<PAGE>
As filed with the Securities and Exchange Commission on April 23, 1999
Registration No. 333-______
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------------
DELAWARE 4813 54-1708481
(STATE OR (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION) INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION
CODE NUMBER)
--------------------------------
1700 OLD MEADOW ROAD, 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 after this 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. [_]
<PAGE>
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. [_]
--------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Title of Each Class of Amount to Proposed Maximum Proposed Maximum Amount of
Securities to be be Offering Price Per Aggregate Offering Registration Fee
Registered Registered Unit Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
11 1/4% Senior Notes $200,000,000 100.00% (1) $200,000,000 (1) $55,600
due 2009
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated pursuant to Rule 457(f) solely for the purpose of calculating the
registration fee.
__________________________________
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>
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
April 23, 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
11.
The Exchange Offer expires at 5:00 p.m., New York City time, on
_______________, 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Information Regarding Forward-Looking Management................................................. 93
Statements.............................. i Transactions with Affiliates and Others.................... 110
Summary................................... 1 Principal Stockholders..................................... 113
Risk Factors.............................. 11 Description of Other Indebtedness.......................... 117
Use of Proceeds........................... 27 Description of Exchange Notes.............................. 120
The Exchange Offer........................ 28 Federal Income Tax Considerations.......................... 161
Capitalization............................ 39 Plan of Distribution....................................... 166
Selected Financial Data................... 40 Available Information...................................... 167
Unaudited Pro Forma Financial Data........ 42 Incorporation of Documents................................. 167
Management's Discussion and Analysis of Legal Matters.............................................. 167
Financial Condition and Results of Experts.................................................... 167
Operations.............................. 45 Index to Financial Statements.............................. F-1
Business.................................. 56
</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:
<TABLE>
<S> <C>
. changes in the telecommunications . acquisitions and strategic investments;
industry and the general economy; . international operations;
. the competition we face; . our dependence on effective
. changes in service offerings; information and billing systems;
. our limited operating history; . our ability to develop and manage
. our entry into developing markets; our communications network; and
. our ability to manage rapid growth; . regulatory developments
</TABLE>
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>
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:
Year Ended Revenue
----------------- ---------------
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
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 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
-1-
<PAGE>
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;
-2-
<PAGE>
. Expanding our Service Offerings to Become a Full-Service Carrier
in Selected Deregulating Markets;
. 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 April 19, 1999, our equity market capitalization was $419,057,795,
based upon a closing price of $14.75 per share and 28,410,698 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
__________, 1999, unless we extend
the Exchange Offer.
Conditions of the Exchange
Offer............................. The exchange offer is not conditioned
upon any 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 Initial
Notes............................. Unless a tender of unregistered notes
is effected 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
-4-
<PAGE>
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
(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 Procedures... If you wish to tender your unregistered
notes and
(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 Notes............ We will accept for exchange any and all
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
Considerations.................... The exchange pursuant to the exchange
offer will not be a taxable event for
federal income tax purposes.
The Exchange Agent................ First Union National Bank is the
exchange agent for the
-5-
<PAGE>
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 Notes..... Based on interpretations by the staff
of the SEC 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 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
-6-
<PAGE>
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,
. 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,
-7-
<PAGE>
. 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 11.
-8-
<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
Year Ended December 31, 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 2,024 20,114 50,622 79,532 93,765
administrative................
Depreciation and 160 2,164 6,733 24,185 30,687
amortization.................. ------- -------- -------- -------- --------
Total operating 2,184 22,278 57,355 103,717 124,452
expenses................... ------- -------- -------- -------- --------
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>
-9-
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998
-------------------------
Actual As Adjusted (9)
------ --------------
<S> <C> <C>
(in thousands)
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.
-10-
<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.
-11-
<PAGE>
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,
. 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
-12-
<PAGE>
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.
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
-13-
<PAGE>
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 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
-14-
<PAGE>
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.
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.
-15-
<PAGE>
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 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.
-16-
<PAGE>
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.
-17-
<PAGE>
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 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.
-18-
<PAGE>
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
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.
-19-
<PAGE>
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 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.
-20-
<PAGE>
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 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.
-21-
<PAGE>
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-
-22-
<PAGE>
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 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
-23-
<PAGE>
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 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
-24-
<PAGE>
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.
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
-25-
<PAGE>
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.
-26-
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the Exchange Offer.
-27-
<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 _________ __, 1999. Tenders of the initial notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on _________ __, 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.
-28-
<PAGE>
Initial notes may be tendered only in multiples of $1,000. Subject to the
foregoing, holders may tender less than the aggregate principal amount
represented by the initial notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered
initial notes (or so indicate pursuant to the procedures for book-entry
transfer).
As of the date of this Prospectus, $200.0 million in aggregate principal
amount of the initial notes is outstanding. As of April 20, 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 _____ of its participants. Solely for
reasons of administration (and for no other purpose), we have fixed the close of
business on _________ __, 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 __________ __, 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.
-29-
<PAGE>
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.
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.
-30-
<PAGE>
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.
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
-31-
<PAGE>
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 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
-32-
<PAGE>
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
-33-
<PAGE>
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
(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
-34-
<PAGE>
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.
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
-35-
<PAGE>
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:
<TABLE>
<S> <C>
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) 590-7408
Charlotte, N.C. 28262
</TABLE>
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:
-36-
<PAGE>
(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 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
-37-
<PAGE>
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.
-38-
<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>
39
<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
------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share data)
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
============ ======= ======== ======== ========
</TABLE>
40
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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>
- ----------
(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.
41
<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.
42
<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.
43
<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
LONG TERM OBLIGATIONS 397,751 200,000 (1) 579,932
(17,819) (2)
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.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
applicable consolidated financial statements and notes thereto contained
elsewhere in this prospectus.
Overview
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
45
<PAGE>
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
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
46
<PAGE>
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 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.
47
<PAGE>
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.
<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>
48
<PAGE>
<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.
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
49
<PAGE>
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
50
<PAGE>
North American operations and reflects a growth rate of approximately 350%
(approximately 300% exclusive of net revenue associated with the
TelePassport/USFI acquisition and operations acquired in Canada during 1997).
The growth is a result of increased traffic volumes in wholesale carrier
operations and, to a lesser extent, in ethnic residential and business customer
traffic. The Asia-Pacific operations contributed $31.9 million to the year-over-
year net revenue growth, resulting primarily from the residential customer
marketing campaigns commenced in early 1997. The 1997 results also reflect a
full year of the Australian operations as compared to ten months in 1996 as a
result of the March 1, 1996 acquisition of these operations. The Asia-Pacific
net revenue growth was negatively impacted by weakness in the Australian dollar
during 1997 as compared to 1996. The remaining net revenue growth of $17.6
million, a year-over-year growth rate in excess of 300%, came from the European
operations as a result of expansion into the wholesale carrier marketplace
during the third quarter of 1997 and continued growth in the ethnic residential
and business marketplaces.
Cost of revenue increased $93.9 million, from $158.8 million, or 91.8% of net
revenue, for the year ended December 31, 1996 to $252.7 million, or 90.2% of net
revenue, for the year ended December 31, 1997. The increase in the cost of
revenue is a direct reflection of the increase in traffic volumes. The decrease
in the cost of revenue as a percentage of net revenue reflects 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.
51
<PAGE>
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.
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
52
<PAGE>
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 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 is expected to
close in early May 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.
53
<PAGE>
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 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
54
<PAGE>
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 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.
55
<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:
Year Ended Revenue
---------- -------
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
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
56
<PAGE>
. 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.
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:
Location Type of Switch
-------- --------------
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
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
57
<PAGE>
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 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,
58
<PAGE>
. 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.
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
59
<PAGE>
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 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.
60
<PAGE>
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 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
61
<PAGE>
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 believes 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
62
<PAGE>
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 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.
63
<PAGE>
. 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 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.
64
<PAGE>
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 upon completion of the acquisition of the related
Wintel companies, we will be the third largest long distance provider after 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 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.
65
<PAGE>
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, 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
66
<PAGE>
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.
67
<PAGE>
. 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.
. 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.
68
<PAGE>
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.
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):
69
<PAGE>
<TABLE>
<CAPTION>
Cable System Countries Served Status
- ---------------------- ------------------------------------------- ------------------
<S> <C> <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
PTAT-1 United States--United States Virgin Islands Existing
CARAC United States--United States Virgin Islands Existing
Taino--Carib United States Virgin Islands--Puerto Rico Existing
Bahamas I United States--Bahamas Existing
ECMS United States Virgin Islands--Antigua Existing
--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.
70
<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
71
<PAGE>
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 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
72
<PAGE>
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.
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.
73
<PAGE>
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 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,
74
<PAGE>
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.
75
<PAGE>
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.
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.
76
<PAGE>
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 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
77
<PAGE>
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 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
78
<PAGE>
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.
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.
79
<PAGE>
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 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,
80
<PAGE>
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
81
<PAGE>
self-regulatory body or where, following a public inquiry, the ACCC is satisfied
that a declaration would be in the long-term interests of end-users of
telecommunications services. Once a service is declared, carriers supplying that
service are, unless otherwise exempt, under an obligation to supply the declared
service to other carriers and service providers.
Access providers must comply with their access obligations on conditions
negotiated between the access provider and access seeker; as detailed in an
access undertaking; or as determined by the ACCC through arbitration.
It is expected that in many areas, the industry will negotiate, on a
multilateral basis, standard terms and conditions for access to declared
services. The access regime establishes a mechanism for the industry to develop
an access code containing model terms and conditions for access to particular
declared services. Once approved by the ACCC, those model terms and conditions
may be adopted in an undertaking by individual carriers who are under an access
obligation.
Carrier license conditions will include an obligation to provide other
carriers with access to certain facilities and network information. A carrier
must provide other carriers with access to its facilities for the purpose of
enabling the other carriers to provide competitive facilities and competitive
carriage services or to establish their own facilities; to certain information
relating to the operation of its telecommunications network; and to its
infrastructure, including transmission towers, the sites of transmission towers
and underground facilities that are designed to hold lines, if technically
feasible.
In July 1997, the Australian government mandated that Telstra provide access
to its facilities at specified rates to other service providers including 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
82
<PAGE>
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, 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
83
<PAGE>
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 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
84
<PAGE>
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 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
85
<PAGE>
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-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
86
<PAGE>
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
87
<PAGE>
and some of its major competitors in Germany have been unable to reach agreement
on interconnection rates, the RegTP established provisional interconnection
tariffs in September 1997 which Deutsche Telekom has since challenged in court.
These rates are now part of the standard offer of Deutsche Telekom and 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
88
<PAGE>
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.
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
89
<PAGE>
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.
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
90
<PAGE>
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.
91
<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.
92
<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
- --------------------------- --- ---------------------------------------------- -------------------
<S> <C> <C> <C>
K. Paul Singh(1) .......... 48 Chairman of the Board of Directors, President, 1999
and Chief Executive Officer
Neil L. Hazard ............ 46 Executive Vice President and Chief Financial N/A
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
93
<PAGE>
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.
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
94
<PAGE>
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 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
95
<PAGE>
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.
96
<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 of 1998 258,013 180,000 -- -- -- -- --
the Board of Directors, 1997 247,692 160,000 -- -- 100,000 -- --
President and Chief 1996 185,000 100,000 -- -- 338,100 -- --
Executive Officer
Neil L. Hazard--Executive 1998 184,006 105,000 -- -- -- -- --
Vice President and Chief 1997 159,231 100,000 -- -- 40,000 -- --
Financial Officer 1996 118,461 60,000 -- -- 304,290 -- --
Yousef B. Javadi--Chief 1998 154,808 80,000 -- -- -- -- --
Operating Officer, Primus 1997 121,154 60,000 -- -- 170,000 -- --
North America 1996 -- -- -- -- -- -- --
John F. DePodesta--Executive 1998 178,718 135,000 -- -- -- -- --
Vice President 1997 100,000 -- -- -- 180,000 -- --
1996 -- 10,000 -- -- -- -- --
John Melick--Vice 1998 128,391 55,000 -- -- -- -- --
President of International 1997 105,000 50,000 -- -- 25,000 -- --
Business Development 1996 101,538 10,000 -- -- -- -- --
</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.
97
<PAGE>
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 ___________. 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 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
98
<PAGE>
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 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
99
<PAGE>
(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
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.
100
<PAGE>
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.
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
101
<PAGE>
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.
102
<PAGE>
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 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
103
<PAGE>
deductions will be made with respect to the participant. A participant who
elects to withdraw from an offering shall be deemed to have elected not to
participate in each of the four succeeding offerings following the date on which
the participant gives a termination form to the committee.
Upon termination of a participant's employment for any reason other than
death, including termination due to disability or continuation of a leave of
absence beyond 90 days, all amounts credited to such participant's account shall
be returned to the participant. In the event of a participant's (1) termination
of employment due to death or (2) death after termination of employment but
before the participant's account has been returned, all amounts credited to such
participant's account shall be returned to the participant's successor-in-
interest. A participant who is on an approved leave of absence shall remain
eligible to participate in the ESP Plan until the end of the first offering
ending after commencement of such approved leave of absence. A participant who
has been on an approved leave of absence for more than 90 days shall not be
eligible to participate in any offering that begins on or after the commencement
of such approved leave of absence so long as such leave of absence continues.
All funds held or received by 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
104
<PAGE>
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.
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
105
<PAGE>
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.
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
106
<PAGE>
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 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
107
<PAGE>
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.
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.
108
<PAGE>
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.
109
<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
110
<PAGE>
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.
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
111
<PAGE>
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.
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.
112
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of March 31, 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 Percent
------------- -----------
Name and Address of Beneficial Owner Beneficial of Class(2)
- ------------------------------------ ------------- -----------
Ownership(1)
-------------
<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
</TABLE>
113
<PAGE>
<TABLE>
<S> <C> <C>
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 March 31, 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 28,404,934 shares of our common stock outstanding as of March
31, 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.
114
<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.
115
<PAGE>
(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.
116
<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.
117
<PAGE>
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,
. 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:
118
<PAGE>
<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.
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.
119
<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:
Maturity......................... January 15, 2009
Interest......................... 11 1/4% per annum
120
<PAGE>
Interest Payable................. semiannually on
January 15 and July 15
of each year, commencing
July 15, 1999
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 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>
Year Redemption
---- ----------
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)
121
<PAGE>
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.
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.
122
<PAGE>
(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,
123
<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
124
<PAGE>
(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;
(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
125
<PAGE>
"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:
(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
126
<PAGE>
(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 (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);
127
<PAGE>
(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:
128
<PAGE>
(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.
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
129
<PAGE>
(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
(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,
130
<PAGE>
(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 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
131
<PAGE>
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;
132
<PAGE>
(v) that holders electing to have a Note purchased pursuant to the
Excess Proceeds Offer will be required to surrender the Note, together with the
form entitled "Option of the Holder to Elect Purchase" on the reverse side of
the Note completed, to the Paying Agent at the address specified in the notice
prior to the close of business on the Business Day immediately preceding the
Excess Proceeds Payment Date;
(vi) that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Excess Proceeds Payment Date, a telegram,
facsimile transmission or letter setting forth the name of such holder, the
principal amount of Notes delivered for purchase and a statement that such
holder is withdrawing his election to have such Notes purchased; and
(vii) that holders whose Notes are being purchased only in part will be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered; provided that each Note purchased and each new Note issued
shall be in a principal amount of $1,000 or integral multiples thereof.
On the Excess Proceeds Payment Date, the Company shall
(i) accept for payment on a pro rata basis Notes or portions thereof
tendered pursuant to the Excess Proceeds Offer up to the Proportionate Share of
such Excess Proceeds;
(ii) deposit with the Paying Agent money sufficient to pay the purchase
price of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee all Notes or
portions thereof so accepted together with an 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
133
<PAGE>
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)
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
134
<PAGE>
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");
(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;
135
<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 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.
136
<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;
137
<PAGE>
(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,
(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,
138
<PAGE>
(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 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
139
<PAGE>
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
140
<PAGE>
(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,
(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
141
<PAGE>
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,
(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.
142
<PAGE>
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.
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
143
<PAGE>
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; 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
144
<PAGE>
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.
145
<PAGE>
"Consolidated Cash Flow" is defined to mean, for any period, the sum of the
amounts for such period of (i) Consolidated Net Income, (ii) Consolidated
Interest Expense, (iii) income taxes, to the extent such amount was deducted in
calculating Consolidated Net Income (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets), (iv) depreciation expense, to the extent such amount was
deducted in calculating Consolidated Net Income, (v) amortization expense, to
the extent such amount was deducted in calculating Consolidated Net Income, and
(vi) all other non-cash items reducing Consolidated Net Income (excluding any
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period), less all non-cash items increasing
Consolidated Net Income, all as determined on a consolidated basis for the
Company and its Restricted Subsidiaries in conformity with GAAP.
"Consolidated Fixed Charges" is defined to mean, for any period, Consolidated
Interest Expense plus dividends declared and payable on Preferred Stock.
"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
146
<PAGE>
case, as amended, restated, modified, renewed, refunded, replaced or refinanced
in whole or in part form time to time.
"Currency Agreement" is defined to mean any foreign exchange contract,
currency swap agreement and any other arrangement and agreement designed to
provide protection against fluctuations in currency values.
"Default" is defined to mean any event that is, or after notice or passage of
time or both would be, an Event of Default.
"Eligible Accounts Receivable" is defined to mean the accounts receivables
(net of any reserves and allowances for doubtful accounts in accordance with
GAAP) of any Person that are not more than 60 days past their due date and that
were entered into in the ordinary course of business on normal payment terms as
shown on the most recent consolidated balance sheet of such Person filed with
the Commission, all in accordance with GAAP.
"Eligible Institution" is defined to mean a commercial banking institution
that has combined capital and surplus of not less than $500 million or its
equivalent in foreign currency, whose debt is rated "A-3" or higher or "A-" or
higher according to Moody's Investors Service, Inc. or Standard & Poor's Ratings
Group (or such similar equivalent rating by at least one "nationally recognized
statistical rating organization" (as defined in Rule 436 under the Securities
Act)) respectively, at the time as of which any investment or rollover therein
is made.
"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
147
<PAGE>
agreements to keep-well, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for purposes of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided that the
term "Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Incur" is defined to mean, with respect to any Indebtedness, to incur,
create, issue, assume, Guarantee or otherwise become liable for or with respect
to, or become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Indebtedness by reason of the
acquisition of more than 50% of the Capital Stock of any Person; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness.
"Indebtedness" is defined to mean, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion of
such services, except Trade Payables, (v) all obligations of such Person as
lessee under Capitalized Leases, (vi) all Indebtedness of other Persons secured
by a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the Fair Market Value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness of
other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person, (viii) the maximum fixed redemption or repurchase
price of Redeemable Stock of such Person at the time of determination and (ix)
to the extent not otherwise included in this definition, obligations under
Currency Agreements and Interest Rate Agreements. The amount of Indebtedness of
any Person at any date shall be the outstanding balance at such date of all
unconditional obligations as described above and, with respect to contingent
obligations, the maximum liability upon the occurrence of the contingency giving
rise to the obligation, provided (i) that the amount outstanding at any time 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
148
<PAGE>
"Unrestricted Subsidiary," the "Limitation on Restricted Payments" covenant and
the "Limitation on Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant described above, (i) "Investment" shall include (a) the
Fair Market Value of the assets (net of liabilities) of any Restricted
Subsidiary of the Company at the time that such Restricted Subsidiary of the
Company is designated an Unrestricted Subsidiary and shall exclude the Fair
Market Value of the assets (net of liabilities) of any Unrestricted Subsidiary
at the time that such Unrestricted Subsidiary is designated a Restricted
Subsidiary of the Company and (b) the Fair Market Value, in the case of a sale
of Capital Stock in accordance with the "Limitation on the Issuance and Sale of
Capital Stock of Restricted Subsidiaries" covenant such that a Person no longer
constitutes a Restricted Subsidiary, of the remaining assets (net of
liabilities) of such Person after such sale, and shall exclude the Fair Market
Value of the assets (net of liabilities) of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary of
the Company and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its Fair Market Value at the time of such
transfer, in each case as determined by the Board of Directors in good faith.
"Lien" is defined to mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof, any sale with recourse against the seller or any Affiliate of the
seller, or any agreement to give any security interest).
"Marketable Securities" is defined to mean: (i) Government Securities which
have a remaining weighted average life to maturity of not more than one year
from the date of Investment therein; (ii) any time deposit account, money market
deposit and certificate of deposit maturing not more than 180 days after the
date of acquisition issued by, or time deposit of, an Eligible Institution;
(iii) commercial paper maturing not more than 90 days after the date of
acquisition issued by a corporation (other than an Affiliate of the Company)
with a rating, at the time as of which any investment therein is made, of "P-1"
or higher according to Moody's Investors Service, Inc., or "A-1" or higher
according to Standard & Poor's Rating Group (or such similar equivalent rating
by at least one "nationally recognized statistical rating organization" (as
defined in Rule 436 under the Securities Act)); (iv) any banker's acceptance or
money market deposit accounts issued or offered by an Eligible Institution; (v)
repurchase obligations with a term of not more than 7 days for Government
Securities entered into with an Eligible Institution; and (vi) any fund 95% of
the assets of which consist of investments of the types described in clauses (i)
through (v) above.
"Net Cash Proceeds" is defined to mean, (a) with respect to any Asset Sale,
the proceeds of such Asset Sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of (i) brokerage
commissions and other fees and expenses (including 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
149
<PAGE>
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 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
150
<PAGE>
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.
151
<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.
152
<PAGE>
"Significant Subsidiary" is defined to mean, at any date of determination, any
Subsidiary of the Company that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company or (ii) as of the end of such fiscal year,
was the owner of more than 10% of the consolidated assets of the Company, all as
set forth on the most recently available consolidated financial statements of
the Company for such fiscal year.
"Stated Maturity" is defined to mean, (i) with respect to any debt security,
the date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii) with
respect to any scheduled installment of principal of or interest on any debt
security, the date specified in such debt security as the fixed date on which
such installment is due and payable.
"Strategic Subordinated Indebtedness" is defined to mean Indebtedness of the
Company Incurred to finance the acquisition of a Person engaged in a business
that is related, ancillary or complementary to the business conducted by the
Company or any of its Restricted Subsidiaries, which Indebtedness by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness is Incurred, (i) is expressly made subordinate in right of payment
to the Notes and (ii) provides that no payment of principal, premium or interest
on, or any other payment with respect to, such Indebtedness may be made prior to
the payment in full of all of the Company's obligations under the Notes;
provided that such Indebtedness may provide for and be repaid at any time from
the proceeds of a capital contribution, the sale of Common Stock (other than
Redeemable Stock) of the Company, or other Strategic Subordinated Indebtedness
Incurred, after the Incurrence of such Indebtedness.
"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,
153
<PAGE>
directly or indirectly, with respect to any Indebtedness other than Unrestricted
Subsidiary Indebtedness. The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary of the Company; provided that
immediately after giving effect to such designation (x) the Company could Incur
$1.00 of additional Indebtedness under the first paragraph of the "Limitation on
Indebtedness" covenant described above and (y) no Default or Event of Default
shall have occurred and be continuing. Any such designation by the Board of
Directors shall be evidenced to the Trustee by promptly filing with the Trustee
a copy of the Board Resolution giving effect to such designation and an
Officer's Certificate certifying that such designation complied with the
foregoing provisions.
"Unrestricted Subsidiary Indebtedness" is defined to mean Indebtedness of any
Unrestricted Subsidiary (i) as to which neither the Company nor any Restricted
Subsidiary is directly or indirectly liable (by virtue of the Company or any
such Restricted Subsidiary being the primary obligor on, guarantor of, or
otherwise liable in any respect to, such Indebtedness), and (ii) which, upon the
occurrence of a default with respect thereto, does not result in, or permit any
holder of any Indebtedness of the Company or any Restricted Subsidiary to
declare, a default on such Indebtedness of the Company or any Restricted
Subsidiary or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"U.S. Subsidiary" is defined to mean any corporation or other entity
incorporated or organized under the laws of the United States or any state
thereof.
"Voting Stock" is defined to mean with respect to any Person, Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly Owned," with respect to any Subsidiary, is defined to mean a
Subsidiary of the Company if all of the outstanding Capital Stock in such
Subsidiary (other than any director's qualifying shares or Investments by
foreign nationals mandated by applicable law) is owned by the Company or one or
more Wholly Owned Subsidiaries of the Company.
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.
154
<PAGE>
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.
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.
155
<PAGE>
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.
Exchange of Book-Entry Notes for Certificated Notes.
A Global Note is exchangeable for definitive Notes in registered certificated
form if:
156
<PAGE>
(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.
157
<PAGE>
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, 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 its 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,
158
<PAGE>
(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
(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
159
<PAGE>
(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).
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"),
160
<PAGE>
(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.
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
161
<PAGE>
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.
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
162
<PAGE>
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.
163
<PAGE>
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 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 will be effective with respect to payments made
after December 31, 1999 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.
164
<PAGE>
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.
165
<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.
166
<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.
167
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
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-18
Consolidated Balance Sheets as of December 31, 1997 and 1996......... F-19
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995................................................ F-20
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................... F-21
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995............................................ F-22
Notes to Consolidated Financial Statements........................... F-23
Financial Statement Schedule:
Report of Independent Auditors....................................... S-1
Schedule II - Valuation and Qualifying Accounts...................... S-2
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>
<TABLE>
<CAPTION>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
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>
<TABLE>
<CAPTION>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
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>
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 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.
F-8
<PAGE>
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.
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.
F-9
<PAGE>
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.
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.
F-10
<PAGE>
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>
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.
F-11
<PAGE>
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>
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>
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-12
<PAGE>
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.
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.
F-13
<PAGE>
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>
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
Total Life Exercise Total Exercise
Range of 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>
F-14
<PAGE>
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.
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
Deferred Tax Asset Valuation
- ------------------------------------------------------------------------------------
Charged to
Balance at Costs and Balance at
Period Beginning of Period Expenses Deductions Other (1) End of Period
- ------ ------------------- -------- ---------- --------- -------------
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-15
<PAGE>
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
======== ======== ========
December 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
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-16
<PAGE>
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, 1998 June 30, 1998 September 30, 1998 December 31, 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)
For the quarter ended
-----------------------------------------------------------------------------
March 31, 1997 June 30, 1997 September 30, 1997 December 31, 1997
-----------------------------------------------------------------------------
(in thousands)
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-17
<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-18
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- ---------
(IN THOUSANDS,
EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................................... $ 1,481 $ 6,020
Accounts receivable, net of allowance for doubtful
accounts of $8,149 and $7,588, respectively.................................... 31,743 29,063
Other current assets............................................................ 2,406 3,441
------- --------
Total current assets............................................................. 35,630 38,524
Property and equipment, at cost:
Transmission and communications equipment....................................... 29,720 24,691
Furniture, fixtures and other................................................... 9,620 5,600
------- --------
39,340 30,291
Less accumulated depreciation and amortization................................... (9,668) (5,755)
------- --------
29,672 24,536
Other assets:
Customer bases, net of accumulated amortization of $2,385
and $1,358, respectively....................................................... 3,274 3,806
Excess of cost over net assets of businesses acquired,
net of accumulated amortization of $3,508 and $2,368,
respectively................................................................... 38,826 34,260
Other........................................................................... 1,027 484
------- --------
Total assets..................................................................... $108,429 $101,610
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 1,237 $ 2,758
Accrued network costs........................................................... 19,497 19,546
Other accrued expenses.......................................................... 6,365 5,395
Long-term obligations due within one year....................................... 1,098 817
Deferred revenue and other current liabilities.................................. 1,689 1,807
------- --------
Total current liabilities........................................................ 29,886 30,323
Long-term obligations (Notes 3 and 4)............................................ 19,593 3,965
Shareholders' equity:
Preferred stock, $.01 par value per share; 1,000,000 shares
authorized, no shares issued and outstanding................................... -- --
Common stock, $.0419 par value per share; 50,000,000
shares authorized; 12,104,960 and 11,804,675 shares
issued and outstanding, respectively........................................... 505 493
Deferred compensation........................................................... (551) (808)
Additional paid-in capital...................................................... 108,354 106,140
Accumulated deficit............................................................. (49,358) (38,503)
------- --------
Total shareholders' equity....................................................... 58,950 67,322
------- --------
Total liabilities and shareholders' equity....................................... $108,429 $101,610
======== ========
</TABLE>
See accompanying notes.
F-19
<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-20
<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)
====== ======= ====== ===== ========= ==== ======== ======= ========
</TABLE>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
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
=============
See accompanying notes.
F-21
<PAGE>
TRESCOM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss before extraordinary item............... $(10,855) $ (3,621) $(11,627)
Extraordinary loss on early extinguishment
of debt..................................... -- (1,956) --
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.............. 6,599 4,928 3,961
Non-cash interest expense.................. -- 431 607
Non-cash interest expense on note to
shareholder............................... -- 297 --
Non-cash compensation...................... 257 1,264 139
Changes in operating assets and
liabilities, net of effects of
acquisitions:
Accounts receivable...................... (2,118) (11,770) (5,511)
Other current assets..................... 1,045 (2,139) (943)
Accounts payable......................... (2,805) 564 (2,307)
Accrued network costs.................... (49) 7,911 1,180
Other accrued expenses................... (772) 754 (1,942)
Deferred revenue and other current
liabilities............................. (1,427) 1,513 --
-------- -------- --------
Net cash used in operating activities........ (10,125) (1,824) (16,443)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.......... (6,914) (8,086) (5,637)
Expenditures for line installations.......... (577) (144) (418)
Cash paid for purchases of businesses,
net......................................... (1,201) (522) --
-------- -------- --------
Net cash used in investing activities........ (8,692) (8,752) (6,055)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common
stock....................................... -- 50,727 915
Costs relating to initial public offering.... -- (2,160) --
Proceeds from the issuance of preferred
stock....................................... -- -- 14,778
Proceeds from debt........................... -- -- 7,572
Proceeds from issuance of warrants
associated with debt........................ -- -- 2,428
Proceeds from revolving credit agreement,
net......................................... 15,645 -- --
Payment of loan acquisition costs............ (482) (86) (533)
Repayment of cash overdraft.................. -- -- (382)
Repayment of revolving credit facility....... -- (24,173) --
Repayment of sellers' note................... -- (1,000) --
Repayment of notes payable to stockholder.... -- (8,476) --
Repayment of debt............................ (15) (18) (27)
Proceeds from stock option exercise.......... 7 60 --
Principal payments on capital lease
obligations................................. (877) (330) (201)
-------- -------- --------
Net cash provided by financing activities.... 14,278 14,544 24,550
-------- -------- --------
Net change in cash and cash equivalents...... (4,539) 3,968 2,052
Cash and cash equivalents at beginning of
period...................................... 6,020 2,052 --
-------- -------- --------
Cash and cash equivalents at end of
period...................................... $ 1,481 $ 6,020 $ 2,052
======== ======== ========
Interest paid................................ $ 806 $ 1,352 $ 2,257
======== ======== ========
Capital lease obligations incurred........... $ 1,156 $ 4,310 $ --
======== ======== ========
</TABLE>
See accompanying notes.
F-22
<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:
Transmission and communications equipment.................... 3 to 20 years
Furniture, fixtures and other................................ 3 to 7 years
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 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
F-23
<PAGE>
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-24
<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-25
<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
F-26
<PAGE>
declaration and payment of dividends. Through July 31, 1997, TresCom was either
in compliance or received waivers with respect to all covenants under the Credit
Facility.
On July 31, 1997, TresCom entered into a Revolving Credit and Security
Agreement (the "Revolving Credit Agreement") secured by TresCom's accounts
receivable and certain intangible assets. The maximum borrowing under this
agreement is $25,000; however, the amount available to be borrowed is based upon
TresCom's pledged accounts receivable and intangible assets.
On July 31, 1997, all borrowings under the Credit Facility were repaid in full
with borrowings under the Revolving Credit Agreement and the Credit Facility was
terminated. As of December 31, 1997, availability under the Revolving Credit
Agreement was approximately $19,702, of which $15,645 (including approximately
$600 of letters of credit) had been utilized. At December 31, 1997, TresCom was
in compliance with all covenants under the Revolving Credit Agreement.
Principal payments on all debt obligations are:
1998............................................................ $ 17
1999............................................................ 17
2000............................................................ 18
2001............................................................ 19
2002............................................................ 20
Thereafter...................................................... 310
Revolving Credit Agreement...................................... 15,645
-------
Total......................................................... $16,046
=======
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:
DECEMBER 31,
--------------
1997 1996
------ ------
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
====== ======
F-27
<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-28
<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-29
<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-30
<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-31
<PAGE>
TRESCOM INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. FINANCIAL INSTRUMENTS
The carrying amounts reflected in the consolidated balance sheets for cash,
accounts receivable, accounts payable and accrued expenses approximate the
respective fair values due to the short-term nature of these items. The fair
values for long-term obligations at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------ ----- -------- -----
<S> <C> <C> <C> <C>
Loans payable to the Small Business Adminis-
tration....................................... $401 $323 $416 $335
==== ==== ==== ====
</TABLE>
The fair values of all other long-term obligations approximate the carrying
values and are therefore not disclosed.
11. RELATED PARTY TRANSACTIONS
During 1996, an affiliate of a major shareholder of TresCom owned
approximately 20% of LCI International, Inc. ("LCI"). TresCom buys network
services from and provides network services to LCI. At December 31, 1996, the
net amount due to LCI was $1,935. During 1996, $7,140 of services were provided
and $5,453 were used. During 1997, the affiliate of TresCom's major shareholder
reduced their ownership stake to an insignificant percentage.
In December 1996, TresCom acquired 100% of the common stock of Intex
Telecommunications, Inc. from LCI. The purchase price consideration was 394,095
shares of TresCom common stock.
12. NATURAL DISASTER
On September 16, 1995, Hurricane Marilyn damaged the island of St. Thomas
where TresCom has significant operations. TresCom's Property and Business
Interruption Insurance covered a significant portion of the damages to equipment
and certain losses from operations. At September 30, 1995, TresCom estimated its
exposure relating to the hurricane to be $2,500. Based on visits to the affected
area, review of accounts receivable and actual settlements with customers,
management revised its estimate of losses resulting from the hurricane to
$1,717. Accordingly, the net loss for the quarter ended December 31, 1996
included this change in estimate of $783.
F-32
<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-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TresCom International, Inc.
We have audited the consolidated financial statements of TresCom
International, Inc. and its subsidiaries ("TresCom") as of December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997, and
have issued our report thereon dated February 27, 1998. Our audit also included
the accompanying financial statement schedule of TresCom. This schedule is the
responsibility of TresCom's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1998
S-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TRESCOM INTERNATIONAL, INC.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- -------------------------- ----------- ----------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............ $7,588 $4,159 $500(1) $4,098(3) $8,149
Valuation allowance
for deferred taxes... 8,479 5,574 -- -- 14,053
Year ended December 31,
1996:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 4,140 5,036 -- 1,588(3) 7,588
Valuation allowance
for deferred taxes... 8,793 -- -- 314(2) 8,479
Year ended December 31,
1995:
Reserve and allowance
deducted from asset
accounts:
Allowance for doubtful
accounts............. 3,761 1,791 700(4) 2,112(3) 4,140
Valuation allowance
for deferred taxes... 5,737 3,056 -- -- 8,793
</TABLE>
- --------
(1) In connection with acquisitions.
(2) Change in deferred taxes.
(3) Write-off of uncollectible accounts.
(4) Uncollectible accounts in U.S. Virgin Islands resulting from Hurricane
Marilyn.
S-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
April , 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
II-1
<PAGE>
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
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.)
II-2
<PAGE>
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; 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 Indenture of Primus, as amended and restated on
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.
II-3
<PAGE>
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.
II-4
<PAGE>
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.
II-5
<PAGE>
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.
II-6
<PAGE>
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.+
- --------
* To be Filed by Amendment.
+ Filed herewith.
** Compensatory Benefit Plan.
(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
II-7
<PAGE>
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-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in McLean, Virginia on April 19, 1999.
Primus Telecommunications Group,
Incorporated
/s/ K. Paul Singh
By: _________________________________
K. PAUL SINGH President, Chairman
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears
below on this Registration Statement hereby constitutes and appoints K. Paul
Singh and Neil L. Hazard and each of them, with full power to act without the
other, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities (until revoked in writing), to sign any and all amendments
(including post-effective amendments thereto) to this Form S-4 Registration
Statement of Primus Telecommunications Group, Incorporated and to file the same,
with all Exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary fully to all intents and purposes as
he might or could do in person thereby ratifying and confirming all that said
attorney-in-fact and agents, or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
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.
SIGNATURE TITLE DATE
/s/ K. Paul Singh Chairman, President April 19, 1999
- ----------------------------- and Chief Executive
K. PAUL SINGH Officer (principal
executive officer
and Director
/s/ Neil L. Hazard Executive Vice April 19, 1999
- ----------------------------- President and Chief
NEIL L. HAZARD Financial Officer
(principal financial officer)
/s/ Thomas R. Kloster Vice President and
- ----------------------------- Corporate Controller
THOMAS R. KLOSTER (principal accounting officer) April 19, 1999
/s/ John F, DePodesta Executive Vice April 19, 1999
- ----------------------------- President and
JOHN F. DEPODESTA Director
II-9
<PAGE>
SIGNATURE TITLE DATE
/s/ Herman Fialkov Director April 19, 1999
- -------------------------------------
HERMAN FIALKOV
/s/ David E. Hershberg Director April 19, 1999
- -------------------------------------
DAVID E. HERSHBERG
/s/ John Puente Director April 19, 1999
- -------------------------------------
JOHN PUENTE
Director April 19, 1999
- -------------------------------------
DOUGLAS M. KARP
II-10
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
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.)
II-11
<PAGE>
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; 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 Indenture of Primus, as amended and restated on
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.
II-12
<PAGE>
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.
II-13
<PAGE>
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.
10.20 Primus Employee Stock Purchase Plan; Incorporated by reference to
Exhibit 10.15 of the 1997 Senior Note Registration Statement.**
II-14
<PAGE>
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.
II-15
<PAGE>
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.+
- --------
* To be Filed by Amendment.
+ Filed herewith.
** Compensatory Benefit Plan.
II-16
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
As of March 31, 1999
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiary Incorporation
- --------------------------------------------------------------------------------
<S> <C>
Primus Telecommunications, Inc. Delaware
Primus Telecommunications International, Inc Delaware
Primus Telecommunications, Ltd. United Kingdom
Primus Telecommunications de Mexico, S.A. de C.V. Mexico
Primus Telecommunications Pty., Ltd. Australia
Primus Telecommunications (Australia) Pty., Ltd. Australia
(formerly known as Axicorp Pty., Ltd.)
3362426 Canada Inc. Canada
d/b/a Primus Canada
GlobalServe Communications Inc. Ontario
Primus Telecommunications Netherlands B.V. Netherlands
Primus Telecommunications SA France
PTI GmbH Germany
Primus TeleCom A/S Denmark
Primus Telecommunicaciones SA Spain
Primus Telecommunications AG Switzerland
Primus Telecommunications SRL Italy
Primus Telecommunications K.K Japan
Primus Japan K.K. Japan
Eclipse Data Services Pty., Ltd. Australia
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Hotkey Internet Services Pty., Ltd. Australia
Rate Reduction Center, Inc. Florida
Least Cost Routing, Inc. Florida
Rockwell Communications Corporation Florida
Intex Telecommunications, Inc. South Carolina
TresCom International, Inc. Florida
TresCom Network Services, Inc. Florida
TresCom U.S.A., Inc. Florida
Global Telephone Holding, Inc. U.S. Virgin Islands
InterIsland Telephone Corp. U.S. Virgin Islands
The St. Thomas and San Juan Telephone Company, Inc. U.S. Virgin Islands
STSJ Overseas Telephone Company, Inc. Puerto Rico
OTC Network Assets, Inc. Puerto Rico
Puerto Rico Telecom Corporation New York
STSJ Network Assets, Inc. U.S. Virgin Islands
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Primus
Telecommunications Group, Incorporated on Form S-4 of our report dated February
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
April 22, 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 the
Registration Statement (Form S-4 No. 333-_____) 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
April 21, 1999
<PAGE>
Exhibit 25
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------------
FORM T-1
------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT FOR 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a trustee pursuant to Section 305(b) (2) _____
-----------------------------------------
FIRST UNION NATIONAL BANK
(Exact name of Trustee as specified in its charter)
230 SOUTH TRYON STREET, 9TH FL.
CHARLOTTE, NC 28288-1179 22-1147033
(Address of principal executive office) (Zip Code) (I.R.S. Employer Identification No.)
</TABLE>
SARAH A. MCMAHON, (804) 343-6057
800 E. MAIN STREET, RICHMOND, VIRGINIA 23219
-------------------------------------------------
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(Exact name of obligor as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
54-1708481
(I.R.S. Employer Identification No.)
1700 OLD MEADOW ROAD
MCLEAN, VA
(Address of principal executive offices)
22102
(Zip Code)
11 1/4% SENIOR NOTES DUE 2009
(Title of the indenture securities)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
1. GENERAL INFORMATION.
(a) The following are the names and addresses of each examining or
supervising authority to which the Trustee is subject:
The Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Richmond, Richmond, Virginia.
Federal Deposit Insurance Corporation, Washington, D.C.
Securities and Exchange Commission, Division of Market
Regulation, Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR.
The obligor is not an affiliate of the Trustee.
3. VOTING SECURITIES OF THE TRUSTEE.
Not applicable
(See answer to Item 13)
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
Not applicable
(See answer to Item 13)
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR
OR UNDERWRITERS.
Not applicable
(See answer to Item 13)
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS
OFFICIALS.
Not applicable
(See answer to Item 13)
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR
OFFICIALS.
Not applicable
(See answer to Item 13)
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Not applicable
(See answer to Item 13)
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Not applicable
(See answer to Item 13)
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Not applicable
(See answer to Item 13)
<PAGE>
11. OWNERSHIP OF HOLDERS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Not applicable
(See answer to Item 13)
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Not applicable
(See answer to Item 13)
13. DEFAULTS BY THE OBLIGOR.
A. None
B. None
14. AFFILIATIONS WITH THE UNDERWRITERS.
Not applicable
(See answer to Item 13)
15. FOREIGN TRUSTEE.
Trustee is a national banking association organized under the
laws of the United States.
16. LIST OF EXHIBITS.
(1) Articles of Incorporation. (Incorporated by
reference from Exhibit 25 to Registration 333-
25575, filed June 5, 1997.)
(2) Certificate of Authority of the Trustee to conduct business.
(Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(3) Certificate of Authority of the Trustee to exercise corporate trust
powers. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(4) By-Laws. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(5) Inapplicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939. Included at Page 4 of this Form T-1
Statement.
(7) Report of condition of Trustee.
(8) Inapplicable.
(9) Inapplicable.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK, a national association
organized and existing under the laws of the United States of America, has
duly caused this statement of eligibility and qualification to be signed on
its behalf by the undersigned, thereunto duly authorized, all in the City
of Richmond, and Commonwealth of Virginia on the 20th day of April, 1999.
FIRST UNION NATIONAL BANK
(Trustee)
BY:____________________________________
Sarah A. McMahon, Vice President
EXHIBIT T-1 (6)
CONSENTS OF TRUSTEE
Under section 321(b) of the Trust Indenture Act of 1939 and in
connection with the proposed issuance by Primus Telecommunications Group,
Incorporated Senior Notes due 2009, First Union National Bank, as the
Trustee herein named, hereby consents that reports of examinations of said
Trustee by Federal, State, Territorial or District authorities may be
furnished by such authorities to the Securities and Exchange Commission
upon requests therefor.
FIRST UNION NATIONAL BANK
BY:____________________________________
John M. Turner, Vice President
Dated: April 20, 1999
<PAGE>
Exhibit 99.1 Form of Letter of Transmittal.
LETTER OF TRANSMITTAL
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
11 1/4% SENIOR NOTES DUE 2009
FOR A NEW SERIES OF ITS
11 1/4% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED ______ __, 1999
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON ______ __ , 1999,
UNLESS EXTENDED.
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
FIRST UNION NATIONAL BANK
By Mail, Hand or Overnight Delivery: By Facsimile:
First Union Customer Information Center (704) 590-7628
Reorganization Department, 36C-NC 1153
1525 West W.T. Harris Boulevard To confirm by Telephone
Charlotte, NC 28262 or for Information call:
(704) 590-7408
<PAGE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR
TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN THE ONE LISTED
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN
SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned acknowledges receipt of the Prospectus, dated ______ __,
1999 ("Exchange Offer"), of Primus Telecommunications Group, Inc., a Delaware
corporation (the "Company"), relating to the offer of the Company, upon the
terms and subject to the conditions set forth in the Exchange Offer and in this
Letter of Transmittal and the instructions hereto (which together with the
Exchange Offer and the instructions hereto constitute the "Offer"), to exchange
a new series of its 11 1/4% Senior Notes due 2009 (the "Exchange Notes") which
have been registered under the Securities Act of 1933 (the "Securities Act") for
any and all of its outstanding 11 1/4% Senior Notes due 2009 ("Initial Notes"),
at the rate of $1,000 principal amount of the Exchange Notes for each $1,000
principal amount of the Initial Notes. Capitalized terms used but not defined
herein have the meanings given to them in the Exchange Offer.
The undersigned has completed the appropriate boxes below and signed this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Offer.
This Letter of Transmittal is to be used whether the Initial Notes are to
be physically delivered herewith, or whether guaranteed delivery procedures or
book-entry delivery procedures are being used, pursuant to the procedures set
forth under "The Exchange Offer" in the Exchange Offer. If delivery of Initial
Notes is to be made by book-entry transfer to the account maintained by the
Exchange Agent at The Depository Trust Company ("DTC"), this Letter of
Transmittal need not be manually executed, provided, however, that tenders of
Initial Notes must be effected in accordance with the procedures mandated by DTC
and the procedures set forth in the Exchange Offer under the caption "The
Exchange Offer -- Procedures for Tendering Initial Notes --Book-Entry Delivery."
If a person or entity in whose name Initial Notes are registered on the books of
the Registrar (a "Registered Holder") desires to tender Initial Notes and such
Initial Notes are not immediately available or time will not permit all
documents required by the Offer to reach the Exchange Agent (or such Registered
Holder is unable to complete the procedure for book-entry transfer on a timely
basis) prior to 5:00 P.M. New York City time on _________ __, 1999 (the
"Expiration Date"), a tender may be effected in accordance with the guaranteed
delivery procedures set forth in the Exchange Offer under the caption "The
Exchange Offer -- Procedures for Tendering Initial Notes -- Guaranteed Delivery
Procedures." See Instruction 1.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
LADIES AND GENTLEMEN:
Upon the terms and subject to the conditions of the Offer, the undersigned
hereby tenders to the Company the principal amount of the Initial Notes
indicated below. Subject to, and effective upon, the acceptance for exchange of
the Initial Notes tendered hereby, the undersigned hereby irrevocably sells,
assigns and transfers to or upon the order of the Company all right, title and
interest in and to such Initial Notes and hereby irrevocably constitutes and
appoints the Exchange Agent the true and lawful agent and attorney-in-fact of
the undersigned (with full knowledge that said exchange agent also acts as the
agent of the Company) with respect to such Initial Notes, with full power of
substitution (such power of attorney being deemed to be an irrevocable power
coupled with an interest), to take such further action as may be required in
connection with the delivery, tender and exchange of the Initial Notes.
<PAGE>
The undersigned acknowledges that this Offer is being made in reliance on
an interpretation by the staff of the Securities and Exchange Commission (the
"SEC") that the Exchange Notes issued pursuant to the Exchange Offer in exchange
for the Initial Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than (i) a broker-dealer who purchased
Initial Notes directly from the Company for resale pursuant to Rule 144A under
the Securities Act, or (ii) a person that is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance with
the registration and prospectus delivery provisions of the Securities Act
provided that such Exchange Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such Exchange Notes. See Morgan Stanley &
Co. Inc., SEC No-Action Letter (available June 5, 1991); The Exchange Offer
under the caption "The Exchange Offer -- Resales of the Exchange Notes."
The undersigned acknowledges that the Exchange Notes have not been
registered or qualified under any state securities laws. This Offer is being
made to: (i) U.S. persons pursuant to exemptions from such laws for sales to
institutional investors, and (ii) non-U.S. persons (within the meaning of
Regulation S under the Securities Act), as state securities laws do not apply to
sales to persons who are not residents of any state. The undersigned hereby
represents and warrants that the undersigned is either (i) a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act,
(ii) an institutional "accredited investor" within the meaning of subparagraph
(a)(1), (2), (3) or (7) of Rule 501 under the Securities Act or (iii) a non-U.S.
person (within the meaning of Regulation S under the Securities Act).
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT THE COMPANY RESERVES THE RIGHT
NOT TO ACCEPT TENDERED INITIAL NOTES FROM ANY TENDERING HOLDER IF THE COMPANY
DETERMINES, IN ITS SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD
RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS.
The undersigned, if the undersigned is a beneficial holder, represents, or,
if the undersigned is a broker, dealer, commercial bank, trust company or other
nominee, represents that it has received representations from the beneficial
owners of the Initial Notes stating, (as defined in the Exchange Offer) that (i)
the Exchange Notes to be acquired in connection with the Exchange Offer by the
Holder and each Beneficial Owner of the Initial Notes are being acquired by the
Holder and each Beneficial Owner in the ordinary course of business of the
Holder and each Beneficial Owner, (ii) the Holder and each Beneficial Owner are
not participating, do not intend to participate, and have no arrangement or
understanding with any person to participate, in the distribution (within the
meaning of the Securities Act) of the Exchange Notes, (iii) the Holder and each
Beneficial Owner acknowledge and agree that any person participating in the
Exchange Offer for the purpose of distributing the Exchange Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the Exchange Notes acquired
by such person and cannot rely on the position of the staff of the Commission
set forth in no-action letters that are discussed in the Exchange Offer under
the caption "The Exchange Offer -- Resales of the Exchange Notes," (iv) that if
the Holder is a broker-dealer holding Initial Notes acquired for its own account
as a result of market-making activities or other trading activities, it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of Exchange Notes received in respect of such Initial
Notes pursuant to the Exchange Offer; provided that the delivery of a Prospectus
in connection with the exchange of Initial Notes by such Holder will not be
deemed an admission that such Holder is an underwriter (within the meaning of
the Securities Act), (v) the Holder and each Beneficial Owner understand that a
secondary resale transaction described in clause (iii) above should be covered
by an effective registration statement containing the selling security holder
information required by item 507 of Regulations S-K of the Securities Act and
(vi) neither the Holder nor any Beneficial Owner is an "affiliate," as defined
under Rule 405 of the Securities Act, of the Company.
In addition, if the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes. If the undersigned is a broker-dealer holding
Initial Notes acquired for its own account as a result of market-making
activities or other trading activities, it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of Exchange
Notes received in respect of such Initial Notes pursuant to the Exchange Offer;
provided, however, that by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an underwriter (within the
meaning of the Securities Act).
The Company has agreed, subject to the provisions of the Registration
Rights Agreement, the Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer (as defined below) in
connection with resales of Exchange Notes received in exchange for Initial
Notes, where such Initial Notes were acquired by such broker-dealer for its own
account as a result of market-making activities or other trading activities, for
a period ending 180 days after the Expiration Date (subject to extension under
certain limited circumstances described in the Prospectus) or, if earlier, when
all such Exchange Notes have been disposed of by such participating broker-
dealer. In that regard, each broker-dealer who acquired Initial Notes for its
own account as a result of market-making or other trading activities (a
"Participating Broker-Dealer"), by tendering such Initial Notes and executing
this Letter of Transmittal, agrees that, upon receipt of notice from the Company
of the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in the Prospectus untrue in any
material respect or which causes the Prospectus to omit to state a material fact
necessary in order to make the statements contained or incorporated by reference
therein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend the
sale of Exchange Notes pursuant to the Prospectus until the Company have amended
or supplemented the Prospectus to correct such misstatement or omission and the
Company has furnished copies of the amended or supplemented Prospectus to the
Participating Broker-Dealer or the Company has given notice that the sale of the
Exchange Notes may be resumed, as the case may be. If the Company gives such
notice to suspend the sale of the Exchange Notes, they shall extend the
<PAGE>
180-day period referred to above during which Participating Broker-Dealers are
entitled to use the Prospectus in connection with the resale of Exchange Notes
by the number of days during the period from and including the date of the
giving of such notice to and including the date when Participating Broker-
Dealers shall have received copies of the supplemented or amended Prospectus
necessary to permit resales of the Exchange Notes or to and including the date
on which the Company has given notice that the sale of Exchange Notes may be
resumed, as the case may be.
The undersigned understands and acknowledges that the Company reserves the
right in its sole discretion to purchase or make offers for any Initial Notes
that remain outstanding subsequent to the Expiration Date or as set forth in the
Exchange Offer under the caption "The Exchange Offer -- Conditions of the
Exchange Offer," to terminate the Exchange Offer and, to the extent permitted by
applicable law, purchase Initial Notes in the open market, in privately
negotiated transactions or otherwise. The term of any such purchases or offers
could differ from the terms of the Exchange Offer.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Offer, has full power and authority to tender,
exchange, assign and transfer the Initial Notes tendered hereby, and that when
the same are accepted for exchange by the Company, the Company will acquire good
and unencumbered title thereto, free and clear of all liens, restrictions
charges and encumbrances and not subject to any adverse claim or right. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Exchange Agent or the Company to be reasonably necessary or
desirable to complete the sale, assignment and transfer the Initial Notes
tendered hereby.
The undersigned agrees that all authority conferred or agreed to be
conferred by this Letter of Transmittal and every obligation of the undersigned
hereunder shall be binding upon the successors, assigns, heirs, executors,
administrations, trustees in bankruptcy and legal representatives of the
undersigned and shall not be affected by, and shall survive, the death or
incapacity of the undersigned.
The undersigned understands that tenders of the Initial Notes pursuant to
any one of the procedures described under "The Exchange Offer -- Procedures for
Tendering Initial Notes" in the Exchange Offer and in the instructions hereto
will constitute a binding agreement between the undersigned and the Company in
accordance with the terms and subject to the conditions of the Offer.
The undersigned understands that by tendering Initial Notes pursuant to one
of the procedures described in the Exchange Offer and the instructions thereto,
the tendering holder will be deemed to have waived the right to receive any
payment in respect of interest on the Initial Notes accrued up to the date of
issuance of the Exchange Notes.
The undersigned recognizes that, under certain circumstances set forth in
the Exchange Offer, the Company may not be required to accept for exchange any
of the Initial Notes tendered. Initial Notes not accepted for exchange or
withdrawn will be returned to the undersigned as the address set forth below
unless otherwise indicated under "Special Delivery Instructions" below.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Initial Notes, that such Exchange Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute certificates
representing the Initial Notes not exchanged or not accepted for exchange will
be issued to the undersigned or, in the case of a book-entry transfer of Initial
Notes, will be credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions," the
undersigned hereby directs that the Exchange Notes be delivered to the
undersigned at the address shown below the undersigned's signature. The
undersigned recognizes that the Company has no obligation pursuant to the
"Special Exchange Instructions" to transfer any Initial Notes from the name of
the Registered Holder thereof if the Company does not accept for exchange any of
the principal amount of such Initial Notes so tendered.
<PAGE>
THE UNDERSIGNED BY COMPLETING THE BOX "DESCRIPTION OF INITIAL NOTES" BELOW
AND SIGNING THIS LETTER, WILL BE DEEMED TO HAVE TENDERED THE INITIAL NOTES AND
MADE CERTAIN REPRESENTATIONS DESCRIBED HEREIN AND IN THE EXCHANGE OFFER.
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(SEE INSTRUCTIONS 1 AND 3 AND THE FOLLOWING PARAGRAPH)
(IMPORTANT: ALSO COMPLETE SUBSTITUTE FORM W-9 ON PAGE [__])
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE(S) OF OWNER(S)
Dated: ______________________________________________, 1999
If the holder(s) is/are tendering any Initial Notes, this Letter of Transmittal
must be signed by the Registered Holder(s) as the name(s) appear(s) on the
Initial Notes or on a security position listing or by person(s) authorized to
become Registered Holder(s) by endorsements and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian, officer or
other person acting in a fiduciary or representative capacity, please set forth
full title. See Instruction 3.
Name(s)------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Please type or print)
Capacity:______________________________________________________________________
Address:_______________________________________________________________________
(Including Zip Code)
Area Code and Telephone Number
Tax Identification or Social Security No(s)
(COMPLETE SUBSTITUTE FORM W-9 ON PAGE [___])
SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 3)
Signature(s) Guaranteed by
an Eligible Institution:
Authorized Signature:__________________________________________________________
Printed Name:__________________________________________________________________
Title:_________________________________________________________________________
Firm:__________________________________________________________________________
Address:_______________________________________________________________________
Area Code and Telephone Number_________________________________________________
Dated:__________________________, 1999
IMPORTANT: THIS LETTER OR A FACSIMILE HEREOF (TOGETHER WITH THE INITIAL NOTES
OR A NOTICE OF GUARANTEED DELIVERY AND ALL OTHER REQUIRED DOCUMENTS) MUST BE
RECEIVED BY THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE.
<PAGE>
List below the Initial Notes to which this Letter of Transmittal relates.
If the space provided below is inadequate, the certificate numbers and principal
amounts should be listed on a separate signed schedule affixed thereto. See
Instruction 7. The minimum permitted tender is $1,000 principal amount of
Initial Notes; all other tenders must be in integral multiples of $1,000.
<TABLE>
<CAPTION>
DESCRIPTION OF INITIAL NOTES
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Name(s) and Address(es) Certificate Aggregate Principal Amount Principal Amount
of Holder(s) (Please Fill Number(s)* Represented Tendered**
in, if Blank)
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------
* Need not be completed if Initial Notes are being tendered by book-entry holders.
** Unless otherwise indicated in the column labeled "Principal Amount Tendered" and subject to the terms
and conditions of the Offer, the undersigned will be deemed to have tendered the entire aggregate
principal amount represented by the Initial Notes indicated in the column labeled "Aggregate Principal
Amount Represented." See Instruction 8.
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE ENCLOSED HEREWITH.
[ ] CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED INITIAL NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
THE FOLLOWING (SEE INSTRUCTIONS 1 AND 3):
Name(s) of Registered Holder(s):__________________________________________
Window Ticket Number (if any):____________________________________________
Date of Execution of Notice of Guaranteed Delivery:_______________________
Name of Eligible Institution that Guaranteed Delivery:____________________
If Guaranteed Delivery is to be made by Book-Entry Transfer:
Name of Tendering Institution:__________________________________
Account Number:_________________________________________________
Transaction Code Number:________________________________________
<PAGE>
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE INITIAL NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF
THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:___________________________________________________________
Address:________________________________________________________
[ ] CHECK HERE IF TENDERED INITIAL NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE
BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution:__________________________________
Account Number:_________________________________________________
Transaction Code Number:________________________________________
[ ] CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED INITIAL
NOTES ARE TO BE RETURNED BY CREDITING THE BOOK-ENTRY TRANSFER FACILITY
ACCOUNT NUMBER SET FORTH ABOVE.
If delivery of Initial Notes is to be made by book-entry transfer to the
account maintained by the Exchange Agent at DTC, then tenders of Initial Notes
must be effected in accordance with the procedures mandated by DTC and the
procedures set forth in the Exchange Offer under the caption "The Exchange Offer
- -- Procedures for Tendering Initial Notes -- Book-Entry Delivery."
<PAGE>
SPECIAL EXCHANGE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Initial Notes in a principal amount not exchanged and/or
Exchange Notes are to be registered in the name of or issued to someone other
than the person or persons whose signature(s) appear(s) on this Letter of
Transmittal above.
Issue and mail: (check appropriate box(es)):
[ ] Exchange Notes to: [ ] Initial Notes not tendered to:
Name(s):________________________________________________________________________
(Please type or print)
- --------------------------------------------------------------------------------
(Please type or print)
Address:________________________________________________________________________
- --------------------------------------------------------------------------------
(Zip Code)
- --------------------------------------------------------------------------------
Tax Identification or Social Security No(s)
(COMPLETE SUBSTITUTE FORM W-9 ON PAGE [___])
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if Initial Notes in a principal amount not exchanged and/or
Exchange Notes are to be sent to someone other than the person or persons whose
signature(s) appear(s) on this Letter of Transmittal above or to such person or
persons at an address other than that shown in the box entitled "Description of
Initial Notes" on this Letter of Transmittal above.
Mail and deliver: (check appropriate box(es)):
[ ] Exchange Notes to: [ ] Initial Notes not tendered to:
Name(s):___________________________________________________________________
(Please type or print)
- --------------------------------------------------------------------------------
(Please type of print)
Address:___________________________________________________________________
- --------------------------------------------------------------------------------
(Zip Code)
- --------------------------------------------------------------------------------
Tax Identification or Social Security No(s)
<PAGE>
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL EXCHANGING HOLDERS
(SEE INSTRUCTION 5)
<TABLE>
<CAPTION>
PAYER'S NAME: FIRST UNION NATIONAL BANK
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 - PLEASE PROVIDE YOUR TIN IN THE BOX Social security number(s)
FORM W-9 AT RIGHT AND CERTIFY BY SIGNING AND OR __________________________
DATING BELOW. Employer Identification Numbers
DEPARTMENT OF THE ----------------------------------------------------------------------------------------
TREASURY PART 2 - CERTIFICATES - Under penalties of perjury, I certify that:
INTERNAL REVENUE (1) The number shown on this form is my correct taxpayer identification number (or I am
SERVICE waiting for a number to be issued for me), and
Payer's Request for (2) I am not subject to backup withholding because: (a) I am exempt from backup
Taxpayer withholding, or (b) I have not been notified by the internal Revenue Service (IRS)
Identification that I am subject to backup withholding as a result of a failure to report all interest
Number ("TIN") or dividends, or (c) the IRS has notified me that I am no longer subject to backup
withholding.
CERTIFICATION INSTRUCTIONS - You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return.
----------------------------------------------------------------------------------------
SIGNATURE _______________________ DATE_____ PART 3 - Awaiting TIN [_]
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31 PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE
REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER
IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART
3 OF THE SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office of (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
payments of the Purchase Price made to me thereafter will be withheld until I
provide a number.
Signature ________________________________ Date______________________
- --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND INITIAL NOTES: GUARANTEED
DELIVERY PROCEDURES. To be effectively tendered pursuant to the Offer, the
Initial Notes, together with a properly completed Letter of Transmittal (or
manually signed facsimile hereof) duly executed by the Registered Holder
thereof, and any other documents required by this Letter of Transmittal must be
received by the Exchange Agent at one of its addresses set forth on the front
page of this Letter of Transmittal and tendered Initial Notes must be received
by the Exchange Agent at one of such addresses on or prior to the Expiration
Date; provided, however, that book-entry transfers of Initial Notes may be
effected in accordance with the procedures set forth in the Exchange Offer under
the caption "The Exchange Offer -- Procedures For Tendering Initial Notes --
Book-Entry Delivery." If the Beneficial Owner of any Initial Notes is not the
Registered Holder, then such person may validly tender such person's Initial
Notes only by obtaining and submitting to the Exchange Agent a properly
completed Letter of Transmittal from the Registered Holder. LETTERS OF
TRANSMITTAL OF INITIAL NOTES SHOULD BE DELIVERED ONLY BY HAND OR BY COURIER, OR
TRANSMITTED BY MAIL, AND ONLY TO THE EXCHANGE AGENT AND NOT TO THE COMPANY OR TO
ANY OTHER PERSON.
THE METHOD OF DELIVERY OF INITIAL NOTES AND ALL OTHER REQUIRED DOCUMENTS TO
THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, AND IF SUCH
DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED,
REGISTERED MAIL WITH RETURN RECEIPT REQUESTED. IF INITIAL NOTES ARE SENT BY
MAIL, IT IS SUGGESTED THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE
EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT PRIOR TO 5:00 P.M., NEW
YORK CITY TIME, ON THE EXPIRATION DATE.
If a holder desires to tender Initial Notes and such holder's Initial Notes
are not immediately available or time will not permit such holder to complete
the procedures for book-entry transfer on a timely basis or time will not permit
such holder's Letter of Transmittal and other required documents to reach the
Exchange Agent on or before the Expiration Date, such holder's tender may be
effected if:
(a) such tender is made by or through an Eligible Institution (as
defined below);
(b) on or prior to the Expiration Date, the Exchange Agent has
received a telegram, facsimile transmission or letter form such Eligible
Institution setting forth the name and address of the holder of such
Initial Notes, the certificate number(s) of such Initial Notes (except in
the case of book-entry tenders) and the principal amount of Initial Notes
tendered and stating that the tender is being made thereby and guaranteeing
that, within three business days after the Expiration Date, a duly executed
Letter of Transmittal, or facsimile thereof, together with the Initial
Notes, and any other documents required by this Letter of Transmittal and
Instructions, will be deposited by such Eligible Institution with the
Exchange Agent; and
<PAGE>
(c) this Letter of Transmittal, or a manually signed facsimile hereof,
and Initial Notes, in proper form for transfer (or a Book-Entry
confirmation with respect to such Initial Notes), and all other required
documents are received by the Exchange Agent within three business days
after the Expiration Date.
2. WITHDRAWAL OF TENDERS. Tendered Initial Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To be effective, a written, telegraphic or facsimile transmission notice of
withdrawal must (i) be timely received by the Exchange Agent at one of its
addresses set forth on the first page of this Letter of Transmittal before the
Exchange Agent receives notice of acceptance from the Company, (ii) specify the
name of the person who tendered the Initial Notes, (iii) contain the description
of the Initial Notes to be withdrawn, the certificate number(s) of such Initial
Notes (except in the case of book-entry tenders) and the aggregate principal
amount represented by such Initial Notes or a Book-Entry Confirmation with
respect to such Initial Notes, and (iv) be signed by the holder of such Initial
Notes in the same manner as the original signature appears on this Letter of
Transmittal (including any required signature guarantees) or be accompanied by
evidence satisfactory to the Company that the person withdrawing the tender has
succeeded to the beneficial ownership of the Initial Notes. The signature(s) on
the notice of withdrawal must be guaranteed by an Eligible Institution unless
such Initial Notes have been tendered (i) by a Registered Holder (which term for
purposes of this document shall include any participant tendering by book-entry
transfer) of Initial Notes who has not completed either the box entitled
"Special Exchange Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (ii) for the account of an
Eligible Institution. If the Initial Notes have been tendered pursuant to the
procedure for book-entry tender set forth in the Exchange Offer under the
caption "Procedure for Tendering Initial Notes," a notice of withdrawal is
effective immediately upon receipt by the Exchange Agent of a written,
telegraphic or facsimile transmission notice of withdrawal even if physical
release is not yet effected. In addition, such notice must specify, in the case
of Initial Notes tendered by delivery of such Initial Notes, the name of the
Registered Holder (if different from that of the tendering holder) to be
credited with the withdrawn Initial Notes. Withdrawals may not be rescinded,
and any Initial Notes withdrawn will thereafter be deemed not validly tendered
for purposes of the Offer. However, properly withdrawn Initial Notes may be
retendered by following one of the procedures described under "The Exchange
Offer -- Procedures for Tendering Initial Notes" in the Exchange Offer at any
time on or prior to the applicable Expiration Date.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL, BOND POWERS AND
ENDORSEMENTS; GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed
by the Registered Holder of the Initial Notes tendered hereby, the signature
must correspond exactly with the name as written on the face of the Initial
Notes without any change whatsoever.
If any Initial Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If any Initial Notes tendered hereby are registered in different names, it
will be necessary to complete, sign and submit as many separate copies of this
Letter of Transmittal as there are different registrations of Initial Notes.
When this Letter of Transmittal is signed by the Registered Holder or
Holders specified herein and tendered hereby, no endorsements of such Initial
Notes or separate bond powers are required. If, however, Exchange Notes
<PAGE>
are to be issued, or any untendered principal amount of Initial Notes are to be
reissued to a person other than the Registered Holder, then endorsements of any
Initial Notes transmitted hereby or separate bond powers are required.
If this Letter of Transmittal is signed by a person other than the
Registered Holder or Holders, such Initial Notes must be endorsed or accompanied
by appropriate bond powers, in either case signed exactly as the name or names
of the Registered Holder or Holders appear(s) on the Initial Notes.
If this Letter of Transmittal or a Notice of Guaranteed Delivery or any
Initial Notes or bond powers are signed by trustees, executors, administrators,
guardians, attorneys-in-fact, officers of corporations or others acting in a
fiduciary or representative capacity, such persons should so indicate when
signing, and, unless waived by the Company, proper evidence satisfactory to the
Company of their authority so to act must be submitted.
Except as describe in this paragraph, signatures on this Letter of
Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by
an Eligible Institution which is a firm which is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or otherwise be an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution").
Signatures on this Letter of Transmittal or a notice of withdrawal, as the case
may be, need not be guaranteed if the Initial Notes tendered pursuant hereto are
tendered (i) by a Registered Holder of Initial Notes who has not completed
either the box entitled "Special Exchange Instructions" or the box entitled
"Special Delivery Instructions" on this Letter of Transmittal or (ii) for the
account of an Eligible Institution.
Endorsement on Initial Notes or signatures on bond forms required by this
Instruction 3 must be guaranteed by an Eligible Institution.
4. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. Tendering holders should
indicate in the applicable box the name and address to which Exchange Notes
and/or substitute Initial Notes for the principal amounts not exchanged are to
be issued or sent, if different from the name and address of the person signing
this Letter of Transmittal. In the case of issuance in a different name, the
employer identification or social security number of the person named must also
be indicated. If no such instructions are given, such Initial Notes not
exchanged will be returned to the name and address of the person signing this
Letter of Transmittal.
5. TAXPAYER IDENTIFICATION NUMBER AND BACKUP WITHHOLDING. Federal
income tax law of the United States requires that a holder of Initial Notes
whose Initial Notes are accepted for exchange provide the Company with such
holder's correct taxpayer identification number, which, in the case of a holder
who is an individual, is the holder's social security number, or otherwise
establish an exemption from backup withholding. If the Company is not provided
with the holder's correct taxpayer identification number, the exchanging holder
of Initial Notes may be subject to a penalty imposed by the Internal Revenue
Service. In addition, interest on the Exchange Notes acquired pursuant to the
Offer may be subject to backup withholding in an amount equal to 31 percent of
any interest payment. If withholding occurs and results in an overpayment of
taxes, a refund may be obtained from the Internal Revenue Service by filing a
return.
<PAGE>
To prevent backup withholding, each exchanging holder of Initial Notes
subject to backup withholding must provide his correct taxpayer identification
number by completing the Substitute Form W-9 provided in this Letter of
Transmittal, certifying that the taxpayer identification number provided is
correct (or that the exchanging holder of Initial Notes is awaiting a taxpayer
identification number) and that either (a) the exchanging holder has not been
notified by the Internal Revenue Service that he is subject to backup
withholding as a result of failure to report all interest or dividends or (b)
the Internal Revenue Service has notified the exchanging holder that he is no
longer subject to backup withholding.
Certain exchanging holders of Initial Notes (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding requirements. A foreign individual and other exempt holders (e.g.,
corporations) should certify, in accordance with the enclosed Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9, to such
exempt status on the Substitute Form W-9 provided in this Letter of Transmittal.
Nonresident aliens should submit Form W-8, available from the Exchange Agent
upon request.
6. TRANSFER TAXES. Holders tendering pursuant to the Offer will not be
obligated to pay brokerage commissions or fees or to pay transfer taxes with
respect to their exchange under the Offer unless the box entitled "Special
Issuance Instructions" in this Letter of Transmittal has been completed, or
unless the securities to be received upon exchange are to be issued to any
person other than the holder of the Initial Notes tendered for exchange. The
Company will pay all other charges or expenses in connection with the Offer. If
holders tender Initial Notes for exchange and the Offer is not consummated, such
Initial Notes will be returned to the holders at the Company expense.
Except as provided in this Instruction 6, it will not be necessary for
transfer tax stamps to be affixed to the Initial Notes specified in this Letter
of Transmittal.
7. INADEQUATE SPACE. If the space provided herein is inadequate, the
aggregate principal amount of the Initial Notes being tendered and the security
numbers (if available) should be listed on a separate schedule attached hereto
and separately signed by all parties required to sign this Letter of
Transmittal.
8. PARTIAL TENDERS. Tenders of Initial Notes will be accepted only in
integral multiples of $1,000. If tenders are to be made with respect to less
than the entire principal amount of any Initial Notes, fill in the principal
amount of Initial Notes which are tendered in column (iv) of the "Description of
Initial Notes." In the case of partial tenders, the Initial Notes in fully
registered form for the remainder of the principal amount of the Initial Notes
will be sent to the persons(s) signing this Letter of Transmittal, unless
otherwise indicated in the appropriate place on this Letter of Transmittal, as
promptly as practicable after the expiration or termination of the Offer.
Unless otherwise indicated in column (iv) in the box labeled "Description
of Initial Notes," and subject to the terms and conditions of the Offer, tenders
made pursuant to this Letter of Transmittal will be deemed to have been made
with respect to the entire aggregate principal amount represented by the Initial
Notes indicated in column (iii) of such box.
<PAGE>
9. MUTILATED, LOST, STOLEN OR DESTROYED INITIAL NOTES. Any holder whose
Initial Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated above for further instructions.
10. VALIDITY AND ACCEPTANCE OF TENDERS. All questions as to the
validity, form, eligibility (including time of receipt), acceptance and
withdrawal of Initial Notes tendered for exchange will be determined by the
Company in its sole discretion, which determination shall be final and binding.
The Company reserves the absolute right to reject any and all Initial Notes not
properly tendered and to reject any Initial Notes the Company's acceptance of
which might, in the judgment of the Company or its counsel, be unlawful. The
Company also reserves the absolute right to waive any defects or irregularities
or conditions of the Exchange Offer as to particular Initial Notes either before
or after the Expiration Date (including the right to waive the ineligibility of
any holder who seeks to tender Initial Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer (including the
Letter of Transmittal and the instructions thereto) by the Company shall be
final and binding on all parties. Unless waived, any defects or irregularities
in connection with tenders of Initial Notes for exchange must be cured within
such period of time as the Company shall determine. The Company will use
reasonable efforts to give notification of defects or irregularities with
respect to tenders of Initial Notes for exchange but shall not incur any
liability for failure to give such notification. Tenders of the Initial Notes
will not be deemed to have been made until such irregularities have been cured
or waived.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. First Union National
Bank is the Exchange Agent. All tendered Initial Notes, executed Letters of
Transmittal and other related documents should be directed to the Exchange Agent
at the addresses or facsimile number set forth on the first page of this Letter
of Transmittal. Questions and requests for assistance and requests for
additional copies of the Prospectus, the Letter of Transmittal and other related
documents should be addressed to the Exchange Agent as follows:
First Union Customer Information Center
Reorganization Department, 3C3-NC 1153
1525 West W.T. Harris Boulevard
Charlotte, NC 28262
Facsimile Transmission:
(704) 590-7628
To Confirm Receipt:
(704) 590-7408
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
11 1/4% SENIOR NOTES DUE 2009
FOR A NEW SERIES OF ITS
11 1/4% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED ______ __, 1999
- --------------------------------------------------------------------------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON ________ __ 1999
UNLESS EXTENDED.
- --------------------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration is a Prospectus dated _____ __, 1999
("Prospectus") and the related Letter of Transmittal (which, together with any
amendments or supplements thereto, collectively constitute the "Exchange Offer")
relating to an offer by Primus Telecommunications Group, Inc., a Delaware
corporation ("Company"), to exchange all its outstanding 11 1/4% Senior Notes
due 2009 ("Initial Notes") for a new series of its 11 1/4% Senior Notes due 2009
upon the terms and subject to the conditions set forth in the Exchange Offer.
WE ARE THE HOLDER OF RECORD OF INITIAL NOTES HELD BY US FOR YOUR ACCOUNT.
A TENDER FOR EXCHANGE OF SUCH INITIAL NOTES CAN BE MADE ONLY BY US AS THE HOLDER
OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER
FOR EXCHANGE INITIAL NOTES HELD BY US FOR YOUR ACCOUNT.
We request instructions as to whether you wish to have us tender for
exchange on your behalf any or all of such Initial Notes held by us for your
account, pursuant to the terms and subject to the conditions set forth in the
Exchange Offer.
Your attention is directed to the following:
1. The Exchange Offer and withdrawal rights will expire at 5:00
P.M., New York City time, on ________ __ , 1999, unless the Exchange Offer
is extended. Your instructions to us should be forwarded to us in ample time to
permit us to submit a tender on your behalf.
2. The Exchange Offer is made for all Initial Notes outstanding,
constituting $200,000,000 aggregate principal amount as of the date of the
Prospectus.
<PAGE>
3. The minimum permitted tender is $1,000 principal amount of
Initial Notes, and all tenders must be in integral multiples of $1,000.
4. The Offer is conditioned upon the satisfaction of certain
conditions set forth in the Prospectus under the caption "The Exchange Offer --
Conditions of the Exchange Offer." The Exchange Offer is not conditioned upon
any minimum principal amount of Initial Notes being tendered for exchange.
5. Tendering Holders (as defined in the Prospectus) will not be
obligated to pay brokerage fees or commissions or, except as set forth in
Instruction 6 of the Letter of Transmittal, transfer taxes applicable to the
exchange of Initial Notes pursuant to the Exchange Offer.
6. In all cases, exchange of Initial Notes tendered and accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by First Union National Bank ("Exchange Agent") of (i) certificates representing
such Initial Notes or timely confirmation of a book-entry transfer of such
Initial Notes into the Exchange Agent's account at The Depository Trust Company
("Book-Entry Transfer Facility") pursuant to the procedures set forth in the
Prospectus under the caption "The Exchange Offer -- Procedures for Tendering
Initial Notes," (ii) the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees, or
an Agent's Message (as defined in the Prospectus) in connection with a book-
entry transfer, and (iii) any other documents required by the Letter of
Transmittal. Accordingly, payment may be made to tendering Holders at different
times if delivery of the Initial Notes and other required documents occurs at
different times.
The Exchange Offer is being made solely by the Prospectus and the related
Letter of Transmittal and is being made to all Holders of Initial Notes. The
Company is not aware of any state where the making of the Exchange Offer is
prohibited by administrative or judicial action pursuant to any valid state
statute. If the Company becomes aware of any valid state statute prohibiting
the making of the Exchange Offer or the acceptance of Initial Notes tendered for
exchange pursuant thereto, the Company will make a good faith effort to comply
with any such state statute or seek to have such statute declared inapplicable
to the Exchange Offer. If, after such good faith effort, the Company cannot
comply with such state statute the Exchange Offer will not be made to, nor will
tenders be accepted from or on behalf of, the holders of Initial Notes in such
state. In any jurisdiction where the securities, blue sky or other laws require
the Exchange Offer to be made by a licensed broker or dealer, the Exchange Offer
shall be deemed to be made on behalf of the Company by one or more registered
brokers or dealers that are licensed under the laws of such jurisdiction.
If you wish to have us tender any or all of the Initial Notes held by us
for your account, please instruct us by completing, executing and returning to
us the instruction form contained in this letter. If you authorize a tender for
exchange of your Initial Notes, the entire aggregate principal amount of such
Initial Notes will be tendered for exchange unless otherwise specified in such
instruction form. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME TO
PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE
EXCHANGE OFFER.
<PAGE>
INSTRUCTIONS TO REGISTERED HOLDER AND/OR BOOK-ENTRY
TRANSFER PARTICIPANT FROM OWNER WITH RESPECT TO THE
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
11 1/4% SENIOR NOTES DUE 2009
FOR A NEW SERIES OF ITS
11 1/4% SENIOR NOTES DUE 2009
TO REGISTERED HOLDER AND/OR PARTICIPANT OF THE BOOK-ENTRY TRANSFER FACILITY:
The undersigned acknowledge(s) receipt of your letter enclosing the
Prospectus dated _____ __, 1999, and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute the
"Exchange Offer") pursuant to an offer by Primus Telecommunications Group, Inc.,
a Delaware corporation, to exchange all of its outstanding 11 1/4% Senior Notes
due 2009 ("Initial Notes") for a new series of its 11 1/4% Senior Notes due 2009
("Exchange Notes"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you to tender the principal amount of Initial Notes
indicated below (or, if no number is indicated below, the entire aggregate
principal amount) which are held by you for the account of the undersigned, upon
the terms and subject to the conditions set forth in the Exchange Offer.
The aggregate face amount of the Initial Notes held by you for the account
of the undersigned is (fill in amount):
$______________ of the 11 1/4% Senior Notes due 2009.
With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
[_] To TENDER the following Initial Notes held by you for the account of
the undersigned (insert principal amount of Initial Notes to be tendered
(if any)/1/:
$______________ of the 11 1/4% Senior Notes due 2009.
[_] NOT to TENDER any Initial Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Initial Notes held by you
for the account of the undersigned, it is understood that you are authorized (a)
to make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representation and warranties contained in the
Letter of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (i) the
Exchange Notes acquired pursuant to the Exchange Offer are being obtained in the
ordinary course of business of the undersigned, (ii) neither the undersigned nor
any such other person has an arrangement or understanding with any person to
participate in the distribution of such Exchange Notes, (iii) if the undersigned
is not a broker-dealer, or is a broker-dealer but will not receive Exchange
Notes for its own account in exchange for Initial Notes, neither the undersigned
nor any such other person is engaged in or intends to participate in the
distribution of such Exchange Notes and (iv) neither the undersigned nor any
such other person is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act of 1933, as amended (the "Securities Act") or, if
the undersigned is an "affiliate,"
- ----------------------
/*/ Unless otherwise indicated, it will be assumed that the entire
principal amount of the Initial Notes held by us for your account are
to be tendered for exchange. The minimum permitted tender is $1,000
principal amount of Initial Notes; all other tenders must be in
integral multiples of $1,000.
<PAGE>
that the undersigned will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable. If the undersigned
is a broker-dealer (whether or not it is also an "affiliate") that will receive
Exchange Notes for its own account in exchange for Initial Notes, it represents
that such Initial Notes were acquired as a result of marketing-making activities
or other trading activities, and it acknowledges that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. By acknowledging that it will deliver and by
delivering a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes, the undersigned is not deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
SIGN HERE
Name of Beneficial Owner(s):___________________________________________________
Signature(s):__________________________________________________________________
Name(s) (please print):________________________________________________________
Address:_______________________________________________________________________
Telephone Number:______________________________________________________________
Taxpayer identification or Social Security Number:_____________________________
_______________________________________________________________________________
Date:__________________________________________________________________________
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS OUTSTANDING
11 1/4% SENIOR NOTES DUE 2009
FOR A NEW SERIES OF ITS
11 1/4% SENIOR NOTES DUE 2009
___________________________________________________________________
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON __________ __, 1999,
UNLESS THE EXCHANGE OFFER IS EXTENDED.
___________________________________________________________________
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Primus Telecommunications Group, Inc., a Delaware corporation ("Company"),
is offering to exchange all of its outstanding 11 1/4% Senior Notes due 2009
("Initial Notes") for a new series of its 11 1/4% Senior Notes due 2009 upon the
terms and subject to the conditions set forth in the Prospectus dated ______ __,
1999 ("Prospectus") and in the related Letter of Transmittal (which, together
with any amendment or supplements thereto, collectively constitute the "Exchange
Offer") enclosed herewith.
The Exchange Offer is conditioned upon satisfaction of certain conditions
set forth in the Prospectus under the caption "The Exchange Offer -- Conditions
of the Exchange Offer." The Exchange Offer is not conditioned upon any minimum
principal amount of Initial Notes being tendered for exchange.
Enclosed herewith for your information and forwarding to your clients for
whose accounts you hold Initial Notes registered in your name or in the name of
your nominee are copies of the following documents:
1. The Prospectus dated _______ __, 1999.
2. The blue Letter of Transmittal to tender Initial Notes for exchange
(for your use and for the information of your clients). Facsimile
copies of the Letter of Transmittal may be used to tender Initial
Notes for exchange.
3. The gray Notice of Guaranteed Delivery (to be used to tender
Initial Notes for exchange if certificates for Initial Notes are
not immediately available or if such certificates for Initial Notes
and all other required documents cannot be delivered to First Union
National Bank ("Exchange Agent") on or prior to the Expiration Date
or if the procedures for book-entry transfer cannot be completed on
a timely basis).
<PAGE>
4. A yellow printed form of letter which may be sent to your clients
for whose accounts you hold Initial Notes registered in your name
or in the name of your nominee, with space provided for obtaining
such clients' instructions with regard to the Exchange Offer.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
6. A return envelope addressed to the Exchange Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON __________ __, 1999, UNLESS THE
EXCHANGE OFFER IS EXTENDED.
In order for Initial Notes to be validly tendered pursuant to the Exchange
Offer, (i) a duly executed and properly completed Letter of Transmittal (or a
facsimile thereof) together with any required signature guarantees, or an
Agent's Message (as defined in the Prospectus) in connection with a book-entry
delivery of Initial Notes, and any other documents required by the Letter of
Transmittal, must be received by the Depositary on or prior to the Expiration
Date, and (ii) either certificates representing tendered Initial Notes must be
received by the Exchange Agent or such Initial Notes must be tendered by book-
entry transfer into the Exchange Agent account maintained at the Book-Entry
Transfer Facility (as described in the Prospectus), and Book-Entry Confirmation
must be received by the Exchange Agent, all in accordance with the instructions
set forth in the Letter of Transmittal and the Prospectus
If Holder (as defined in the Prospectus) desires to tender Initial Notes
for exchange pursuant to the Exchange Offer and such Holder's Initial Note
certificates are not immediately available or such Holder cannot deliver the
Initial Note certificates and all other required documents to the Exchange Agent
on or prior to the Expiration Date, or such Holder cannot complete the procedure
for delivery by book-entry transfer on a timely basis, such Initial Notes may
nevertheless be tendered for exchange by following the guaranteed delivery
procedures specified in the Prospectus under the caption "The Exchange Offer --
Procedures for Tendering Initial Notes -- Guaranteed Delivery Procedures."
The Company will not pay any fees or commissions to any broker or dealer or
any other person for soliciting tenders of Initial Notes pursuant to the
Exchange Offer. The Company will, however, upon request, reimburse you for
customary mailing and handling expenses incurred by you in forwarding any of the
enclosed materials to your clients. The Company will pay or cause to be paid
any transfer taxes applicable to the exchange of Initial Notes pursuant to the
Exchange Offer, except as otherwise provided in Instruction 6 of the Letter of
Transmittal.
Any inquires you may have with respect to the Exchange Offer should be
addressed to the Exchange Agent, at its address and telephone numbers set forth
on the back cover of the Prospectus. Additional copies of the enclosed material
may be obtained from the Exchange Agent.
Very truly yours,
Primus Telecommunications Group, Inc.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
EXCHANGE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS THEREIN.
<PAGE>
99.2 Form of Notice of Guaranteed Delivery.
NOTICE OF GUARANTEED DELIVERY
PRIMUS TELECOMMUNICATIONS GROUP, INC.
OFFER TO EXCHANGE
ALL OF ITS
11 1/4% SENIOR NOTES DUE 2009
FOR A NEW SERIES OF ITS
11 1/4% SENIOR NOTES DUE 2009
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
PURSUANT TO THE PROSPECTUS DATED ______ __, 1999
As set forth in Prospectus described below, this Notice of Guaranteed
Delivery or one substantially equivalent hereto must be used to tender for
exchange 11 1/4% Senior Notes due 2009 ("Old Notes"), of Primus
Telecommunications Group, Incorporated, a Pennsylvania corporation ("Company"),
pursuant to the Exchange Offer (as defined below) if certificates for Old Notes
are not immediately available or the certificates for Old Notes and all other
required documents cannot be delivered to the Exchange Agent on or prior to
________ __, 1999 (the "Expiration Date"), or if the procedures for delivery by
book-entry transfer cannot be completed on a timely basis. This instrument may
be delivered by hand or transmitted by facsimile transmission or mail to the
Exchange Agent.
The Exchange Agent for the Exchange Offer is:
FIRST UNION NATIONAL BANK
By Mail, Hand or Overnight Delivery: By Facsimile:
First Union Customer Information Center (704) 590-7628
Reorganization Department, 36C-NC 1153
1525 West W.T. Harris Boulevard To confirm by Telephone
Charlotte, NC 28262 or for Information call:
(704) 590-7408
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an Eligible Institution under the Instructions to the Letter of
Transmittal, such signature guarantee must appear in the applicable space
provided in the signature box in the Letter of Transmittal.
__________________________________________
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY
TIME, ON __________ __, 1999,UNLESS THE EXCHANGE OFFER IS EXTENDED.
__________________________________________
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject
to the conditions set forth in the Prospectus dated _________ __, 1999
("Prospectus") and in the related Letter of Transmittal (which, together with
any amendments or supplements thereto, collectively constitute the "Exchange
Offer"), receipt of each of which is hereby acknowledged, the principal amount
of Old Notes indicated below pursuant to the guaranteed delivery procedures set
forth in the Prospectus under the caption "The Exchange Offer -- Procedures for
Tendering Old Notes -- Guaranteed Delivery Procedures."
Signature(s)___________________________________________________________________
Name(s) of Eligible Holders
_______________________________________________________________________________
_______________________________________________________________________________
PLEASE TYPE OR PRINT
Principal Amount of Old Notes Tendered for
Exchange $_____________________________________________________________________
Old Note Certificate No(s). (If available_____________________________________
_______________________________________________________________________________
_______________________________________________________________________________
Dated _____________________________________ , 199
Address(es)____________________________________________________________________
_______________________________________________________________________________
Zip Code
Area Code and Tel. No.(s)______________________________________________________
(Check box if shares will be tendered by book-entry transfer)
[ ] The Depository Trust Company
Account Number_________________________________________________________________
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, an Eligible Institution (as defined in the Prospectus),
having an office or correspondent in the United States, hereby guarantees to
either deliver to the Exchange Agent the certificates representing all the Old
Notes tendered hereby, in proper form for transfer, or to deliver such Old Notes
pursuant to the procedure for book-entry transfer into the Exchange Agent's
account at The Depository Trust Company, in either case together with the Letter
of Transmittal (or a facsimile thereof),properly completed and duly executed,
with any required signature guarantees or an Agent's Message (as defined in the
Prospectus) in the case of a book-entry transfer, and any other required
documents, all within three New York Stock Exchange trading days after the date
hereof.
Name of Firm:_______________________ _______________________________________
(Authorized Signature)
Address: ___________________________ Title:_________________________________
____________________________________ Name:__________________________________
(Zip Code) (Please type or print)
Area Code and Telephone Number: Date:_______________________________
____________________________________
NOTE: DO NOT SEND CERTIFICATES FOR OLD NOTES WITH THIS NOTICE. CERTIFICATES
SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL.
