<PAGE>
As filed with the Securities and Exchange Commission on May 6, 1999
Registration No. 333-76965
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
(Primary Standard (I.R.S.
(State or Incorporation) Industrial EmployerIdentification
Classification Code Number)
Number)
----------------
1700 Old Meadow Road, Suite 300
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, Suite 300
McLean, Virginia 22102
(703) 902-2800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
With Copies to:
James D. Epstein, Esquire Robert Stankey, Esquire
Pepper Hamilton LLP 1700 Old Meadow Road, Suite 300
3000 Two Logan Square McLean, Virginia 22102
18th and Arch Streets (703) 902-2800
Philadelphia, Pennsylvania 19103
(215) 981-4000
----------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable aftert his Registration Statement becomes effective.
----------------
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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Information Regarding Forward-Looking Statements.......................... i
Summary................................................................... 1
Risk Factors.............................................................. 10
Use of Proceeds........................................................... 23
The Exchange Offer........................................................ 24
Capitalization............................................................ 33
Selected Financial Data................................................... 34
Unaudited Pro Forma Financial Data........................................ 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 39
Business.................................................................. 49
</TABLE>
<TABLE>
<S> <C>
Management.................................................................. 79
Transactions with Affiliates and Others..................................... 93
Principal Stockholders...................................................... 96
Description of Other Indebtedness........................................... 98
Description of Exchange Notes............................................... 101
Federal Income Tax Considerations........................................... 134
Plan of Distribution........................................................ 137
Available Information....................................................... 138
Incorporation of Certain Documents by Reference............................. 138
Legal Matters............................................................... 138
Experts..................................................................... 138
Index to Financial Statements............................................... F-1
</TABLE>
----------------
In this prospectus, we use: "dollars" and "$" to refer to United States
dollars; "C$" to refer to Canadian dollars; "DM" to refer to deutsche marks;
"(Yen)" to refer to Japanese yen; "FF" to refer to French francs; and "A$" to
refer to Australian dollars.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
We have included in this Prospectus statements that are not historical
facts. These statements can be identified by the use of forward-looking
terminology such as "believes," "estimates," "expects," "intends," "may,"
"will," "should," or "anticipates." In addition, from time to time, we or our
representatives have made or may make forward-looking statements, orally or in
writing. Forward-looking statements also may be included in, but are not
limited to, various filings that we have made with the SEC, in press releases
or in oral statements made by or with the approval of one of our authorized
executive officers. We wish to caution the reader that the forward-looking
statements referred to above involve predictions. We cannot give you any
assurance that the future results will be achieved or that, if achieved, such
results will be indicative of the results in subsequent periods. Actual events
or results may differ materially as a result of risks facing us. Such risks
include those associated with:
. changes in the telecommunications industry and the general economy;
. the competition we face;
. changes in service offerings;
. our limited operating history;
. our entry into developing markets;
. our ability to manage rapid growth;
. acquisitions and strategic investments;
. international operations;
. our dependence on effective information and billing systems;
. our ability to develop and manage our communications network; and
. regulatory developments
We undertake no obligation to update or revise publicly any forward-looking
statement, whether as a result of new information, future events or otherwise.
All subsequent written and oral forward-looking statements attributable to us
or persons acting on our behalf are expressly qualified in their entirety by
the cautionary statements contained throughout this prospectus.
i
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this preliminary prospectus is not complete and may be+
+ changed. This preliminary prospectus is not an offer to sell these securities+
+ and is not soliciting an offer to buy these securities in any state where the+
+ offer or sale is not permitted.+
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
The information in this prospectus will be amended or completed, dated May 6,
1999
PROSPECTUS
- --------------------------------------------------------------------------------
Offer to exchange all outstanding
11 1/4% Senior Notes due 2009 for
11 1/4% Senior Notes due 2009
which have been registered under
the Securities Act of 1933
Primus Telecommunications Group, Incorporated
- --------------------------------------------------------------------------------
Primus Telecommunications Group, Incorporated offers to exchange all of its
outstanding 11 1/4% Senior Notes due 2009 for 11 1/4% Senior Notes due 2009
which are registered under the Securities Act. The terms of the new notes are
substantially identical to the existing notes, except that the new notes will
be freely tradeable.
Investing in the new notes involves risks. "Risk Factors" begin on page 10.
The Exchange Offer expires at 5:00 p.m., New York City time, on June 9, 1999,
unless extended. All unregistered notes that are validly tendered and not
withdrawn will be exchanged. Tenders of unregistered notes may be withdrawn at
any time prior to the expiration of the Exchange Offer.
We will not receive any proceeds from the Exchange Offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the new notes or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 1999.
<PAGE>
SUMMARY
This summary highlights some of the information in this prospectus. Because
this is only a summary, it does not contain all of the information that may be
important to you. To understand this Exchange Offer, the new notes and our
business, you should read the entire prospectus, especially "Risk Factors" and
the Consolidated Financial Statements and notes.
Primus
We are a facilities-based global telecommunications company. We offer
international and domestic long distance and other telecommunications services
to business, residential and carrier customers. Our customers are primarily in
North America and selected markets within both the Asia-Pacific region and
Europe. We seek to capitalize on the increasing demand for high-quality
international telecommunications services. The globalization of the world's
economies, the worldwide trend toward telecommunications deregulation and the
growth of data and Internet traffic is fueling this demand.
We are a full-service carrier and have licenses and operations in the United
States, Australia, the United Kingdom, Japan, Germany and Canada. We recently
obtained licenses to provide service in France, Ireland and Switzerland. We had
net revenue and pro forma net revenue, after giving effect to our merger with
TresCom International, Inc., as follows:
<TABLE>
<CAPTION>
Year Ended Revenue
---------- --------------
<S> <C>
December 31, 1996 $173.0 million
December 31, 1997 $280.2 million
December 31, 1998 $421.6 million
December 31, 1998 (pro forma) $485.2 million
</TABLE>
We primarily target customers with significant international long distance
usage, including small- and medium-sized businesses, multinational
corporations, ethnic residential customers and other telecommunications
carriers and resellers. We provide our approximately 450,000 customers with
competitively priced telecommunications services, including:
.international and domestic long distance services and private networks;
.reorigination services; prepaid and calling cards and toll-free
services;
.local services in Australia, Puerto Rico and the United States Virgin
Islands;
.data, Internet and cellular services in Australia; and
.Internet services in Canada
In an effort to attract larger business customers in multiple markets, we
intend to offer a broad array of services (including long distance voice,
cellular, Internet and data services) in approximately 10 markets, including
the United States, Australia, the United Kingdom, Germany, France, Canada,
Japan and Italy. We market our services through a variety of channels,
including through our direct sales force, through independent agents, and
through direct marketing.
Our Telecommunications Network
We have been able to reduce our costs, improve our service reliability and
increase our flexibility to introduce new products and services by constructing
and expanding our telecommunications network. As a
1
<PAGE>
result, we increased our gross margin as a percentage of net revenue (after
accounting for bad debt) to 17.8% in the fourth quarter of 1998 from 6.8% in
the first quarter of 1997. We believe that we should continue to improve our
profitability as the volume of telecommunications traffic carried on our
network increases and we realize economies of scale. Currently, 24 countries
are connected directly to our network. We expect to continue to expand our
network through additional investment in undersea and domestic fiber optic
cable systems, international gateway and domestic switching facilities and
international satellite earth stations as customer demand justifies the capital
investment.
Our network consists of 16 carrier-grade switches including 12 international
gateway switches. All of our switches are capable of transmitting both voice
and data, and, other than the Canadian and Washington switches, were
manufactured by either Nortel or Ericsson. We also have 25 points of presence
in additional markets within our principal service regions. Our international
gateway switches will serve as the base for the global expansion of our network
into new countries when customer demand justifies such investment and as
regulatory rules permit us to compete in new markets. We are currently
installing an international gateway switch in France, which is expected to be
operational during the second quarter of 1999. By the end of 2000, we intend to
add up to 11 additional switches in Europe, one switch in North America and one
switch in Japan.
We own and lease transmission capacity, including interests in 23 undersea
fiber optic cable systems, which connects our switches to each other and to the
networks of other international and domestic telecommunications carriers. In
September 1998, we entered into an agreement to purchase $20 million of fiber
capacity from Qwest Communications International Inc., which will provide high
speed connections among our U.S. gateway switches. We expect to continue to
acquire additional capacity on both existing and future international and
domestic fiber optic cable systems as demand justifies such investments.
We are constructing international satellite earth stations and purchasing
capacity on international satellites in order to provide data and Internet
transmission services, principally in developing countries, to and from
primarily the incumbent carriers, other telecommunications carriers and
Internet service providers. Our operational Intelsat earth station located in
London and our capacity on the Intelsat-64 satellite permits us to carry voice,
data and Internet traffic to and from countries in the Indian Ocean/Southeast
Asia region. By the end of 1999, we expect to expand our global satellite
coverage by constructing an additional satellite earth station on each of the
east and west coasts of the United States and by reserving additional capacity
on international satellites. These additional facilities will position us to
provide voice, data and Internet transmission services to Latin America and the
Pacific Rim.
We enter into foreign carrier agreements with the incumbent carriers or
other service providers in a particular country, permitting us to carry traffic
into and receive return traffic from those countries where competition with the
incumbent carriers is limited or is prohibited.
Our Business Strategy
Our objective is to become a leading global provider of international and
domestic long distance voice, Internet, data and other services in our
principal service regions. Key elements of our strategy to achieve this
objective include:
.Focusing on Customers with Significant International Long Distance
Usage;
.Pursuing Early Entry into Selected Deregulating Markets;
.Expanding our Global Network;
.Expanding our Service Offerings to Become a Full-Service Carrier in
Selected Deregulating Markets;
2
<PAGE>
.Providing Transmission for Internet and Data Services in Developing
Countries;
.Delivering a Broad Selection of Quality Services at Competitive Prices;
and
.Growth through Selected Acquisitions, Joint Ventures and Strategic
Investments.
As of May 4, 1999, our equity market capitalization was $419,486,254, based
upon a closing price of $14.75 per share and 28,439,746 shares of Common Stock
outstanding.
Our executive offices are located at 1700 Old Meadow Road, McLean, Virginia
22102, and our telephone number is (703) 902-2800.
3
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer.......... We are offering to exchange $1,000 in principal
amount of our 11 1/4% Senior Notes due 2009
registered under the Securities Act for each
$1,000 in principal amount of the outstanding
unregistered 11 1/4% Senior Notes due 2009. As of
the date of this prospectus, $200.0 million in
aggregate principal amount of the unregistered
notes is outstanding.
Expiration Date.............
5:00 p.m., New York City time, on June 9, 1999,
unless we extend the Exchange Offer.
Conditions of the Exchange The exchange offer is not conditioned upon any
Offer...................... minimum principal amount of unregistered notes
being tendered for exchange. The exchange offer
is subject to the condition that it does not
violate any applicable law or interpretation of
the staff of the SEC. In addition, as a condition
to its participation in the Exchange Offer, each
holder of unregistered notes will be required to
furnish certain written representations to us.
Accrued Interest on the
Unregistered Notes.........
The new notes will bear interest at a rate equal
to 11 1/4% per annum. We will pay to those
holders whose unregistered notes are accepted for
exchange the accrued interest on the unregistered
notes from the date of original issuance or the
last interest payment date, to, but excluding,
the date of issuance of the new notes. Such
interest is payable with the first interest
payment on the new notes. Interest on the
unregistered notes accepted for exchange, which
accrues at the rate of 11 1/4% per annum, will
cease to accrue on the day prior to the issuance
of the new notes.
Procedures for Tendering Unless a tender of unregistered notes is effected
Initial Notes.............. pursuant to the procedures for book-entry
transfer, to accept the exchange offer you must
complete and sign the letter of transmittal, have
your signature guaranteed if required by the
letter of transmittal, and mail or deliver the
letter of transmittal, together with the
unregistered notes and any other required
documents, 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. If you are the
beneficial owner of unregistered notes which are
registered in the name of a nominee, such as a
broker, dealer, commercial bank or trust company,
and you wish to tender unregistered notes in the
exchange offer, you should instruct such entity
or person to promptly tender on your behalf. If
you tender unregistered notes for exchange, you
must represent to us that, among other things,
(i) neither you nor any beneficial owner is
our affiliate within Rule 405 under the
Securities Act,
(ii) any new notes to be received by you or
any beneficial owner are being acquired in the
ordinary course of business, and
4
<PAGE>
(iii) neither you nor any beneficial owner has
an arrangement or understanding with any
person to participate in the distribution
of the new notes.
Guaranteed Delivery If you wish to tender your unregistered notes and
Procedures.................
(i) your unregistered notes are not immediately
available or
(ii) you cannot deliver your unregistered notes
or any other documents required by the
letter of transmittal to the exchange
agent prior to the expiration date or you
cannot complete the procedure for book-
entry transfer on a timely basis,
you may tender your unregistered notes according
to the guaranteed delivery procedures set forth
in the letter of transmittal.
Acceptance of Unregistered
Notes and Delivery of New We will accept for exchange any and all
Notes...................... unregistered notes that are properly tendered in
the exchange offer prior to 5:00 p.m., New York
City time, on the expiration date. The new notes
will be delivered as soon as practicable after
the expiration date.
Withdrawal Rights........... Tenders of unregistered notes may be withdrawn at
any time prior to 5:00 p.m., New York City time,
on the expiration date.
Federal Income Tax The exchange pursuant to the exchange offer will
Considerations............. not be a taxable event for federal income tax
purposes.
The Exchange Agent.......... First Union National Bank is the exchange agent
for the exchange offer. The address and telephone
number of the Exchange Agent are set forth in
"The Exchange Offer--The Exchange Agent;
Assistance."
Resales of the Exchange Based on interpretations by the staff of the SEC
Notes...................... in no-action letters issued to third parties, we
believe that new notes issued pursuant to the
exchange offer to you in exchange for the
unregistered notes may be offered for resale,
resold and otherwise transferred by you without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that you are acquiring the new notes in
the ordinary course of business and are not
participating, and have no arrangement or
understanding with any person to participate, in
a distribution of the new notes. However, the
foregoing is not applicable to you if you are
(i) a broker-dealer who purchased the
unregistered notes directly from us for
resale pursuant to Rule 144A under the
Securities Act or any other available
exemption under the Securities Act or
(ii) our affiliate within Rule 405 under the
Securities Act.
Each broker-dealer that receives new notes for
its own account in exchange for unregistered
notes, where such unregistered notes were
acquired by such broker as a result of market
making or other
5
<PAGE>
trading activities, must acknowledge that it will
deliver a prospectus in connection with any
resale of such new notes.
The New Notes
Issuer...................... Primus Telecommunications Group, Incorporated.
Notes Offered............... $200 million in aggregate principal amount of 11
1/4% Senior Notes due 2009.
Maturity.................... January 15, 2009.
Interest Payment Dates...... January 15 and July 15; the first interest
payment date is July 15, 1999.
Ranking..................... The new notes will rank senior in right of
payment to all of our existing and future
obligations that are expressly subordinated in
right of payment to the new notes and will rank
pari passu in right of payment with all of our
other existing and future senior unsecured
obligations, including our trade payables. As of
December 31, 1998, after giving pro forma effect
to the offering of the new notes and the January
1999 repayment of the outstanding balance under
the TresCom credit facility, we would have had
outstanding approximately $602.4 million of
indebtedness on a consolidated basis. Because we
are a holding company that conducts our business
through our subsidiaries, all existing and future
indebtedness and other liabilities and
commitments of any of our subsidiaries, including
trade payables, will be structurally senior to
the new notes. As of December 31, 1998, our
consolidated subsidiaries had outstanding
aggregate liabilities of approximately $168.3
million, which included $29.4 million of
indebtedness.
Optional Redemption......... We may redeem some or all of the new notes at the
redemption prices listed in "Description of
Exchange Notes--Optional Redemption" at any time
on or after January 15, 2004. Before January 15,
2002, we may redeem up to 35% of the original
principal amount of new notes at the redemption
price listed in "Description of Exchange Notes--
Optional Redemption" with the net cash proceeds
of one or more public equity offerings.
Change of Control........... If we experience a change of control, each holder
of new notes may require us to purchase all or
any part of such holder's new notes at a purchase
price of 101% of the principal amount thereof,
plus accrued and unpaid interest and liquidated
damages, if any, to the date of purchase.
Covenants................... The indenture governing the new notes limits our
ability and that of our restricted subsidiaries
to:
.incur additional indebtedness,
.issue preferred stock,
6
<PAGE>
.pay dividends or make other distributions,
.repurchase capital stock or subordinated
indebtedness,
.make certain other restricted payments,
.create certain liens,
.enter into certain transactions with
affiliates,
.sell assets,
.issue or sell capital stock of our
restricted subsidiaries, or
.enter into certain mergers and
consolidations.
Registration Rights........
If,
.applicable law or SEC policy does not
permit us to effect the Exchange Offer,
.the Exchange Offer is not consummated
within the prescribed periods, or
.certain holders of the unregistered notes
notify us they are not permitted to participate
in, or would not receive freely tradable are
notes pursuant to, the Exchange Offer,
we will use our reasonable best efforts to cause
the SEC to declare effective a shelf registration
statement with respect to resale of the
unrequested notes and to keep the shelf
registration statement continuously effective
until up to two years after the date on which the
unrequested notes were sold. If we fail to
satisfy these registration obligations, we will
be required to pay liquidated damages to the
holders of the unregistered notes under certain
circumstances.
Use of Proceeds............ We will not receive any proceeds from the
exchange offer.
Risk Factors
Investing in the new notes involves risks. "Risk Factors" begin on page 10.
7
<PAGE>
Summary Historical and Pro Forma Data
The summary financial data presented below should be read in conjunction
with our consolidated financial statements, the notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this prospectus. The summary historical
statement of operations data for the years ended December 31, 1995, 1996, 1997
and 1998 have been derived from our audited financial statements. The summary
unaudited pro forma financial data has been derived from our audited financial
statements and the unaudited financial statements of TresCom, and should be
read in conjunction with the Unaudited Pro Forma Financial Data included
elsewhere herein.
<TABLE>
<CAPTION>
Pro Forma
Year Ended December 31, Year Ended
------------------------------------- December 31,
1995 1996 1997 1998 1998(1)
------- -------- -------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue(2)............ $ 1,167 $172,972 $280,197 $421,628 $485,196
Cost of revenue........... 1,384 158,845 252,731 353,016 407,691
------- -------- -------- -------- --------
Gross margin (deficit)... (217) 14,127 27,466 68,612 77,505
------- -------- -------- -------- --------
Operating expenses:
Selling, general and
administrative.......... 2,024 20,114 50,622 79,532 93,765
Depreciation and
amortization............ 160 2,164 6,733 24,185 30,687
------- -------- -------- -------- --------
Total operating
expenses.............. 2,184 22,278 57,355 103,717 124,452
------- -------- -------- -------- --------
Loss from operations...... (2,401) (8,151) (29,889) (35,105) (46,947)
Interest expense(3)....... (59) (857) (12,914) (40,047) (64,141)
Interest income........... 35 785 6,238 11,504 11,504
Other income (expense).... -- (345) 407 -- 288
------- -------- -------- -------- --------
Loss before income taxes.. (2,425) (8,568) (36,158) (63,648) (99,296)
Income taxes.............. -- (196) (81) -- --
------- -------- -------- -------- --------
Net loss.................. $(2,425) $ (8,764) $(36,239) $(63,648) $(99,296)
======= ======== ======== ======== ========
Basic and diluted net loss
per common shares
outstanding.............. $ (0.48) $ (0.75) $ (1.99) $ (2.61) $ (3.57)
======= ======== ======== ======== ========
Weighted average number of
common shares
outstanding.............. 5,019 11,660 18,250 24,432 27,846
======= ======== ======== ======== ========
Ratio of earnings to fixed
charges.................. -- -- -- -- --
------- -------- -------- -------- --------
Geographic Data:
Net revenue:
North America(4)......... $ 1,167 $ 16,573 $ 74,359 $188,008
Asia-Pacific(5).......... -- 151,253 183,126 172,757
Europe(6)................ -- 5,146 22,712 60,863
------- -------- -------- --------
Total.................. $ 1,167 $172,972 $280,197 $421,628
======= ======== ======== ========
Other Data:
Gross margin (deficit) as
a percentage of net
revenue.................. (18.6)% 8.2% 9.8% 16.3% 16.0%
EBITDA(7)................. $(2,241) $ (5,987) $(23,156) $(10,920) $(16,260)
Capital expenditures(8)... $ 396 $ 12,745 $ 39,465 $ 75,983
Number of switches........ 1 1 11 16
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted(9)
-------- --------------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $136,196 $310,877
Restricted investments (including current and long
term)................................................ 50,623 50,623
Working capital(10)................................... 107,193 281,874
Total assets.......................................... 673,963 856,144
Long-term obligations (including current portion)..... 420,174 602,355
Stockholders' equity.................................. 114,917 114,917
</TABLE>
- --------
(1) Gives pro forma effect to our merger with TresCom, the sale of the $150
million of senior notes in May 1998, the sale of the unregistered notes
and the Exchange Offer, in each case less discounts, commissions and
estimated expenses of such offerings payable by us and the repayment of
the TresCom credit facility in January 1999, all as if they had occurred
on January 1, 1998.
(2) Net revenue is after provision for bad debt.
(3) Pro forma interest expense for the year ended December 31, 1998 includes
interest expense on the May 1998 senior notes and both the unregistered
notes and the new notes, and amortization of deferred financing costs.
(4) Consists primarily of net revenue from operations in the United States for
all periods prior to 1997. Net revenue for the year ended December 31,
1997 reflects our commencement of operations in Canada in April 1997.
(5) Consists solely of net revenue from operations in Australia for the year
ended December 31, 1996. Net revenue for the year ended December 31, 1997
reflects our commencement of operations in Japan in October 1997.
(6) Consists solely of net revenue from operations in the United Kingdom for
all periods prior to 1998. Net revenue for the year ended December 31,
1998 reflects our commencement of operations in Germany in August 1998.
(7) As used herein, "EBITDA" is defined as income (loss) from operations plus
depreciation and amortization expense. 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 to provide additional information regarding our ability to meet
our future debt service, capital expenditures and working capital
requirements. EBITDA is not necessarily a measure of our ability to fund
our cash needs and is not necessarily comparable to similarly titled
measures of other companies.
(8) Capital expenditures excludes assets acquired in business combinations and
under terms of capital leases.
(9) Gives effect to the sale of the unregistered notes and the exchange offer,
less discounts, commissions and estimated expenses of the offering payable
by us and the application of the net proceeds, and the repayment of the
TresCom credit facility in January 1999, as if they had occurred on
December 31, 1998.
(10) Consists of total current assets minus total current liabilities.
9
<PAGE>
RISK FACTORS
You should carefully consider the following risks, in addition to the other
information contained elsewhere in this prospectus, in evaluating whether to
participate in the Exchange Offer.
We Have Substantial Indebtedness
We have substantial indebtedness and the indenture governing the new notes
and the unregistered notes limits, but does not prohibit, our incurrence of
additional indebtedness. We expect that we will incur additional indebtedness
in the future and our level of indebtedness could have important consequences
to you, including the following:
. the debt service requirements of any additional indebtedness could make
it more difficult for us to make payments of interest on our outstanding
debt, including the new notes;
. we may limit our ability to obtain any necessary financing in the future
for working capital, capital expenditures, debt service requirements or
other purposes;
. we must dedicate a substantial portion of our cash flow from operations,
if any, to the payment of principal and interest on our indebtedness and
other obligations and this cash flow will not be available for our use
elsewhere in our business;
. our flexibility in planning for, or reacting to, changes in our business
could be limited;
. we may be at a competitive disadvantage because we are more highly
leveraged than some of our competitors; and
. we may be more vulnerable in the event of a downturn in our business if
we have a high level of indebtedness.
We must substantially increase our net cash flow in order to meet our debt
service obligations and cannot assure you that we will be able to meet our debt
service obligations, including our obligations under the new notes. The holders
of such indebtedness can accelerate the maturity of such indebtedness if there
is a default and that could cause defaults under our other indebtedness. Such
defaults could result in a default on the new notes and could delay or preclude
payments of interest or principal thereon.
We Experienced Historical, and Will Experience Future Operating Losses,
Negative EBITDA and Net Losses
Although we experienced net revenue growth in each of our last 15 quarters,
you should not consider that to be a prediction or guaranty of future net
revenue growth, if any. We expect to continue to incur operating losses, and
negative cash flow from operations as we expand our operations and build-out
and upgrade our telecommunications network. We cannot assure you that our net
revenue will grow or be sustained in future periods or that we will be able to
achieve or sustain profitability or generate positive cash flow from operations
in any future period. If we cannot achieve and sustain operating profitability
or positive cash flow from operations, we may not be able to meet our debt
service or working capital requirements, including our obligations with respect
to the new notes.
We Must Obtain Additional Financing to Expand Our Service Offerings
We continually evaluate the expansion of our service offerings and plan to
make further investments in and enhancements to our telecommunications network
and in distribution channels. To fund these additional cash requirements, we
anticipate that we will have to raise additional financing from public or
private equity or debt sources. Additionally, we may be required to seek
additional capital sooner than expected if:
. our plans or assumptions change or are inaccurate, including with
respect to the development of our telecommunications network, the
expansion of our service offerings, the scope of our operations and our
operating cash flow,
10
<PAGE>
. we consummate additional investments or acquisitions, if we experience
unexpected costs or competitive pressures, or
. our existing cash and any other borrowings prove to be insufficient.
We have agreed in the indenture and certain other agreements governing our
indebtedness to restrictive covenants that will affect, and in many respects
will significantly limit or prohibit, among other things, our ability to incur
additional indebtedness and to create liens. If we do raise additional funds
through the incurrence of debt, we would likely become subject to additional
restrictive financial covenants. If we are unable to obtain additional capital
at all or on acceptable terms, we may be required to reduce the scope of our
expansion, which could adversely affect our business prospects and our ability
to compete. We cannot assure you that we 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 expansion or
otherwise.
We Operate Using a Holding Company Structure and Will Rely on Our Subsidiaries
for Distributions to Service the New Notes
We are a holding company and our principal assets are the stock of our
operating subsidiaries. Dividends, intercompany loans and other permitted
payments from our direct and indirect subsidiaries, and our own credit
arrangements, are our sources of funds to meet our cash needs, including
payment of expenses and principal and interest on the new notes. Our
subsidiaries are legally distinct from us and have no obligation to pay amounts
due with respect to the new notes or to make funds available to us. Our
subsidiaries will not guarantee the new notes. Additionally, many of our
subsidiaries are organized in jurisdictions outside the United States. Their
ability to pay dividends, repay intercompany loans or make other distributions
may be restricted by, among other things, the availability of funds, the terms
of various credit arrangements entered into by them, as well as statutory and
other legal restrictions. Additionally, payments from our subsidiaries may
result in adverse tax consequences. If we do not receive dividends,
distributions and other payments from our subsidiaries, we would be restricted
in our ability to pay interest and principal on the new notes and on our
ability to utilize cash flow from one subsidiary to cover shortfalls in working
capital at another subsidiary.
Additionally, creditors of the holding company, including the holders of the
new notes, and the holding company itself will generally have subordinate
claims against the assets of a particular subsidiary as compared to the
creditors of such subsidiary. Accordingly, the new notes will be structurally
subordinated to all existing and future indebtedness and other liabilities and
commitments of our subsidiaries, including trade payables. Our right to receive
assets of any subsidiary upon the liquidation or reorganization of such
subsidiary (and the consequent rights of the holders of the new notes to
participate in those assets) will be structurally subordinated to the claims of
such subsidiary's creditors. However, if the holding company itself is
recognized as a creditor, its claims would be subordinate to any secured
indebtedness of such subsidiary and any indebtedness of such subsidiary that is
senior to the holding company's claims. In addition, holders of our secured
indebtedness have a claim on the assets securing such indebtedness that is
prior to the claim of the holders of the new notes and would have a claim that
is pari passu with the claim of the holders of the new notes to the extent such
security did not satisfy such indebtedness. We have no significant assets other
than the stock of our subsidiaries. If we were to enter into a bank credit
facility or similar arrangement, we expect that the stock of the subsidiaries
would be pledged to secure any such credit facility or arrangement.
We Have Been Operating for Only a Limited Period of Time
We have limited experience in operating our business. Our company was
founded in February 1994 and began generating operating revenues in March 1995.
We intend to enter additional markets where we have limited or no operating
experience. Accordingly, we cannot assure you that our future operations will
generate operating or net income, and you must consider our prospects in light
of the risks, expenses, problems and delays inherent in establishing a new
business in a rapidly changing industry.
11
<PAGE>
We Are Developing Our Network and Moving Traffic onto Our Network
Our long-term success is dependent upon our ability to design, implement,
operate, manage and maintain our telecommunications network, and our ability to
generate and move traffic onto the network. We have limited experience in these
activities. We will incur additional fixed operating costs by expanding the
network. These costs typically are in excess of the revenue attributable to the
transmission capacity funded by such costs until we generate additional traffic
volume for such capacity. We cannot guarantee that we will generate sufficient
traffic to economically utilize our capacity or that we can complete our
network in a timely manner or operate it efficiently. We also intend to expand
our network as more countries deregulate their telecommunications industries.
This expansion will require us to acquire additional licenses and equipment. We
cannot guarantee that we will be able to obtain the licenses or purchase the
necessary equipment on favorable terms or, if we do, that we will be able to
successfully develop our network in those countries.
Managing Rapid Growth
Our continued growth and expansion places a significant strain on our
management, operational and financial resources, and increases demands on our
systems and controls. We continue to add switches and fiber optic cable and to
expand our operations. To manage our growth effectively, we must continue to
implement and improve our operational and financial systems and controls,
purchase and utilize other transmission facilities, and expand, train and
manage our employee base. If we inaccurately forecast the movement of traffic
onto our network, we could have insufficient or excessive transmission
facilities and disproportionate fixed expenses. We cannot guarantee that we
will be able to further develop our 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 we proceed with our development, we
will place additional demands on our customer support, billing and management
information systems, on our support, sales and marketing and administrative
resources and on our network infrastructure. We cannot guarantee that our
operating and financial control systems and infrastructure will be adequate to
maintain and effectively manage our future growth.
Acquisition and Strategic Investment Risks
A key element of our business strategy is to acquire or make strategic
investments in complementary assets and businesses, and a major portion of our
growth in recent years is as a result of such acquisitions. Acquisitions and
strategic investments involve financial and operational risks. We may incur
indebtedness in order to effect an acquisition and will need to service that
indebtedness. An acquisition may not provide the benefits originally
anticipated while we continue to incur operating expenses. There may be
difficulty in integrating the service offerings, distribution channels and
networks gained through acquisitions and strategic investments with our own. In
a strategic investment where we acquire a minority interest in a company, we
may lack control over the operations and strategy of the business, and we
cannot guarantee that such lack of control will not interfere with the
integration of services and distribution channels of the business with our own.
Although we attempt to minimize the risk of unexpected liabilities and
contingencies associated with acquired businesses through planning,
investigation and negotiation, such unexpected liabilities may nevertheless
accompany such strategic investments and acquisitions. We cannot guarantee that
we will successfully
. identify attractive acquisition and strategic investment candidates,
. complete and finance additional acquisitions on favorable terms, or
. integrate the acquired businesses or assets into our own.
We cannot guarantee that the integration of our business with any acquired
company's business will be accomplished smoothly or successfully, if at all. If
we encounter significant difficulties 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. We cannot guarantee that we will be able to take
full advantage of the combined sales forces' efforts. Successful integration of
operations
12
<PAGE>
and technologies requires the dedication of management and other personnel
which may distract their attention from our day-to-day business, the
development or acquisition of new technologies, and the pursuit of other
business acquisition opportunities.
We Experience 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. The industry has relatively limited barriers to
entry in the more deregulated countries 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. We believe
that competition in all of our 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 the non-United States
markets continue to experience deregulatory influences. This increase in
competition could adversely affect net revenue per minute and gross margin as a
percentage of net revenue. We compete primarily on the basis of price,
particularly with respect to our sales to other carriers, and also on the basis
of customer service and our ability to provide a variety of telecommunications
products and services. Prices for long distance calls in several of the markets
in which we compete have declined in recent years and are likely to continue to
decrease. We cannot guarantee that we will be able to compete successfully in
the future.
Many of our competitors are significantly larger than us, and many of our
competitors have:
. substantially greater financial, technical and marketing resources,
. larger networks,
. a broader portfolio of services,
. controlled transmission lines,
. stronger name recognition and customer loyalty, and
. long-standing relationships with our target customers.
In addition, many of our 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. If this strategy is
widely adopted, it could have an adverse effect on our 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.
Recent and pending deregulation in various countries may encourage new
entrants to compete, including Internet service providers, cable television
companies and utilities. For example, the United States and 68 other countries
have committed to open their telecommunications markets to competition pursuant
an agreement under the World Trade Organization which began on January 1, 1998.
Further, in the United States once certain conditions are met under the United
States Telecommunications Act of 1996, the regional bell operating companies
will be allowed to enter the domestic long distance market, AT&T, MCI/WorldCom
and other long distance carriers will be allowed to enter the local telephone
services market, and any entity, including cable television companies and
utilities, will be allowed to enter both the local service and long distance
telecommunications markets. In addition, we could experience additional
competition in the Australian market from newly licensed telecommunications
carriers with the ongoing deregulation of the Australian telecommunications
market and the granting of additional carrier licenses. 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.
13
<PAGE>
We Depend on Transmission Facilities-Based Carriers
We primarily connect our customers' telephone calls through transmission
lines that we lease under a variety of arrangements with other facilities-based
long distance carriers. Many of these carriers are, or may become, our
competitors. Our ability to maintain and expand our business is dependent upon
whether we continue to maintain favorable relationships with the facilities-
based carriers from which we lease transmission lines. If our relationship with
one or more of these carriers were to deteriorate or terminate, it could have a
material adverse effect upon our cost structure, service quality, network
diversity, results of operations and financial condition. Moreover, we lease
transmission lines from some vendors that currently are subject to tariff
controls and other price constraints which in the future may be changed.
Risks Associated With International Operations
A key element of our business strategy is to expand in international
markets. In many international markets, the existing incumbent carrier has
certain advantages, including:
. controlling access to the local networks,
. enjoying better brand recognition and brand and customer loyalty,
and
. having significant operational economies, including a larger
backbone network and foreign carrier agreements with other incumbent
carriers and other service providers.
Moreover, the incumbent carrier may take many months to allow competitors to
interconnect to its switches. To achieve our objective of pursuing growth
opportunities in international markets, we may have to make significant
investments for an extended period before returns, if any, on such investments
are realized. In addition, we cannot guarantee that we will be able to obtain
the permits and operating licenses required by us to:
. operate our own transmission facilities or switches,
. obtain access to local transmission facilities or
. market, sell and deliver competitive services in these markets.
In addition, such permits and operating licenses, if we obtain them, may not be
obtained in the time frame that we currently contemplate.
There are additional risks inherent in doing business on an international
level which could materially adversely impact our international operations.
These risks include:
. 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.
A significant portion of our net revenue and expenses is denominated, and is
expected to continue to be denominated, in currencies other than United States
dollars. Changes in exchange rates may have a significant
14
<PAGE>
effect on our results of operations. We have not historically engaged in
hedging transactions, and do not currently contemplate engaging in hedging
transactions to mitigate foreign exchange risk.
On January 1, 1999, 11 member countries of the European Union established
fixed conversion rates between their national currencies and the "euro". At
that time, the euro began trading on currency exchanges and became usable for
non- cash transactions. However, traditional currencies will continue to be
used until at least January 1, 2002. Given the extent of our current services
in continental Europe and the nature of those services, we do not currently
expect euro conversion to have a material impact on operations or cash flows.
However, uncertainties exist as to the effects of euro conversion on certain
European customers and on the economies of the participating countries. Euro
conversion will also cause a better ability to compare prices in different
countries which may negatively impact pricing strategies in different
participating countries. We plan to continue to evaluate the impact of euro
conversion on our computer and financial systems, business processes, market
risk and price competition.
We Depend on Effective Information Systems
To bill our customers, we must record and process massive amounts of data
quickly and accurately. We believe that our management information system will
have to grow as our business expands and it will have to change as new
technological developments occur. We believe that the successful implementation
and integration of new information systems and backroom support will be
important to our ability to
. develop and grow our business,
. monitor and control costs,
. bill our customers accurately and in a timely fashion, and
. achieve operating efficiencies.
We cannot guarantee that we will not encounter delays or cost-overruns or
suffer adverse consequences in implementing these systems. Any such delay or
other malfunction of our management information systems could have a material
adverse effect on our business, financial condition and results of operations.
We Must Modify our Systems to be Year 2000 Compliant
In 1998, we began a comprehensive inventory and Year 2000 assessment of our
principal computer systems, network elements, software applications and other
business systems throughout the world. 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 our systems, elements or applications that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000. This could result in improperly routed traffic, a
major system failure or miscalculations in invoices. We expect to complete our
inventory and assessment by June 30, 1999 and have begun repairing or replacing
the most critical items that we have determined not to be Year 2000 compliant.
We expect to complete the repair, replacement, testing and certification of
substantially all non-compliant network elements by September 30, 1999. We are
using both internal and external resources to identify, correct or reprogram,
and test our systems for Year 2000 compliance. In addition, we are contacting
third party suppliers of major equipment, software, systems and services that
we use to identify and, to the extent possible, to resolve issues involving
Year 2000 compliance. However, we have limited or no control over the actions
of these third party suppliers. Consequently, we cannot guarantee that these
suppliers will resolve any or all Year 2000 issues before the occurrence of a
material disruption to our business or any of our customers.
We expect to incur in the aggregate approximately $3 to $5 million in
expenditures during 1999 to complete our Year 2000 compliance program. These
estimates do not include the cost of systems, software and equipment that are
being replaced or upgraded in the normal course of business. The costs of
modifying our network elements, software and systems for Year 2000 compliance
are being funded from existing cash resources. If we do not achieve compliance
prior to December 31, 1999, or if we fail to identify and remedy all
15
<PAGE>
critical Year 2000 problems, our results of operations or financial condition
could be materially affected. We have begun to develop appropriate contingency
plans to mitigate, to the extent possible, any significant Year 2000
noncompliance and expect to complete our contingency plans by September 30,
1999. If we are required to implement our contingency plans, the cost of Year
2000 compliance may be greater than the amount referenced above and cannot
guarantee that these plans will be adequate.
We Experience Risks of Industry Changes That Affect Our Competitiveness and Our
Financial Results
The international telecommunications industry is changing rapidly due to:
. deregulation,
. privatization of incumbent carriers,
. technological improvements,
. expansion of telecommunications infrastructure and
. the globalization of the world's economies.
In addition, deregulation in any particular market may cause such market to
shift unpredictably. We cannot guarantee that we will be able to compete
effectively or adjust our contemplated plan of development to meet changing
market conditions.
The telecommunications industry generally is experiencing a rapid
technological evolution. New products and service offerings are being
introduced. Satellite and undersea cable transmission capacity is increasingly
available for services similar to those we provide. Potential developments that
could adversely affect us if we do not anticipate them or appropriately respond
to them include:
. improvements in transmission equipment,
. development of switching technology allowing voice/data/video
multimedia transmission simultaneously and
. commercial availability of competitively-priced Internet-based
domestic and international switched voice/data/video services.
Our profitability will depend on our ability to anticipate, assess and adapt to
rapid technological changes and our ability to offer, on a timely and cost-
effective basis, services that meet evolving industry standards. We cannot
guarantee that we 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.
We May Be Affected by Natural Disasters
Many of the geographic areas where we conduct our business may be affected
by natural disasters, including hurricanes and tropical storms. Hurricanes,
tropical storms and other natural disasters could have a material adverse
effect on our business by damaging our network facilities or curtailing
telephone traffic as a result of the effects of such events, such as
destruction of homes and businesses.
We Depend on Key Personnel
We depend upon the efforts of our management team and our key technical,
marketing and sales personnel, particularly those of K. Paul Singh, our
Chairman and Chief Executive Officer. If we lose the services of one or more of
these key individuals, particularly Mr. Singh, our business and its future
prospects could be materially and adversely affected. We have entered into an
employment agreement with Mr. Singh, which continues until May 30, 1999, and
from year to year thereafter unless terminated. We do not maintain any key
person life insurance on the lives of any officer, director or key employee.
Our future success will also depend on our ability to attract and retain
additional key management and technical and sales personnel required in
connection with the growth and development of our business. The competition to
hire qualified
16
<PAGE>
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. We cannot guarantee that we will be successful in
attracting and retaining such executives and personnel.
We are Subject to Potential Adverse Effects of Regulation
As a multinational telecommunications company, we are subject to varying
degrees of regulation in each of the jurisdictions in which we currently
provide, or expect to provide, our services. Local laws and regulations, and
the interpretation of such laws and regulations, differ significantly among the
jurisdictions in which we operate. There can be no assurance that future
regulatory, judicial and legislative changes will not have a material adverse
effect on us, that domestic or international regulators or third parties will
not raise material issues with regard to our compliance or noncompliance with
applicable regulations or that regulatory activities will not have a material
adverse effect on us. Certain risks regarding the regulatory framework in the
principal jurisdictions in which we provide our services are briefly described
below.
United States. In the United States, our services are subject to the
provisions of the United States Communications Act of 1934, as amended by the
United States 1996 Telecommunications Act, and the Federal Communications
Commission regulations thereunder, as well as the applicable laws and
regulations of the various states administered by the relevant state public
service commissions. 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 us. 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 us.
Despite recent trends toward deregulation, the FCC and relevant state public
service commissions continue to exercise authority to regulate ownership of
transmission facilities, provision of services and the terms and conditions
under which our services are provided. In addition, we are required by federal
and state law and regulations to file tariffs listing the rates, terms and
conditions of the services we provide. Any failure to maintain proper federal
and state tariffs or certification or any finding by the federal or state
agencies that we are 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 us.
To originate and terminate calls, long distance carriers such as us must
purchase "access" from the local exchange carriers, including competitive local
exchange carriers. Access charges represent a significant portion of our cost
of revenue and, generally, such access charges are regulated by the FCC. The
FCC has recently reformed its regulation of access charges by local exchange
carriers to better account for increasing levels of local competition. Under
the new rules, local exchange carriers 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 us, could be placed at a significant cost disadvantage to larger
competitors. We also contribute to universal service funds based on revenues
collected in the United States. In a pending rulemaking, the FCC may amend its
rules to require us to contribute based on foreign revenues as well as domestic
revenues.
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 our control. The FCC
has established and administered a variety of international service
regulations, including the International Settlements Policy 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" settlement
rates for such settlement and permissible
17
<PAGE>
exceptions to these policies. The FCC could find that, absent a waiver, certain
terms of our foreign carrier agreements do not meet the requirements of the
International Settlements Policy or that certain actions do not constitute
permissible deviations from these policies. Although the FCC generally has not
issued penalties in this area, it has recently issued a Notice of Apparent
Liability against a U.S. company for violating the International Settlements
Policy and it could, among other things, issue a cease and desist order or
impose fines if it finds that these agreements conflict with the International
Settlements Policy. We do not believe that any such fine or order would have a
material adverse effect on us. The FCC also regulates the nature and extent of
foreign ownership in radio licenses and our foreign carrier affiliations.
Regulatory requirements pertinent to our operations have recently changed
and will continue to change as a result of the World Trade Organization
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 our ability to compete with other service
providers, to continue providing the same services, or to introduce services
currently planned for the future. The impact of any changes in applicable
regulatory requirements on our operations cannot be predicted.
Canada. In Canada, the operations of telecommunications carriers are
regulated by the Canadian regulatory agency known as the Canadian Radio-
television and Telecommunications Commission. The CRTC has recently established
a new competitive regulatory framework governing the international segment of
the long-distance market, eliminating certain barriers to competition,
consistent with Canada's commitments in the World Trade Organization Agreement.
As a result, full facilities-based and resale competition has been introduced
in the provision of international services in Canada, effective October 1,
1998, coincident with the elimination of traffic routing limitations on
switched hubbing through the United States. In addition, foreign ownership
rules for facilities-based carriers have now been waived in relation to
ownership of international submarine cables landed in Canada and satellite
earth stations used for telecommunication purposes. Effective January 1, 1999
all international service providers must be licensed by the CRTC under the
Canadian Telecommunications Act of 1993, and we have received our international
license. Our operations will remain subject to conditions of our CRTC license,
which address matters such as competitive conduct and consumer safeguards, and
to a regime of contribution charges (roughly the equivalent of access charges
in the U.S.). There can be no assurance that the new regulatory framework, once
implemented in Canada, will allow us 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 our
competitive position, growth and financial performance.
Australia. In Australia, the provision of our services is subject to federal
regulation. Two primary instruments of regulation have been the Australian
Telecommunications Act 1991 and federal regulation of anti-competitive
practices pursuant to the Australian Trade Practices Act 1974. The regulatory
climate changed in July 1997 with the implementation of the Australian
Telecommunications Act 1997.
We are licensed under the Australian Telecom Act to own and operate
transmission facilities in Australia. Under the new regulatory framework, we do
not require a carriage license in order to supply carriage services to the
public using network facilities owned by another carrier. Instead, we 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 regulates matters including the licensing of carriers and technical
matters, and the Australian Competition and Consumer Commission has the role of
promotion of competition and consumer protection. As a licensed carrier, we are
required to comply with our own license and are under the regulatory
18
<PAGE>
control of the Australian Communications Authority and the Australian
Competition and Consumer Commission. 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 us. 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 us.
Carriers must also meet the universal service obligation to assist in
providing all Australians, particularly those living in remote areas, with
reasonable access to standard telephone services. The levy required to be paid
by us in connection with this obligation has been set previously at a level
that is not material. The levy is currently under review. Telstra, as the only
universal service provider, has submitted a claim to the Australian
Communications Authority that, if adopted, could result in material charges to
carriers such as us. The other carriers have rejected Telstra's model in
relation to its claim. The Australian government has not accepted Telstra's
model and has referred the model and the criteria for determining the size of
this obligation to the Australian Communications Authority for review. The
outcome of this determination is not expected to be material for us. However,
there can be no guarantee that the Australian Communications Authority will not
make an assessment of a universal service charge that would be material.
United Kingdom. In the United Kingdom, the provision of our services is
subject to and affected by regulations introduced by the United Kingdom
telecommunications regulatory authority, the Office of Telecommunications under
the United Kingdom Telecommunications Act of 1984. 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 our ability to conduct our 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 we can charge our customers. Our
subsidiary, Primus Telecommunications Limited, holds a 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 United Kingdom subject to certain conditions. There can be no
assurance that future changes in regulation and government will not have a
material adverse effect on our business, results of operations and financial
condition.
Japan. Our services in Japan are subject to regulation by the Ministry of
Post and Telecommunications under the Japanese Telecommunications Business Law.
We have obtained licenses as a Type I business, which allows us to provide
telecommunications services using our own facilities, and as a Special Type II
business, which allows us 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.
We may also provide over leased lines basic telecommunications services, value-
added services and services to closed user groups. There can be no guarantee
that the Japanese regulatory environment will allow us to provide services in
Japan at competitive rates.
Germany. Our services in Germany are governed by the German
Telecommunications Act of 1996, 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, we
must obtain a license if we (i) operate transmission infrastructure for the
provision of telecommunications services to the public (which requires a Class
3 License); or (ii) offer voice telephony services to the public through
telecommunications networks operated by us (which requires a Class 4 License).
We have obtained a Class 4 license and have 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 we currently provide
19
<PAGE>
in Germany, or services to closed user groups using leased lines. A change in
regulatory policy has taken place which will require us to invest in additional
points of presence and transmission lines in order to continue to receive the
lowest available interconnection rates. However, the build-out of our German
network is currently hindered by Deutsche Telekom's insufficient capacities and
consequent order backlog of points of presence. Further changes in regulatory
policy or court decisions could result in our having to pay less favorable
interconnection prices and/or having to invest into a Germany-wide license to
be able to continue our current services. The Regulierungsbehorde fur
Telekommunikation und Post ("RegTP") has in particular invited Deutsche Telekom
to launch a regulatory authorization of additional interconnection fees to be
paid by small network operators for so called "atypical traffic", a designation
applicable to most of our traffic. Moreover, we are subject to certain
regulatory requirements when we operate under our license, including the
requirement that we present our standard terms and conditions to German
regulators and possibly that we contribute to universal service mechanisms.
We have received notice from Deutsche Telekom that it is exercising its
option to terminate its current interconnection agreement with us. Deutsche
Telekom has asked that renegotiations be commenced, failing which the agreement
will be terminated by the end of 1999, following notice given by Deutsche
Telekom. Deutsche Telekom has at the same time presented us with a new draft
interconnection agreement containing terms less favorable than in the current
agreement. Such less favorable terms include, among other things, higher
interconnection fees; higher resale fees for certain interconnecting calls;
minimum traffic volume requirements; and the requirement to extend our license
to a Germany-wide license. Major provisions of this new interconnection
agreement are currently being evaluated in proceedings before the RegTP. Final
decisions are expected to be issued at the end of May 1999. In addition
Deutsche Telekom has instituted regulatory proceedings for the approval of
surcharges on the interconnection fees provisionally approved in September
1997. The outcome of these proceedings and their bearing on existing
interconnection agreements, and any new interconnection agreement, cannot be
predicted. However, if these surcharges are approved, they could significantly
affect our business in Germany.
There can be no assurance that the regulatory environment in Germany
generally or the applicable interconnection rates with Deutsche Telekom will
allow us to provide telecommunications services competitively with other
providers.
Latin America. We may decide to install switches and other network equipment
in several Latin American countries. Some of these 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 us
to obtain numbers or interconnection with the incumbent carrier. We are
currently providing to customers in certain Latin American countries
international call reorigination or similar types of services that do not
require us 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 we will be able to obtain any authorizations or otherwise take the actions
necessary to provide services in these countries.
Other Jurisdictions. We intend to expand our operations into other
jurisdictions as such markets deregulate and we are able to offer a full range
of switched public telephone services to our 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 World Trade Organization 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 our entry
into such additional markets. Our ability to enter a particular market and
provide telecommunications services is dependent upon the extent to which the
regulations in a particular market permit new entrants. In some countries,
regulators may make subjective judgments in awarding licenses and permits,
without any legal recourse for unsuccessful applicants. In the event we are
able to gain entry into such a market, no assurances can be given that we will
be able to provide a full range of services in such market. In addition, we may
have to modify significantly our operations to comply with changes in the
regulatory environment in such market
20
<PAGE>
and any such changes may have a material adverse effect on our business,
results of operations or financial condition.
A Group of Our Stockholders Could Exercise Significant Influence Over Our
Affairs
As of March 31, 1999, our executive officers and directors beneficially
owned 9,939,073 shares of our common stock, representing 33.5% of the
outstanding common stock. The executive officers and directors have also been
granted options to purchase an additional 593,336 shares of our common stock
which vest after May 30, 1999. Of these amounts, Mr. K. Paul Singh, our
Chairman and Chief Executive Officer, beneficially owns 4,760,416 shares of our
common stock, including options to purchase 166,667 shares of our common stock.
Investors affiliated with E.M. Warburg, Pincus & Co., LLC beneficially own
3,875,689 shares of our common stock. As a result, the executive officers,
directors and Warburg, Pincus exercise significant influence over such matters
as the election of our directors, amendments to our charter, other fundamental
corporate transactions such as mergers and asset sales, and otherwise the
direction of our business and affairs. Additionally, under the terms of a
shareholders' agreement among Warburg, Pincus, Mr. Singh and us, entered into
in connection with our merger with TresCom, we agreed to nominate one
individual selected by Warburg, Pincus and reasonably acceptable to our non-
employee directors, to serve as a member of our board of directors. This
nomination right remains effective so long as Warburg, Pincus is the beneficial
owner of 10% or more of our outstanding common stock. In June 1998, Douglas
Karp joined our board of directors pursuant to the foregoing arrangement.
There Could Be No Market for the New Notes
The new notes are a new issue of securities, have no established trading
market, and may not be widely distributed. We do not intend to list the new
notes on any national securities exchange or to seek to have them admitted to
trade on The Nasdaq Stock Market. We cannot guarantee that an active public or
other market will develop for the new notes. If a trading market does not
develop or is not maintained, holders of the new notes may experience
difficulty in reselling the new notes or may be unable to sell them at all. If
a market for the new notes develops, it may be discontinued at any time. If a
public trading market develops for the new notes, future trading prices of the
new notes will depend on many factors, including prevailing interest rates, our
results of operations and the market for similar securities. The price at which
the holders of new notes will be able to sell such new notes is not assured and
the new 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 our financial condition, the new notes
may trade at a discount from their principal amount.
The liquidity of, and trading market for, the new notes also may be
adversely affected by declines in the market for the 1997 Senior Notes,
declines in the market for the 1998 Senior Notes and in general declines in the
market for similar securities issued by other companies. Any such decline may
adversely affect such liquidity and trading markets independent of our
financial performance and prospects.
The Notes Have Not Been Registered under State Securities Laws
The 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, as state securities laws do not apply to sales to persons who are
not residents of any state. In order to acquire the unregistered notes, each
holder was required to represent to us that it was either (i) a "qualified
institutional buyer", (ii) an institutional "accredited investor" or (iii) a
non-U.S. person. Holders who wish to exchange their unregistered notes for
notes pursuant to the Exchange Offer will be required to represent to us that
they remain institutional investors or non-U.S. persons. Any holder who no
longer qualifies as an institutional investor or who is no longer a non-U.S.
person, will not be entitled to exchange its unregistered notes for 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
unregistered notes, which will continue to be subject to the restrictions on
transfer as set forth in the legend thereon.
21
<PAGE>
Consequences of Failure to Exchange
Holders of unregistered notes who do not exchange their unregistered notes
for new notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such unregistered notes as set forth in the legend
thereon since the unregistered notes were issued 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
unregistered 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. We do not
currently anticipate that we will register the unregistered notes for resale
under the Securities Act. New notes issued pursuant to the Exchange Offer in
exchange for unregistered notes may be offered for resale, resold or otherwise
transferred by the holders without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such new
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 new notes. However, the foregoing is not applicable to any such holder
which is our "affiliate" and other than any broker-dealer who purchased
unregistered notes directly from us for resale pursuant to Rule 144A under the
Securities Act or any other available exemption under the Securities Act. Each
broker-dealer that acquired unregistered notes for its own account as a result
of market making or other trading activities and that receives new 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 new notes. This
prospectus may be used by a broker-dealer in connection with resales of new
notes received in exchange for unregistered notes where such unregistered notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. We have agreed that, for a period of 180 days after
the effective date of this prospectus, we will make this prospectus available
to any broker-dealer for use in connection with any such resale. However, to
comply with the securities laws of certain jurisdictions, if applicable, the
new 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
unregistered notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted unregistered notes will be
adversely affected.
22
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the Exchange Offer.
23
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect
We sold the initial unregistered notes to the initial purchasers, including
Lehman Brothers, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Morgan Stanley & Co. Incorporated, on January 29, 1999, pursuant to a purchase
agreement entered into as of January 22, 1999 by and between us and the initial
purchasers. 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. We and the initial purchasers also entered into a
registration rights agreement, pursuant to which we agreed, with respect to the
initial notes, to
(i) cause to be filed with the Commission as promptly as practicable a
registration statement under the Securities Act concerning the
exchange offer,
(ii) use our reasonable best efforts to cause such registration
statement to be declared effective by the Commission on or prior
to June 28, 1998 and
(iii) file all pre- and post-effective amendments necessary to cause
such registration statement to become effective and cause all
necessary filings in connection with the registration and
qualification of the new notes under the "blue sky" laws of such
jurisdictions as are necessary to consummate the exchange,
(iv) use our reasonable best efforts to cause the exchange offer to be
consummated on or before July 28, 1998, and
(v) deliver the new notes in the same aggregate principal amount as the
aggregate principal amount of the initial unregistered notes as are
tendered by holders thereof pursuant to the exchange offer.
We also agreed to use our reasonable best efforts to keep the registration
statement effective for no less than 20 days. This exchange offer is intended
to satisfy our exchange offer obligations under the registration rights
agreement.
Terms of the Exchange Offer
We hereby offer, 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 new notes for each $1,000 in principal amount of the
outstanding unregistered initial notes. We 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 June 9, 1999. Tenders of the initial notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on June 9, 1999. This 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 the
conditions, terms and provisions of the registration rights agreement. The form
and terms of the new notes will be identical in all material respects to the
form and terms of the initial notes, except that
(i) the new 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 new notes will
not be entitled to liquidated damages, and
(iii) holders of new 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.
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).
24
<PAGE>
As of the date of this Prospectus, $200.0 million in aggregate principal
amount of the initial notes is outstanding. As of May 5, 1999, CEDE was the
sole registered holder of the initial notes and held $200.0 million of
aggregate principal amount of the initial notes for 22 of its participants.
Solely for reasons of administration (and for no other purpose), we have fixed
the close of business on May 6, 1999, as 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. We believe that,
as of the date of this Prospectus, no such the holder is our affiliate (as
defined in Rule 405 under the Securities Act).
We shall be deemed to have accepted validly tendered initial notes when, as
and if we have 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 new notes from us.
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.
Expiration Date; Extensions; Amendments
The expiration date of the exchange offer is June 9, 1999 at 5:00 p.m., New
York City time, unless we, in our sole discretion, extend 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, we 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.
We reserve the right, in our 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 us to constitute
a material change, we will, in accordance with applicable law, file a post-
effective amendment to the registration statement and resolicit the registered
holders of the initial notes. If we file a post-effective amendment, we 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.
25
<PAGE>
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 us
(which may be contained in the Letter of Transmittal to the effect that such
holder
(i) is not our affiliate,
(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 new notes to be issued in the exchange offer
and
(iii) is acquiring the new notes in its ordinary course of business.
Each holder using the exchange offer to participate in a distribution of the
new notes will be required to acknowledge and agree that, if the resales are of
new notes obtained by such holder in exchange for initial notes acquired
directly from us or our affiliate, 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 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) we fail 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 are not declared effective by
the Commission on or prior to the date specified for such
effectiveness in the registration rights agreement,
(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
event referred to in clauses (i) through (iv) above being a
registration default), additional cash interest 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 us 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.
26
<PAGE>
Accrued Interest on the Initial Notes
The new notes will bear interest at a rate equal to 11 1/4% 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 new notes. Such
interest will be payable with the first interest payment on the new notes.
Interest on the initial notes accepted for exchange, which interest accrued at
the rate of 11 1/4% per annum, will cease to accrue on the day prior to the
issuance of the new notes.
Procedures for Tendering Initial Notes
The tender of a holder's initial notes as set forth below and the acceptance
thereof by us will constitute a binding agreement between the tendering holder
and us 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.
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 described below).
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. 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 us in our 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 us in our sole discretion, which determination shall be final
and binding. We reserve the absolute right to reject any and all initial notes
not properly tendered and to
27
<PAGE>
reject any initial notes, our acceptance of which might, in our judgment or
that of our counsel, be unlawful. We also reserve 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 us 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 we shall determine. We
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 us, proper evidence satisfactory to us, in our sole
discretion, of such person's authority to so act must be submitted.
Any beneficial owner of the initial notes 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 us that, among other
things
(i) the new 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 new
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 new notes must comply with the registration and
prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction of the new 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 new 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 new 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 us except as
otherwise disclosed to us 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
28
<PAGE>
(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. Such account is the Book-Entry
Transfer Facility and will be established 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 described 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 we may enforce such agreement against such
participant.
Acceptance of Initial Notes for Exchange; Delivery of Exchange Notes
Upon satisfaction or waiver of all the conditions to the exchange offer, we
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 new 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, we shall be deemed to have accepted validly tendered initial
notes, when, as, and if we have given oral or written notice thereof to the
exchange agent.
29
<PAGE>
In all cases, issuances of new 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 we reserve 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,
(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 us
in our 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 us, in our 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
1525 West W.T. Harris Boulevard To confirm receipt: (704) 590-
Charlotte, N.C. 28262 7408
30
<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 us. 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 our
affairs 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, we may, at our discretion, take such action
as we 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 our consummation of the exchange offer and
compliance with the registration rights agreement will be borne by us,
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 new 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 our counsel,
(v) fees and disbursements of independent certified public accountants,
(vi) rating agency fees,
(vii) our internal expenses (including, without limitation, all
salaries and expenses of our officers and employees performing
legal or accounting duties), and
(ix) fees and expenses incurred in connection with the listing, if any,
of the new notes on a securities exchange.
We have 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. We will, however, 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 new notes will be recorded at the same carrying value as the initial
notes, as reflected in our accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by us for accounting purposes.
The expenses of the exchange offer will be amortized over the term of the new
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,we believe that the new 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 us for resale
pursuant to Rule 144A under the Securities Act or any
31
<PAGE>
other available exemption under the Securities Act, or (ii) a person that is
our affiliate 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 new 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 new
notes. We have not requested or obtained an interpretive letter from the
Commission staff with respect to this exchange offer, and we 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 new notes in the exchange offer for the purpose of distributing
or participating in a distribution of the new notes, such holder cannot rely on
the position of the staff of the Commission enunciated in 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 new 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 new notes. We
have agreed that for a period of 180 days after the effective date of this
Prospectus, we will make this Prospectus, as amended and supplemented,
available to any broker-dealer who receives new 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 new
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. We do
not currently anticipate that we will register the initial notes under the
Securities Act.
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,
we 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. 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.
We may in the future seek to acquire untendered initial notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plan to acquire any initial notes which are not
tendered in the exchange offer.
32
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998 our:
. actual capitalization; and
. actual capitalization adjusted to give effect to (A) the sale of the
notes previously offered and to be exchanged hereby, less discounts,
commissions, and estimated expenses of the offering payable by us,
and the application of the estimated net proceeds therefrom, and (B)
the repayment of the outstanding balance under the TresCom credit
facility in January 1999.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements, and notes thereto, included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1998
---------------------------
Actual As Adjusted
----------- --------------
(Dollars in thousands,
except share data)
<S> <C> <C>
Cash and cash equivalents........................... $ 136,196 $ 310,877
Restricted investments (including current and long-
term).............................................. 50,623 50,623
----------- -----------
Total cash, cash equivalents and restricted
investments...................................... $ 186,819 $ 361,500
=========== ===========
Debt and capital lease obligations:
TresCom credit facility........................... $ 17,819 $ --
11 3/4% Senior Notes due 2004..................... 222,978 222,978
9 7/8% Senior Notes due 2008...................... 150,000 150,000
11 1/4% Senior Notes due 2009..................... -- 200,000
Notes payable..................................... 1,109 1,109
Capital lease obligations......................... 28,268 28,268
----------- -----------
Total debt and capital lease obligations........ 420,174 602,355
Stockholders' equity:
Common Stock, $.01 par value--80,000,000 shares
authorized; 28,059,063 shares actual and as
adjusted, issued and outstanding................. 281 281
Additional paid-in capital........................ 234,549 234,549
Accumulated deficit............................... (111,653) (111,653)
Accumulated other comprehensive loss.............. (8,260) (8,260)
----------- -----------
Total stockholders' equity...................... 114,917 114,917
----------- -----------
Total capitalization............................ $ 535,091 $ 717,272
=========== ===========
</TABLE>
33
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
consolidated financial statements, the notes thereto, and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained elsewhere in this prospectus. The statement of operations data from
inception to December 31, 1994, for the years ended December 31, 1995, 1996,
1997, 1998 and the balance sheet data as of December 31, 1994, 1995, 1996, 1997
and 1998 have been derived from the consolidated financial statements, which
have been audited by Deloitte & Touche LLP, independent auditors.
<TABLE>
<CAPTION>
Period from
Inception Year Ended
through December 31,
December 31, ------------------------------------------
1994 1995 1996 1997 1998
------------ --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net revenue(1).......... $ -- $ 1,167 $ 172,972 $ 280,197 $ 421,628
Cost of revenue......... -- 1,384 158,845 252,731 353,016
------ -------- --------- --------- ---------
Gross margin
(deficit)............. -- (217) 14,127 27,466 68,612
Operating expenses:
Selling, general and
administrative........ 557 2,024 20,114 50,622 79,532
Depreciation and
amortization.......... 12 160 2,164 6,733 24,185
------ -------- --------- --------- ---------
Total operating
expenses............ 569 2,184 22,278 57,355 103,717
------ -------- --------- --------- ---------
Loss from operations.... (569) (2,401) (8,151) (29,889) (35,105)
Interest expense........ (13) (59) (857) (12,914) (40,047)
Interest income......... 5 35 785 6,238 11,504
Other income (expense).. -- -- (345) 407 --
------ -------- --------- --------- ---------
Loss before income
taxes.................. (577) (2,425) (8,568) (36,158) (63,648)
Income taxes............ -- -- (196) (81) --
------ -------- --------- --------- ---------
Net loss................ $ (577) $ (2,425) $ (8,764) $ (36,239) $ (63,648)
====== ======== ========= ========= =========
Basic and diluted net
loss per common shares
outstanding............ $(0.22) $ (0.48) $ (0.75) $ (1.99) $ (2.61)
====== ======== ========= ========= =========
Weighted average number
of common shares
outstanding............ 2,620 5,019 11,660 18,250 24,432
====== ======== ========= ========= =========
Ratio of earnings to
fixed charges(2)....... -- -- -- -- --
====== ======== ========= ========= =========
Geographic Data:
Net revenue
North America(3)....... $ -- $ 1,167 $ 16,573 $ 74,359 $ 188,008
Asia-Pacific(4)........ -- -- 151,253 183,126 172,757
Europe(5).............. -- -- 5,146 22,712 60,863
------ -------- --------- --------- ---------
Total................ $ -- $ 1,167 $ 172,972 $ 280,197 $ 421,628
====== ======== ========= ========= =========
Other Data:
Gross margin (deficit)
as a percentage of net
revenue................ -- (18.6)% 8.2% 9.8% 16.3%
EBITDA(6)............... $ (557) $ (2,241) $ (5,987) $ (23,156) $ (10,920)
Capital
expenditures(7)........ $ 106 $ 396 $ 12,745 $ 39,465 $ 75,983
Number of switches...... -- 1 1 11 16
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1994 1995 1996 1997 1998
----- ------ -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............ $ 221 $2,296 $ 35,474 $115,232 $136,196
Restricted investments (including
current and long-term).............. -- -- -- 73,550 50,623
Working capital (deficit)............ (264) 1,295 39,282 118,615 107,193
Total assets......................... 487 5,042 135,609 355,393 673,963
Long-term obligations (including
current portion).................... 13 528 17,248 231,211 420,174
Stockholders' equity (deficit)....... (71) 2,562 76,440 42,526 114,917
</TABLE>
34
<PAGE>
- --------
(1) Net revenue is after provision for bad debt.
(2) 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 we
believe to be representative of interest. For the following years, earnings
were insufficient to cover fixed charges by the following amounts:
<TABLE>
<CAPTION>
Year Deficiency
---- -------------
<S> <C>
1994........................................................ $ 0.6 million
1995........................................................ $ 2.4 million
1996........................................................ $ 8.6 million
1997........................................................ $36.4 million
1998........................................................ $63.6 million
</TABLE>
(3) Consists primarily of net revenue from operations in the United States for
all periods prior to 1997. Net revenue for the year ended December 31, 1997
reflects our commencement of operations in Canada beginning in April, 1997.
(4) Consists solely of net revenue from operations in Australia for the year
December 31, 1996. Net revenue for the year ended December 31, 1997
reflects our commencement of operations in Japan beginning in October 1997.
(5) Consists solely of net revenue from operations in the United Kingdom for
all periods prior to 1998. Net revenue for the year ended December 31, 1998
reflects our commencement of operations in Germany in August 1998.
(6) As used herein, "EBITDA" is defined as income (loss) from operations plus
depreciation and amortization expense. 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 to provide
additional information regarding our ability to meet future debt service,
capital expenditures and working capital requirements. EBITDA is not
necessarily a measure of our ability to fund our cash needs and is not
necessarily comparable to similarly titled measures of other companies.
(7) Capital expenditures excludes assets acquired in business combinations and
under terms of capital leases.
35
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma consolidated financial statements are
based on the historical presentation of our audited consolidated financial
statements and the unaudited financial statements of TresCom. The Unaudited Pro
Forma Consolidated Statement of Operations for the year ended December 31, 1998
gives effect to our merger with TresCom, the offering of the 1998 senior notes
and the offering of the notes to be exchanged as if they had occurred on
January 1, 1998. The Unaudited Consolidated Balance Sheet as of December 31,
1998 gives effect to the offering of the notes to be exchanged and the January
1999 repayment of the TresCom credit facility as if they ocurred on December
31, 1998. The unaudited pro forma consolidated financial statements should be
read in conjunction with the historical financial statements, including notes
thereto, of Primus and TresCom included elsewhere herein.
The unaudited pro forma consolidated financial statements may not be
indicative of the results that actually would have occurred if the transactions
had occurred on the dates indicated or which may be obtained in the future.
36
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
TresCom Offering Pro Forma
Primus(1) TresCom(2) Adjustments Adjustments As Adjusted
--------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenue............. $421,628 $71,342 $(1,817)(3) $ -- $485,196
(5,957)(4)
Cost of revenue......... 353,016 60,632 (5,957)(4) -- 407,691
-------- ------- ------- -------- --------
Gross margin............ 68,612 10,710 (1,817) -- 77,505
Operating expenses
Selling, general, and
administrative....... 79,532 16,050 (1,817)(3) -- 93,765
Depreciation and
amortization......... 24,185 3,215 (1,046)(5) -- 30,687
4,333 (6)
-------- ------- ------- -------- --------
Total Operating
Expenses........... 103,717 19,265 1,470 -- 124,452
-------- ------- ------- -------- --------
Loss from operations.... (35,105) (8,555) (3,287) -- (46,947)
Interest expense........ (40,047) (754) -- (23,340)(9) (64,141)
Interest income......... 11,504 -- -- -- 11,504
Other income (expense).. -- 288 -- -- 288
-------- ------- ------- -------- --------
Loss before income
taxes.................. (63,648) (9,021) (3,287) (23,340) (99,296)
Income taxes............ -- -- -- (7) -- --
-------- ------- ------- -------- --------
Net loss................ $(63,648) $(9,021) $(3,287) $(23,340) $(99,296)
======== ======= ======= ======== ========
Basic and diluted net
loss per common share.. $ (2.61) $ (3.57)
======== ========
Weighted average number
of common shares
outstanding............ 24,432 3,414(8) 27,846
======== ======= ========
</TABLE>
- --------
(1) Reflects the historical results of our operations for the year ended
December 31, 1998.
(2) Reflects the historical results of operations of TresCom from January 1,
1998 through June 9, 1998 (acquisition date).
TresCom Adjustments:
(3) To reflect the reclassification of TresCom's bad debt cost from selling,
general and administrative expenses to a reduction of net revenue to
conform to Primus's accounting practices.
(4) To eliminate the effects of intercompany transactions between Primus and
TresCom.
(5) 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.
(6) To record amortization expense associated with acquired customer list and
the excess of purchase over the fair value of net assets acquired.
(7) 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.
(8) To reflect the issuance of Primus common stock to purchase the common
shares of TresCom.
Notes Offering:
(9) To reflect estimated interest expense and amortization of deferred
financing costs on the 1998 senior notes and the notes to be exchanged.
37
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(in thousands)
<TABLE>
<CAPTION>
As
Primus Adjustments Adjusted
-------- ----------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS................................. $136,196 $192,500 (1) $310,877
Cash and cash equivalents.................... (17,819)(2)
Restricted investments....................... 25,729 -- 25,729
Accounts receivable, net..................... 92,531 -- 92,531
Prepaid expenses and other current assets.... 13,505 -- 13,505
-------- -------- --------
Total current assets....................... 267,961 174,681 442,642
RESTRICTED INVESTMENTS......................... 24,894 -- 24,894
PROPERTY AND EQUIPMENT, net.................... 158,873 -- 158,873
INTANGIBLES, net............................... 205,039 -- 205,039
OTHER ASSETS................................... 17,196 7,500 (1) 24,696
-------- -------- --------
TOTAL ASSETS............................... $673,963 $182,181 $856,144
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable............................. $ 82,520 $ -- $ 82,520
Accrued expenses and other current
liabilities................................. 42,597 -- 42,597
Accrued interest............................. 12,867 -- 12,867
Deferred income taxes........................ 361 -- 361
Current portion of long-term obligations..... 22,423 -- 22,423
-------- -------- --------
Total current liabilities.................. 160,768 -- 160,768
200,000 (1)
LONG TERM OBLIGATIONS.......................... 397,751 (17,819)(2) 579,932
OTHER LIABILITIES.............................. 527 -- 527
-------- -------- --------
Total liabilities.......................... 559,046 182,181 741,227
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
TOTAL STOCKHOLDERS' EQUITY..................... 114,917 -- 114,917
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY.................................... $673,963 $182,181 $856,144
======== ======== ========
</TABLE>
- --------
(1) To reflect the proceeds of the note offering, net of deferred financing
costs, and the debt from the note offering.
(2) To reflect the repayment of the TresCom credit facility.
38
<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
We are a facilities-based global telecommunications company. We offer
international and domestic long distance and other telecommunications services
to business, residential and carrier customers. Our customers are primarily in
North America and selected markets within both the Asia-Pacific region and
Europe. We seek to capitalize on the increasing demand for high-quality
international telecommunications services. The globalization of the world's
economies, the worldwide trend toward telecommunications deregulation and the
growth of data and Internet traffic fuels this demand. We provide services over
our telecommunications network, which includes (i) 12 international gateway
switches in the United States, Australia, Canada, Germany, Japan, Puerto Rico
and the United Kingdom, (ii) four domestic switches in Australia, (iii) both
owned and leased transmission capacity on undersea and land-based fiber optic
cable systems and (iv) an international satellite earth station located in
London. Utilizing this network, along with resale arrangements and foreign
carrier agreements, we offer quality service to approximately 450,000
customers.
Primus was founded in February 1994, and through the first half of 1995 was
a development stage enterprise involved in various start-up activities. These
activities included:
. raising capital,
. obtaining licenses,
. acquiring equipment,
. leasing space,
. developing markets and
. recruiting and training personnel.
We began generating revenue during March 1995. On March 1, 1996 we acquired
Axicorp, the fourth largest telecommunications provider in Australia. The
Axicorp acquisition had a material effect on our results of operations for the
year ended December 31, 1996. Our Australian operations generated approximately
$177.6 million, or 89%, of our pro forma net revenue for the year ended
December 31, 1996 assuming the Axicorp acquisition had occurred on January 1,
1996.
We have 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 reseller of long distance, local and cellular service and did not
own any switches. Since the Axicorp acquisition, we have installed and begun to
carry traffic on a five-switch network in Australia, have 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. We have focused on migrating existing traffic onto our
network while increasing the number of higher-margin, higher-volume business
customers with significant international long distance traffic. As part of our
focus on business customers, we have increased Axicorp's direct sales force and
reduced its reliance on marketing through trade and professional associations.
We have experienced and expect 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. We expect to continue to upgrade
Axicorp's facilities, increase its traffic capacity and introduce new products
and services. In that regard, we expanded our service offerings in Australia
with our March 1998 acquisition of a controlling interest in Hotkey Internet
Services Pty. Ltd., an Australia-based Internet service provider, our April
1998 acquisition of all the outstanding stock of Eclipse
39
<PAGE>
Telecommunications Pty. Ltd., an Australia-based data communications service
provider and our February 1999 acquisition of the remaining interest in Hotkey.
On June 9, 1998, we acquired the operations of TresCom. After giving pro
forma effect to the TresCom merger, for the year ended December 31, 1998, we
would have had net revenue of $485.2 million. The TresCom merger expands the
scope and coverage of our telecommunications network, thereby providing
additional opportunities to migrate traffic onto the network, resulting in
better utilization of the network and reduced variable costs.
In September 1998, we announced a refinement of our strategic outlook. The
principal element of the revised strategy includes concentrating our immediate
expansion plans in those markets that are more economically stable and are
experiencing more rapid deregulation, such as continental Europe and Canada.
Thereafter, we would expand in additional markets within our principal service
regions, including Japan, other parts of the Asia-Pacific region and Latin
America. As part of the refined strategy, we announced our intention to
continue the development of our retail customer base in the United States, the
United Kingdom and Australia, and to build the infrastructure to expand our
retail customer base in select European countries (focusing on Germany in the
immediate future). Finally, the refined strategy, as announced, also includes
greater focus on data and Internet services.
Net revenue is earned based on the number of minutes billable and is
recorded upon completion of a call, adjusted for sales allowance. We generally
price our services at a savings compared to the major carriers operating in our
principal service regions. Our net revenue is derived from carrying a mix of
business, residential and carrier long distance traffic, data and Internet
traffic in Australia and Canada, and, in Australia, also from the provision of
local and cellular services. We expect to continue to generate net revenue from
internal growth through sales and marketing efforts focused on customers with
significant international long-distance usage, including small- and medium-
sized businesses, multinational corporations, ethnic residential customers and
other telecommunications carriers and resellers.
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, we believe that prices are likely to continue to decrease.
Additionally, we believe that because deregulatory influences only recently
have begun to affect non-United States and non-United Kingdom
telecommunications markets, including Australia, the deregulatory trend in such
markets is expected to result in greater competition which could adversely
affect our net revenue per minute and gross margin as a percentage of net
revenue. However, we believe 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 our cost of revenue is variable, based upon the number
of minutes of use, with transmission and termination costs being our most
significant expense. As we increase the portion of traffic transmitted over
leased or owned facilities, cost of revenue increasingly will be comprised of
fixed costs. In order to manage such costs, we pursue a flexible approach with
respect to the expansion of our network. In most instances, we initially obtain
transmission capacity on a variable-cost, per-minute leased basis, next acquire
additional capacity on a fixed-cost basis when traffic volume makes such a
commitment cost-effective, and ultimately purchase and operate our own
facilities when traffic levels justify such investment. We also seek to lower
our cost of revenue through (i) optimizing the routing of calls over the least
cost route, (ii) increasing volumes on our 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 the foreign incumbent carriers and others, and (iv)
continuing to expand the network when we believe traffic volumes justify such
investment.
Typical of the long distance telecommunications industry, we generally
realize a higher gross margin as a percentage of net revenue on our
international as compared to our domestic long distance services and a higher
40
<PAGE>
gross margin as a percentage of net revenue on our services to both business
and residential customers compared to those realized on our services to other
telecommunications carriers. In addition, we generally realize a higher gross
margin as a percentage of net revenue on our long distance services as compared
to those realized on local switched and cellular services. Carrier services,
which generate a lower gross margin as a percentage of net revenue than retail
services, are an important part of our net revenue because the additional
traffic volume of such carrier customers improves the utilization of the
network and allows us to obtain greater volume discounts from our suppliers
than we otherwise would realize. Our overall gross margin as a percentage of
net revenue may fluctuate based on our relative volumes of international versus
domestic long distance services, carrier services versus business and
residential long distance services, and the proportion of traffic carried on
our network versus resale of other carriers' services.
Our 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 our operations and the
transformation of both Axicorp's and TresCom's operations. We expect this trend
to continue and believe that we will incur additional selling, general and
administrative expenses to support the expansion of sales and marketing efforts
and operations in current markets as well as new markets in our principal
service regions.
Since the inception of our operations, we have made, and expect to continue
to make, significant investments in the development of our operations in our
principal service regions and the development and expansion of our network. The
costs of developing our operations and expanding our network, including the
purchase and installation of switches, sales and marketing expenses and other
organizational costs, are significant. In addition, our increased capital
investment activity in the future can be expected to affect our operating
results in the near term due to increased depreciation charges and interest
expense in connection with borrowings to fund such expenditures. These costs
will be incurred in advance of the realization of the expected improvements in
operating results from such investments. Such costs and investment activities
have resulted in negative cash flows and operating losses for us on an
historical basis, which are expected to continue in the near future as we use
the proceeds from the notes to accelerate the expansion of our business and the
build-out of our network.
Although our functional currency is the United States dollar, a significant
portion of our net revenue is derived from sales and operations outside the
United States. In the future, we expect to continue to derive the majority of
our net revenue and incur a significant portion of our operating costs from
outside the United States and therefore changes in exchange rates may have a
significant effect on our results of operations. We historically have not
engaged in hedging transactions and do not currently contemplate engaging in
hedging transactions to mitigate foreign exchange risks.
Other Financial and Operating Data. The following financial and operating
data for the ten quarters ended December 31, 1998 is provided for informational
purposes and should be read in conjunction with the consolidated financial
statements and the notes thereto contained elsewhere herein.
41
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1996 1996 1997 1997 1997 1997
------------- ------------ --------- -------- ------------- ------------
(in thousands, except gross margin percentage)
<S> <C> <C> <C> <C> <C> <C>
Financial Data(1):
Net revenue(2)......... $51,819 $55,738 $59,036 $ 70,045 $ 73,018 $ 78,098
Gross margin........... 4,609 4,266 4,002 5,867 7,752 9,845
Gross margin
percentage............ 8.9% 7.7% 6.8% 8.4% 10.6% 12.6%
EBITDA(3)............... (1,585) (2,946) (4,827) (7,339) (5,997) (4,993)
Minutes of Long Distance
Use:
International:
North America.......... 9,199 12,160 17,629 45,784 57,199 75,950
Asia-Pacific........... 1,967 1,876 2,384 6,222 11,844 18,944
Europe................. 1,713 3,192 4,253 5,131 9,852 17,403
------- ------- ------- -------- -------- --------
Total international.. 12,879 17,228 24,266 57,137 78,895 112,297
------- ------- ------- -------- -------- --------
Domestic:
North America.......... 3,972 5,533 6,346 18,498 17,131 17,653
Asia-Pacific........... 56,932 58,336 59,481 61,304 61,544 61,496
Europe................. 1,512 3,051 4,533 5,775 6,973 9,626
------- ------- ------- -------- -------- --------
Total domestic....... 62,416 66,920 70,360 85,577 85,648 88,775
------- ------- ------- -------- -------- --------
Total minutes of long
distance use........... 75,295 84,148 94,626 142,714 164,543 201,072
======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
----------- ----------- -------------- -------------
(in thousands, except gross margin percentage)
<S> <C> <C> <C> <C>
Financial Data(1):
Net revenue(2)......... $ 80,051 $ 99,475 $ 116,047 $ 126,055
Gross margin........... 11,329 15,349 19,490 22,444
Gross margin
percentage............ 14.2% 15.4% 16.8% 17.8%
EBITDA(3)............... (4,048) (3,641) (3,532) 302
Minutes of Long Distance
Use:
International:
North America.......... 78,950 111,029 152,701 197,069
Asia-Pacific........... 24,596 29,865 32,896 32,370
Europe................. 22,944 49,028 52,266 69,628
Total international.. 126,490 189,922 237,863 299,067
Domestic:
North America........... 20,138 36,590 86,113 73,019
Asia-Pacific........... 61,151 64,936 76,456 82,111
Europe................. 11,462 18,263 16,354 25,633
----------- ----------- ----------- -----------
Total domestic....... 92,751 119,789 178,923 180,763
----------- ----------- ----------- -----------
Total minutes of long
distance use........... 219,241 309,711 416,786 479,830
=========== =========== =========== ===========
</TABLE>
- --------
(1) Reflects the Axicorp acquisition in March 1996, the commencement of
operations in Canada in April 1997, the TelePassport/USFI acquisition in
October 1997 and the TresCom merger in June 1998.
(2) Net revenue is after provision for bad debt.
(3) As used herein, "EBITDA" is defined as income (loss) from operations plus
depreciation and amortization expense. 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 our ability to meet future debt
service, capital expenditures and working capital requirements. EBITDA is
not necessarily a measure of our ability to fund our cash needs and is not
necessarily comparable to similarly titled measures of other companies.
42
<PAGE>
Results of Operations
For the year ended December 31, 1998 as compared to the year ended December
31, 1997
Net revenue increased $141.4 million or 51% to $421.6 million for the year
ended December 31, 1998, from $280.2 million for the year ended December 31,
1997. Of the net revenue increase, $113.7 million was associated with our North
American operations, which represents a growth rate of approximately 153%. The
growth reflects increased traffic volumes in business and ethnic residential
retail operations and in carrier operations, and includes operations of TresCom
(since the June 9, 1998 acquisition), and a full year's results of the acquired
Canadian operations and the acquired operations of TelePassport L.L.C./USFI,
Inc. Our European net revenue increased from $22.7 million for the year ended
December 31, 1997 to $60.9 million for the year ended December 31, 1998,
resulting from increased retail business and residential traffic and the
addition of carrier services, both in the United Kingdom and Germany. Our Asia-
Pacific net revenue decreased by $10.3 million or 5.7% to $172.8 million for
the year ended December 31, 1998 from $183.1 million for the year ended
December 31, 1997 primarily resulting from a 13% decrease in the Australian
dollar average exchange rate. Net revenue of the Australian operations, in
Australian dollar terms, grew 7% to Australian $259.5 million as a result of
increased retail business and residential traffic growth and the addition of
data and Internet services.
Cost of revenue increased $100.3 million, from $252.7 million, or 90.2% of
net revenue, for the year ended December 31, 1997 to $353.0 million, or 83.7%
of net revenue, for the year ended December 31, 1998. The increase in the cost
of revenue is primarily attributable to the increased traffic volumes and
associated net revenue growth. The cost of revenue as a percentage of net
revenue decreased by 650 percentage points as a result of the expansion of our
global network, the continuing migration of existing and newly generated
customer traffic onto our network, and new higher margin product offerings such
as data and Internet services.
Selling, general and administrative expenses increased $28.9 million to
$79.5 million for the year ended December 31, 1998 from $50.6 million for the
year ended December 31, 1997. The increase is attributable to the addition of
expenses from acquired operations including TresCom, Hotkey, Eclipse and the
Canadian operations, the hiring of additional sales and marketing staff and
network operations personnel and increased advertising and promotional expenses
associated with our residential marketing campaigns.
Depreciation and amortization increased from $6.7 million for the year ended
December 31, 1997 to $24.2 million for the year ended December 31, 1998. The
increase is associated with increased amortization expense related to
intangible assets arising from our acquisitions and with increased depreciation
expense related to capital expenditures for fiber optic cable, switching and
other network equipment being placed into service.
Interest expense increased to $40.0 million for the year ended December 31,
1998 from $12.9 million for the year ended December 31, 1997. The increase is
primarily attributable to the interest expense associated with our July 1997
$225 million 11 3/4% senior notes offering, due 2004 and our May 1998 $150
million 9 7/8% senior notes offering due 2008, and, to a lesser extent, our
Bank Revolving Credit Facility and additional capital lease financing.
Interest income increased from $6.2 million for the year ended December 31,
1997 to $11.5 million for the year ended December 31, 1998. The increase is a
result of the investment of the net proceeds of our 1998 and 1997 Senior Note
offerings.
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 our 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 our North American operations and reflects a growth rate of
approximately 350% (approximately 300% exclusive of net revenue
43
<PAGE>
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 our
investments in the network and the associated migration of customer traffic
onto our 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 our 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 our network; the TelePassport/USFI acquisition and operations acquired
in Canada during 1997; a full year of our Australian operations versus ten
months in the prior year; and increased advertising and promotional expenses
associated with our 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 our 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 our 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 our 1997 Senior Notes
offering and our 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 transaction
gains/losses on Australian dollar-denominated debt incurred by us for the
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 our United Kingdom and
Australian subsidiaries.
44
<PAGE>
Liquidity and Capital Resources
Our liquidity requirements arise from:
. net cash used in operating activities,
. purchases of network equipment including switches, related
transmission equipment, international and domestic fiber cable
capacity, satellite earth stations and satellite transmission
capacity,
. interest and principal payments on outstanding indebtedness and
. acquisitions of and strategic investments in businesses.
We have financed our growth to date through public offerings and private
placements of debt and equity securities, bank debt and capital lease
financing.
Net cash used in operating activities was $71.3 million for the year ended
December 31, 1998 as compared to net cash used in operating activities of $14.8
million for the year ended December 31, 1997 and $6.9 million for the year
ended December 31, 1996. The increase in cash used in operating activities for
the year ended December 31, 1998 as compared to the year ended December 31,
1997 is primarily comprised of an increase in the net loss of $27.4 million and
a decrease in accounts payable of $8.2 million (as compared to an increase in
accounts payable of $30.2 million in 1997), partially offset by increased non-
cash operating expenses of $21.5 million. 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. The increased cash usage for the year
ended December 31, 1996 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 $54.2 million for the year ended
December 31, 1998 compared to net cash used in investing activities of $104.2
million for the year ended December 31, 1997 and $39.6 million for the year
ended December 31, 1996. Net cash used in investing activities during the year
ended December 31, 1998 includes $76.0 million of capital expenditures
primarily for the expansion of our global network, partially offset by $22.9
million of 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 our global network, the
TelePassport/USFI acquisition and the acquisition of our 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 our global network
and $1.7 million for the purchase of Axicorp, net of cash acquired.
Net cash provided by financing activities was $146.8 million for the year
ended December 31, 1998 as compared to net cash provided by financing
activities of $200.1 million during the year ended December 31, 1997 and $79.5
million during the year ended December 31, 1996. Cash provided by financing
activities in the year ended December 31, 1998 resulted primarily from $144.5
million of net proceeds of the 1998 Senior Notes offering. Net cash provided by
financing activities for the year ended December 31, 1997 resulted primarily
from the net proceeds of the offering of 1997 Senior Notes. In 1996, we
completed private placements of Common Stock generating net proceeds of
approximately $21.9 million, and in November 1996, we completed an initial
public offering of our Common Stock and generated net proceeds of approximately
$54.4 million.
We anticipate aggregate capital expenditures of approximately $125 million
during 1999. Such capital expenditures will be primarily for international and
domestic switches and points of presence, international and domestic fiber
optic cable capacity for new and existing routes, satellite earth station
facilities, other transmission equipment, and back office support systems. We
are currently installing an additional international
45
<PAGE>
gateway switch in Paris, which is expected to be operational during the second
quarter of 1999. By the end of 2000, we intend to add up to one switch in North
America, 11 additional switches in Europe and one switch in Japan.
On March 31, 1999, we purchased the common stock of London Telecom Network,
Inc. and certain related entities that provide long distance telecommunications
services in Canada, for approximately $36 million in cash (including payments
made in exchange for certain non-competition agreements). In addition, on March
31, 1999, we entered into an agreement to purchase substantially all of the
operating assets of Wintel CNC Communications, Inc. and Wintel CNT
Communications, Inc., which are Canada-based long distance telecommunications
providers affiliated with the London Telecom Network companies, for $14 million
in cash. The purchase of the assets of the Wintel companies was consummated on
May 3, 1999. If the London Telecom Network companies and the Wintel companies
collectively achieve certain financial goals during the first half of 1999, we
have agreed to pay up to an additional $4.6 million in cash.
On January 29, 1999, we completed an offering of $200 million 11 1/4% Senior
Notes due in 2009. The $192.5 million of net proceeds of the offering are to be
used for continued expansion of our network and other general corporate
purposes.
On January 20, 1999, we entered into a supplemental indenture applicable to
our 11 3/4% Senior Notes in order to provide additional flexibility to incur
indebtedness to fund our expansion, to make permitted investments in marketing
channels and complementary telecommunications services and to secure additional
bank debt. The supplemental indenture substantially conformed certain covenants
applicable to the 1997 Senior Notes to the corresponding provisions of our
other senior notes. We incurred fees and expenses of approximately $4.8 million
in connection with securing consents to enter into the supplemental indenture.
In January 1999, we voluntarily repaid in full with a part of our available
cash, and delivered notice of our termination of, the TresCom credit facility.
The TresCom credit facility, which provided for up to $25 million of revolving
credit borrowings and which was due to mature on July 30, 2002, was acquired
from TresCom upon the completion of the TresCom merger. In March 1999, the
TresCom credit facility was terminated and we will no longer be able to borrow
funds under it. The collateral securing the repayment obligations, consisting
primarily of TresCom's receivables, have been released. We do not believe that
the termination of the TresCom credit facility will have a material adverse
effect on our liquidity and capital resources.
We believe that the net proceeds from the notes to be exchanged, together
with our existing cash and available capital lease financing and bank financing
(subject to limitations in the 1999 indenture, the 1997 indenture and 1998
indenture) will be sufficient to fund our operating losses, debt service
requirements, capital expenditures and other cash needs for our operations for
at least until the end of 2000. The semi-annual interest payments due under the
1997 senior notes through August 1, 2000 have been pre-funded and will be paid
from our restricted investments. We are continually evaluating the expansion of
our service offerings and plan to make further investments in and enhancements
to our switches and distribution channels in order to expand our service
offerings. In order to fund these additional cash requirements, we anticipate
that we will be required to raise additional financing from public or private
equity or debt sources. Additionally, if our plans or assumptions change
(including those with respect to the development of our network, the level of
our operations and our operating cash flow), if our assumptions prove
inaccurate, if we consummate additional investments or acquisitions or if we
experience unexpected costs or competitive pressures, or if existing cash and
any other borrowings prove to be insufficient, we may be required to seek
additional capital sooner than expected.
Since our inception through December 31, 1998, we have had negative cash
flow from operating activities of $95.5 million and negative EBITDA of $42.9
million. In addition, we incurred net losses in 1995, 1996, 1997 and 1998 of
$2.4 million, $8.8 million, $36.2 million and $63.6 million, respectively, and
had an accumulated deficit of approximately $111.7 million as of December 31,
1998. On a pro forma basis, after giving effect to the offering of the 1998
senior notes, the offering of the notes to be exchanged and the
46
<PAGE>
TresCom merger, for the year ended December 31, 1998, we would have had a net
loss of $99.3 million. Although we have experienced net revenue growth in each
of our last 15 quarters, such growth should not be considered to be indicative
of future net revenue growth, if any. We expect to continue to incur additional
operating losses and negative cash flow from operations as we expand our
operations and continue to build-out and upgrade our network. There can be no
assurance that our revenue will grow or be sustained in future periods or that
we will be able to achieve or sustain profitability or positive cash flow from
operations in any future period. If we cannot achieve and sustain operating
profitability or positive cash flow from operations, we may not be able to meet
our debt service or working capital requirements (including our obligations
with respect to the notes to be exchanged).
From time to time we evaluate acquisitions, joint ventures and strategic
investments involving businesses which complement our business. Depending on
the cash requirements of potential transactions, we may finance such
transactions with bank borrowings, through other debt financing vehicles, or
through the issuance of capital stock. However, we presently have no commitment
or agreement with respect to any material acquisition, joint venture or
strategic investment. There can be no assurance that if we were to pursue such
an opportunity, any such transaction would occur or that the funds to finance
any such transaction would be available on reasonable terms, if at all.
Year 2000 Compliance
General. We are reviewing our network elements, computer systems, software
applications and other business systems in order to determine if any of these
systems will not properly reflect or recognize the year 2000. Because many
computer and computer applications define dates by the last two digits of the
year, "00" could be interpreted to mean the year 1900, rather than the year
2000. This error could result in miscalculations or system failures. Year 2000
issues may also affect the systems and applications of our customers, vendors
or resellers.
Compliance Program. In 1998, we began a comprehensive inventory and Year
2000 assessment of our principal computer systems, network elements, software
applications and other business systems throughout the world. We expect to
complete our inventory and assessment by June 30, 1999 and have begun repairing
or replacing the most critical items that we have determined not to be Year
2000 compliant. We expect to complete the repair, replacement, testing and
certification of substantially all non-compliant network elements by September
30, 1999. We are using both internal and external resources to identify,
correct or reprogram, and test our systems for Year 2000 compliance.
Suppliers. We are currently and have been contacting third party suppliers
of major equipment, software, systems and services used by us to identify and,
to the extent possible, to resolve issues involving Year 2000 compliance.
However, we have limited or no control over the actions of these third party
suppliers. Consequently, while we expect that we will be able to resolve any
significant Year 2000 issues with regard to these systems and services, there
can be no assurance that these suppliers will resolve any or all Year 2000
issues before the occurrence of a material disruption to our business or any of
our customers.
Costs. We expect to incur in the aggregate approximately $3 to $5 million in
expenditures in 1999 to complete our Year 2000 compliance program. These
estimates do not include the costs of systems, software and equipment that are
being replaced or upgraded in the normal course of business. The costs of
modifying our network elements, software and systems for Year 2000 compliance
are being funded from existing cash resources and are being charged as expenses
as incurred.
Risks. We believe that we will substantially complete the implementation of
our Year 2000 program prior to December 31, 1999. Consequently, we do not
believe that Year 2000 issues will have a material adverse effect on our
business or results of operations. However, if we do not achieve compliance
prior to December 31, 1999, if we fail to identify and remedy all critical Year
2000 problems or if major suppliers or
47
<PAGE>
customers experience material Year 2000 problems, our results of operations or
financial condition could be materially affected. We have determined that non-
compliant network elements may result in improperly routed traffic and that
non-compliant, non-network systems may result in errors in customer billing and
accounting records.
Contingency Plans. We have begun to develop appropriate contingency plans to
mitigate, to the extent possible, any significant Year 2000 noncompliance. We
expect to complete our contingency plans by September 30, 1999. If we are
required to implement our contingency plans, the cost of Year 2000 compliance
may be greater than the amount referenced above and there can be no assurance
that these plans will be adequate.
48
<PAGE>
BUSINESS
General
We are a facilities-based global telecommunications company. We offer
international and domestic long distance and other telecommunications services
to business, residential and carrier customers. Our customers are primarily in
North America and selected markets within both the Asia-Pacific region and
Europe. We seek to capitalize on the increasing demand for high-quality
international telecommunications services. The globalization of the world's
economies, the worldwide trend toward telecommunications deregulation and the
growth of data and Internet traffic is fueling this demand. We provide services
over our network, which includes:
. 12 international gateway switches in the United States, Australia,
Canada, Germany, Japan, Puerto Rico and the United Kingdom;
. four domestic switches in Australia;
. both owned and leased transmission capacity on undersea and land-based
fiber optic cable systems; and,
. an international satellite earth station located in London.
Utilizing our network, along with resale arrangements and foreign carrier
agreements, we offer quality service to approximately 450,000 customers.
We are a full-service carrier and have licenses and operations in the United
States, Australia, the United Kingdom, Germany, Japan and Canada. In addition,
we recently obtained licenses to provide service in France, Ireland and
Switzerland. We had net revenue and pro forma net revenue, after giving effect
to our merger with Trescom International, Inc., as follows:
<TABLE>
<CAPTION>
Year Ended Revenue
---------- -------
<S> <C>
December 31, 1996............................................ $173.0 million
December 31, 1997............................................ $280.2 million
December 31, 1998............................................ $421.6 million
December 31, 1998 (pro forma)................................ $485.2 million
</TABLE>
We primarily target customers with significant international long distance
usage, including
. small- and medium-sized businesses,
. multinational corporations,
. ethnic residential customers and
. other telecommunications carriers and resellers.
In an effort to attract larger business customers in multiple markets, we
intend to offer a broad array of services (including long distance voice,
cellular, Internet and data services) in approximately 10 markets, including
the United States, Australia, the United Kingdom, Germany, France, Canada,
Japan and Italy. We currently provide competitively priced telecommunications
services, including:
. international and domestic long distance services and private networks,
. reorigination services, prepaid and calling cards and toll-free
services,
. local services in Australia, Puerto Rico and the United States Virgin
Islands,
. data, Internet and cellular services in Australia, and
. Internet services in Canada
We market our services through a variety of channels, such as our direct
sales force and independent agents as well as through direct marketing.
49
<PAGE>
By constructing and expanding our network, we reduced costs, improved
service reliability and increased flexibility to introduce new products and
services. By carrying more traffic over our expanding network, we have
increased gross margins as a percentage of net revenue (after accounting for
bad debt) to 17.8% in the fourth quarter of 1998 from 6.8% in the first quarter
of 1997. We believe that, as the volume of telecommunications traffic carried
on our network increases, we should continue to improve profitability as we
more fully utilize our network capacity and realize economies of scale.
Currently, 24 countries are connected directly to our network. We expect to
continue to expand our network through additional investment in undersea and
domestic fiber optic cable systems, international gateway and domestic
switching facilities and international satellite earth stations as customer
demand justifies the capital investment. Major components of our network
include the following:
Switches. The major components of our network include our 16 carrier-grade
switches and our 25 points of presence in additional markets within our
principal service regions. Here is further information about the location and
type of our switches:
<TABLE>
<CAPTION>
Location Type of Switch
-------- ---------------------
<S> <C>
New York City(2)....................................... International Gateway
Los Angeles............................................ International Gateway
Washington............................................. International Gateway
Fort Lauderdale........................................ International Gateway
Toronto................................................ International Gateway
Vancouver.............................................. International Gateway
London................................................. International Gateway
Frankfurt.............................................. International Gateway
Sydney................................................. International Gateway
Tokyo.................................................. International Gateway
Puerto Rico............................................ International Gateway
Adelaide............................................... Domestic
Brisbane............................................... Domestic
Melbourne.............................................. Domestic
Perth.................................................. Domestic
</TABLE>
Our international gateway switches will serve as the base for our global
expansion of the network into new countries when customer demand justifies the
investment and as regulatory rules permit us to compete in new markets. We are
currently installing an international gateway switch in France, which is
expected to be operational during the second quarter of 1999. By the end of
2000, we intend to add up to 11 switches in Europe, one switch in North America
and one switch in Japan.
Fiber Capacity. We own and lease transmission capacity which connects our
switches to each other and to the networks of other international and domestic
telecommunications carriers. Our ownership interests in fiber consist of
minimum assignable ownership units and indefeasible rights of use in 23
undersea fiber optic cable systems, including the CANTAT-3, TAT-12/TAT-13, TPC-
5, Gemini, Atlantic Crossing-1, FLAG, Americas 1 and Columbus 2 systems. In
addition, in September 1998, we entered into an agreement to purchase $20
million of fiber capacity from Qwest which will provide high speed connections
among our U.S. gateway switches. We expect to continue to acquire additional
capacity on both existing and future international and domestic fiber optic
cable systems as we determine that anticipated customer demand justifies such
investments.
Satellite Earth Stations and Capacity. We are currently constructing
international satellite earth stations and purchasing capacity on international
satellites. This will permit us to provide data and Internet transmission
services, in addition to voice services, to and from primarily post, telephone
and telegraph operators, other telecommunications carriers and Internet service
providers, principally in developing countries. We have completed the
construction of an Intelsat earth station in London and have purchased capacity
on the
50
<PAGE>
Intelsat-64 satellite. When this earth station becomes operational, which we
expect to occur in the second quarter of 1999, we expect to be able to carry
voice, data and Internet traffic to and from countries in the Indian
Ocean/Southeast Asia region. By the end of 1999, we expect to expand our global
satellite coverage by constructing an additional satellite earth station on
each of the east and west coasts of the United States and by reserving
additional capacity on international satellites. These additional facilities
will position us to provide voice, data and Internet transmission services to
Latin America and the Pacific Rim.
Foreign Carrier Agreements. In selected countries where competition with the
traditional incumbent post, telephone and telegraph operators is limited or is
not currently permitted, we have entered into foreign carrier agreements with
post, telephone and telegraph operators or other service providers which permit
us to carry traffic into and receive return traffic from these countries. We
have existing foreign carrier agreements with post, telephone and telegraph
operators in Cyprus, Greece, India, Iran, Italy and New Zealand, as well as
additional carrier agreements with foreign service providers in other
countries.
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. The change has resulted, and is expected to
continue to result, in significant growth in usage of international
telecommunications services. According to TeleGeography, in 1997, the
international long distance industry accounted for $66 billion in revenues and
82 billion minutes of use. That is an increase from $27 billion in revenues and
22 billion minutes of use in 1988. TeleGeography has estimated that, under one
scenario, by the year 2001 this market will have expanded to $80 billion in
revenues and 159 billion minutes of use.
We believe that the growth in international long distance services is being
driven by:
. globalization of the world's economies and the worldwide trend toward
telecommunications deregulation,
. the growth of data and Internet traffic,
. declining prices and a wider choice of products and services driven by
greater competition resulting from privatization and deregulation,
. increased telephone accessibility resulting from technological advances
and greater investment in telecommunications infrastructure, including
deployment of wireless networks and
. increased international business and leisure travel.
We believe that growth of traffic originated in markets outside the United
States will continue to 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 lowered
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 we currently compete. 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. We
believe 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 we believe is publicly available, for the period 1989 through
1996, per minute settlement payments by United States-based carriers to foreign
post, telephone and telegraph operators fell 38.6%, from $0.70 per minute to
$0.43 per minute. At the same time, per minute international billed revenue
fell only 27.5%, from $1.02 in 1989 to $0.74 in 1996. We believe 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.
51
<PAGE>
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 (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, France
Telecom in France, Deutsche Telekom in Germany, 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 regional
Bell operating companies and, most recently, by the passage of the 1996
Telecommunications Act. Deregulation has occurred elsewhere, such as in the
United Kingdom, Canada and Australia, and is being implemented in other
countries, including most EU countries, Japan and several Latin American
countries, including Chile, Guatemala, Peru and El Salvador.
On February 15, 1997, the United States and 68 other countries, including
Australia, the United Kingdom, Canada, Germany and Japan, signed the World
Trade Organization 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. We believe that the World Trade Organization Agreement has begun to,
and will continue to, provide us with significant opportunities to compete in
markets where we did not previously have access and will allow us to provide
end-to-end, facilities-based services to and from these countries.
In addition, to implement the United States' "open market" commitments under
the World Trade Organization Agreement, the FCC has (i) eliminated the FCC's
Effective Competitive Opportunities test for applicants affiliated with
carriers in World Trade Organization 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. We
believe that the FCC order has had and will continue to have the following
effects on United States carriers:
. reduce impediments to investment in United States carriers by foreign
entities,
. increase opportunities to enter into innovative traffic arrangements
with foreign carriers located in World Trade Organization member
countries,
. add new opportunities to engage in international simple resale to
additional foreign countries and
. 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 consists of calls going
from a country of origination, and inbound traffic consists of 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
52
<PAGE>
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
indefeasible rights of use or minimum assignable ownership units. The
fundamental difference between a holder of indefeasible rights of use and an
owner of minimum assignable ownership units is that the indefeasible rights of
use 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, 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. 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 total accounting
rate, 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 total accounting rate 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 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 in order to complete calls more economically than under the
accounting rate mechanism. Some of the more significant alternative calling
procedures include:
. transit,
. refiling or "hubbing,"
. international simple resale and
. reorigination.
The most common of the above methods is transit. The transit procedure
allows traffic between two countries to be carried through a third country on
another carrier's network. This procedure, which requires
53
<PAGE>
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 international simple resale, 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. International simple resale currently is allowed by
applicable regulatory authorities between a limited number of international
routes, including Canada-United Kingdom, United States-United Kingdom, United
States-Sweden and United Kingdom-Australia and is currently experiencing
increasing usage. 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 alternative calling procedures 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 alternative
calling procedures and are developing networks to compete with the first-tier
carriers and gain market share. Other entrants, including Primus, 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
Our objective is to become a leading global provider of international and
domestic long distance voice, Internet, data and other services in our
principal service regions. Key elements of our strategy to achieve this
objective include:
. Focus on Customers with Significant International Long Distance
Usage. We primarily target customers with significant international long
distance usage, including small- and medium-sized businesses,
multinational corporations, ethnic residential customers and other
telecommunication carriers and resellers. We believe 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. We seek to be an
early entrant into selected deregulating telecommunications markets
where we believe there is significant demand for international long
distance services as well as substantial growth and profit potential. We
further believe that early entrance into deregulating markets provides
us with competitive advantages as we develop sales channels, establish a
customer base, hire personnel experienced in the telecommunications
industry and achieve name recognition, prior to the entry into these
markets by a large number of competitors. We intend to concentrate our
immediate expansion plans in those markets that are more economically
stable and are experiencing more rapid deregulation, such as continental
Europe and Canada. Subsequently, we expect to expand in additional
markets within our principal service regions, including Japan, other
parts of the Asia-Pacific region and Latin America.
. Expand Global Network. By constructing and expanding our network, we
have reduced operating costs, improved service reliability and increased
our flexibility to introduce new services. We expect
54
<PAGE>
that continued strategic development of our network will continue to
lead to reduced transmission and other operating costs as a percentage
of net revenue, improved gross margins, reduced reliance on other
carriers and more efficient network utilization. We own our own
switching facilities, fiber optic cable capacity and a satellite earth
station and purchase fiber optic cable capacity on an end-to-end basis
and satellite transmission capacity when we believe that current and
expected traffic levels justify such investment.
. Expand Service Offerings to Become a Full-Service Carrier in Selected
Deregulating Markets. We typically enter markets which are in the
initial stages of deregulation by first providing international long-
distance services and, as the market deregulates further, by expanding
our portfolio of service offerings within the particular market. In an
effort to attract larger business customers in multiple markets, we
intend to offer a broad array of services (including long distance
voice, cellular, Internet and data services) in approximately 10
markets, including the United States, Australia, the United Kingdom,
Germany, France, Canada, Japan and Italy. We believe that international
long distance generally offers attractive margins in markets in the
early stage of deregulation and provides a platform for expanding our
service offerings to our customers.
. Provide Transmission for Internet and Data Services in Developing
Countries. We plan to offer satellite-based broadband transmission
capacity on a wholesale basis to post, telephone and telegraph
operators, other telecommunications carriers and Internet service
providers principally serving developing countries. We focus these
services on developing countries due to their limited capacity to handle
their rapidly-growing Internet and data traffic. Once operational, our
satellite earth station in London will enable us to offer Internet and
data transmission services in the Indian Ocean/Southeast Asia region.
Additionally, we plan to replicate this strategy so as to offer such
services in Latin America and the Pacific Rim by adding two additional
satellite earth stations, one on each of the east and west coasts of the
United States.
. Deliver a Broad Selection of Quality Services at Competitive Prices. We
believe that we deliver high quality services at competitive prices and
provide a high level of customer service. We intend to maintain a low
cost structure in order to offer our customers international and
domestic long distance services priced below those of major carriers in
our principal service regions. In addition, we intend to maintain strong
customer relationships through the use of trained and experienced sales
and service representatives, and through the provision of customized
billing services. By also offering a broad selection of services,
including cellular, data, Internet and other value-added services, we
believe we can bundle services for customers and reduce per customer
sales and marketing costs and customer turnover.
. Growth through Selected Acquisitions, Joint Ventures and Strategic
Investments. As part of our business strategy, we frequently evaluate
potential acquisitions, joint ventures and strategic investments. We
view acquisitions, joint ventures and strategic investments as means to
enter additional markets, add new products and expand our operations
within existing markets, thereby facilitating an acceleration of our
business plan. Potential candidates include voice and data service
providers and Internet service providers with an established customer
base, complementary operations, telecommunications licenses, experienced
management or network facilities in countries into which we seek 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 we provide our services and
a description of our operations in each of our primary 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 $17.9 billion from international services
(representing 18.0% of the total
55
<PAGE>
market). AT&T is the largest long distance carrier in the United States market,
with market share of approximately 49.9% of international outgoing minutes in
1996. MCI/WorldCom and Sprint had market shares of 28.1% and 14.4%,
respectively in 1996. AT&T, MCI/WorldCom 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 Frontier and Qwest, 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, we provide long distance services to small- and
medium-sized businesses, residential customers, multinational corporations and
other telecommunication carriers. We operate international gateway telephone
switches in the New York City area, Washington, Fort Lauderdale and Los Angeles
which are connected with countries in Europe, Latin America and the Asia-
Pacific region through owned and leased international fiber cable systems. We
maintain a direct sales organization in New York and Virginia to sell to
business customers and have a telemarketing center for small business sales in
Tampa. To reach residential customers, we advertise nationally in ethnic
newspapers and other publications, offering discounted rates for international
calls to targeted countries. We also utilize independent agents to reach and
enhance sales to both business and residential customers and have established a
direct sales force for marketing international services to other long distance
carriers. Additionally, as a result of the TresCom merger, we have expanded our
marketing activities to customers in the United States seeking to transmit
international calls to Latin America, consisting principally of businesses with
sales or operations in Latin America, as well as the growing Hispanic
population in the United States. We maintain a national customer service center
in Florida staffed with multi-lingual representatives and operate a 24-hour
global network management control center in Virginia that monitors our network.
In addition to international long distance services, we provide local service
in Puerto Rico and the United States Virgin Islands.
According to the International Telecommunications Union, 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, was the largest provider of long distance services prior
to 1999. The Stentor partnership was discontinued on January 1, 1999, and the
former Stentor partner companies such as Bell Canada and BCT.Telus
Communications now compete against one another for the first time. Two other
types of long distance providers also compete against the former Stentor
partner companies. The first, which includes AT&T Canada and Call-Net
Enterprises (Sprint Canada), owns and operates interexchange circuits and
offers essentially the same services as the former Stentor partner companies.
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, we provide long distance services to
small- and medium-sized businesses, residential customers and other
telecommunication carriers and have sales and customer service offices in
Vancouver, Toronto and Montreal. We operate international gateway switches in
Toronto and Vancouver, maintain points-of-presence in Ottawa, Montreal and
Calgary and lease interexchange circuits in Canada. In Canada, we offer
Internet access services through our February 1999 acquisition of GlobalServe
Communications, Inc. In March 1999, we acquired London Telecom Network, Inc.
and certain related entities which provide long distance telecommunications
services in Canada. With this acquisition and the completion of the acquisition
of the related Wintel companies, we believe we are the third largest long
distance provider in Canada among competitors to the former Stentor partner
companies based on revenues.
According to the International Telecommunications Union, 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/WorldCom) to operate as facilities-based long distance
carriers. Resale of basic switched voice long distance services, however, is
still not allowed in Mexico. We provide customers
56
<PAGE>
with United States-Mexico cross border private line services, but are
prohibited by the private ownership limitations from providing other services.
As of December 31, 1998, we had approximately 22,000 business customers and
150,000 residential customers in North America.
Asia-Pacific. According to the International Telecommunications Union, in
1996, the total telecommunications market in Australia accounted for
approximately $13.4 billion in revenues. Telstra and Cable & Wireless 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
majority of the telecommunications market share. In addition to Cable &
Wireless Optus and us, 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 Cable & Wireless Optus to
own domestic transmission facilities and mandating that Telstra provide equal
(non-code) access to customers of select service providers such as us. We are a
licensed carrier permitted to own and operate transmission facilities in
Australia.
We are the fourth largest long distance company in Australia based on
revenues, 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. We have invested substantial resources over the past three years to
build a domestic and international long distance network to transform our
Australian operations into a facilities-based telecommunications carrier.
During 1997, we installed and began operating a five-city switched network
using Northern Telecom switches in Sydney, Melbourne, Perth, Adelaide, and
Brisbane. We purchased international fiber cable capacity during 1997 and
linked the Australian network to the United States via the TPC-5, APCN, and
Jasaurus cable systems, as well as to New Zealand. We became a fully licensed
facilities-based telecommunications carrier on July 1, 1997. In August 1997,
equal access was introduced in Australia, and we began the process of migrating
and connecting customers directly onto our own network. We maintain both a 24-
hour customer service center and a network management control center in
Australia.
In March 1998, we purchased a controlling interest in Hotkey, an Australia-
based Internet service provider, and in April 1998, we acquired all of the
outstanding stock of Eclipse, an Australia-based data communications service
provider. In February 1999, we purchased the remaining stock in Hotkey. The
Hotkey and Eclipse acquisitions positioned us 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. We market
our 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 volume of international calls.
We entered the Japanese market in late 1997 through the TelePassport/USFI
acquisition. According to the International Telecommunications Union, in 1996,
the total telecommunications market in Japan accounted for approximately $93.6
billion in revenues. We maintain an office in downtown Tokyo and operate an
international gateway switch to provide international calling services to
resellers and small businesses. We interconnected our Tokyo switch to Los
Angeles via the TPC-5 fiber cable system. We have a Type I carrier license,
which permits us to provide telecommunications services using our own
facilities in Japan. We plan to market our services in Japan through direct
sales and relationships that we are establishing with business partners.
As of December 31, 1998, we had approximately 18,000 business customers and
230,000 residential customers in the Asia-Pacific region.
Europe. According to the International Telecommunications Union, in 1996 the
total telecommunications market in the United Kingdom accounted for
approximately $28.6 billion in revenue. In the United Kingdom,
57
<PAGE>
British Telecom historically has dominated the telecommunications market and is
the largest carrier. Mercury, which owns and operates interexchange
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, MCI/WorldCom, ACC and Esprit.
We are a fully-licensed carrier in the United Kingdom and provide domestic
and international long distance services to residential customers, small
businesses, and other telecommunications carriers. We operate an Ericsson AXE-
10 international gateway telephone switch in London, which is directly
connected to the United States and is directly connected to continental Europe
via our international gateway switch in Frankfurt, Germany. In addition, we
have completed the construction in London of an Intelsat earth station and have
reserved capacity on the Intelsat-64 satellite. When this earth station becomes
operational, which we expect to occur in the second quarter of 1999, we expect
to be able to carry voice, data and Internet traffic to and from countries in
the Indian Ocean/Southeast Asia region. Our European operations are
headquartered in London, where we maintain both a 24-hour customer service call
center and a 24-hour network management control center which monitors our
network in the United Kingdom. We market our 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 December 31, 1998, we had approximately 1,000
business customers and 22,000 residential customers in the United Kingdom.
We are in the process of expanding our services and network to continental
Europe which has recently begun the process of deregulation of its
telecommunications markets. We currently hold a Class-4 switched voice
telephone license in Germany, an L34.1 switched voice license in France and a
voice services license in Switzerland. According to the International
Telecommunications Union, in 1996, the German telecommunications market
generated approximately $44.6 billion in revenues. By the end of the second
quarter of 2000, our network in Europe is expected to include the Frankfurt
international gateway switch which is currently operational, a second
international gateway switch in France which is currently being installed and
is expected to be operational by the end of the second quarter of 1999, and up
to 11 additional switches in various countries. Through the TelePassport/USFI
acquisition, we acquired a base of small business customers in Germany to whom
we provide reorigination services, establishing a platform for the our
expansion into that market. Additionally, we have opened our first continental
European sales office in Frankfurt and are in the process of building a direct
sales force and engaging independent sales agents to market our services.
Services
We offer a broad array of telecommunications services through our network
and through interconnection with the networks of other carriers. Our decision
to offer certain services in a market is based on competitive factors and
regulatory restraints within the market. Below is a summary of services we
offer:
. International and Domestic Long Distance. We provide international long
distance voice services terminating in approximately 230 countries, and
provide domestic long distance voice services within selected countries
within our principal 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, we design and
implement international private network services that may be used for
voice, data and video applications.
. Reorigination Services. In selected countries, we provide 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.
. Local Switched Services. We intend to provide local service on a resale
basis as part of our "multi-service" marketing approach, subject to
commercial feasibility and regulatory limitations. We currently provide
local service in Australia, Puerto Rico and the United States Virgin
Islands.
58
<PAGE>
. Toll-free Services. We offer domestic and international toll-free
services within selected countries within our principal service regions.
. Data and Internet Services. In Australia, we offer data services over
ATM and frame relay networks in addition to other data services
including Internet access. In Canada, we offer Internet access services
through our February 1999 acquisition of GlobalServe Communications,
Inc. Once operational, our satellite earth station in London will enable
us to offer such Internet and data transmission services in the Indian
Ocean/Southeast Asian region. We plan to replicate this strategy so as
to offer such services in Latin America and the Pacific Rim by adding
two additional satellite earth stations, one on each of the east and
west coasts of the United States.
. Cellular Services. We resell Telstra analog and digital cellular
services in Australia.
. Prepaid and Calling Cards. We offer prepaid and calling cards that may
be used by customers for domestic and international telephone calls both
within and outside of their home country.
Network
General. Since our inception in 1994, we have 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. We believe that our network allows us to
control both the quality and cost of the on-net telecommunications services we
provide to our customers. To ensure high-quality telecommunications services,
our network employs digital switching and fiber optic technologies, uses SS7
signaling and is supported by comprehensive monitoring and technical services.
Our network consists of:
. a global backbone network connecting intelligent gateway switches in our
principal service regions,
. a domestic long distance network presence within certain countries
within our principal service regions, and
. a combination of owned and leased transmission facilities, resale
arrangements and foreign carrier agreements.
Each of our international gateway switches is connected to our domestic and
international networks as well as those of other carriers in a particular
market, allowing us to:
. provide seamless service,
. package and market the voice and data services purchased from other
carriers under the "Primus" brand name and
. divert a portion of each market's United States-bound return traffic
through our switches in the United States.
We have targeted North America, the United Kingdom and continental Europe
for the immediate development of our network due to their economic stability
and the more rapid pace of deregulation as compared to other areas of the
world. We expect to expand our network into additional markets within our
principal service regions, including in Japan and other parts of the Asia-
Pacific region and Latin America. We are using our United Kingdom operations to
coordinate efforts to enter other major markets in Europe in conjunction with
the deregulation of the telecommunications industry in certain EU countries
which began in 1998. This expansion commenced with our installation of an
international gateway switch in Frankfurt, and is continuing with our
installation of an international gateway switch in France.
International Gateway and Domestic Switches. Our network consists of 16
carrier-grade switches, including 12 international gateway switches (two in the
New York City area, and one in each of Los Angeles, Washington, Fort
Lauderdale, Toronto, Vancouver, London, Frankfurt, Sydney, Tokyo and Puerto
Rico), and four domestic switches in Australia (Adelaide, Brisbane, Melbourne
and Perth). We currently operate approximately 25 points of presence in other
major metropolitan areas of our principal service regions. All of our switches
were manufactured by Nortel or Ericsson, except for the Washington and Canadian
switches.
59
<PAGE>
Fiber Optic Cable Systems. Where our customer base has developed sufficient
traffic, we have purchased and leased undersea and land-based fiber optic cable
transmission capacity to connect to our various switches. Where traffic is
light or moderate, we obtain capacity to transmit traffic on a per-minute
variable cost basis. When traffic volume increases and such commitments are
cost effective, we either purchase lines or lease lines on a monthly or longer
term basis at a fixed cost and acquire economic interests in transmission
capacity through minimum assignable ownership units and indefeasible rights of
use to international traffic destinations. The following chart sets forth a
listing of the undersea fiber optic cable systems in which we have capacity
(which includes both minimum assignable ownership units and indefeasible rights
of use):
<TABLE>
<CAPTION>
Cable System Countries Served Status
------------ ---------------- ------
<C> <S> <C>
TAT 12/13 United States--United Kingdom Existing
Gemini United States--United 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
Atlantic Crossing-1 United States--United Kingdom Existing
Columbus II United States--Mexico Existing
Americas I United States--Brazil Existing
United States--United States Virgin
Islands Existing
United States Virgin Islands--
Trinidad Existing
United States--United States Virgin
PTAT-1 Islands Existing
United States--United States Virgin
CARAC Islands Existing
United States Virgin Islands--Puerto
Taino--Carib Rico Existing
Bahamas I United States--Bahamas Existing
ECMS United States Virgin Islands-- Existing
Antigua--St. Martin--St. Kitts
--Martinique--Guyana
CANTAT 3 United States--Denmark Existing
ODIN Netherlands--Denmark Existing
RIOJA Netherlands--Belgium Existing
Southern Cross United States--Australia Under Construction
JPN--US United States--Japan Under Construction
SEA ME WE Italy--Japan Under Construction
Americas II United States--Argentina Under Construction
Columbus III United States--Spain Under Construction
Pan American United States Virgin Islands--Aruba-- Under Construction
Venezuela--Panama
--Colombia--Ecuador--Peru--Chile--
Panama
Bahamas 2 United States--Bahamas Under Construction
MONA Puerto Rico--Dominican Republic Under Construction
Antillas 1 Puerto Rico--Dominican Republic Under Construction
</TABLE>
We have also entered into an agreement to purchase $20 million of fiber
capacity from Qwest, which will provide connections among our U.S. gateway
switches and future points of presence. By replacing existing leased lines in
the U.S. with this Primus-owned high speed capacity, we expect to reduce our
cost structure and provide improved service to customers on our high traffic
routes. During the fourth quarter of 1998, we began using the first portion of
this capacity--a DS-3 link between New York and Los Angeles.
60
<PAGE>
Satellite Earth Stations and Capacity. We are constructing international
satellite earth stations and purchasing capacity on international satellites in
order to provide data and Internet transmission services, in addition to voice
services, principally to and from post, telephone and telegraph operators,
other telecommunications carriers and Internet service providers, principally
in developing countries. We have completed the construction in London of an
Intelsat earth station and have reserved capacity on the Intelsat-64 (degree
symbol) satellite. When this earth station becomes operational, which we expect
to occur in the second quarter of 1999, we will be able to carry voice, data
and Internet traffic to and from countries in the Indian Ocean/Southeast Asia
region.
Foreign Carrier Agreements. In selected countries where competition with the
traditional incumbent post, telephone and telegraph operators is limited or is
not currently permitted, we have entered into foreign carrier agreements with
post, telephone and telegraph operators or other service providers which permit
us to provide traffic into and receive return traffic from these countries. We
have existing foreign carrier agreements with post, telephone and telegraph
operators in Cyprus, Greece, India, Iran, Italy and New Zealand, and additional
agreements with other foreign carriers in other countries.
Network Management and Control. We own and operate network management
control centers in McLean, Virginia, London and Sydney which are used to
monitor and control a majority of the switches and other transmission equipment
used in our network. These network management control centers operate seven
days a week, 24 hours per day, 365 days a year. In Canada, Tokyo and Frankfurt,
we currently monitor and control each switch locally. We are using a portion of
the net proceeds of the offering of the notes to be exchanged to upgrade the
existing network management control centers so that they can monitor all of our
switching and other transmission equipment throughout the entire network.
Planned Expansion of Network. We are currently installing an international
gateway switch in Paris, France. By the end of 2000, we intend to add up to 11
additional switches in Europe, one switch in North America and one switch in
Japan. Additionally, we intend to continue to invest in additional switches and
points of presence in major metropolitan areas of our principal service regions
as the traffic usage warrants the expenditure. We also intend to acquire
capacity in terrestrial and undersea fiber optic cable systems in our principal
service regions, particularly in North America and Europe. Moreover, so as to
position us to provide data and Internet transmission services, in addition to
voice services, to and from primarily post, telephone and telegraph operators,
other telecommunications carriers and Internet service providers in Latin
America and the Pacific Rim by the end of 1999, we expect to expand our global
satellite coverage by constructing an additional satellite earth station on
each of the east and west coasts of the United States and by purchasing
capacity on international satellites.
Customers
As of December 31, 1998, Primus had approximately 450,000 customers. Set
forth below is a description of our customer base:
. Businesses. Historically, our business sales and marketing efforts
targeted small- and medium-sized businesses with significant
international long distance traffic. More recently, we have also
targeted larger multi-national businesses. In an effort to attract these
larger business customers in multiple markets, we intend to offer a
broad array of services (including long distance voice, cellular,
Internet and data services) in approximately 10 markets, including the
United States, Australia, the United Kingdom, Germany, France, Canada,
Japan and Italy. We believe that these users are and will continue to be
attracted to us primarily due to price savings compared to first-tier
carriers and, secondarily, due to our personalized approach to customer
service and support, including customized billing and bundled service
offerings.
. Residential Consumers. Our residential sales and marketing strategy
targets ethnic residential consumers who generate high international
traffic volumes. We believe that such customers are
61
<PAGE>
attracted to us because of price savings as compared to first-tier
carriers, simplified pricing structure, and multilingual customer
service and support.
. Telecommunications Carriers and Resellers. We compete 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 us maximize the utilization of our network and thereby
reduce our fixed costs per minute of use.
. Customer Service. We strive to provide personalized customer service and
believe that the quality of our customer service is one of our
competitive advantages. Our larger customers are actively covered by
dedicated account and service representatives who seek to identify,
prevent and solve problems. We provide toll-free, 24-hour a day customer
service in the United States, Canada, the United Kingdom and Australia
which can be accessed to complete collect, third party, person-to-
person, station-to-station and credit card validation calls. We also
provide a multi-lingual "Trouble Reporting Center" for our residential
customers. As of December 31, 1998, we employed approximately 179 full-
time customer service employees, many of whom are multi-lingual.
Sales and Marketing
We market our services through a variety of sales channels, as summarized
below:
. Direct Sales Force. Our direct sales force is comprised of full-time
employees who focus on business customers with substantial international
traffic, including multinational businesses and international
governmental organizations. We also employ 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. We currently have offices in New
York City, Virginia, Tampa, Puerto Rico, St. Thomas, Montreal, Toronto,
Vancouver, Mexico City, London, Frankfurt, Adelaide, Brisbane,
Melbourne, Perth, Sydney and Tokyo.
. Agents and Independent Sales Representatives. We supplement our 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. We also provide
additional incentives in the form of restricted stock to those agents
that meet certain revenue growth targets. We also market our services
through representatives of network marketing companies. Within major
metropolitan regions, we usually grant only nonexclusive sales rights
and require our agents and representatives to maintain minimum quotas.
. Telemarketing. We employ full-time telemarketing sales personnel to
supplement sales efforts to ethnic residential consumers and small- and
medium-sized business customers.
. Media and Direct Mail. We use a variety of print, television and radio
advertising to increase name recognition and generate new customers. We
reach ethnic residential consumers by print advertising campaigns in
ethnic newspapers, and by advertising on select radio and television
programs.
Management Information and Billing Systems
We use various management information, network and customer billing systems
in our different operating subsidiaries to support the functions of network
and traffic management, customer service and customer billing. For financial
reporting, we utilize a common system in each of our markets. For our billing
requirements in the United States, we use a customer billing system developed
by Electronic Data Systems Inc. which supplies, operates and maintains this
system and is responsible for providing backup facilities and disaster
recovery. The EDS system is widely used in the telecommunications industry and
has been customized to meet our specific needs. Elsewhere, we use other third
party systems or systems developed in-house to handle our billing
requirements. We bill all of our business, reseller and residential customers
directly in all of our principal service regions.
62
<PAGE>
We believe that, subject to modifications which are necessary to make our
systems Year 2000 compliant, our financial reporting and billing systems are
generally adequate to meet our needs in the near term. However, as we continue
to grow, we will need to invest additional capital to purchase hardware and
software, license more specialized software, increase capacity and link our
systems among different countries.
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. We believe 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, we have numerous
competitors. We believe 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 we compete have declined historically and are likely to continue to
decrease. In addition, many of our competitors are significantly larger, have
substantially greater financial, technical and marketing resources and larger
networks.
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, regional Bell operating
companies will be allowed to enter the long distance market, AT&T, MCI/WorldCom
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 EU 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 its principal 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 primarily 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/WorldCom and Sprint
being the next largest providers. In the future, under provisions of
recently enacted federal legislation, we anticipate that we will also
compete with regional Bell operating companies, local exchange carriers
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 us. We compete with facilities-based
carriers, other resellers and rebillers, primarily on the basis of
price. The principal facilities-based competitors include the former
Stentor member companies, in particular, Bell Canada, the dominant
supplier of local and long-distance services in Canada, and BCT.Telus
Communications, the next largest Stentor company, as well as non-Stentor
companies, AT&T Canada Corp., Teleglobe Canada and Call-Net Enterprises
(Sprint Canada). Based upon current market share estimates, the former
Stentor member companies control approximately 70% of the entire
Canadian long distance market and approximately 66% of the business long
distance market. The former Stentor member companies discontinued their
alliance on January 1, 1999 and now compete against one another for the
first time.
. Asia-Pacific. Australia is one of the most deregulated and competitive
telecommunications markets in the Asia-Pacific region. Our principal
competitors in Australia are Telstra, the dominant carrier, Cable &
Wireless Optus and AAPT and a number of other switchless resellers. We
compete in Australia by offering a comprehensive menu of competitively-
priced products and services, including
63
<PAGE>
value-added services, and by providing superior customer service and
support. We believe that competition in Australia will increase as more
companies are awarded carrier licenses in the future. Our 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, MCI/WorldCom and ATNet.
. Europe. Our 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 Communications. We compete in the United Kingdom, and expect to
compete in other European countries, by offering competitively-priced
bundled and stand-alone services, personalized customer service and
value-added services. Our principal competitor in Germany is Deutsche
Telekom, the dominant carrier. We also compete with Mannesmann
ARCOR/O.tel.o Communications, VIAG Interkom, MobilCom, Talkline,
NTS/Colt, MCI/WorldCom and RSL Communications. Additionally, we also
face 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."
Government Regulation
As a global telecommunications company, we are subject to varying degrees of
regulation in each of the jurisdictions in which we provide services. Local
laws and regulations, and the interpretation of such laws and regulations,
differ significantly among the jurisdictions in which we operate. There can be
no assurance that future regulatory, judicial and legislative changes will not
have a material adverse effect on us, that domestic or international regulators
or third parties will not raise material issues with regard to our compliance
or noncompliance with applicable regulations or that regulatory activities will
not have a material adverse effect on us.
Regulation of the telecommunications industry is changing rapidly both
domestically and globally. The Federal Communications Commission 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. We are 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 World Trade Organization
Agreement, which reflects efforts to dismantle government-owned
telecommunications monopolies throughout Europe and Asia may affect us.
Although we believe 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 us.
The regulatory framework in certain jurisdictions in which we provide
services is described below:
United States
In the United States, our services are subject to the provisions of the
Communications Act of 1934, 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, we 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. We are classified as a
non-dominant common carrier for domestic service and are not required to obtain
specific prior FCC approval to initiate or expand domestic interstate services.
International Service Regulation. International common carriers like us 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.
We have 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.
64
<PAGE>
In addition to the general common carrier principles, we must conduct our
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 International
Settlements Policy, 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 International Settlements Policy also provides for a mechanism by which the
FCC can review the rates contained in such foreign carrier agreements. The FCC
could find that we do not meet certain International Settlements Policy
requirements with respect to certain of our foreign carrier agreements.
Although the FCC generally has not issued penalties in this area, it has
recently issued a Notice of Apparent Liability to a U.S. company for violations
of the International Settlements Policy and it could, among other things, issue
a cease and desist order, impose fines or allow the collection of damages if it
finds that we are not in compliance with the International Settlements Policy.
We do not believe that any such fine or order would have a material adverse
effect on Primus.
We are 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 World Trade Organization Agreement,
the FCC recently reduced the applicability of some of these requirements to the
activities of telecommunications carriers such as the Primus. Moreover, we have
a number of customers in foreign countries that access our services through
international call reorigination. In providing service to these customers, we
are required by the FCC to offer such services in compliance with the laws of
foreign countries where our 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. We 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
International Settlements Policy 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 us to enter into an alternative termination arrangement with our
Australian subsidiary Axicorp, which allows Axicorp and us to terminate each
other's traffic under favorable terms that deviate from the International
Settlements Policy.
Domestic Service Regulation. We are considered a non-dominant domestic
interstate carrier subject to minimal regulation by the FCC. We are not
required to obtain FCC authority to expand our domestic interstate operations,
but we are 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 local exchange carriers to permit interconnection to their networks
and by establishing local exchange carrier 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 local exchange carriers' equal access and nondiscrimination
obligations and preempts inconsistent state regulation. The legislation also
contains special provisions that eliminate the restrictions on incumbent local
exchange carriers such as the regional Bell operating companies and the GTE
Operating Companies from providing long distance services. These new provisions
permit a regional Bell operating company 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 a regional Bell operating company 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,
that it has entered into interconnection agreements which satisfy a
65
<PAGE>
14-point "checklist" of competitive requirements and that it is in the public
interest. The 1996 Telecommunications Act also addresses a wide range of other
telecommunications issues that may potentially impact our operations. It is
unknown at this time precisely the nature and extent of the impact that the
legislation will have. On August 1, 1996, the FCC adopted an Interconnection
Order implementing the requirements that incumbent local exchange carriers 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 we could be adversely affected to the extent that conditions of
regional Bell operating company entry into the long distance market are relaxed
or eliminated.
Our costs of providing long distance services will be affected by changes in
the access charge rates imposed by incumbent local exchange carriers for
origination and termination of calls over local facilities. The FCC has
significantly revised its access charge rules in recent years to permit
incumbent local exchange carriers greater pricing flexibility and relaxed
regulation of new switched access services in those markets where there are
other providers of access services. The FCC continues to adjust its access
charge rules and has indicated that it will promulgate additional rules
sometime in 1999 that may grant certain local exchange carriers further
flexibility.
The FCC has also significantly revised the universal service subsidy regime
to be funded by interstate carriers, such as us, 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. Our share of these federal subsidy funds will be based on
our share of certain defined telecommunications end user revenue. The revenues
for the high cost and low income fund are our estimated quarterly interstate
and gross end-user telecommunications revenues. The revenues for the schools
and libraries and rural health care fund are our estimated quarterly
intrastate, interstate and international gross end user revenues. The
contribution factors issued by the FCC for 1998 range from 3.14% to 3.19% for
the high cost and low income fund and .72% to .76% for the schools and
libraries and rural health care fund. The amounts contributed may be billed to
customers. The FCC order revising these funds is under appeal by the U.S. Court
of Appeals for the Fifth Circuit. The outcome of these proceedings or their
effect cannot be predicted.
State Regulation. Our intrastate long distance operations are subject to
various state laws and regulations, including, in most jurisdictions,
certification and tariff filing requirements. We have 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. Public service commissions also regulate access charges and other
pricing for telecommunications services within each state. The regional Bell
operating companies and other local exchange carriers have been seeking
reduction of state regulatory requirements, including greater pricing
flexibility which, if granted, could subject us to increased price competition.
We may also be required to contribute to universal service funds in some
states.
Foreign Ownership Affiliations and Limitations. The Communications Act of
1934 limits the ownership of an entity holding a common carrier radio license
by non-U.S. citizens, foreign corporations and foreign governments. Through
TresCom, we hold common carrier wireless licenses. In its order implementing
the U.S. commitments under the World Trade Organization 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 World Trade Organization. FCC rules also require international carriers to
notify the FCC 60 days in advance of an
66
<PAGE>
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 a company to meet certain "dominant carrier" reporting and
other conditions if the FCC finds that the acquisition creates an affiliation
with a dominant foreign carrier. In addition, if a company becomes affiliated
with a dominant carrier from a country that is not a member of the World Trade
Organization, the FCC will apply an "effective competitive opportunities" test
and could prevent such company from providing services between the United
States and that country. The effect of the World Trade Organization Agreement
or other new legislation, or the outcome of the FCC's rulemaking regarding
implementing World Trade Organization regulations which may become applicable
to us, cannot be determined.
Canada
The operations of telecommunications carriers are regulated by the Canadian
Radio-television and Telecommunications Commission, which has recently
established a new competitive regulatory framework governing the international
segment of the long-distance market, eliminating certain barriers to
competition, consistent with Canada's commitments in the World Trade
Organization Agreement. As a result, full facilities-based and resale
competition has been introduced in the provision of international services in
Canada, effective October 1, 1998, coincident with the elimination of traffic
routing limitations on switched hubbing through the United States. In addition,
foreign ownership rules for facilities-based carriers have now been waived in
relation to ownership of international submarine cables landed in Canada and
satellite earth stations used for telecommunications purposes. Effective
January 1, 1999, all international service providers must be licensed by the
Canadian Radio-Television and Telecommunications Commission under the
Telecommunications Act of 1993, and we received our international license as of
December 23, 1998. Our international operations will remain subject to
conditions of our Canadian Radio-Television and Telecommunications Commission
license, which address matters such as competitive conduct and consumer
safeguards, and to a regime of contribution charges (roughly the equivalent of
access charges in the U.S.).
Teleglobe which traditionally had 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. We are permitted to
provide international simple resale of private leased lines to any country
which permits such arrangements on a reciprocal basis.
Primus, as a reseller of domestic Canadian telecommunications, is virtually
unregulated by the Canadian Radio-television and Telecommunications Commission.
In particular, because we do not own and operate transmission facilities in
Canada, we are not subject to the Canadian Telecommunications Act or the
regulatory authority of the Canadian Radio-television and Telecommunications
Commission, except to the extent that our provisions of international
telecommunications has related licensing and other regulations. We may
therefore provide resold Canadian domestic 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 incumbent local exchange carriers 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 Canadian Radio-Television and Telecommunications Commission
issued its ground-breaking Telecom Decision CRTC 92-12 requiring the incumbent
local exchange carriers to interconnect their networks with their facilities-
based as well as resale competitors. These dominant companies, including Bell
Canada, have traditionally offered both local and long distance services within
their respective provincial or regional territories, and did not compete
against one another. These companies have disbanded the Stentor alliance
effective January 1, 1999, and now compete against one another. Other
nationwide providers are AT&T Canada Corp., and Sprint Canada. 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.
67
<PAGE>
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 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.
Australia
The provision of our 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.
We are licensed under the Telecommunications Act of 1997 to own and operate
transmission facilities in Australia. Under the new regulatory framework, we
are not required to maintain 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, we must comply with legislated
"service provider" rules contained in the Telecommunications Act of 1997
covering matters such as compliance with the Telecommunications Act of 1997,
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 Telecommunications Act of 1997, 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 is the authority regulating matters
including the licensing of carriers and technical matters, and the Australian
Competition and Consumer Commission has the role of promotion of competition
and consumer protection. We are 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 Australian government policy and
court decisions affecting telecommunications carriers also apply to us.
In the Australian context, a distinction is drawn in the Telecommunications
Act of 1997 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
Telecommunications Act of 1997, 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 Telecommunications
Act of 1997, with certain commitments made in their industry development plan
and with the telecommunications access regime and related facilities access
obligations). We
68
<PAGE>
have submitted our industry development plan to the Australian government. A
typical 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 levy required
to be paid by in connection with this obligation has been set previously at a
level that is not material. The levy is currently under review. Telstra, as the
only universal service provider has submitted a claim to the Australian
Communications Authority that, if adopted, could result in material charges to
the carriers. The other carriers have rejected Telstra's model in relation to
its claim. The Australian government has not accepted Telstra's model and has
referred the model and the criteria for determining the size of this obligation
to the ACA for review. The outcome of this determination is not expected to be
material for us. However, there can be no guarantee that the ACA will not make
an assessment of a universal service charge that would be material.
Tariffs. The Australian Competition and Consumer Commission has access to
various information on market conduct. The ACCC's information gathering powers
include: a requirement on Telstra to continue to file tariffs with the ACCC
about its basic carriage services, unless the ACCC exempts it from this
obligation; an ability to direct any carrier or carriage service provider with
a substantial degree of market power to file tariff information; and an ability
to set rules regarding the way carriers or carriage service providers keep
records so that, e.g., information is kept in a form that will assist the ACCC
in determining terms and conditions of access under the telecommunications
access regime.
Tariff filing will essentially be an information gathering tool to
supplement the ACCC's general information gathering powers, and to assist in
identifying anti-competitive conduct such as predatory pricing and preferential
pricing to a related person. If, on the basis of the information provided in a
tariff filing, the ACCC forms the view that a carrier is engaging in anti-
competitive conduct, it may use its powers to stop that conduct.
The ACCC may make tariff information publicly available if it is satisfied
there would be a public benefit (e.g., by enabling other industry players to
scrutinize the tariffs for anti-competitive purpose or effect, or to inform the
public). The ACCC will balance concerns about commercial confidentiality and
the promotion of competition against dealing with anti-competitive conduct and
informing the public.
Fair Trading Practices. The ACCC will enforce legislation for the promotion
of competition and consumer protection, particularly rights of access
(including pricing for access) and interconnection. The ACCC will be able to
issue a competition notice to a carrier which has engaged in anti-competitive
conduct. Where a competition notice has been issued, the ACCC will be able to
seek pecuniary penalties, and other carriers will be able to seek damages, if
the carrier continues to engage in the specified conduct.
The Telecommunications Act of 1997 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 Cable & Wireless 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.
69
<PAGE>
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 us.
We have negotiated access arrangements with Telstra in substitution for certain
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. We notified the Australian government of our proposed
acquisition of Axicorp in 1996 and were 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 us, in the future.
Japan
Our services in Japan are subject to regulation by the Japanese Ministry of
Post and Telecommunications under the Japanese Telecommunications Business Law.
We have obtained licenses as a Type I business, which allows us to provide
telecommunications services using our own facilities, and as a Special Type II
business, which allows us 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.
We may also provide over leased lines basic telecommunications services, value-
added services and services to closed user groups. We only must notify the
Japanese Ministry of Post and Telecommunications as a General Type II business
if we provide domestic service in Japan over leased circuits and do not exceed
the traffic threshold 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
Ministry of Post and Telecommunications 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 Ministry of Post and Telecommunications 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,
70
<PAGE>
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands,
Portugal, Spain, Sweden and the United Kingdom, 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 post telephone and telegraph operators. 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, 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 closed user group 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 post, telephone and telegraph operators 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 post, telephone and telegraph
operators' monopolies in voice telephony by 1998. Certain EU countries were
allowed to 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 and Ireland (which were liberalized on
December 1, 1998), Portugal (January 1, 2000) and Greece (December 31, 2000).
Each EU member state in which we currently conduct or plan to conduct our
business has a different regulatory regime and such differences have continued
beyond January 1998. The requirements for us 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 EU generally does not permit
its member states to require individual licenses for other types of services.
In addition, we have 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,
we may be delayed in obtaining or may not be able to obtain interconnection in
certain countries that would allow us to compete effectively. Moreover, there
can be no guarantee that long distance providers like us will be able to afford
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 post, telephone and telegraph operators.
Fourth Report on the Implementation of The Telecommunications Regulatory
Package. The European Commission adopted its fourth report on the
implementation of the telecommunications regulatory package in the EU member
states. The Report focuses on the main provisions of the package, such as
national regulatory authorities, licensing, interconnection, universal service,
tariffs, numbering, frequency and rights of way. In general, the Report finds
that the national regulatory authorities have begun to implement the principles
outlined in the Telecommunications Regulatory Package in all EU member states,
and are cooperating and exchanging information on a systematic basis with each
other and with the European Commission. The Report also concluded that the
national licensing frameworks appear to be functioning well, with the
procedures applied in practice conforming broadly to the requirements of the
Package. Interconnection regimes, according to the Report, are also operating
well in most EU member states. However, the European Commission concluded in
the Report that, with an extensive legislative framework put in place, the
detailed implementation
71
<PAGE>
in the EU member states is bound to show a number of shortcomings; however, the
Report found that, effectively, most of the European Commission rules have been
adopted into national law and are being applied effectively in the EU member
states.
In the Report, the European Commission's assessment of the extent to which
nationally transposed measures are being applied effectively in the EU member
states has been made on the basis of an analysis of a series of legal
indicators of compliance, together with data showing the extent to which
markets are effectively opening to competition. The European Commission finds
the results encouraging despite the long delays in licensing and
interconnection, the shortage of carrier selection codes and the high license
fees. The European Commission also concluded in the Report that it probably
will not be imposing substantial pressure to force the national regulators and
post, telephone and telegraph operators to improve accessibility in some of the
more difficult markets such as France, Spain, Germany and Italy.
The Report found that national regulatory authorities have now begun
operations in all EU member states, and are cooperating and exchanging
information on a systematic basis with each other and with the European
Commission. In addition, they have all begun to implement the principles
described in the Package. The Report, however, expressed some concerns as to
the sufficiency of the powers and resources available to them, the degree of
separation from the body controlling the incumbent national regulatory
authorities and the clarity of the division of powers between the different
bodies constituting the national regulatory authorities.
In addition, the Report concluded that the national licensing frameworks in
place also appear to be functioning well. Large numbers of new companies are
authorized to enter the market and the procedures applied in practice conform
broadly to the requirements of the Package. However, the European Commission
continues to have concerns relating to onerous license conditions, the lack of
transparency in regard to conditions and procedures, the level of fees and the
length of time required in certain cases to issue licenses.
According to the Report, a significant number of interconnection agreements
are also already in place in the EU. The Report expressed concerns about the
excessive length of negotiations, the scarcity of agreements in the fixed
market, the inadequacy of some reference interconnection offers and the lack of
transparency relating to cost accounting systems. The Report found evidence
that the interconnection charges are beginning to converge on best practice
charges, which contribute to the level of service competition.
Other issues identified by the Report in regards to the Package relate to
the methods for financing universal service, tariff rebalancing and the lack of
availability of telecommunications numbers. Specifically, methods for financing
universal service have been set up in only a limited number of EU member states
and there is some concern relating to the calculation of the amount of the
contribution from market players. Similarly, tariff rebalancing has not been
completed in a number of EU member states. The Report concluded that tariffs
that are not sufficiently cost-oriented produce anti-competitive effects in
certain market segments and increase the cost burden on other sectors of the
economy. Finally, the Report concluded that, while operators do not appear to
be squeezed due to the lack of availability of numbers, the incumbents in a
small minority of EU member states appear to exercise an undue influence on
their allocation and although carrier selection is operating only partially in
most EU member states, number portability has been introduced ahead of schedule
in some of them.
United Kingdom
Our 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, is
responsible for granting UK telecommunications licenses, while the Director
General of Telecommunications and Oftel are responsible for enforcing the terms
of such licenses. Oftel attempts to promote effective competition both in
networks and in services to redress anti-competitive behavior.
In 1991, the British government established a "multi-operator" policy to
replace the duopoly that had existed between British Telecom and Cable and
Wireless Communications. Under the multi-operator policy, the
72
<PAGE>
Department of Trade and Industry recommends the grant of a license to operate a
telecommunications network to any applicant that it 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 voice 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).
Our subsidiary, Primus Telecommunications Limited, holds a 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 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 us
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 us higher prices for certain services or to charge
end user customers prices that are lower than we are able to charge.
Interconnection and Indirect Access. We must interconnect our U.K. network
to networks of other service providers in the United Kingdom and allow our end
user customers to obtain access to our services in order to compete effectively
in the United Kingdom. In the United Kingdom, licensed long distance carriers
like us can obtain interconnection to British Telecom at cost-based rates.
However, while 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 anti-
competitive conduct harmful to us. 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
Department of Trade and Industry does have a discretion as to whether to award
licenses on a case by case basis. We are also subject to general European law,
which, among other things, prohibits certain anti-
73
<PAGE>
competitive agreements and abuses of dominant market positions through Articles
85 and 86 of the Treaty of Rome. The European Commission is entrusted with the
principal enforcement powers under EU 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 Telecommunications Act of 1996 liberalized all telecommunications
activities as of 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. The
Regulierungsbehorde fur Telekommunikation und Post is responsible for enforcing
the German Telecom Act.
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. valued-added, data, etc.) are only subject to
a notification requirement. We operate under a line license class 4 which is
currently being extended to a Germany-wide area license.
Under the German Telecom Act, companies that desire to connect with Deutsche
Telekom's network must enter into an interconnection agreement with the
regulated interconnection tariffs. We entered into an interconnection agreement
with Deutsche Telekom on February 27, 1998 at the regulated standard
interconnection rates presently under court review. Our 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 or a party's
license situation or which are considered by both parties to materially affect
the interconnection agreement in any other way.
In addition, Deutsche Telekom has reserved, in the interconnection agreement
with us, the unilateral right to apply to the Regulierungsbehorde fur
Telekommunikation und Post ("RegTP") with regard to the questions: (i) whether
our network structure, in particular the number and locations of points of
interconnection with Deutsche Telekom, entitles us to interconnection as
defined by Section 35 of the German Telecom Act and (ii) whether it entitles us
to the switching of calls originating Germany-wide. The result of such
regulatory proceeding if launched prior to May 31, 1998 would be a
contractually founded claim by Deutsche Telekom to amend the interconnection
agreement in accordance with the RegTP's ruling and, thus, could potentially
require additional investments into points of interconnection, switching
facilities and/or the payment of higher interconnection prices and/or a
geographical restriction of our switching of originating calls. Deutsche
Telekom has claimed to have launched such regulatory inquiry pursuant to the
interconnection agreement although no formal proceedings have been instituted.
We believe this issue is superseded by the RegTP's decision to require Germany-
wide class 4 area licenses for all long distance providers requesting to be
interconnected with Deutsche Telekom if origination of long distance services
is intended to be offered Germany-wide. We have therefore applied for a
commensurate extension of our license at substantial additional costs which
will allow us to continue to offer Germany-wide origination services under the
current interconnection agreement. The interconnection agreement may also be
terminated by commencing a six month notice period at the end of the calendar
year, and which, as described below, has been exercised by Deutsche Telekom.
Several complaints, the outcome of which may affect our 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
74
<PAGE>
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 are 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. In addition,
Deutsche Telekom has applied for regulatory approval of surcharges on these
provisionally approved interconnection fees which would apply to all
interconnection agreements which do not obligate the interconnection partner of
Deutsche Telekom to install additional points of interconnection in case of
atypical traffic and to pay surcharges in case the minimum traffic requirement
is not met. As our interconnection agreement currently in force does not
provide for these obligations, we may be required to pay higher interconnection
rates during 1999 and possibly even 1998 should Deutsche Telekom's application
for tariff regulation be successful. 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.
Due, in part, to Deutsche Telekom's refusal, since March 1998, to conclude
interconnection agreements with long-distance operators, the RegTP initiated a
public hearing concerning the prerequisites for interconnection under the
German Telecom Act. The preliminary results were presented to the general
public in a hearing on December 15, 1998. These results have in the meantime
been confirmed and published. Accordingly, the RegTP regards an operator that
requests three points of interconnection directed by one switch and three
leased lines connecting these three points of interconnection as a carrier
operating a public telecommunications network as defined in the German Telecom
Act and as such they are entitled to interconnection based on the regulated
tariffs. Since the RegTP invited Deutsche Telekom to submit an application to
regulate surcharges causing additional costs caused by so-called "atypical
traffic" Deutsche Telekom has, in fact, filed such an application requesting
such surcharges to be imposed on all operators who have not signed the new
interconnection agreement requiring operators to install additional points of
interconnection and meet minimum traffic requirements to avoid atypical
traffic. Should this application be approved, Deutsche Telekom could raise
interconnection fees under our interconnection agreement at least for the
current year and possibly even with retroactive effect for 1998. Deutsche
Telekom uses the term "atypical traffic" to denote what it perceives an
inefficient traffic caused by long-distance operators with only a few
interconnection points with Deutsche Telekom. According to Deutsche Telekom,
traffic originating outside the long distance network's geographic reach is
transported through Deutsche Telekom's network to the long distance network's
closest switch and back again to be terminated in Deutsche Telekom's network.
In extreme cases this may multiply the distance a single call travels as
compared to the case where the same call would have been routed more or less
directly to its destination through Deutsche Telekom's or any other large
network. Deutsche Telekom has claimed that this type of traffic jams its
network and requires otherwise unnecessary investments into surplus capacity.
After the public announcement on December 15, 1998, Deutsche Telekom, by
letter of December 23, 1998, informed us that, as a matter of precaution, it
terminates the interconnection agreement as of December 31, 1999 and asks that
renegotiations be opened. Simultaneously, Deutsche Telekom has presented a new
draft interconnection agreement subject to the upcoming negotiations. The new
interconnection offer is generally based on less favorable terms than the
current one. Such less favorable terms include, but are not restricted to: (i)
higher interconnection fees for long-distance operators (such as us) than for
local exchange carriers, (ii) higher resale fees for interconnecting calls
without a network-based service (where calls originate and terminate in
Deutsche Telekom's network and are switched through only one point of
interconnection belonging to us for reasons of our reduced network reach),
(iii) minimum traffic volume requirements (failing which the additional
interconnection fees per minute below the minimum requirement must be paid),
(iv) requirements for the installation of additional points of interconnection
where traffic relations between existing points of interconnection and adjacent
area codes (following Deutsche Telekom's network hierarchy) surpass a certain
defined volume, and (v) the requirement to extend our license to a Germany-wide
license, if we decide to continue our presently Germany-wide offer of long
distance services to end-customers.
75
<PAGE>
These less favorable provisions are currently being tested in several
regulatory proceedings instituted by long distance operators. The outcome of
these proceedings cannot be predicted. However, we believe the RegTP may be
inclined to uphold at least some of these less favorable provisions, based in
part from interconnection proceedings decided in the second half of 1998
(regarding the requirements to install additional points of interconnection)
and in part from the December 15, 1998 public presentation of the results of a
hearing (regarding the surcharges for atypical traffic and minimum traffic
requirement).
In addition, the general price depression in the end-customer market along
with the fact that the RegTP has authorized Deutsche Telekom's price cuts in
the end-customer market (announced to be effective as of January 1 and April 1,
1999) may adversely affect us. Other large operators have also reduced their
prices which may adversely affect our business.
We are 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. We 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, we could be subject to such universal
service requirements and financing schemes if we at that time should have a
market share in Germany of at least 4%.
France
The French Telecommunications Act of 26 July 1996 developed a new legal
framework for the development of a competitive telecommunications market in
France expanding upon the principles for liberalization of the
telecommunications industry set out in the Act of 29 December 1990. The French
Telecommunications Act of 26 July 1996 provided for the establishment of a new
French Regulatory Authority as of January 1, 1997. Most significantly, the
monopoly on the provision of voice telephony services to the public was
abolished as of January 1, 1998.
The French Regulator (Autorite de Regulation des Telecommunications) was
created on January 1, 1997 with the task of overseeing the development of a
competitive telecommunications sector which would provide benefits to the user.
Under the French regulatory regime, an L33.1 licence is required for the
establishment and running by the operator of a telecommunications network open
to the public (an "infrastructure licence") and the provision of public voice
telephony services requires an L34.1 licence. An infrastructure licence is
required by those operators who wish to install or purchase dark fiber for the
running of a network. As with the L34.1 voice licence, L33.1 infrastructure
licences are granted on a regional or nation-wide basis and it is possible to
be granted a licence just for the region of Paris and its suburbs. We (via our
French subsidiary) were awarded the first L34.1 only license on May 29, 1998.
Call back operators and least cost routing operators not using their own leased
lines as defined by the French Regulator, do not need to apply and obtain an
L34.1 licence. Certain competitors obtained a joint L34.1 & L33.1 licence and
we are considering applying for an L33.1 licence in addition to our L34.1
license so that we can benefit from the lower interconnection tariffs afforded
to L33.1 infrastructure license holders.
Because we hold a nation-wide class L34.1 licence, we have the authority to
originate and terminate calls throughout France.
Companies that desire to interconnect with France Telecom's network must
enter into an interconnection agreement which applies certain fixed
interconnection tariffs set out in an interconnection catalog. In order to
obtain the lowest available interconnection tariffs throughout France, we would
need to obtain a nation-wide infrastructure licence and install dark fiber and
points of interconnection in all the different French regions (a minimum of 18
regions) where we are to be originating and terminating traffic.
76
<PAGE>
We have entered into an interconnection agreement with France Telecom at the
regulated standard interconnection rates applicable to L34.1 voice licence
holders set out in the interconnection catalog. In order to interconnect with
France Telecom, we are required to install, in addition to our principal switch
in the city of Paris, a second point of presence to be interconnected with
France Telecom in the outer zone of the Parisian region as defined for
telecommunications purposes. We have located a site for our principal Ericsson
AXE-10 switch and have ordered the leased lines from France Telecom to
interconnect our switch with the most convenient France Telecom points of
interconnection. France Telecom estimates and sets out in the interconnection
agreement that leased lines so requested will be provided within a period of 6
to 18 months.
It is possible that the licence fees currently paid could be further
increased. In addition, the interconnection fees payable to France Telecom
include an element relating to the funding of France Telecom's universal
service financing obligations, and it is possible that the levels of such
contributions will be raised in the foreseeable future.
We have been granted the 1656 four digit indirect access code; however,
there have been seven one digit indirect access numbers granted to other
telecommunications providers in France. Those operators with a one digit access
number will have a competitive advantage. It is highly unlikely that we will be
able to obtain a one digit access number.
Latin America
Various countries in Latin America have taken initial steps towards
deregulating 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 post, telegraph and telephone
operators. 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. Brazil
currently is in the process of opening its telecommunications market to
competition. Brazil intends to privatize Telecomunicas Brasileras S.A.
("Telebras"), which, through its 28 regional subsidiaries, holds 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, Colombia 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--Empresa Brasiliera de Telecomunicaciones
S.A. 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 radio-electric spectrum frequencies for
the provision of personal communications services and Local Multipoint
Distribution System Services. 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.
77
<PAGE>
Employees
The following table summarizes the number of our full-time employees as of
December 31, 1998, by region and classification:
<TABLE>
<CAPTION>
North Asia-
America Pacific Europe Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Management and Administrative................... 97 59 13 169
Sales and Marketing............................. 181 122 24 327
Customer Service and Support.................... 85 63 31 179
Technical....................................... 101 91 22 214
--- --- --- ---
Total......................................... 464 335 90 889
=== === === ===
</TABLE>
We have never experienced a work stoppage, and none of our employees are
represented by a labor union or covered by a collective bargaining agreement.
We consider our employee relations to be excellent.
Properties
We currently lease our corporate headquarters which is located in McLean,
Virginia. Additionally, we also lease administrative, technical and sales
office space, as well as space for our switches, in various locations in the
countries in which we operate, including the United States, Australia, the
United Kingdom, Canada, Japan, Mexico, Germany and France. Total leased space
approximates 240,000 square feet and the total annual lease costs are
approximately $5.3 million. The operating leases expire at various times
through 2008. Certain communications equipment which includes network switches
and transmission lines are leased through operating and capital leases. We
believe that our present administrative and sales office facilities are
adequate for our anticipated operations and that similar space can readily be
obtained as needed. We further believe that the current leased facilities are
adequate to house existing communications equipment. However, as our network
grows, we expect to lease additional locations to house the new equipment.
Legal Proceedings
We are from time to time involved in litigation incidental to the conduct of
its business. We believe the outcome of pending legal proceedings to which we
are a party will not have a material adverse effect on our business, financial
condition, results of operations, or cash flows.
78
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table and biographies set forth information concerning the
individuals who serve as directors and executive officers of Primus:
<TABLE>
<CAPTION>
Year of Expiration
Name Age Position of Term as Director
---- --- -------- -------------------
<C> <S> <C> <C>
K. Paul Singh(1)....... 48 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...... 54 Executive Vice President and Director 1999
Ravi Bhatia............ 50 Chief Operating Officer, Primus Australia N/A
Yousef Javadi.......... 43 Chief Operating Officer, Primus North N/A
America
John Melick............ 40 Vice President of International Business N/A
Development
Jay Rosenblatt......... 34 Vice President, Global Carrier Services N/A
Herman Fialkov(2)(3)... 77 Director 2000
David E. Hershberg(2).. 61 Director 2000
Douglas M. Karp........ 43 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 securities compliance
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.
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.
79
<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.
Mr. Fialkov is also a director of GlobeComm Systems, Inc.
David E. Hershberg became a director of Primus in 1995. Mr. Hershberg is the
founder, Chairman, 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 Qwest, TV Filme, Inc., Journal Register Company, PageNet do
Brasil, S.A., StarMedia Network Inc. 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, and a director of MICROS
Systems, Inc. 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, we have agreed
to nominate one individual selected by Warburg, Pincus and reasonably
acceptable to our non-employee directors, 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 our 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 our By-Laws, the board of directors is divided into three
classes of directors each containing, as nearly as possible, an equal number of
directors. Directors within each class are elected to serve three-year
80
<PAGE>
terms and approximately one-third of the directors sit for election at each
annual meeting of the our stockholders. A classified board of directors may
have the effect of deterring or delaying any attempt by any group to obtain
control of Primus 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, we paid each director $500 for each board meeting and each
committee meeting attended by such director in person. Commencing with 1998, we
pay directors an annual fee of $10,000 and will reimburse their expenses for
attending meetings, however we have discontinued paying any meeting fees. In
addition, we grant each person who becomes an Eligible Director (as defined in
the Director Option Plan) options to purchase 15,000 shares of our common stock
pursuant to the Director Option Plan. These options vest one-third upon the
grant date, and one-third on each of the first and second anniversary of the
grant dates. We did not grant any such options in 1997 or 1998.
Committees of the Board
Our 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 our books, records and financial
statements and to review our systems of accounting (including our 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 our 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
our 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 our management bonus plan.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the 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.
81
<PAGE>
Executive Compensation
The following table sets forth, for the years ended December 31, 1998, 1997
and 1996, certain compensation information with respect to our Chief Executive
Officer and our other officers named therein.
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 1998 258,013 180,000 -- -- -- -- --
of the Board of 1997 247,692 160,000 -- -- 100,000 -- --
Directors, President 1996 185,000 100,000 -- -- 338,100 -- --
and Chief Executive
Officer
Neil L. Hazard-- 1998 184,006 105,000 -- -- -- -- --
Executive Vice 1997 159,231 100,000 -- -- 40,000 -- --
President and Chief 1996 118,461 60,000 -- -- 304,290 -- --
Financial Officer
Yousef B. Javadi--Chief 1998 154,808 80,000 -- -- -- -- --
Operating Officer, 1997 121,154 60,000 -- -- 170,000 -- --
Primus North America 1996 -- -- -- -- -- -- --
John F. DePodesta-- 1998 178,718 -- -- -- -- -- --
Executive Vice 1997 100,000 135,000 -- -- 180,000 -- --
President 1996 -- 10,000 -- -- -- -- --
John Melick--Vice 1998 128,391 55,000 -- -- -- -- --
President of 1997 105,000 50,000 -- -- 25,000 -- --
International Business 1996 101,538 10,000 -- -- -- -- --
Development
</TABLE>
Stock Options Granted to Certain Executive Officers During Last Fiscal Year
Under the Employee Stock Option Plan, options to purchase our common stock
are available for grant to selected employees. Options are also available for
grant to eligible directors under our Director Stock Option Plan. No options
for the purchase of our common stock were awarded to the executive officers
named on the above summary compensation table during 1998.
Stock Plans
Employee Stock Option Plan. We established the Employee Stock Option Plan
for our employees and consultants on January 2, 1995. Recently, our 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 Primus and its subsidiaries who contribute to the development
and success of Primus 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 our common stock for which options may be granted pursuant to the
Employee Stock Option Plan is 3,690,500, of which 144,703 are available for
future grants, subject to certain adjustments reflecting changes in our
capitalization. We plan to place a proposal before our stockholders at our 1999
annual meeting to increase the total number of shares of our common stock for
which options may be granted under this plan to 5,500,000. 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 our board of directors which is
82
<PAGE>
comprised of directors who are not also our employees. 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.
Members of our board of directors administering the Employee Stock Option Plan
may vote on any matters affecting the administration of the Employee Stock
Option Plan, except that no member may act upon the granting of an option to
himself or herself.
The exercise price of the options granted under the Employee Stock Option
Plan is determined by our board of directors, but may not be less than the fair
market value per share of our 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 our capital stock, then the exercise price for such ISO may
not be less than 110% of the fair market value per share of our common stock on
the date the option is granted. Our board of directors also determines the
method of payment for the exercise of options under the Employee Stock Option
Plan. Payment may consist entirely of cash, check, promissory notes or our
common stock having a fair market value on the date of surrender equal to the
aggregate exercise price. Our 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 or a
consultant's engagement 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 our board of directors makes
a determination that a terminated employee or consultant engaged in disloyalty
to us, 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 one of our
competitors 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 Primus 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 our common stock, the approval by the our
stockholders of a merger, reorganization or consolidation in which our
stockholders do not own 50% or more of the voting power of the stock of the
entity surviving such transaction, the approval of our stockholders of an
agreement of sale of all or substantially all of our assets, and the acceptance
by our stockholders of a share exchange in which our 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 Primus 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"), we
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 Primus if an ISO lapses
before
83
<PAGE>
exercise or is forfeited. The grant of a NQSO has no immediate tax consequences
to Primus. Upon the exercise of a NQSO by an employee or consultant, we are
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 Primus 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 our common stock received on the exercise of the
ISO is an adjustment for purposes of the alternative minimum tax. Upon the
exercise of an ISO, an employee will have a basis in the common stock received
equal to the amount paid. An employee will be subject to capital gain or loss
upon the sale of such common 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 common stock received from
the exercise of the ISO was held prior to disposition. There are no tax
consequences to an employee if an ISO lapses before exercise or is forfeited.
In the event of a Disqualifying Disposition, an employee will be required to
recognize:
(1) taxable ordinary income in an amount equal to the difference
between the fair market value of the ISO Stock on the date of exercise of
the ISO and the exercise price; and
(2) capital gain or loss (long- or short-term, as the case may be) in
an amount equal to the difference between
(a) the amount realized by the employee upon the Disqualifying
Disposition and
(b) the exercise price paid by the employee for the stock,
increased by the amount of ordinary income recognized by the employee,
if any.
If the disposition generates an allowable loss (e.g., a sale to an unrelated
party not within 30 days of purchase of our 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 our common stock. If the employee pays with
shares of our common stock that are already owned, the basis of the newly
acquired common 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, the transaction will be tax-
free to the extent that the number of shares received does not exceed the
number of shares paid. The basis of the number of shares of newly acquired
common stock which does not exceed the number of shares of common 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
common stock paid. To the extent that the employee receives more new shares
than shares surrendered, the "excess" shares of common stock will take a zero
basis. If an employee exercises an ISO by using stock that is previously
acquired from the exercise of an ISO, however, certain special rules apply. If
the employee has not held the previously acquired common 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 common stock, the use of such common
stock to pay the exercise price will constitute a Disqualifying Disposition and
subject the employee to income tax with respect to the common stock as
described above. In such circumstances, the basis of the newly acquired common
stock will be equal to the fair market value of the previously acquired common
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. We are
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
84
<PAGE>
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 common stock from the exercise of an ISO 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.
Our 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 designation of employees eligible thereunder, or decrease the
price at which options may be granted. Our board of directors 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, we assumed a stock option plan previously sponsored by TresCom.
Pursuant to the terms of the agreement governing the TresCom merger, each
outstanding option to acquire one share of TresCom common stock was converted
into an option to acquire 0.6147 shares of our common stock. Options to acquire
175,721 shares of our common stock are outstanding under this Primus-TresCom
Option Plan. The Primus-TresCom Option Plan provides for an equitable
adjustment in the number and price of shares of our common stock with respect
to outstanding options in the event the outstanding shares of our 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 employees, consultants and directors of
TresCom prior to the TresCom merger in order to increase their proprietary
interest in our success and to encourage them to continue to provide services
to us. No additional stock options will be granted under the Primus-TresCom
Option Plan. All options issued under the Primus-TresCom Option Plan are
entirely vested and exercisable in full.
The Primus-TresCom Option Plan is administered by our board of directors or
by a committee appointed by our board of directors and consisting of not less
than two members of our board of directors who are not also employees of Primus
or any of its subsidiaries. The Primus-TresCom Option Plan does not limit the
length of time a director may serve as part of this committee. Subject to the
terms of the Primus-TresCom Option Plan, the board of directors or this
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 our common stock purchased under an option must be made in full upon
exercise of the option, by certified or bank cashier's check or by any other
means acceptable to us, including, without limitation, tender of shares of our
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 our common stock subject to the option and
includes other terms and conditions applicable to the option. These 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.
The tax consequences to Primus and the recipient of these options upon the
grant and exercise of either a NQSO or ISO, and the sale of our common stock
acquired upon exercise thereof, are identical to those described for NQSOs and
ISOs under "--Employee Stock Option Plan" above.
85
<PAGE>
Director Stock Option Plan. We 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 Primus by outside directors (present or future
incumbent directors who are not affiliated with or employees Primus or any
subsidiary and who have not been nominated to serve as directors pursuant to an
agreement with Primus) whose services are considered essential to our 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 our common stock for which options
may be granted pursuant to the Director Stock Option Plan is 338,100. On the
effective date of the Director Stock Option Plan or the first date thereafter
that any director becomes eligible to receive an award under the Director Stock
Option Plan, each eligible director will automatically receive an option to
purchase 15,000 shares of our 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 our board
of directors, upon the death or permanent disability of a director, or if we
merge with another company and we are not the surviving corporation, we enter
into an agreement to sell or otherwise dispose of all or substantially all of
our assets, or any person or group acquires more than 20% of our 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 our 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 Primus. Upon the
exercise of a NQSO by a director, we are 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 Primus 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 our common stock acquired upon exercise thereof, are identical
to those described for NQSOs under "--Employee Stock Option Plan" above, except
that we have no withholding obligations upon the exercise of a NQSO by a
director.
Employee Stock Purchase Plan. During 1997, our board of directors adopted
and the stockholders approved an Employee Stock Purchase Plan. The Employee
Stock Purchase Plan provides employees with the right to purchase shares of our
common stock through payroll deduction. A total of 2,000,000 shares of our
common stock are available for purchase under the Employee Stock Purchase Plan,
subject to adjustment in the number and price of shares of our common stock
available for purchase in the event the outstanding shares of our common stock
are increased or decreased through stock dividends, recapitalizations,
reorganizations or similar changes. This ESP Plan is to be administered by our
board of directors, which may delegate responsibility for such administration
to a committee of our board of directors. Subject to the terms of this ESP
Plan, our board of directors 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 our 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 our employees 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
86
<PAGE>
week. Notwithstanding the foregoing, any employee who, after purchasing our
common stock under the ESP Plan, would own five percent or more of the total
combined voting power or value of all classes of our stock or any parent
corporation or subsidiary corporation thereof is not eligible to participate.
Ownership of stock is determined in accordance with the provisions of Section
424(d) of the Internal Revenue Code. Further, an employee is not eligible to
participate if such participation would permit such employee's rights to
purchase stock under all employee stock purchase plans of the participating
companies which meet the requirements of section 423(b) of the Code to accrue
at a rate which exceeds $25,000 in fair market value (as determined pursuant to
section 423(b)(8) of the Code) for each calendar year in which such option is
outstanding.
Eligible employees may elect to participate in the Employee Stock Purchase
Plan during an offering which starts on the first day of each month beginning
on or after adoption of the Employee Stock Purchase Plan by our board of
directors and ends on the last day of each month. Shares will be deemed to have
been purchased on the last day of such month. The purchase price per share
offered under the Employee Stock Purchase Plan will be 85 percent of the lesser
of: (1) the fair market value per share on the first day of the month, 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 last day of the month, 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 Employee Stock
Purchase Plan shall file an election form with our board of directors or the
committee governing the ESP Plan at least 15 days before the first of the month
for the first offering for which such election form is effective. On this form
an employee 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 our common stock for which purchase rights
are exercised on the last day of a month exceeds the maximum number of shares
of our common stock available, our board of directors or the relevant 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 last day of the
month.
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 our board of directors or
the relevant committee on or before the 15th day of the month immediately
preceding the first of the month 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 our board of directors
or the committee at any time before the last day of the month 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.
87
<PAGE>
All funds held or received by us under the ESP Plan may be used for any
corporate purpose until applied to the purchase of shares of our common stock
or refunded to employees and shall not be segregated from our general assets.
Shares of our common stock purchased under the ESP Plan will be issued from our
treasury stock or from our authorized but unissued shares. The participating
companies shall pay all fees and expenses incurred (excluding individual
Federal, state, local or other taxes) in connection with the ESP Plan.
An Employee's rights under the ESP Plan belong to the employee alone and may
not be transferred or assigned to any other person during the employee's
lifetime. After the shares of our common stock have been issued under the ESP
Plan, such shares may be assigned or transferred the same as any other shares.
The ESP Plan is not qualified under Section 401(a) of the Internal Revenue
Code. We 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 our common stock is purchased by the employee, or less than two
years after each commencement of an offering.
Generally, no tax consequences arise at the time the participant purchases
shares of our common stock. If a participant does not dispose of shares of our
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 our 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.
Our board of directors or the relevant 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.
Restricted Stock Plan. We established the 1998 Restricted Stock Plan on
December 15, 1998 to facilitate the grant of "restricted stock" to selected
individuals who contribute to our development and success and that of our
subsidiaries. The total number of shares of our common stock which may be
granted under the 1998 Restricted Stock Plan is 750,000. For any calendar year,
the maximum number of shares of our common stock which may be granted to any
individual is 200,000.
The 1998 Restricted Stock Plan is administered by our board of directors,
provided that our board of directors may delegate its authority under the 1998
Restricted Stock Plan to a member of our board of directors, a committee of our
board of directors or an executive officer of Primus. Except as otherwise
provided by our board of directors, only our board of directors or the relevant
committee may make grants under the 1998 Restricted Stock Plan to an executive
officer or establish the number of shares of our common stock that can be
subject to grants for any of our fiscal periods.
88
<PAGE>
Persons who may receive grants under the 1998 Restricted Stock Plan are
limited to our and our subsidiaries' employees, consultants, agents, advisers,
managers or any other individual whose participation in the 1998 Restricted
Stock Plan is determined by our board of directors to be in our best interests.
However, notwithstanding the foregoing, individuals who are required to file
reports under Section 16(a) of the Exchange Act are not eligible to receive
grants under the 1998 Restricted Stock Plan.
Unless delegated to the relevant committee, our board of directors has the
full and final authority to:
(i) designate recipients of grants,
(ii) determine the types of grants to be made
(iii) determine the number of shares of our common stock to be subject
to a grant,
(iv) establish the terms and conditions of each grant, including, but
not limited to, the nature and duration of any restriction or condition,
(v) prescribe the form of each award agreement pursuant to which
grants are made,
(vi) make grants alone, in addition to, in tandem with or in
substitution or exchange for any other grant or any other award granted
under another plan maintained by Primus or a subsidiary and
(vii) amend, modify or supplement the terms of any outstanding grant
of shares of our common stock under the 1998 Restricted Stock Plan.
The Board or its delegate will establish a restricted period with respect to
each grant of restricted stock under the 1998 Restricted Stock Plan. Except as
otherwise determined by our board of directors, the minimum restricted period
is one year. Each grant may be subject to a different restricted period, and
may be subject to restrictions other than or in addition to the expiration of
time, such as the satisfaction of individual or corporate objectives.
Performance objectives other than the lapse of time must be established on or
before the 90th day of the period of service to which the objectives relate and
while the outcome is substantially uncertain, and may include:
. earnings per share,
. total stockholder return,
. operating earnings,
. growth in assets,
. return on equity,
. return on capital,
. market share,
. stock price,
. net income,
. cash flow,
. sales growth in general,
. sales growth by type of product,
. sales growth by type of customer,
. retained earnings,
. completion of acquisitions,
. completion of divestitures and asset sales,
. cost or expense reductions,
. introduction or conversion of products or services and
. achievement of specified management information systems objectives.
89
<PAGE>
In addition, performance objectives may include positive results,
maintaining the status quo or limiting economic losses.
Our common stock subject to grants under the 1998 Restricted Stock Plan may
not be sold, transferred, assigned, pledged or otherwise encumbered or disposed
of during the restricted period. These restrictions lapse upon the expiration
of the restricted period, whether by lapse of time or the fulfillment of
applicable performance objectives. Unless our board of directors provides
otherwise in any particular award agreement, recipients may vote the shares
subject to that award agreement and will be entitled to receive dividends paid
with respect to such shares. However, our board of directors may require that
such dividends be reinvested in shares of our common stock, which shares may or
may not be subject to the same restrictions as the shares subject to the award
agreement.
Unless otherwise provided by our board of directors, if a recipient
terminates employment or engagement for any reason other than death or
disability, any shares of our common stock held by such recipient that remain
subject to restrictions under the 1998 Restricted Stock Plan will be forfeited.
Unless otherwise provided by our board of directors, if a recipient terminates
employment or engagement by reason of death or disability, all restrictions
under the 1998 Restricted Stock Plan applicable to shares held by such
recipient will lapse. For purposes of the 1998 Restricted Stock Plan,
"disability" means "total and permanent disability," as described in Section
22(e)(3) of the Code.
The numbers of and type of shares subject to the 1998 Restricted Stock Plan
and to grants made thereunder will be adjusted to the extent necessary to
prevent the enlargement or diminution of rights in the event of any merger,
reorganization, consolidation, recapitalization, stock dividend, spin-off or
other change in corporate structure affecting our common stock.
All restrictions on shares of our common stock granted under the 1998
Restricted Stock Plan will lapse and the 1998 Restricted Stock Plan will
terminate in the event of certain major corporate events. Those events include:
(i) dissolution or liquidation of the Company, (ii) merger, consolidation or
reorganization of the Company in which the Company is not the surviving entity,
or (iii) any transaction approved by our board of directors that results in any
person(s) or entity(ies) owning 80% or more of the combined voting power of all
classes of securities of Primus. Notwithstanding the foregoing, the lapse of
restrictions and the termination of the 1998 Restricted Stock Plan described in
this paragraph will not occur despite the consummation of such a major
corporate transaction if: (x) provision is made for continuation of the 1998
Restricted Stock Plan following such transaction, or for the substitution for
such shares of new restricted stock of a successor entity (with appropriate
adjustments as to the number and kind of shares), or (y) a majority of our
board of directors determines that such transaction should not trigger the
lapse of the restrictions and the termination of the 1998 Restricted Stock
Plan.
Under the Internal Revenue Code, if property is transferred in connection
with the performance of services, the excess, if any, of the fair market value
of the property received over the price paid for such property is included in
the income of the person performing such services as ordinary income. The
income is included at the time such property either ceases to be subject to a
substantial risk of forfeiture or is transferable free of such risk of
forfeiture. The fair market value of such property is generally measured at the
time when the substantial risk of forfeiture lapses, or when the property
becomes transferable free of such risk of forfeiture, unless an election is
made, as described below, to include the amount of any income at an earlier
date.
Shares of our common stock granted to a recipient under the 1998 Restricted
Stock Plan will be treated as acquired in connection with the performance of
services and will be considered to be subject to a substantial risk of
forfeiture during the restricted period, as described above. A recipient who
receives a grant of restricted stock will recognize ordinary compensation
income, in each year in which the restricted period lapses, equal to the fair
market value of the shares of our common stock as to which the restricted
period lapses. The fair market value of such shares at the time of vesting
generally will be equal to the then current market price of
90
<PAGE>
such shares. A recipient's basis for determining gain or loss on a subsequent
disposition of such shares of our common stock will be the amount which he must
include in income when the shares vest. Any gain or loss recognized on a
disposition of such shares generally will be long-term capital gain or loss if
the recipient holds the shares for more than one year from the date the
restricted period lapses.
The general rules described above do not apply if a recipient elects,
pursuant to Section 83(b) of the Internal Revenue Code, to include in his
income the fair market value of the shares of our common stock subject to an
award at the time the shares are awarded, without taking into account the
effect of the restrictions on the shares. If a recipient makes such a Section
83(b) election, he will not be required to recognize any income in any later
year in which the shares vest. The recipient's basis for determining gain or
loss on a disposition of the shares will be the amount included in income in
the year of the initial award. Any gain or loss recognized by the recipient on
a disposition of shares which were the subject of a Section 83(b) election will
be capital gain or loss, and will be long-term capital gain or loss if the
recipient holds the shares for more than one year from the date the shares are
transferred to him. If, however, the recipient forfeits any shares upon a
termination of employment, he will not be entitled to deduct any loss upon such
forfeiture even though he may have been required to include an amount in income
by virtue of a Section 83(b) election.
In general, for federal income tax purposes, we will be entitled to a
deduction in the same amount and at the same time as a recipient recognizes
income. In certain circumstances, our deductions may be limited because of the
application of the $1,000,000 compensation cap under Section 162(m) of the
Internal Revenue Code.
Employment Agreements
K. Paul Singh. We have entered into an employment agreement with Mr. Singh.
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 our board of directors,
President and Chief Executive Officer. We are required to compensate Mr. Singh
at an annual rate of $250,000 effective January 1, 1997 (which amount is
reviewed annually by our board of directors and is subject to increase at their
discretion). Mr. Singh, however, agreed to defer payment of his base salary
from June 1, 1994 through May 31, 1995, which was subsequently paid to him on
July 31, 1996. We are also obligated to:
(i) allow Mr. Singh to participate in any bonus or incentive
compensation plan approved for senior management,
(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.
We may terminate the Singh Agreement at any time in the event of Mr. Singh's
disability or for cause, each as defined in the Singh Agreement. Mr. Singh may
resign at any time without penalty (other than the non-competition obligations
discussed below). If we terminate the Singh Agreement for disability or cause,
we will have no further obligations to Mr. Singh. If, however, we terminate the
Singh Agreement other than for disability or cause, we will have the following
obligations: (i) if the termination is after May 30, 1999, we 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, we must pay to Mr. Singh, as they
become due, all amounts otherwise payable if he had remained employed by us
until June 1, 1999. If Mr. Singh resigns, he may not directly or indirectly
compete with our business until six months after his resignation. If we
terminate Mr. Singh's employment for any reason, Mr. Singh may not directly or
indirectly compete with our business until six months after the final payment
of any amounts owed to him under the Singh Agreement become due.
91
<PAGE>
Wesley T. O'Brien. TresCom entered into an employment agreement with Mr.
Wesley T. O'Brien which was amended and restated on February 15, 1997 and was
further amended on February 3, 1998. The O'Brien Agreement provided for Mr.
O'Brien to serve as TresCom's President and Chief Executive Officer for which
he would receive an annual base salary of $231,000 and was to terminate in June
1999; however, it was terminated as of June 22, 1998. Pursuant to the terms of
the O'Brien Agreement, Mr. O'Brien will continue to receive any unpaid salary
and bonus, as well as an additional amount equal to the salary remaining until
June 1999. 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 first installment of this special
bonus was paid contemporaneously with the closing of the TresCom merger and the
remainder was 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 each provide
for a one-time special bonus of $500,000 in the event of a change in control,
which was triggered by the 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 Primus.
92
<PAGE>
TRANSACTIONS WITH AFFILIATES AND OTHERS
Private Equity Sale
In July 1996, we completed the sale of 965,999 shares of our common stock
for an aggregate purchase price of approximately $8.0 million to:
(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
The Soros/Chatterjee Group named above also purchased, for an additional $8.0
million, warrants representing the right to receive, upon exercise, an
indeterminate number of shares our common stock with a fair market value of
$10.0 million as of the date of exercise, plus up to 627,899 additional shares
our common stock. The warrants have been exercised in full.
The Soros/Chatterjee Group was granted registration rights pursuant to a
registration rights agreement with us. 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 our
common stock after the first demand registration. We are 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 of a registration statement relating to the
sale of shares for our own account. The Soros/Chatterjee Group is also entitled
to unlimited piggyback registrations. All such registrations would be at our
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. We and the Soros/Chatterjee Group have entered into
customary indemnification and contribution provisions.
Additionally, members of the Soros/Chatterjee Group are entitled to tag-
along rights to participate with Mr. Singh and members of his family in sales
of capital stock on the same terms and conditions as Mr. Singh and members of
his family. The Soros/Chatterjee Group shares are also subject to drag-along
rights in the event holders of a majority of our common stock decide to sell
80% or more of the outstanding capital stock of Primus. A securityholders
agreement provides that members of the Soros/Chatterjee Group will not transfer
shares of our common stock to a company, or any affiliate, that competes with
us 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
We entered into an agreement on January 12, 1996 with Teleglobe, pursuant to
which Teleglobe purchased 410,808 shares of our common stock for a total of
$1,458,060. The equity investment was consummated in February 1996 as was a
loan by Teleglobe of $2.0 million to us. The loan was repaid in full with the
proceeds from the offering of the 1997 senior notes. Related to the Teleglobe
investments, we and a number of our subsidiaries have entered into trading
agreements with Teleglobe with respect to our respective service offerings. The
parties have also agreed to cooperate in an effort to maximize efficiencies
with respect to network facilities.
93
<PAGE>
NSI Private Placements
In 1995 and 1996, we engaged Northeast Securities, Inc. to serve as the
placement agent for two private placements of our common stock. Mr. Andrew B.
Krieger, a former director of Primus, served as a broker-dealer in the private
placements through an affiliation with Northeast Securities. In connection with
these offerings, we paid Mr. Krieger cash commissions aggregating approximately
$1,007,000. We 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, we issued a total of 193,718 shares of our
common stock to Krieger Associates and Mr. Krieger, and at the direction of Mr.
Krieger issued a total of 74,003 shares of our common stock to other
individuals associated with the transaction. We also issued, in connection with
these private placements, a total of 245,555 shares of our common stock to
Northeast Securities and certain of its employees associated with the
transactions.
Hotkey Investment
In March 1998, we invested in Hotkey, a Melbourne, Australia-based Internet
service provider, acquiring a 60% interest in the Company. Mr. Singh was the
holder of approximately 14% of the outstanding equity securities of Hotkey. We
purchased our 60% ownership of Hotkey for approximately $1.3 million in cash.
In February 1999, we purchased the remaining 40% of Hotkey from its
stockholders for approximately $1.1 million comprised of $0.3 million in cash
and 57,025 shares of our common stock. In connection with the February 1999
transaction, K. Paul Singh received 6,148 shares of our common stock and
$34,252 in cash.
Executive Officer Loan
As of September 3, 1998, we loaned Ravi and Madhu Bhatia the principal
amount of $164,000. As of March 31, 1999, the Bhatias paid down the principal
amount of the loan to $112,681 and we extended the maturity of the loan. The
loan is now due on the earlier of the termination of Mr. Bhatia's employment or
August 31, 1999. Interest is calculated daily at a rate of 10% per annum.
Repayment of the loan is secured by options to purchase our common stock held
by Mr. Bhatia and a pledge of 50,000 shares of our common stock. The common
stock which is pledged is subject to a prior pledge in favor of Schroder & Co.
to secure payment of certain loans.
TresCom Merger
In June 1998, pursuant to an Agreement and Plan of Merger dated February 3,
1998, as amended, Taurus Acquisition Corporation, a Florida corporation and our
wholly-owned subsidiary, merged with and into TresCom International, Inc., a
Florida corporation. Under the terms of the merger agreement, TresCom
shareholders received 0.6147 shares of our common stock in exchange for each
share of TresCom's common stock outstanding at the effective time of the
merger, other than shares beneficially owned by us or our affiliates. The
exchange ratio was determined pursuant to the merger agreement by dividing
$12.00 by $19.5223, which was the weighted average sales price of our common
stock during the 20-trading day period ending on June 4, 1998. As a result of
the consummation of the merger, TresCom became our wholly-owed subsidiary.
As a result of the merger, Warburg, Pincus Investors, L.P., which
beneficially owned approximately 52% of TresCom's common stock, received
approximately 3,875,689 shares of our common stock valued at approximately
$71,458,016. Warburg, Pincus currently beneficially owns approximately 13.6% of
our common stock. Pursuant to a Stockholder Agreement dated February 3, 1998,
by and among Mr. Singh, Warburg, Pincus, and us, Warburg, Pincus was granted
certain demand and piggyback registration rights related to shares of our
common stock, which if exercised, would permit Warburg, Pincus to transfer such
shares free of Rule 144 volume limitations (the same as non-affiliates of
TresCom), and the right, so long as Warburg, Pincus beneficially owns 10% or
more of our common stock, to nominate an individual, reasonably acceptable to
our non-employee directors, to serve as a director on our Board of Directors.
94
<PAGE>
Satellite Earth Station
In June 1998, our U.K. subsidiary entered into a $2.1 million agreement for
the design, manufacture, installation and the provision of training with
respect to a satellite earth station in London. David Hershberg, one of our
directors, is the chairman, president and a stockholder of the company
providing such services. During 1998, $1.2 million was paid by us for the above
services.
95
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of April 30, 1999, with
respect to the beneficial ownership of shares of our common stock by each
person or group who is known to us to be the beneficial owner of more than five
percent of our outstanding common stock, by each director or nominee for
director, by each of the executive officers on the Summary Compensation Table,
and by all directors and executive officers as a group. Unless otherwise
indicated, each person has sole voting power and sole investment power.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent
Name and Address of Beneficial Owner Ownership(1) of Class(2)
- ------------------------------------ ------------ -----------
<S> <C> <C>
K. Paul Singh(3)...................................... 4,760,416 16.5%
1700 Old Meadow Road
McLean, VA 22102
Warburg, Pincus Investors, L.P.(4).................... 3,875,689 13.6%
466 Lexington Avenue
New York, New York 10017
Franklin Resources, Inc.(5)........................... 2,035,270 7.2%
777 Mariners Island Boulevard
San Mateo, CA 94404
John F. DePodesta(6).................................. 382,199 1.3%
Herman Fialkov........................................ 30,000 *
David E. Hershberg(7)................................. 51,667 *
Douglas M. Karp(8).................................... 3,875,689 13.6%
John G. Puente........................................ 100,715 *
Neil L. Hazard(9)..................................... 324,140 1.1%
Yousef B. Javadi(10).................................. 112,242 *
John Melick(11)....................................... 126,999 *
Ravi Bhatia(12)....................................... 113,930 *
All executive officers and directors as a group(13)... 9,939,073 33.5%
</TABLE>
- --------
* Less than 1% of our 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 our common
stock subject to options or warrants currently exercisable or which become
exercisable on or prior to 60 days from April 30, 1999 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 28,439,746 shares of our common stock outstanding as of April
30, 1999.
(3) Includes 377,786 shares of our common stock owned by Mr. Singh's wife and
children, 488,500 shares of our common stock held by a private foundation
of which Mr. Singh is the president and a director, 396,828 shares of our
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 1,031 shares held in a 401(k) plan of
which Mr. Singh is a beneficiary. Also includes 371,433 shares of our
common stock issuable upon the exercise of options granted to Mr. Singh.
(4) 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.
96
<PAGE>
(5) Based on a Schedule 13G dated February 1, 1999, Franklin Resources, Inc.
("Franklin") has reported that it may be deemed to be the beneficial owner
of 2,035,270 shares of our 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 our common stock held by Franklin.
Franklin, the Adviser, and Messrs. Charles and Rupert Johnson disclaim any
economic interest or beneficial ownership in such shares.
(6) Includes 161,430 shares of our common stock issuable upon the exercise of
options granted to Mr. DePodesta.
(7) Includes 50,715 shares of our common stock issuable upon the exercise of
options granted to Mr. Hershberg and 952 shares of our common stock owned
by a partnership of which Mr. Hershberg is a general partner.
(8) 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 4 above.
(9) Includes 317,623 shares of our common stock issuable upon the exercise of
options granted to Mr. Hazard.
(10) Includes 106,666 shares of our common stock issuable upon the exercise of
options granted to Mr. Javadi.
(11) Includes 123,287 shares of our common stock issuable upon the exercise of
options granted to Mr. Melick.
(12) Includes 43,810 shares of our common stock issuable upon the exercise of
options granted to Mr. Bhatia. Certain of Mr. Bhatia's options and shares
are pledged to secure payment of certain loans. See "Transactions with
Affiliates and Others--Executive Officer Loan."
(13) Consists of 11 persons and includes 1,225,536 shares of our 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 4 and 12 above.
97
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS
1997 Senior Notes
General. Our 1997 senior notes are senior obligations, limited to $225
million in principal amount, which 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 1997 senior notes will rank senior in right of payment to any
of our future subordinated indebtedness (as defined in the 1997 indenture), and
pari passu in right of payment with all of our senior indebtedness. Because we
operate via a holding company that conducts its business through its
subsidiaries, all existing and future indebtedness and other liabilities and
commitments of our subsidiaries, including trade payables, will be structurally
senior to the 1997 senior notes.
Security. The indenture required us 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. We used approximately $71.8
million of the net proceeds of the 1997 senior notes to acquire these 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 our option, 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>
Redemption
Year Price
---- ----------
<S> <C>
2001.............................................................. 105.875%
2002.............................................................. 102.938%
2003 (and thereafter)............................................. 100.000%
</TABLE>
In addition, prior to August 1, 2000, we 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 us 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 our ability and that of our 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,
98
<PAGE>
. enter into certain transactions with affiliates,
. sell assets,
. issue or sell Capital Stock of our Restricted Subsidiaries or
. enter into certain mergers and consolidations.
Pursuant to a consent solicitation, we amended the 1997 indenture to
generally conform portions of covenants relating to debt incurrence, restricted
payments, permitted investments and permitted liens to the corresponding
provisions in the 1998 indenture and to the corresponding provisions which will
be contained in the indenture.
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.
1998 Senior Notes
General. Our 1998 senior notes are senior obligations, limited to $150
million in principal amount, which mature on May 15, 2008. The 1998 senior
notes, which were issued pursuant to the 1998 indenture, accrue interest at a
rate of 9 7/8% per annum. Interest is payable each May 15 and November 15,
commencing on November 15, 1998.
Ranking. The 1998 senior notes rank senior in right of payment to any future
subordinated Indebtedness (as defined in the 1998 indenture), and pari passu in
right of payment with all senior indebtedness. Because we are a holding company
that conducts business through subsidiaries, all existing and future
indebtedness and other liabilities and commitments of our subsidiaries,
including trade payables, will be structurally senior to the 1998 senior notes.
Optional Redemption. The 1998 senior notes are not redeemable prior to May
15, 2003. Thereafter, the 1998 senior notes will be redeemable, in whole or in
part, at our option, 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 May 15 of the years set forth
below, the redemption price will be that amount, expressed as a percentage of
the principal amount of the 1998 senior notes, set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2003............................................................ 104.938%
2004............................................................ 103.208%
2005............................................................ 101.604%
2006 (and thereafter)........................................... 100.000%
</TABLE>
In addition, prior to May 15, 2001, we may redeem up to 25% of the
originally issued principal amount of the 1998 senior notes at 109.875% 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 1998 indenture); provided, however, that at least
75% of the originally issued principal amount of the 1998 senior notes remains
outstanding after the occurrence of such redemption.
99
<PAGE>
Change of Control. Upon the occurrence of a Change of Control (as defined in
the 1998 indenture), each holder of 1998 senior notes will have the right to
require us to repurchase all or any part of such holder's 1998 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 1998 indenture contains certain covenants that, among other
things, limit the ability of Primus and its Restricted Subsidiaries (as defined
in the 1998 indenture) to:
. incur additional indebtedness and issue preferred stock,
. pay dividends or make other distributions,
. repurchase Capital Stock (as defined in the 1998 indenture) or
subordinated indebtedness or make certain other Restricted Payments (as
defined in the 1998 indenture),
. create certain liens,
. enter into certain transactions with affiliates,
. sell assets,
. issue or sell Capital Stock of our Restricted Subsidiaries or
. enter into certain mergers and consolidations.
These covenants are substantially the same as those contained in the
indenture. See "Description of Exchange Notes--Covenants."
Events of Default. The 1998 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 1998
indenture,
(iii) cross defaults on more than $10 million of other indebtedness,
(iv) failure to pay more than $10 million of judgments that have not
been stayed by appeal or otherwise and
(v) the bankruptcy of Primus or certain of its subsidiaries.
100
<PAGE>
DESCRIPTION OF EXCHANGE NOTES
Set forth below is a summary of certain provisions of the new notes. The new
notes will be issued pursuant to an indenture, dated as of January 29, 1999,
between us, as issuer, and First Union National Bank, as trustee. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its 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 form of the indenture are available upon request
from us or the trustee. The term "Note" or "Notes" includes the initial notes
and the new notes.
The form and terms of the new notes will be identical in all material
respects to the form and terms of the initial notes, except that:
(i) the new notes have been registered under the Securities Act and,
therefore, will not bear legends restricting the transfer thereof,
(ii) holders of the new notes, except in limited circumstances, will not
be entitled to liquidated damages, and
(iii) holders of the new 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 Agreement intended for the
holders of unregistered securities.
The exchange offer shall be deemed consummated upon the occurrence of the
delivery by us to the Registrar under the exchange note 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.
General
The Notes issued on the Closing Date will be our senior obligations, limited
to $200 million aggregate principal amount, except that the indenture will
provide for the issuance of an additional $75 million of Notes which may be of
the same series as, and which may vote as a single class for purpose of the
Indenture with, the $200 million of Notes issued on the Closing Date (the
"Additional Notes"). In addition, the Notes have the following characteristics:
<TABLE>
<S> <C>
Maturity.......................................... January 15, 2009
Interest.......................................... 11 1/4% per annum
Interest Payable.................................. semiannually on January 15
and July 15 of each year,
commencing July 15, 1999
</TABLE>
Interest on the Notes will be payable to the Person in whose name the Note (or
any predecessor Note) is registered at the close of business on the preceding
January 1 or July 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
Primus (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 our option, payment of interest may be made by check
mailed to the address of the holders as such address appears in the Note
Register.
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. No service charge will be made for any
101
<PAGE>
registration of transfer or exchange of Notes, but we may require payment of a
sum sufficient to cover any transfer tax or other similar governmental charge
payable in connection therewith.
Optional Redemption
The Notes will be redeemable, at our option, in whole or in part, at any
time or from time to time, on or after January 15, 2004 and prior to maturity,
upon not less than 30 nor more than 60 days' prior notice mailed by first class
mail to each holders' last address as it appears in the note register, at the
following redemption prices (expressed in percentages of principal amount
thereof), plus accrued and unpaid interest and liquidated damages, if any,
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 January 15, of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004.............................................................. 105.625%
2005.............................................................. 103.750%
2006.............................................................. 101.875%
2007 (and thereafter)............................................. 100.000%
</TABLE>
Notwithstanding the foregoing, prior to January 15, 2002 we may on any one
or more occasions redeem up to 35% of the originally issued principal amount of
Notes at a redemption price of 111.25% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, thereon to the
redemption date, with the Net Cash Proceeds of one or more Public Equity
Offerings; provided (i) that at least 65% 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. (Section 1101)
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 of our existing and future obligations that are expressly subordinated
in right of payment to the Notes and will rank pari passu in right of payment
with all other of our existing and future senior unsecured obligations,
including trade payables. As of December 31, 1998, after giving pro forma
effect to the offering of the initial notes, and the application of the net
proceeds thereof, and assuming the repayment of the outstanding balance under
the TresCom credit facility in January 1999, we (on a consolidated basis) would
have had outstanding approximately $602.4 million of indebtedness. Because we
are a holding company that conducts business through our subsidiaries, all
existing and future indebtedness and other liabilities and commitments of our
subsidiaries, including trade payables, will be structurally senior to the
Notes. As of December 31, 1998, assuming the TresCom credit facility had been
repaid in full, our consolidated subsidiaries had outstanding aggregate
liabilities of approximately $168.3 million, which included $29.4 million of
indebtedness.
102
<PAGE>
Covenants
Limitation on Indebtedness
(a) We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than the Notes issued on the Closing Date);
provided, however, that we 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 Primus and its Restricted Subsidiaries on a
consolidated basis outstanding as of the Transaction Date to
(ii) the Pro Forma Consolidated Cash Flow for the preceding two full
fiscal quarters multiplied by two, determined on a pro forma basis as if
any such Indebtedness 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, Primus 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 Primus 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 or
(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 Primus 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 Primus or a Restricted Subsidiary after the
Closing Date (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 (as determined in good
faith by our board of directors, whose determination shall be conclusive
and evidenced by a Board Resolution) of such equipment, ownership rights or
minimum investment units so acquired);
(iii) Indebtedness of any Restricted Subsidiary to Primus or
Indebtedness of Primus 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 us or another Restricted
Subsidiary) shall be deemed, in each case, to constitute the incurrence of
such Indebtedness, and provided further that Indebtedness to a Restricted
Subsidiary must be subordinated in right of payment to the Notes;
(iv) Indebtedness of Primus or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of Primus 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,
103
<PAGE>
(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 our Indebtedness be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (iv);
(v) Indebtedness not to exceed, at any one time outstanding, 2.00 times
(A) the Net Cash Proceeds received by us after May 18, 1998 from the
issuance and sale of our Capital Stock (other than Redeemable Stock) to
a Person that is not a Subsidiary, to the extent such Net Cash Proceeds
have not been used pursuant to clause (C)(2) of the first paragraph or
clauses (iii), (iv) or (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 our 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 us after May 18,
1998 from the issuance or sale of our Capital Stock (other than
Redeemable Stock) to a Person that is not a Subsidiary to the extent
such sale of Capital 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 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 Primus 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 us 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 of our
obligations or any of our Restricted Subsidiaries pursuant to such
agreements, in any case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary (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 us or any Restricted Subsidiary in
connection with such disposition;
104
<PAGE>
(vii) Indebtedness of Primus, 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 permitted by and made in
accordance with the "Limitation on Issuances of Guarantees of Indebtedness
by Restricted Subsidiaries" covenant;
(ix) Indebtedness of Primus or any Restricted Subsidiary not otherwise
permitted hereunder in an aggregate principal amount which, 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 Primus 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 Primus 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, we, in our 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
We 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 our Capital Stock to the holders thereof (other than dividends or
distributions payable solely in shares of Capital Stock (other than
Redeemable Stock) 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 Primus 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 (including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person other than a Restricted
Subsidiary,
(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:
105
<PAGE>
(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 our 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 Primus 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
(1) 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 us after
the Closing Date from the issuance and sale of our Capital Stock
(other than Redeemable Stock) to a Person who is not a
Subsidiary (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
Closing Date by us from the issuance or sale of debt securities
that have been converted into or exchanged for Capital Stock
(other than Redeemable Stock) together with the aggregate cash
received by us 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
in exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of Capital Stock (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);
(iv) the acquisition of Indebtedness 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 Capital Stock
106
<PAGE>
(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 our property and assets;
(vi) cash payments in lieu of the issuance of fractional shares issued
in connection with the exercise of any Common Stock warrants;
(vii) Investments in Permitted Businesses acquired in exchange for
Capital Stock (other than Redeemable Stock) or the Net Cash Proceeds from
the issuance and sale of such Capital 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 we have
made the Change of Control offer as provided in such covenant with respect
to the Notes and have 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 (1) a Restricted Payment referred to in clause (ii)
thereof, (2) an exchange of Capital Stock for Capital Stock or an exchange of
Indebtedness for Capital Stock referred to in clauses (iii) or (iv) thereof or
(3) an Investment referred to in clause (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.
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 us and our 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, we 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
us or any other Restricted Subsidiary,
(ii) pay any indebtedness owed to us or any other Restricted Subsidiary,
(iii) make loans or advances to us or any other Restricted Subsidiary,
or
(iv) transfer any of its property or assets to us or any other
Restricted Subsidiary.
107
<PAGE>
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
of the Notes 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 us) and we determine that any such encumbrance or restriction
will not materially affect our 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 us or any Restricted Subsidiary, existing at the
time of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(v) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant,
(A) that restrict in a customary manner the subletting, assignment
or transfer of any property or asset that is, or is subject to, a
lease, purchase mortgage obligation, license, conveyance or contract or
similar property or asset,
(B) existing by virtue of any transfer of, agreement to transfer,
option or right with respect to, or Lien on, any of our property or
assets or those of 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 our property or assets or those of
any Restricted Subsidiary in any manner material to Primus 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 us 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 Primus
or any of its Restricted Subsidiaries that secure Indebtedness of Primus or any
of its Restricted Subsidiaries. (Section 1013)
Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
We 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 Primus 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
108
<PAGE>
(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
We 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 or with any Affiliate or
any Restricted Subsidiary, unless
(i) such transaction or series of transactions is on terms no less
favorable to us 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 our board of directors, including
the approval of a majority of the independent, disinterested directors, and
is evidenced by a resolution of our board of directors, and
(iii) if such transaction or series of transactions involves aggregate
consideration in excess of $25.0 million, then we or such Restricted
Subsidiary will deliver to the Trustee a written opinion as to the fairness
to us 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 deemed to
be on terms no less favorable to us 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 our board of
directors, including a majority of the independent, disinterested
directors, and are evidenced by a resolution of our board of directors.
The foregoing limitation does not limit, and will not apply to
(i) any transaction between us and any of our Restricted Subsidiaries or
between Restricted Subsidiaries;
(ii) the payment of reasonable and customary regular fees to our
directors who are not our employees;
(iii) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant;
(iv) transactions provided for in the Employment Agreement as in effect
on the Closing Date; and
(v) loans and advances to employees of Primus 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, we 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 our assets or properties of any
character (including, without limitation, licenses and trademarks), or any
shares of Capital Stock or
109
<PAGE>
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
We will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale unless (i) Primus 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 our 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.
We 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
our unsubordinated Indebtedness or Indebtedness of any Restricted Subsidiary,
in each case owing to a Person other than Primus 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, Primus and its
Restricted Subsidiaries existing on the date of such investment (as determined
in good faith by our 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, we 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").
We 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 we default 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;
110
<PAGE>
(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 Officer's 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. We 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.
We will comply with Rule 14e-1 under the Securities Exchange Act of 1934 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
We will not permit any Restricted Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any of
our Indebtedness, 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 of reimbursement, indemnity or subrogation
or any other rights against Primus or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted Subsidiary may
provide by its terms that it will be automatically and unconditionally released
and discharged upon (i) any sale, exchange or transfer, to any Person not an
Affiliate of us, of all of our 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)
111
<PAGE>
Business of the Company
We 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
We will not make, and will not permit any of our 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 our board of directors
(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
We will file on a timely basis with the Securities Exchange Commission, to
the extent such filings are accepted by the Commission and whether or not we
have a class of securities registered under the Securities Exchange Act of
1934, the annual reports, quarterly reports and other documents that we would
be required to file if we were subject to Section 13 or 15 of the Exchange Act.
All such annual reports shall include the geographic segment financial
information contemplated by Item 101(d) of Regulation S-K under the Securities
Act of 1933 and all such quarterly reports shall provide the same type of
interim financial information that, as of the date of the Indenture, currently
is our practice to provide. We 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 we file such
reports and documents with the Commission or the date on which we would be
required to file such reports and documents if we 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 our cost
copies of such reports and documents to any prospective holder promptly upon
request. (Section 1009)
Other
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Indebtedness (other than fees and expenses which accrue by the terms
of the TresCom credit facility) under the TresCom credit facility and we will
cause the TresCom credit facility to be terminated as soon as practicable.
Repurchase of Notes upon a Change of Control
Upon the occurrence of a Change of Control, each holder shall have the right
to require us 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 following any Change of Control, we 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");
112
<PAGE>
(iii) that any Note not tendered will continue to accrue interest
pursuant to its terms;
(iv) that, unless we default 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, we 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 Officer's 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. We 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.
We will comply with Rule 14e-1 under the Securities Exchange Act of 1934 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
we are required to repurchase the Notes under this "Repurchase of Notes upon a
Change of Control" covenant. (Section 1010)
If we are unable to repay all of our indebtedness that would prohibit
repurchase of the Notes or are unable to obtain the consents of the holders of
our indebtedness, if any, outstanding at the time of a Change of Control whose
consent would be so required to permit the repurchase of Notes, then we will
have breached such covenant. Our failure 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 we 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 of our securities which might be outstanding at the time).
The above covenant requiring us to repurchase the Notes will, unless the
consents referred to above are obtained, require us to repay all indebtedness
then outstanding which by its terms would prohibit such Note repurchase, either
prior to or concurrently with such note repurchase.
113
<PAGE>
Consolidation, Merger and Sale of Assets
We will not consolidate with, merge with or into, or sell, convey, transfer,
lease or otherwise dispose of all or substantially all of our 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 us and we will not permit any of our Restricted Subsidiaries to
enter into any such transaction or series of transactions if such transaction
or series of transactions, in the aggregate, would result in the sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of our properties and assets or of us and our Restricted
Subsidiaries, taken as a whole, to any other Person or Persons, unless:
(i) we will be the continuing Person, or the Person (if other than us)
formed by such consolidation or into which we are merged or that acquired
or leased such property and assets of us will be a corporation, partnership
or trust 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 our
obligations 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 we, 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) we deliver to the Trustee an Officer's Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii)) and
Opinion of Counsel stating that such consolidation, merger or transfer and,
if required in connection with such transaction, the related 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 our board of directors, whose determination shall be
evidenced by a Board Resolution, the principal purpose of such transaction
is to change our state of incorporation; 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 or Liquidated Damages, if any, 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 at its Stated Maturity, upon acceleration, redemption or otherwise;
(c) default in the payment of principal or interest or Liquidated
Damages, if any, 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 of our
covenants or agreements 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
Primus 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,
114
<PAGE>
(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 us 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 us or any of our Significant Subsidiaries
in an involuntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect,
(B) appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator or similar official of us or any of our
Significant Subsidiaries or for all or substantially all of our
property and assets or those of our Significant Subsidiaries or
(C) the winding up or liquidation of the affairs of Primus 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) we 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 us or any of our Significant Subsidiaries or for
all or substantially all of the property and assets of Primus 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 us (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 and liquidated damages, if any, on the Notes to be immediately due and
payable. Upon a declaration of acceleration, such principal of, premium, if
any, and accrued interest and liquidation damages, if any, 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 Indebtedness that is the subject of such Event of Default has been
discharged or the holders thereof have rescinded their declaration of
acceleration in respect of such Indebtedness, and written notice of such
discharge or rescission, as the case may be, shall have been given to the
trustee by us and countersigned by the holders of such Indebtedness or a
trustee, fiduciary or agent for such
115
<PAGE>
holders, within 60 days after such declaration of acceleration in respect of
the Notes, and no other Event of Default has occurred during such 60-day period
which has not been cured or waived during such period. If an Event of Default
specified in clause (h) or (i) above occurs, the principal of, premium, if any,
and accrued interest and liquidated damages, if any, 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 us and to the Trustee, may waive all past defaults and
rescind and annul a declaration of acceleration and its consequences if, among
other things, (i) all existing Events of Default, other than the nonpayment of
the principal of, premium, if any, and accrued and unpaid interest and
Liquidated Damages, if any, on the Notes that have become due solely by such
declaration of acceleration, have been cured or waived and (ii) the rescission,
in the Opinion of Counsel, would not conflict with any judgment or decree of a
court of competent jurisdiction. (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 or Liquidated
Damages, if any, 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, 508
and 512)
The indenture will require certain of our officers to certify, on or before
a date not more than 90 days after the end of each fiscal year, that a review
has been conducted of our activities and our performance under the indenture
and that we have 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. We 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
We may, at our option and at any time, elect to have our obligations upon
the Notes discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that we will be deemed to have paid and discharged the entire
Indebtedness represented by the outstanding Notes and to have satisfied all our
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 and Liquidated Damages, if any, on such Notes
when such payments are due,
116
<PAGE>
(ii) our 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, we may, at our option and at any time, elect to have our
obligations 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) we 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 and Liquidated Damages, if any, 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 clauses (h) or (i) 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 we are a party or by which
we are bound;
(iv) in the case of defeasance, we shall have delivered to the trustee
an opinion of counsel stating that we have received from, or there has been
published by, the Internal Revenue Service a ruling, or since January 29,
1999, 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, we 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) we 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 us and the
trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that no
such modification or amendment may, without the consent of each holder affected
thereby,
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note,
(ii) reduce the principal amount of, or premium or Liquidated Damages,
if any, or interest on any Note or extend the time for payment of interest
on, or alter the redemption provisions of, any Note,
117
<PAGE>
(iii) change the 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) modify any provision of any Guarantee of the Notes in a manner
adverse to the holders of the Notes,
(vii) waive a default in the payment of principal of, premium, if any,
or accrued and unpaid interest or liquidated damages, if any, on the Notes
or
(viii) reduce the percentage or aggregate principal amount of
outstanding Notes the consent of whose holders is necessary for waiver of
compliance with certain provisions of the indenture or for waiver of
certain defaults.
Governing Law and Submission to Jurisdiction
The Notes and the indenture will be governed by the laws of the State of New
York. We and the trustee 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 us 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 our winding-up or dissolution or otherwise) by any holder of a
Note in respect of any sum expressed to be due to it from us shall only
constitute a discharge to us 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, we shall indemnify the
recipient against any loss sustained by it as a result. In any event, we 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 our
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 us, 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 Securities Exchange
Commission for permission to continue or resign.
118
<PAGE>
The holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
shall occur (which shall not be cured), the trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request of any holder of Notes, unless such holder shall have offered to
the trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the indenture. Reference is made to the
indenture for the full definition of all terms as well as any other capitalized
term used herein for which no definition is provided.
"Acquired Indebtedness" is defined to mean Indebtedness of a Person existing
at the time such Person becomes a Restricted Subsidiary or assumed in
connection with an Asset Acquisition by Primus 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;
119
<PAGE>
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."
"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 Primus 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 January 29, 1999.
"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
120
<PAGE>
the extent such amount was deducted in calculating Consolidated Net Income, (v)
amortization expense, to the extent such amount was deducted in calculating
Consolidated Net Income, and (vi) all other non-cash items reducing
Consolidated Net Income (excluding any non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period),
less all non-cash items increasing Consolidated Net Income, all as determined
on a consolidated basis for the Company and its Restricted Subsidiaries in
conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period,
Consolidated Interest Expense plus dividends declared and payable on Preferred
Stock.
"Consolidated Interest Expense" is defined to mean, for any period, the
aggregate amount of interest in respect of Indebtedness (including capitalized
interest, amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting; all commissions, discounts
and other fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and interest on Indebtedness that is Guaranteed or secured by the Company or
any of its Restricted Subsidiaries) and all but the principal component of
rentals in respect of Capitalized Lease Obligations paid, accrued or scheduled
to be paid or to be accrued by the Company and its Restricted Subsidiaries
during such period.
"Consolidated Net Income" is defined to mean, for any period, the aggregate
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
121
<PAGE>
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.
"Employment Agreement" is defined to mean the employment agreement 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
122
<PAGE>
such Person as lessee under Capitalized Leases, (vi) all Indebtedness of other
Persons secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; provided that the amount of such
Indebtedness shall be the lesser of (A) the Fair Market Value of such asset at
such date of determination and (B) the amount of such Indebtedness, (vii) all
Indebtedness of other Persons Guaranteed by such Person to the extent such
Indebtedness is Guaranteed by such Person, (viii) the maximum fixed redemption
or repurchase price of Redeemable Stock of such Person at the time of
determination and (ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with respect
to contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation, provided (i) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the face amount of such Indebtedness less the remaining unamortized portion
of the original issue discount of such Indebtedness at such time as determined
in conformity with GAAP and (ii) that Indebtedness shall not include any
liability for federal, state, local or other taxes.
"Interest Rate Agreement" is defined to mean interest rate swap agreements,
interest rate cap agreements, interest rate insurance, and other arrangements
and agreements designed to provide protection against fluctuations in interest
rates.
"Investment" in any Person is defined to mean any direct or indirect
advance, loan or other extension of credit (including, without limitation, by
way of Guarantee or similar arrangement; but excluding advances to customers in
the ordinary course of business that are, in conformity with GAAP, recorded as
accounts receivable on the balance sheet of the Company or its Restricted
Subsidiaries) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the
account or use of others), or any purchase or acquisition of Capital Stock,
bonds, notes, debentures or other similar instruments issued by, such Person.
For purposes of the definition of "Unrestricted Subsidiary," the "Limitation on
Restricted Payments" covenant and the "Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant described above, (i)
"Investment" shall include (a) the Fair Market Value of the assets (net of
liabilities) of any Restricted Subsidiary of the Company at the time that such
Restricted Subsidiary of the Company is designated an Unrestricted Subsidiary
and shall exclude the Fair Market Value of the assets (net of liabilities) of
any Unrestricted Subsidiary at the time that such Unrestricted Subsidiary is
designated a Restricted Subsidiary of the Company and (b) the Fair Market
Value, in the case of a sale of Capital Stock in accordance with the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant such that a Person no longer constitutes a Restricted
Subsidiary, of the remaining assets (net of liabilities) of such Person after
such sale, and shall exclude the Fair Market Value of the assets (net of
liabilities) of any Unrestricted Subsidiary at the time that such Unrestricted
Subsidiary is designated a Restricted Subsidiary of the Company and (ii) any
property transferred to or from an Unrestricted Subsidiary shall be valued at
its Fair Market Value at the time of such transfer, in each case as determined
by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Marketable Securities" is defined to mean: (i) Government Securities which
have a remaining weighted average life to maturity of not more than one year
from the date of Investment therein; (ii) any time deposit 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
123
<PAGE>
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 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, Primus 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
124
<PAGE>
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
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.
125
<PAGE>
"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.
"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; provided that
if the terms of such other Indebtedness do not provide for proration of the
amount of such Indebtedness to be purchased with Excess Proceeds, the
"Proportionate Share" in respect of the Notes may be zero.
"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.
126
<PAGE>
"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.
"Subordinated Indebtedness" is defined to mean Indebtedness of the Company
subordinated in right of payment to the Notes.
"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association or other business entity of which more than 50% of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
"Trade Payables" is defined to mean any accounts payable or any other
indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by the Company or any of its Restricted Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods and
services.
"Transaction Date" is defined to mean, with respect to the Incurrence of any
Indebtedness by the Company or any of its Restricted Subsidiaries, the date
such Indebtedness is to be Incurred and, with respect to any Restricted
Payment, the date such Restricted Payment is to be made.
"Unrestricted Subsidiary" is defined to mean (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Restricted Subsidiary of the Company (including any newly acquired or newly
formed Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary owns any Capital Stock of, or owns or holds any Lien on any property
of, the Company or any Restricted Subsidiary; provided that (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.
127
<PAGE>
"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.
Book Entry, Delivery and Form
The initial notes were offered and sold to qualified institutional buyers
("Qualified Institutional Buyers") in reliance on Rule 144A and, to certain
non-U.S. holders, Regulation S under the Securities Act of 1933. The Initial
Notes were issued in registered, global form in minimum denominations of $1,000
in excess thereof.
The initial notes are represented by one or more permanent global notes in
registered, global form without interest coupons (collectively, the "Rule 144A
Global Note"), and, except as set forth below, the new notes will be
represented by one or more Notes in registered, global form without interest
coupons (the "Unrestricted Global Note," and together with the Rule 144A Global
Note, the "Global Note"). The Rule 144A Global Note was, and the Unrestricted
Global Note will be deposited upon issuance with the trustee as custodian for
the Depositary Trust Company (the "Depositary") in New York, New York, 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 as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to the Depositary, a nominee of the Depositary or to a
successor of the Depositary or its nominee. Beneficial interests in the Global
Notes may not be exchanged for Notes in certificated form except in the limited
circumstances described below. See "--Depositary Procedures--Exchange of Book-
Entry Notes for Certificated Notes."
The Trustee will act as registrar.
Depositary Procedures
The depositary has advised us 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 us that pursuant to procedures established
by it, (i) upon deposit of the Global Notes, the depositary will credit the
accounts of Participants designated by the initial purchasers with portions of
the principal amount of Global Notes and (ii) ownership of such interests in
the Global Notes 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 Notes).
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.
128
<PAGE>
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.
Except as described below, owners of interests in the Global Notes 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, we and the trustee will treat the
persons in whose names the Notes, including the Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither we, the trustee nor any
agent of us or the trustee have 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 Notes, 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 Notes 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 us 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 Notes 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 us. Neither we nor the
trustee will be liable for any delay by the depositary or its Participants in
identifying the beneficial owners of the Notes, and we 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 Notes 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 us 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 Notes 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 Global Notes 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 we believe to be reliable, but we
take no responsibility for the accuracy thereof. Neither we 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.
129
<PAGE>
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 us that it is unwilling or unable to continue as
depository for the Global Note and we thereupon fail to appoint a
successor depository or
(B) has ceased to be a clearing agency registered under the
Securities Exchange Act of 1934,
(ii) upon the continuance of an Event of Default or
(iii) we, at our option, notify the Trustee in writing that we elect 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 we
determine otherwise in compliance with applicable law.
Year 2000 Issues.
Management of the Depositary is aware that some computer applications,
systems, and the like for processing data ("Systems") that are dependent upon
calendar dates, including dates before, on, and after January 1, 2000, may
encounter "Year 2000 problems." The depositary has informed its Participants
and other members of the financial community (the "Industry") that it has
developed and is implementing a program so that its Systems, as the same
relate to the timely payment of distributions (including principal and income
payments) to securityholders, book-entry deliveries, and settlement of trades
within the depositary ("DTC Services"), continue to function appropriately.
This program includes a technical assessment and a remediation plan, each of
which is complete. Additionally, the depositary's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, the depositary's ability to perform properly its services is also
dependent upon other parties, including but not limited to issuers and their
agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom the Depositary relies for
information or the provision of services, including telecommunication and
electrical utility service providers, among others. The depositary has
informed the Industry that it is contacting (and will continue to contact)
third party vendors from whom the Depositary acquires services to: (i) impress
upon them the importance of such services being Year 2000 compliant; and (ii)
determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services. In addition, the depositary is in the
process of developing such contingency plans as it deems appropriate.
According to the Depositary, the foregoing information with respect to the
Depositary has been provided to the Industry for informational purposes only
and is not intended to serve as a representation, warranty, or contract
modification of any kind.
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, we 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,
130
<PAGE>
by mailing a check to each such holder's registered address. We expect that
secondary trading in the certificated Notes will also be settled in immediately
available funds.
Exchange Offer and Registration Rights
Primus and certain subsidiaries entered into the Registration Rights
Agreement with the initial purchasers, pursuant to which we agreed to file with
the Securities Exchange Commission, subject to the provisions described below,
the Exchange Offer Registration Statement on an appropriate form permitting
registration of the new notes to be offered in exchange for the Transfer
Restricted Securities and to permit resales of new notes held by broker-dealers
as contemplated by the Registration Rights Agreement. The Registration Rights
Agreement provides that unless the exchange offer would not be permitted by
applicable law or Securities Exchange Commission policy, we will (i) file the
Exchange Offer Registration Statement with the Commission and use our
reasonable best efforts to cause the Exchange Offer Registration Statement to
be declared effective by the Commission within 150 days after the Closing Date,
(ii) (A) file all pre-effective amendments to such Registration Statement as
may be necessary in order to cause such Registration Statement to become
effective, (B) file if applicable, a post-effective amendment to such
Registration Statement pursuant to Rule 430A under the Securities Act of 1933
and (C) cause all necessary filing in connection with the registration and
qualifications of the new notes to be made under the blue sky laws of such
jurisdictions as are necessary to permit consummation of the exchange offer and
(iii) use our reasonable best efforts to cause the exchange offer to be
consummated on or prior to 180 days after the Closing Date.
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 new notes in the exchange offer,
(ii) following the exchange by a broker-dealer in the exchange offer of
such Note for one or more new notes, the date on which such new 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 of 1934 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.
Under existing Commission interpretations, the new notes would, in general,
be freely transferable after the exchange offer without further registration
under the Securities Act; provided, however, that, in the case of broker-
dealers participating in the exchange offer, a prospectus meeting the
requirements of the Securities Act must be delivered by such broker-dealers in
connection with resales of the new notes. We have agreed, for a period of 180
days after consummation of the exchange offer, to make available a prospectus
meeting the requirements of the Securities Act to any such broker-dealer for
use in connection with any resale of any new notes acquired in the exchange
offer. A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act and will be bound by the provisions of the
Registration Rights Agreement (including certain indemnification rights and
obligations).
Holders of Notes that desire to exchange such Notes for new notes in the
exchange offer will be required to make certain representations, including
representations that:
(i) any new notes to be received by it will be acquired in the ordinary
course of its business,
(ii) it has no arrangement with any person to participate in the
distribution (within the meaning of the Securities Act) of the new notes
and
131
<PAGE>
(iii) it is not our "affiliate," as defined in Rule 405 of the
Securities Act, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to
the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of
the new notes. If the holder is a broker-dealer that will receive new notes
for its own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes.
We have agreed to pay all expenses incident to the exchange offer and will
indemnify the initial purchasers against certain liabilities, including
liabilities under the Securities Act.
If:
(i) we are 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) any holder of Transfer Restricted Securities that is a "qualified
institutional buyer" (as defined in Rule 144A under the Securities Act)
notifies the Company at least 20 business days prior to the consummation of
the exchange offer that
(a) applicable law or Commission policy prohibits us from
participating in the Exchange Offer,
(b) such Holder may not resell the new notes acquired by it in the
exchange offer to the public without delivering a prospectus and the
prospectus contained in the Exchange Offer Registration Statement is not
appropriate or available for such resales by such holder or
(c) such holder is a broker-dealer and holds Notes acquired directly
from us or an affiliate of ours,
(iii) the exchange offer is not for any other reason consummated by July
28, 1999 or
(iv) 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, we will use
our 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.
We shall use our 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 us 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).
132
<PAGE>
If:
(i) we fail to file with the Commission the Shelf Registration Statement
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 180 days after
the Closing 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"),
then 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 us 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 will be made available to prospective purchasers of
the Notes upon request to us.
133
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain material United States
federal income tax consequences of the exchange of the initial notes for the
new notes, and the ownership and disposition of the new notes for holders who
acquired the new notes in exchange for existing notes. This discussion is
limited to holders who hold both the existing notes and the new notes as
capital assets, within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended.
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 constructive sale 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 in this section, the term "U.S. holder" means a beneficial owner of
a Note that is, for United States federal income tax purposes,
. a citizen or resident of the United States,
. a corporation or partnership created or organized under the laws of the
United States or of any political subdivision thereof,
. an estate the income of which is subject to United States federal income
taxation regardless of its source, or
. 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 beneficial owner of a Note other than a
U.S. Holder.
U.S. Taxation of U.S. Holders
Payments of Interest. Stated interest payable on the new 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.
We may be required to pay liquidation damages to U.S. holders of the new
notes. Although the matter is not free from doubt, we intend to take the
position that a U.S. holder of a new note should be required to report the
liquidated damages as ordinary income for United States federal income tax
purposes when the liquidated damages accrue or are received in accordance with
the holder's method of accounting. It is possible, however, that the Internal
Revenue Service may take a different position, in which case the timing and
amount of income may be different.
134
<PAGE>
Disposition of the Notes. The exchange of the existing notes for the new
notes will not be a taxable event for U.S. federal income tax purposes. The
holding period of the new note will include the U.S. holder's holding period of
the initial note, and the basis of the new note will be the same as the basis
in the initial note immediately before the exchange.
On the sale, exchange, redemption, retirement at maturity or other
disposition of a new note, a U.S. holder generally will recognize capital gain
or loss (except ans noted in the next paragraph) equal to the difference
between the amount realized and the U.S. holder's adjusted tax basis in the new
note. The capital gain or loss will be long-term capital gain or loss if the
holding period for the new note (that includes the holding period for the
initial note) exceeds one year at the time of the disposition. Generally, the
maximum tax rate for individuals on long term capital gain is 20%.
To the extent a portion of the amount realized on the disposition of the new
note is attributable to interest, it will be taxed as ordinary income and not
capital gain. A portion of the amount realized will be attributable to interest
if there is accrued but unpaid interest at the time of the disposition, or if
the U.S. holder purchased the initial notes (other than at original issuance)
at a market discount, as defined in the Internal Revenue Code of 1986, as
amended. If a U.S. holder bought an existing note for an amount less than the
stated redemption price at maturity, he or she should consult with his or her
tax advisor to determine if there is market discount in the new note, and the
impact of the market discount on the taxation of the holding and disposition of
the new note.
Bond Premium
If a U.S. holder purchased an initial note for an amount in excess of the
amount payable at the maturity date, the U.S. holder may deduct the excess as
amortizable bond premium over the aggregate terms of the existing notes and the
new notes under a yield to maturity formula. The deduction is available only if
an election is made by the U.S. holder, and the election will apply to all
obligations owned or acquired by the U.S. holder. The U.S. holder's adjusted
basis in the initial notes and the new notes will be reduced to the extent of
the amortizable bond premium.
U.S. Taxation of Non-U.S. Holders
Payments of Interest. In general, under current U.S. tax law, 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
. does not actually or constructively own 10% or more of the total
combined voting power of all of our classes of stock entitled to vote,
. is not a controlled foreign corporation that is related to us actually
or constructively through stock ownership, and
. either
. the beneficial owner of the new note provides us or our 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
. a securities clearing organization, bank or other financial
institution that holds customer's securities in the ordinary course
of its business holds the new note and certifies to us or our agent
under penalties of perjury that the IRS form W-8 (or a suitable
substitute form) has been received from the beneficial owner of the
new 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, or not exempt because of a change of law effective after the
date of the original issuance of the existing note, will be subject
135
<PAGE>
to such withholding tax at the rate of 30%, unless reduced or eliminated under
an applicable income tax treaty, and unless the beneficial owner of the new
note provides us or our paying agent, as the case may be, with a properly
executed
. IRS Form 1001 (or successor form) claiming an exemption from withholding
under the benefit of a tax treaty or
. IRS Form 4224 (or successor form) stating that interest paid on the new
note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in
the United States.
It is unclear whether the payment of liquidated damages to a non-U.S. holder
will be subject to withholding of U.S. federal income tax, and we may withhold
30% from any such payments made to non-U.S. holders.
Treasury regulations that are to be effective with respect to payments made
after December 31, 2000 provide alternative methods for satisfying the
certification requirements described in the preceding paragraph. Those
regulations also will require, in the case of new notes held by a foreign
partnership, that the certification described above be provided by each
partner.
Disposition of the New Notes.
The exchange of an initial note for a new note will not be a taxable event
for a non-U.S. holder.
A non-U.S. holder generally will not be subject to U.S. federal income tax
(and no tax will be withheld) with respect to gain realized on the sale,
exchange or other disposition of a new note, unless
. the gain is effectively connected with a U.S. trade or business
conducted by the non-U.S. holder or
. 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 conditions are met.
Effectively Connected Income. If interest and other payments received by a
non-U.S. holder with respect to the new notes, including proceeds from the sale
or exchange of the new 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), the 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). The non-U.S. holder may also be subject to the U.S. "branch profits
tax" if the holder is a corporation.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to certain
payments of principal, interest and liquidated damages paid on new notes and to
the proceeds of sale of a new note made to U.S. holders other than certain
exempt recipients (such as corporations). U.S. holders also may be subject to
backup withholding at a rate of 31% on payments of principal, liquidated
damages and interest on, and the proceeds of the sale or exchange of, the new
notes. In general, backup withholding will apply to the payments if the U.S.
holder
. fails to furnish a taxpayer identification number ("TIN") which, for an
individual, would be his or her Social Security number,
. furnishes an incorrect TIN, or
. fails to report in full payments of interest or dividends.
Information reporting and backup withholding generally will not apply to
payments made to a non-U.S. holder 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 neither we or
the paying agent have actual knowledge that the holder is a U.S. person.
136
<PAGE>
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 us), may exchange initial notes for new
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 new 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. We have agreed that, for a period of 180 days after the effective
date of this Prospectus, we will make this Prospectus, as amended or
supplemented, available to any broker-dealer who receives new notes in the
exchange offer for use in connection with any such sale. We will not receive
any proceeds from any sales of new notes by broker-dealers. new 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 new
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 new 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 new notes. Any broker-dealer that resells new 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 new notes may be
deemed to be an "underwriter" within the meaning of the Securities Act and any
profit on any such resale of new notes and any commissions or concessions
received by any such persons may be deemed to be underwriting compensation
under the Securities Act. We have 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 new notes pursuant to the
exchange offer hereby agrees to notify us prior to using the Prospectus in
connection with the sale or transfer of new notes, and acknowledges and agrees
that, upon receipt of notice from us 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 we agree to deliver promptly to
such broker-dealer), such broker- dealer will suspend use of the prospectus
until we have 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.
137
<PAGE>
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and in accordance therewith file reports and other information with
the Securities Exchange Commission, which reports include our financial
information set forth in full. Such reports and other information filed by us
can be inspected and copied at public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, NW, Judiciary Plaza, Washington,
D.C. 20549; Seven World Trade Center, 13th Floor, New York, New York 10048; and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. For further
information concerning the Commission's public reference rooms, the Commission
can be reached at 1-800-SEC-0330. 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 and Registration Rights Agreement without charge
by writing to Primus Telecommunications Group, Incorporated, 1700 Old Meadow
Road, McLean, VA 22102, Attention: Robert Stankey, General Counsel.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with the Commission by us pursuant to sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
date of this prospectus and prior to termination of the offering made hereby
are incorporated herein by reference. 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 in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby and certain United States
federal income tax matters are being passed upon for us 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 381,806
shares of our common stock.
EXPERTS
The consolidated financial statements of Primus as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998
included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is included herein, 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 TresCom International, Inc. at
December 31, 1997 and 1996, and for each of the three years in the period ended
December 31, 1997, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
138
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Primus Telecommunications Group, Incorporated:
Independent Auditors' Report.............................................. F-2
Consolidated Financial Statements:
Consolidated Statement of Operations for the years ended December 31,
1998, 1997 and 1996.................................................... F-3
Consolidated Balance Sheet as of December 31, 1998 and 1997............. F-4
Consolidated Statement of Stockholders' Equity for the years ended
December 31, 1998,
1997 and 1996.......................................................... F-5
Consolidated Statement of Cash Flows for the years ended December 31,
1998, 1997
and 1996............................................................... F-6
Consolidated Statement of Comprehensive Loss for the years ended
December 31, 1998,
1997 and 1996.......................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
TresCom International, Inc.:
Financial Statements:
Report of Independent Auditors.......................................... F-20
Consolidated Balance Sheets as of December 31, 1997 and 1996............ F-21
Consolidated Statements of Operations for the years ended December 31,
1997, 1996
and 1995............................................................... F-22
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997,
1996 and 1995.......................................................... F-23
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996
and 1995............................................................... F-24
Notes to Consolidated Financial Statements.............................. F-25
Financial Statement Schedule:
Report of Independent Auditors.......................................... S-1
Schedule II--Valuation and Qualifying Accounts.......................... S-2
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders 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, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, comprehensive loss and cash flows for each of
the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Washington, D.C.
February 10, 1999, except
for paragraph one of Note 16
as to which the date is
March 31, 1999
F-2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net revenue............................... $ 421,628 $ 280,197 $ 172,972
Cost of revenue........................... 353,016 252,731 158,845
---------- ---------- ----------
Gross margin.............................. 68,612 27,466 14,127
---------- ---------- ----------
Operating expenses
Selling, general and administrative..... 79,532 50,622 20,114
Depreciation and amortization........... 24,185 6,733 2,164
---------- ---------- ----------
Total operating expenses.............. 103,717 57,355 22,278
---------- ---------- ----------
Loss from operations...................... (35,105) (29,889) (8,151)
Interest expense.......................... (40,047) (12,914) (857)
Interest income........................... 11,504 6,238 785
Other income (expense).................... -- 407 (345)
---------- ---------- ----------
Loss before income taxes.................. (63,648) (36,158) (8,568)
Income taxes.............................. -- (81) (196)
---------- ---------- ----------
Net loss.................................. $ (63,648) $ (36,239) $ (8,764)
========== ========== ==========
Basic and diluted net loss per common
share.................................... $ (2.61) $ (1.99) $ (0.75)
========== ========== ==========
Weighted average number of common shares
outstanding.............................. 24,432 18,250 11,660
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 136,196 $115,232
Restricted investments............................. 25,729 22,774
Accounts receivable (net of allowance for doubtful
accounts of
$14,976 and $5,044)............................... 92,531 58,172
Prepaid expenses and other current assets.......... 13,505 5,152
--------- --------
Total current assets............................. 267,961 201,330
Restricted investments............................... 24,894 50,776
Property and equipment, net.......................... 158,873 59,241
Intangibles--Net..................................... 205,039 33,164
Other assets......................................... 17,196 10,882
--------- --------
Total assets..................................... $ 673,963 $355,393
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................................... $ 82,520 $ 56,358
Accrued expenses and other current liabilities..... 42,597 12,468
Accrued interest................................... 12,867 11,016
Deferred income taxes.............................. 361 1,814
Current portion of long-term obligations........... 22,423 1,059
--------- --------
Total current liabilities........................ 160,768 82,715
Long term obligations................................ 397,751 230,152
Other liabilities.................................... 527 --
--------- --------
Total liabilities................................ 559,046 312,867
--------- --------
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,
80,000,000 and
40,000,000 shares; issued and outstanding,
28,059,063 and
19,662,233 shares................................. 281 197
Additional paid-in capital......................... 234,549 92,181
Accumulated deficit................................ (111,653) (48,005)
Accumulated other comprehensive loss............... (8,260) (1,847)
--------- --------
Total stockholders' equity....................... 114,917 42,526
--------- --------
Total liabilities and stockholders' equity....... $ 673,963 $355,393
========= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Other
----------------- ------------- Paid-In Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Deficit Loss Equity
------- ------- ------ ------ -------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 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 employer 401(k)
match................. -- -- 5 -- 45 -- -- 45
Common shares issued
upon exercise of
employee stock
options............... -- -- 35 -- 42 -- -- 42
Senior note 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
Common shares issued
for business
acquisitions.......... -- -- 7,864 79 137,547 -- -- 137,626
Common shares issued
for employer 401(k)
match................. -- -- 9 -- 119 -- -- 119
Common shares issued
upon exercise of
employee stock
options............... -- -- 489 5 4,334 -- -- 4,339
Common shares issued
for employee stock
purchase plan......... -- -- 24 -- 263 -- -- 263
Common shares issued
upon exercise of
warrants.............. -- -- 11 -- 105 -- -- 105
Foreign currency
translation
adjustment............ -- -- -- -- -- -- (6,413) (6,413)
Net loss............... -- -- -- -- -- (63,648) -- (63,648)
------- ------- ------ ---- -------- --------- ------- --------
Balance, December 31,
1998................... -- $ -- 28,059 $281 $234,549 $(111,653) $(8,260) $114,917
======= ======= ====== ==== ======== ========= ======= ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $ (63,648) $ (36,239) $ (8,764)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, amortization and
accretion.............................. 24,547 6,733 2,164
Sales allowance......................... 9,431 6,185 1,960
Foreign currency transaction (gain)
loss................................... -- (407) 345
Stock issuance--401(k) plan employer
match.................................. 119 45 --
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................ (20,765) (34,240) (19,405)
(Increase) decrease in prepaid expenses
and other current assets.............. (7,027) (4,080) (227)
(Increase) decrease in other assets.... 735 1,147 (1,621)
Increase (decrease) in accounts
payable............................... (8,196) 30,247 11,729
Increase (decrease) in accrued
expenses, other current liabilities
and other liabilities................. (8,073) 5,000 6,032
Increase (decrease) in accrued interest
payable............................... 1,581 10,852 847
---------- ----------- ----------
Net cash provided by (used in)
operating activities................ (71,296) (14,757) (6,940)
---------- ----------- ----------
Cash flows from investing activities:
Purchase of property and equipment........ (75,983) (39,465) (12,745)
(Purchase) sale of short-term
investments.............................. -- 25,125 (25,125)
(Purchase) sale of restricted
investments.............................. 22,927 (73,550) --
Cash used for business acquisitions, net
of cash acquired......................... (1,165) (16,349) (1,701)
---------- ----------- ----------
Net cash provided by (used in)
investing activities................ (54,221) (104,239) (39,571)
---------- ----------- ----------
Cash flows from financing activities:
Principal payments on capital leases and
long-term obligations.................... (2,373) (16,881) (508)
Proceeds from sale of common stock and
exercise of employee stock options....... 4,707 1,514 77,576
Proceeds from issuance of long-term
obligations.............................. 150,000 225,000 2,407
Deferred financing costs.................. (5,500) (9,500) --
---------- ----------- ----------
Net cash provided by (used in)
financing activities................ 146,834 200,133 79,475
---------- ----------- ----------
Effects of exchange rate changes on cash
and cash equivalents...................... (353) (1,379) 214
---------- ----------- ----------
Net change in cash and cash equivalents.... 20,964 79,758 33,178
Cash and cash equivalents, beginning of
year...................................... 115,232 35,474 2,296
---------- ----------- ----------
Cash and cash equivalents, end of year..... $ 136,196 $ 115,232 $ 35,474
========== =========== ==========
Supplemental cash flow information
Cash paid for interest.................... $ 38,466 $ 2,745 $ 149
Non-cash investing and financing
activities:
Common stock issued for services....... $ -- $ -- $ 990
Capital leases for acquisition of
equipment............................. $ 16,958 $ 8,228 $ 388
Notes payable for acquisition of
equipment............................. $ -- $ -- $ 2,826
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net Loss...................................... $ (63,648) $ (36,239) $ (8,764)
Other Comprehensive Loss--
Foreign currency translation adjustment..... (6,413) (1,769) (75)
---------- ---------- ---------
Comprehensive Loss............................ $ (70,061) $ (38,008) $ (8,839)
========== ========== =========
</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 ("Primus" or the "Company") is
a facilities-based global telecommunications company that offers international
and domestic long distance, Internet and data, and other telecommunications
services to business, residential and other telecommunications carrier
customers primarily in North America, the Asia-Pacific and Europe. The Company,
incorporated in the state of Delaware, operates as a holding company and has
wholly-owned operating subsidiaries in the United States, Canada, Mexico,
Australia, Japan, the United Kingdom and Germany.
2. Summary of Significant Accounting Policies
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned and majority-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 that 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
reflected within accumulated other comprehensive loss in the stockholders'
equity section of the balance sheet.
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 recorded at amortized cost.
These securities are classified as held-to-maturity and are restricted to
satisfy certain interest obligations on the Company's 1997 Senior Notes.
Property and Equipment--Property and equipment, which consists of fiber
optic cable and telecommunications equipment, furniture and computer equipment,
leasehold improvements and software is stated at cost less accumulated
depreciation and amortization. Depreciation and amortization expense are
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 or estimated
lives, whichever is shorter. Expenditures for maintenance and repairs that do
not materially extend the useful lives of the assets are charged to expense.
Intangible Assets--At December 31, 1998 and 1997 intangible assets, net of
accumulated amortization, consist of goodwill of $179.9 million and $27.8
million respectively, and customer lists of $25.1 million and $5.3 million
respectively. Goodwill is being amortized over 30 years on a straight-line
basis and customer lists over the estimated run-off of the customer bases not
to exceed five years. Accumulated amortization at December 31, 1998 and 1997,
was $4.7 million and $1.2 million related to goodwill and $5.9 million and $1.9
million related to customer lists, respectively. The Company periodically
evaluates the realizability of intangible and other long-lived assets. In
making such evaluations, the Company compares certain financial
F-8
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
indicators such as expected undiscounted future revenues and cash flows to the
carrying amount of the assets. The Company believes that no impairments exist
as of December 31, 1998.
Deferred Financing Costs--Deferred financing costs incurred in connection
with the 1998 Senior Notes and the 1997 Senior Notes are reflected within other
assets and are being amortized over the life of the respective Senior Notes
using the straight-line method which does not differ materially from the
effective interest method.
Stock-Based Compensation--The Company adopted Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123, the Company continues to
measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and has provided in
Note 10 pro forma disclosures of the effect on net loss and loss per share as
if the fair value-based method prescribed by SFAS 123 had been applied in
measuring compensation expense.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities 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--The Company 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. 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.
Comprehensive Income (Loss)--In 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income. As such, a consolidated statement of comprehensive loss
reflecting the aggregation of net loss and foreign currency translation
adjustments, the Company's principal components of other comprehensive income
or loss, has been presented for each of the three years in the period ended
December 31, 1998.
Operating Segments--In 1998, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 131 ("SFAS 131"), Disclosures about
Segments of an Enterprise and Related Information (Note 14). SFAS 131
superceded SFAS 14 and its adoption resulted in revised and additional
disclosures but had no effect on the financial position, results of operations
or liquidity of the Company.
F-9
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
New Accounting Pronouncements--In June 1998, Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities was issued. SFAS 133 established standards
for the accounting and reporting of derivative instruments and hedging
activities and requires that all derivative financial instruments be measured
at fair value and recognized as assets or liabilities in the financial
statements. The Statement will be adopted by the Company during fiscal 2000,
and the Company is currently evaluating the impact of such adoption.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SoP") 98-5, Reporting on the Costs of
Start-Up Activities. SoP 98-5 provides guidance on the financial reporting of
start-up and organizational costs. The effect of adopting SoP 98-5 is not
expected to have a material effect on the financial position, results of
operation or liquidity of the Company.
Reclassifications--Certain previous year amounts have been reclassified to
conform with current year presentation.
3. Acquisitions
On June 9, 1998 the Company acquired TresCom International, Inc.
("TresCom"), a 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 regions. As a result
of the acquisition, all of the approximately 12.7 million TresCom common shares
outstanding were exchanged for approximately 7.8 million shares of the
Company's common stock valued at approximately $138 million. An additional
$11.7 million cash purchase obligation associated with a subsidiary of TresCom
is expected to paid during 1999 and has been included in accrued expenses and
other current liabilities.
In March 1998 the Company purchased a 60% controlling interest in Hotkey
Internet Services Pty., Ltd. ("Hotkey"), an Australian Internet service
provider, for 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 in Australia. The Company paid approximately $1.8 million in cash and
27,500 shares of the Company's Common Stock for Eclipse.
On October 20, 1997, the Company acquired 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.
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 acquired the outstanding capital stock of
Axicorp Pty., Ltd. (subsequently renamed Primus Australia), 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.
F-10
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has accounted for all of these 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.
Unaudited pro forma operating results for the years ended December 31, 1998
and 1997, as if the acquisitions of TresCom, Telepassport and USFI had occurred
as of January 1, 1997, are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Net revenue........................................... $485,196 $448,929
Net loss.............................................. $(75,956) $(63,426)
Basic and diluted net loss per share.................. $ (2.73) $ (2.43)
</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.
4. Property and Equipment
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1997
-------- -------
<S> <C> <C>
Network equipment....................................... $148,413 $48,246
Furniture and equipment................................. 11,987 9,334
Leasehold improvements.................................. 2,907 1,845
Construction in progress................................ 16,157 5,147
-------- -------
179,464 64,572
Less: Accumulated depreciation and amortization......... (20,591) (5,331)
-------- -------
$158,873 $59,241
======== =======
</TABLE>
Equipment under capital leases totaled $34.5 million and $9.2 million with
accumulated depreciation of $4.3 million and $0.8 million at December 31, 1998
and 1997, respectively.
5. Long-Term Obligations
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Obligations under capital leases....................... $ 28,268 $ 8,487
Revolving Credit Agreement............................. 17,819 --
Senior Notes........................................... 372,978 222,616
Other long-term obligations............................ 1,109 108
-------- --------
Subtotal............................................... 420,174 231,211
Less: Current portion of long-term obligations......... (22,423) (1,059)
-------- --------
$397,751 $230,152
======== ========
</TABLE>
F-11
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As a result of the acquisition of TresCom, the Company has a $25 million
revolving credit and security agreement (the "Revolving Credit Agreement") with
a commercial bank secured by certain of the Company's accounts receivable. In
January 1999, the Company voluntarily repaid in full and terminated the
Revolving Credit Agreement.
On May 19, 1998 the Company completed the sale of $150 million 9 7/8% Senior
Notes ("1998 Senior Notes"). The 1998 Senior Notes are due May 15, 2008 with
early redemption at the option of the Company at any time after May 15, 2003.
In addition, prior to May 15, 2001, the Company may redeem up to 25% of the
originally issued principal amount of the 1998 Senior Notes at 109.875% of the
principal amount thereof, plus accrued and unpaid interest through the
redemption date. Interest is payable each May 15th and November 15th.
On August 4, 1997 the Company completed the sale of $225 million 11 3/4%
Senior Notes ("1997 Senior Notes") and Warrants ("the Offering") to purchase
392,654 shares of the Company's common stock. The 1997 Senior Notes are due
August 1, 2004 with early redemption at the option of the Company at any time
after August 1, 2001, at a premium to par value. Dividends are currently
prohibited by the senior notes indenture. Interest payments are due semi-
annually on February 1st and August 1st. A portion of the proceeds from the
offering of the 1997 Senior Notes have been pledged to secure the first six
semi-annual interest payments on the 1997 Senior Notes and are reflected on the
balance sheet as restricted investments. A portion of the proceeds of the
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.
6. Income Taxes
The differences between the tax provision calculated at the statutory
federal income tax rate and the actual tax provision for each period is shown
in the table below (in thousands):
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Tax benefit at federal statutory
rate................................. $ (22,277) $ (12,294) $ (2,913)
State income tax, net of federal
benefit.............................. (1,387) (2,100) (491)
Foreign taxes......................... -- 81 196
Unrecognized benefit of net operating
losses............................... 21,506 14,394 3,387
Other................................. 2,158 -- 17
---------- ---------- ---------
Income taxes.......................... $ -- $ 81 $ 196
---------- ---------- ---------
</TABLE>
F-12
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C> <C>
Deferred tax assets (non-current):
Cash to accrual basis adjustments (U.S.)......... $ 269 $ 590
Accrued expenses................................. 5,393 936
Net operating loss carryforwards................. 32,606 17,856
Valuation allowance.............................. (38,268) (16,762)
-------- --------
$ -- $ --
======== ========
Deferred tax liabilities (current):
Accrued income................................... $ -- $ 903
Other............................................ -- 385
Depreciation..................................... 361 526
-------- --------
$ 361 $ 1,814
======== ========
</TABLE>
During the year ended December 31, 1998, the valuation allowance increased
by approximately $21.5 million primarily due to the acquisition of TresCom and
its related net operating losses.
At December 31, 1998, the Company had operating loss carryforwards available
to reduce future federal taxable income which expire as follows (in millions):
<TABLE>
<CAPTION>
Year Primus TresCom
---- ------ -------
<S> <C> <C>
2009........................................................ $ 6.1 $ 5.8
2010........................................................ 7.1 5.4
2011........................................................ 6.9 1.9
2012........................................................ 33.2 10.6
2018........................................................ 35.6 --
----- -----
$88.9 $23.7
===== =====
</TABLE>
Approximately $23.7 million of operating loss carryforwards relate to the
acquisition of TresCom. Utilization of these operating losses is limited to the
offset of future TresCom operating income. The Company's net operating loss
carryforwards for state purposes are not significant and, therefore, have not
been recorded as deferred tax assets.
At December 31, 1998, the Company had Australian and United Kingdom net
operating loss carryforwards of $18.6 million and $2.1 million (in United
States dollars), respectively, that have no expiration periods.
No provision was made in 1998 for U.S. income taxes on the undistributed
earnings of the foreign subsidiaries as it is the Company's intention to
utilize those earnings in the foreign operations for an indefinite period of
time or to repatriate such earnings only when tax effective to do so. It is not
practicable to determine the amount of income or withholding tax that would be
payable upon the remittance of those earnings.
F-13
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet for cash and
cash equivalents, restricted investments, accounts receivable and accounts
payable approximate fair value. The estimated fair value of the Company's 1998
and 1997 Senior Notes (carrying value of $373 million), based on quoted market
prices, at December 31, 1998 was $375 million. The estimated fair value of the
Company's 1997 Senior Notes (carrying value of $223 million), based on quoted
market prices, at December 31, 1997 was $242 million.
8. Commitments and Contingencies
Future minimum lease payments under capital lease obligations and non-
cancelable operating leases as of December 31, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999.................................................. $ 7,219 $ 5,295
2000.................................................. 7,604 3,502
2001.................................................. 8,088 3,187
2002.................................................. 8,045 2,740
2003.................................................. 4,934 1,754
Thereafter............................................ 198 3,058
------- -------
Total minimum lease payments.......................... 36,088 $19,536
=======
Less: Amount representing interest...................... (7,820)
-------
$28,268
=======
</TABLE>
Rent expense under operating leases was $4.8 million, $2.6 million and $1.1
million for the years ended December 31, 1998, 1997 and 1996, respectively.
9. Stockholders' Equity
In December 1998, the Company adopted a Stockholders' Rights Plan (the
"Rights Plan") under which preferred stock purchase rights have been granted to
the Company's common stockholders of record at the close of business on
December 31, 1998. The rights will become exercisable if a person or group
becomes the beneficial owner of more than 20% of the outstanding common stock
of the Company or announces an offer to become the beneficial owner of more
than 20% of the outstanding common stock of the Company.
In June 1998, the Company issued 7,836,324 shares of its common stock,
valued at $137.6 million, in exchange for all of the outstanding common shares
of TresCom. Additionally, the Board amended the Company's Amended and Restated
Certificate of Incorporation (the "Certificate") to increase the authorized
Common Stock to 80,000,000 shares.
In October 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 $16 million July 1996 private equity sale. In
connection with such exercise, the Company received approximately $1.5 million.
In August 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.
F-14
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (after
deducting 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 Certificate to increase the authorized Common
Stock to 40,000,000 shares. All share amounts presented have been restated to
give effect to the November 7, 1996 stock split.
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 Primus Australia. The
outstanding Preferred Stock was converted to Common Stock prior to the date of
the Company's initial public offering.
10. Stock-Based Compensation
In December 1998, the Company established the 1998 Restricted Stock Plan
(the "Restricted Plan") to facilitate the grant of restricted stock to selected
individuals who contribute to the development and success of the Company. The
total number of shares of common stock that may be granted under the Restricted
Plan is 750,000. As of December 31, 1998, there had not been any grants under
the Restricted Plan.
The Company sponsors 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 not 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 sponsors a Director Stock Option Plan (the "Director Plan") for
non-employee directors. Under the Director Plan, an option is granted to each
qualifying non-employee director to purchase 15,000 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 three years ended December 31,
1998 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding--
Beginning of year...... 2,555,360 $ 6.95 1,587,894 $ 3.02 722,015 $2.64
Granted............... 1,298,937 16.07 1,063,750 12.59 913,552 3.35
Exercised............. (488,835) 7.42 (35,724) 1.19 -- --
Forfeitures........... (236,896) 17.52 (60,560) 6.27 (47,673) 3.55
--------- ------ --------- ------ --------- -----
Outstanding--
End of year............ 3,128,566 $ 9.87 2,555,360 $ 6.95 1,587,894 $3.02
========= ====== ========= ====== ========= =====
Eligible for exercise--
End of year............ 1,427,041 $ 6.93 899,170 $ 3.00 511,149 $2.81
========= ====== ========= ====== ========= =====
</TABLE>
F-15
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Total Life Exercise Total Exercise
Option Prices Outstanding in Years Price Exercisable Price
------------- ----------- --------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.01 to $ 3.55 1,176,527 2.06 $ 3.07 913,195 $ 2.99
$ 3.56 to $14.00 1,474,017 4.73 $12.24 409,307 $12.59
$14.01 to $23.87 478,022 5.39 $19.28 104,539 $19.13
--------- ---------
3,128,566 1,427,041
========= =========
</TABLE>
The weighted average fair value at date of grant for options granted during
1998, 1997 and 1996 was $7.38, $5.45 and $1.38 per option, respectively. The
fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Expected dividend yield............................ 0% 0% 0%
Expected stock price volatility.................... 97% 80% 49%
Risk-free interest rate............................ 4.6% 5.7% 6.0%
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>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Net loss (amounts in thousands)
As reported................................ $(63,648) $(36,239) $(8,764)
Pro forma.................................. $(67,621) $(37,111) $(9,242)
Basic and diluted net loss per share
As reported................................ $ (2.61) $ (1.99) $ (0.75)
Pro forma.................................. $ (2.77) $ (2.03) $ (0.79)
</TABLE>
11. Employee Benefit Plans
The Company sponsors a 401(k) employee benefit plan (the "401(k) Plan") that
covers substantially all United States based employees. Employees may
contribute amounts to the 401(k) Plan not to exceed statutory limitations. The
401(k) plan provides 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 $119,000 and $45,000
during 1998 and 1997.
Effective January 1, 1998, the Company adopted 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. An aggregate of 2,000,000 shares of common stock were
reserved for issuance under the ESPP.
F-16
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Related Parties
In June 1998, a subsidiary of the Company entered into a $2.1 agreement for
the design, manufacture, installation and the provision of training with
respect to a satellite earth station in London. A Director of the Company is
the Chairman and a stockholder of the company providing such services. During
1998, $1.2 million was paid for the above services.
13. Valuation and Qualifying Accounts
Activity in the Company's allowance accounts for the years ended December
31, 1998, 1997 and 1996 was as follows (in thousands):
<TABLE>
<CAPTION>
Doubtful Accounts
- -------------------------------------------------------------------------
Charged to
Balance at Costs and Balance at
Period Beginning of Period Expenses Deductions Other (1) End of Period
- ------ ------------------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
1996 $ 132 $ 1,960 $ (377) $ 870 $ 2,585
1997 $ 2,585 $ 6,185 $ (4,309) $ 583 $ 5,044
1998 $ 5,044 $ 9,431 $(12,772) $13,273 $14,976
<CAPTION>
Deferred Tax Asset Valuation
- -------------------------------------------------------------------------
Charged to
Balance at Costs and Balance at
Period Beginning of Period Expenses Deductions Other (1) End of Period
- ------ ------------------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
1996 $ 1,087 $ 1,641 $ -- $ -- $ 2,728
1997 $ 2,728 $14,034 $ -- $ -- $16,762
1998 $16,762 $21,506 $ -- $ -- $38,268
</TABLE>
- --------
(1) Other additions represent the allowances for doubtful accounts, which were
recorded in connection with business acquisitions.
F-17
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. Operating Segment and Related Information
The Company has three reportable operating segments based on management's
organization of the enterprise into geographic areas--North America, Asia-
Pacific and Europe. The Company evaluates the performance of its segments and
allocates resources to them based upon net revenue and EBITDA. The Company
defines EBITDA as net income (loss) before interest expense and interest
income, income taxes, depreciation and amortization and other income (expense).
Operations and assets of the North American segment include shared corporate
functions and assets which the Company does not allocate to its other
geographic segments for management reporting purposes. Summary information with
respect to the Company's segments is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net Revenue
North America................................ $188,008 $ 74,359 $ 16,573
Asia-Pacific................................. 172,757 183,126 151,253
Europe....................................... 60,863 22,712 5,146
-------- -------- --------
Total...................................... $421,628 $280,197 $172,972
======== ======== ========
EBITDA
North America................................ $(14,420) $(14,709) $ (5,965)
Asia-Pacific................................. 1,482 (5,856) 2,207
Europe....................................... 2,018 (2,591) (2,229)
-------- -------- --------
Total...................................... $(10,920) $(23,156) $ (5,987)
======== ======== ========
Capital Expenditures
North America................................ $ 33,431 $ 12,441 $ 7,453
Asia-Pacific................................. 24,589 16,506 4,263
Europe....................................... 17,763 10,518 1,029
-------- -------- --------
Total...................................... $ 75,983 $ 39,465 $ 12,745
======== ======== ========
<CAPTION>
December 31,
----------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Assets
North America................................ $507,356 $249,109 $ 67,575
Asia-Pacific................................. 109,290 83,476 62,823
Europe....................................... 57,317 22,808 5,211
-------- -------- --------
Total...................................... $673,963 $355,393 $135,609
======== ======== ========
</TABLE>
The above capital expenditures exclude assets acquired in business
combinations and under terms of capital leases.
F-18
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Quarterly Results of Operations (unaudited)
The following is a tabulation of the unaudited quarterly results of
operations for the two years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
For the quarter ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net Revenue................... $ 80,051 $ 99,475 $116,047 $126,055
Gross Margin.................. $ 11,329 $ 15,349 $ 19,490 $ 22,444
Net Loss...................... $(12,317) $(14,793) $(19,035) $(17,503)
<CAPTION>
For the quarter ended
-----------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net Revenue................... $ 59,036 $ 70,045 $ 73,018 $ 78,098
Gross Margin.................. $ 4,002 $ 5,867 $ 7,752 $ 9,845
Net Loss...................... $ (4,907) $ (8,875) $(10,591) $(11,866)
</TABLE>
16. Subsequent Events
On March 31, 1999, the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for approximately
$36 million in cash (including payments made in exchange for certain non-
competition agreements). In addition, on March 31, 1999, the Company entered
into an agreement to purchase for $14 million in cash substantially all of the
operating assets of Wintel CNC Communications Inc. and Wintel CNT
Communications Inc. (the "Wintel Companies"), which are Canada-based long
distance telecommunications providers affiliated with the LTN Companies. The
purchase of the assets of the Wintel Companies is expected to close in early
May 1999. If the LTN companies and the Wintel Companies collectively achieve
certain financial goals during the first half of 1999, the Company has agreed
to pay up to an additional $4.6 million in cash.
In February 1999 the Company purchased the remaining 40% of Hotkey Internet
Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia-based Internet service
provider. The remaining 40% was purchased for approximately $1.1 million
comprised of $0.3 million in cash and 57,025 shares of the Company's common
stock.
On February 5, 1999 the Company acquired all of the outstanding shares in
the capital of GlobalServe Communications, Inc., a privately held Internet
services provider ("ISP") based in Toronto, Canada. The purchase price of
approximately $4.2 million was comprised of $2.1 million in cash and 142,806
shares of the Company's common stock.
On January 29, 1999 the Company completed the sale of $200 million 11 1/4%
Senior Notes ("1999 Senior Notes") due 2009 with semi-annual interest payments.
The $192.5 million in net proceeds of the 1999 Senior Notes will be used to
fund capital expenditures to expand and develop the Company's global Network
and other corporate purposes.
F-19
<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-20
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------
1997 1996
-------- --------
(in Thousands,
except share snd
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-21
<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-22
<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-23
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Months Ended
December 31,
----------------------------
1997 1996 1995
-------- -------- --------
<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-24
<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-response
F-25
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Share and Per Share Data)
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-26
<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-27
<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 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.
F-28
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(In Thousands, Except Share and Per Share Data)
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-29
<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-30
<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
F-31
<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-32
<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-33
<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
Administration............................. $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-34
<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-35
<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 Balance
Beginning Costs and to Other at End
Description of Period Expenses Accounts Deductions of 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OFFER TO EXCHANGE ALL OUTSTANDING
11 1/4% SENIOR NOTES DUE 2009
($200,000,000 PRINCIPAL AMOUNT)
FOR 11 1/4% SENIOR NOTES DUE 2009
Primus Telecommunications Group, Incorporated
----------------
PROSPECTUS
May , 1999
----------------
All tendered initial unregistered 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 our Amended and Restated By-Laws provides that we, to
the full extent permitted by Section 145 of the DGCL, shall indemnify all of
our past and present directors and may indemnify all of our past or present
employees or other agents. To the extent that a director, officer, employee or
agent of our's 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 us against
actually and reasonably incurred expenses in connection therewith. Such
expenses may be paid by us 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 our Amended and
Restated Certificate of Incorporation provides that no director shall be liable
to us 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 us or our
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 our
capital stock or
(iv) for any transaction from which the director derived an improper
personal benefit.
We have obtained a policy insuring us and our directors and officers against
certain liabilities, including liabilities under the 1933 Act.
Pursuant to Section 5(h) of the TresCom merger agreement, we 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 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 company which survived the merger 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 Taurus
Acquisition Corp. ("TAC"), dated as of February 3, 1998, and as
amended by Amendments No. 1 and 2 to Agreement and Plan of Merger
dated as of April 8, 1998 and as of April 16, 1998, respectively;
Incorporated by reference to Appendix A to the Joint Proxy
Statement/Prospectus on Form S-4, No. 333-51797 dated May 4, 1998.
2.2 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.
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
2.3 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.
2.4 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.)
2.5 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.)
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 Registration Statement on Form S-1, No. 333-10875
(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 regarding the 1997 Senior Notes (the "1997
Indenture"); 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 Supplemental Indenture of Primus to the 1997 Indenture dated
January 20, 1999, between Primus and First Union National Bank.*
4.4 Form of Warrant Agreement of Primus; Incorporated by reference to
Exhibit 4.2 of the 1997 Senior Note Registration Statement.
4.5 Indenture, dated May 19, 1998, between Primus Telecommunications
Group, Incorporated and First Union Nation Bank; Incorporated by
reference to Exhibit 4.4 of the Registration Statement on Form S-4, No
333-58547 (the "1998 Senior Note Registration Statement").
4.6 Specimen 9 7/8% Senior Note due 2008; Incorporated by reference to
Exhibit A included in Exhibit 4.4 of the 1998 Senior Note Registration
Statement.
4.7 Indenture, dated January 29, 1999, between Primus and First Union
National Bank. *
4.8 Specimen 11 1/4% Senior Note due 2009; Incorporated by reference to
Exhibit A included in Exhibit 4.7.
4.9 Rights Agreement, dated as of December 23, 1998, between Primus and
StockTrans, Inc., including the Form of Rights Certificate (Exhibit
A), the Certificate of Designation (Exhibit B) and the Form of Summary
of Rights (Exhibit C); Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, No 000-29092 filed with
the Commission on December 30, 1998.
4.10 Form of legend on certificates representing shares of Common Stock
regarding Series B Junior Participating Preferred Stock Purchase
Rights; Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A, No 000-29092 filed with the
Commission on December 30, 1998.
5.1 Opinion of Pepper Hamilton LLP regarding the validity of the
securities being registered.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
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 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.
10.7 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.
10.8 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.
10.9 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.
10.10 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA; Incorporated by reference to Exhibit 10.3 of the IPO
Registration Statement.
10.11 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.
10.12 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.**
10.13 Primus 1995 Stock Option Plan; Incorporated by reference to Exhibit
10.6 of the IPO Registration Statement.**
10.14 Primus 1995 Director Stock Option Plan; Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement.**
10.15 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.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.20 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement.**
10.21 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4 of the
Primus Registration Statement on Form S-8 (No. 333-35005).
10.22 Purchase Agreement, dated May 14, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.; Incorporated by reference to Exhibit 10.22 of the 1998 Senior
Note Registration Statement.
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.; Incorporated by reference to Exhibit 10.23 of the 1998 Senior
Note Registration Statement.
10.24 Primus Telecommunications Group, Incorporated-TresCom International
Stock Option Plan; 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.*
23.2 Consent of Ernst & Young LLP.*
23.3 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.
** Compensatory Benefit Plan.
II-4
<PAGE>
(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
registrant pursuant to the foregoing provisions, or otherwise, the registrant
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
registrant 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 registrant 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.
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>
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 May 5, 1999.
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>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ K. Paul Singh Chairman, President and May 5, 1999
______________________________________ Chief Executive Officer
K. Paul Singh (principal executive
officer and Director
/s/ Neil L. Hazard Executive Vice President May 5, 1999
______________________________________ and Chief Financial
Neil L. Hazard Officer (principal
financial officer)
/s/ Thomas R. Kloster Vice President and May 5, 1999
______________________________________ Corporate Controller
Thomas R. Kloster (principal accounting
officer)
/s/ John F, DePodesta Executive Vice President May 5, 1999
______________________________________ and Director
John F. Depodesta
* Director May 5, 1999
______________________________________
Herman Fialkov
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director May 5, 1999
______________________________________
David E. Hershberg
* Director May 5, 1999
______________________________________
John Puente
* Director May 5, 1999
______________________________________
Douglas M. Karp
</TABLE>
/s/ Neil L. Hazard
*By:____________________________
Attorney-in-fact
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
2.1 Agreement and Plan of Merger by and among Primus, TresCom and Taurus
Acquisition Corp. ("TAC"), dated as of February 3, 1998, and as
amended by Amendments No. 1 and 2 to Agreement and Plan of Merger
dated as of April 8, 1998 and as of April 16, 1998, respectively;
Incorporated by reference to Appendix A to the Joint Proxy
Statement/Prospectus on Form S-4, No. 333-51797 dated May 4, 1998.
2.2 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.
2.3 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.
2.4 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.)
2.5 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.)
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 Registration Statement on Form S-1, No. 333-10875
(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 regarding the 1997 Senior Notes (the "1997
Indenture"); 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 Supplemental Indenture of Primus to the 1997 Indenture dated
January 20, 1999, between Primus and First Union National Bank.*
4.4 Form of Warrant Agreement of Primus; Incorporated by reference to
Exhibit 4.2 of the 1997 Senior Note Registration Statement.
4.5 Indenture, dated May 19, 1998, between Primus Telecommunications
Group, Incorporated and First Union Nation Bank; Incorporated by
reference to Exhibit 4.4 of the Registration Statement on Form S- 4,
No 333-58547 (the "1998 Senior Note Registration Statement").
4.6 Specimen 9 7/8% Senior Note due 2008; Incorporated by reference to
Exhibit A included in Exhibit 4.4 of the 1998 Senior Note Registration
Statement.
4.7 Indenture, dated January 29, 1999, between Primus and First Union
National Bank.*
4.8 Specimen 11 1/4% Senior Note due 2009; Incorporated by reference to
Exhibit A included in Exhibit 4.7.
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
4.9 Rights Agreement, dated as of December 23, 1998, between Primus and
StockTrans, Inc., including the Form of Rights Certificate (Exhibit
A), the Certificate of Designation (Exhibit B) and the Form of Summary
of Rights (Exhibit C); Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement on Form 8-A, No 000-29092 filed with
the Commission on December 30, 1998.
4.10 Form of legend on certificates representing shares of Common Stock
regarding Series B Junior Participating Preferred Stock Purchase
Rights; Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A, No 000-29092 filed with the
Commission on December 30, 1998.
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 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.
10.7 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.
10.8 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.
10.9 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.
10.10 Hardpatch Transit Agreement, dated February 29, 1996, between
Teleglobe USA; Incorporated by reference to Exhibit 10.3 of the IPO
Registration Statement.
10.11 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.
10.12 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.**
10.13 Primus 1995 Stock Option Plan; Incorporated by reference to Exhibit
10.6 of the IPO Registration Statement.**
10.14 Primus 1995 Director Stock Option Plan; Incorporated by reference to
Exhibit 10.7 of the IPO Registration Statement.**
10.15 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.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement.**
10.21 Primus 401(k) Plan; Incorporated by reference to Exhibit 4.4 of the
Primus Registration Statement on Form S-8 (No. 333-35005).
10.22 Purchase Agreement, dated May 14, 1998, among Primus
Telecommunications Group, Incorporated, Primus Telecommunications,
Incorporated, Primus Telecommunications Pty. Ltd. and Lehman Brothers,
Inc.; Incorporated by reference to Exhibit 10.22 of the 1998 Senior
Note Registration Statement.
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.; Incorporated by reference to Exhibit 10.23 of the 1998 Senior
Note Registration Statement.
10.24 Primus Telecommunications Group, Incorporated-TresCom International
Stock Option Plan; 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.
</TABLE>
II-10
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------- -----------------------
<C> <S>
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.*
23.2 Consent of Ernst & Young LLP.*
23.3 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.
** Compensatory Benefit Plan.
II-11
<PAGE>
EXHIBIT 4.3
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE dated as of January 20, 1999 (the "Supplemental
------------
Indenture") between PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED, a Delaware
- ---------
corporation, as issuer (the "Company"), and FIRST UNION NATIONAL BANK, a banking
-------
association organized and existing under the laws of the United States, as
trustee (the "Trustee").
-------
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Company and the Trustee are parties to the Indenture
dated as of August 4, 1997 (as the same has been amended, and may hereafter be
further amended, supplemented or otherwise modified from time to time, the
"Indenture") relating to the 11-3/4% Senior Notes due 2004 (the "Notes") of the
- ---------- -----
Company;
WHEREAS, the Board of Directors of the Company has adopted a
resolution authorizing the Company to enter into this Supplemental Indenture;
WHEREAS, Section 902 of the Indenture authorizes the Company and the
Trustee, in accordance with the terms thereof, to enter into this supplemental
indenture with the consent of the Holders of not less than a majority in
principal amount of the Notes; and
WHEREAS, the Company has requested the Trustee and the Trustee has
agreed to join in the execution of this Supplemental Indenture pursuant to
Section 902 of the Indenture on the terms and subject to the conditions set
forth below;
NOW, THEREFORE, in consideration of the promises and mutual agreements
herein contained, the Company and the Trustee mutually covenant and agree for
the equal and proportionate benefit of the Holders from time to time of the
Notes as follows:
ARTICLE 1 AMENDMENTS TO THE INDENTURE.
---------------------------
1.1 Amendment to Section 101 (Definitions). Section 101 of the
--------------------------------------
Indenture is hereby amended by:
(a) deleting the percentage amount "5.0%" from clause (vii) of the
definition of Permitted Investment, and substituting therefor "10.0%";
(b) deleting in its entirety clause (xxi) from the definition of
Permitted Liens and substituting therefor the following clauses (xxi) and
(xxii):
<PAGE>
"(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 Section 1011. "
1.2 Amendment to Section 1011 (Limitation on Indebtedness). Section
------------------------------------------------------
1011 of the Indenture is hereby amended by deleting such Section in its
entirety, and substituting therefor, the following new Section 1011:
"SECTION 1011. Limitation on Indebtedness.
--------------------------
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Existing
Indebtedness); provided, however, that the Company may Incur Indebtedness,
and any Restricted Subsidiary may Incur Acquired Indebtedness, if
immediately thereafter the ratio of (i) the aggregate principal amount (or
accreted value, as the case may be) of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis outstanding as at the
Transaction Date to (ii) the Pro Forma Consolidated Cash Flow for the
preceding two full fiscal quarters multiplied by two, determined on a pro
forma basis as if any such Indebtedness 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 5.0 to 1.
(b) Notwithstanding the foregoing, the Company and (except for
Indebtedness under subsections (v) and (vii) below) any Restricted
Subsidiary may Incur each and all of the following:
(i) Indebtedness 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 or (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
-2-
<PAGE>
or a Restricted Subsidiary after the Closing Date (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 (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) of
such equipment, ownership rights or minimum investment units so acquired,
excluding the portion of the Fair Market Value of such Capital Stock
attributable to property other than such equipment, ownership rights or
minimum investment units);
(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) and (ix) of this paragraph, and any refinancings thereof in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, and reasonable fees and expenses); provided that such new
Indebtedness shall only be permitted under this clause (iv) if (A) in case
the Notes are refinanced in part or the Indebtedness to be refinanced is
pari passu with the Notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new
Indebtedness is issued or remains outstanding, is expressly made pari passu
with, or subordinate in right of payment to, the remaining Notes, (B) in
case the Indebtedness to be refinanced is subordinated in right of payment
to the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is issued
or remains outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced
is subordinated to the Notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness, does not mature prior
to the Stated Maturity of the Indebtedness to be refinanced or refunded,
and the Average Life of such
-3-
<PAGE>
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, (A) 2.00 times the Net Cash Proceeds received by the Company
after May 18, 1998 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) or (iv) of the second
paragraph of Section 1012 to make a Restricted Payment plus (B) 1.50 times
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 May 18, 1998 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) and (iv) of the second paragraph of
Section 1012 to make a 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
-4-
<PAGE>
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 set
forth in Article XIII;
(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 Section 1018;
(ix) Indebtedness of the Company or any Restricted Subsidiary not
otherwise permitted hereunder in an aggregate principal amount which, 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, provided that to the extent that the
Indebtedness outstanding and incurred pursuant to this clause (ix) exceeds
$125 million, such excess Indebtedness must be unsecured Indebtedness of
the Company and must be expressly made, by its terms or the terms of any
agreement or instrument pursuant to which such Indebtedness is issued or
remains outstanding, (A) subordinate in right of payment to the Notes or
(B) pari passu with the Notes and, in the case of such pari passu
Indebtedness, must mature after the Stated Maturity of the Notes and have
an Average Life longer than that of the Notes; and
(x) Acquired Indebtedness.
(c) Notwithstanding any other provision of this Section 1011, the
maximum amount of Indebtedness that the Company or a Restricted Subsidiary
may Incur pursuant to this Section 1011 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 Section 1011, Guarantees, Liens or obligations
-5-
<PAGE>
with respect to letters of credit supporting Indebtedness otherwise
included in the termination of such particular amount shall not be
included. For purposes of determining compliance with this Section 1011,
(A) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described in the above clauses, the
Company, in its sole discretion, shall classify 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 and (B) the
principal amount of Indebtedness issued at a price that is less than the
principal amount thereof shall be equal to the amount of the liability in
respect thereof determined in conformity with GAAP."
1.3 Amendment to Section 1012 (Limitation on Restricted Payments).
-------------------------------------------------------------
Section 1012 of the Indenture is hereby amended by deleting the dollar amount
"$2.5 million" in clause (vii) of the second paragraph thereof, and substituting
therefor, "$5.0 million".
ARTICLE 2 MISCELLANEOUS.
-------------
2.1 The Trustee. The recitals contained herein shall be taken as the
-----------
statements of the Company and the Trustee shall not assume responsibility for,
or be liable in respect of, the correctness thereof. The Trustee makes no
representation as to, and shall not be liable or responsible for, the validity
or sufficiency of this Supplemental Indenture.
2.2 Limited Effect. Except as expressly amended hereby, all of the
--------------
provisions, covenants, terms and conditions of the Indenture are ratified and
confirmed, and shall remain in full force.
2.3 Counterparts; Facsimile Signatures. This Supplemental Indenture
----------------------------------
may be executed by one or more parties hereto on any number of separate
counterparts, including by facsimile, and all of said counterparts taken
together shall be deemed to constitute one and the same instrument.
2.4 GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY,
-------------
AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW
YORK.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed, all as of the date first above written.
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED
Attest: /s/ Robert Stankey By: /s/ John DePodesta
____________________ ___________________________
Name: Robert Stankey Name: John DePodesta
Title: Secretary Title: Executive Vice President
FIRST UNION NATIONAL BANK
Attest: /s/ Patricia A. Welling By: /s/ S. A. McMahon
__________________________ ________________________
Name: Patricia A. Welling Name: S. A. McMahon
Title: Vice President Title: Vice President
-7-
<PAGE>
================================================================================
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED,
Issuer
to
FIRST UNION NATIONAL BANK,
Trustee
_________________________
INDENTURE
Dated as of January 29, 1999
_________________________
11-1/4% Senior Notes Due 2009
11-1/4% Series B Senior Notes Due 2009
================================================================================
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
Reconciliation and tie between Trust Indenture Act
of 1939 and Indenture, dated as of January 29, 1999
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
<S> <C> <C>
(S) 310(a)(1) ...................................... 607
(a)(2) ...................................... 607
(b) ...................................... 608
(S) 312(c) ...................................... 701
(S) 314(a) ...................................... 703
(a)(4) ...................................... 1008(a)
(c)(1) ...................................... 102
(c)(2) ...................................... 102
(e) ...................................... 102
(S) 315(b) ...................................... 601
(S) 316(a)(last
sentence) ...................................... 101 ("Outstanding")
(a)(1)(A) ...................................... 502, 512
(a)(1)(B) ...................................... 513
(b) ...................................... 508
(c) ...................................... 104(d)
(S) 317(a)(1) ...................................... 503
(a)(2) ...................................... 504
(b) ...................................... 1003
(S) 318(a) ...................................... 111
</TABLE>
______________________
Note: This reconciliation and tie shall not, for any purpose,
be deemed to be a part of the Indenture.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
Page
----
RECITALS OF THE COMPANY................................. 1
ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION ................................. 1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 101. Definitions.................................................. 1
Acquired Indebtedness................................................ 2
Act.................................................................. 2
Additional Notes..................................................... 2
Affiliate............................................................ 2
Agent Member......................................................... 2
Asset Acquisition.................................................... 2
Asset Disposition.................................................... 3
Asset Sale........................................................... 3
Average Life......................................................... 3
Board of Directors................................................... 3
Board Resolution..................................................... 3
Business Day......................................................... 3
Capital Stock........................................................ 4
Capitalized Lease.................................................... 4
Capitalized Lease
Obligation.......................................................... 4
Change of Control.................................................... 4
Change of Control Offer.............................................. 4
Change of Control Payment............................................ 4
Change of Control Payment
Date................................................................ 4
Closing Date......................................................... 4
Commission........................................................... 5
Common Stock......................................................... 5
Company.............................................................. 5
Company Request" or
"Company Order...................................................... 5
Consolidated Cash Flow............................................... 5
Consolidated Fixed Charges........................................... 5
Consolidated Interest Expense........................................ 5
Consolidated Net Income.............................................. 6
Corporate Trust Office............................................... 6
corporation.......................................................... 6
covenant defeasance.................................................. 6
Credit Facilities.................................................... 6
Currency Agreement................................................... 6
Default.............................................................. 6
Defaulted Interest................................................... 7
defeasance........................................................... 7
Depositary........................................................... 7
Eligible Accounts Receivable......................................... 7
Eligible Institution................................................. 7
Event of Default..................................................... 7
Excess Proceeds...................................................... 7
Excess Proceeds Offer................................................ 7
Excess Proceeds Payment.............................................. 7
Excess Proceeds Payment Date......................................... 7
Exchange Act......................................................... 7
Exchange Notes....................................................... 7
Exchange Offer....................................................... 7
Exchange Offer Registration Statement................................ 8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Existing Indebtedness................................................ 8
Fair Market Value.................................................... 8
Federal Bankruptcy Code.............................................. 8
GAAP................................................................. 8
Global Notes......................................................... 8
Government Securities................................................ 8
Guarantee............................................................ 8
Holder............................................................... 8
Incur................................................................ 8
Indebtedness......................................................... 9
Indenture............................................................ 9
Initial Notes........................................................ 9
Initial Purchasers................................................... 9
Interest Payment Date................................................ 9
Interest Rate Agreement.............................................. 9
Investment........................................................... 10
Lien................................................................. 10
Liquidated Damages................................................... 10
Marketable Securities................................................ 10
Maturity............................................................. 11
Net Cash Proceeds.................................................... 11
Non-Registration Opinion.............................................
and Supporting Evidence............................................. 11
Note Register" and "Note
Registrar........................................................... 11
Notes................................................................ 12
Officer's Certificate................................................ 12
Offshore Global Notes................................................ 12
Offshore Notes Exchange Date......................................... 12
Offshore Physical Notes.............................................. 12
Opinion of Counsel................................................... 12
Original Notes....................................................... 12
Outstanding.......................................................... 12
Paying Agent......................................................... 13
Payment Account...................................................... 13
Permitted Investment................................................. 13
Permitted Liens...................................................... 14
Person............................................................... 15
Physical Notes....................................................... 15
Predecessor Note..................................................... 15
Preferred Stock...................................................... 15
Private Placement Legend............................................. 15
Pro Forma Consolidated Cash Flow..................................... 15
Proportionate Share.................................................. 16
Public Equity Offering............................................... 16
Purchase Money Obligations........................................... 16
Qualified Capital Stock.............................................. 16
Redeemable Stock..................................................... 16
Redemption Date...................................................... 16
Redemption Price..................................................... 16
Registration Rights Agreement........................................ 16
Registration Statement............................................... 17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Regular Record Date.................................................. 17
Regulation S......................................................... 17
Resale Restriction Termination Date.................................. 17
Responsible Officer.................................................. 17
Restricted Payments.................................................. 17
Restricted Subsidiary................................................ 17
Rule 144A............................................................ 17
Securities Act....................................................... 17
Shelf Registration Statement......................................... 17
Significant Subsidiary............................................... 17
Special Record Date.................................................. 18
Stated Maturity...................................................... 18
Strategic Subordinated Indebtedness.................................. 18
Subordinated Indebtedness............................................ 18
Subsidiary........................................................... 18
Trade Payables....................................................... 18
Transaction Date..................................................... 18
Trust Indenture Act.................................................. 19
TIA.................................................................. 19
Trustee.............................................................. 19
Unrestricted Subsidiary.............................................. 19
Unrestricted Subsidiary Indebtedness................................. 19
U.S. Global Note..................................................... 19
U.S. Government Obligations.......................................... 19
U.S. Physical Notes.................................................. 19
U.S. Subsidiary...................................................... 20
Vice President....................................................... 20
Voting Stock......................................................... 20
Wholly Owned......................................................... 20
SECTION 102. Incorporation by Reference of Trust Indenture Act............. 20
SECTION 103. Compliance Certificates and Opinions......................... 20
SECTION 104. Form of Documents Delivered to Trustee....................... 21
SECTION 105. Acts of Holders.............................................. 22
SECTION 106. Notices, Etc. to Trustee, Company............................ 23
SECTION 107. Notice to Holders; Waiver.................................... 23
SECTION 108. Effect of Headings and Table of Contents..................... 24
SECTION 109. Successors and Assigns....................................... 24
SECTION 110. Separability Clause.......................................... 24
SECTION 111. Benefits of Indenture........................................ 24
SECTION 112. Governing Law................................................ 24
SECTION 113. Legal Holidays............................................... 24
SECTION 114. Currency Indemnity........................................... 25
ARTICLE TWO...............................NOTE FORMS 25
SECTION 201. Forms Generally.............................................. 25
SECTION 202. Restrictive Legends.......................................... 27
ARTICLE THREE..............................THE NOTES 29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 301. Titles and Terms............................................. 29
SECTION 302. Denominations................................................ 30
SECTION 303. Execution, Authentication, Delivery and Dating............... 30
SECTION 304. Temporary Note............................................... 32
SECTION 305. Registration, Registration of Transfer and Exchange.......... 32
SECTION 306. Book-Entry Provisions for Global Notes....................... 33
SECTION 307. Transfer Provisions.......................................... 34
SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes.................. 43
SECTION 309. Payment of Interest; Interest Rights Preserved............... 43
SECTION 310. Persons Deemed Owners........................................ 45
SECTION 311. Cancellation................................................. 45
SECTION 312. Computation of Interest...................................... 45
SECTION 313. CUSIP Numbers................................................ 45
ARTICLE FOUR................SATISFACTION AND DISCHARGE 46
SECTION 401. Satisfaction and Discharge of Indenture...................... 46
SECTION 402. Application of Trust Money................................... 47
ARTICLE FIVE..................................REMEDIES 47
SECTION 501. Events of Default............................................ 47
SECTION 502. Acceleration of Maturity; Rescission and Annulment........... 49
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee................................................... 50
SECTION 504. Trustee May File Proofs of Claim............................. 51
SECTION 505. Trustee May Enforce Claims Without Possession of Notes....... 52
SECTION 506. Application of Money Collected............................... 52
SECTION 507. Limitation on Suits.......................................... 52
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest........................................ 53
SECTION 509. Restoration of Rights and Remedies........................... 53
SECTION 510. Rights and Remedies Cumulative............................... 53
SECTION 511. Delay or Omission Not Waiver................................. 54
SECTION 512. Control by Holders........................................... 54
SECTION 513. Waiver of Past Defaults...................................... 54
SECTION 514. Waiver of Stay or Extension Laws............................. 55
ARTICLE SIX................................THE TRUSTEE 55
SECTION 601. Notice of Defaults........................................... 55
SECTION 602. Certain Rights of Trustee.................................... 55
SECTION 603. Trustee Not Responsible for Recitals or Issuance of Notes.... 57
SECTION 604. May Hold Notes............................................... 57
SECTION 605. Money Held in Trust.......................................... 57
SECTION 606. Compensation and Reimbursement............................... 57
SECTION 607. Corporate Trustee Required; Eligibility...................... 58
SECTION 608. Resignation and Removal; Appointment of Successor............ 58
SECTION 609. Acceptance of Appointment by Successor....................... 60
SECTION 610. Merger, Conversion, Consolidation or Succession to Business.. 60
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ARTICLE SEVEN HOLDERS LISTS AND REPORTS BY
TRUSTEE AND COMPANY..................................... 61
SECTION 701. Disclosure of Names and Addresses of Holders................. 61
SECTION 702. Reports by Trustee........................................... 61
SECTION 703. Reports by Company........................................... 61
ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE,
TRANSFER OR LEASE............................................ 62
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms......... 62
SECTION 802. Successor Substituted........................................ 63
SECTION 803. Notes to Be Secured in Certain Events........................ 63
ARTICLE NINE...................SUPPLEMENTAL INDENTURES 64
SECTION 901. Supplemental Indentures Without Consent of Holders........... 64
SECTION 902. Supplemental Indentures with Consent of Holders.............. 64
SECTION 903. Execution of Supplemental Indentures......................... 65
SECTION 904. Effect of Supplemental Indentures............................ 65
SECTION 905. Conformity with Trust Indenture Act.......................... 66
SECTION 906. Reference in Notes to Supplemental Indentures................ 66
SECTION 907. Notice of Supplemental Indentures............................ 66
ARTICLE TEN..................................COVENANTS 66
SECTION 1001. Payment of Principal, Premium, if Any, and Interest......... 66
SECTION 1002. Maintenance of Office or Agency............................. 66
SECTION 1003. Money for Note Payments to Be Held in Trust................. 67
SECTION 1004. Corporate Existence......................................... 68
SECTION 1005. Payment of Taxes and Other Claims........................... 68
SECTION 1006. Maintenance of Properties................................... 69
SECTION 1007. Insurance................................................... 69
SECTION 1008. Statement by Officers As to Default......................... 69
SECTION 1009. Provision of Financial Statements........................... 70
SECTION 1010. Repurchase of Notes upon a Change of Control................ 70
SECTION 1011. Limitation on Indebtedness.................................. 72
SECTION 1012. Limitation on Restricted Payments........................... 75
SECTION 1013. Limitation on Dividend and Other Payment Restrictions
Affecting Restricted Subsidiaries.......................... 77
SECTION 1014. Limitation on the Issuance and Sale of Capital Stock
of Restricted Subsidiaries................................. 79
SECTION 1015. Limitation on Transactions with Shareholders and Affiliates. 79
SECTION 1016. Limitation on Liens......................................... 80
SECTION 1017. Limitation on Asset Sales................................... 80
SECTION 1018. Limitation on Issuances of Guarantees of Indebtedness
by Restricted Subsidiaries................................. 82
SECTION 1019. Business of the Company..................................... 83
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 1020. Limitation on Investments in Unrestricted Subsidiaries...... 83
SECTION 1021. Termination of TresCom Facility............................. 83
SECTION 1022. Waiver of Certain Covenants................................. 83
ARTICLE ELEVEN
REDEMPTION OF NOTES..................................... 84
SECTION 1101. Right of Redemption......................................... 84
SECTION 1102. Applicability of Article.................................... 84
SECTION 1103. Election to Redeem Notice to Trustee........................ 84
SECTION 1104. Selection by Trustee of Notes to Be Redeemed................ 85
SECTION 1105. Notice of Redemption........................................ 85
SECTION 1106. Deposit of Redemption Price................................. 86
SECTION 1107. Notes Payable on Redemption Date 86
SECTION 1108. Notes Redeemed in Part...................................... 86
ARTICLE TWELVE............[This Article Has Been
Intentionally Omitted] 87
ARTICLE THIRTEEN..........DEFEASANCE AND COVENANT
DEFEASANCE 87
SECTION 1301. Company's Option to Effect Defeasance or Covenant
Defeasance................................................. 87
SECTION 1302. Defeasance and Discharge.................................... 87
SECTION 1303. Covenant Defeasance......................................... 88
SECTION 1304. Conditions to Defeasance or Covenant Defeasance............. 88
SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held
in Trust; Other Miscellaneous Provisions................... 90
SECTION 1306. Reinstatement............................................... 90
</TABLE>
<PAGE>
INDENTURE, dated as of January 29, 1999, between PRIMUS
TELECOMMUNICATIONS GROUP, INCORPORATED, a corporation duly organized and
existing under the laws of the State of Delaware (herein called the "Company"),
having its principal office at 1700 Old Meadow Road, McLean, Virginia 22102, and
FIRST UNION NATIONAL BANK, a national banking association, duly organized and
existing under the laws of the United States, as Trustee (the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of 11-1/4%
Senior Notes Due 2009 (the "Initial Notes") and 11-1/4% Series B Senior Notes
Due 2009 (the "Exchange Notes" and, together with the Initial Notes, the
"Notes"), of substantially the tenor and amount hereinafter set forth, and to
provide therefor the Company has duly authorized the execution and delivery of
this Indenture. Except as otherwise provided for herein, the Notes shall be
limited to $275,000,000 in aggregate principal amount outstanding, of which
$200,000,000 in aggregate principal amount of Initial Notes will be issued on
the date hereof (the "Original Notes"). Subject to the conditions set forth
herein, the Company may issue up to $75,000,000 aggregate principal amount of
additional Notes subsequent to the Closing Date (as defined herein).
Upon the issuance of the Exchange Notes, if any, or the effectiveness
of the Shelf Registration Statement (as defined herein), this Indenture will be
subject to the provisions of the Trust Indenture Act of 1939, as amended, that
are required to be part of this Indenture and shall, to the extent applicable,
be governed by such provisions. All things necessary have been done to make the
Notes, when executed by the Company and authenticated and delivered hereunder
and duly issued by the Company, the valid obligations of the Company and to make
this Indenture a valid agreement of the Company, in accordance with their and
its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Notes
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Notes, as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 101. Definitions.
-----------
For all purposes of this indenture, except as otherwise expressly
provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meaning assigned to
them in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the meanings
assigned to them therein, and the terms "cash transaction" and "self-
liquidating paper", as used in TIA Section 311, shall have the meanings
assigned to them in the rules of the Commission adopted under the Trust
Indenture Act;
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted accounting
principles, and
<PAGE>
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision.
"Acquired Indebtedness" means 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.
"Act", when used with respect to any Holder, has the meaning specified
in Section 105.
"Additional Notes" means up to $75,000,000 aggregate principal amount
of Notes issued subsequent to the Closing Date (other than Exchange Notes issued
in exchange for Initial Notes) in accordance with the terms of this Indenture,
including Section 301, Section 303 and Section 1011.
"Affiliate" means, 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, means 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.
"Agent Member" has the meaning specified in Section 306.
"Asset Acquisition" means (1) 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" means 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" means 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 this 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 Section 1017, shall not be included within the meaning of
"Asset Sale."
2
<PAGE>
"Average Life" means, 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.
"Board of Directors" means either the board of directors of the
Company or any duly authorized committee of that board.
"Board Resolution" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday which is not a day on which banking institutions in The City of New York
or Richmond, Virginia are authorized or obligated by law or executive order to
close.
"Capital Stock" means, 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 this Indenture, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, 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" means the discounted present value of the rental obligations
under such lease.
"Change of Control" means 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 l3d-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.
"Change of Control Offer" has the meaning specified in Section 1010.
"Change of Control Payment" has the meaning specified in Section 1010.
"Change of Control Payment Date" has the meaning specified in Section
1010.
"Closing Date" means January 29, 1999.
3
<PAGE>
"Commission" means the Securities and Exchange Commission, as from
time to time constituted, created under the Securities Exchange Act of 1934, or,
if at any time after the execution of this Indenture such Commission is not
existing and performing the duties now assigned to it under the Trust Indenture
Act, then the body performing such duties at such time.
"Common Stock" means, 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 this Indenture, including, without limitation, all
series and classes of such common stock.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Request" or "Company Order" means a written request or order
signed in the name of the Company by its Chairman, its President, any Vice
President, its Treasurer or an Assistant Treasurer, and delivered to the
Trustee.
"Consolidated Cash Flow" means, 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" means, for any period, Consolidated
Interest Expense plus dividends declared and payable on Preferred Stock.
"Consolidated Interest Expense" means, 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" means, 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 Section 1012, 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 Section 1012, any amount paid or accrued as dividends on Preferred
Stock of the Company or Preferred Stock of any Restricted
4
<PAGE>
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.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee, at which at any particular time its corporate trust business shall
be administered, which office at the date of execution of this Indenture is
located at 800 East Main Street, Richmond, Virginia 23219, Attention: Corporate
Trust, except that with respect to presentation of Notes for payment or for
registration of transfer or exchange, such term shall mean the office or agency
of the Trustee at which, at any particular time, its corporate agency business
shall be conducted.
"corporation" includes corporations, associations, companies and
business trusts.
"covenant defeasance" has the meaning specified in Section 1303.
"Credit Facilities" means, with respect to the Company, one or more
debt facilities or commercial paper facilities with banks or other institutional
lenders providing for revolving credit loans, term loans, receivables financing
(including through the sale of receivables to such lenders or to special purpose
entities formed to borrow from such lenders against such receivables) or letters
of credit, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means any foreign exchange contract, currency
swap agreement and any other arrangement and agreement designed to provide
protection against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Defaulted Interest" has the meaning specified in Section 309.
"defeasance" has the meaning specified in Section 1302.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Eligible Accounts Receivable" means 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" means 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.
"Employment Agreement" means the employment agreement between the
Company and Mr. K. Paul Singh, dated June 1994.
"Event of Default" has the meaning specified in Section 501.
"Excess Proceeds" has the meaning specified in Section 1017.
5
<PAGE>
"Excess Proceeds Offer" has the meaning specified in Section 1017.
"Excess Proceeds Payment" has the meaning specified in Section 1017.
"Excess Proceeds Payment Date" has the meaning specified in Section
1017.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" has the meaning stated in the first recital of this
Indenture and refers to any Exchange Notes containing terms substantially
identical to the Initial Notes (except that such Exchange Notes shall be
registered under the Securities Act and will not contain (i) transfer
restrictions or (ii) certain provisions relating to the increase in the interest
rate of such Exchange Notes) that are issued and exchanged for Initial Notes
pursuant to the Registration Rights Agreement and this Indenture.
"Exchange Offer" means the offer by the Company to the Holders of
Initial Notes to exchange Initial Notes for Exchange Notes, as provided in the
Registration Rights Agreement.
"Exchange Offer Registration Statement" means the Exchange Offer
Registration Statement as defined in the Registration Rights Agreement.
"Existing Indebtedness" means Indebtedness outstanding on the date of
the Indenture.
"Fair Market Value" means, 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.
"Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the
United States Code, as amended from time to time.
"GAAP" means 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.
"Global Notes" has the meaning set forth in Section 201.
"Government Securities" means 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" means 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
--------
6
<PAGE>
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"Holder" means a Person in whose name a Note is registered in the Note
Register.
"Incur" means, 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" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person , whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
--------
the lesser of (A) the Fair Market Value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person, (viii) the maximum fixed redemption or repurchase
price of Redeemable Stock of such Person at the time of determination and (ix)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided (i) that the amount outstanding at any time of
--------
any Indebtedness issued with original issue discount is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for federal, state,
local or other taxes.
"Indenture" means this instrument as originally executed and as it may
from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Initial Notes" has the meaning stated in the first recital of this
Indenture.
"Initial Purchasers" means Lehman Brothers Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Morgan Stanley & Co. Incorporated.
"Interest Payment Date" means the Stated Maturity of an installment of
interest on the Notes.
"Interest Rate Agreement" means 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 means 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
7
<PAGE>
of the definition of "Unrestricted Subsidiary" and Sections 1012 and 1014, (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 Section 1014 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 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 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).
"Issuance Date" means, with respect to any Initial Notes, the date on
which such Initial Notes are originally issued, which in the case of the
Original Notes shall be the Closing Date and which in the case of any Additional
Notes shall occur after the Closing Date.
"Lien" means 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).
"Liquidated Damages" means all liquidated damages then owing pursuant
to Section 5 of the Registration Rights Agreement.
"Marketable Securities" means: (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 seven 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.
"Maturity", when used with respect to any Notes, means the date on
which the principal of such Notes or an installment of principal becomes due and
payable as therein or herein provided, whether at the Stated Maturity or by
declaration of acceleration, notice of redemption or otherwise.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary of the
Company) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold
8
<PAGE>
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.
"Non-Registration Opinion and Supporting Evidence" has the meaning
specified in Section 307.
"Note Register" and "Note Registrar" have the respective meanings
specified in Section 305.
"Notes" has the meaning stated in the first recital of this Indenture
and more particularly means any Notes authenticated and delivered under this
Indenture, including Additional Notes. For all purposes of this Indenture, the
term "Notes" shall include any Exchange Notes to be issued and exchanged for any
Initial Notes pursuant to the Registration Rights Agreement and this Indenture
and, for purposes of this Indenture, (A) all Initial Notes and Exchange Notes
(including, to the extent provided in clause (B), Additional Notes) shall vote
together as one series of Notes under this Indenture and (B) all Additional
Notes that are of the same series as the other Notes and bear the same CUSIP
numbers as the other Notes shall vote together with such other Notes as one
series of Notes under this Indenture.
"Officer's Certificate" means a certificate signed by the Chairman,
the President, a Vice President, the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary of the Company, and delivered to the
Trustee.
"Offshore Global Notes" has the meaning set forth in Section 201.
"Offshore Notes Exchange Date" has the meaning set forth in Section
202.
"Offshore Physical Notes" has the meaning set forth in Section 201.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Company, including an employee of the Company, and who shall be
acceptable to the Trustee.
"Original Notes" has the meaning stated in the first recital of the
Indenture.
"Outstanding", when used with respect to Notes, means, as of the date
of determination, all Notes theretofore authenticated and delivered under this
Indenture, except:
(i) Notes theretofore cancelled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Notes, or portions thereof, for whose payment or redemption
money in the necessary amount has been theretofore deposited with the
Trustee or any Paying Agent (other than the Company) in trust or set aside
and segregated in trust by the Company (if the Company shall act as its own
Paying Agent) for the Holders of such Notes; provided that, if such Notes
--------
are to be redeemed, notice of such redemption has been duly given pursuant
to this Indenture or provision therefor satisfactory to the Trustee has
been made;
9
<PAGE>
(iii) Notes, except to the extent provided in Sections 1302 and 1303,
with respect to which the Company has effected defeasance and/or covenant
defeasance as provided in Article Thirteen; and
(iv) Notes which have been paid pursuant to Section 308 or in
exchange for or in lieu of which other Notes have been authenticated and
delivered pursuant to the Indenture, other than any such Notes in respect
of which there shall have been presented to the Trustee proof satisfactory
to it that such Notes are held by a bona fide purchaser in whose hands the
Notes are valid obligations of the Company whose determination shall be
conclusive and evidenced by a Board Resolution.
provided, however, that in determining whether the Holders of the requisite
- -------- -------
principal amount of Outstanding Notes have given any request, demand,
authorization, direction, consent, notice or waiver hereunder, and for the
purpose of making the calculations required by TIA Section 313, Notes owned by
the Company or any other obligor upon the Notes or any Affiliate of the Company
or such other obligor shall be disregarded and deemed not to be Outstanding,
except that, in determining whether the Trustee shall be protected in making
such calculation or in relying upon any such request, demand, authorization,
direction, notice, consent or waiver, only Notes which the Trustee actually
knows to be so owned shall be so disregarded. Notes so owned which have been
pledged in good faith may be regarded as Outstanding if the pledgee establishes
to the satisfaction of the Trustee the pledgee's right so to act with respect to
such Notes and that the pledgee is not the Company or any other obligor upon the
Notes or any Affiliate of the Company or such other obligor.
"Paying Agent" means any Person (including the Company acting as
Paying Agent) authorized by the Company to pay the principal of (and premium, if
any) or interest on any Notes on behalf of the Company.
"Payment Account" has the meaning set forth in Section 402.
"Permitted Business" means 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" means (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 Section 1017; 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" means (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
10
<PAGE>
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made; (iii) Liens incurred or deposits made
in the ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
or regulatory obligations, bankers' acceptances, surety and appeal bonds,
government contracts, performance and return-of-money bonds and other
obligations of a similar nature incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (v) easements,
rights-of-way, municipal and zoning ordinances and similar charges,
encumbrances, title defects or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Restricted Subsidiaries; (vi) Liens (including extensions and renewals thereof)
upon real or personal property purchased or leased after the Closing Date;
provided that (a) such Lien is created solely for the purpose of securing
- --------
Indebtedness Incurred in compliance with Section 1011 (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 Section 1011;
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 this Indenture; and (xxii) Liens securing
Indebtedness under Credit Facilities incurred in compliance with clauses (i) and
(ii) of paragraph (b) of Section 1011.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust unincorporated organization or
government or any agency or political subdivision thereof.
"Physical Notes" has the meaning set forth in Section 201.
"Predecessor Note" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated
11
<PAGE>
and delivered under Section 308 in exchange for a mutilated security or in lieu
of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as
the mutilated, lost, destroyed or stolen Note.
"Preferred Stock" means, 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.
"Private Placement Legend" has the meaning specified in Section 202.
"Pro Forma Consolidated Cash Flow" means, 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.
"Proportionate Share" means, 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 and the terms of which provide
for proration of the amount of such Indebtedness to be purchased with Excess
Proceeds.
"Public Equity Offering" means an underwritten primary public offering
of Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Purchase Money Obligations" means, 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.
"Qualified Institutional Buyers" or "QIB" means a "qualified
institutional buyer" as defined in Rule 144A.
"Qualified Capital Stock" of any Person means any and all Capital
Stock of such Person other than Redeemable Stock.
"Redeemable Stock" means 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 will 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 Sections 1017 and 1010 and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to Section
1017 and Section 1010.
"Redemption Date", when used with respect to any Note to be redeemed,
in whole or in part, means the date fixed for such redemption by or pursuant to
this Indenture.
12
<PAGE>
"Redemption Price", when used with respect to any Note to be redeemed,
means the price at which it is to be redeemed pursuant to this Indenture.
"Registration Rights Agreement" means (i) the Registration Rights
Agreement between the Company, Primus Telecommunications Incorporated, Primus
Telecommunications (Australia) Pty. Ltd., Primus Telecommunications Pty. Ltd.
and the Initial Purchasers dated as of January 29, 1999, concerning the
registration and exchange of the Original Notes and (ii) any other similar
Registration Rights Agreement relating to any Additional Notes.
"Registration Statement" means a Registration Statement as defined in
the Registration Rights Agreement.
"Regular Record Date" for the interest payable on any Interest Payment
Date means the January 1 or July 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act and any
successor provision.
"Resale Restriction Termination Date" has the meaning specified in
Section 202.
"Responsible Officer", when used with respect to the Trustee, means
the chairman or any vice-chairman of the board of directors, the chairman or any
vice-chairman of the executive committee of the board of directors, the chairman
of the trust committee, the president, any vice president, the secretary, any
assistant secretary, the treasurer, any assistant treasurer, the cashier, any
assistant cashier, any trust officer or assistant trust officer, the controller
or any assistant controller or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers and having direct responsibility for the administration of this
Indenture, and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Payments" has the meaning specified in Section 1012. Any
Restricted Payments made other than in cash shall be valued at Fair Market
Value.
"Restricted Subsidiary" means any Subsidiary of the Company other than
an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act and any successor
provision.
"Securities Act" means the Securities Act of 1933, as amended.
"Shelf Registration Statement" means a Shelf Registration Statement as
defined in the Registration Rights Agreement.
"Significant Subsidiary" means, 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.
"Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 309.
13
<PAGE>
"Stated Maturity" means, (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" means 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.
"Subordinated Indebtedness" means Indebtedness of the Company
subordinated in right of payment to the Notes.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the outstanding
Voting Stock is owned, directly or indirectly, by such Person and one or more
other Subsidiaries of such Person.
"Trade Payables" means 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" means, 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.
"TresCom Facility" means the $25,000,000 revolving credit and security
agreement dated July 31, 1997, together with the related guarantees, among
TresCom International, Inc, the lenders party thereto and PNC Bank, as Agent.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act of 1939
as in force at the date as of which this Indenture was executed, except as
provided in Section 905.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in New York State.
"Unrestricted Subsidiary" means (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 Section 1012, and (B) such Subsidiary is not liable, directly or
indirectly, with respect to any Indebtedness other than Unrestricted Subsidiary
14
<PAGE>
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 Section 1011 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" means 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. Global Note" has the meaning set forth in Section 201.
"U.S. Government Obligations" has the meaning specified in Section
1304.
"U.S. Physical Notes" has the meaning set forth in Section 201.
"U.S. Subsidiary" means any corporation or other entity incorporated
or organized under the laws of the United States or any state thereof.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
"Voting Stock" means 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, means 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.
SECTION 102. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture. The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"indenture notes" means the Notes;
"indenture note holder" means a Holder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the indenture notes means the Company or any other
obligor on the Notes.
15
<PAGE>
All other Trust Indenture Act terms used in this Indenture that are
defined by the Trust Indenture Act, defined by reference in the Trust Indenture
Act to another statute or defined by a rule of the Commission and not otherwise
defined herein shall have the meanings assigned to them therein.
SECTION 103. Compliance Certificates and Opinions.
------------------------------------
Upon any application or request by the Company to the Trustee to take
any action under any provision of this Indenture, the Company shall furnish to
the Trustee an Officer's Certificate stating that all conditions precedent, if
any, provided for in this Indenture (including any covenant compliance with
which constitutes a condition precedent) relating to the proposed action have
been complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent, if any, have been complied with, except
that in the case of any such application or request as to which the furnishing
of such documents is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 1008(a)) shall include:
(1) a statement that each individual signing such certificate or
opinion has read such covenant or condition and the definitions herein
relating thereto;
(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 104. Form of Documents Delivered to Trustee.
--------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
16
<PAGE>
SECTION 105. Acts of Holders.
---------------
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Indenture to be given or taken by
Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and conclusive in favor of the Trustee and the Company, if made in the
manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner that the Trustee deems sufficient.
(c) The principal amount and serial numbers of Notes held by any
Person, and the date of holding the same, shall be proved by the Note Register.
(d) If the Company shall solicit from the Holders of Notes any
request, demand, authorization, direction, notice, consent, waiver or other Act,
the Company may, at its option, by or pursuant to a Board Resolution, fix in
advance a record date for the determination of Holders entitled to give such
request, demand, authorization, direction, notice, consent, waiver or other Act,
but the Company shall have no obligation to do so. Notwithstanding TIA Section
316(c), such record date shall be the record date specified in or pursuant to
such Board Resolution, which shall be a date not earlier than the date 30 days
prior to the first solicitation of Holders generally in connection therewith and
not later than the date such solicitation is completed. If such a record date is
fixed, such request, demand, authorization, direction, notice, consent, waiver
or other Act may be given before or after such record date, but only the Holders
of record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Notes have authorized or agreed or consented to such
request, demand, authorization, direction, notice, consent, waiver or other Act,
and for that purpose the Outstanding Notes shall be computed as of such record
date; provided that no such authorization, agreement or consent by the Holders
--------
on such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than eleven months after
the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee or the Company in
reliance thereon, whether or not notation of such action is made upon such Note.
SECTION 106. Notices, Etc. to Trustee, Company.
---------------------------------
Any request, demand, authorization, direction, notice, consent, waiver
or Act of Holders or other document provided or permitted by this Indenture to
be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be sufficient
for every purpose hereunder if made, given, furnished or filed in writing
to or with the Trustee at its Corporate Trust Office, Attention: Corporate
Trust, 800 East Main Street, 2nd Floor, Richmond, Virginia 23219, or
17
<PAGE>
(2) the Company by the Trustee or by any Holder shall be sufficient
for every purpose hereunder (unless otherwise herein expressly provided) if
in writing and mailed, first-class postage prepaid, to the Company
addressed to it at the address of its principal office specified in the
first paragraph of this Indenture, or at any other address previously
furnished in writing to the Trustee by the Company.
SECTION 107. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice of any event to Holders by
the Company or the Trustee, such notice shall be sufficiently given (unless
otherwise herein expressly provided) if in writing and mailed, first-class
postage prepaid, to each Holder affected by such event, at his address as it
appears in the Note Register, not later than the latest date, and not earlier
than the earliest date, prescribed for the giving of such notice. In any case
where notice to Holders is given by mail, neither the failure to mail such
notice, nor any defect in any notice so mailed, to any particular Holder shall
affect the sufficiency of such notice with respect to other Holders. Any notice
mailed to a Holder in the manner herein prescribed shall be conclusively deemed
to have been received by such Holder, whether or not such Holder actually
receives such notice. Where this Indenture provides for notice in any manner,
such notice may be waived in writing by the Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
In case by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
SECTION 108. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
-------------------
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Notes, express or implied, shall
give to any Person, other than the parties hereto, any Paying Agent, any Notes
Registrar and their successors hereunder, and the Holders, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
-------------
This Indenture and the Notes shall be governed by and construed in
accordance with the law of the State of New York. Upon the issuance of Exchange
Notes, if any, or the effectiveness of the Shelf Registration Statement, this
Indenture will be subject to the provisions of the Trust Indenture Act that are
required to be part of this Indenture and shall, to the extent applicable, be
governed by such provisions. Each of the parties hereto submits to the
jurisdiction of the U.S. federal and any New York state court located in the
Borough of Manhattan, City and State of
18
<PAGE>
New York with respect to any actions brought against it as defendant in any
suit, action or proceeding arising out of or relative to this Indenture or the
Notes and waives any rights to which it may be entitled on account of place of
residence or domicile.
SECTION 113. Legal Holidays.
--------------
In any case where any Interest Payment Date, Redemption Date, sinking
fund payment date or Stated Maturity or Maturity of any Note shall not be a
Business Day, then (notwithstanding any other provision of this Indenture or of
the Notes) payment of principal (or premium, if any) or interest need not be
made on such date, but may be made on the next succeeding Business Day with the
same force and effect as if made on the Interest Payment Date, Redemption Date
or sinking fund payment date, or at the Stated Maturity or Maturity; provided
--------
that no interest shall accrue for the period from and after such Interest
Payment Date, Redemption Date, sinking fund payment date, Stated Maturity or
Maturity, as the case may be.
SECTION 114. 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 Section 114, 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.
ARTICLE TWO
NOTE FORMS
SECTION 201. Forms Generally.
---------------
The Notes and the Trustee's certificate of authentication shall be in
substantially the form annexed hereto as Exhibit A. The Notes may have such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Indenture and may have such letters, numbers or
other marks of identification and such notations, legends or endorsements as may
be required by law, or to comply with the rules of any securities exchange or
agreements to which the Company is subject or as may, consistently herewith, be
determined by the officers executing such Notes, as evidenced by their execution
of the Notes. Any portion of the text of any Note may be set forth on the
reverse thereof, with an appropriate reference thereto on the face of the Note.
The Company shall approve the form of the Notes and any notation, legend or
endorsement on the Notes.
19
<PAGE>
The terms and provisions contained in the form of the Notes annexed
hereto as Exhibit A shall constitute, and are hereby expressly made, a part of
this Indenture. To the extent applicable, the Company and the Trustee, by their
execution and delivery of this Indenture, expressly agree to such terms and
provisions and to be bound thereby.
Initial Notes offered and sold in reliance on Rule 144A shall be
issued initially in the form of one or more permanent global Notes in registered
form, substantially in the form set forth in Exhibit A and contain each of the
legends set forth in Section 202 (the "U.S. Global Note"), registered in the
name of the Depositary or the nominee of the Depositary, deposited with the
Trustee, as custodian for the Depositary, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of the U.S. Global Note may from time to time be increased or decreased
by adjustments made on the records of the Trustee, as custodian for the
Depositary or its nominee, as hereinafter provided.
Initial Notes offered and sold in offshore transactions in reliance on
Regulation S shall be issued initially in the form of a single permanent global
Note in registered form, substantially in the form set forth in Exhibit A (the
"Offshore Global Note"), registered in the name of the Depositary or the nominee
of the Depositary, deposited with the Trustee, as custodian for the Depositary
or its nominee, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. The aggregate principal amount of the Offshore Global Note
may from time to time be increased or decreased by adjustments made in the
records of the Trustee, as custodian for the Depositary or its nominee, as
herein provided. Initial Notes issued pursuant to Section 305 in exchange for or
upon transfer of beneficial interests in the U.S. Global Note or the Offshore
Global Note shall be in the form of U.S. Physical Notes or in the form of
permanent certificated Notes substantially in the form set forth in Exhibit A
(the "Offshore Physical Notes"), respectively as hereinafter provided.
Initial Notes offered and sold other than as described in the
preceding two paragraphs shall be issued in the form of permanent certificated
Notes in registered form substantially in the form set forth in Exhibit A and,
unless sold in a transaction registered under the Securities Act, contain the
Private Placement Legend as set forth in Section 202(a)(i) (the "U.S. Physical
Notes").
The Offshore Physical Notes and U.S. Physical Notes are sometimes
collectively herein referred to as the "Physical Notes". The U.S. Global Note
and the Offshore Global Notes are sometimes collectively referred to as the
"Global Notes".
The definitive Notes shall be printed, lithographed or engraved on
steel-engraved borders or may be produced in any other manner, all as determined
by the officers of the Company executing such Notes, as evidenced by their
execution of such Notes.
Exchange Notes shall be substantially in the form set forth in Exhibit
A.
SECTION 202. Restrictive Legends.
-------------------
(a) Unless and until (x) an Initial Note is sold pursuant to an
effective Shelf Registration Statement or (y) an Initial Note is exchanged for
an Exchange Note in an Exchange Offer pursuant to an effective Exchange Offer
Registration Statement, in each case pursuant to the Registration Rights
Agreement, (A) each such U.S. Global Note and each U.S. Physical Note shall bear
the following legends (the "Private Placement Legend") on the face thereof and
(B) the Offshore Physical Notes and the Offshore Global Note shall bear the
Private Placement Legend on the face thereof until at least 41 days after the
date hereof (the "Offshore Notes Exchange Date") and receipt by the Trustee of a
certificate substantially in the form of Exhibit B hereto:
(i) THE NOTES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR
OTHER SECURITIES
20
<PAGE>
LAWS. NEITHER THIS NOTE NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS NOTE BY ITS ACCEPTANCE HEREOF (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN
RULE 144A UNDER THE SECURITIES ACT ("RULE 144A")) OR (B) IT IS NOT A U.S.
PERSON AND IS ACQUIRING THIS NOTE IN AN "OFFSHORE TRANSACTION" PURSUANT TO
RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT
IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS (OR SUCH SHORTER
PERIOD OF TIME AS PERMITTED BY RULE 144(k) UNDER THE SECURITIES ACT OR ANY
SUCCESSOR PROVISION THEREUNDER) AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF (OR OF ANY PREDECESSOR OF THIS NOTE) OR THE LAST DAY ON WHICH THE
COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS NOTE (OR ANY
PREDECESSOR OF THIS NOTE) AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAW (THE "RESALE RESTRICTION TERMINATION DATE"),
OFFER, SELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE COMPANY, (B)
PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE NOTES ARE ELIGIBLE FOR
RESALE PURSUANT TO RULE 144A INSIDE THE UNITED STATES, TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE
144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE
IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S.
PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF
REGULATION S UNDER THE SECURITIES ACT, PURSUANT TO RULE 904 OF REGULATION S
OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE TO EACH
PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE
EFFECT OF THIS LEGEND; PROVIDED THAT THE COMPANY, THE TRUSTEE, AND
--------
THE REGISTRAR SHALL HAVE THE RIGHT PRIOR TO ANY SUCH OFFER, SALE OR
TRANSFER (I) PURSUANT TO CLAUSE (D) OR (E) TO REQUIRE THE DELIVERY OF AN
OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO
EACH OF THEM, AND (II) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A
CERTIFICATION OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS
NOTE IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS
LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE
RESTRICTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE
TRANSACTION," "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT.
(ii) THE NOTE REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE
PROVISIONS OF A REGISTRATION RIGHTS AGREEMENT BY AND BETWEEN THE COMPANY
AND THE HOLDERS NAMED THEREIN. THE COMPANY WILL FURNISH A COPY OF SUCH
AGREEMENT TO THE RECORD HOLDER OF THIS CERTIFICATE WITHOUT CHARGE UPON
WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE.
(b) Each Global Note, whether or not an Initial Note, shall also bear
the following legend on the face thereof:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR
ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
21
<PAGE>
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 306 AND 307 OF THE INDENTURE.
ARTICLE THREE
THE NOTES
SECTION 301. Titles and Terms.
----------------
The aggregate principal amount of Notes which may be authenticated and
delivered under this Indenture is limited to $275,000,000, except for Notes
authenticated and delivered upon registration of transfer of, or in exchange
for, or in lieu of, other Notes pursuant to Section 303, 304, 305, 308, 906,
1010, 1017 or 1108. The aggregate principal amount of Notes to be authenticated
and delivered under this Indenture on the Closing Date shall be $200,000,000.
With respect to any Additional Notes issued after the Closing Date
(except for Notes authenticated and delivered upon registration of transfer of,
or in exchange for, or in lieu of, other Notes pursuant to Section 303, 304,
305, 308, 906, 1010, 1017 or 1108), there shall be (i) established in or
pursuant to a Board Resolution and (ii) (A) set forth or determined in the
manner provided in an Officer's Certificate or (B) established in one or more
indentures supplemental hereto, prior to the issuance of such Additional Notes:
(1) the aggregate principal amount of such Additional Notes which may
be authenticated or delivered under this Indenture, which shall not be in
an amount which exceeds $75,000,000 (except for Notes authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu
of, other Notes pursuant to Section 303, 304, 305, 308, 906, 1010, 1017 or
1108);
(2) the issue price and issuance date of such Additional Notes,
including the date from which interest on such Additional Notes shall
accrue;
(3) whether the CUSIP number for such Additional Notes shall be the
same as that for the Notes issued on the date hereof;
(4) whether such Additional Notes shall be deemed to be of the same
series as the Notes issued on the date hereof;
(5) if applicable, that such Additional Notes shall be issuable in
whole or in part in the form of one or more Global Notes and, in such case,
the respective depositaries for such Global Notes, the form of any legend
or legends which shall be borne by such Global Notes in addition to or in
lieu of those set forth in Section 202 and any circumstances in addition to
or in lieu of those set forth in Section 307 under which any such Global
Notes may be exchanged in whole or in part for Additional Notes
registered, or any transfer of
22
<PAGE>
such Global Notes in whole or in part may be registered, in the name or
names of Persons other than the depositary for such Global Notes or a
nominee thereof; and
(6) if applicable, that such Additional Notes shall not be issued in
the form of Initial Notes, but shall be issued in the form of Exchange
Notes.
If any of the terms of any Additional Notes are established by action
taken by a Board Resolution, a copy of the appropriate record of such
action shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the
Officer's Certificate or any indenture supplemental hereto setting forth
the terms of such Additional Notes.
The Initial Notes shall be known as the "11-1/4% Senior Notes Due
2009" and the Exchange Notes shall be known as the "11-1/4% Series B Senior
Notes Due 2009," in each case, of the Company. The Stated Maturity of the Notes
shall be January 15, 2009, and the Notes shall bear interest at the rate of
11-1/4% per annum from the Issuance Date, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, payable on
July 15, 1999 and semi-annually thereafter on January 15 and July 15 in each
year and at said Stated Maturity, until the principal thereof is paid or duly
provided for.
The principal of (and premium and Liquidated Damages, if any) and
interest on the Notes shall be payable at the office or agency of the Company
maintained for such purpose in The City of New York, or at such other office or
agency of the Company as may be maintained for such purpose; provided, however,
-------- -------
that, at the option of the Company, interest may be paid by check mailed to
addresses of the Persons entitled thereto as such addresses shall appear on the
Note Register.
The Notes shall be redeemable as provided in Article Eleven.
SECTION 302. Denominations.
-------------
The Notes shall be issuable only in registered form without coupons
and only in denominations of $1,000 and any integral multiple thereof; provided
--------
that Notes issued to a Holder that delivers an Accredited Investor Certificate
pursuant to Section 307 shall be issuable only in registered form without
coupons and only in denominations of $250,000 and any integral multiple of
$1,000 in excess thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Notes shall be executed on behalf of the Company by its Chairman,
its President or a Vice President, and attested by its Secretary, an Assistant
Secretary or any Vice President. The signature of any of these officers on the
Notes may be manual or facsimile signatures of the present or any future such
authorized officer and may be imprinted or otherwise reproduced on the Notes.
Notes bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Notes or did not hold
such offices at the date of such Notes.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Notes executed by the Company to the
Trustee for authentication, together with a Company Order for the authentication
and delivery of such Notes, and the Trustee in accordance with such Company
Order shall authenticate and deliver such Notes.
23
<PAGE>
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Initial Notes executed by the Company to
the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Initial Notes directing the Trustee to
authenticate the Notes and certifying that all conditions precedent to the
issuance of Notes contained herein have been fully complied with, and the
Trustee in accordance with such Company Order shall authenticate and deliver
such Initial Notes. On Company Order, the Trustee shall authenticate for
original issue Exchange Notes in an aggregate principal amount not to exceed
$275,000,000; provided that such Exchange Notes shall be issuable only upon the
--------
valid surrender for cancellation of Initial Notes of a like aggregate principal
amount in accordance with an Exchange Offer pursuant to the Registration Rights
Agreement and a Company Order for the authentication of such securities
certifying that all conditions precedent to the issuance have been complied with
(including the effectiveness of a registration statement related thereto). In
each case, the Trustee shall be entitled to receive an Officer's Certificate and
an Opinion of Counsel of the Company that it may reasonably request in
connection with such authentication of Notes. Such order shall specify the
amount of Notes to be authenticated and the date on which the original issue of
Initial Notes or Exchange Notes is to be authenticated.
Each Note shall be dated the date of its authentication.
No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose unless there appears on such Note a
certificate of authentication substantially in the form provided for in Exhibit
A, duly executed by the Trustee by manual signature of an authorized officer,
and such certificate upon any Note shall be conclusive evidence, and the only
evidence, that such Note has been duly authenticated and delivered hereunder and
is entitled to the benefits of this Indenture.
In case the Company, pursuant to Article Eight, shall be consolidated
or merged with or into any other Person or shall convey, transfer, lease or
otherwise dispose of its properties and assets substantially as an entirety to
any Person, and the successor Person resulting from such consolidation, or
surviving such merger, or into which the Company shall have been merged, or the
Person which shall have received a conveyance, transfer, lease or other
disposition as aforesaid, shall have executed an indenture supplemental hereto
with the Trustee pursuant to Article Eight, any of the Notes authenticated or
delivered prior to such consolidation, merger, conveyance, transfer, lease or
other disposition may, from time to time, at the request of the successor
Person, be exchanged for other Notes executed in the name of the successor
Person with such changes in phraseology and form as may be appropriate, but
otherwise in substance of like tenor as the Notes surrendered for such exchange
and of like principal amount; and the Trustee, upon Company Request of the
successor Person, shall authenticate and deliver Notes as specified in such
request for the purpose of such exchange. If Notes shall at any time be
authenticated and delivered in any new name of a successor Person pursuant to
this Section in exchange or substitution for or upon registration of transfer of
any Notes, such successor Person, at the option of the Holders but without
expense to them, shall provide for the exchange of all Notes at the time
Outstanding for Notes authenticated and delivered in such new name.
SECTION 304. Temporary Note.
--------------
Pending the preparation of definitive Notes, the Company may execute,
and upon Company Order the Trustee shall authenticate and deliver, temporary
Notes which are printed, lithographed, typewritten, mimeographed or otherwise
produced, in any authorized denomination, substantially of the tenor of the
definitive Notes in lieu of which they are issued and with such appropriate
insertions, omissions, substitutions and other variations as the officers
executing such Notes may determine, as conclusively evidenced by their execution
of such Notes.
If temporary Notes are issued, the Company will cause definitive Notes
to be prepared without unreasonable delay. After the preparation of definitive
Notes, the temporary Notes shall be exchangeable for definitive Notes upon
surrender of the temporary Notes at the office or agency of the Company
designated for such purpose pursuant to Section 1002, without charge to the
Holder. Upon surrender for cancellation of any one or more temporary Notes, the
Company shall execute and upon Company Order the Trustee shall authenticate and
deliver in exchange
24
<PAGE>
therefor a like principal amount of definitive Notes of authorized
denominations. Until so exchanged, the temporary Notes shall in all respects be
entitled to the same benefits under this Indenture as definitive Notes.
SECTION 305. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
The Company shall cause to be kept at the Corporate Trust Office of
the Trustee a register (the register maintained in such office and in any other
office or agency designated pursuant to Section 1002 being herein sometimes
referred to as the "Note Register") in which, subject to such reasonable
regulations as it may prescribe, the Company shall provide for the registration
of Notes and of transfers of Notes. The Note Register shall be in written form
or any other form capable of being converted into written form within a
reasonable time. At all reasonable times, the Note Register shall be open to
inspection by the Trustee. The Trustee is hereby initially appointed as security
registrar (the "Note Registrar") for the purpose of registering Notes and
transfers of Notes as herein provided.
Upon surrender for registration of transfer of any Note at the office
or agency of the Company designated pursuant to Section 1002, the Company shall
execute, and upon Company Order the Trustee shall authenticate and deliver, in
the name of the designated transferee or transferees, one or more new Notes of
any authorized denomination or denominations of a like aggregate principal
amount.
At the option of the Holder, Notes may be exchanged for other Notes of
any authorized denomination and of a like aggregate principal amount, upon
surrender of the Notes to be exchanged at such office or agency. Whenever any
Notes are so surrendered for exchange, the Company shall execute, and upon
Company Order the Trustee shall authenticate and deliver, the Notes which the
Holder making the exchange is entitled to receive; provided that no exchange of
--------
Initial Notes for Exchange Notes shall occur until an Exchange Offer
Registration Statement shall have been declared effective by the Commission, the
Trustee shall have received an Officer's Certificate confirming that the
Exchange Offer Registration Statement has been declared effective by the
Commission and that the Initial Notes to be exchanged for the Exchange Notes
shall be canceled by the Trustee.
All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Company, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or
for exchange shall be duly endorsed and be accompanied by a written instrument
of transfer, in form satisfactory to the Company and the Note Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Section 304, 906, 1010, 1017 or 1108 not involving any
transfer.
The Company shall not be required (i) to issue, register the transfer
of or exchange any Note during a period beginning at the opening of business 15
days before the selection of Notes to be redeemed under Section 1104 and ending
at the close of business on the day of such mailing of the relevant notice of
redemption, or (ii) to register the transfer of or exchange any Note so selected
for redemption in whole or in part, except the unredeemed portion of any Note
being redeemed in part.
SECTION 306. Book-Entry Provisions for Global Notes.
--------------------------------------
(a) Each Global Note initially shall (i) be registered in the name of
the Depositary for such Global Note or the nominee of such Depositary, (ii) be
delivered to the Trustee as custodian for such Depositary and (iii) bear legends
as set forth in Section 202.
25
<PAGE>
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note held on
their behalf by the Depositary, or the Trustee as its custodian, or under the
Global Note, and the Depositary may be treated by the Company, the Trustee and
any agent of the Company or the Trustee as the absolute owner of such Global
Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein
shall prevent the Company, the Trustee or any agent of the Company or the
Trustee, from giving effect to any written certification, proxy or other
authorization furnished by the Depositary or shall impair, as between the
Depositary and its Agent Members, the operation of customary practices governing
the exercise of the rights of a holder of any Note.
(b) Transfers of a Global Note shall be limited to transfers of such
Global Note in whole, but not in part, to the Depositary, its successors or
their respective nominees, except (i) as otherwise set forth in Section 307 and
(ii) U.S. Physical Notes or Offshore Physical Notes shall be transferred to all
beneficial owners in exchange for their beneficial interests in the U.S. Global
Note or the Offshore Global Note, respectively, in the event that the Depositary
notifies the Company that it is unwilling or unable to continue as Depositary
for the applicable Global Note or the Depositary ceases to be a "Clearing
Agency" registered under the Exchange Act and a successor depositary is not
appointed by the Company within 90 days. Interests of beneficial owners in a
Global Note may be transferred in accordance with the rules and procedures of
the Depositary and the provisions of Section 307. In connection with the
transfer of an entire Global Note to beneficial owners pursuant to clause (ii)
of this paragraph (b), the applicable Global Note shall be deemed to be
surrendered to the Trustee for cancellation, and the Company shall execute, and
the Trustee shall authenticate and deliver, to each beneficial owner identified
by the Depositary in exchange for its beneficial interest in the applicable
Global Note, an equal aggregate principal amount at maturity of U.S. Physical
Notes (in the case of the U.S. Global Note) or Offshore Physical Notes (in the
case of the Offshore Global Note), as the case may be, of authorized
denominations.
(c) Any beneficial interest in one of the Global Notes that is
transferred to a Person who takes delivery in the form of an interest in the
other Global Note will, upon transfer, cease to be an interest in such Global
Note and become an interest in the other Global Note and, accordingly, will
thereafter be subject to all transfer restrictions, if any, and other procedures
applicable to beneficial interests in such other Global Note for as long as it
remains such an interest.
(d) Any U.S. Physical Note delivered in exchange for an interest in
the U.S. Global Note pursuant to paragraph (b) of this Section shall, unless
such change is made on or after the Resale Restriction Termination Date and
except as otherwise provided in Section 307, bear the Private Placement Legend.
(e) The registered holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.
SECTION 307. Transfer Provisions.
-------------------
Unless and until (i) an Initial Note is sold pursuant to an effective
Registration Statement, or (ii) an Initial Note is exchanged for an Exchange
Note in the Exchange Offer pursuant to an effective Registration Statement, in
each case, pursuant to the Registration Rights Agreement, the following
provisions shall apply:
(a) General. The provisions of this Section 307 shall apply to all
-------
transfers involving any Physical Note and any beneficial interest in any
Global Note.
(b) Certain Definitions. As used in this Section 307 only, "delivery"
-------------------
of a certificate by a transferee or transferor means the delivery to the
Note Registrar by such transferee or transferor of the applicable
certificate duly completed; "holding" includes both possession of a
Physical Note and ownership of a beneficial
26
<PAGE>
interest in a Global Note, as the context requires; "transferring" a Global
Note means transferring that portion of the principal amount of the
transferor's beneficial interest therein that the transferor has notified
the Note Registrar that it has agreed to transfer; and "transferring" a
Physical Note means transferring that portion of the principal amount
thereof that the transferor has notified the Note Registrar that it has
agreed to transfer.
As used in this Indenture, "Accredited Investor Certificate" means a
certificate substantially in the form set forth in Exhibit C; "Regulation S
Certificate" means a certificate substantially in the form set forth in
Exhibit D; "Rule 144A Certificate" means a certificate substantially in the
form set forth in Exhibit E; and "Non-Registration Opinion and Supporting
Evidence" means a written opinion of counsel reasonably acceptable to the
Company to the effect that, and such other certification or information as
the Company may reasonably require to confirm that, the proposed transfer
is being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act.
(c) [Intentionally Omitted]
(d) Deemed Delivery of a Rule 144A Certificate in Certain
-----------------------------------------------------
Circumstances. A Rule 144A Certificate, if not actually delivered, will be
-------------
deemed delivered if (A) (i) the transferor advises the Company and the
Trustee in writing that the relevant offer and sale were made in accordance
with the provisions of Rule 144A (or, in the case of a transfer of a
Physical Note, the transferor checks the box provided on the Physical Note
to that effect) and (ii) the transferee advises the Company and the Trustee
in writing that (x) it and, if applicable, each account for which it is
acting in connection with the relevant transfer, is a qualified
institutional buyer within the meaning of Rule 144A, (y) it is aware that
the transfer of Notes to it is being made in reliance on the exemption from
the provisions of Section 5 of the Securities Act provided by Rule 144A,
and (z) if at any time the Company is not subject to Section 13 or 15(d) of
the Exchange Act, prior to the proposed date of transfer the transferee has
been given the opportunity to obtain from the Company the information
referred to in Rule 144A(d)(4), and has either declined such opportunity or
has received such information (or, in the case of a transfer of a Physical
Note, the transferee signs the certification provided on the Physical Note
to that effect); or (B) the transferor holds the U.S. Global Note and is
transferring to a transferee that will take delivery in the form of the
U.S. Global Note.
(e) Procedures and Requirements.
---------------------------
1) if the proposed transfer occurs prior to the Offshore Notes
Exchange Date, and the proposed transferor holds:
(A) a U.S. Physical Note which is surrendered to the
Note Registrar, and the proposed transferee or transferor, as
applicable:
(i) delivers an Accredited Investor Certificate and,
if required by the Company, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have
delivered pursuant to clause (d) above) a Rule 144A
Certificate and the proposed transferee requests delivery in
the form of a U.S. Physical Note, then the Note Registrar
shall (x) register such transfer in the name of such
transferee and record the date thereof in its books and
records, (y) cancel such surrendered U.S. Physical Note and
(z) deliver a new U.S. Physical Note to such transferee duly
registered in the name of such transferee in principal
amount equal to the principal amount being transferred of
such surrendered U.S. Physical Note;
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the
proposed transferee is or is acting through an Agent member
and requests that the proposed transferee receive a
beneficial interest in the
27
<PAGE>
U.S. Global Note, then the Note Registrar shall (x) cancel
such surrendered U.S. Physical Note, (y) record an increase
in the principal amount of the U.S. Global Note equal to the
principal amount being transferred of such surrendered U.S.
Physical Note and (z) notify the Depositary in accordance
with the procedures of the Depositary that it approves of
such transfer; or
(iii) delivers a Regulation S Certificate and the
proposed transferee is or in acting through an Agent Member
and requests that the proposed transferee receive a
beneficial interest in the Offshore Global Note, then the
Note Registrar shall (x) cancel such surrendered U.S.
Physical Note, (y) record an increase in the principal
amount of the Offshore Global Note equal to the principal
amount being transferred of such surrendered U.S. Physical
Note and (z) notify the Depositary in accordance with the
procedures of the Depositary that it approves of such
transfer.
In any of the cases described in this Section 307(e)(1)(A),
the Note Registrar shall deliver to the transferor a new U.S.
Physical Note in principal amount equal to the principal amount
not being transferred of such surrendered U.S. Physical Note, as
applicable.
(B) an interest in the U.S. Global Note, and the
proposed transferee or transferor, as applicable:
(i) delivers an Accredited Investor Certificate
and, if required by the Company, a Non-Registration
Opinion and Supporting Evidence, or delivers (or is
deemed to have delivered pursuant to clause (d) above)
a Rule 144A Certificate and the proposed transferee
requests delivery in the form of a U.S. Physical Note,
then the Note Registrar shall (w) register such
transfer in the name of such transferee and record the
date thereof in its books and records, (x) record a
decrease in the principal amount of the U.S. Global
Note in an amount equal to the beneficial interest
therein being transferred, (y) deliver a new U.S.
Physical Note to such transferee duly registered in the
name of such transferee in principal amount equal to
the amount of such decrease and (z) notify the
Depositary in accordance with the procedures of the
Depositary that it approves of such transfer;
(ii) delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate
and the proposed transferee is or is acting through an
Agent Member and requests that the proposed transferee
receive a beneficial interest in the U.S. Global Note,
then the transfer shall be effected in accordance with
the procedures of the Depositary therefor; or
(iii) delivers a Regulation S Certificate and the
proposed transferee is or is acting through an Agent
Member and requests that the proposed transferee
receive a beneficial interest in the Offshore Global
Note, then the Note Registrar shall (w) register such
transfer in the name of such transferee and record the
date thereof in its books and records, (x) record a
decrease in the principal amount of the U.S. Global
Note in an amount equal to the beneficial interest
therein being transferred, (y) record an increase in
the principal amount of the Offshore Global Note equal
to the amount of such decrease and (z) notify the
Depositary in accordance with the procedures of the
Depositary that it approves of such transfer.
28
<PAGE>
(C) an interest in the Offshore Global Note, and the
proposed transferee or transferor, as applicable:
(i) delivers an Accredited Investor Certificate
and, if required by the Trust, a Non-Registration
Opinion and Supporting Evidence delivers (or is deemed
to have delivered pursuant to clause (d) above) a Rule
144A Certificate and the proposed transferee requests
delivery in the form of a U.S. Physical Note, then the
Note Registrar shall (w) register such transfer in the
name of such transferee and record the date thereof in
its books and records, (x) record a decrease in the
principal amount of the Offshore Global Note in an
amount equal to the beneficial interest therein being
transferred, (y) deliver a new U.S. Physical Note to
such transferee duly registered in the name of such
transferee in principal amount equal to the amount of
such decrease and (z) notify the Depositary in
accordance with the procedures of the Depositary that
it approves of such transfer.
(ii) delivers (or is deemed to have delivered
pursuant to clause (d) above) a Rule 144A Certificate
and the proposed transferee is or is acting through an
Agent Member and requests that the proposed transferee
receive a beneficial interest in the U.S. Global Note,
then the Note Registrar shall (x) record a decrease in
the principal amount of the Offshore Global Note in an
amount equal to the beneficial interest therein being
transferred, (y) record an increase in the principal
amount of the U.S. Global Note equal to the amount of
such decrease and (z) notify the Depositary in
accordance with the procedures of the Depositary that
it approves of such transfer; or
(iii) delivers a Regulation S Certificate and the
proposed transferee is or is acting through an Agent
Member and requests that the proposed transferee
receive a beneficial interest in the Offshore Global
Note, then the transfer shall be effected in accordance
with the procedures of the Depositary therefor;
provided, however, that until the Offshore Note
-------- -------
Exchange Date occurs, beneficial interests in the
Offshore Global Note may be held only in or through
accounts maintained at the Depositary by Euroclear or
Cedel (or by Agent Members acting for the account
thereof), and no person shall be entitled to effect any
transfer or exchange that would result in any such
interest being held otherwise than in or through such
an account.
2) If the proposed transfer occurs on or after the Offshore
Note Exchange Date and the proposed transferor holds:
(A) a U.S. Physical Note which is surrendered to the Note
Registrar, and the proposed transferee or transferor, as
applicable:
(i) delivers an Accredited Investor Certificate and,
if required by the Company, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have
delivered pursuant to clause (d) above) a Rule 144A
Certificate and the proposed transferee requests delivery in
the form of a U.S. Physical Note, then the procedures set
forth in Section 307(e)(1)(A)(i) shall apply.
29
<PAGE>
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the
proposed transferee is or is acting through an Agent Member
and requests that the proposed transferee receive a
beneficial interest in the Offshore Global Note, then the
procedures set forth in Section 307(e)(1)(A)(ii) shall
apply; or
(iii) delivers a Regulation S Certificate, then the
Note Registrar shall cancel such surrendered U.S. Physical
Note and at the direction of the transferee, either:
(x) register such transfer in the name of such
transferee, record the date thereof in its books and
records and deliver a new Offshore Physical Note to
such transferee in principal amount equal to the
principal amount being transferred of such surrendered
U.S. Physical Note, or
(y) if the proposed transferee is or is acting
through an Agent Member, record an increase in the
principal amount of the Offshore Global Note equal to
the principal amount being transferred of such
surrendered U.S. Physical Note and notify the
Depositary in accordance with the procedures of the
Depositary that it approves of such transfer.
In any of the cases described in this Section
307(e)(2)(A)(i), (ii) or (iii)(x), the Note Registrar shall
deliver to the transferor a new U.S. Physical Note in principal
amount equal to the principal amount not being transferred of
such surrendered U.S. Physical Note, as applicable.
(B) an interest in the U.S. Global Note, and the proposed
transferee or transferor, as applicable:
(i) delivers an Accredited Investor Certificate and,
if required by the Company, a Non-Registration Opinion and
Supporting Evidence, or delivers (or is deemed to have
delivered pursuant to clause (d) above) a Rule 144A
Certificate and the proposed transferee requests delivery in
the form of a U.S. Physical Note, then the procedures set
forth in Section 307(e)(1)(A)(i) shall apply; or
(ii) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the
proposed transferee is or is acting through an Agent Member
and requests that the proposed transferee receive a
beneficial interest in the U.S. Global Note, then the
procedures set forth in Section 307(e)(1)(B)(ii) shall
apply; or
(iii) delivers a Regulation S Certificate, then the
Note Registrar shall (x) record a decrease in the principal
amount of the U.S. Global Note in an amount equal to the
beneficial interest therein being transferred, (y) notify
the Depositary in accordance with the procedures of the
Depositary that it approves of such transfer and (z) at the
direction of the transferee, either:
(x) register such transfer in the name of such
transferee, record the date thereof in its books and
records and deliver a new Offshore Physical Note to
such transferee in principal amount equal to the amount
of such decrease, or
30
<PAGE>
(y) if the proposed transferee is or is acting
through an Agent Member, record an increase in the
principal amount of the Offshore Global Note equal to
the amount of such decrease.
(C) an Offshore Physical Note which is surrendered to the
Note Registrar, and the proposed transferee or transferor or, as
applicable:
(i) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the
proposed transferee is or is acting through an Agent Member
and requests delivery in the form of the U.S. Global Note,
then the Note Registrar shall (x) cancel such surrendered
Offshore Physical Note, (y) record an increase in the
principal amount of the U.S. Global Note equal to the
principal amount being transferred of such surrendered
Offshore Physical Note and (z) notify the Depositary in
accordance with the procedures of the Depositary that it
approves of such transfer;
(ii) where the proposed transferee is or is acting
through an Agent Member, requests that the proposed
transferee receive a beneficial interest in the Offshore
Global Note, then the Note Registrar shall (x) cancel such
surrendered Offshore Physical Note, (y) record an increase
in the principal amount of the Offshore Global Note equal to
the principal amount being transferred of such surrendered
Offshore Physical Note and (z) notify the Depositary in
accordance with the procedures of the Depositary that it
approves of such transfer; or
(iii) does not make a request covered by Section
307(e)(2)(C)(i) or Section 307(e)(2)(C)(ii), then the Note
Registrar shall (x) register such transfer in the name of
such transferee and record the date thereof in its books and
records, (y) cancel such surrendered Offshore Physical Note
and (z) deliver a new Offshore Physical Note to such
transferee duly registered in the name of such transferee in
principal amount equal to the principal amount being
transferred of such surrendered Offshore Physical Note.
In any of the cases described in this Section
307(e)(2)(C), the Note Registrar shall deliver to the
transferor a new U.S. Physical Note in principal amount
equal to the principal amount not being transferred of such
surrendered U.S. Physical Note, as applicable.
(D) an interest in the Offshore Global Note, and the
proposed transferee or transferor, as applicable:
(i) delivers (or is deemed to have delivered pursuant
to clause (d) above) a Rule 144A Certificate and the
proposed transferee is or is acting through an Agent Member
and requests delivery in the form of the U.S. Global Note,
then the Note Registrar shall (x) record a decrease in the
principal amount of the Offshore Global Note in an amount
equal to the beneficial interest therein being transferred,
(y) record an increase in the principal amount of the U.S.
Global Note equal to the amount of such decrease and (z)
notify the Depositary in accordance with the procedures of
the Depositary that it approves of such transfer;
31
<PAGE>
(ii) where the proposed transferee is or is acting
through an Agent Member, requests that the proposed
transferee receive a beneficial interest in the Offshore
Global Note, then the transfer shall be effected in
accordance with the procedures of the Depositary therefor,
or
(iii) does not make a request covered by Section
307(e)(2)(D)(i) or Section 307(e)(2)(D)(ii), then the Note
Registrar shall (w) register such transfer in the name of
such transferee and record the date thereof in its books and
records, (x) record a decrease in the principal amount of
the Offshore Global Note in an amount equal to the
beneficial interest therein being transferred, (y) deliver a
new Offshore Physical Note to such transferee duly
registered in the name of such transferee in principal
amount equal to the amount of such decrease and (z) notify
the Depositary in accordance with the procedures of the
Depositary that it approves of such transfer.
(f) Execution, Authentication and Delivery of Physical Notes.
--------------------------------------------------------
In any case in which the Note Registrar is required to deliver a
Physical Note to a transferee or transferor, the Company shall
execute, and the Trustee shall authenticate and make available for
delivery, such Physical Note.
(g) Certain Additional Terms Applicable to Physical Notes. Any
-----------------------------------------------------
transferee entitled to receive a Physical Note may request that the
principal amount thereof be evidenced by one or more Physical Notes in
any authorized denomination or denominations the Note Registrar shall
comply with such request if all other transfer restrictions are
satisfied.
(h) Transfers Not Covered by Section 307(e). The Note Registrar
---------------------------------------
shall effect and record, upon receipt of a written request from the
Company so to do, a transfer not otherwise permitted by Section
307(e), such recording to be done in accordance with the otherwise
applicable provisions of Section 307(e), upon the furnishing by the
proposed transferor or transferee of a Non-Registration Opinion and
Supporting Evidence.
(i) General. By its acceptance of any Note bearing the Private
-------
Placement Legend, each Holder of such Note acknowledges the
restrictions on transfer of such Note set forth in this Indenture and
in the Private Placement Legend and agrees that it will transfer such
Note only as provided in the Indenture. The Note Registrar shall not
register a transfer of any Note unless such transfer complies with the
restrictions with respect thereto set forth in this Indenture. The
Note Registrar shall not be required to determine (but may rely upon a
determination made by the Company) the sufficiency or accuracy of any
such certifications, legal opinions, other information or document.
(j) Private Placement Legend. Upon the transfer, exchange or
------------------------
replacement of Notes not bearing the Private Placement Legend, the
Note Registrar shall deliver Notes that do not bear the Private
Placement Legend. Upon the transfer, exchange or replacement of Notes
bearing the Private Placement Legend, the Note Registrar shall deliver
only Notes that bear the Private Placement Legend unless (i) the
circumstances exist contemplated by the fourth paragraph of Section
201 (with respect to an Offshore Physical Note) or the requested
transfer is at least two years after the original issue date of the
Initial Note (with respect to any Physical Note), (ii) there is
delivered to the Note Registrar an Opinion of Counsel reasonably
satisfactory to the Company and the Trustee to the effect that neither
such legend nor the related restrictions on transfer are required in
order to maintain compliance with the provisions of the Act or (iii)
such Notes are exchanged for Exchange Notes pursuant to an Exchange
Offer.
32
<PAGE>
SECTION 308. Mutilated, Destroyed, Lost and Stolen Notes.
-------------------------------------------
If (i) any mutilated Note is surrendered to the Trustee, or (ii) the
Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Note, and there is delivered to the Company
and the Trustee such security or indemnity as may be required by them to save
each of them harmless, then, in the absence of written notice to the Company or
the Trustee that such Note has been acquired by a bona fide purchaser, the
Company shall execute and upon Company Order the Trustee shall authenticate and
deliver, in exchange for any such mutilated Note or in lieu of any such
destroyed, lost or stolen Note, a new Note of like tenor and principal amount,
bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 308, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and shall require
the payment of a sum sufficient to pay any other expenses (including the fees
and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section 308 in lieu of any
mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated,
destroyed, lost or stolen Note shall be at any time enforceable by anyone, and
shall be entitled to all benefits of this Indenture equally and proportionately
with any and all other Notes duly issued hereunder.
The provisions of this Section 308 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 309. Payment of Interest; Interest Rights Preserved.
----------------------------------------------
Interest on any Note which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name such Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest at the office or agency of
the Company maintained for such purpose pursuant to Section 1002; provided,
--------
however, that each installment of interest may at the Company's option be paid
- -------
by (i) mailing a check for such interest, payable to or upon the written order
of the Person entitled thereto pursuant to Section 310, to the address of such
Person as it appears in the Note Register or (ii) transferring the interest
payment to an account located in the United States maintained by the payee.
Any interest on any Note which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date shall forthwith cease to be
payable to the Holder on the Regular Record Date by virtue of having been such
Holder, and such defaulted interest and (to the extent lawful) interest on such
defaulted interest at the rate borne by the Notes (such defaulted interest and
interest thereon herein collectively called "Defaulted Interest") may be paid by
the Company, at its election in each case, as provided in clause (1) or (2)
below:
(1 The Company may elect to make payment of any Defaulted Interest
to the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Note and the date
of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of money equal to the aggregate amount proposed
to be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Company, with the written consent of the
Trustee, shall fix a Special Record Date for the payment of such Defaulted
Interest which shall be not more than 15 days
33
<PAGE>
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee, in the name and at the expense of the
Company, shall cause notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor to be given in the manner
provided for in Section 106, not less than 10 days prior to such Special
Record Date. Notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor having been so given, such Defaulted
Interest shall be paid to the Persons in whose names the Notes (or their
respective Predecessor Notes) are registered at the close of business on
such Special Record Date and shall no longer be payable pursuant to the
following clause (2).
(2 The Company may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any
securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange, if, after notice given by the Company
to the Trustee of the proposed payment pursuant to this clause, such manner
of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest accrued and
unpaid, and to accrue, which were carried by such other Note.
SECTION 310. Persons Deemed Owners.
---------------------
Prior to the due presentment of a Note for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name such Note is registered as the owner of such Note for
the purpose of receiving payment of principal of (and premium, if any) and
(subject to Sections 305 and 309) interest on such Note and for all other
purposes whatsoever, whether or not such Note be overdue, and none of the
Company, the Trustee or any agent of the Company or the Trustee shall be
affected by notice to the contrary.
SECTION 311. Cancellation.
------------
All Notes surrendered for payment, redemption, registration of
transfer or exchange shall, if surrendered to any Person other than the Trustee,
be delivered to, and promptly cancelled by, the Trustee. The Company may at any
time deliver to the Trustee for cancellation any Notes previously authenticated
and delivered hereunder which the Company may have acquired in any manner
whatsoever, and may deliver to the Trustee (or to any other Person for delivery
to the Trustee) for cancellation any Notes previously authenticated hereunder
which the Company has not issued and sold, and all Notes so delivered shall be
promptly cancelled by the Trustee. If the Company shall so acquire any of the
Notes, however, such acquisition shall not operate as a redemption or
satisfaction of the indebtedness represented by such Notes unless and until the
same are surrendered to the Trustee for cancellation. No Notes shall be
authenticated in lieu of or in exchange for any Notes cancelled as provided in
this Section, except as expressly permitted by this Indenture. All cancelled
Notes held by the Trustee shall be disposed of by the Trustee in accordance with
its customary procedures and certification of their disposal delivered to the
Company unless by Company Order the Company shall direct that cancelled Notes be
returned to it after being appropriately designated as cancelled.
SECTION 312. Computation of Interest.
-----------------------
Interest on the Notes shall be computed on the basis of a 360-day year
of twelve 30-day months.
SECTION 313. CUSIP Numbers.
-------------
The Company in issuing the Notes may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption or other notices to Holders as a convenience to Holders; provided
--------
that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Notes or as contained in
the notice of redemption and that reliance may be placed only on the other
34
<PAGE>
identification numbers and other identifying information printed on the Notes,
and any such redemption shall not be affected by any defect in or omission of
such numbers. The Company will promptly notify the Trustee of any change in the
CUSIP numbers.
In the event that the Company shall issue and the Trustee shall
authenticate any Additional Notes pursuant to this Indenture, the Company shall
use its best efforts to obtain the same CUSIP number for such Additional Notes
as is printed on the Notes outstanding at such time; provided, however, that if
any series of Additional Notes is determined, pursuant to an Opinion of Counsel,
to be a different class of security than the Notes outstanding at such time for
federal income tax purposes, the Company may obtain a CUSIP number for such
series of Additional Notes that is different from the CUSIP number printed on
the Notes then outstanding, in which event such Additional Notes shall be deemed
to be a different series from the Notes issued on the date hereof.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall upon Company Request cease to be of further
effect (except as to surviving rights of registration of transfer or exchange of
Notes expressly provided for herein or pursuant hereto) and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture when
(1 either
(a all Notes theretofore authenticated and delivered (other
than (i) Notes which have been destroyed, lost or stolen and which
have been replaced or paid as provided in Section 308 and (ii) Notes
for whose payment money has theretofore been deposited in trust with
the Trustee or any Paying Agent or segregated and held in trust by the
Company and thereafter repaid to the Company or discharged from such
trust, as provided in Section 1003) have been delivered to the Trustee
for cancellation; or
(b all such Notes not theretofore delivered to the Trustee for
cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated Maturity
within one year, or
(iii) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name, and at the expense, of
the Company,
and the Company, in the case of (i), (ii) or (iii) above, has
irrevocably deposited or caused to be deposited with the Trustee as
trust funds in trust for such purpose an amount sufficient to pay and
discharge the entire indebtedness on such Notes not theretofore
delivered to the Trustee for cancellation, for principal (and premium,
if any) and interest and Liquidated Damages, if any, to the date of
such deposit (in the case of Notes which have become due and payable)
or to the Stated Maturity or Redemption Date, as the case may be,
together with irrevocable instructions from the Company directing the
Trustee to apply such funds to the payment thereof at Stated Maturity
or redemption, as the case may be;
35
<PAGE>
(2) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(3) the Company has delivered to the Trustee an Officer's Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 606 and, if money shall
have been deposited with the Trustee pursuant to subclause (b) of clause (1) of
this Section, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
--------------------------
On or prior to the effective date of this Indenture, the Trustee shall
establish a segregated, non-interest bearing corporate trust account (the
"Payment Account") maintained by the Trustee for the benefit of the Holders in
which all amounts paid to the Trustee for the benefit of the Holders in respect
of the Notes will be held and from which the Trustee (if the Trustee is the
Paying Agent) shall make payments to the Holders in accordance with this
Indenture and the Notes. Subject to the provisions of the last paragraph of
Section 1003, all money deposited with the Trustee pursuant to Section 401 and
otherwise pursuant to this Indenture shall be held in trust and applied by it,
in accordance with the provisions of the Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Persons
entitled thereto, of the principal (and premium, if any) and interest for whose
payment such money has been deposited with the Trustee.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
-----------------
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(1) default in the payment of interest or Liquidated Damages, if any,
on any Note when due and payable and continuance of such default for a
period of 30 days; or
(2) default in the payment of principal of (or premium, if any, on)
any Note at its Stated Maturity, upon acceleration, redemption or
otherwise; or
(3) default in the payment of principal or interest or Liquidated
Damages, if any, on any Note required to be purchased pursuant to an Excess
Proceeds Offer as set forth in Section 1017 or pursuant to a Change of
Control Offer as set forth in Section 1010; or
(4) failure to perform or comply with the provisions in Section 801;
or
(5) default in the performance or breach of any covenant or agreement
of the Company in this Indenture or under the Notes (other than a default
in the performance, or breach, of a covenant or agreement
36
<PAGE>
which is specifically dealt with elsewhere in this Section), and
continuance of such default or breach for a period of 30 consecutive days
after there has been given, by registered or certified mail, to the Company
by the Trustee or to the Company and the Trustee by the Holders of at least
25% in principal amount of the Outstanding Notes a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(6) 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;
or
(7) 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 (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; or
(8) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of the Company or any of its Significant
Subsidiaries in an involuntary case under any applicable bankruptcy,
insolvency or other similar law now or hereafter in effect, (B) appointment
of a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official of the Company or any of its Significant Subsidiaries or
for all or substantially all of the property and assets of the Company or
any of its Significant Subsidiaries or (C) the winding up or liquidation of
the affairs of the Company or any of its Significant Subsidiaries and, in
each case, such decree or order shall remain unstayed and in effect for a
period of 30 consecutive days; or
(9) 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 502. Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default (other than an Event of Default specified in
Section 501(8) or 501(9)) occurs and is continuing, then and in every such case
the Trustee or the Holders of not less than 25% in principal amount of the Notes
Outstanding may, and the Trustee at the request of such Holders shall, declare
the principal of, premium, if any, and accrued but unpaid interest and
Liquidated Damages, if any, on all the Notes to be due and payable immediately,
by a notice in writing to the Company (and to the Trustee if given by Holders),
and upon any such declaration of acceleration, such principal of, premium, if
any, and accrued interest and Liquidated Damages, if any, shall become
immediately due and payable. If an Event of Default specified in Section 501(8)
or 501(9) occurs, then the principal amount of, premium, if any, and accrued
interest and Liquidated Damages, if any, 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.
37
<PAGE>
At any time after a declaration of acceleration has been made, the
Holders of a majority in principal amount of the Notes Outstanding, by written
notice to the Company and the Trustee, may waive all past defaults and rescind
and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay,
(A) all overdue interest and Liquidated Damages on all
Outstanding Notes,
(B) all unpaid principal of (and premium, if any, on) any
Outstanding Notes which has become due otherwise than by such
declaration of acceleration, and interest on such unpaid principal at
the rate borne by the Notes,
(C) to the extent that payment of such interest is lawful,
interest on overdue interest at the rate borne by the Notes, and
(D) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, fees, expenses, disbursements and advances of
the Trustee, its agents and counsel and any amounts due the Trustee
under Section 606;
(2) all Events of Default, other than the non-payment of amounts of
principal of (or premium, if any, on) and accrued and unpaid interest and
Liquidated Damages, if any, on the Notes which have become due solely by
such declaration of acceleration, have been cured or waived as provided in
Section 513; and
(3) the recission, in the Opinion of Counsel, would not conflict with
any judgment or decree of a court of competent jurisdiction.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event of a declaration
of acceleration in respect of the Notes because of an Event of Default specified
in Section 501(6) shall have occurred and be continuing, such declaration of
acceleration shall be automatically rescinded annulled if the Indebtedness that
is the subject of such Event of Default has been discharged or the holders
thereof have rescinded their declaration of acceleration in respect of such
Indebtedness, and written notice of such discharge or rescission, as the case
may be, shall have been given to the Trustee by the Company and countersigned by
the holders of such Indebtedness or a trustee, fiduciary or agent for such
holders, within 60 days after such declaration of acceleration in respect of the
Notes, and no other Event of Default has occurred during such 60-day period
which has not been cured or waived during such period.
SECTION 503. Collection of Indebtedness and Suits for Enforcement by
-------------------------------------------------------
Trustee.
- -------
The Company covenants that if
(a) default is made in the payment of any installment of interest and
Liquidated Damages, if any, on any Note when such interest becomes due and
payable and such default continues for a period of 30 days, or
(b) default is made in the payment of the principal of (or premium,
if any, on) any Note at the Maturity thereof,
the Company will pay to the Trustee for the benefit of the Holders of such
Notes, the whole amount then due and payable on such Notes for principal (and
premium and Liquidated Damages, if any) and interest, and interest on any
overdue principal (and premium, if any) and, to the extent that payment of such
interest shall be legally enforceable, upon any overdue installment of interest
and Liquidated Damages, if any, at the rate borne by the Notes, and, in addition
38
<PAGE>
thereto, such further amount as shall be sufficient to cover the costs and
expenses of collection, including the reasonable compensation, fees expenses,
disbursements and advances of the Trustee, its agents and counsel and any
amounts due the Trustee under Section 606.
If the Company fails to pay such amounts forthwith upon such demand,
the Trustee, in its own name as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon the Notes and collect the moneys
adjudged or decreed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon the Notes, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in
its discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem most
effectual to protect and enforce any such rights, whether for the specific
enforcement of any covenant or agreement in this Indenture or in aid of the
exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the Notes
or the property of the Company or of such other obligor or their creditors, the
Trustee (irrespective of whether the principal of the Notes shall then be due
and payable as therein expressed or by declaration or otherwise and irrespective
of whether the Trustee shall have made any demand on the Company for the payment
of overdue principal, premium, if any, interest or Liquidated Damages, if any)
shall be entitled and empowered, by intervention in such proceeding or
otherwise,
(i) to file and prove a claim for the whole amount of principal (and
premium and Liquidated Damages, if any) and interest owing and unpaid in
respect of the Notes and to file such other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee
(including any claim for the reasonable compensation, fees, expenses,
disbursements and advances of the Trustee, its agents and counsel and any
amounts due the Trustee under Section 606) and of the Holders allowed in
such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
similar official in any such judicial proceeding is hereby authorized by each
Holder to make such payments to the Trustee and, in the event that the Trustee
shall consent to the making of such payments directly to the Holders, to pay the
Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 606.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Notes or
the rights of any Holder thereof, or to authorize the Trustee to vote in respect
of the claim of any Holder in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of Notes.
------------------------------------------------------
All rights of action and claims under this Indenture or the Notes may
be prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name and as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, fees, expenses,
39
<PAGE>
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Notes in respect of which such judgment
has been recovered.
SECTION 506. Application of Money Collected.
------------------------------
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal (or premium,
if any, or Liquidated Damages, if any) or interest, upon presentation of the
Notes and the notation thereon of the payment if only partially paid and upon
surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
606;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium and Liquidated Damages, if any) and interest on the
Notes in respect of which or for the benefit of which such money has been
collected, ratably, without preference or priority of any kind, according to the
amounts due and payable on such Notes for principal (and premium and Liquidated
Damages, if any) and interest, respectively; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
SECTION 507. Limitation on Suits.
-------------------
Except to enforce the right to receive payment of principal or,
premium, if any, or interest or Liquidated Damages, if any, when due, no Holder
of any Notes shall have any right to institute any proceeding, judicial or
otherwise, with respect to this Indenture, or for the appointment of a receiver
or trustee, or for any other remedy hereunder, unless:
(1) such Holder has previously given written notice to the Trustee of
a continuing Event of Default;
(2) such Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the
remedy;
(3) such Holder or Holders offer the Trustee indemnity satisfactory
to the Trustee against any costs, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(5) 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;
it being understood and intended that no one or more Holders shall have any
right in any manner whatever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
----------------------------------------------------
Premium and Interest.
- --------------------
Notwithstanding any other provision in this Indenture, the Holder of
any Note shall have the right, which is absolute and unconditional, to receive
payment, as provided herein (including, if applicable, Article Thirteen) and in
such Note of the principal of (and premium and Liquidated Damages, if any) and
(subject to Section 309) interest
40
<PAGE>
on such Note on the respective Stated Maturities expressed in such Note (or, in
the case of redemption, on the Redemption Date) and to institute suit for the
enforcement of any such payment, and such rights shall not be impaired without
the consent of such Holder.
SECTION 509. Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce
any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of
Section 308, no right or remedy herein conferred upon or reserved to the Trustee
or to the Holders is intended to be exclusive of any other right or remedy, and
every right and remedy shall, to the extent permitted by law, be cumulative and
in addition to every other right and remedy given hereunder or now or hereafter
existing at law or in equity or otherwise. The assertion or employment of any
right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other appropriate right or remedy.
SECTION 511. Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Note to
exercise any right or remedy accruing upon any Event of Default shall impair any
such right or remedy or constitute a waiver of any such Event of Default or an
acquiescence therein. Every right and remedy given by this Article or by law to
the Trustee or to the Holders may be exercised from time to time, and as often
as may be deemed expedient, by the Trustee or by the Holders, as the case may
be.
SECTION 512. Control by Holders.
------------------
The Holders of not less than a majority in principal amount of the
Outstanding Notes shall have the right to 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, provided that
--------
(1) such direction shall not be in conflict with any rule of law or
with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve it in
personal liability or which, in the good faith determination of the
Trustee, may be unjustly prejudicial to the Holders not consenting.
SECTION 513. Waiver of Past Defaults.
-----------------------
The Holders of not less than a majority in principal amount of the
Outstanding Notes may on behalf of the Holders of all the Notes waive any past
default hereunder and its consequences, except a default
(1) in respect of the payment of the principal of (or premium or
Liquidated Damages, if any) or interest on any Note, or
41
<PAGE>
(2) in respect of a covenant or provision hereof which under Article
Nine cannot be modified or amended without the consent of the Holder of
each Outstanding Note affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or Event of Default or impair any right consequent thereon.
SECTION 514. Waiver of Stay or Extension Laws.
--------------------------------
The Company covenants (to the extent that it may lawfully do so) that
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law wherever enacted,
now or at any time hereafter in force, which may affect the covenants or the
performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such law
and covenants that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
ARTICLE SIX
THE TRUSTEE
SECTION 601. Notice of Defaults.
------------------
Within 90 days after the occurrence of any Default hereunder, the
Trustee shall transmit in the manner and to the extent provided in TIA Section
313(c), notice of such Default hereunder actually known to the corporate trust
officer having responsibility for the administration of this Indenture on behalf
of the Trustee, unless such Default shall have been cured or waived; provided,
--------
however, that, except in the case of a Default in the payment of the principal
- -------
of (or premium, if any) or interest on any Note, the Trustee shall be protected
in withholding such notice if and so long as the board of directors, the
executive committee or a trust committee of directors and/or Responsible
Officers of the Trustee in good faith determines that the withholding of such
notice is in the interest of the Holders; and provided further that in the case
-------- -------
of any Default of the character specified in Section 501(6), no such notice to
Holders shall be given until at least 30 days after the corporate trust officer
having responsibility for the administration of this Indenture on behalf of
Trustee has actual knowledge of the occurrence thereof.
In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
his or her own affairs.
SECTION 602. Certain Rights of Trustee.
-------------------------
Subject to the provisions of TIA Sections 315(a) through 315(d):
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document believed by it to be genuine and to have been signed or presented
by the proper party or parties;
(2) any request or direction of the Company mentioned herein shall be
sufficiently evidenced by a Company Request or Company Order and any
resolution of the Board of Directors may be sufficiently evidenced by a
Board Resolution;
42
<PAGE>
(3) whenever in the administration of this Indenture the Trustee
shall deem it desirable that a matter be proved or established prior to
taking, suffering or omitting any action hereunder, the Trustee (unless
other evidence be herein specifically prescribed) may, in the absence of
bad faith on its part, rely upon an Officer's Certificate;
(4) the Trustee may consult with counsel and the written advice of
such counsel or any Opinion of Counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in reliance thereon;
(5) the Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction
of any of the Holders pursuant to this Indenture, unless such Holders shall
have offered to the Trustee reasonable security or indemnity against the
costs, expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(6) the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent, order,
bond, debenture, note, other evidence of indebtedness or other paper or
document, but the Trustee, in its discretion, may make such further inquiry
or investigation into such facts or matters as it may see fit, and, if the
Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the
Company, personally or by agent or attorney;
(7) the Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by
it hereunder;
(8) the Trustee shall not be liable for any action taken, suffered or
omitted by it in good faith and believed by it to be authorized or within
the discretion or rights or powers conferred upon it by this Indenture; and
(9) the Trustee shall have no duty to inquire as to the performance
of the Company's covenants herein.
The Trustee shall not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
hereunder, or in the exercise of any of its rights or powers if it shall have
reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
SECTION 603. Trustee Not Responsible for Recitals or Issuance of
---------------------------------------------------
Notes.
- -----
The recitals contained herein and in the Notes, except for the
Trustees certificates of authentication, shall be taken as the statements of the
Company, and the Trustee assumes no responsibility for their correctness. The
Trustee makes no representations as to the validity or sufficiency of this
Indenture or of the Notes, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Notes and
perform its obligations hereunder and that the statements made by it in a
Statement of Eligibility on Form T-1 supplied to the Company are true and
accurate, subject to the qualifications set forth therein. The Trustee shall not
be accountable for the use or application by the Company of Notes or the
proceeds thereof.
43
<PAGE>
SECTION 604. May Hold Notes.
--------------
The Trustee, any Paying Agent, any Note Registrar or any other agent
of the Company or of the Trustee, in its individual or any other capacity, may
become the owner or pledgee of Notes and, subject to TIA Sections 310(b) and
311, may otherwise deal with the Company with the same rights it would have if
it were not Trustee, Paying Agent, Note Registrar or such other agent.
SECTION 605. Money Held in Trust.
-------------------
Money held by the Trustee in trust hereunder shall be segregated from
other funds. The Trustee shall be under no liability for interest on any money
received by it hereunder.
SECTION 606. Compensation and Reimbursement.
------------------------------
The Company agrees:
(1) to pay to the Trustee from time to time reasonable compensation
for all services rendered by it hereunder (which compensation shall not be
limited by any provision of law in regard to the compensation of a trustee
of an express trust);
(2) except as otherwise expressly provided herein, to reimburse the
Trustee upon its request for all reasonable expenses, disbursements and
advances incurred or made by the Trustee in accordance with any provision
of this Indenture (including the reasonable compensation and the expenses
and disbursements of its agents, accountants, experts and counsel), except
any such expense, disbursement or advance as may be attributable to its
gross negligence or bad faith; and
(3) to indemnify the Trustee and each of its officers, directors,
employees, attorneys-in-fact and agents for, and to hold it harmless
against, any claim, demand, loss, liability or expense (including but not
limited to reasonable compensation, disbursements and expenses of the
Trustee's agents and counsel) incurred without gross negligence or bad
faith on its part, arising out of or in connection with the offering and
sale of the Notes, or the acceptance or administration of this trust,
including the costs and expenses of defending itself against any claim or
liability in connection with the exercise or performance of any of its
powers or duties hereunder and enforcing this indemnification provision.
The obligations of the Company under this Section to compensate the
Trustee, to pay or reimburse the Trustee for expenses, disbursements and
advances and to indemnify and hold harmless the Trustee shall constitute
additional indebtedness hereunder and shall survive the satisfaction and
discharge of this Indenture. As security for the performance of such obligations
of the Company, the Trustee shall have a claim prior to the Notes upon all
property and funds held or collected by the Trustee as such, except funds held
in trust for the payment of principal of (and premium, if any) or interest on
particular Notes.
When the Trustee incurs expenses or renders services in connection
with an Event of Default specified in Section 501(8) or (9), the expenses
(including the reasonable charges and expenses of its counsel) of and the
compensation for such services are intended to constitute expenses of
administration under any applicable Federal or State bankruptcy, insolvency or
other similar law.
The provisions of this Section shall survive the resignation or
removal of the Trustee or the termination of this Indenture.
SECTION 607. Corporate Trustee Required; Eligibility.
---------------------------------------
There shall be at all times a Trustee hereunder which shall be
eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined
capital and surplus of at least $50,000,000. If such corporation publishes
44
<PAGE>
reports of condition at least annually, pursuant to law or to the requirements
of Federal, State, territorial or District of Columbia supervising or examining
authority, then for the purposes of this Section, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published. If at
any time the Trustee shall cease to be eligible in accordance with the
provisions of this Section 607, it shall resign immediately in the manner and
with the effect hereinafter specified in this Article.
SECTION 608. Resignation and Removal; Appointment of Successor.
-------------------------------------------------
(a) No resignation or removal of the Trustee and no appointment of a
successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of Section 609.
(b) The Trustee may resign at any time by giving written notice
thereof to the Company. If the instrument of acceptance by a successor Trustee
required by Section 609 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of
not less than a majority in principal amount of the Outstanding Notes, delivered
in writing to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of TIA
Section 310(b) after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six months,
or
(2) the Trustee shall cease to be eligible under Section 607 and
shall fail to resign after written request therefor by the Company or by
any Holder who has been a bona fide Holder of a Note for at least six
months, or
(3) the Trustee shall become incapable of acting or shall be adjudged
a bankrupt or insolvent or a receiver of the Trustee or of its property
shall be appointed or any public officer shall take charge or control of
the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by a Board Resolution, may remove the
Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona
fide Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Company, by a Board Resolution, shall promptly appoint a successor Trustee. If,
within one year after such resignation, removal or incapability, or the
occurrence of such vacancy, a successor Trustee shall be appointed by Act of the
Holders of a majority in principal amount of the Outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment, become the successor Trustee
and supersede the successor Trustee appointed by the Company. If no successor
Trustee shall have been so appointed by the Company or the Holders and accepted
appointment in the manner hereinafter provided, any Holder who has been a bona
fide Holder of a Note for at least six months may, on behalf of himself and all
others similarly situated, petition any court of competent jurisdiction for the
appointment of a successor Trustee.
45
<PAGE>
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
Holders of Notes in the manner provided for in Section 106. Each notice shall
include the name of the successor Trustee and the address of its Corporate Trust
Office.
SECTION 609. Acceptance of Appointment by Successor.
--------------------------------------
Every successor Trustee appointed hereunder shall execute, acknowledge
and deliver to the Company and to the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the retiring
Trustee shall become effective and such successor Trustee, without any further
act, deed or conveyance, shall become vested with all the rights, powers, trusts
and duties of the retiring Trustee; but, on request of the Company or the
successor Trustee, such retiring Trustee shall, upon payment of its charges,
execute and deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and shall duly assign,
transfer and deliver to such successor Trustee all property and money held by
such retiring Trustee hereunder. Upon request of any such successor Trustee, the
Company shall execute any and all instruments for more fully and certainly
vesting in and confirming to such successor Trustee all such rights, powers and
trusts.
No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article.
SECTION 610. Merger, Conversion, Consolidation or Succession to
--------------------------------------------------
Business.
- --------
Any corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
corporation succeeding to all or substantially all of the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes. In case at
that time any of the Notes shall not have been authenticated, any successor
Trustee may authenticate such Notes either in the name of any predecessor
hereunder or in the name of the successor Trustee. In all such cases such
certificates shall have the full force and effect which this Indenture provides
for the certificate of authentication of the Trustee shall have; provided,
--------
however, that the right to adopt the certificate of authentication of any
- -------
predecessor Trustee or to authenticate Notes in the name of any predecessor
Trustee shall apply only to its successor or successors by merger, conversion or
consolidation.
ARTICLE SEVEN
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Disclosure of Names and Addresses of Holders.
--------------------------------------------
Every Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that none of the Company or the Trustee or any agent
of either of them shall be held accountable by reason of the disclosure of any
such information as to the names and addresses of the Holders in accordance with
TIA Section 312, regardless of the source from which such information was
derived, and that the Trustee shall not be held accountable by reason of mailing
any material pursuant to a request made under TIA Section 312(b).
46
<PAGE>
SECTION 702. Reports by Trustee.
------------------
Within 60 days after May 15 of each year commencing with the first May
15 after the first issuance of Notes, the Trustee shall transmit to the Holders,
in the manner and to the extent provided in TIA Section 313(c), a brief report
dated as of such May 15 if required by TIA Section 313(a).
SECTION 703. Reports by Company.
------------------
The Company shall:
(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual reports
and of the information, documents and other reports (or copies of such
portions of any of the foregoing as the Commission may from time to time by
rules and regulations prescribe) which the Company may be required to file
with the Commission pursuant to Section 13 or Section 15(d) of the Exchange
Act; or, if the Company is not required to file information, documents or
reports pursuant to either of said Sections, then it shall file with the
Trustee and the Commission, in accordance with rules and regulations
prescribed from time to time by the Commission, such of the supplementary
and periodic information, documents and reports which may be required
pursuant to Section 13 of the Exchange Act in respect of a security listed
and registered on a national securities exchange as may be prescribed from
time to time in such rules and regulations;
(2) file with the Trustee and the Commission, in accordance with
rules and regulations prescribed from time to time by the Commission, such
additional information, documents and reports with respect to compliance by
the Company with the conditions and covenants of this Indenture as may be
required from time to time by such rules and regulations; and
(3) transmit by mail to all Holders, in the manner and to the extent
provided in TIA Section 313(c), within 30 days after the filing thereof
with the Trustee, such summaries of any information, documents and reports
required to be filed by the Company pursuant to paragraphs (1) and (2) of
this Section as may be required by rules and regulations prescribed from
time to time by the Commission.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms.
----------------------------------------------------
The Company shall not consolidate with, merge with or into, or sell,
convey, transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company and the Company will not permit any of
its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in the sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company or the Company and its Restricted Subsidiaries, taken as a whole, to any
other Person or Persons, unless:
(1) either (A), the Company shall be the continuing Person, or (B)
the Person (if other than the Company) formed by such consolidation or into
which the Company is merged or the Person which acquires by conveyance or
transfer, or which leases, the properties and assets of the Company
substantially as an entirety (i) shall be a corporation, partnership (in
the case of a partnership, together with a corporate co-obligor) or trust
organized and validly existing under the laws of the United States of
America or any jurisdiction thereof and (ii) shall expressly assume, by a
supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the Company's obligation for the due and
punctual payment of
47
<PAGE>
the principal of (and premium and Liquidated Damages, if any) and interest
on all Notes and the performance and observance of every covenant of the
Indenture on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction (and treating
any Indebtedness which becomes an obligation of the Company or a Restricted
Subsidiary in connection with or as a result of such transaction as having
been incurred at the time of such transaction), no Default or Event of
Default shall have occurred and be continuing;
(3) 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 Section 1011; and
(4) the Company or such Person shall have delivered to the Trustee an
Officer's Certificate (attaching the arithmetic computations to demonstrate
compliance with clause (3) above) and an Opinion of Counsel, each stating
that such consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture complies with this Article and that all
conditions precedent provided for herein relating to such transaction have
been complied with; provided, however, that clause (3) above does not apply
-------- -------
if, in the good faith determination of the Board of Directors of the
Company, whose determination shall be conclusive and 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 802. Successor Substituted.
---------------------
Upon any consolidation of the Company with or merger of the Company
with or into any other corporation or any conveyance, transfer or lease of the
properties and assets of the Company substantially as an entirety to any Person
in accordance with Section 801, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture with the
same effect as if such successor Person had been named as the Company herein,
and in the event of any such conveyance or transfer, the Company (which term
shall for this purpose mean the Person named as the "Company" in the first
paragraph of this Indenture or any successor Person which shall theretofore
become such in the manner described in Section 801), except in the case of a
lease, shall be discharged of all obligations and covenants under this Indenture
and the Notes and may be dissolved and liquidated.
SECTION 803. Notes to Be Secured in Certain Events.
-------------------------------------
If, upon any such consolidation of the Company with or merger of the
Company into any other corporation, or upon any conveyance, lease or transfer of
the property of the Company substantially as an entirety to any other Person,
any property or assets of the Company would thereupon become subject to any
Lien, then unless such Lien could be created pursuant to Section 1016 without
equally and ratably securing the Notes, the Company, prior to or simultaneously
with such consolidation, merger, conveyance, lease or transfer, will as to such
property or assets, secure the Notes Outstanding (together with, if the Company
shall so determine any other Indebtedness of the Company now existing or
hereinafter created which is not subordinate in right of payment to the Notes)
equally and ratably with (or prior to) the Indebtedness which upon such
consolidation, merger, conveyance, lease or transfer is to become secured as to
such property or assets by such Lien, or will cause such Notes to be so secured.
48
<PAGE>
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
--------------------------------------------------
Without the consent of any Holders, the Company, when authorized by a
Board Resolution, and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
contained herein and in the Notes; or
(2) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company; or
(3) to add any additional Events of Default; or
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of Section
609; or
(5) to cure any ambiguity, to correct or supplement any provision
herein which may be inconsistent with any other provision herein, or to
make any other provisions with respect to matters or questions arising
under this Indenture; provided, that such action shall not adversely affect
--------
the interests of the Holders in any material respect; or
(6) to secure the Notes pursuant to the requirements of Section 803
or Section 1016 or otherwise, or
(7) to provide for the issuance of Additional Notes; provided that
--------
such issuance shall otherwise be in accordance with the terms of the
Indenture, including Section 1011.
SECTION 902. Supplemental Indentures with Consent of Holders.
-----------------------------------------------
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Notes, by Act of said Holders
delivered to the Company and the Trustee, the Company, when authorized by a
Board Resolution, and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders under this Indenture;
provided, however, that no such supplemental indenture shall, without the
- --------- -------
consent of the Holder of each Outstanding Note affected thereby:
(1) change the Stated Maturity of the principal of or any installment
of interest on any Note, or reduce the principal amount thereof (or premium
or Liquidated Damages, if any) or the rate of interest thereon or change
the coin or currency in which any Note or any premium or the interest
thereon is payable or extend the time for the payment of interest, or alter
the redemption provisions of, any Note, or 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 redemption, on or after the Redemption Date) of any Note, or
(2) reduce the percentage in principal amount of the Outstanding
Notes, the consent of whose Holders is required for any such supplemental
indenture, or the consent of whose Holders is required for any
49
<PAGE>
waiver of compliance with certain provisions of this Indenture or certain
defaults hereunder and their consequences provided for in this Indenture,
or
(3) waive a default in the payment of principal of (or premium, if
any) or accrued and unpaid interest or Liquidated Damages, if any, on the
Notes, or
(4) modify any provision of any Guarantees of the Notes in a manner
adverse to the Holders, or
(5) modify any of the provisions of this Section or Sections 513 and
Section 1022, except to increase any such percentage or to provide that
certain other provisions of this Indenture cannot be modified or waived
without the consent of the Holder of each Outstanding Note affected
thereby.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION 903. Execution of Supplemental Indentures.
------------------------------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article or the modifications thereby of
the trusts created by this Indenture, the Trustee shall be entitled to receive,
and shall be fully protected in relying upon, an Opinion of Counsel stating that
the execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustees own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
---------------------------------
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of Notes theretofore or thereafter authenticated and delivered hereunder shall
be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
-----------------------------------
Every supplemental indenture executed pursuant to the Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 906. Reference in Notes to Supplemental Indentures.
---------------------------------------------
Notes authenticated and delivered after the execution of any
supplemental indenture pursuant to this Article may, and shall if required by
the Trustee, bear a notation in form approved by the Trustee as to any matter
provided for in such supplemental indenture. If the Company shall so determine,
new Notes so modified as to conform, in the opinion of the Trustee and the
Company, to any such supplemental indenture may be prepared and executed by the
Company and upon Company Order authenticated and delivered by the Trustee in
exchange for Outstanding Notes.
SECTION 907. Notice of Supplemental Indentures.
---------------------------------
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to the provisions of Section 902, the Company
shall give notice thereof to the Holders of each Outstanding Note affected, in
the manner provided for in Section 106, setting forth in general terms the
substance of such supplemental indenture.
50
<PAGE>
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, and Interest.
---------------------------------------------------
The Company covenants and agrees for the benefit of the Holders that
it will duly and punctually pay the principal of (and premium, if any) and
interest and Liquidated Damages, if any, on the Notes in accordance with the
terms of the Notes and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
-------------------------------
The Company will maintain in The City of New York, an office or agency
(which may be a drop facility) where Notes may be presented or surrendered for
payment, where Notes may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Company in respect of the Notes and
this Indenture may be served. The Company will give prompt written notice to
the Trustee of any change in the location of any such office or agency. If at
any time the Company shall fail to maintain any such required office or agency
or shall fail to furnish the Trustee with the address thereof, such
presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Company hereby appoints the
Trustee as its agent to receive all such presentations, surrenders, notices and
demands.
The Company may also from time to time designate one or more other
offices or agencies (in or outside of The City of New York) where the Notes may
be presented or surrendered for any or all such purposes and may from time to
time rescind any such designation; provided, however, that no such designation
-------- -------
or rescission shall in any manner relieve the Company of its obligation to
maintain an office or agency in The City of New York for such purposes. The
Company will give prompt written notice to the Trustee of any such designation
or rescission and any change in the location of any such other office or agency.
The Company hereby designates the Trustee, c/o First Union National Bank, 40
Broad Street, Fifth Floor, Suite 550, New York, New York 10004 as such drop
facility in compliance with this Section 1002.
SECTION 1003. Money for Note Payments to Be Held in Trust.
-------------------------------------------
If the Company shall at any time act as its own Paying Agent, it will,
on or before each due date of the principal of (or premium or Liquidated
Damages, if any) or interest on any of the Notes, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal of (or premium or Liquidated Damages, if any) or interest so becoming
due until such sums shall be paid to such Persons or otherwise disposed of as
herein provided and will promptly notify the Trustee in writing of its action or
failure so to act.
Whenever the Company shall have one or more Paying Agents for the
Notes, it will, on or before each due date of the principal of (or premium or
Liquidated Damages, if any) or interest on any Notes, deposit with a Paying
Agent a sum sufficient to pay the principal (and premium and Liquidated Damages,
if any) or interest so becoming due, such sum to be held in trust for the
benefit of the Persons entitled to such principal, premium, Liquidated Damages
or interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee in writing of such action or any failure so to act.
The Company will cause each Paying Agent (other than the Trustee) to
execute and deliver to the Trustee an instrument in which such Paying Agent
shall agree with the Trustee, subject to the provisions of this Section, that
such Paying Agent will:
(1) hold all sums held by it for the payment of the principal of (and
premium and Liquidated Damages, if any) or interest on Notes in trust for
the benefit of the Persons entitled thereto until such sums shall be paid
to such Persons or otherwise disposed of as herein provided;
51
<PAGE>
(2) give the Trustee notice of any default by the Company (or any
other obligor upon the Notes) in the making of any payment of principal
(and premium and Liquidated Damages, if any) or interest on the Notes; and
(3) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so
held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same terms as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Any money deposited with the Trustee or any Paying Agent, or then held
by the Company, in trust for the payment of the principal of (or premium or
Liquidated Damages, if any) or interest on any Note and remaining unclaimed for
two years after such principal, premium, Liquidated Damages or interest has
become due and payable shall be paid to the Company on Company Request, or (if
then held by the Company) shall be discharged from such trust; and the Holder of
such Note shall thereafter, as an unsecured general creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
-------- -------
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Company.
SECTION 1004. Corporate Existence.
-------------------
Subject to Article Eight, the Company will do or cause to be done all
things necessary to preserve and keep in full force and effect the corporate
existence, rights (charter and statutory) and franchises of the Company and each
Subsidiary; provided, however, that the Company shall not be required to
-------- -------
preserve any such right or franchise if the Board of Directors shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of the Company and its Subsidiaries as a whole and that the loss
thereof is not disadvantageous in any material respect to the Holders.
SECTION 1005. Payment of Taxes and Other Claims.
---------------------------------
The Company will pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (a) all taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary or
upon the income, profits or property of the Company or any Subsidiary and (b)
all lawful claims for labor, materials and supplies, which, if unpaid, might by
law become a Lien upon the property of the Company or any Subsidiary; provided,
--------
however, that the Company shall not be required to pay or discharge or cause to
- -------
be paid or discharged any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings.
52
<PAGE>
SECTION 1006. Maintenance of Properties.
-------------------------
The Company will cause all properties owned by the Company or any
Subsidiary or used or held for use in the conduct of its business or the
business of any Subsidiary to be maintained and kept in good condition, repair
and working order and supplied with all necessary equipment and will cause to be
made all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times; provided, however, that nothing in this Section shall
-------- -------
prevent the Company from discontinuing the maintenance of any of such properties
if such discontinuance is, in the judgment of the Company, desirable in the
conduct of its business or the business of any Subsidiary and not
disadvantageous in any material respect to the Holders.
SECTION 1007. Insurance.
---------
The Company will at all times keep all of its and its Subsidiaries
properties which are of an insurable nature insured with insurers, believed by
the Company to be responsible, against loss or damage to the extent that
property of similar character is usually so insured by corporations similarly
situated and owning like properties.
SECTION 1008. Statement by Officers As to Default.
-----------------------------------
(a) The Company will deliver to the Trustee, within 90 days after the
end of each fiscal year, a brief certificate from the principal executive
officer, principal financial officer or principal accounting officer as to his
or her knowledge of the Company's compliance with all conditions and covenants
under this Indenture. For purposes of this Section 1008(a), such compliance
shall be determined without regard to any period of grace or requirement of
notice under this Indenture.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of the Company or any Subsidiary gives any notice or takes any
other action with respect to a claimed default (other than with respect to
Indebtedness in the principal amount of less than $1,000,000), the Company shall
deliver to the Trustee by registered or certified mail or by telegram, telex or
facsimile transmission an Officer's Certificate specifying such event, notice or
other action within five Business Days of its occurrence.
(c) When any Registration Default (as defined in the Registration
Rights Agreement) occurs, the Company shall promptly deliver to the Trustee by
registered or certified mail or by telegram, telex or facsimile transmission an
Officer's Certificate specifying the nature of such Registration Default. In
addition, the Company shall deliver to the Trustee on each Interest Payment Date
during the continuance of a Registration Default and on the Interest Payment
Date following the cure of a Registration Default, an Officer's Certificate
specifying the amount of Liquidated Damages which have accrued and which are
then owing under the Registration Rights Agreement.
SECTION 1009. Provision of Financial Statements.
---------------------------------
(a) 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 shall include the geographic segment financial information
contemplated by Item 101(d) of Regulation S-K under the Securities Act/SFAS 14,
and all such quarterly reports shall provide the same type of interim financial
information that, as of the date of this Indenture, currently is the Company's
practice to provide.
(b) The Company will also be required (i) 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 (ii) if filing such reports and documents with the
53
<PAGE>
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 1010. Repurchase of Notes upon a Change of Control.
--------------------------------------------
(a) 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 and Liquidated Damages, if any, 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") in accordance with the
procedures set forth in paragraphs (c) and (e) of this Section.
(b) [Intentionally Omitted]
(c) Within 30 days following any Change of Control, the Company shall
give to each Holder of the Notes and the Trustee in the manner provided in
Section 106 a notice stating:
(i) that a Change of Control has occurred, that the Change of Control
Offer is being made pursuant to this Section 1010 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 and
Liquidated Damages, if any, pursuant to its terms;
(iv) that, unless the Company defaults in the payment of the Change
of Control Payment, any Note accepted for payment pursuant to the Change of
Control Offer shall cease to accrue interest and Liquidated Damages, if
any, 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 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.
(d) [Intentionally Omitted]
(e) 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;
54
<PAGE>
(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 Officer's 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 Section 1010, the Trustee shall act as Paying Agent.
The Company will comply with Rule l4e-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 Section 1010.
SECTION 1011. Limitation on Indebtedness.
--------------------------
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the $200,000,000 of Original
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 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 or (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 or a Restricted Subsidiary after
the Closing Date (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 (as determined in good
faith by the Board of Directors, whose determination shall be conclusive
and evidenced by a Board Resolution) 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,
55
<PAGE>
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 May 18, 1998 from the issuance and sale of its Capital 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) or (vii) of the second
paragraph of Section 1012 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 May 18, 1998 from the issuance or sale of its Capital
Stock (other than Redeemable Stock) to a Person that is not a Subsidiary of
the Company to the extent such sale of Capital Stock has not been used
pursuant to clauses (iii), (iv) or (vii) of the second paragraph of Section
1012 to make a 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
56
<PAGE>
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 set
forth in Article Thirteen;
(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 Section 1018;
(ix) Indebtedness of the Company or any Restricted Subsidiary not
otherwise permitted hereunder in an aggregate principal amount which, 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 Section 1011, the
maximum amount of Indebtedness that the Company or a Restricted Subsidiary may
Incur pursuant to this Section 1011 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 Section 1011, 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 Section 1011, 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 1012. 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 other than a Restricted Subsidiary, (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;
57
<PAGE>
(B) the Company could not Incur at least $1.00 of Indebtedness under
paragraph (a) of Section 1011; 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
paragraph (b) of Section 1011) plus (3) the aggregate Net Cash Proceeds
----
received after the Closing Date 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 Section 1011;
(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
Section 1011);
(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 (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 Section 1011);
(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 this Indenture
applicable to mergers, consolidations and transfers of all or substantially
all of the property and assets of the Company;
58
<PAGE>
(vi) cash payments in lieu of the issuance of fractional shares
issued in connection with the exercise of any Common Stock warrants;
(vii) Investments in Permitted Businesses acquired in exchange for
Capital Stock (other than Redeemable Stock) of the Company or the Net Cash
Proceeds from the issuance and sale of such Capital Stock (except to the
extent such proceeds are used to incur new Indebtedness pursuant to clause
(v) of paragraph (b) of Section 1011); 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 Section 1010; 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.
Each Restricted Payment permitted pursuant to the immediately
preceding paragraph (other than (1) a Restricted Payment referred to in clause
(ii) thereof, (2) an exchange of Capital Stock for Capital Stock or an exchange
of Indebtedness for Capital Stock referred to in clauses (iii) or (iv) thereof
or (3) an Investment referred to in clause (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 Section 1012 have been met with respect to any
subsequent Restricted Payments.
SECTION 1013. 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;
59
<PAGE>
(iii) existing under or by reason of applicable law;
(iv) existing with respect to any Person or the property or assets of
such Person acquired by the Company or any Restricted Subsidiary, existing
at the time of such acquisition and not incurred in contemplation thereof,
which encumbrances or restrictions are not applicable to any Person or the
property or assets of any Person other than such Person or the property or
assets of such Person so acquired;
(v) in the case of clause (iv) of the first paragraph of this Section
1013, (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 Section 1013 shall
prevent the Company or any Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted in
Section 1016 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 1014. 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 Section 1017, (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 Section
1012 if made on the date of such issuance, transfer, conveyance, sale, lease or
other disposition (valued as provided in the definition of "Investment").
SECTION 1015. 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,
60
<PAGE>
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 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 Section 1012; (iv) transactions
provided for in the Employment Agreement 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 1016. 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 1017. 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, shall 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 Section 1017. The amount of such Net Cash Proceeds
required to be applied (or to be
61
<PAGE>
committed to be applied) during such 360-day period in the manner as set forth
in clause (i) of 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, (i) use such Excess Proceeds to make an offer to
purchase the 11-3/4% Senior Notes due 2004 of the Company in accordance with the
terms of such Indebtedness which require such a purchase offer and do not
provide for proration of the amount of such Indebtedness to be purchased with
such Exceeds Proceeds (the "1997 Senior Notes Offer") and (ii) to the extent
Excess Proceeds remain after such offer is consummated, 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 remaining after application pursuant to the 1997
Senior Notes Offer, 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").
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
Section 1017 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 remaining after application pursuant to the
1997 Senior Notes Offer;
(ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and
62
<PAGE>
(iii) deliver, or cause to be delivered, to the Trustee all Notes or
portions thereof so accepted together with an Officer's 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 upon Company Order, 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 Section 1017, the Trustee shall act as the Paying Agent.
The Company will comply with Rule l4e-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 Section 1017 and the Company is required to repurchase
Notes as described above.
SECTION 1018. 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 Section 1011, unless (i) such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Guarantee of the Notes on terms
substantially similar to the guarantee of such Indebtedness, except that if such
Indebtedness is by its express terms subordinated in right of payment to the
Notes, any such assumption, Guarantee or other liability of such Restricted
Subsidiary with respect to such Indebtedness shall be subordinated in right of
payment to such Restricted Subsidiary's assumption, Guarantee of other liability
with respect to the Notes substantially to the same extent as such Indebtedness
is subordinated to the Notes and (ii) such Restricted Subsidiary waives, and
will not in any manner whatsoever claim or take the benefit or advantage of, any
rights of reimbursement, indemnity or subrogation or any other rights against
the Company or any other Restricted Subsidiary as a result of any payment by
such Restricted Subsidiary under its Guarantee.
Notwithstanding the foregoing, any Guarantee by a Restricted
Subsidiary may provide by its terms that it will be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any 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 1019. 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.
SECTION 1020. 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 Section 1012. 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
63
<PAGE>
(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 1021. Termination of TresCom Facility.
-------------------------------
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than fees and expenses which
accrue by the terms of the TresCom Facility) under the TresCom Facility and the
Company will cause the TresCom Facility to be terminated as soon as practicable.
SECTION 1022. Waiver of Certain Covenants.
---------------------------
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Section 803 or Sections 1007 through
1022, inclusive, if before or after the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Notes, by Act of such
Holders, waive such compliance in such instance with such term, provision or
condition, but no such waiver shall extend to or affect such term, provision or
condition except to the extent so expressly waived, and, until such waiver shall
become effective, the obligations of the Company and the duties of the Trustee
in respect of any such term, provision or condition shall remain in full force
and effect.
ARTICLE ELEVEN
REDEMPTION OF NOTES
SECTION 1101. Right of Redemption.
-------------------
(a) The Notes may be redeemed, at the election of the Company, as a
whole or from time to time in part, at any time on or after January 15, 2004,
subject to the conditions and at the Redemption Prices specified in the Notes,
together with accrued interest to the Redemption Date.
(b) Notwithstanding the foregoing, prior to January 15, 2002, the
Company may redeem up to 35% of the originally issued aggregate principal amount
of the Notes on one or more occasions with the Net Cash Proceeds of one or more
Public Equity Offerings at a redemption price equal to 111.25% of the aggregate
principal amount thereof, plus accrued interest, if any, and Liquidated Damages,
if any, 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); provided that, immediately after giving effect to such
--------
redemption, at least 65% of the originally issued aggregate principal amount of
the Notes remains Outstanding; and provided further that notice of such
-------- -------
redemptions shall be given within 60 days of the date of closing of any such
Public Equity Offering.
SECTION 1102. Applicability of Article.
------------------------
Redemption of Notes at the election of the Company or otherwise, as
permitted or required by any provision of this Indenture, shall be made in
accordance with such provision and this Article.
SECTION 1103. Election to Redeem Notice to Trustee.
------------------------------------
The election of the Company to redeem any Notes pursuant to Section
1101 shall be evidenced by a Board Resolution. In case of any redemption at the
election of the Company, the Company shall, at least 60 days prior to the
Redemption Date fixed by the Company (unless a shorter notice shall be
satisfactory to the Trustee), notify the
64
<PAGE>
Trustee of such Redemption Date and of the principal amount of Notes to be
redeemed and shall deliver to the Trustee such documentation and records as
shall enable the Trustee to select the Notes to be redeemed pursuant to Section
1104.
SECTION 1104. Selection by Trustee of Notes to Be Redeemed.
--------------------------------------------
If less than all the Notes are to be redeemed, the particular Notes to
be redeemed shall be selected not more than 60 days prior to the Redemption Date
by the Trustee, from the Outstanding Notes not previously called for redemption,
in compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are listed, if the Notes are not listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions of the principal of Notes; provided,
--------
however, that no such partial redemption shall reduce the portion of the
- -------
principal amount of a Note not redeemed to less than $1,000.
The Trustee shall promptly notify the Company in writing of the Notes
selected for redemption and, in the case of any Notes selected for partial
redemption, the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to redemption of Notes shall relate, in the
case of any Note redeemed or to be redeemed only in part, to the portion of the
principal amount of such Note which has been or is to be redeemed.
SECTION 1105. Notice of Redemption.
--------------------
Notice of redemption shall be given in the manner provided for in
Section 106 not less than 30 nor more than 60 days prior to the Redemption Date,
to each Holder of Notes to be redeemed.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price and the amount of accrued interest to the
Redemption Date payable as provided in Section 1107, if any,
(3) if less than all Outstanding Notes are to be redeemed, the
identification (and, in the case of a partial redemption, the principal
amounts) of the particular Notes to be redeemed,
(4) in case any Note is to be redeemed in part only, the notice which
relates to such Note shall state that on and after the Redemption Date,
upon surrender of such Note, the Holder will receive, without charge, a new
Note or Notes of authorized denominations for the principal amount thereof
remaining unredeemed,
(5) that on the Redemption Date the Redemption Price (and accrued
interest and Liquidated Damages, if any, to the Redemption Date payable as
provided in Section 1107) will become due and payable upon each such Note,
or the portion, thereof, to be redeemed, I and that interest thereon will
cease to accrue on and after said date,
(6) the place or places where such Notes are to be surrendered for
payment of the Redemption Price and accrued interest and Liquidated
Damages, if any.
Notice of redemption of Notes to be redeemed at the election of the
Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
65
<PAGE>
SECTION 1106. Deposit of Redemption Price.
---------------------------
Prior to any Redemption Date, the Company shall deposit with the
Trustee or with a Paying Agent (or, if the Company is acting as its own Paying
Agent, segregate and hold in trust as provided in Section 1003) an amount of
money sufficient to pay the Redemption Price of, and Liquidated Damages, if any,
and accrued interest on, all the Notes which are to be redeemed on that date.
SECTION 1107. Notes Payable on Redemption Date.
--------------------------------
Notice of redemption having been given as aforesaid, the Notes so to
be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified (together with Liquidated Damages and accrued
interest, if any, to the Redemption Date), and from and after such date (unless
the Company shall default in the payment of the Redemption Price and accrued
interest) such Notes shall cease to bear interest. Upon surrender of any such
Note for redemption in accordance with said notice, such Note shall be paid by
the Company at the Redemption Price, together with Liquidated Damages and
accrued interest, if any, to the Redemption Date; provided, however, that
-------- -------
installments of interest whose Stated Maturity is on or prior to the Redemption
Date shall be payable to the Holders of such Notes, or one or more Predecessor
Notes, registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 309.
If any Note called for redemption shall not be so paid upon surrender
thereof for redemption, the principal (and premium, if any) shall, until paid,
bear interest from the Redemption Date at the rate borne by the Notes.
SECTION 1108. Notes Redeemed in Part.
----------------------
Any Note which is to be redeemed only in part (pursuant to the
provisions of this Article) shall be surrendered at the office or agency of the
Company maintained for such purpose pursuant to Section 1002 (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form satisfactory to the Company and the Trustee duly executed
by, the Holder thereof or such Holder's attorney duly authorized in writing),
and the Company shall execute, and the Trustee shall upon Company Order
authenticate and deliver to the Holder of such Note without service charge, a
new Note or Notes, of any authorized denomination as requested by such Holder,
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Note so surrendered.
ARTICLE TWELVE
[This Article Has Been Intentionally Omitted]
ARTICLE THIRTEEN
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1301. Company's Option to Effect Defeasance or Covenant
-------------------------------------------------
Defeasance.
- ----------
The Company may, at its option by Board Resolution, at any time, with
respect to the Notes, elect to have either Section 1302 or Section 1303 be
applied to all Outstanding Notes upon compliance with the conditions set forth
below in this Article Thirteen.
66
<PAGE>
SECTION 1302. Defeasance and Discharge.
------------------------
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1302, the Company shall be deemed to have been
discharged from its obligations with respect to all Outstanding Notes on the
date the conditions set forth in Section 1304 are satisfied (hereinafter,
"defeasance"). For this purpose, such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
Outstanding Notes, which shall thereafter be deemed to be "Outstanding" only for
the purposes of Section 1305 and the other Sections of this Indenture referred
to in (A) and (B) below, and to have satisfied all its other obligations under
such Notes and this Indenture insofar as such Notes are concerned (and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging the same), except for the following which shall survive until
otherwise terminated or discharged hereunder: (A) the rights of Holders of
Outstanding Notes to receive, solely from the trust fund described in Section
1304 and as more fully set forth in such Section, payments in respect of the
principal of (and premium, if any, on) and interest and Liquidated Damages, if
any, on such Notes when such payments are due, (B) the Company's obligations
with respect to such Notes under Sections 304, 305, 308, 1002 and 1003, (C) the
rights, powers, trusts, duties and immunities of the Trustee hereunder and (D)
this Article Thirteen. Subject to compliance with this Article Thirteen, the
Company may exercise its option under this Section 1302 notwithstanding the
prior exercise of its option under Section 1303 with respect to the Notes.
SECTION 1303. Covenant Defeasance.
-------------------
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1303, the Company shall be released from its
obligations under any covenant contained in Section 801(3) and Section 803 and
in Sections 1007 through 1021 with respect to the Outstanding Notes on and after
the date the conditions set forth below are satisfied (hereinafter, "covenant
defeasance"), and the Notes shall thereafter be deemed not to be "Outstanding"
for the purposes of any direction, waiver, consent or declaration or Act of
Holders (and the consequences of any thereof) in connection with such covenants,
but shall continue to be deemed "Outstanding" for all other purposes hereunder.
For this purpose, such covenant defeasance means that, with respect to the
Outstanding Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section
501(5), but, except as specified above, the remainder of this Indenture and such
Notes shall be unaffected thereby.
SECTION 1304. Conditions to Defeasance or Covenant Defeasance.
-----------------------------------------------
The following shall be the conditions to application of either Section
1302 or Section 1303 to the Outstanding Notes:
(1) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements
of Section 607 who shall agree to comply with the provisions of this
Article Thirteen applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (A) cash in
United States dollars, or (B) U.S. Government Obligations which through the
scheduled payment of principal and interest in respect thereof in
accordance with their terms will provide, not later than one day before the
due date of any payment, money in an amount, or (C) a combination thereof,
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered
to the Trustee, to pay and discharge, and which shall be applied by the
Trustee (or other qualifying trustee) to pay and discharge, (i) the
principal of (and premium, if any), interest and Liquidated Damages, if
any, on the Outstanding Notes on the Stated Maturity (or Redemption Date,
if applicable) of such principal (and premium, if any) or installment of
interest and Liquidated Damages, if any, and (ii) any mandatory sinking
fund payments or analogous payments applicable to the Outstanding Notes on
the day on which such payments are due and payable in accordance with the
terms of this Indenture and of such Notes; provided that the Trustee shall
--------
have been irrevocably instructed to apply such money or the proceeds of
67
<PAGE>
such U.S. Government Obligations to said payments with respect to the
Notes. Before such a deposit, the Company may give to the Trustee, in
accordance with Section 1103 hereof, a notice of its election to redeem all
of the Outstanding Notes at a future date in accordance with Article Eleven
hereof, which notice shall be irrevocable. Such irrevocable redemption
notice, if given, shall be given effect in applying the foregoing. For this
purpose, "U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which
its full faith and credit is pledged or (y) obligations of a Person
controlled or supervised by and acting as an agency or instrumentality of
the United States of America the timely payment of which is unconditionally
guaranteed as a full faith and credit obligation by the United States of
America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and shall also include a depository receipt
issued by a bank (as defined in Section 3(a)(2) of the Securities Act of
1933, as amended), as custodian with respect to any such U.S. Government
Obligation or a specific payment of principal of or interest on any such
U.S. Government Obligation held by such custodian for the account of the
holder of such depository receipt, provided that (except as required by
--------
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the
specific payment of principal of or interest on the U.S. Government
Obligation evidenced by such depository receipt.
(2) No Default or Event of Default with respect to the Notes shall
have occurred and be continuing on the date of such deposit or, insofar as
paragraphs (8) and (9) of Section 501 hereof are concerned, at any time
during the period ending on the 123rd day after the date of such deposit
(it being understood that this condition shall not be deemed satisfied
until the expiration of such period).
(3) [Intentionally Omitted]
(4) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than this Indenture) to which the Company is
a party or by which it is bound.
(5) In the case of an election under Section 1302, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (y) since January 29, 1999, there has been a
change in the 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.
(6) In the case of an election under Section 1303, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Notes 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.
(7) 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 under Section 1302
or the covenant defeasance under Section 1303 (as the case may be) have
been complied with.
SECTION 1305. Deposited Money and U.S. Government Obligations to Be
-----------------------------------------------------
Held in Trust; Other Miscellaneous Provisions.
- ---------------------------------------------
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for
68
<PAGE>
purposes of this Section 1305, the "Trustee") pursuant to Section 1304 in
respect of the Outstanding Notes shall be held in trust and applied by the
Trustee, in accordance with the provisions of such Notes and this Indenture, to
the payment, either directly or through any Paying Agent (including the Company
acting as its own Paying Agent) as the Trustee may determine, to the Holders of
such Notes of all sums due and to become due thereon in respect of principal
(and premium and Liquidated Damages, if any) and interest, but such money need
not be segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Governmental Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Notes.
Anything in this Article Thirteen to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request any money or U.S. Government Obligations held by it as provided in
Section 1304 which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance, as applicable, in accordance with this Article.
SECTION 1306. Reinstatement.
-------------
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's obligations under this Indenture and the Notes
shall be revived and reinstated as though no deposit had occurred pursuant to
Section 1302 or 1303, as the case may be, until such time as the Trustee or
Paying Agent is permitted to apply all such money in accordance with Section
1305; provided, however, that if the Company makes any payment of principal of
-------- -------
(or premium or Liquidated Damages, if any) or interest on any Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
This Indenture may be signed in any number of counterparts each of
which so executed shall be deemed to be an original, but all such counterparts
shall together constitute but one and the same Indenture.
69
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
PRIMUS TELECOMMUNICATIONS
GROUP, INCORPORATED
By: /s/ K. Paul Singh
_____________________________
Name: K. Paul Singh
Title: President and Chief Executive Officer
Attest:
By: /s/ John F. DePodesta
_______________________________
Name: John F. DePodesta
Title: Executive Vice President
FIRST UNION NATIONAL BANK
By: /s/ S.A. McMahon
_____________________________
Name: S.A. McMahon
Title: Vice President
Attest:
By: /s/ Patricia A. Welling
_______________________________
Name: Patricia A. Welling
Title: Vice President
70
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
TESTIMONIUM
SIGNATURE AND SEALS
EXHIBIT A Form of Note
EXHIBIT B Form of Certificate to be Delivered upon
Termination of Restricted Period
EXHIBIT C Form of Certificate to be Delivered in Connection
with Transfers to Non-QIB Institutional Accredited Investors
EXHIBIT D Form of Certificate to be Delivered in Connection
with Transfers Pursuant to Regulation S
EXHIBIT E Rule 144A Certificate
</TABLE>
<PAGE>
EXHIBIT A
---------
[FORM OF FACE OF NOTE]
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
11-1/4% [Series B]/1/ Senior Note Due 2009
[CUSIP][CINS]________
No.________ $________
Primus Telecommunications Group, Incorporated, a Delaware corporation
(herein called the "Company," which term includes any successor Person under the
Indenture hereinafter referred to), for value received, hereby promises to pay
to __________ or registered assigns, the principal sum of ________________
United States dollars on _________ __, 2009, at the office or agency of the
Company referred to below, and to pay interest thereon on _______ __, 1999 and
semi-annually thereafter, on ___________ and ___________ in each year, from
_______ __, ____ or from the most recent Interest Payment Date to which interest
has been paid or duly provided for, at the rate of 11-1/4% per annum, until the
principal hereof is paid or duly provided for, and (to the extent lawful) to pay
on demand interest on any overdue interest at the rate borne by the Notes from
the date on which such overdue interest becomes payable to the date payment of
such interest has been made or duly provided for. The interest so payable, and
punctually paid or duly provided for, on any Interest Payment Date will, as
provided in such Indenture, be paid to the Person in whose name this Note (or
one or more Predecessor Notes) is registered at the close of business on the
Regular Record Date for such interest, which shall be the _________ or
___________ (whether or not a Business Day), as the case may be, next preceding
such Interest Payment Date. Any such interest not so punctually paid or duly
provided for shall forthwith cease to be payable to the Holder on such Regular
Record Date, and such defaulted interest, and (to the extent lawful) interest on
such defaulted interest at the rate borne by the Notes, may be paid to the
Person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to
Holders of Notes not less than 10 days prior to such Special Record Date, or may
be paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Notes may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in said Indenture.
__________________________
/1/ Include only for Exchange Notes.
<PAGE>
[The Holder of this Note is entitled to the benefits of the
Registration Rights Agreement, dated as of January 21, 1999 (the "Registration
Rights Agreement"), between the Company, Primus Telecommunications Incorporated,
Primus Telecommunications (Australia) Pty. Ltd., Primus Telecommunications Pty.
Ltd. and the Initial Purchasers named therein. In the event that either (i) the
Company fails to file with the Commission the Shelf Registration Statement
required by the Registration Rights Agreement on or before the date specified
therein for such filing, (ii) any of the 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 on or prior to the
date specified for such consummation in the Registration Rights Agreement 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 declared effective within such five Business Day period
(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 (as defined in the Registration Rights
Agreement), the accrual of Liquidated Damages with respect to such Transfer
Restricted Notes will cease.]/2/
Payment of the principal of (and premium and Liquidated Damages, if
any) and interest on this Note will be made at the office or agency of the
Company maintained for that purpose in The City of New York, or at such other
office or agency of the Company as may be maintained for such purpose, in such
coin or currency of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided, however, that
-------- -------
payment of interest may be made at the option of the Company (i) by check mailed
to the address of the Person entitled thereto as such address shall appear on
the Note Register or (ii) by transfer to an account maintained by the payee
located in the United States.
Reference is hereby made to the further provisions of this Note set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed
by the Trustee referred to on the reverse hereof by manual signature, this Note
shall not be entitled to any benefit under the Indenture, or be valid or
obligatory for any purpose.
__________________
/2/ To be included in Initial Notes and modified, as appropriate, for the
Additional Notes.
A-2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated: PRIMUS TELECOMMUNICATIONS
GROUP, INCORPORATED
By
______________________________
Attest:
______________________________
Authorized Signature
TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
Dated:
This is one of the Notes referred to in the within-mentioned Indenture.
FIRST UNION NATIONAL BANK,
as Trustee
By
_______________________________________
Authorized Officer
A-3
<PAGE>
[FORM OF REVERSE SIDE OF NOTE]
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
11-1/4% Senior Notes Due 2009
This Note is one of a duly authorized issue of notes of the Company
designated as its 11-1/4% Senior Notes Due 2009 (herein called the "Notes"),
limited (except as otherwise provided in the Indenture referred to below) in
aggregate principal amount to $_________, which may be issued under an indenture
(herein called the "Indenture") dated as of January 29, 1999 between the Company
and First Union National Bank, trustee (herein called the "Trustee", which term
includes any successor trustee under the Indenture), to which Indenture and all
indentures supplemental thereto reference is hereby made for a statement of the
respective rights, limitations of rights, duties, obligations and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor more
than 60 days prior notice, in whole or in part, at any time or from time to time
on or after January 15, 2004 and prior to Maturity, at the election of the
Company, at Redemption Prices (expressed in percentages of principal amount
thereof), plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the Redemption Date (subject to the right of Holders of record on the
relevant 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
beginning January 15 of the years indicated:
Redemption
2004 105.625%
2005 103.750%
2006 101.875%
2007 (and thereafter) 100.000%
Notwithstanding the foregoing, prior to January 15, 2002, the Company
may on any one or more occasions redeem up to 35% of the originally issued
principal amount of Notes at a redemption price of 111.25% of the principal
amount thereof, plus accrued and unpaid interes and Liquidated Damages, if any,
thereon to the redemption date, with the Net Cash Proceeds of one or more Public
Equity Offerings; provided (i) that at least 65% of the originally issued
--------
principal amount of Notes remains outstanding immediately after giving effect to
such redemption and (ii) that notice of such redemption is mailed within 60 days
of the closing of each such Public Equity Offering.
A-4
<PAGE>
Upon the occurrence of a Change of Control, the Holder of this Note
may require the Company, subject to certain limitations provided in the
Indenture, to repurchase all or any part of this Note at a purchase price in
cash in an amount equal to 101% of the principal amount thereof plus accrued and
unpaid interest and Liquidated Damages, if any, to the date of purchase.
Under certain circumstances, in the event the Net Cash Proceeds
received by the Company from an Asset Sale, which proceeds are not used to (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 immediately following the date of receipt of the Net Cash
Proceeds from an Asset Sale) such excess Net Cash Proceeds (to the extent not
applied pursuant to clause (i)) in accordance with the Indenture, and which
proceeds equal or exceed a specified amount and are not applied to purchase 11-
3/4% Senior Notes due 2004 of the Company pursuant to a 1997 Senior Notes Offer
(as defined in the Indenture), the Company shall be required to make an offer to
all Holders to purchase the maximum principal amount of Notes, in an integral
multiple of $1,000, that may be purchased out of such amount at a purchase price
in cash equal to 100% of the principal amount thereof, plus accrued, unpaid
interest and Liquidated Damages, if any, to the date of purchase, in accordance
with the Indenture. Holders of Notes that are subject to any offer to purchase
shall receive an Excess Proceeds Offer from the Company prior to any related
Excess Proceeds Payment Date.
In the case of any redemption or repurchase of Notes, interest
installments and Liquidated Damages, if any, whose Stated Maturity is on or
prior to the Redemption Date or Excess Proceeds Payment Date will be payable to
the Holders of such Notes, or one or more Predecessor Notes, of record at the
close of business on the relevant Record Date referred to on the face hereof.
Notes (or portions thereof) for whose redemption and payment provision is made
in accordance with the Indenture shall cease to bear interest from and after the
Redemption Date or Excess Proceeds Payment Date, as the case may be.
In the event of redemption of this Note in part only, a new Note or
Notes for the unredeemed portion hereof shall be issued in the name of the
Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal of
all the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
A-5
<PAGE>
The Indenture contains provisions for defeasance at any time of (a)
the entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Default, upon compliance by the
Company with certain conditions set forth therein, which provisions apply to
this Note.
The Indenture permits, with certain exceptions as therein provided the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders under the Indenture at any time by the
Company and the Trustee with the consent of the Holders of a majority in
aggregate principal amount of the Notes at the time Outstanding. The Indenture
also contains provisions permitting the Holders of specified percentages in
aggregate principal amount of the Notes at the time Outstanding, on behalf of
the Holders of all the Notes, to waive compliance by the Company with certain
provisions of the Indenture and certain past defaults under the Indenture and
their consequences. Any such consent or waiver by or on behalf of the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herewith or in lieu hereof whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest and Liquidated Damages, if any, on this Note at the times, place, and
rate, and in the coin or currency, herein prescribed.
If less than all the Notes are to be redeemed, the particular Notes to
be redeemed shall be selected not more than 60 days prior to the Redemption Date
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 fair and appropriate and
which may provide for the selection for redemption of portions of the principal
of Notes.
As provided in the Indenture and subject to certain limitations
therein set forth, the transfer of this Note is registrable on the Note Register
of the Company, upon surrender of this Note for registration of transfer at the
office or agency of the Company maintained for such purpose in The City of New
York, duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Note Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Notes, of authorized denominations and for the same aggregate principal
amount, will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain
A-6
<PAGE>
limitations therein set forth, the Notes are exchangeable for a like aggregate
principal amount of Notes of a different authorized denomination, as requested
by the Holder surrendering the same.
No service charge shall be made for any registration of transfer or
exchange of Notes, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered on the Note Register
as the owner hereof for all purposes, whether or not this Note be overdue, and
neither the Company, the Trustee nor any agent shall be affected by notice to
the contrary.
THIS NOTE SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK.
Interest on this Note shall be computed on the basis of a 360-day year
of twelve 30-day months.
All terms used in this Note which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
A-7
<PAGE>
[FORM OF TRANSFER NOTICE]
FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto
Insert Taxpayer Identification No.
- ---------------------------------
_____________________________________________________________________________
(Please print or typewrite name and address including zip code of assignee)
_____________________________________________________________________________
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing ___________________________________its attorney to transfer such
Note on the books of the Company with full power of substitution in the
premises.
[THE FOLLOWING PROVISION TO BE INCLUDED ON
ALL NOTES OTHER THAN EXCHANGE NOTES
AND OFFSHORE PHYSICAL NOTES]
In connection with any transfer of this Note occurring prior to the
date which is the earlier of the (i) date of an effective Registration Statement
or (ii) two years after the later of the original issuance of this Note or the
last date on which this Note was held by an Affiliate of the Company, the
undersigned confirms that without utilizing any general solicitation or general
advertising:
[Check One]
(a) this Note is being transferred in compliance with the exemption from
registration under the Securities Act of 1933, as amended, provided by Rule
144A thereunder,
or
--
(b) this Note is being transferred other than in accordance with (a) above
and documents are being furnished which comply with the conditions of
transfer set forth in this Note and the Indenture.
A-8
<PAGE>
If neither of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Section 305 of the Indenture shall have
been satisfied.
Date:__________
__________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon
the face of the within-mentioned
instrument in every particular, without
alteration or any change whatsoever.
Signature Guarantee*:_______________________________________________________
TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it or such account is a "qualified institutional
buyer" within the meaning of Rule 144A under the Securities Act of 1933, as
amended, and that each is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A or has determined
not to request such information and that each is aware that the transferor is
relying upon the undersigned's foregoing representations in order to claim the
exemption from registration provided by Rule 144A.
Date:__________
________________________________________
NOTICE: To be executed by an
executive officer
__________________
* Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP").
A-9
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you wish to have this Note purchased by the Company pursuant to
Section 1010 or 1017 of the Indenture, check the Box:
If you wish to have a portion of this Note purchased by the Trust
pursuant to Section 1010 or 1017 of the Indenture, state the amount (in original
principal amount) below:
$_________.
Date:___________
Your Signature:______________________________________________
(Sign exactly as your name appears on the other side of this Note)
Signature Guarantee*:_______________________________________________
__________________
* Guarantor must be a member of the Securities Transfer Agents Medallion
Program ("STAMP"), the New York Stock Exchange Medallion Signature Program
("MSP") or the Stock Exchange Medallion Program ("SEMP")
A-10
<PAGE>
EXHIBIT B
---------
Form of Certificate
to Be Delivered upon
Termination of Restricted Period
--------------------------------
On or after ______, 1999
First Union National Bank, as Trustee
Corporate Trust
800 East Main Street, 2nd Floor
Richmond, Virginia 23219
Re: Primus Telecommunications Group, Incorporated (the "Company")
11-1/4% [Series B]/1/ Senior Notes due 2009 (the "Notes")
------------------------------------------------------
Ladies and Gentlemen:
This letter relates to $_______ principal amount of Notes represented
by the global note certificate (the "Offshore Global Note"). Pursuant to Section
201 of the Indenture dated as of January __, 1999 relating to the Notes (the
"Indenture"), we hereby certify that (1) we are the beneficial owner of such
principal amount of Notes represented by the Offshore Global Note and (2) we are
a Non-U.S. Person to whom the Notes could be transferred in accordance with Rule
904 of Regulation S promulgated under the U.S. Securities Act of 1933, as
amended ("Regulation S"). Accordingly, you are hereby requested to issue a
Offshore Physical Note representing the undersigned's interest in the principal
amount of Securities represented by the Offshore Global Note, all in the manner
provided by the Indenture.
You and the Company are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceeding or official inquiry with respect
to the matters covered hereby. Terms used in this certificate have the meanings
set forth in Regulation S.
Very truly yours,
[Name of Holder]
By:___________________________________________
Authorized Signature
- -----------------------------------
/1/ Include only for Exchange Notes.
<PAGE>
EXHIBIT C
---------
Form of Certificate to Be
Delivered in Connection with
Transfers to Non-QIB Institutional Accredited Investor
------------------------------------------------------
[Date]
Primus Telecommunications Group, Incorporated
c/o First Union National Bank, as Trustee
Corporate Trust
800 East Main Street, 2nd Floor
Richmond, Virginia 23219
Re: Primus Telecommunications Group, Incorporated (the
"Company") 11-1/4% Senior Notes due 2009 (the "Notes")
------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed purchase of $__________ aggregate
principal amount of the Notes, we confirm that:
1. We have received such information regarding the Company as we deem
necessary in order to make our investment decision.
2. We understand that the Notes have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any other
applicable law; and may not be offered, sold, or otherwise transferred
except as permitted in the following sentence. We agree on our own behalf
and on behalf of any investor account for which we are purchasing the Notes
to offer, sell or otherwise transfer such Notes prior to the date which is
two years after the later of the date of original issue and the last date
on which the Company or any affiliate of the Company was the owner of such
Notes, or any predecessor thereto (the "Resale Restriction Termination
Date") only (a) to the Company, (b) pursuant to a registration statement
which has been declared effective under the Securities Act, (c) for so long
as the Notes are eligible for resale pursuant to Rule 144A under the
Securities Act, to a person we reasonably believe is a qualified
institutional buyer under Rule 144A (a "QIB") that purchases for its own
account or for the account of a QIB and to whom notice is given that the
transfer is being made in reliance on Rule 144A, (d) pursuant to offers and
sales to non-U.S. persons that occur outside the United States within the
meaning of Regulation S under the Securities Act, (e) to an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3)
or (7) of Rule 501 of Regulation D under the Securities Act acquiring the
Notes for its own account or for the account of such an institutional
"accredited investor" for investment purposes and not with a view to, or
for offer or sale in connection with, any distribution thereof in violation
of the Securities Act or (f) pursuant to any other available exemption from
the registration requirements of the Securities Act, subject in each of the
foregoing cases to any requirement of law that the disposition of our
property and the property of such investor account or accounts be at all
times within our or their control and to compliance with any applicable
state securities laws. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Notes is proposed to be made pursuant to clause (e)
above prior to the Resale Restriction Termination Date, the transferor
shall deliver a letter to the Trustee (the "Trustee") under the Indenture
pursuant to which the Notes are being issued a letter from the transferee
substantially in the form of this letter, which shall provide, among other
things, that the transferee is an institutional "accredited investor"
within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501
under the Securities Act and that it is acquiring such Notes for investment
purposes and not for distribution in violation of the Securities Act. We
acknowledge that the Company and the Trustee reserve the right prior to any
offer, sale or other transfer prior to the Resale Restriction Termination
Date of the Notes pursuant to clauses (d), (e) and (f) above to require the
delivery of an opinion of counsel, certifications and/or other information
satisfactory to the Company and the Trustee.
<PAGE>
3. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act)
purchasing for our own account or for the account of such an institutional
"accredited investor," and we are acquiring the Notes for investment
purposes and not with a view to, or for offer or sale in connection with,
any distribution in violation of the Securities Act, and we have such
knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of our investment in the Notes, and we
and any accounts for which we are acting are each able to bear the economic
risk of our or its investment.
4. We are acquiring the Notes purchased by us for our own account or
for one or more accounts as to each of which we exercise sole investment
discretion.
<PAGE>
5. You are entitled to rely upon this letter and you are irrevocably
authorized to produce this letter or a copy hereof to any interested party
in any administrative or legal proceeding or official inquiry with respect
to the matters covered hereby.
Very truly yours,
By: (NAME OF PURCHASER)
Date:
Upon transfer, the Notes should be registered in the name of the new
beneficial owner as follows:
Name:_______________________________________________________________
Address:____________________________________________________________
Taxpayer ID Number:_________________________________________________
<PAGE>
EXHIBIT D
---------
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
------------------------
[Date]
First Union National Bank, as Trustee
Corporate Trust
800 East Main Street, 2nd Floor
Richmond, Virginia 23219
Re: Primus Telecommunications Group, Incorporated (the "Company")
___ % Senior Notes due 2009 (the "Notes")
-------------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $___________ aggregate principal
amount of Notes, we confirm that such sale has been effected pursuant to and in
accordance with Regulation S ("Regulation S") under the Securities Act of 1933,
as amended (the "Securities Act"), and accordingly, we hereby certify as
follows:
1. The offer of the Notes was not made to a person in the United
States (unless such person or the account held by it for which it is acting
is excluded from the definition of "U.S. person" pursuant to Rule 902(k)(1)
of Regulation S under the circumstances described in Rule 902(k)(2) of
Regulation S) or specifically targeted at an identifiable group of U.S.
citizens abroad.
2. Either (a) at the time the buy order was originated, the buyer was
outside the United States or we and any person acting on our behalf
reasonably believed that the buyer was outside the United States or (b) the
transaction was executed in, on or through the facilities of a designated
offshore securities market, and neither we nor any person acting on our
behalf knows that the transaction was pre-arranged with a buyer in the
United States.
3. Neither we, any of our affiliates, nor any person acting on our or
their behalf has made any directed selling efforts in the United States in
contravention of the requirements of Rule 903(a) or Rule 904(a) of
Regulation S, as applicable.
4. The proposed transfer of Notes is not part of a plan or scheme to
evade the registration requirements of the Securities Act.
<PAGE>
5. If we are a dealer or a person receiving a selling concession or
other fee or remuneration in respect of the Notes, and the proposed
transfer takes place before the Offshore Note Exchange Date referred to in
the Indenture, dated as of January __, 1999, among the Company and the
Trustee, or we are an officer or director of the Company or a distributor,
we certify that the proposed transfer is being made in accordance with the
provisions of Rules 903 and 904(b) of Regulation S.
You and the Company are entitled to rely upon this Certificate and are
irrevocably authorized to produce this Certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official
inquiry with respect to the matters covered hereby. Terms used in this
certificate have the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:_________________________________
Authorized Signature
D-2
<PAGE>
EXHIBIT E
---------
Rule 144A Certificate
---------------------
To: First Union National Bank, as Trustee
Corporate Trust
800 East Main Street, 2nd Floor
Richmond, Virginia 23219
Attention: Corporate Trust Office
Re: Primus Telecommunications Group, Incorporated (the "Company")
11-1/4% Senior Notes due 2009 (the "Notes")
--------------------------------------------------------------
Ladies and Gentlemen:
In connection with our proposed sale of $____________ aggregate
principal amount of Notes, we confirm that such sale has been effected pursuant
to and in accordance with Rule 144A ("Rule 144A") under the Securities Act of
1933, as amended (the "Securities Act"). We are aware that the transfer of Notes
to us is being made in reliance on the exemption from the provisions of Section
5 of the Securities Act provided by Rule 144A. If the Company is not subject to
Section 13 or 15(d) of the Exchange Act, prior to the date of this Certificate
we have been given the opportunity to obtain from the Company the information
referred to in Rule 144A(d)(4), and have either declined such opportunity or
have received such information.
You and the Company are entitled to rely upon this Certificate and are
irrevocably authorized to produce this Certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.
Very truly yours,
[NAME OF PURCHASER]
By:_________________________________
Name:
Title:
Address:
Date of this Certificate: ________ __, ____
<PAGE>
Exhibit 5.1
[Letterhead of Pepper Hamilton LLP]
May 6, 1999
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") the Company's registered 11 1/4% Senior Notes due 2009 (the
"Exchange Notes") for an equal principal amount of the Company's outstanding 11
1/4% Senior Notes due 2009 (the "Notes").
The Notes were issued, and the Exchange Notes will be issued, under an
Indenture dated as of January 29, 1999 (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 4.7 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>
Primus Telecommunications Group, Incorporated
May 6, 1999
Page 2
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 proceeding 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 reference to our Firm under the caption "Legal
Matters" in the Registration Statement. In doing so, we do not admit that we
are in the category of persons whose consent is required under Section 7 of the
Act, or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
PEPPER HAMILTON LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-76965 of Primus Telecommunications Group, Incorporated on Form S-4 of our
report dated February 10, 1999, except for paragraph one of Note 16 as to which
the date is March 31, 1999, appearing in the Prospectus, which is part of this
Registration Statement and to the reference to us under the headings "Selected
Financial Data" and "Experts" in such Prospectus.
Deloitte & Touche LLP
Washington, DC
May 6, 1999
<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 reports dated February 27, 1998, with respect to the financial
statements and schedule of TresCom International, Inc. included in Amendment No.
1 to the Registration Statement (Form S-4 No. 333-76965) and related Prospectus
of Primus Telecommunications Group, Incorporated for the Exchange Offer of its
11 1/4% Senior Notes due 2009.
Ernst & Young LLP
Atlanta, Georgia
May 5, 1999
