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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
COMMISSION FILE NO. 0-29-092
PRIMUS TELECOMMUNICATIONS GROUP,
INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 54-1708481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1700 0LD MEADOW ROAD, SUITE 300, MCLEAN, VA 22102
(Address of principal executive offices) (Zip Code)
</TABLE>
(703) 902-2800
(Registrant's telephone number, including area code)
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 X NO
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.
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<CAPTION>
OUTSTANDING AS OF
CLASS OCTOBER 31, 1998
----- ----------------
<S> <C>
COMMON STOCK , $.01 PAR VALUE 28,049,231
</TABLE>
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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
INDEX TO FORM 10-Q
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Page
No.
----
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Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Operations.................. 1
Consolidated Balance Sheet............................ 2
Consolidated Statement of Cash Flows.................. 3
Notes to Consolidated Financial Statements............ 4
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................. 6
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................... 11
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................... 12
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............. 12
Item 3. DEFAULTS UPON SENIOR SECURITIES....................... 12
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.... 12
Item 5. OTHER INFORMATION..................................... 12
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................... 12
SIGNATURE............................................................... 13
EXHIBIT INDEX........................................................... 14
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUE $116,047 $ 73,018 $295,573 $202,099
COST OF REVENUE 96,557 65,266 249,406 184,478
------------- ------------- ------------- -------------
GROSS MARGIN 19,490 7,752 46,167 17,621
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative 23,022 13,749 57,389 35,784
Depreciation and amortization 7,411 1,877 15,322 4,343
------------- ------------- ------------- -------------
Total operating expenses 30,433 15,626 72,711 40,127
------------- ------------- ------------- -------------
LOSS FROM OPERATIONS (10,943) (7,874) (26,544) (22,506)
INTEREST EXPENSE (11,456) (4,893) (28,235) (5,570)
INTEREST INCOME 3,364 2,118 8,634 3,377
OTHER INCOME (EXPENSE) - 58 - 407
------------- ------------- ------------- -------------
LOSS BEFORE INCOME TAXES (19,035) (10,591) (46,145) (24,292)
INCOME TAXES - - - 81
------------- ------------- ------------- -------------
NET LOSS $(19,035) $(10,591) $(46,145) $(24,373)
============= ============= ============= =============
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $(0.68) $(0.60) $(1.99) $(1.37)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 27,998 17,781 23,211 17,780
============= ============= ============= =============
</TABLE>
See notes to consolidated financial statements.
1
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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $179,070 $115,232
Restricted investments 25,388 22,774
Accounts receivable (net of allowance of $10,493
and $5,044) 98,433 58,172
Prepaid expenses and other current assets 14,184 5,152
--------------- ---------------
Total current assets 317,075 201,330
RESTRICTED INVESTMENTS 24,517 50,776
PROPERTY AND EQUIPMENT - Net 127,649 59,241
INTANGIBLES - Net 203,073 33,164
DEFERRED INCOME TAXES 2,391 2,620
OTHER ASSETS 15,185 10,882
--------------- ---------------
TOTAL ASSETS $689,890 $358,013
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 97,338 $ 56,358
Accrued expenses and other current liabilities 32,163 13,898
Accrued interest 9,810 11,016
Deferred income taxes 2,740 3,004
Current portion of long-term obligations 26,333 1,059
--------------- ---------------
Total current liabilities 168,384 85,335
LONG TERM OBLIGATIONS 384,670 230,152
OTHER LIABILITIES 527 -
--------------- ---------------
Total liabilities 553,581 315,487
--------------- ---------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - authorized 2,455,000 shares;
none issued and outstanding - -
Common stock, $.01 par value - authorized, 80,000,000 and
40,000,000 shares; issued and outstanding,
28,041,692 and 19,662,233 shares 280 197
Additional paid-in capital 234,405 92,181
Accumulated deficit (94,150) (48,005)
Accumulated other comprehensive loss (4,226) (1,847)
--------------- ---------------
Total stockholders' equity 136,309 42,526
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $689,890 $358,013
=============== ===============
</TABLE>
See notes to consolidated financial statements.
2
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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(46,145) $(24,373)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation, amortization and accretion 15,593 4,494
Sales allowance 6,592 4,211
Stock issuance - 401(k) plan employer match 70 -
Foreign currency transaction loss - (407)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (24,728) (30,454)
(Increase) decrease in prepaid expenses and
other current assets (7,678) (1,422)
(Increase) decrease in other assets 171 (766)
Increase (decrease) in accounts payable 7,116 45,798
Increase (decrease) in accrued expense,
other current liabilities and other liabilities (5,378) 1,134
Increase (decrease) in accrued interest payable (1,476) 3,664
--------------- ---------------
Net cash provided by (used in) operating activities (55,863) 1,879
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (55,933) (34,667)
(Purchase) sale of short-term investments - 25,125
(Purchase) sale of restricted investments 23,644 (72,521)
Cash used in business acquisitions, net of cash acquired (1,165) (5,208)
--------------- ---------------
Net cash provided by (used in) investing activities (33,454) (87,271)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases and long-term obligations (4,673) (14,968)
Sale of common stock, employee option and purchase plan 4,613 -
Proceeds from long-term obligations 159,320 225,000
Deferred financing costs (5,500) (9,500)
--------------- ---------------
Net cash provided by (used in) financing activities 153,760 200,532
--------------- ---------------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (605) (427)
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 63,838 114,713
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 115,232 35,474
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $179,070 $150,187
=============== ===============
</TABLE>
See notes to consolidated financial statements.
3
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PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission ("SEC")
regulations. Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. In the opinion of management, the financial statements
reflect all adjustments (of normal and recurring nature) which are
necessary to present fairly the financial position, results of operations
and cash flows for the interim periods. The results for the three months or
nine months ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998.
The financial statements should be read in conjunction with the Company's
audited consolidated financial statements included in the Company's most
recently filed Form 10-K.
(2) Acquisition
-----------
On June 9, 1998 the Company completed its acquisition of 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. 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.
The Company has accounted for the TresCom acquisition using the purchase
method. Accordingly, the results of operations of TresCom are included in
the consolidated results of the Company as of June 9, 1998, the date of
acquisition. Under the purchase method of accounting, the Company has
preliminarily allocated the purchase price to assets and liabilities
acquired based upon their estimated fair values. The purchase price
allocation reflected in the financial statements is therefore tentative and
is subject to changes arising from the receipt of additional valuation and
other information.
Pro forma operating results for the nine months ended September 30, 1998
and the year ended December 31, 1997, as if the acquisition of TresCom had
occurred as of January 1, 1997, are as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, 1998 December 31, 1997
---------------------- ---------------------
<S> <C> <C>
Net revenue $359,141 $428,454
Net loss $(55,724) $(54,204)
Basic and diluted net loss per share $ (2.01) $ (2.08)
</TABLE>
4
<PAGE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of future operations.
(3) Long Term Obligations
---------------------
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- --------------
(Unaudited)
<S> <C> <C>
Obligations under capital leases $ 14,003 $ 8,487
Revolving Credit Agreement 23,554 -
Senior Notes 11 3/4% 222,888 222,616
Senior Notes 9 7/8% 150,000 -
Notes payable 558 -
Settlement obligation - 108
--------- ---------
Subtotal 411,003 231,211
Less: Current portion of long term obligations (26,333) (1,059)
--------- ---------
$ 384,670 $ 230,152
========= =========
</TABLE>
On May 19, 1998 the Company completed the sale of $150 million 9 7/8%
senior notes ("1998 Senior Notes Offering") due 2008 with semi-annual
interest payments.
As a result of the merger with 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.
(4) New Accounting Pronouncements
-----------------------------
In January 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(SFAS No. 130). Under SFAS No. 130, the Company's foreign currency
translation adjustments are considered to be components of other
comprehensive income (loss), and the stockholders' equity section of the
accompanying balance sheet has been reclassified accordingly. During the
three and nine months ended September 30, 1998 and 1997, the Company's
foreign currency translation adjustment totaled $(1.2) million and $(2.4)
and $(0.3) million and $(0.6) million, respectively. For the year ending
December 31, 1998, the Company will report its net income (loss) and its
foreign currency translation income or loss within a separate statement of
comprehensive income (loss).
(5) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the current
year presentation.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Primus is a global facilities-based telecommunications company that offers
international and domestic long distance and other telecommunications services
to business, residential and wholesale carrier customers in North America, Asia-
Pacific and Europe. The Company is exploiting the increasing demand for high-
quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation. The Company currently provides services in the
United States, Canada, Mexico, Japan, Germany, Australia and the United Kingdom.
Net revenue is earned based on the number of minutes billable by the Company and
is recorded upon completion of a call, adjusted for sales allowance. The Company
generally prices its services at a savings compared to the major carriers
operating in its service regions. The Company's net revenue is derived from
carrying a mix of business, residential and wholesale long distance voice and
data traffic and, in Australia, also from provision of local and cellular
services.
Cost of revenue is primarily comprised of costs incurred from other domestic and
foreign telecommunications carriers to originate, transport and terminate calls.
The majority of the Company's cost of revenue is variable, based upon the number
of minutes of use, with transmission and termination costs being the Company's
most significant expense. As the Company increases the portion of traffic
transmitted over its leased or owned facilities, cost of revenue increasingly
will be comprised of fixed costs.
Although the Company's functional currency is the U.S. dollar, a significant
portion of the Company's net revenue is derived from its sales and operations
outside the United States, principally in Australia, the United Kingdom and
Canada. In the future, the Company expects to continue to derive a significant
portion of its net revenue and incur a significant portion of its operating
costs outside the United States and changes in foreign currency exchange rates
may have a significant effect on the Company's results of operations. The
Company historically has not engaged in hedging transactions.
OTHER OPERATING DATA
The following information for the three months ended September 30, 1998 and 1997
is provided for informational purposes and should be read in conjunction with
the unaudited Consolidated Financial Statements and Notes provided herein and
the Consolidated Financial Statements presented with the Company's most recently
filed Form 10-K.
6
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<TABLE>
<CAPTION>
------------------------------------------------------------------------
Three Months Ended September 30, 1998
------------------------------------------------------------------------
Minutes of Long Distance Use
Net -------------------------------------------------------
Revenue International Domestic Total
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
North America $ 58,553 152,701 86,113 238,814
Europe 16,614 52,266 16,354 68,620
Asia-Pacific 40,880 32,896 76,456 109,352
--------------- ----------------- ----------------- -----------------
Total $116,047 237,863 178,923 416,786
=============== ================= ================= =================
<CAPTION>
------------------------------------------------------------------------
Three Months Ended September 30, 1997
------------------------------------------------------------------------
Minutes of Long Distance Use
Net -------------------------------------------------------
Revenue International Domestic Total
--------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
North America $20,350 57,199 17,131 74,330
Europe 6,228 9,852 6,973 16,825
Asia-Pacific 46,440 11,844 61,544 73,388
--------------- ----------------- ----------------- -----------------
Total $73,018 78,895 85,648 164,543
=============== ================= ================= =================
</TABLE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AS
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 1997
Net revenue increased $43.0 million or 59%, from $73.0 million for the three
months ended September 30, 1997 to $116.0 million for the three months ended
September 30, 1998. Of the increase, $38.2 million was associated with the North
American operations, which represents a growth rate of approximately 188%. The
growth is a result of the addition of traffic from the acquisition of TresCom,
increased traffic volumes in the Company's United States and Canadian wholesale
carrier operations and in retail operations particularly from ethnic residential
consumers. European net revenue increased $10.4 million from $6.2 million for
the three months ended September 30, 1997 to $16.6 million for the three months
ended September 30, 1998, a growth rate of 167%. The European increase is
attributable to increased traffic volumes and net revenue in the United Kingdom
wholesale and retail operations and the addition of wholesale operations in
Germany. The Company's Asia- Pacific net revenue, in United States dollar terms,
decreased $5.6 million or 12.0%, from $46.4 million for the three months ended
September 30, 1997 to $40.9 million for the three months ended September 30,
1998, primarily as a result of a 24% decrease in the Australian dollar's average
exchange rate. Net revenue of the Australian operations, in Australian dollar
terms, grew 9.0% to $68.4 million as a result of increased traffic from retail
residential and business customers and from the addition of data and internet
services.
Cost of revenue increased $31.3 million, from $65.3 million, or 89.4% of net
revenue, for the three months ended September 30, 1997 to $96.6 million, or
83.2% of net revenue, for the three months ended September 30, 1998. The
increase in the cost of revenue is attributable to the increase in traffic
volumes and associated net revenue growth. The decrease in the cost of revenue
as a percentage of net revenue is reflective of the continuing migration of
existing and newly generated customer traffic onto the Company's expanding
network and new higher margin product offerings such as data and internet
services.
Selling, general and administrative expenses increased $9.3 million, from
$13.7 million for the three months ended September 30, 1997, to $23.0 million
for the three months ended September 30, 1998. The increase is primarily a
result of the addition of expenses from acquired operations including TresCom,
Hotkey Internet Services Pty., Ltd. ("Hotkey") and Eclipse Telecommunications
Pty., Ltd. ("Eclipse").
7
<PAGE>
Depreciation and amortization expense increased from $1.9 million for the three
months ended September 30, 1997 to $7.4 million for the three months ended
September 30, 1998. The increase is primarily associated with increased
amortization expense related to intangible assets arising from the Company's
acquisitions of TresCom, Hotkey and Eclipse and increased depreciation expense
related to acquired fixed assets and capital expenditures for fiber optic cable,
switching and other network equipment being placed into service.
Interest expense increased from $4.9 million for the three months ended
September 30, 1997 to $11.5 million for the three months ended September 30,
1998. The increase is primarily due to the additional debt incurred pursuant to
the 1998 senior notes offerings and, to a lesser extent, the addition of the
Company's Revolving Credit Agreement and additional capital lease financings.
Interest income increased from $2.1 million for the three months ended
September 30, 1997 to $3.4 million for the three months ended September 30,
1998. The increase is a result of the investment of the net proceeds from the
Company's 1997 and 1998 senior notes offerings.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AS
COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997
Net revenue increased $93.5 million or 46%, from $202.1 million for the nine
months ended September 30, 1997 to $295.6 million for the nine months ended
September 30, 1998. Of the net revenue increase, $79.7 million was associated
with the Company's North American operations, which represents a growth rate of
approximately 170%. The growth is a result of increased traffic volumes in
wholesale carrier operations and in business and ethnic residential retail
operations. Additionally, the 1998 period includes operations of TresCom (since
the June 9, 1998 acquisition), the acquired Canadian operations and the acquired
operations of TelePassport L.L.C. / USFI, Inc. European operations contributed
$24.9 million of the year-over-year net revenue growth, which represents a
growth rate of approximately 169%. The European net revenue increased from
$14.7 million for the nine months ended September 30, 1997 to $39.6 million for
the nine months ended September 30, 1998 resulting primarily from increased
retail business and residential traffic and the addition of wholesale services,
both in the United Kingdom and Germany. The Company's Asia-Pacific net revenue,
in United States dollar terms, decreased by $11.1 million, or 7.9%, from
$140.4 million for the nine months ended September 30, 1997 to $129.3 million
for the nine months ended September 30, 1998 primarily resulting from a 17%
decrease in the Australian dollar average exchange rate. Net revenue of the
Australian operations, in Australian dollar terms, grew 6% to $195.8 million as
a result of increased retail business and residential traffic growth and the
addition of data and internet services.
Cost of revenue increased $64.9 million, from $184.5 million, or 91.3% of net
revenue, for the nine months ended September 30, 1997 to $249.4 million, or
84.4% of net revenue, for the nine months ended September 30, 1998. The increase
in the cost of revenue is primarily attributable to the increased traffic
volumes and associated net revenue growth. The decrease in the cost of revenue
as a percentage of net revenue is reflective of the continual expansion of the
Company's global network, the continuing migration of existing and newly
generated customer traffic onto the Company's network, and the new higher margin
product offerings such as data and internet services.
Selling, general and administrative expenses increased $21.6 million from
$35.8 million to $57.4 million for the nine months ended September 30, 1997 as
compared to the nine months ended September 30, 1998. 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 the Company's residential
marketing campaigns.
Depreciation and amortization increased from $4.3 million for the nine months
ended September 30, 1997 to $15.3 million for the nine months ended September
30, 1998. The increase is associated with increased amortization expense related
to intangible assets arising from the Company's
8
<PAGE>
acquisitions and with increased depreciation expense related to acquired fixed
assets and capital expenditures for fiber, switching and other network equipment
being placed into service.
Interest expense increased from $5.6 million for the nine months ended
September 30, 1997 to $28.2 million for the nine months ended September 30,
1998. The increase is primarily attributable to the interest expense associated
with the Company's 1997 and 1998 senior notes offerings and, to a lesser extent,
the Company's Revolving Credit Agreement and capital lease financings.
Interest income increased from $3.4 million for the nine months ended
September 30, 1997 to $8.6 million for the nine months ended September 30, 1998.
The increase is a result of the investment of the net proceeds of the 1997 and
1998 senior note offerings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity requirements arise from cash used in operating
activities, purchases of network equipment including switches, related
transmission equipment, and fiber optic cable transmission capacity, interest
and principal payments on outstanding indebtedness, and acquisitions of and
strategic investments in businesses. The Company has financed its growth through
private placements of its common stock, the initial public offering of its
common stock, the 1997 Senior Notes and Warrants Offering, the 1998 Senior Notes
Offering, a $25 million bank Revolving Credit Agreement and capital lease
financing. The semi-annual interest payments due under the 1997 Senior Notes
through August 1, 2000 have been pre-funded and will be paid from restricted
investments.
Net cash used in operating activities was $55.9 million for the nine months
ended September 30, 1998 as compared to net cash used in operating activities
of $1.9 million for the nine months ended September 30, 1997. The increase
in operating cash used is primarily comprised of an increase in the net loss
of $21.8 million and an increase in accounts receivable of $24.7 million,
partially offset by increased non-cash operating expenses of $14.0 million
and an increase in accounts payable of $7.1 million.
Net cash used in investing activities was $33.5 million for the nine months
ended September 30, 1998 compared to net cash used in investing activities of
$87.3 million for the nine months ended September 30, 1997. Net cash used in
investing activities during the nine months ended September 30, 1998 includes
$55.9 million of capital expenditures primarily for the expansion of the
Company's global network, partially offset by $23.6 million of cash provided
by the sale of restricted investments used to fund interest payments on the
1997 Senior Notes.
Net cash provided by financing activities was $153.8 million for the nine
months ended September 30, 1998 as compared to net cash provided by financing
activities of $200.5 million during the nine months ended September 30, 1997.
Cash provided by financing activities in the nine months ended September 30,
1998 resulted primarily from $145.5 million of net proceeds of the 1998
senior notes offering.
The Company anticipates aggregate capital expenditures of approximately $100
to $125 million during the remainder of 1998 and 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.
The Company believes that its cash, cash equivalents, and restricted investments
along with available capital lease financing will be sufficient to fund the
Company's operating losses, debt service requirements, capital expenditures and
other cash needs for its operations through at least the end of 1999. In order
to fund the Company's longer term cash requirements, including the continual
expansion of its network, Primus anticipates that it will be required to raise a
significant amount of cash in excess of its existing cash, cash equivalents and
restricted investments. Consequently, the
9
<PAGE>
Company expects to raise additional capital from public or private equity
or debt sources to meet its new financing needs, including for the continued
buildout of the network. Additionally, if the Company's plans or assumptions
change (including those with respect to the development of the network, the
level of its operations and its operating cash flow), if its assumptions
prove inaccurate, if it consummates additional investments or acquisitions or
if it experiences unexpected costs or competitive pressures, or if existing
cash and any other borrowings prove insufficient, the Company may require to
seek additional capital sooner than expected.
YEAR 2000
General. Primus is reviewing its 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 Primus's customers,
vendors or resellers.
Compliance Program. Earlier in the year, Primus began a comprehensive inventory
and Year 2000 assessment of its principal computer systems, network elements,
software applications and other business systems throughout the world. Primus
expects to complete its inventory and assessment by the end of 1998 and begin
repairing or replacing the most critical items that are determined not to be
Year 2000 compliant. Primus expects to complete the repair, replacement, testing
and certification of substantially all non-compliant network elements by
September 30, 1999. Primus will be using both internal and external resources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
Suppliers. Primus is also contacting third party suppliers of major equipment,
software, systems and services used by the Company to identify and, to the
extent possible, to resolve issues involving Year 2000 compliance. However, the
Company has limited or no control over the actions of these third party
suppliers. Consequently, while Primus expects that it 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 the business of the
Company or any of its customers.
Costs. Primus expects to incur approximately $10 to $15 million in expenditures
in 1998 and 1999 to complete its 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
the Company's network elements, software and systems for Year 2000 compliance
are being funded from existing cash resources.
Risks. Primus believes that it will substantially complete the implementation of
its Year 2000 program prior to December 31, 1999. Consequently, the Company does
not believe that Year 2000 issues will have a material adverse effect on the
Company's business or results of operations. However, if the Company does not
achieve compliance prior to December 31, 1999, if it fails to identify and
remedy all critical Year 2000 problems or if major suppliers or customers
experience material Year 2000 problems, the Company's results of operations or
financial condition could be materially affected.
Contingency Plans. Primus has begun to develop appropriate contingency plans to
mitigate, to the extent possible, any significant Year 2000 noncompliance. The
Company expects to complete its contingency plans by September 30, 1999. If
Primus is required to implement its 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.
10
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Form 10-Q which are based on current expectations and are not
strictly historical statements may differ materially from actual results. Not
strictly historical statements include, without limitation, those regarding
management's plans, objectives and strategy for future operations, product plans
and performance, management's assessment of market factors, and future financial
performance. In addition, discussion of the Company's efforts, and management's
expectations, regarding Year 2000 compliance issues are also forward-looking
statements that may differ materially from actual results. Among factors that
could cause actual results to differ materially are changes in business
conditions; changes in the telecommunications industry and the general economy;
competition; changes in service offering; and risks associated with Primus's
limited operating history, entry into developing markets, managing rapid growth,
integration of TresCom, risks associated with international operations,
dependence on effective information systems, and development of the network.
These factors are discussed more fully in the company's Form 10-K and Prospectus
dated July 16, 1998 filed with the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 14)
(b) Reports on Form 8-K
Current report on Form 8-K filed on August 14, 1998 with regards to
the Company's second quarter 1997 financial results.
12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
Date November 13, 1998 By:/s/ Neil L. Hazard
----------------- ------------------
NEIL L. HAZARD
(Executive Vice President and Chief Financial
Officer)
Date November 13, 1998 By:/s/ Thomas R. Kloster
----------------- ---------------------
THOMAS R. KLOSTER
(Vice President, Corporate Controller and Chief
Accounting Officer)
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule for the nine months ended September 30, 1998
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET OF
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AT SEPTEMBER 30, 1998 AND THE
INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 228,975
<SECURITIES> 0
<RECEIVABLES> 108,926
<ALLOWANCES> 10,493
<INVENTORY> 0
<CURRENT-ASSETS> 317,075
<PP&E> 142,674
<DEPRECIATION> 15,025
<TOTAL-ASSETS> 689,890
<CURRENT-LIABILITIES> 168,384
<BONDS> 384,670
0
0
<COMMON> 280
<OTHER-SE> 136,029
<TOTAL-LIABILITY-AND-EQUITY> 689,890
<SALES> 0
<TOTAL-REVENUES> 295,573
<CGS> 0
<TOTAL-COSTS> 249,406
<OTHER-EXPENSES> 92,312
<LOSS-PROVISION> 6,592
<INTEREST-EXPENSE> 28,235
<INCOME-PRETAX> (46,145)
<INCOME-TAX> 0
<INCOME-CONTINUING> (46,145)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (46,145)
<EPS-PRIMARY> (1.99)
<EPS-DILUTED> (1.99)
</TABLE>
