<PAGE>
===============================================================================
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 March 31, 1999
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)
Delaware
(State or other jurisdiction of 54-1708481
incorporation or organization) (I.R.S. Employer Identification No.)
1700 Old Meadow Road, Suite 300, McLean, VA 22102
(Address of principal executive offices) (Zip Code)
(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.
Outstanding as of
Class April 30, 1999
----- ------------------------
Common Stock , $.01 par value 28,439,746
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<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Operations............................................................... 1
Consolidated Balance Sheet......................................................................... 2
Consolidated Statement of Cash Flows............................................................... 3
Consolidated Statement of Comprehensive Loss....................................................... 4
Notes to Consolidated Financial Statements......................................................... 5
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................................................... 8
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK................................................................................. 12
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.......................................................................... 13
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. 13
Item 3. DEFAULTS UPON SENIOR SECURITIES............................................................ 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS............................................. 13
Item 5. OTHER INFORMATION.............................................................................. 13
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 13
SIGNATURE.................................................................................................... 14
EXHIBIT INDEX................................................................................................ 15
</TABLE>
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
NET REVENUE $131,228 $ 80,051
COST OF REVENUE 104,596 68,722
-------- --------
GROSS MARGIN 26,632 11,329
-------- --------
OPERATING EXPENSES
Selling, general and administrative 29,296 15,377
Depreciation and amortization 8,976 3,478
-------- --------
Total operating expenses 38,272 18,855
-------- --------
LOSS FROM OPERATIONS (11,640) (7,526)
INTEREST EXPENSE (16,770) (7,175)
INTEREST INCOME 3,255 2,384
-------- --------
LOSS BEFORE INCOME TAXES (25,155) (12,317)
INCOME TAXES - -
-------- --------
NET LOSS $(25,155) $(12,317)
======== ========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (0.89) $ (0.62)
======== ========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 28,317 19,717
======== ========
</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>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 268,530 $ 136,196
Restricted investments 27,464 25,729
Accounts receivable (net of allowance for
doubtful accounts of $13,564 and $14,976) 102,510 92,531
Prepaid expenses and other current assets 20,876 13,505
--------- ---------
Total current assets 419,380 267,961
RESTRICTED INVESTMENTS 10,546 24,894
PROPERTY AND EQUIPMENT - Net 171,013 158,873
INTANGIBLES - Net 214,347 205,039
OTHER ASSETS 27,508 17,196
--------- ---------
TOTAL ASSETS $ 842,794 $ 673,963
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 89,045 $ 82,520
Accrued expenses and other current liabilities 42,658 42,958
Accrued interest 14,288 12,867
Current portion of long-term obligations 5,204 22,423
--------- ---------
Total current liabilities 151,195 160,768
LONG TERM OBLIGATIONS 596,505 397,751
OTHER LIABILITIES 25 527
--------- ---------
Total liabilities 747,725 559,046
--------- ---------
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
shares; issued and outstanding,
28,404,934 and 28,059,063 shares 284 281
Additional paid-in capital 238,569 234,549
Accumulated deficit (136,808) (111,653)
Accumulated other comprehensive loss (6,976) (8,260)
--------- ---------
Total stockholders' equity 95,069 114,917
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 842,794 $ 673,963
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(25,155) $(12,317)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, amortization and accretion 9,067 3,567
Sales allowance 2,833 1,724
Stock issuance - 401(k) plan employer match 62 20
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (12,342) (11,020)
(Increase) decrease in prepaid expenses and
other current assets (7,118) (1,576)
(Increase) decrease in other assets (2,272) (325)
Increase (decrease) in accounts payable 5,512 9,876
Increase (decrease) in accrued expenses,
other current liabilities and other liabilities (2,179) (413)
Increase (decrease) in accrued interest payable 1,419 (6,609)
-------- --------
Net cash provided by (used in) operating activities (30,173) (17,073)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (16,391) (11,369)
(Purchase) sale of restricted investments 12,612 12,072
Cash used for business acquisitions, net of cash acquired (7,825) (1,627)
-------- --------
Net cash provided by (used in) investing activities (11,604) (924)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases and long-term obligations (18,961) (316)
Proceeds from sale of common stock and exercise of employee
stock options 203 496
Proceeds from issuance of long-term obligations 200,000 (114)
Deferred financing costs (7,500) -
-------- --------
Net cash provided by (used in) financing activities 173,742 66
-------- --------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 369 80
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 132,334 (17,851)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 136,196 115,232
-------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR $268,580 $ 97,381
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1999 1998
-------- --------
<S> <C> <C>
NET LOSS $(25,155) $(12,317)
OTHER COMPREHENSIVE GAIN (LOSS) -
Foreign currency translation adjustment 1,284 1,103
-------- --------
COMPREHENSIVE LOSS $(23,871) $(11,214)
======== ========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements of Primus
Telecommunications Group, Incorporated (the "Company" or "Primus") 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 a normal and recurring nature) which
are necessary to present fairly the financial position, results of
operations, cash flows and comprehensive loss for the interim periods. The
results for the three months ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1999.
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) Acquisitions
------------
On March 31, 1999 the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for
approximately $36 million in cash, including payments made in exchange for
certain non-competition agreements. The acquisition of the LTN Companies
will be reflected in the Company's financial statements beginning on April
1, 1999. In addition, on May 3, 1999 the Company purchased for
approximately $15 million in cash substantially all of the operating assets
of Wintel CNC Communications, Inc. and Wintel CNT Communications, Inc. (the
"Wintel Companies"), which are Canadian-based long distance
telecommunications providers affiliated with the LTN Companies. If the LTN
Companies and the Wintel Companies collectively achieve certain financial
goals during the first half of 1999, the Company has agreed to pay an
additional amount of up to approximately $5 million in cash.
In February 1999 the Company purchased the remaining non-Company owned 40%
of Hotkey Internet Services Pty., Ltd. ("Hotkey"), a Melbourne, Australia-
based Internet service provider ("ISP"). The purchase price for the
additional 40% ownership of Hotkey was approximately $1.1 million comprised
of $0.3 million in cash and 57,025 shares of the Company's common stock.
In February 1999 the Company acquired all of the outstanding shares of
GlobalServe Communications, Inc., a privately held ISP based in Toronto,
Canada. The purchase price of approximately $4.4 million was comprised of
$2.2 million in cash and 142,806 shares of the Company's common stock.
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.
5
<PAGE>
The Company has accounted for all of these acquisitions using the purchase
method. Accordingly, the results of operations of the acquired entities are
included in the consolidated results of operations of the Company as of the
date of their respective acquisitions.
(3) Long Term Obligations
---------------------
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited)
------------------- ---------------------
<S> <C> <C>
Obligations under capital leases $ 28,237 $ 28,268
Revolving Credit Agreement - 17,819
Senior Notes 573,069 372,978
Other long-term obligations 403 1,109
-------- --------
Subtotal 601,709 420,174
Less: Current portion of long term obligations (5,204) (22,423)
-------- --------
$596,505 $397,751
======== ========
</TABLE>
On January 29, 1999 the Company completed the sale of $200 million 11 1/4%
Senior Notes (the "1999 Senior Notes") due 2009 with semi-annual interest
payments.
In January 1999, the Company voluntarily repaid in full and subsequently
terminated the Trescom senior secured revolving credit facility (the
"Revolving Credit Agreement").
(4) Operating Segment and Related Information
-----------------------------------------
The Company has three reportable operating segments based on management's
organization of the enterprise into geographic areas North America, Asia-
Pacific and Europe. The Company evaluates the performance of its segments
and allocates resources to them based upon net revenue and income/(loss) from
operations. Operations of the North America segment include shared corporate
functions and assets that the Company does not allocate to its other
geographic segments for management reporting purposes. Summary information
with respect to the Company's segments is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------------------
1999 1998
------------------------ -----------------------
<S> <C> <C>
Net Revenue
North America $ 62,186 $26,310
Asia-Pacific 44,410 44,659
Europe 24,632 9,082
-------- -------
Total $131,228 $80,051
======== =======
Income/(Loss) from Operations
North America $ (8,289) $(5,320)
Asia-Pacific (2,860) (1,559)
Europe (491) (647)
-------- -------
Total $(11,640) $(7,526)
======== =======
</TABLE>
6
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(5) New Accounting Pronouncements
-----------------------------
In June 1998, Statement of Financial Accounting Standards No. 133 ("SFAS
133"), Accounting for Derivative Instruments and Hedging Activities was
issued. SFAS 133 established standards for the accounting and reporting of
derivative instruments and hedging activities and require that all
derivative financial instruments be measured at fair value and recognized as
assets or liabilities in the financial statements. The Statement will be
adopted by the Company during fiscal 2000, and the Company is currently
evaluating the impact of such adoption.
In April 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SoP") 98-5, Reporting on the Costs
of Start-Up Activities. SoP 98-5 provides guidance on the financial
reporting of start-up and organizational costs. The effect of adopting SoP
98-5 is not expected to have a material effect on the financial position,
results of operation or liquidity of the Company.
(6) Reclassifications
-----------------
Certain previous year amounts have been reclassified to conform to the
current year presentation.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Primus is a facilities-based global telecommunications company that offers
international and domestic long distance, Internet access and data, and other
telecommunications services to business, residential and carrier customers in
North America and in selected markets within both the Asia-Pacific region and
Europe. The Company seeks to capitalize on the increasing demand for high-
quality international telecommunications services resulting from the
globalization of the world's economies and the worldwide trend toward
telecommunications deregulation and the growth of data and Internet traffic.
Primus provides service over its network which includes (i) 12 international
gateway switches in the Unites States, Australia, Canada, Germany, Japan,
Puerto Rico and the United Kingdom, (ii) four domestic switches in Australia,
(iii) data and Internet access switches in Australia and Canada, (iv) both
owned and leased transmission capacity on undersea and land-based fiber optic
cable systems and (v) an international satellite earth station located in
London. Utilizing this network, along with resale arrangements and foreign
carrier agreements, the Company provides service to over 650,000 customers.
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 each country. The Company's net revenue is derived
from carrying a mix of business, residential and carrier long distance voice
traffic, data and Internet traffic in Australia and Canada, 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, fixed costs as a
percentage of cost of revenue will proportionately increase.
Although the Company's functional currency is the United States dollar, a
significant portion of the Company's net revenue is derived from its sales
and operations outside the United States. In the future, the Company expects
to continue to derive a significant portion of its net revenue and incur a
significant portion of its operating costs outside the United States;
therefore, 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 and does not currently contemplate
engaging in hedging transactions.
Other Operating Data
The following information for the three months ended March 31, 1999 and 1998
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.
8
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
Three Months Ended March 31, 1999
----------------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
-----------------------------------------------------------------------
Revenue International Domestic Total
------------------ -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
North America $ 62,186 205,194 67,958 273,152
Asia-Pacific 44,410 35,113 85,054 120,167
Europe 24,632 97,133 21,516 118,649
---------------- -------------- -------------- --------------
Total $131,228 337,440 174,528 511,968
================ ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Three Months Ended March 31, 1998
----------------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
-----------------------------------------------------------------------
Revenue International Domestic Total
------------------ -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
North America $26,310 78,950 20,138 99,088
Asia-Pacific 44,659 24,596 61,151 85,747
Europe 9,082 22,944 11,462 34,406
------------------ -------------------- -------------------- --------------------
Total $80,051 126,490 92,751 219,241
================== ==================== ==================== ====================
</TABLE>
Results of operations for the three months ended March 31, 1999 as compared
to the three months ended March 31, 1998
Net revenue increased $51.1 million or 64%, from $80.1 million for the three
months ended March 31, 1998 to $131.2 million for the three months ended
March 31, 1999. Of the increase, $35.9 million was associated with the North
American operations, which represents a growth rate of 136%. The growth
reflects increased traffic volumes in business and ethnic residential retail
operations and in carrier operations, and includes operations of TresCom in
the 1999 results. The European net revenue increased $15.5 million from $9.1
million for the three months ended March 31, 1998 to $24.6 million for the
three months ended March 31, 1999, a growth rate of 171%. The European net
revenue increase is attributable to increased traffic volumes in business and
residential retail traffic operations, the addition of carrier operations in
the United Kingdom and the addition of carrier and retail operations in
Germany. The Company's Asia-Pacific net revenue decreased slightly from $44.7
million for the three months ended March 31, 1998 to $44.4 million for the
three months ended March 31, 1999. The Asia-Pacific net revenue decrease in
United States dollar terms is a result of a 7% decrease in the Australian
dollar's average exchange rate period over period. Net revenue of the
Australian operations, in Australian dollar terms, grew 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 $35.9 million, from $68.7 million, or 85.8% of net
revenue, for the three months ended March 31, 1998 to $104.6 million, or
79.7% of net revenue, for the three months ended March 31, 1999. The
increase in the cost of revenue is attributable to the increase in traffic
volumes and associated net revenue growth. The cost of revenue as a
percentage of net revenue decreased by 610 basis points as a result of the
continuing expansion of the Company's global network, a greater mix of retail
versus carrier traffic and the continuing migration of existing and newly
generated customer traffic onto the Company's network and new higher margin
product offerings such as data and Internet services.
Selling, general and administrative expenses increased $13.9 million, from
$15.4 million for the three months ended March 31, 1998, to $29.3 million for
the three months ended March 31, 1999. The increase is attributable to the
addition of expense from acquired operations including TresCom and
GlobalServe and increased advertising and promotional expenses associated
with the Company's retail marketing campaigns.
9
<PAGE>
Depreciation and amortization expense increased from $3.5 million for the
three months ended March 31, 1998 to $9.0 million for the three months ended
March 31, 1999. The increase is associated with increased amortization
expense related to intangible assets arising from the Company's acquisitions
of TresCom, GlobalServe and Hotkey and increased depreciation expense related
to capital expenditures for fiber optic cable, switching and other network
equipment being placed into service.
Interest expense increased from $7.2 million for the three months ended March
31, 1998 to $16.8 million for the three months ended March 31, 1999. The
increase is primarily due to the additional debt incurred pursuant to the 11
1/4% Senior Notes due 2009 (the "1999 Senior Notes") and, to a lesser extent,
additional capital lease financings.
Interest income increased from $2.4 million for the three months ended March
31, 1998 to $3.3 million for the three months ended March 31, 1999. The
increase is a result of the investment of the net proceeds from the Company's
1999 Senior Notes offering.
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 to
date through public offerings and private placements of debt and equity
securities and capital lease financing.
Net cash used in operating activities was $30.2 million for the three months
ended March 31, 1999 as compared to net cash used in operating activities of
$17.1 million for the three months ended March 31, 1998. The increase in
operating cash used is primarily comprised of an increase in the net loss of
$12.8 million.
Net cash used in investing activities was $11.6 million for the three months
ended March 31, 1999 compared to net cash used in investing activities of
$0.9 million for the three months ended March 31, 1998. Net cash used in
investing activities during the three months ended March 31, 1999 includes
$16.4 million of capital expenditures primarily for the expansion of the
Company's global network, $7.8 million for business acquisition, partially
offset by $12.6 million of cash provided by the sale of restricted
investments used to fund interest payments on the 11 3/4% Senior Notes due
2007 (the "1997 Senior Notes").
Net cash provided by financing activities was $173.7 million for the three
months ended March 31, 1999 as compared to net cash provided by financing
activities of $0.1 million during the three months ended March 31, 1998.
Cash provided by financing activities in the three months ended March 31,
1999 resulted primarily from $192.5 million of net proceeds of the 1999
Senior Notes offering, offset by the $17.8 million net repayment of the
Revolving Credit Agreement.
The Company anticipates aggregate capital expenditures of approximately $100
million during the remainder of 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.
On March 31, 1999 the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide long distance
telecommunications services in Canada (the "LTN Companies"), for
approximately $36 million in cash, including payments made in exchange for
certain non-competition agreements. The acquisition of the LTN Companies
will be reflected in the Company's financial statements beginning on April 1,
1999. In addition, on May 3, 1999 the Company purchased for approximately
$15 million in cash substantially all of the operating assets of
10
<PAGE>
Wintel CNC Communications, Inc. and Wintel CNT Communications, Inc. (the
"Wintel Companies"), which are Canadian-based long distance
telecommunications providers affiliated with the LTN Companies. If the LTN
Companies and the Wintel Companies collectively achieve certain financial
goals during the first half of 1999, the Company has agreed to pay an
additional amount of up to approximately $5 million in cash.
The Company believes that its cash, cash equivalents, and restricted
investments along with available capital lease financing (subject to the
limitations in the Indentures related to the Company's Senior Notes) will be
sufficient to fund the Company's operating losses, debt service requirements,
capital expenditures, and other cash needs for its operations for at least
until the end of 2000. The semi-annual interest payments due under the 1997
Senior Notes through August 1, 2000 have been pre-funded and will be paid
from restricted investments. The Company is continually evaluating the
expansion of its service offerings and plans to make further investments in
and enhancements to its Network and distribution channels (including the
acquisitions) in order to expand its service offerings. In order to fund
these additional cash requirements, the Company anticipates that it will be
required to raise additional financing from public or private equity or debt
sources. 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, if it
experiences unexpected costs or competitive pressures, or if existing cash
and any other borrowings prove insufficient, the Company may be required to
seek additional capital sooner than expected. In the event that the Company
is unable to obtain such additional capital or is unable to obtain such
additional capital on acceptable terms, it may be required to reduce the
scope of its expansion, which could adversely affect its business prospects
and its ability to compete. There can be no assurance that the Company will
be able to raise equity capital, obtain capital lease or bank financing or
incur other borrowings on commercially reasonable terms, if at all, to fund
any such expansion or otherwise.
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'
customers, vendors or resellers.
Compliance Program. Beginning in 1998, Primus began a comprehensive
inventory and Year 2000 assessment of its principal computer systems, network
elements, software applications and other business systems. Primus expects
to complete its inventory and assessment by June 30, 1999 and has begun
repairing or replacing the most critical network elements and significant
management systems 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 is 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 its
systems and services, there can be no assurance that its 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 $3 to $5 million in
expenditures in 1999 to complete its Year 2000 compliance program. The costs
of modifying the Company's network elements,
11
<PAGE>
software and systems for Year 2000 compliance are being funded from existing
cash resources and are being charged as expenses as incurred.
Risks. Primus believes that it will 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, cash flows, 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 and adversely affected.
Primus has determined that non-compliant network elements may result in
improperly routed traffic and that non-compliant, non-network systems may
result in errors in customer billing and accounting records.
Contingency Plans. 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.
Special Note Regarding Forward Looking Statements
Statements in this Form 10-Q, including those concerning the Company's
expectations of future sales, net revenue, gross profit, net income, network
development, traffic development, capital expenditures, selling, general and
administrative expenses, service introductions and cash requirements include
certain forward-looking statements. As such, actual results may vary
materially from such expectations. Factors, which could cause results to
differ from expectations, include risks associated with Primus's limited
operating history; entry into developing markets; managing rapid growth;
substantial indebtedness; liquidity; historical and future operating losses;
acquisition and strategic investment risks; intense competition; dependence
on transmission facilities-based carriers; international operations;
dependence on effective information systems; industry changes; network
development; dependence on key personnel and government regulations. These
factors are discussed more fully in the Company's 1998 Form 10-K and the
Prospectus dated May 7, 1999 filed with the Securities and Exchange
Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposures relate to changes in foreign
currency exchange rates and to changes in interest rates.
Foreign currency - Although the Company's functional currency is the United
States dollar, a significant portion of the Company's net revenue is derived
from its sales and operations outside the United States. In the future, the
Company expects to continue to derive 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 operations of
affiliates and subsidiaries in foreign countries have been funded with
investments and other advances. Due to the long-term nature of such
investments and advances, the Company accounts for any adjustments resulting
from translation as a charge or credit to "accumulated other comprehensive
loss" within the stockholders' equity section of the consolidated balance
sheet. The Company historically has not engaged in hedging transactions.
Interest rates - The Company's financial instruments that are sensitive to
changes in interest rates are its 1997, 1998 and 1999 Senior Notes. The
aggregate fair value of the 1997, 1998 and 1999 Senior Notes approximates
their face value.
12
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) On January 20, 1999, the Company amended the indenture relating to
the 1997 Senior Notes to modify exceptions to the debt incurrence
covenant, an exception to the restricted payments covenant, and
the definitions of "permitted investments" and "permitted liens",
in each case to conform such provisions substantially to the
corresponding provisions of the 1998 and 1999 Senior Notes.
(b) On February 2, 1999, the Company acquired the shares of Hotkey
that it did not already own for $0.3 million in cash and 57,025
shares of the Company's common stock. On February 9, 1999, the
Company acquired all of the outstanding equity of GlobalServe for
$2.2 million in cash and 142,806 shares of the Company's common
stock. The Company issued these shares in reliance on the
exemption from registrations provided by Section 4(2) of the
Securities Act of 1933, as amended.
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 15)
(b) Reports on Form 8-K
Not applicable.
13
<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 May 14, 1999 By: /s/ Neil L. Hazard
--------------------- ------------------
Neil L. Hazard
(Executive Vice President and Chief
Financial Officer)
Date May 14, 1999 By: /s/ Thomas R. Kloster
-------------------- ---------------------
Thomas R. Kloster
(Vice President, Corporate Controller and
Chief Accounting Officer)
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of Primus;
Incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-8, No. 333-56557 (the "S-8 Registration
Statement").
3.2 Amended and Restated Bylaws of Primus; Incorporated by reference to
Exhibit 3.2 of the Registration Statement on Form S-1, No. 333-10875
(the "IPO Registration Statement").
4.1 Specimen Certificate of Primus Common Stock; Incorporated by
reference to Exhibit 4.1 of the IPO Registration Statement.
4.2 Form of Indenture of Primus regarding the 1997 Senior Notes (the
"1997 Indenture"); Incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, No 333-30195 (the "1997 Senior
Note Registration Statement").
4.3 Form of Supplemental Indenture of Primus to the 1997 Indenture dated
January 20, 1999, between Primus and First Union National Bank;
Incorporated by reference to Exhibit 4.3 of the Registration
Statement on Form S-4/A, No 333-76965 (the "1999 Exchange Offer
Registration Statement").
4.4 Form of Warrant Agreement of Primus; Incorporated by reference to
Exhibit 4.2 of the 1997 Senior Note Registration Statement.
4.5 Indenture, dated May 19, 1998, between Primus Telecommunications
Group, Incorporated and First Union National Bank; Incorporated by
reference to Exhibit 4.4 of the Registration Statement on Form S-4,
No 333-58547 (the "1998 Senior Note Registration Statement").
4.6 Specimen 9 7/8% Senior Note due 2008; Incorporated by reference to
Exhibit A included in Exhibit 4.4 of the 1998 Senior Note
Registration Statement.
4.7 Indenture, dated January 29, 1999, between Primus and First Union
National Bank; Incorporated by reference to Exhibit 4.7 of the 1999
Exchange Offer Registration Statement.
4.8 Specimen 11 1/4% Senior Note due 2009; Incorporated by reference to
Exhibit A included in Exhibit 4.7 of the 1999 Exchange Offer
Registration Statement.
4.9 Rights Agreement, dated as of December 23, 1998, between Primus and
StockTrans, Inc., including the Form of Rights Certificate (Exhibit
A), the Certificate of Designation (Exhibit B) and the Form of
Summary of Rights (Exhibit C); Incorporated by reference to Exhibit
4.1 to the Company's Registration Statement on Form 8-A, No 000-29092
filed with the Commission on December 30, 1998.
4.10 Form of legend on certificates representing shares of Common Stock
regarding Series B Junior Participating Preferred Stock Purchase
Rights; Incorporated by reference to Exhibit
15
<PAGE>
4.2 to the Company's Registration Statement on Form 8-A, No 000-29092
filed with the Commission on December 30, 1998.
27.1 Financial Data Schedule for the three months ended March 31, 1999
Exhibit 27.1
16
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET OF
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AT MARCH 31, 1999 AND THE INCOME
STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 268,530
<SECURITIES> 38,010
<RECEIVABLES> 116,074
<ALLOWANCES> 13,564
<INVENTORY> 0
<CURRENT-ASSETS> 419,380
<PP&E> 197,101
<DEPRECIATION> 26,088
<TOTAL-ASSETS> 842,794
<CURRENT-LIABILITIES> 151,195
<BONDS> 596,505
0
0
<COMMON> 284
<OTHER-SE> 94,785
<TOTAL-LIABILITY-AND-EQUITY> 842,794
<SALES> 0
<TOTAL-REVENUES> 131,228
<CGS> 0
<TOTAL-COSTS> 104,596
<OTHER-EXPENSES> 38,272
<LOSS-PROVISION> 2,833
<INTEREST-EXPENSE> 16,770
<INCOME-PRETAX> (25,155)
<INCOME-TAX> 0
<INCOME-CONTINUING> (25,155)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,155)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
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