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) a broker-dealer who purchased
Initial Notes directly from the Company for resale pursuant to Rule 144A under
the Securities Act, or (ii) a person that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Notes. See Morgan Stanley &
Co. Inc., SEC No-Action Letter (available June 5, 1991); The Exchange Offer
under the caption "The Exchange Offer--Resales of the Exchange Notes."
The undersigned acknowledges that the Exchange Notes have not been
registered or qualified under any state securities laws. This Offer is being
made to: (i) U.S. persons pursuant to exemptions from such laws for sales to
institutional investors, and (ii) non-U.S. persons (within the meaning of
Regulation S under the Securities Act), as state securities laws do not apply
to sales to persons who are not residents of any state. The undersigned hereby
represents and warrants that the undersigned is either (i) a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act,
(ii) an institutional "accredited investor" within the meaning of subparagraph
(a)(1), (2), (3) or (7) of Rule 501 under the Securities Act or (iii) a non-
U.S. person (within the meaning of Regulation S under the Securities Act).
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT
NOT TO ACCEPT TENDERED INITIAL NOTES FROM ANY TENDERING HOLDER IF THE COMPANY
DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD
RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
The undersigned, if the undersigned is a beneficial holder, represents, or,
if the undersigned is a broker, dealer, commercial bank, trust company or
other nominee, represents that it has received representations from the
beneficial owners of the Initial Notes stating, (as defined in the Exchange
Offer) that (i) the Exchange Notes to be acquired in connection with the
Exchange Offer by the Holder and each Beneficial Owner of the Initial Notes
are being acquired by the Holder (as defined in the Exchange Offer) and each
Beneficial Owner in the ordinary course of business of the Holder and each
Beneficial Owner, (ii) the Holder and each Beneficial Owner are not
participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in the distribution (within the
meaning of the Securities Act) of the Exchange Notes, (iii) the Holder and
each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the Exchange Notes must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a secondary resale transaction of the
Exchange Notes acquired by such person and cannot rely on the position of the
staff of the Commission set forth in no-action letters that are discussed in
the Exchange Offer under the caption "The Exchange Offer--Resales of the
Exchange Notes," (iv) that if the Holder is a broker-dealer holding Initial
Notes acquired for its own account as a result of market-making activities or
other trading activities, it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes received in respect of such
3
<PAGE>
Initial Notes pursuant to the Exchange Offer; provided that the delivery of a
Prospectus in connection with the exchange of Initial Notes by such Holder
will not be deemed an admission that such Holder is an underwriter (within the
meaning of the Securities Act), (v) the Holder and each Beneficial Owner
understand that a secondary resale transaction described in clause (iii) above
should be covered by an effective registration statement containing the
selling security holder information required by item 507 of Regulations S-K of
the Securities Act and (vi) neither the Holder nor any Beneficial Owner is an
"affiliate," as defined under Rule 405 of the Securities Act, of the Company.
In addition, if the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer holding
Initial Notes acquired for its own account as a result of market-making
activities or other trading activities, it will deliver a prospectus meeting
the requirements of the Securities Act in connection with any resale of
Exchange Notes received in respect of such Initial Notes pursuant to the
Exchange Offer; provided, however, that by so acknowledging and by delivering
a prospectus, the undersigned will not be deemed to admit that it is an
underwriter (within the meaning of the Securities Act).
The Company has agreed, subject to the provisions of the Registration Rights
Agreement, the Prospectus, as it may be amended or supplemented from time to
time, may be used by a Participating Broker-Dealer (as defined below) in
connection with resales of Exchange Notes received in exchange for Initial
Notes, where such Initial Notes were acquired by such broker-dealer for its
own account as a result of market-making activities or other trading
activities, for a period ending 180 days after the Expiration Date [(subject
to extension under certain limited circumstances described in the Prospectus)]
or, if earlier, when all such Exchange Notes have been disposed of by such
participating broker-dealer. In that regard, each broker-dealer who acquired
Initial Notes for its own account as a result of market-making or other
trading activities (a "Participating Broker-Dealer"), by tendering such
Initial Notes and executing this Letter of Transmittal, agrees that, upon
receipt of notice from the Company of the occurrence of any event or the
discovery of any fact which makes any statement contained or incorporated by
reference in the Prospectus untrue in any material respect or which causes the
Prospectus to omit to state a material fact necessary in order to make the
statements contained or incorporated by reference therein, in light of the
circumstances under which they were made, not misleading or of the occurrence
of certain other events specified in the Registration Rights Agreement, such
Participating Broker-Dealer will suspend the sale of Exchange Notes pursuant
to the Prospectus until the Company have amended or supplemented the
Prospectus to correct such misstatement or omission and the Company has
furnished copies of the amended or supplemented Prospectus to the
Participating Broker-Dealer or the Company has given notice that the sale of
the Exchange Notes may be resumed, as the case may be. If the Company gives
such notice to suspend the sale of the Exchange Notes, they shall extend the
180-day period referred to above during which Participating Broker-Dealers are
entitled to use the Prospectus in connection with the resale of Exchange Notes
by the number of days during the period from and including the date of the
giving of such notice to and including the date when Participating Broker-
Dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Exchange Notes or to and including the date
on which the Company has given notice that the sale of Exchange Notes may be
resumed, as the case may be.
The undersigned understands and acknowledges that the Company reserves the
right in its sole discretion to purchase or make offers for any Initial Notes
that remain outstanding subsequent to the Expiration Date or as set forth in
the Exchange Offer under the caption "The Exchange Offer--Conditions of the
Exchange Offer," to terminate the Exchange Offer and, to the extent permitted
by applicable law, purchase Initial Notes in the open market, in privately
negotiated transactions or otherwise. The term of any such purchases or offers
could differ from the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Offer, has full power and authority to tender,
exchange, assign and transfer the Initial Notes tendered hereby, and that when
the same are accepted for exchange by the Company, the Company will acquire
good and unencumbered title thereto, free and clear of all liens, restrictions
charges and encumbrances and not subject to
4
<PAGE>
any adverse claim or right. The undersigned will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Company
to be reasonably necessary or desirable to complete the sale, assignment and
transfer the Initial Notes tendered hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the
undersigned hereunder shall be binding upon the successors, assigns, heirs,
executors, administrations, trustees in bankruptcy and legal representatives
of the undersigned and shall not be affected by, and shall survive, the death
or incapacity of the undersigned.
The undersigned understands that tenders of the Initial Notes pursuant to
any one of the procedures described under "The Exchange Offer--Procedures for
Tendering Initial Notes" in the Exchange Offer and in the instructions hereto
will constitute a binding agreement between the undersigned and the Company in
accordance with the terms and subject to the conditions of the Offer.
The undersigned understands that by tendering Initial Notes pursuant to one
of the procedures describe in the Exchange Offer and the instructions thereto,
the tendering holder will be deemed to have waived the right to receive any
payment in respect of interest on the Initial Notes accrued up to the date of
issuance of the Exchange Notes.
The undersigned recognizes that, under certain circumstances set forth in
the Exchange Offer, the Company may not be required to accept for exchange any
of the Initial Notes tendered. Initial Notes not accepted for exchange or
withdrawn will be returned to the undersigned as the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Initial Notes, that such Exchange Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute certificates
representing the Initial Notes not exchanged or not accepted for exchange will
be issued to the undersigned or, in the case of a book-entry transfer of
Initial Notes, will be credited to the account indicated above maintained at
DTC. Similarly, unless otherwise indicated under "Special Delivery
Instructions," the undersigned hereby directs that the Exchange Notes be
delivered to the undersigned at the address shown below the undersigned's
signature. The undersigned recognizes that the Company has no obligation
pursuant to the "Special Exchange Instructions" to transfer any Initial Notes
from the name of the Registered Holder thereof if the Company does not accept
for exchange any of the principal amount of such Initial Notes so tendered.
5
<PAGE>
THE UNDERSIGNED BY COMPLETING THE BOX "DESCRIPTION OF INITIAL NOTES" BELOW
AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE INITIAL NOTES AND
MADE CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE EXCHANGE OFFER.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH)
(IMPORTANT: ALSO COMPLETE SUBSTITUTE FORM W-9 ON PAGE 10)
_______________________________________________________________________________
_______________________________________________________________________________
SIGNATURE(S) OF OWNER(S)
Dated: , 1998
If the holder(s) is/are tendering any Initial Notes, this Letter of
Transmittal must be signed by the Registered Holder(s) as the name(s)
appear(s) on the Initial Notes or on a security position listing or by
person(s) authorized to become Registered Holder(s) by endorsements and
documents transmitted herewith. If signature is by a trustee, executor,
administrator, guardian, officer or other person acting in a fiduciary or
representative capacity, please set forth full title. See Instruction 3.
Name(s) _______________________________________________________________________
_______________________________________________________________________________
(PLEASE TYPE OR PRINT)
Capacity: _____________________________________________________________________
Address: ______________________________________________________________________
_______________________________________________________________________________
(INCLUDING ZIP CODE)
Area Code and Telephone Number ________________________________________________
_______________________________________________________________________________
TAX IDENTIFICATION OR SOCIAL SECURITY NO(S)
(COMPLETE SUBSTITUTE FORM W-9 ON PAGE 10)
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized Signature: _________________________________________________________
Printed Name: _________________________________________________________________
Title: ________________________________________________________________________
Firm: _________________________________________________________________________
Address: ______________________________________________________________________
Area Code and Telephone Number ________________________________________________
Dated: , 1998
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE INITIAL NOTES
OR A NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
6
<PAGE>
List below the Initial Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, the certificate numbers and principal
amounts should be listed on a separate signed schedule affixed thereto. See
Instruction 7. The minimum permitted tender is $1,000 principal amount of
Initial Notes; all other tenders must be in integral multiples of $1,000.
DESCRIPTION OF INITIAL NOTES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND
ADDRESS(ES)
OF
HOLDER(S)
(PLEASE
FILL IN, IF CERTIFICATE AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
BLANK) NUMBER(S)* AMOUNT REPRESENTED TENDERED**
- -------------------------------------------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
<S> <C> <C> <C>
TOTAL
</TABLE>
- -------------------------------------------------------------------------------
* Need not be completed if Initial Notes are being tendered by book-entry
holders.
** Unless otherwise indicated in the column labeled "Principal Amount
Tendered" and subject to the terms and conditions of the Offer, the
undersigned will be deemed to have tendered the entire aggregate
principal amount represented by the Initial Notes indicated in the
column labeled "Aggregate Principal Amount Represented." See
Instruction 8.
7
<PAGE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[_]CHECK HERE IF TENDERED INITIAL NOTES ARE ENCLOSED HEREWITH.
[_]CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTIONS 1 AND 3):
Name(s) of Registered Holder(s): ___________________________________________
Window Ticket Number (if any): _____________________________________________
Date of Execution of Notice of Guaranteed Delivery: ________________________
Name of Eligible Institution that Guaranteed Delivery: _____________________
If Guaranteed Delivery is to be made by Book-Entry Transfer: _______________
Name of Tendering Institution: _________________________________________
Account Number: ________________________________________________________
Transaction Code Number: _______________________________________________
[_]CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ______________________________________________________________________
Address: ___________________________________________________________________
_____________________________________________________________________
[_]CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: _____________________________________________
Account Number: ____________________________________________________________
Transaction Code Number: ___________________________________________________
[_]CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED INITIAL
NOTES ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER SET FORTH ABOVE.
If delivery of Initial Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC, then tenders of Initial Notes
must be effected in accordance with the procedures mandated by DTC and the
procedures set forth in the Exchange Offer under the caption "The Exchange
Offer--Procedures for Tendering Initial Notes--Book-Entry Delivery."
8
<PAGE>
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5) (SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Initial To be completed ONLY if Initial
Notes in a principal amount not Notes in a principal amount not
exchanged and/or Exchange Notes exchanged and/or Exchange Notes
are to be registered in the name are to be sent to someone other
of or issued to someone other than the person or persons whose
than the person or persons whose signature(s) appear(s) on this
signature(s) appear(s) on this Letter of Transmittal above or
Letter of Transmittal above. to such person or persons at an
address other than that shown in
the box entitled "Description of
Initial Notes" on this Letter of
Transmittal above.
Issue and mail: (check appropri-
ate box(es)):
[_] Exchange Notes to:
Mail and deliver: (check appro-
[_] Initial Notes not tendered priate box(es)):
to:
[_] Exchange Notes to:
Name(s): ________________________
(PLEASE TYPE OR PRINT) [_] Initial Notes not tendered
to:
_________________________________ Name(s): ________________________
(PLEASE TYPE OR PRINT) (PLEASE TYPE OR PRINT)
Address: ________________________ _________________________________
_________________________________ (PLEASE TYPE OR PRINT)
(ZIP CODE) Address: ________________________
_________________________________ _________________________________
(TAX IDENTIFICATION OR SOCIAL
SECURITY NO(S))
(ZIP CODE)
_________________________________
(COMPLETE SUBSTITUTE FORM W-9 ON TAX IDENTIFICATION OR SOCIAL
PAGE 10]) SECURITY NO(S)
9
<PAGE>
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL EXCHANGING HOLDERS
(SEE INSTRUCTION 5)
PAYOR'S NAME: FIRST UNION NATIONAL BANK
PART 1--PLEASE PROVIDE YOUR
TIN IN THE BOX AT RIGHT AND
CERTIFY BY SIGNING AND DATING
BELOW.
------------------
SUBSTITUTE Social security
FORM W-9 number(s)
DEPARTMENT OF OR
THE TREASURY
INTERNAL ------------------
REVENUE SERVICE PART 2--CERTIFICATES--Under penalties of perjury, I
certify that:
Employer
identification
numbers
(1) The number shown on this form is my correct
taxpayer identification number (or I am waiting
for a number to be issued for me), and
(2) I am not subject to backup withholding because:
(a) I am exempt from backup withholding, or (b)
I have not been notified by the internal
Revenue Service (IRS) that I am subject to
backup withholding as a result of a failure to
report all interest or dividends, or (c) the
IRS has notified me that I am no longer subject
to backup withholding.
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER ("TIN")
------------------------------------------------------
CERTIFICATION INSTRUCTIONS--You must cross out
item (2) above if you have been notified by the
IRS that you are currently subject to backup
withholding because of underreporting interest
or dividends on your tax return.
------------------------------------------------------
PART 3
SIGNATURE: ______________ DATE: ______ Awaiting
TIN [_]
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF THE SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (1) I have mailed or
delivered an application to receive a taxpayer identification number to
the appropriate Internal Revenue Service Center or Social Security
Administration Office of (2) I intend to mail or deliver an application in
the near future. I understand that if I do not provide a taxpayer
identification number by the time of payment, 31% of all payments of the
Purchase Price made to me thereafter will be withheld until I provide a
number.
Signature ___________________________ Date ____________________
10
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND INITIAL NOTES: GUARANTEED
DELIVERY PROCEDURES. To be effectively tendered pursuant to the Offer, the
Initial Notes, together with a properly completed Letter of Transmittal (or
manually signed facsimile hereof) duly executed by the Registered Holder
thereof, and any other documents required by this Letter of Transmittal must
be received by the Exchange Agent at one of its addresses set forth on the
front page of this Letter of Transmittal and tendered Initial Notes must be
received by the Exchange Agent at one of such addresses on or prior to the
Expiration Date; provided, however, that book-entry transfers of Initial Notes
may be effected in accordance with the procedures set forth in the Exchange
Offer under the caption "The Exchange Offer--Procedures For Tendering Initial
Notes--Book-Entry Delivery." If the Beneficial Owner of any Initial Notes is
not the Registered Holder, then such person may validly tender such person's
Initial Notes only by obtaining and submitting to the Exchange Agent a
properly completed Letter of Transmittal from the Registered Holder. LETTERS
OF TRANSMITTAL OF INITIAL NOTES SHOULD BE DELIVERED ONLY BY HAND OR BY
COURIER, OR TRANSMITTED BY MAIL, AND ONLY TO THE EXCHANGE AGENT AND NOT TO THE
COMPANY OR TO ANY OTHER PERSON.
THE METHOD OF DELIVERY OF INITIAL NOTES AND ALL OTHER REQUIRED DOCUMENTS TO
THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IF INITIAL NOTES ARE SENT BY
MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Initial Notes and such holder's Initial Notes
are not immediately available or time will not permit such holder to complete
the procedures for book-entry transfer on a timely basis or time will not
permit such holder's Letter of Transmittal and other required documents to
reach the Exchange Agent on or before the Expiration Date, such holder's
tender may be effected if:
(a) such tender is made by or through an Eligible Institution (as defined
below);
(b) on or prior to the Expiration Date, the Exchange Agent has received a
telegram, facsimile transmission or letter form such Eligible Institution
setting forth the name and address of the holder of such Initial Notes, the
certificate number(s) of such Initial Notes (except in the case of book-
entry tenders) and the principal amount of Initial Notes tendered and
stating that the tender is being made thereby and guaranteeing that, within
three business days after the Expiration Date, a duly executed Letter of
Transmittal, or facsimile thereof, together with the Initial Notes, and any
other documents required by this Letter of Transmittal and Instructions,
will be deposited by such Eligible Institution with the Exchange Agent; and
(c) this Letter of Transmittal, or a manually signed facsimile hereof,
and Initial Notes, in proper form for transfer (or a Book-Entry
confirmation with respect to such Initial Notes), and all other required
documents are received by the Exchange Agent within three business days
after the Expiration Date.
2. WITHDRAWAL OF TENDERS. Tendered Initial Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must (i) be timely received by the Exchange Agent at one of its
addresses set forth on the first page of this Letter of Transmittal before the
Exchange Agent receives notice of acceptance from the Company, (ii) specify
the name of the person who tendered the Initial Notes, (iii) contain the
description of the Initial Notes to be withdrawn, the certificate number(s) of
such Initial Notes (except in the case of book-entry tenders) and the
aggregate principal amount represented by such Initial Notes or a Book-Entry
Confirmation with respect to such Initial Notes, and (iv) be
11
<PAGE>
signed by the holder of such Initial Notes in the same manner as the original
signature appears on this Letter of Transmittal (including any required
signature guarantees) or be accompanied by evidence satisfactory to the
Company that the person withdrawing the tender has succeeded to the beneficial
ownership of the Initial Notes. The signature(s) on the notice of withdrawal
must be guaranteed by an Eligible Institution unless such Initial Notes have
been tendered (i) by a Registered Holder (which term for purposes of this
document shall include any participant tendering by book-entry transfer) of
Initial Notes who has not completed either the box entitled "Special Exchange
Instructions" or the box entitled "Special Delivery Instructions" on this
Letter of Transmittal or (ii) for the account of an Eligible Institution. If
the Initial Notes have been tendered pursuant to the procedure for book-entry
tender set forth in the Exchange Offer under the caption "Procedure for
Tendering Initial Notes," a notice of withdrawal is effective immediately upon
receipt by the Exchange Agent of a written, telegraphic or facsimile
transmission notice of withdrawal even if physical release is not yet
effected. In addition, such notice must specify, in the case of Initial Notes
tendered by delivery of such Initial Notes, the name of the Registered Holder
(if different from that of the tendering holder) to be credited with the
withdrawn Initial Notes. Withdrawals may not be rescinded, and any Initial
Notes withdrawn will thereafter be deemed not validly tendered for purposes of
the Offer. However, properly withdrawn Initial Notes may be retendered by
following one of the procedures described under "The Exchange Offer--
Procedures for Tendering Initial Notes" in the Exchange Offer at any time on
or prior to the applicable Expiration Date.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
Registered Holder of the Initial Notes tendered hereby, the signature must
correspond exactly with the name as written on the face of the Initial Notes
without any change whatsoever.
If any Initial Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Initial Notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Initial Notes.
When this Letter of Transmittal is signed by the Registered Holder or
Holders specified herein and tendered hereby, no endorsements of such Initial
Notes or separate bond powers are required. If, however, Exchange Notes are to
be issued, or any untendered principal amount of Initial Notes are to be
reissued to a person other than the Registered Holder, then endorsements of
any Initial Notes transmitted hereby or separate bond powers are required.
If this Letter of Transmittal is signed by a person other than the
Registered Holder or Holders, such Initial Notes must be endorsed or
accompanied by appropriate bond powers, in either case signed exactly as the
name or names of the Registered Holder or Holders appear(s) on the Initial
Notes.
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
Initial Notes or bond powers are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
Except as describe in this paragraph, signatures on this Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed
by an Eligible Institution which is a firm which is a member of a registered
national securities exchange or the National Association of Securities
Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or otherwise be an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (each
an "Eligible Institution"). Signatures on this Letter of Transmittal or a
notice of withdrawal, as the case may be, need not be guaranteed if the
Initial Notes tendered pursuant hereto are tendered (i) by a Registered Holder
of Initial Notes who has not completed either the box entitled "Special
Exchange Instructions" or the box entitled "Special Delivery Instructions" on
this Letter of Transmittal or (ii) for the account of an Eligible Institution.
12
<PAGE>
Endorsement on Initial Notes or signatures on bond forms required by this
Instruction 3 must be guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate in the applicable box the name and address to which Exchange Notes
and/or substitute Initial Notes for the principal amounts not exchanged are to
be issued or sent, if different from the name and address of the person
signing this Letter of Transmittal. In the case of issuance in a different
name, the employer identification or social security number of the person
named must also be indicated. If no such instructions are given, such Initial
Notes not exchanged will be returned to the name and address of the person
signing this Letter of Transmittal.
5. TAXPAYER IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal income tax
law of the United States requires that a holder of Initial Notes whose Initial
Notes are accepted for exchange provide the Company with such holder's correct
taxpayer identification number, which, in the case of a holder who is an
individual, is the holder's social security number, or otherwise establish an
exemption from backup withholding. If the Company is not provided with the
holder's correct taxpayer identification number, the exchanging holder of
Initial Notes may be subject to a penalty imposed by the Internal Revenue
Service. In addition, interest on the Exchange Notes acquired pursuant to the
Offer may be subject to backup withholding in an amount equal to 31 percent of
any interest payment. If withholding occurs and results in an overpayment of
taxes, a refund may be obtained from the Internal Revenue Service by filing a
return.
To prevent backup withholding, each exchanging holder of Initial Notes
subject to backup withholding must provide his correct taxpayer identification
number by completing the Substitute Form W-9 provided in this Letter of
Transmittal, certifying that the taxpayer identification number provided is
correct (or that the exchanging holder of Initial Notes is awaiting a taxpayer
identification number) and that either (a) the exchanging holder has not been
notified by the Internal Revenue Service that he is subject to backup
withholding as a result of failure to report all interest or dividends or (b)
the Internal Revenue Service has notified the exchanging holder that he is no
longer subject to backup withholding.
Certain exchanging holders of Initial Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. A foreign individual and other exempt holders (e.g.,
corporations) should certify, in accordance with the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9, to
such exempt status on the Substitute Form W-9 provided in this Letter of
Transmittal. Nonresident aliens should submit Form W-8, available from the
Exchange Agent upon request.
6. TRANSFER TAXES. Holders tendering pursuant to the Offer will not be
obligated to pay brokerage commissions or fees or to pay transfer taxes with
respect to their exchange under the Offer unless the box entitled "Special
Issuance Instructions" in this Letter of Transmittal has been completed, or
unless the securities to be received upon exchange are to be issued to any
person other than the holder of the Initial Notes tendered for exchange. The
Company will pay all other charges or expenses in connection with the Offer.
If holders tender Initial Notes for exchange and the Offer is not consummated,
such Initial Notes will be returned to the holders at the Company expense.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Initial Notes specified in this
Letter of Transmittal.
7. INADEQUATE SPACE. If the space provided herein is inadequate, the
aggregate principal amount of the Initial Notes being tendered and the
security numbers (if available) should be listed on a separate schedule
attached hereto and separately signed by all parties required to sign this
Letter of Transmittal.
8. PARTIAL TENDERS. Tenders of Initial Notes will be accepted only in
integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Initial Notes, fill in the principal
amount of Initial Notes which are tendered in column (iv) of the "Description
of Initial Notes." In the
13
<PAGE>
case of partial tenders, the Initial Notes in fully registered form for the
remainder of the principal amount of the Initial Notes will be sent to the
persons(s) signing this Letter of Transmittal, unless otherwise indicated in
the appropriate place on this Letter of Transmittal, as promptly as
practicable after the expiration or termination of the Offer.
Unless otherwise indicated in column (iv) in the box labeled "Description of
Initial Notes," and subject to the terms and conditions of the Offer, tenders
made pursuant to this Letter of Transmittal will be deemed to have been made
with respect to the entire aggregate principal amount represented by the
Initial Notes indicated in column (iii) of such box.
9. MUTILATED, LOST, STOLEN OR DESTROYED INITIAL NOTES. Any holder whose
Initial Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated above for further instructions.
10. VALIDITY AND ACCEPTANCE OF TENDERS. All questions as to the validity,
form, eligibility (including time of receipt), acceptance and withdrawal of
Initial Notes tendered for exchange will be determined by the Company in its
sole discretion, which determination shall be final and binding. The Company
reserves the absolute right to reject any and all Initial Notes not properly
tendered and to reject any Initial Notes the Company's acceptance of which
might, in the judgment of the Company or its counsel, be unlawful. The Company
also reserves the absolute right to waive any defects or irregularities or
conditions of the Exchange Offer as to particular Initial Notes either before
or after the Expiration Date (including the right to waive the ineligibility
of any holder who seeks to tender Initial Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer (including
the Letter of Transmittal and the instructions thereto) by the Company shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Initial Notes for exchange must
be cured within such period of time as the Company shall determine. The
Company will use reasonable efforts to give notification of defects or
irregularities with respect to tenders of Initial Notes for exchange but shall
not incur any liability for failure to give such notification. Tenders of the
Initial Notes will not be deemed to have been made until such irregularities
have been cured or waived.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. First Union National Bank
is the Exchange Agent. All tendered Initial Notes, executed Letters of
Transmittal and other related documents should be directed to the Exchange
Agent at the addresses or facsimile number set forth on the first page of this
Letter of Transmittal. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other
related documents should be addressed to the Exchange Agent as follows:
First Union Customer Information Center
Reorganization Department, 3C3-NC 1153
1525 West W.T. Harris Boulevard
Charlotte, NC 28262
Facsimile Transmission:
(704) 590-7628
To Confirm Receipt:
(704) 590-7408
14
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
9 7/8% SENIOR NOTES DUE 2008
FOR A NEW SERIES OF ITS
9 7/8% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED JULY 16, 1998
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON AUGUST 14 1998
UNLESS EXTENDED.
- -------------------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration is a Prospectus dated July 16, 1998
("Prospectus") and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Exchange
Offer") relating to an offer by Primus Telecommunications Group, Inc., a
Delaware corporation ("Company"), to exchange all its outstanding 9 7/8%
Senior Notes due 2008 ("Initial Notes") for a new series of its 9 7/8% Senior
Notes due 2008 upon the terms and subject to the conditions set forth in the
Exchange Offer.
WE ARE THE HOLDER OF RECORD OF INITIAL NOTES HELD BY US FOR YOUR ACCOUNT. A
TENDER FOR EXCHANGE OF SUCH INITIAL NOTES CAN BE MADE ONLY BY US AS THE HOLDER
OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
FOR EXCHANGE INITIAL NOTES HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to have us tender for
exchange on your behalf any or all of such Initial Notes held by us for your
account, pursuant to the terms and subject to the conditions set forth in the
Exchange Offer.
Your attention is directed to the following:
1. The Exchange Offer and withdrawal rights will expire at 5:00 P.M., New
York City time, on August 14, 1998, unless the Exchange Offer is extended.
Your instructions to us should be forwarded to us in ample time to permit
us to submit a tender on your behalf.
2. The Exchange Offer is made for all Initial Notes outstanding,
constituting $150,000,000 aggregate principal amount as of the date of the
Prospectus.
3. The minimum permitted tender is $1,000 principal amount of Initial
Notes, and all tenders must be in integral multiples of $1,000.
4. The Offer is conditioned upon the satisfaction of certain conditions
set forth in the Prospectus under the caption "The Exchange Offer--
Conditions of the Exchange Offer." The Exchange Offer is not conditioned
upon any minimum principal amount of Initial Notes being tendered for
exchange.
5. Tendering Holders (as defined in the Prospectus) will not be obligated
to pay brokerage fees or commissions or, except as set forth in Instruction
6 of the Letter of Transmittal, transfer taxes applicable to the exchange
of Initial Notes pursuant to the Exchange Offer.
<PAGE>
6. In all cases, exchange of Initial Notes tendered and accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by First Union National Bank ("Exchange Agent") of (i) certificates
representing such Initial Notes or timely confirmation of a book-entry
transfer of such Initial Notes into the Exchange Agent's account at The
Depository Trust Company ("Book-Entry Transfer Facility") pursuant to the
procedures set forth in the Prospectus under the caption "The Exchange
Offer--Procedures for Tendering Initial Notes," (ii) the Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed,
with any required signature guarantees, or an Agent's Message (as defined
in the Prospectus) in connection with a book-entry transfer, and (iii) any
other documents required by the Letter of Transmittal. Accordingly, payment
may be made to tendering Holders at different times if delivery of the
Initial Notes and other required documents occurs at different times.
The Exchange Offer is being made solely by the Prospectus and the related
Letter of Transmittal and is being made to all Holders of Initial Notes. The
Company is not aware of any state where the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to any valid state
statute. If the Company becomes aware of any valid state statute prohibiting
the making of the Exchange Offer or the acceptance of Initial Notes tendered
for exchange pursuant thereto, the Company will make a good faith effort to
comply with any such state statute or seek to have such statute declared
inapplicable to the Exchange Offer. If, after such good faith effort, the
Company cannot comply with such state statute the Exchange Offer will not be
made to, nor will tenders be accepted from or on behalf of, the holders of
Initial Notes in such state. In any jurisdiction where the securities, blue
sky or other laws require the Exchange Offer to be made by a licensed broker
or dealer, the Exchange Offer shall be deemed to be made on behalf of the
Company by one or more registered brokers or dealers that are licensed under
the laws of such jurisdiction.
If you wish to have us tender any or all of the Initial Notes held by us for
your account, please instruct us by completing, executing and returning to us
the instruction form contained in this letter. If you authorize a tender for
exchange of your Initial Notes, the entire aggregate principal amount of such
Initial Notes will be tendered for exchange unless otherwise specified in such
instruction form. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO
PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE
EXCHANGE OFFER.
2
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER AND/OR BOOK-ENTRY
TRANSFER PARTICIPANT FROM OWNER WITH RESPECT TO THE
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
9 7/8% SENIOR NOTES DUE 2008
FOR A NEW SERIES OF ITS
9 7/8% SENIOR NOTES DUE 2008
TO REGISTERED HOLDER AND/OR PARTICIPANT OF THE BOOK-ENTRY TRANSFER FACILITY:
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus dated July 16, 1998, and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute
the "Exchange Offer") pursuant to an offer by Primus Telecommunications Group,
Inc., a Delaware corporation, to exchange all of its outstanding 9 7/8% Senior
Notes due 2008 ("Initial Notes") for a new series of its 9 7/8% Senior Notes
due 2008 ("Exchange Notes"). Capitalized terms used but not defined herein
have the meanings ascribed to them in the Prospectus.
This will instruct you to tender the principal amount of Initial Notes
indicated below (or, if no number is indicated below, the entire aggregate
principal amount) which are held by you for the account of the undersigned,
upon the terms and subject to the conditions set forth in the Exchange Offer.
The aggregate face amount of the Initial Notes held by you for the account
of the undersigned is (fill in amount):
$ of the 9 7/8% Senior Notes Due 2008.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[_]To TENDER the following Initial Notes held by you for the account of the
undersigned (insert principal amount of Initial Notes to be tendered (if
any)*:
$ of the 9 7/8% Senior Notes Due 2008.
[_]NOT to TENDER any Initial Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Initial Notes held by you for
the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representation and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations, that
(i) the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the undersigned, (ii) neither
the undersigned nor any such other person has an arrangement or understanding
with any person to participate in the distribution of such Exchange Notes,
(iii) if the undersigned is not a broker-dealer, or is a broker-dealer but
will not receive Exchange Notes for its own account in exchange for Initial
Notes, neither the undersigned nor any such other person is engaged in or
intends to participate in the distribution of such Exchange Notes and (iv)
neither the undersigned nor any such other person is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act of 1933, as
amended (the "Securities Act") or, if the undersigned is an "affiliate," that
the undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the
undersigned is a broker-dealer (whether or not it is also an "affiliate") that
will receive Exchange Notes for its own account in exchange for Initial Notes,
it represents that such Initial Notes were acquired as a result of
- --------
* Unless otherwise indicated, it will be assumed that the entire principal
amount of the Initial Notes held by us for your account are to be tendered for
exchange. The minimum permitted tender is $1,000 principal amount of Initial
Notes; all other tenders must be in integral multiples of $1,000.
<PAGE>
marketing-making activities or other trading activities, and it acknowledges
that it will deliver a prospectus meeting the requirements of the Securities
Act in connection with any resale of such Exchange Notes. By acknowledging that
it will deliver and by delivering a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes, the
undersigned is not deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
SIGN HERE
Name of Beneficial Owner(s): ___________________________________________________
Signature(s): __________________________________________________________________
Name(s) (please print): ________________________________________________________
Address: _______________________________________________________________________
________________________________________________________________________________
Telephone Number: ______________________________________________________________
Taxpayer identification or Social Security Number: _____________________________
________________________________________________________________________________
Date: __________________________________________________________________________
2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
9 7/8% SENIOR NOTES DUE 2008
FOR A NEW SERIES OF ITS
9 7/8% SENIOR NOTES DUE 2008
- -------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON AUGUST 14, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
- -------------------------------------------------------------------------------
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Primus Telecommunications Group, Inc., a Delaware corporation ("Company"),
is offering to exchange all of its outstanding 9 7/8% Senior Notes due 2008
("Initial Notes") for a new series of its 9 7/8% Senior Notes due 2008 upon
the terms and subject to the conditions set forth in the Prospectus dated July
16, 1998 ("Prospectus") and in the related Letter of Transmittal (which,
together with any amendment or supplements thereto, collectively constitute
the "Exchange Offer") enclosed herewith.
The Exchange Offer is conditioned upon satisfaction of certain conditions
set forth in the Prospectus under the caption "The Exchange Offer--Conditions
of the Exchange Offer." The Exchange Offer is not conditioned upon any minimum
principal amount of Initial Notes being tendered for exchange.
Enclosed herewith for your information and forwarding to your clients for
whose accounts you hold Initial Notes registered in your name or in the name
of your nominee are copies of the following documents:
1. The Prospectus dated July 16, 1998.
2. The blue Letter of Transmittal to tender Initial Notes for exchange
(for your use and for the information of your clients). Facsimile copies of
the Letter of Transmittal may be used to tender Initial Notes for exchange.
3. The green Notice of Guaranteed Delivery (to be used to tender Initial
Notes for exchange if certificates for Initial Notes are not immediately
available or if such certificates for Initial Notes and all other required
documents cannot be delivered to First Union National Bank ("Exchange
Agent") on or prior to the Expiration Date or if the procedures for book-
entry transfer cannot be completed on a timely basis).
4. A yellow printed form of letter which may be sent to your clients for
whose accounts you hold Initial Notes registered in your name or in the
name of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exchange Offer.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
6. A return envelope addressed to the Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTRACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL
RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON AUGUST 14, 1998,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
<PAGE>
In order for Initial Notes to be validly tendered pursuant to the Exchange
Offer, (i) a duly executed and properly completed Letter of Transmittal (or a
facsimile thereof) together with any required signature guarantees, or an
Agent's Message (as defined in the Prospectus) in connection with a book-entry
delivery of Initial Notes, and any other documents required by the Letter of
Transmittal, must be received by the Depositary on or prior to the Expiration
Date, and (ii) either certificates representing tendered Initial Notes must be
received by the Exchange Agent or such Initial Notes must be tendered by book-
entry transfer into the Exchange Agent account maintained at the Book-Entry
Transfer Facility (as described in the Prospectus), and Book-Entry
Confirmation must be received by the Exchange Agent, all in accordance with
the instructions set forth in the Letter of Transmittal and the Prospectus
If Holder (as defined in the Prospectus) desires to tender Initial Notes for
exchange pursuant to the Exchange Offer and such Holder's Initial Note
certificates are not immediately available or such Holder cannot deliver the
Initial Note certificates and all other required documents to the Exchange
Agent on or prior to the Expiration Date, or such Holder cannot complete the
procedure for delivery by book-entry transfer on a timely basis, such Initial
Notes may nevertheless be tendered for exchange by following the guaranteed
delivery procedures specified in the Prospectus under the caption "The
Exchange Offer--Procedures for Tendering Initial Notes--Guaranteed Delivery
Procedures."
The Company will not pay any fees or commissions to any broker or dealer or
any other person for soliciting tenders of Initial Notes pursuant to the
Exchange Offer. The Company will, however, upon request, reimburse you for
customary mailing and handling expenses incurred by you in forwarding any of
the enclosed materials to your clients. The Company will pay or cause to be
paid any transfer taxes applicable to the exchange of Initial Notes pursuant
to the Exchange Offer, except as otherwise provided in Instruction 6 of the
Letter of Transmittal.
Any inquires you may have with respect to the Exchange Offer should be
addressed to the Exchange Agent, at its address and telephone numbers set
forth on the back cover of the Prospectus. Additional copies of the enclosed
material may be obtained from the Exchange Agent.
Very truly yours,
Primus Telecommunications Group,
Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS THEREIN.
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<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
9 7/8% SENIOR NOTES DUE 2008
FOR A NEW SERIES OF ITS
9 7/8% SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED JULY 16, 1998
As set forth in Prospectus described below, this Notice of Guaranteed
Delivery or one substantially equivalent hereto must be used to tender for
exchange 9 7/8% Senior Notes due 2008 ("Initial Notes"), of Primus
Telecommunications Group, Inc., a Delaware corporation ("Company"), pursuant
to the Exchange Offer (as defined below) if certificates for Initial Notes are
not immediately available or the certificates for Initial Notes and all other
required documents cannot be delivered to the Exchange Agent on or prior to
the Expiration Date (as defined in the Prospectus), or if the procedures for
delivery by book-entry transfer cannot be completed on a timely basis. This
instrument may be delivered by hand or transmitted by facsimile transmission
or mail to the Exchange Agent.
The Exchange Agent for the Exchange Offer is:
FIRST UNION NATIONAL BANK
By Mail, Hand or Overnight Delivery: By Facsimile Transmission:
First Union Customer Information (704) 590-7628
Center
Confirm by Telephone:
Reorganization Department, 3C3-NC
1153
1525 West W.T. Harris Boulevard (704) 590-7408
Charlotte, NC 28262-1153
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the Instructions to the Letter of
Transmittal, such signature guarantee must appear in the applicable space
provided in the signature box in the Letter of Transmittal.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON AUGUST 14, 1998, UNLESS THE EXCHANGE OFFER IS EXTENDED.
<PAGE>
LADIES AND GENTLEMEN:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus dated July 16, 1998 ("Prospectus")
and in the related Letter of Transmittal (which, together with any amendments
or supplements thereto, collectively constitute the "Exchange Offer"), receipt
of each of which is hereby acknowledged, the principal amount of Initial Notes
indicated below pursuant to the guaranteed delivery procedures set forth in
the Prospectus under the caption "The Exchange Offer--Procedures for Tendering
Initial Notes--Guaranteed Delivery Procedures."
Signature(s) __________________________________________________________________
Name(s) of Eligible Holders ___________________________________________________
PLEASE TYPE OR PRINT
Principal Amount of Initial Notes Tendered for Exchange $ _____________________
Initial Note Certificate No(s). (If available) ________________________________
Dated , 199
Address(es) ___________________________________________________________________
ZIP CODE
Area Code and Tel. No.(s) _____________________________________________________
(Check box if shares will be tendered by book-entry transfer)
[_] The Depository Trust Company
DTC Account Number __________________________________________________________
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<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an Eligible Institution (as defined in the Prospectus),
having an office or correspondent in the United States, hereby (a) represents
that the above named person(s) "own(s)" the Initial Notes tendered hereby
within the meaning of Rule 14e-4 promulgated under the Securities Exchange Act
of 1934, as amended ("Rule 14e-4"), (b) represents that such tender of Initial
Notes complies with Rule 14e-4, and (c) guarantees to either deliver to the
Exchange Agent the certificates representing all the Initial Notes tendered
hereby, in proper form for transfer, or to deliver such Initial Notes pursuant
to the procedure for book-entry transfer into the Exchange Agent's account at
The Depository Trust Company, in either case together with the Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed,
with any required signature guarantees or an Agent's Message (as defined in
the Prospectus) in the case of a book-entry transfer, and any other required
documents, all within three New York Stock Exchange trading days after the
date hereof.
_____________________________________ _____________________________________
NAME OF FIRM
AUTHORIZED SIGNATURE
_____________________________________ _____________________________________
ADDRESS
PLEASE TYPE OR PRINT
_____________________________________ _____________________________________
ZIP CODE DATE
NOTE: DO NOT SEND CERTIFICATES FOR INITIAL NOTES WITH THIS NOTICE.
CERTIFICATES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
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