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TABLE OF CONTENTS Description Part I
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

Commission File No. 0-29092

PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
(Exact name of registrant as specified in its charter)

(703) 902-2800
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants' knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        Non-affiliates of Primus Telecommunications Group, Incorporated held 51,065,784 shares of Common Stock as of June 30, 2003. The fair market value of the stock held by non-affiliates is $262,988,788 based on the sale price of the shares on June 30, 2003.

        As of February 27, 2004, 88,850,615 shares of Common Stock, par value $.01, were outstanding.

Documents Incorporated by Reference:

        Portions of the definitive Proxy Statement to be delivered to Stockholders in connection with the Annual Meeting of Stockholders are incorporated by reference into Part III.

TABLE OF CONTENTS

Description

Part I

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PART I

ITEM 1. BUSINESS

General

        We, Primus Telecommunications Group, Incorporated, are a global, facilities-based telecommunications services provider offering an integrated portfolio of international and domestic voice, Internet, voice-over-Internet protocol (VOIP), data and hosting services to business and residential retail customers and other carriers located primarily in the United States, Australia, Canada, the United Kingdom and Europe. Our focus is to service the demand for high quality, competitively priced international communications services that is being driven by the globalization of the world's economies, the worldwide trend toward telecommunications deregulation and the growth of Internet, VOIP and data traffic.

        We target customers with significant telecommunications needs, including small- and medium-sized enterprises (SMEs), multinational corporations, residential customers, and other telecommunications carriers and resellers. We provide services over our global network, which consists of:

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18 domestic and international gateway switching systems (the hardware/software devices that direct the voice traffic across the network) in North America, Australia, Europe and Japan;



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approximately 250 interconnection points to our network, or points of presence (POPs), within our service regions and other markets;



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undersea and land-based fiber optic transmission line systems that we own or lease and that carry voice and data traffic across the network; and



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global network and data centers that use a high-bandwidth network standard, asynchronous transfer mode, and Internet-based protocol (ATM+IP) to connect with the network. The global VOIP network is based on routers and gateways with an open network architecture which connects our partners in over 150 countries.

        The services we offer can be classified into three main product categories: voice, data/Internet and VOIP services. Within these three main product categories, we offer our customers a wide range of services, including:

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international and domestic long distance services;



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prepaid calling cards (including services which allow transmission of mobile voice traffic over our land-based network known as Virtual Mobile Network Services or VMNS), toll-free services and reorigination services;



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dial-up, dedicated and high-speed Internet access;



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local services;



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ATM+IP broadband services; and



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managed and shared Web hosting services and applications.

        Generally, we price our services competitively with the major carriers operating in our principal service regions. We expect to continue to generate net revenue from internal growth through sales and marketing efforts focused on customers with significant communications needs (international and domestic voice, Internet and data), including SMEs, multinational corporations, residential customers, particularly ethnic customers, and other telecommunications carriers and resellers, as well as acquisitions.

        Having completed our global network infrastructure deployment, our primary operational focus is on building scale in our core markets by adding customers and traffic. The combination of network

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ownership and increasing scale provides us with the ability to reduce our cost structure, improve service quality and reliability, and introduce new products and services.

Operating Highlights and Accomplishments in 2003 and subsequent events:

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We increased net revenue by 25.8% to $1.3 billion for the twelve months ended December 31, 2003 from $1.0 billion for the twelve months ended December 31, 2002.



•

Our income from operations increased to $69.6 million for the twelve months ended December 31, 2003, a $72.9 million increase from a loss of $3.3 million for the twelve months ended December 31, 2002.



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We increased net cash provided by operating activities by $32.3 million to $66.9 million for the twelve months ended December 31, 2003 from $34.6 million for the twelve months ended December 31, 2002.



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We received stockholder approval for and closed the remaining $9 million investment in our Series C convertible preferred stock ("Series C Preferred") by fund affiliates of American International Group, Incorporated (AIG).



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All outstanding shares of our Series C Preferred were converted into an aggregate of 22,616,990 shares of our common stock on November 4, 2003.



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We completed an offering of $132.0 million in principal amount of 3³/4% convertible senior notes due 2010 ("2003 Convertible Senior Notes"), which we used primarily to retire higher interest debt and to extend our debt maturity profile. The 2003 Convertible Senior Notes are convertible into shares of our common stock at an initial conversion price of $9.3234 per share.



•

In January 2004, we completed the sale of $240.0 million 8% senior notes due 2014 ("2004 Senior Notes"), which we used primarily to retire higher interest debt and also to extend our debt maturity profile.



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We continued our debt reduction efforts and improved liquidity by retiring $276.7 million in principal amount of our senior notes, which were funded in part through the proceeds from the 2003 Convertible Senior Notes and the 2004 Senior Notes. In particular, the following debt securities were retired during 2003: $87.2 million principal amount of the 11³/4% senior notes due 2004 ("1997 Senior Notes"), $6.5 million principal amount of the 11¹/4% senior notes due 2009 ("January 1999 Senior Notes"), and $3.6 million principal amount of the 9⁷/8% senior notes due 2008 ("1998 Senior Notes"). In addition, the following debt securities were retired during the three months ended March 31, 2004; $109.9 million principal amount of the January 1999 Senior Notes, $46.6 million of the 1998 Senior Notes and $22.9 million of the 12³/4% senior notes due 2009 ("October 1999 Senior Notes").



•

We further reduced debt by settling an outstanding vendor financing of $14.9 million for approximately $10.6 million, accelerating the payoff of $55.2 million for an equipment financing facility and repaying early 13.0 million CAD ($10.0 million at December 31, 2003) of a financing agreement during the three months ended March 31, 2004, which were funded in part through the proceeds from the 2003 Convertible Senior Notes and the 2004 Senior Notes.



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Our common stock is once again traded on the Nasdaq National Market after a period of trading on the Nasdaq SmallCap Market.



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On June 30, 2003, the Russell 3000 Index included our common stock.



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We acquired three Canadian Internet service providers (ISPs), one Canadian local wireless service provider and a Canadian prepaid calling card company for an aggregate purchase price of approximately $10.7 million in cash. The purchase price for the prepaid calling card company may increase based on additional consideration to be paid, as provided by the terms of the

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acquisition agreement, if the acquired company's adjusted revenues exceed certain targeted levels.

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In February 2004, we acquired Australian-based AOL/7 Pty Ltd (AOL/7) which is a joint venture between America Online Inc., a wholly-owned subsidiary of Time Warner Inc., AAPT Limited, a unit of the Telecom New Zealand Group, and Seven Network Limited. This acquisition provides us with the customer base, content, content development and online advertising business of AOL/7, as well as a license for the AOL brand in Australia, for a total consideration of $18.1 million.

Operating Highlights and Accomplishments from our Inception through 2002:

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We were incorporated in February 1994, and through the first half of 1995 we were a development stage enterprise involved in various start-up activities.



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We began generating revenue during March 1995.



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In March 1996, we completed our first acquisition with the purchases of Axicorp Pty. Ltd., a switchless reseller in Australia.



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In November 1996, we made our initial public offering to fund growth of our operating subsidiaries.



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In 1997, we raised $225 million in senior notes and warrants for continued expansion, including network equipment purchases, funding for general corporate purposes, and potential acquisitions. We entered the Canadian market, the Japanese market, the German market and expanded our service offerings in Australia through acquisitions.



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In June 1998, we acquired the operations of TresCom which expanded the scope and coverage of our communications network, thereby providing additional opportunities to migrate traffic onto the network.

        During 1998 and 1999, to continue our expansion, we raised an additional $645.5 million from three senior note issuances and conducted a secondary equity offering of 8 million shares.

        In 1999, among other things, we:

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acquired London Telecom, a Canadian long distance provider;



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purchased a residential long distance customer base, customer support assets and residential Internet customers and network from AT&T Canada and ACC;



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purchased Telegroup's global retail customer businesses, which included retail customers primarily in North America and Europe; and



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organized our Internet and data services business into a new subsidiary, iPRIMUS.com; acquired GlobalServe, a Canadian ISP; a majority interest in Matrix, a Brazilian ISP; TCP/IP and TouchNet, two independent German ISPs; and the remaining interest in Hotkey Internet Services; entered into agreements with Covad Communications and NorthPoint Communications to offer digital subscriber line (DSL) services; acquired Digital Select, a provider of DSL Internet access and Web content; 1492 Technologies, a Web site development, consulting and service firm; and began to build an IP-based network platform in Australia.

        In 2000, among other things, we:

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acquired LCR Telecom Group, Plc; an international telecommunications company operating principally in European markets, providing least cost routing, international callback and other value-added services, primarily to SMEs;



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purchased CTE Networks (CTE), a Canadian long distance reseller;

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purchased A-Tel GmbH, a German reseller of voice traffic to SMEs;



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expanded our Internet and data services business, enhanced by acquisitions such as Eco Software, Inc. ("Shore.Net"), a United States-based business-focused ISP, Seker BBS S.A. and Nexus Comunicaciones S.A., two Spanish ISPs, and Infinity Online Systems, a Canada-based ISP; and



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issued $300 million in convertible subordinated debentures.

        In 2001, we focused on debt reduction, cost containment and growth in cash flow from operations. These efforts resulted in the following:

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reduced debt to $667.6 million at December 31, 2001 from $1.3 billion in 2000, with a gain on early extinguishment of debt of $491.8 million for the year;



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reduced selling, general and administrative expenses by $27.4 million from the previous year; and



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reduced interest expense by $38.7 million over the prior year from the principal reduction of senior notes and convertible debentures.

        In addition, in 2001, we:

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recorded an asset impairment write-down of $526.3 million in goodwill, property and equipment, and customer lists; and



•

recorded a $15.0 million write-off of our investment in Pilot Network Services.

        In 2002, we focused our attention on continuing a three-pronged strategy that was initiated at the end of 2000, which involved improving operating results, reducing debt, and raising additional financing.

        Initiatives and results from our efforts to improve operating results:

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We focused on higher margin retail customers and services.



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We de-emphasized or exited certain low margin businesses, and emphasized operations in core markets including the United States, Australia, Canada and Europe.



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Our Australian and Canadian subsidiaries both achieved their highest levels to date of operating income for a full fiscal year.

        Initiatives and results from our efforts to reduce debt:

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We reduced debt during 2002 by $66.6 million to $601.0 million at December 31, 2002, with a gain on early extinguishment of debt of $36.7 million for the year.



•

We reduced interest expense by $27.3 million over the prior year from the principal reduction of senior notes and convertible debentures effected during 2001 and 2002.

        Initiatives and results from our efforts to raise additional funds:

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We signed an agreement to issue and sell $42 million of Series C Preferred (including commitments of $39.9 million from fund affiliates of AIG). We received $33 million on December 31, 2002 in the initial closing of the Series C Preferred offering.



•

We obtained $9.5 million of funding through an extension of an accounts receivable facility with Textron Financial, Inc. ("Textron").

        Growth initiatives in 2002:

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In September 2002, we signed an agreement to acquire the United States-based SME voice customer base of Cable & Wireless (C&W). We acquired the SME voice customer base during

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the three months ending December 31, 2002. The acquired customer base has migrated to our network and increased the size of our United States retail business.

        Other Events:

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Our 2002 results reflect the deconsolidation of three non-core foreign investments, which resulted from: the partial divestment of interests in Cards & Parts, our German mobile accessories business, which subsequently filed for insolvency administration; the relinquishment of control rights concerning Bekkoame Internet, Inc. ("Bekko"), our Internet and data investment in Japan; and an insolvency administration filing for InterNeXt, our Internet and data subsidiary in France.

Strategy

        Having completed our global network infrastructure deployment, our primary objectives are to continue to build scale in our core markets by adding customers, traffic and new services; and continue to improve our profitability, cash flow and balance sheet. Key elements of our strategy to achieve these objectives are the following:

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Focus on Profitable Markets and Higher Margin Retail Customers and Services: We are focused on specific, large, developed markets, where we look to take market share away from the dominant telecommunications carriers. Our target customer base consists of SMEs, multinational corporations and residential customers, particularly ethnic customers, who have international telecommunications needs, in addition to needs for domestic voice, Internet and data services. We offer our services at competitive prices and seek to differentiate ourselves based on customer service through experienced sales and service representatives. By bundling our traditional voice services with Internet and data services, we seek to increase net revenue per customer and improve our ability to attract and retain business and residential customers. In addition, we continually seek to add new services to offer to both existing and new customers. We are specifically targeting major growth areas of local, wireless and broadband.

We have grown our net revenue from $1.1 billion for the year ended December 31, 2001 to $1.3 billion for the year ended December 31, 2003, primarily as a result of our expanding prepaid calling card, Internet access and retail services, as well as our fourth quarter 2002 acquisition of the SME voice customer base of C&W in the United States. In addition, our net revenue growth was substantially improved in 2003 by the weakening of the United States dollar (USD) against the currencies of our principal foreign markets in Australia, Canada, the United Kingdom and Europe. For additional information regarding the impact of fluctuations in foreign currency exchange rates on our results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk."

In addition to focusing on net revenue growth initiatives, we also concentrate on high margin customers and products and monitor our cost structure to improve our income from operations. For instance, in 2001 and 2002, we de-emphasized or exited certain low margin businesses and emphasized operations in our core markets of the United States, Australia, Canada and Europe with corresponding reductions of approximately one-third of our personnel. As a result, we have improved our income from operations from a loss of $672.3 million for the year ended December 31, 2001 to income from operations of $69.6 million for the year ended December 31, 2003.

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Leverage Our Global Network Infrastructure: We have invested in developing our global, high capacity voice and data network and our product capabilities. By increasing the volume of voice and data traffic that we carry over our existing global network, we are able to reduce transmission costs and other operating costs as a percentage of net revenue, improve service

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quality and enhance our ability to introduce new products and services. In addition, by leveraging multiple customer segments in different geographical regions, including retail and carrier customers, we achieve greater utilization of our network assets, because our network experiences multiple periods of peak usage throughout each day. We believe the current network meets the near-term needs of our current and prospective customers and that capital expenditures will be in the range of 3% of net revenue in 2004. We expect these spending levels to remain consistent over the next few years.

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Improve Our Balance Sheet and Liquidity through Debt Reduction and Refinancing Activities: We have reduced our long-term obligations from $1.3 billion as of December 31, 2000, to $542.5 million as of December 31, 2003, and our interest expense from $132.1 million for the year ended December 31, 2000 to $60.7 million for the year ended December 31, 2003. In September 2003, we raised $132 million through the issuance of our 2003 Convertible Senior Notes, and in January 2004, we issued $240 million in debt through the completion of the sale of our 2004 Senior Notes. The proceeds of these offerings were used primarily to retire higher interest debt and extend our debt maturity profile. By extending the maturities of our obligations and reducing interest expense through refinancing activities, we seek to improve both our short-term and long-term liquidity. We believe that by further enhancing scale in our core markets, we will be able to grow cash provided by operating activities, which will enable us to continue to delever our balance sheet.



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Capitalize on Our Experienced Management Team: Our management team is composed of seasoned executives with extensive expertise in the communications industry and knowledge of the markets in which we operate. Our core senior management team has been with us since the commencement of our operations, and these individuals have guided us through the recent telecommunications industry downturn. We expect that they will continue to be instrumental in expanding our services into new markets.

Description of Operating Markets

        The following is a description of our operations in each of our four primary markets. Management organizes the enterprise into geographic areas—North America, Europe and Asia-Pacific. The United States and Canadian operating markets are the significant portions of our North America segment, and the Australian market is the substantial portion of the Asia-Pacific segment. See the footnote within Item 8—"Financial Statements and Supplementary Data—Notes to the Consolidated Financial Statements—Operating Segment and Related Information," for further information regarding our segments.

        United States.    The United States is one of our four primary markets, representing 22% of our 2003 net revenue. We provide international and domestic voice, data, Internet and VOIP services to SMEs, residential customers, multinational corporations and other telecommunication carriers. We operate international gateway telephone switches in the New York City area 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 lease and own domestic fiber in the United States to interconnect our switches, data centers, and POPs. POPs are our interconnection points with other networks. We maintain direct sales organizations in Massachusetts and Virginia to sell to business customers and have inbound telemarketing centers in Florida, Virginia and Puerto Rico. To reach residential customers, we utilize telemarketing services and we advertise in national and regional ethnic newspapers, other publications, and on television to offer competitive rates for international and domestic telephone calls, data, Internet and VOIP services. We also utilize independent agents to reach and enhance sales to both business and residential customers and have a direct sales force for marketing international services to other telecommunication service providers, including long distance companies, ISPs and VOIP service providers. We maintain customer service centers in Florida and Virginia and also outsource selected customer service functions overseas. We operate a 24-hour global

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network management control center in Virginia that monitors our global voice, Internet and data. We offer dial-up and DSL Internet access services to business and residential customers. We also provide managed and shared Web hosting services through our data center located in Lynn, Massachusetts. Additionally, we provide local and international long distance voice services, VOIP, and Internet services in Puerto Rico.

        Australia.    We are the fourth largest full service telecommunications company, 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 corporate, SMEs and residential customers. Our Australian operations represent 26% of our 2003 net revenue. We have a nationwide domestic long distance network, and a five-city backbone network using Northern Telecom switches in Sydney, Melbourne, Perth, Adelaide and Brisbane with over 100 POPs covering more than 90% of Telstra (the dominant carrier and former monopoly in Australia) local exchanges. We maintain 24-hour customer service and network management control centers.

        We are the third largest ISP, based on market share, in Australia. We have a data center in Melbourne which offers hosting and e-commerce applications and services. We market our services through a combination of direct sales to corporate and SME customers and independent agents, which market to retail business and residential customers, and media advertising aimed at residential customers who make a high volume of international calls.

        Canada.    Canada is another of our primary markets, representing 17% of our 2003 net revenue. We are the largest alternative consumer carrier in Canada based on net revenue. We provide international and domestic voice services to SMEs, residential customers and other telecommunication carriers and have sales and customer service offices in key cities throughout Canada, including Vancouver, Toronto and Montreal. We operate international gateway switches in Toronto and Vancouver, maintain POPs in Ottawa, Montreal and Calgary, and operate a nationwide integrated network backbone for our voice, data, Internet and private line services. Each of the 24 nodes on the backbone is equipped with Sonet add/drop, ATM, frame and IP equipment to provide a complete spectrum of voice and data communications products to our customers. We operate two Nortel DMS 500 switches in Toronto and Vancouver, which provide on-net equal access coverage to an estimated 90% of the population of Canada. We also operate a voice dial access network which consists of some 70 POPs across the country.

        We have data centers co-located with our switch sites in Vancouver and Toronto through which we offer shared and dedicated hosting and co-location services. We have an extensive Internet footprint and provide dial-up and Integrated Services Digital Network (ISDN) Internet coverage to over 700 communities across Canada through a network of 51 POPs.

        We market our services through a combination of direct sales to corporate and SME customers and media advertising aimed at residential customers, and affinity channels.

        Europe.    We operate as a licensed carrier in the United Kingdom, Germany, France, Spain, Italy, Denmark, the Netherlands and Switzerland. The European market represents 33% of our 2003 net revenue. Our network consists of core backbone voice/data nodes in London, Frankfurt and Paris with nodes in Milan, Madrid, Copenhagen, Amsterdam and Zurich. Our European network interconnects with our global network. In London, we have a data center for Web hosting and other services.

        Our European operation is headquartered in London. We provide voice and data services to residential customers, small businesses, and other telecommunications carriers. We maintain a European multilingual customer service call center in Glasgow, Scotland. We market our services across Europe using a combination of direct sales, agents, and direct-media advertising. We offer prepaid services (including VMNS) in most major European countries, which are our largest and fastest growing products in Europe. Throughout Europe, a large portion of call origination is via mobile phones. In most cases, mobile carriers' tariffs for terminating international minutes are higher than fixed line operators. Through the sale of prepaid VMNS to mobile phone users, our European businesses are now targeting international minutes originated from a mobile phone to bring onto our global network for termination.

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        We operate Ericsson AXE-10 switches and provide services to retail business and residential and carrier customers in Paris, Frankfurt, and London.

Services

        We offer a broad array of communications services:

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International and Domestic Long Distance. We provide international long distance voice services terminating in over 240 countries, and domestic long distance voice services in our core operating markets.



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VOIP Services. We offer to ISPs, telecommunications carriers worldwide, and enterprise customers VOIP services both over the public Internet as well as direct point-to-point VOIP services over our ATM+IP network. In addition, we offer VOIP services for PC-to-phone or PC-to-PC usage through a partnership arrangement with Microsoft.



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Internet and Data Services. We offer global ATM, frame relay, and Internet/IP services which are available to customers in the United States, Australia, Canada and the United Kingdom. In Australia, we offer data transfer services over ATM and frame relay networks in addition to Internet access services through dial-up, accelerated dial-up and DSL. We also offer Web hosting, managed hosting, dedicated hosting, virtual private networking (VPN) and co-location services in our primary operating markets.



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Prepaid Services (including VMNS). We offer prepaid calling cards that may be used by customers for domestic and international telephone calls both within and outside of their home country. In Europe, we offer prepaid VMNS to mobile phone users which bring international minutes originating from a mobile phone onto our global network.



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Toll-free Services. We offer domestic and international toll-free services within selected countries in our principal service regions.



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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.



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Local Switched Services. We offer local service on a resale basis, primarily in Australia and Canada.



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Cellular. We offer cellular services on a resale basis in Australia and the United Kingdom.

Network

        General.    We operate a global telecommunications network consisting of international and domestic switches and related peripheral equipment, carrier-grade routers and switches for Internet and data services, undersea and trans-continental fiber optic cable systems, leased satellite and cable capacity. To ensure high-quality communications services, our network employs digital switching and fiber optic technologies, incorporates the use of SS7/C7 signaling, and is supported by comprehensive network monitoring and technical support services. Our fully deployed global network consists of the following:

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a global backbone connecting our international gateway switches, each of which is connected to our domestic and international network as well as those of other carriers in each particular market;



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a domestic long distance network presence within certain countries;

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•

a combination of owned and leased transmission facilities, resale arrangements and foreign carrier agreements; and



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ATM switches and IP routers in select markets around the world, which leverage our fiber optic cable facilities and are connected to our approximately 250 POPs, as well as Internet peering/transit points with other carriers. This network also allows us to provide VOIP on a global basis. In select markets, we have installed or leased DSL equipment to offer high-speed Internet access.

        Switching Systems.    Our network consists of 18 carrier-grade domestic and international gateway switch systems throughout Europe, North America, Australia, and Japan. We also have deployed and operate an additional 20 enhanced switching platforms in support of specialized products.

        The locations and types of our switching systems follow:

        In addition, we operate a global VOIP network based on Cisco Systems routers and gateways with an open network architecture which connects with our partners in over 150 countries through the use of open settlement protocol (OSP).

        Fiber Optic Cable Systems.    We have purchased and leased undersea and land-based fiber optic cable transmission capacity to connect our various switching systems. We either lease lines on a term basis for a fixed cost or purchase economic interests in transmission capacity through minimum assignable ownership units (MAOUs) or indefeasible rights of use (IRUs) to international traffic

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destinations. The following chart sets forth a listing of the undersea fiber optic cable systems in which we have capacity (which includes both MAOUs and IRUs):

        In December 1999, we agreed to purchase $23.2 million of fiber capacity from Qwest Communications, which provides us with ATM+IP based international broadband backbone. The backbone is comprised of nearly 11,000 route miles of fiber optic cable in the United States and overseas as well as private Internet peering at select sites in the United States and overseas. In March 2000, we agreed to purchase an additional $20.8 million of fiber capacity and as of June 30, 2001 had fulfilled the total purchase obligation. As of June 30, 2002, we had made cash payments of $27.6 million and settled our outstanding payment obligation of $16.4 million with Qwest Communications for $10.0 million in cash, which has been paid in full. We recorded this transaction in accordance with FIN No. 26, "Accounting for Purchase of a Leased Asset by the Lessee during the Term of the Lease," and accordingly, the transaction resulted in a reduction of property and equipment of $7.2 million during the three months ended June 30, 2002.

        In June 2000, we purchased from AT&T Canada for $20.6 million (26.7 million Canadian dollars (CAD)) six rings of SONET protected OC-12 capacity across Canada. This capacity provides a national backbone network for Primus Canada. This purchase price has been paid in full.

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        In December 2000, we entered into a financing arrangement to purchase fiber optic capacity in Australia for $38.3 million (51.1 million Australian dollars (AUD)) from Optus Networks Pty. Limited. As of December 31, 2001, we had fulfilled the total purchase obligation. We signed a promissory note payable over a four-year term ending in April 2005 bearing interest at a rate of 14.31%. During the three months ended June 30, 2003, we renegotiated the payment terms extending the payment schedule through April 2007, and lowering the interest rate to 10.2%. At December 31, 2003 and 2002, we had a liability recorded in the amount of $21.9 million (29.2 million AUD) and $17.2 million (30.4 million AUD), respectively.

        In the three months ended September 30, 2001, we accepted delivery of fiber optic capacity on an IRU basis from Southern Cross Cables Limited (SCCL). We and SCCL entered into an arrangement financing the capacity purchase. In the three months ended December 31, 2001, we renegotiated the payment terms with SCCL. Under the new terms, the payments for each capacity segment will be made over a five-year term ending in April 2008, which added two years to the original three-year term, and continues to bear interest at 6.0% above LIBOR (7.12% at December 31, 2003). We further agreed to purchase $12.2 million of additional fiber optic capacity from SCCL under the IRU agreement. As of December 31, 2003, we had fulfilled the total purchase obligation to SCCL. At December 31, 2003 and 2002, we had a liability recorded under this agreement in the amount of $18.6 million and $18.4 million, respectively.

        Foreign Carrier Agreements.    In selected countries where competition with the traditional Post Telegraph and Telecommunications companies (PTTs) is limited, we have entered into foreign carrier transit agreements with PTTs 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 PTTs and other licensed operators in nearly every major country.

        Network Management and Control.    We own and operate network management control centers in McLean, Virginia; Toronto, Canada; London, England; and Sydney, Australia, which are used to monitor and control a majority of the switching systems, global data network, and other digital transmission equipment used in our network. These network management control centers operate seven days per week, 24 hours per day, 365 days per year.

        Network for Data and Internet Services.    We have built an Internet backbone network that enables our global network to carry Internet and data traffic for our business, residential, carrier and ISP customers. This network uses packet switched technology, including IP and ATM. This network allows us to offer to existing and new customers data and voice communications services, including, in selected geographic areas, dial-up and dedicated Internet access, Web hosting, e-commerce, managed VPN services, VOIP, ATM and frame relay data services.

Customers

        Our business sales and marketing efforts primarily target SMEs with significant international long distance traffic. We also target large multinational businesses. Many of the services we provide in the United States, Australia, Canada, the United Kingdom, and Europe include long distance voice, Internet, data and the resale of cellular services.

        Our residential sales and marketing strategy targets residential customers who generate high international and domestic long distance traffic volumes, particularly ethnic customers. We believe that such customers are attracted to us because of competitive pricing as compared to traditional carriers, and in-language customer service and support. We are now offering Internet access to our residential customers in select markets and expanding our Internet and data offerings to additional markets and bundling them with traditional voice services.

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        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, as well as permitting our network to be interconnected with other major carriers, thereby providing global coverage.

        Business, residential and carrier revenues for the year ended December 31, 2003 were distributed 27%, 53%, and 20%, respectively, and for the year ended December 31, 2002 were distributed 28%, 48%, and 24%, respectively. No single customer accounted for greater than 10% of net revenue for the years ended December 31, 2003, 2002 and 2001.

Sales and Marketing

        We market our services through a variety of sales channels, as summarized below:

•

Direct Sales Force. As of December 31, 2003, our direct sales force included 211 full-time employees who focus on business customers with substantial international traffic, including multinational businesses and international governmental organizations. Direct sales personnel are compensated with a base salary plus commissions. We currently have sales offices in Boston (vicinity), McLean, Puerto Rico, Montreal, Toronto, Vancouver, London, Frankfurt, Adelaide, Brisbane, Melbourne, Perth, Sydney and Tokyo. In addition, approximately 117 full-time sales representatives focus on residential consumers, and 21 direct sales representatives exclusively sell services to other long distance carriers and resellers.



•

Independent Sales Agents. We also sell our services through independent sales agents and representatives, who typically focus on residential consumers and SMEs. An agent receives commissions based on revenue generated by customers obtained for us by the agent. We usually grant nonexclusive sales rights and require our agents and representatives to maintain minimum revenues. As part of the C&W SME voice customer base acquisition, we substantially increased the number of independent sales agents working for us in the United States.



•

Telemarketing. We employ full-time inbound telemarketing sales personnel, and we had been selectively outsourcing certain telemarketing functions to supplement sales efforts to residential consumers, particularly ethnic consumers, and SMEs.



•

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 customers by print advertising campaigns in ethnic newspapers, and by advertising on select radio and television programs.



•

Third party Distribution Agreements and Affinity Channels. With the growing recognition of the Primus brand and an increasing number of customers in our core markets, we have been able to establish relationships to market our services through external retailers, manufacturers, affinity and preferred partnerships and programs. These relationships allow us to increase awareness and credibility of our services among customers and reduce the cost of customer acquisition.

Management Information and Billing Systems

        We operate 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 consolidate information from each of our markets into a single database. For our billing requirements in the United States, we use a billing system developed by Electronic Data Systems Inc. (EDS) 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.

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We also use several systems developed in-house to handle our billing requirements as well as a few third party systems. We bill all of our business, reseller and residential customers directly.

        We believe that our financial reporting and billing systems are generally adequate to meet our needs in the near term. As we continue to grow, we will need to invest additional capital to purchase hardware and software, license more specialized software and increase our capacity.

Competition

Voice

        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 including wireline, wireless and cable 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 and the Telecommunications Act of 1996. Prices for long distance voice calls in the markets in which we compete have declined historically and are likely to continue to decrease. In addition, many of our competitors are significantly larger, have substantially greater financial, technical and marketing resources and larger networks.

        Privatization and deregulation have had, and are expected to continue to have, significant effects on competition in the industry. For example, as a result of legislation enacted in the United States, Regional Bell Operating Companies (RBOCs) are allowed to enter the long distance market; AT&T, MCI, Sprint and other long distance carriers are allowed to enter the local telephone services market; and cable television companies and utilities are allowed to enter both the local and long distance telecommunications markets. In addition, competition has begun to increase in the European Union (EU) communications markets in connection with the deregulation of the telecommunications industry. In most EU countries full liberalization took place in January 1998. In addition, alternatives to wireline services, such as wireless and VOIP services, are significant competitive threats. This increase in competition could adversely affect net revenue per minute.

        The following is a brief summary of the competitive environment in our principal service regions:

        United States.    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 and the bundling of services. AT&T is the largest supplier of long distance services, with MCI, Sprint and, as a result of federal legislation, RBOCs, local exchange carriers (LECs) and ISPs being significant competitors in providing domestic and international long distance services. The major wireless carriers are also substantial competitors for domestic long distance services.

        Australia.    Australia is one of the most deregulated and competitive communications markets in the Asia-Pacific region. Our principal competitors in Australia are Telstra, the dominant carrier, SingTel Optus and Telecom New Zealand. 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.

        Canada.    The Canadian communications 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. In residential markets, we compete primarily with each of the

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incumbent telecommunication companies (of which the largest are those owned by BCE in eastern Canada and Telus in western Canada) in their respective territories. We also compete against Call-Net Enterprises and other smaller resellers. In the highly competitive business market, we compete with BCE and Telus, who are both expanding beyond their traditional territories and competing with each other across the country, and with Allstream, Call-Net Enterprises and other smaller carriers.

        United Kingdom.    Our principal competitors in the United Kingdom are British Telecommunications (BT), the dominant provider of telecommunications services in the United Kingdom, Cable & Wireless UK, Colt Telecom, Energis and MCI. Major wireless carriers are also a significant source of competition. We compete in the United Kingdom and European countries by offering competitively-priced stand-alone and bundled services, personalized customer service and value-added services.

Internet and Data

        The market for Internet services and data services is extremely competitive. We anticipate that competition will continue to intensify. Our current and prospective competitors offering these services include national, international, regional and local ISPs such as AOL and EarthLink, Web hosting companies, other long distance and international long distance telecommunications companies, including AT&T, MCI and Sprint, LECs such as Verizon and SBC, cable television, direct broadcast satellite, wireless communications providers and on-line service providers. Many of these competitors have significantly greater resources, market presence and brand recognition than we do.

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. Privatization and deregulation have had, and are expected to continue to have, significant effects on competition in the industry. For example, as a result of legislation enacted in the United States, RBOCs have been allowed to enter the long distance markets in many states. AT&T, MCI, Sprint and other long distance carriers have expanded their services to include local telephone services. In addition, competition has increased in the EU communications markets as a result of legislation enacted at the EU level. Beginning in 1990, a number of legislative measures were adopted which culminated in the full liberalization of telecommunications markets throughout most EU member states as of January 1, 1998. This increase in competition could adversely affect net revenue per minute. 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. Further the increase in providers vying for a limited market share will require us to maintain competitive rate structures.

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        The regulatory frameworks in certain jurisdictions in which we provide services are described below:

United States

        In the United States, our services are subject to the provisions of the Communications Act of 1934, as amended, the Federal Communications Commission (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 of 1934, including the offering of service on a nondiscriminatory 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 subject to various specific common carrier telecommunications requirements set forth in the FCC's rules, including operating, reporting and fee requirements. Both federal and state regulatory agencies have broad authority to impose monetary and other penalties on us for violations of regulatory requirements.

        International Service Regulation.    International common carriers like us are required to obtain authority under Section 214 of the Communications Act of 1934. 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 on a nondominant carrier basis. The FCC is considering a number of international service issues in the context of several policy rulemaking proceedings in response to specific petitions and applications filed by other international carriers. We are unable to predict how the FCC will resolve the pending international policy issues or how such resolution will affect our international business. In recent years, the FCC has taken steps to streamline regulation of international services where competition can provide consumers with lower rates and choices among carriers and services. To that end, with some exceptions, current FCC rules require facilities-based United States carriers, like us, with operating agreements with dominant foreign carriers, to abide by the International Settlements Policy by following uniform accounting rates, ⁵⁰/50 split in settlement rates, and proportionate return of traffic. United States carrier arrangements with nondominant foreign carriers are not subject to these requirements. Further, the FCC recently announced that it would lift the International Settlements Policy requirements from a substantial number of additional routes where competition exists. We may take advantage of these more flexible arrangements with nondominant foreign carriers, and the greater pricing flexibility that may result, but we may also face greater price competition from other international service carriers.

        Pursuant to a change in rules by the FCC, we have replaced our international and domestic FCC tariff with a general service agreement and price list posted on our Web site (also as required by FCC order). This "detariffing" has given us greater pricing flexibility in our service offerings, but we are no longer entitled to legal protection under the "filed rate doctrine," which provides protection to carriers from customers' legal actions challenging terms and conditions of service.

        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 initiate or expand our domestic interstate operations, but we are required to obtain FCC approval to transfer control or discontinue service and to file various reports and pay various fees and assessments. Among other things, interstate common carriers must offer service on a nondiscriminatory basis at just and reasonable rates. In addition, as a non-dominant carrier, we are subject to the FCC's complaint jurisdiction. In particular, we may be subject to complaint proceedings in conjunction with alleged noncompliance such as unauthorized changes in a customer's preferred carrier or violations of the FCC's Do-Not-Call telemarketing rules. We are also subject to the Communications Assistance for Law Enforcement Act and certain FCC regulations which require telecommunications common carriers to modify their networks to allow law enforcement authorities to perform electronic surveillance. The recently enacted Do-Not-Call Registry and related restrictions set out the specific parameters for telemarketing solicitation and prohibit outbound telemarketing in some circumstances.

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        Our costs of providing long distance services will be affected by changes in the switched access charge rates imposed by LECs for origination and termination of calls over local facilities. FCC rules currently cap the rates that both incumbent and competitive LECs may charge for switched access, and restrain incumbent LECs ability to change their charges. The FCC's decision to place caps on competitive LECs charges has been appealed in court and is on reconsideration at the FCC. The FCC continues to grant incumbent LECs greater pricing flexibility and relaxed regulation of access services in those markets where there are other providers of access services. Responding to a Congressional directive in the Telecommunications Act of 1996, the FCC has attempted several times over the past seven years to develop a list of Unbundled Network Elements (UNEs—portions of the incumbent local exchange carrier (ILECs) networks and services that are sold separately) that must be made available to competitive local exchange carriers (CLECs). On several occasions the courts have faulted the FCC for both its identification of the network elements to be unbundled, and its justifications for requiring UNEs to be made available. The FCC's most recent attempt is colloquially known as the Triennial Review Order (TRO). On March 2, 2004, the U.S. Court of Appeals in Washington D.C. in "U.S. Telecom Association v. FCC" vacated significant portions of the FCC's scheme governing unbundling of network elements for voice services, while upholding provisions excluding broadband network elements from unbundling. The court said its mandate would become effective upon at the later of 60 days after its order or the appeals court's rejection of petitions to rehear the decision. This ruling, which favors the ILECs, unsettles the regulatory landscape for CLECs dependent on UNEs. While we do not currently use UNEs in our services, the current regulatory landscape could make it more difficult for us to use UNEs in the future, should we decide to initiate local service, which could affect our cost of providing local services. Depending on the outcome of the litigation, any new rules promulgated by the FCC and the manner in which such these rules are implemented between LECs, we may have fewer competitive choices among LECs and, as a result, could see an increase in our termination and origination costs over time.

        All interstate telecommunications carriers, including us, are required to make contributions to support federal universal service programs. The FCC is currently considering revisions to its universal service funding mechanism. We cannot predict the outcome of these proceedings or their potential effect on us. Our VOIP service operations are not currently subject to direct regulation by the FCC or state regulatory commissions to the extent that they qualify as "enhanced" or "information" services. The FCC defines enhanced services as services that (1) employ computer processing applications that act on the format, content, code, protocol or similar aspects of the subscriber's transmitted information, (2) provide the subscriber additional, different or restructured information, or (3) involve subscriber interaction with stored information. In 1998, in a non-binding report, the FCC observed that "computer-to-computer" VOIP may be appropriately considered to be unregulated but that "phone-to-phone" VOIP may lack the characteristics that would render them unregulated "information" services. In February 2004, the FCC ruled that free computer-to-computer VOIP service is not "telecommunications service" and that it is an interstate "information service." Although this order clarifies some of the relevant VOIP issues, the FCC has not yet issued a formal decision as to whether other variations of VOIP services should be subject to traditional common carrier telecommunications service regulation or whether any of the VOIP services should be subject to universal service contribution and access charge obligations. In March 2004, the FCC released a Notice of Proposed Rulemaking ("NPRM") regarding VOIP Service. The NPRM specifically addresses the regulatory classification and jurisdiction of VOIP; the application of access charges; and how to preserve key public policy objectives such as universal service, 911/emergency services, law enforcement surveillance requirements, and the needs of persons with disabilities. While initial indications from the FCC suggest that any regulation of VOIP will be limited in nature, the future regulatory treatment of other variations of VOIP by the FCC and state regulatory bodies continues to be uncertain. Furthermore, Congressional dissatisfaction with the FCC's treatment of IP telephony could result in legislation requiring the FCC to impose greater or lesser regulation. Changes to, and further

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clarifications of, the treatment of VOIP services could result in the imposition of burdensome regulation and fees on some of our services and/or increase certain of our operating costs.

        State Regulation.    Our intrastate long distance operations are subject to various state laws and regulations, including, in most jurisdictions, certification and tariff filing requirements. Primus Telecommunications, Inc. (PTI), a wholly-owned subsidiary of ours, maintains the necessary certificate and tariff approvals, where approvals are necessary, to provide intrastate long distance service in 49 states and Puerto Rico. PTI also maintains the necessary certificate to provide local services in Puerto Rico. Certain of our other subsidiaries, such as Trescom USA, Inc. and Least Cost Routing, Inc., also maintain certificates and tariffs in some states. Some states also require the filing of periodic reports, the payment of various fees and surcharges and compliance with service standards and consumer protection rules. States often require prior approval or notification for certain stock or asset transfers or, in several states, for the issuance of securities, debt or for name changes. As a certificated carrier, consumers may file complaints against us at the public service commissions. 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 RBOCs and other LECs 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.

        Wireless Service Regulations.    Through subsidiaries of TresCom International, Inc., a wholly-owned subsidiary of ours, we hold several wireless licenses issued by the FCC. As a licensee authorized to provide microwave and satellite earth station services, we are subject to Title III of the Communications Act of 1934, as amended by the Telecommunications Act of 1996, and FCC regulations promulgated thereunder. Pursuant to Title III, foreign entities may not directly hold more than 20% of the stock or other ownership interests in an entity, including us, that holds certain types of FCC licenses, such as the wireless licenses held by the TresCom International, Inc. subsidiaries referred to above. In addition, unless granted an FCC waiver, foreign citizens and entities may not indirectly hold 25% or more of the stock or other ownership interest in such entities.

Australia

        The provision of our services is subject to federal regulation in Australia. The two primary instruments of regulation are the Australian Telecommunications Act 1997 and federal regulation of anti-competitive practices pursuant to the Australian Trade Practices Act 1974. The current regulatory framework came into effect in July 1997.

        We are licensed under the Telecommunications Act 1997 to own and operate transmission facilities in Australia. Under the 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 1997 covering matters such as compliance with the Telecommunications Act 1997, operator services, regulation of land access, directory assistance, provision of information to allow maintenance of an integrated public number database and itemized billing.

        Two federal regulatory authorities exercise control over a broad range of issues affecting the operation of the Australian telecommunications industry. The Australian Communications Authority (ACA) is the authority regulating matters including the licensing of carriers and technical matters, and the Australian Competition and Consumer Commission (ACCC) has the role of promotion of competition and consumer protection and in particular dealing with carrier to carrier interconnection

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and network access. We are required to comply with the terms of our own license, are subject to the greater controls applicable to licensed facilities-based carriers and are under the regulatory control of the ACA and the ACCC. 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. As a carrier we must also be a member of the Telecommunications Industry Ombudsman (TIO) Scheme. The TIO is responsible for handling complaints from consumers about carriers and Internet service providers. The TIO may impose financial penalties upon carriers that do not satisfactorily deal with consumer complaints.

        There is no limit to the number of carriers that may be licensed. 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. 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 1997 and with the telecommunications access regime and related facilities access obligations). Carriers also must meet the Universal Service Obligations (USO), to assist in providing all Australians, particularly in remote areas, with reasonable access to standard telephone services and digital data services. Telstra is currently the sole universal service provider. One of our subsidiaries, Hotkey Internet Services, has been approved as a special digital service provider. Since 2000, the responsible Minister of the Australian government may make a determination of the amount of USO subsidies, with advice from the Australian Communications Authority. No methodology is provided in legislation and the Minister could make a determination of a Universal Service Legislation (USL) that would be material to us. However, the USL has been set until 2005 at levels (e.g., approximately 11 Australian dollars (AUD) per 1,000 AUD of eligible revenue for the 2001-02 financial year) that we do not consider material.

        Fair Trading Practices.    The ACCC enforces legislation for the promotion of competition and consumer protection, particularly rights of access (including pricing for access) and interconnection. The ACCC can issue a competition notice to a carrier which has engaged in anti-competitive conduct. Where a competition notice has been issued, the ACCC can seek pecuniary penalties, and other carriers can seek damages, if the carrier continues to engage in the specified conduct.

        The Telecommunications Act 1997 package of legislation includes a telecommunications access regime that provides a framework for regulating access rights for specific carriage services and related services through the declaration of services by the ACCC. 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 Singtel 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.

Canada

        We, as a reseller of domestic Canadian telecommunications services, are largely unregulated by the Canadian Radio-television and Telecommunications Commission (CRTC). In particular, because we do not own or operate transmission facilities in Canada, we are not subject to direct regulation by the CRTC pursuant to the Canadian Telecommunications Act. Therefore, we may provide resold Canadian domestic long distance service without regulation of our rates, prices or the requirement to file tariffs. In addition, as described below, as a reseller we are not subject to restrictions on foreign ownership or control.

        In 2000, the CRTC implemented a revenue-based contribution regime to replace the per minute contribution charge formerly in place to support universal access. This new revenue-based contribution

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mechanism collects from a wider base of telecommunications service providers and has consequently lowered our contribution expenses considerably since 2001, to 1.1% of our net Canadian telecommunications service revenues in 2003.

        In a price cap decision issued in May 2002, the CRTC lowered the prices incumbent providers can charge competitors for a range of competitor services—i.e., facilities and services required by competitors to provide telecommunications services to their customers. Several proceedings are currently underway that may lead to reductions in the costs incurred by us for the lease of certain incumbent facilities and the interconnection of our network with the incumbents' local access network. These reduced rates may be effective on a retroactive basis to June 2002.

        Competition.    Long distance competition has been in place in Canada since 1990 for long distance resellers and since 1992 for facilities-based carriers. Since 1994, the ILECs have been required to provide "equal access" which eliminated the need for customers of competitive long distance providers to dial additional digits when placing long distance calls. In June 1992, the CRTC issued its ground-breaking Telecom Decision CRTC 92-12 requiring the incumbent LECs to interconnect their networks with their facilities-based, as well as resale, competitors. However, these companies have now disbanded the Stentor alliance effective January 1, 1999, and former Stentor companies, Bell Canada and TELUS Communications, the two largest carriers in Canada, have begun to compete against one another. Other nationwide providers are Allstream (formerly AT&T Canada Corp.), Sprint Canada and 360 Networks. Additional long distance services competition is provided by a substantial resale long distance industry in Canada.

        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 ("Canadian carriers"), CLECs and microwave license holders, but not to companies which do not own or operate facilities or to resellers, which may be wholly foreign-owned and controlled. These restrictions limit the amount of foreign investment in Canadian carriers to no more than 20% of the voting equity of a Canadian carrier operating company and no more than 33¹/3% 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. Primus Canada, along with several other telecommunications service providers, has sought to have the Canadian government review foreign ownership restrictions with a view to lowering these restrictions or eliminating them altogether.

        In April 2003, a committee of the House of Commons (the Industry Committee) recommended the removal of the restrictions in their entirety, for both telecommunications common carriers and for broadcasting distribution undertakings (BDUs) such as cable companies. In June 2003, however, another committee of the House of Commons (the Heritage Committee) expressed concerns that changes in ownership restrictions for either telecommunications common carriers or BDUs could have an adverse impact on the broadcasting system. In its September 2003 response to the Industry Committee's recommendation, the government acknowledged the appropriateness of the committee's conclusion that removing foreign investment restrictions would benefit the telecommunications industry. However, the government also noted the concerns expressed by the Heritage Committee. The government recognized that it has a responsibility to determine how best to reconcile the conflicting recommendations of the two committees and undertook to analyze this question and be in a position to examine possible solutions by the spring of 2004. Therefore, it is premature to predict whether the recommendation to remove the restrictions for telecommunications common carriers will be implemented and if so, when.

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European Union

        In Europe, the regulation of telecommunications is governed at a supranational level by the European Parliament, Council and 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. These institutions are responsible for creating European Union-wide policies and, through legislation, have progressively developed a regulatory framework aimed at ensuring an open, competitive telecommunications market.

        In February 2002, the Council agreed to a new European regulatory framework for the communications sector which was formally adopted on March 7, 2002. The new regime comprises the following legislative texts:

•

Directive 2002/21 on a common regulatory framework for electronic communications networks and services ("Framework Directive");



•

Directive 2002/20 on the authorization of electronic communications networks and services ("Authorization Directive");



•

Directive 2002/19 on access to, and interconnection of, electronic communications networks and associated facilities ("Access Directive"); and



•

Directive 2002/22 on universal service and users rights relating to electronic communications networks and services ("Universal Service Directive").

        These directives were supposed to be implemented by EU member states and incorporated into the regulatory regime of each member state by July 25, 2003. However, a number of member states missed this deadline and are still in the process of implementation. We anticipate, but can make no assurance, that these new directives will not have any material impact on our business operations in Europe.

        One of the requirements of the Authorization Directive is that no company wishing to provide electronic communications networks or services should have to obtain prior authorization, although such a company could be required to notify relevant regulatory authorities in the member states where it is intending to operate of its intention to provide such networks or services.

        A further directive relating to privacy and electronic communications (Directive 2002/58) was added to the new regime at a later stage. This directive aims in a number of respects to harmonize national laws on personal data protection in the electronic communications age and deals with matters including the confidentiality of billing information, the use of caller identification devices, the use of subscriber directories and unsolicited communications. The directive was supposed to be implemented by EU member states and incorporated into the regulatory regime of each member state by October 31, 2003 but, as with the earlier directives referred to above, a number of member states have missed this deadline.

        Each EU member state in which we currently conduct or plan to conduct our business has historically had a different regulatory regime and we expect that, even after the adoption of the new EU regulatory regime, differences will continue for the foreseeable future. There may well be differences in the way in which the new EU regulatory regime is implemented from one member state to another. The requirements for us to obtain necessary approvals have varied considerably from one country to another. We have obtained and will continue to seek to obtain interconnection agreements with other carriers within the EU. While previous EU directives have required that carriers with significant market power offer cost-based and non-discriminatory interconnection to competitors, individual EU member states have implemented this requirement differently and may continue to do so under the new EU regulatory regime. 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.

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United Kingdom

        Until recently, the running of telecommunications systems and the provision of telecommunications services was governed by the Telecommunications Act 1984 (the "1984 Act"). Under the 1984 Act, it was a criminal offense for any person to run a telecommunications system unless authorized to do so by a license.

        Until 1991, the United Kingdom government operated a duopoly policy, under which licenses to run fixed link systems for the provision of voice telephony services were restricted to two companies, BT and Mercury Communications (now Cable & Wireless UK).

        In 1991, the United Kingdom government adopted a new "multi-operator" policy. Under this policy, any company wishing to run a telecommunications system was able to apply for a license to the Department of Trade and Industry (DTI), as it is now known. In deciding whether to recommend the award of a license, the DTI had to consider all applications made and would take into account matters such as the business plan of the applicant, the experience of the applicant's senior management team and the technical characteristics of the system it was intending to deploy. Licenses, known as Public Telecommunication Operator (PTO) licenses were awarded by the relevant Secretary of State, on the recommendation of the DTI, but were administered and enforced by the Director General, a sector-specific regulator for the telecommunications industry established under the 1984 Act. The Director General presided over Oftel.

        Over time, a number of so-called telecommunications "class licenses" were promulgated by the DTI to avoid the need for companies to have to apply for an individual PTO licence in all instances. However, the class licenses were of limited application, and generally any company wishing to operate systems to provide public services on a regional or national basis, had to apply for an individual license.

        Depending upon the technical characteristics of the system deployed and the services provided, a company might be required to obtain additional licenses not covered by the 1984 Act. For example, if the system made use of radio spectrum, including satellite links, a license under the Wireless Telegraphy Act 1949 was likely to be required.

        The detailed terms of telecommunications licenses evolved and became more complex over time and provisions were inserted into BT's license in particular, which were not to be found in other licenses. These included provisions giving the Director General the ability to exercise price controls in relation to BT's wholesale and retail services. The Director General used this ability to impose a series of successive price caps on BT, both in relation to its wholesale and retail prices, although BT was increasingly given greater pricing flexibility particularly at the retail level. The Director General launched a consultation in October 2003 as to whether BT should be able, at the retail level, to offer business customers discounted prices for bundles of services and discount schemes based on expenditure aggregated across a range of services. A final decision on this issue is still outstanding. Without existing price controls, or with greater pricing flexibility, BT would be able to charge us higher prices for certain services or to charge end user customers prices that are lower than we are able to charge, subject to any constraints imposed by general competition law.

        Any operator qualifying under the Telecommunications (Interconnection) Regulations 1997, was able to apply to Oftel to be recognized as a so-called "Annex II" operator. The effect was to confer an entitlement on an "Annex II" operator to request interconnection services from another "Annex II" operator and, conversely, an obligation to negotiate for the provision of interconnection services itself when requested to do so by another "Annex II" operator. The requirements imposed on BT as a result of these regulations went further, as it was considered to possess significant market power. BT was placed under an obligation to meet all reasonable requests for interconnection from other "Annex II" operators, to do so on non-discriminatory and cost-based terms and to publish a reference

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