<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 June 30, 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)
<TABLE>
<CAPTION>
<S> <C>
Delaware 54-1708481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1700 Old 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.
<TABLE>
<CAPTION>
Outstanding as of
Class July 31, 1999
----- -----------------
<S> <C>
Common Stock, $.01 par value 28,707,691
</TABLE>
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <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..................................14
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS....................................15
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............15
Item 3. DEFAULTS UPON SENIOR SECURITIES......................15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..15
Item 5. OTHER INFORMATION....................................15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.....................16
SIGNATURE..............................................................17
EXHIBIT INDEX..........................................................18
</TABLE>
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET REVENUE $ 185,626 $ 99,475 $ 316,854 $ 179,526
COST OF REVENUE 142,860 84,126 247,456 152,848
--------- --------- --------- ---------
GROSS MARGIN 42,766 15,349 69,398 26,678
--------- --------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative 41,553 18,990 70,849 34,367
Depreciation and amortization 12,514 4,433 21,490 7,911
--------- --------- --------- ---------
Total operating expenses 54,067 23,423 92,339 42,278
--------- --------- --------- ---------
LOSS FROM OPERATIONS (11,301) (8,074) (22,941) (15,600)
INTEREST EXPENSE (17,523) (9,605) (34,293) (16,780)
INTEREST INCOME 2,756 2,886 6,011 5,270
--------- --------- --------- ---------
LOSS BEFORE INCOME TAXES (26,068) (14,793) (51,223) (27,110)
INCOME TAXES - - - -
--------- --------- --------- ---------
NET LOSS $ (26,068) $ (14,793) $ (51,223) $ (27,110)
========= ========= ========= =========
BASIC AND DILUTED NET
LOSS PER COMMON SHARE $ (0.92) $ (0.68) $ (1.80) $ (1.30)
========= ========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 28,486 21,829 28,402 20,779
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
(unaudited)
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 168,679 $ 136,196
Restricted investments 27,825 25,729
Accounts receivable (net of allowance for
doubtful accounts of $28,410 and $14,976) 146,168 92,531
Prepaid expenses and other current assets 45,456 13,505
----------- ----------
Total current assets 388,128 267,961
RESTRICTED INVESTMENTS 10,736 24,894
PROPERTY AND EQUIPMENT - Net 216,623 158,873
INTANGIBLES - Net 384,404 205,039
OTHER ASSETS 28,553 17,196
----------- ----------
TOTAL ASSETS $ 1,028,444 $ 673,963
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 122,488 $ 82,520
Accrued expenses and other current liabilities 144,677 42,958
Accrued interest 22,728 12,867
Current portion of long-term obligations 15,055 22,423
----------- ----------
Total current liabilities 304,948 160,768
LONG TERM OBLIGATIONS 649,909 397,751
OTHER LIABILITIES 25 527
----------- ----------
Total liabilities 954,882 559,046
----------- ----------
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,
28,658,488, and 28,059,063 shares 287 281
Additional paid-in capital 242,536 234,549
Accumulated deficit (162,876) (111,653)
Accumulated other comprehensive loss (6,385) (8,260)
----------- ----------
Total stockholders' equity 73,562 114,917
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,028,444 $ 673,963
=========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (51,223) $ (27,110)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation, amortization and accretion 21,670 8,092
Sales allowance 8,361 4,212
Stock issuance - 401(k) plan employer match 118 39
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (23,709) (20,287)
(Increase) decrease in prepaid expenses and
other current assets (24,241) (7,671)
(Increase) decrease in other assets (3,476) (2,014)
Increase (decrease) in accounts payable 13,354 9,963
Increase (decrease) in accrued expenses,
other current liabilities and other liabilities 38,193 1,458
Increase (decrease) in accrued interest payable 9,859 1,601
---------- ----------
Net cash provided by (used in) operating activities (11,094) (31,717)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (45,395) (36,029)
(Purchase) sale of restricted investments 12,062 11,196
Cash used for business acquisitions, net of cash acquired (92,594) (1,165)
---------- ----------
Net cash provided by (used in) investing activities (125,927) (25,998)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases and long-term obligations (20,419) (2,129)
Proceeds from sale of common stock and exercise of employee
stock options 1,396 1,903
Proceeds from issuance of long-term obligations, net 192,500 145,549
---------- ----------
Net cash provided by (used in) financing activities 173,477 145,323
---------- ----------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (3,973) (147)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 32,483 87,461
CASH AND CASH EQUIVALENTS, BEGINNING OF
YEAR 136,196 115,232
---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 168,679 $ 202,693
========== ==========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET LOSS $ (26,068) $ (14,793) $ (51,223) $ (27,110)
OTHER COMPREHENSIVE GAIN (LOSS) -
Foreign currency translation adjustment 591 (2,312) 1,875 (1,209)
---------- ---------- ---------- ----------
COMPREHENSIVE LOSS $ (25,477) $ (17,105) $ (49,348) $ (28,319)
========== ========== ========== ==========
</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 and six month periods ended June 30, 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
------------
Effective June 1, 1999, the Company purchased the global retail customer
business of Telegroup, Inc. including the acquisition of selected
Telegroup, Inc. foreign subsidiaries ("Telegroup"). The purchase price for
Telegroup of $94.0 million included $22.2 million for certain current
assets including accounts receivable. The Telegroup purchase price was paid
through the issuance of $45.5 million of 11 1/4% senior notes due 2009
("Telegroup Notes"), the issuance of a $4.6 million short-term promissory
note ("Telegroup Promissory Note") and $43.9 million in cash.
Selected pro forma operating results for the six months ended June 30, 1999
give effect to the Telegroup acquisition and the issuance of the Telegroup
Notes, as if each had occurred on January 1, 1999. Pro forma operating
results for the six months ended June 30, 1998 give effect to the Telegroup
acquisition and the issuance of the Telegroup Notes, and the Company's June
1998 merger with TresCom International, Incorporated ("TresCom"), as if
each had occurred on January 1, 1998. The unaudited results below are
presented in thousands, except per share amounts.
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Net revenue $ 409,098 $ 349,956
Net loss $ (61,690) $ (61,775)
Basic and diluted net loss per share $ (2.17) $ (2.55)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of future operations.
In June 1999, the Company acquired Telephone Savings Network Limited
(TelSN), a reseller of local Canadian services to small- and medium-sized
business customers, for approximately $5 million in cash and stock.
5
<PAGE>
On May 31, 1999, the Company purchased the residential long distance
customer base, customer support assets and residential Internet customers
and network of AT&T Canada and ACC Telenterprises ("AT&T Canada") for a
purchase price of $38.7 million comprised of $29.1 million in cash and a
$9.6 million, 8.5% promissory note due November 30, 2000 ("AT&T Promissory
Note").
In May 1999, the Company acquired all of the outstanding shares of Tele-
Communications Products/Internet Provider (TCP/IP) GmbH ("TCP/IP"), an
independent German Internet service provider ("ISP"). TCP/IP operates the
Contrib.Net Internet backbone.
On March 31, 1999, the Company purchased the common stock of London Telecom
Network, Inc. and certain related entities that provide domestic and
international long distance telecommunications services in Canada (the "LTN
Companies") for $35.8 million in cash, including payments made in exchange
for certain non-competition agreements. On May 3, 1999 the Company
purchased for $14.6 million in cash substantially all of the operating
assets of Wintel CNC Communications, Inc. and Wintel CNT Communications,
Inc. (the "Wintel Companies"), which are Canada-based long distance
telecommunications providers affiliated with the LTN Companies.
In February 1999, the Company acquired the remaining 40% interest in Hotkey
Internet Services Pty. Limited in Australia that it did not previously own
for a purchase price of 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. ("GlobalServe"), a privately held ISP in
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.
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>
June 30, December 31,
1999 1998
(unaudited)
----------- ------------
<S> <C> <C>
Obligations under capital leases $ 26,863 $ 28,268
Revolving Credit Agreement - 17,819
Senior notes 618,626 372,978
Other long-term obligations 19,475 1,109
--------- ---------
Subtotal 664,964 420,174
Less: Current portion of long-term obligations (15,055) (22,423)
--------- ---------
Total $ 649,909 $ 397,751
========= =========
</TABLE>
In January 1999, the Company repaid in full and subsequently terminated the
Trescom senior secured revolving credit facility (the "Revolving Credit
Agreement").
On January 29, 1999 the Company completed the sale of $200 million
aggregate principal amount of 11 1/4% senior notes due 2009 ("1999 Senior
Notes") with semi-annual interest payments.
In June 1999, in connection with the Telegroup acquisition, the Company
issued an additional $45.5 million aggregate principal amount of 11 1/4%
senior notes due 2009 to Telegroup pursuant to the 1999 Senior Notes
indenture.
6
<PAGE>
Other long-term obligations include the $9.6 million AT&T Promissory Note,
a $4.7 million short-term payable related to the purchase of AT&T Canada's
accounts receivables and the $4.6 million Telegroup Promissory Note.
(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 June 30,
(unaudited)
----------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Net Revenue
North America $ 90,696 $ 41,782
Asia-Pacific 56,084 43,787
Europe 38,846 13,906
------------- -------------
Total $ 185,626 $ 99,475
============= =============
Income/(Loss) from Operations
North America $ (9,184) $ (7,538)
Asia-Pacific (1,698) (266)
Europe (419) (270)
------------- -------------
Total $ (11,301) $ (8,074)
============= =============
June 30, 1999 December 31, 1998
(unaudited)
------------- -----------------
Assets
North America $ 813,488 $507,356
Asia-Pacific 138,757 109,290
Europe 76,199 57,317
------------- -------------
Total $1,028,444 $673,963
============= =============
</TABLE>
(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 requires that all
derivative financial instruments be measured at fair value and recognized
as assets or liabilities in the financial statements. SFAS 133 will be
adopted by the Company during fiscal 2000, and the Company is currently
evaluating the impact of such adoption.
(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 and other telecommunications services
to business, residential and carrier customers in North America and selected
markets within both the Asia-Pacific region and Europe. The Company is
capitalizing on the increasing demand for high-quality international
telecommunications services, which is driven by the globalization of the world's
economies, the worldwide trend toward telecommunications deregulation and the
growth of data and Internet traffic. Primus provides service over its network
which consists of (i) 19 carrier-grade switches, including 15 international
gateway switches in the United States, Australia, Canada, France, Germany,
Japan, Puerto Rico and the United Kingdom and four domestic switches in
Australia, (ii) more than 100 points of presence and Internet access nodes
within our principal service regions worldwide (iii) both owned and leased
transmission capacity on undersea and land-based fiber optic cable systems and
(iv) an international satellite earth station located in London. Utilizing this
network, along with resale arrangements and foreign carrier agreements, the
Company provides service to over 1.7 million 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, data and Internet
traffic in Australia, Canada, and Germany, and in Australia and Canada from
provision of local and cellular services.
Cost of revenue is comprised primarily 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 to mitigate foreign exchange risks.
Other Operating Data
The following information for the three months ended June 30, 1999 and 1998 is
provided for informational purposes and should be read in conjunction with the
unaudited Consolidated Financial Statements and Notes thereto contained
elsewhere herein and the Consolidated Financial Statements presented with the
Company's most recently filed Form 10-K.
8
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
(unaudited)
---------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
------------------------------------------------------------------
Revenue International Domestic Total
----------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
North America $ 90,696 276,128 173,438 449,566
Asia-Pacific 56,084 36,815 108,923 145,738
Europe 38,846 129,277 58,686 187,963
----------------- ------------------- ------------------- -------------------
Total $185,626 442,220 341,047 783,267
================= =================== =================== ===================
</TABLE>
<TABLE>
Three Months Ended June 30, 1998
(unaudited)
---------------------------------------------------------------------------------------
Net Minutes of Long Distance Use
------------------------------------------------------------------
Revenue International Domestic Total
----------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
North America $41,782 111,029 36,590 147,619
Asia-Pacific 43,787 29,865 64,936 94,801
Europe 13,906 49,028 18,263 67,291
----------------- ------------------- ------------------- -------------------
Total $99,475 189,922 119,789 309,711
================= =================== =================== ===================
</TABLE>
Results of operations for the three months ended June 30, 1999 as compared to
the three months ended June 30, 1998
Net revenue increased $86.1 million or 87% to $185.6 million for the three
months ended June 30, 1999, from $99.5 million for the three months ended June
30, 1998. Of the increase, $48.9 million was associated with North American
operations, representing a rate of growth of 117%. The growth reflects increased
traffic volumes in business and ethnic residential retail operations and in
carrier operations, and includes three months of operations of TresCom in the
1999 results versus 21 days of operations in the 1998 results. The 1999 results
also reflect three months of results for the LTN and Wintel Companies and one
month of results for Telegroup and AT&T Canada. The total of these acquisitions
contributed $25.8 million to the North American increase. The Company's Asia-
Pacific net revenue increased $12.3 million or 28% from $43.8 million for the
three months ended June 30, 1998 to $56.1 million for the three months ended
June 30, 1999. Net revenue of the Australian operations grew as a result of
increased traffic from retail residential and business customers and from the
addition of data and Internet services. The European net revenue increased $24.9
million, growing 179% from $13.9 million for the three months ended June 30,
1998 to $38.8 million for the three months ended June 30, 1999. The European net
revenue increase is attributable to increased traffic volumes in the United
Kingdom's business and residential retail traffic and carrier operations,
increased retail and carrier traffic volumes in Germany, and the addition of one
month of Telegroup net revenue.
Cost of revenue increased $58.8 million, from $84.1 million, for the three
months ended June 30, 1998 to $142.9 million, for the three months ended June
30, 1999. As a percentage of net revenue, the cost of revenue decreased by 760
basis points from 84.6% to 77.0% primarily due to the continuing expansion of
the Company's global network, a greater mix of retail versus carrier traffic,
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. The increase in the cost of revenue is attributable to the
increase in traffic volumes and associated net revenue growth. The increase is
also due to the addition of expense from acquired operations including the LTN
Companies, the Wintel Companies, Telegroup and AT&T Canada.
9
<PAGE>
Selling, general and administrative expenses increased $22.6 million to $41.6
million, or 22.4% of net revenue, for the three months ended June 30, 1999, from
$19.0 million, or 19.1% of net revenue, for the three months ended June 30,
1998. The increase is attributable to the Company's acquisitions of the LTN and
Wintel Companies, Telegroup, AT&T Canada, TresCom and GlobalServe, as well as
the impact of increased advertising, marketing and sales expenses focused on
Primus's retail operations.
Depreciation and amortization expense increased to $12.5 million for the three
months ended June 30, 1999 from $4.4 million for the three months ended June 30,
1998. The increase is associated with increased depreciation expense related to
capital expenditures to expand the network including purchases of fiber optic
cable, switching and other network equipment being placed into service, and
increased amortization expense related to intangible assets arising from the
Company's acquisitions of Trescom, the LTN and Wintel Companies, Telegroup, AT&T
Canada and GlobalServe.
Interest expense increased from $9.6 million for the three months ended June 30,
1998 to $17.5 million for the three months ended June 30, 1999. The increase is
primarily attributable to the 1999 Senior Notes, the $150 million 9 7/8% senior
notes due 2008 ("1998 Senior Notes") and additional capital lease financing.
Interest income decreased slightly to $2.8 million for the three months ended
June 30, 1999 from $2.9 million for the three months ended June 30, 1998.
Results of operations for the six months ended June 30, 1999 as compared to the
six months ended June 30, 1998
Net revenue increased $137.4 million or 77%, from $179.5 million for the six
months ended June 30, 1998 to $316.9 million for the six months ended June 30,
1999. North American operations contributed $84.8 million, representing 125%
growth in North America, to the overall net revenue increase. The growth
reflects increased traffic volumes in business and ethnic residential retail
operations and in carrier operations, and includes six months of operations of
TresCom in the 1999 results versus twenty-one days of operations in the 1998
results. The 1999 results also reflect three months of results for the LTN
Companies and the Wintel Companies and one month of results for Telegroup and
AT&T Canada. The Company's Asia-Pacific net revenue increased $12.1 million or
14% from $88.4 million for the six months ended June 30, 1998 to $100.5 million
for the six months ended June 30, 1999. Net revenue of the Australian operations
grew as a result of increased traffic from retail residential and business
customers and from the addition of data and Internet services. The European net
revenue increased $40.5 million from $23.0 million for the six months ended June
30, 1998 to $63.5 million for the six months ended June 30, 1999, a growth rate
of 176%. The European net revenue increased $24.9 million, growing 179% from
$13.9 million for the three months ended June 30, 1998 to $38.8 million for the
three months ended June 30, 1999. The European net revenue increase is
attributable to increased traffic volumes in the United Kingdom's business and
residential retail traffic and carrier operations, increased retail and carrier
traffic volumes in Germany, and the addition of one month of Telegroup net
revenue.
Cost of revenue increased to $247.5 million or 78.1% of net revenue for the six
months ended June 30, 1999, from $152.8 million or 85.1% of net revenue for the
six months ended June 30, 1998. This $94.7 million increase is caused by the
increase in traffic volumes associated with net revenue growth. The cost of
revenue as a percentage of net revenue decreased as a result of the continuing
expansion of the Company's global network, a greater mix of retail 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 of $70.8 million for the six months
ended June 30, 1999 increased by $36.4 million from $34.4 million for the six
months ended June 30, 1998. The increase is attributable to the addition of the
LTN and Wintel Companies, Telegroup, AT&T Canada,
10
<PAGE>
TresCom and GlobalServe as well as the impact of increased advertising and sales
expenses focused on Primus's retail operations.
Depreciation and amortization expense increased from $7.9 million for the six
months ended June 30, 1998 to $21.5 million for the six months ended June 30,
1999. The increase is associated with increased depreciation expense related to
capital expenditures to expand the network including purchases for fiber optic
cable, switching and other network equipment being placed into service, and
increased amortization expense related to intangible assets arising from the
Company's acquisitions of Trescom, the LTN and Wintel Companies, Telegroup, AT&T
Canada, GlobalServe and Hotkey.
Interest expense increased from $16.8 million for the six months ended June 30,
1998 to $34.3 million for the six months ended June 30, 1999. The increase is
primarily due to the 1999 Senior Notes, 1998 Senior Notes and additional capital
lease financing.
Interest income increased from $5.3 million for the six months ended June 30,
1998 to $6.0 million for the six months ended June 30, 1999.
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 $11.1 million for the six months ended
June 30, 1999 as compared to net cash used in operating activities of $31.7
million for the six months ended June 30, 1998. The decrease in operating cash
use was comprised of an increase in accrued liabilities, which included $40.3
million for the acquisition of Telegroup, an increase in interest payable,
offset by an increase in prepaid expenses, other current assets and an increase
in the net loss.
Net cash used in investing activities was $125.9 million for the six months
ended June 30, 1999 compared to net cash used in investing activities of $26.0
million for the six months ended June 30, 1998. Net cash used in investing
activities during the six months ended June 30, 1999 includes $45.4 million of
capital expenditures primarily for the expansion of the Company's global network
as compared to $36.0 million during the six months ended June 30, 1998. Also,
$92.6 million was used for acquisitions of Telegroup, the LTN Companies, the
Wintel Companies, AT&T Canada, GlobalServe, TelSN, Hotkey and TCP/IP.
Effective June 1, 1999, the Company purchased the global retail customer
business of Telegroup including the acquisition of selected Telegroup foreign
subsidiaries. The purchase price was $94.0 million, which included $22.2 million
for current assets. The Telegroup purchase price was paid by the issuance of
$45.5 million aggregate principal amount of 11 1/4% senior notes due 2009, a
$4.6 million short-term promissory note and a cash payment of $43.9 million.
On May 31, 1999, the Company purchased the residential long distance customer
base, customer support assets and residential Internet customers and network of
AT&T Canada and ACC Telenterprises for a purchase price of $38.7 million
comprised of $29.1 million in cash and a $9.6 million, 8.5% promissory note due
November 30, 2000.
On March 31, 1999, the Company purchased the common stock of the LTN Companies,
for $35.8 million in cash, including payments made in exchange for certain non-
competition agreements. On May 3, 1999 the Company purchased for $14.6 million
in cash the Wintel Companies, which are Canada-based long distance
telecommunications providers affiliated with the LTN Companies.
11
<PAGE>
Net cash provided by financing activities was $173.5 million for the six months
ended June 30, 1999 as compared to net cash provided by financing activities of
$145.3 million during the six months ended June 30, 1998. Cash provided by
financing activities in the six months ended June 30, 1999 resulted primarily
from $192.5 million of net proceeds from the 1999 Senior Notes offering,
partially offset by the $17.8 million repayment of the Revolving Credit
Agreement.
The Company anticipates aggregate capital expenditures of approximately $60
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.
The Company requires additional capital to fund its anticipated operating
losses and planned capital expenditures. On August 4, 1999, the Company
announced that it anticipates offering $200 million in aggregate principal
amount of senior notes due 2009 in a private placement pursuant to Rule 144A
under the Securities Act of 1933. The Company believes that its cash, cash
equivalents, and restricted investments, along with available capital lease
financing and bank financing (subject to the limitations in the Indentures
related to the Company's senior notes), and the proceeds of the private
placement of senior notes, will be sufficient to fund the Company's operating
losses, debt service requirements, capital expenditures, and other cash needs
for the next year. There can be no assurance that the proposed offering of $200
million in senior notes due 2009 will be consummated. The semi-annual interest
payments due through August 1, 2000 under the $225 million 11 3/4% senior notes
("1997 Senior Notes") have been pre-funded and will be paid from restricted
investments. The Company is continually evaluating the need for expansion of its
services and plans to make further investments in and enhancements to its
network and distribution channels. In order to fund these 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 to be 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.
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.
Readiness 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 throughout the world. Primus
has completed its inventory and assessment and has begun repairing or replacing
the most critical network elements and significant management systems that are
determined not to be Year 2000 ready. Primus expects to complete the repair,
replacement, testing and certification of substantially all non-ready network
elements in the United States by September 30, 1999 and elsewhere by the middle
of the fourth quarter 1999. Primus is using both internal and external resources
to identify, correct or reprogram, and test its systems for Year 2000 readiness.
12
<PAGE>
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 readiness. 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 $1 to $3 million in expenditures in
1999 to complete its Year 2000 readiness program and to date has spent
approximately $1 million. The costs of modifying the Company's network elements,
software and systems for Year 2000 readiness 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 readiness 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-ready network elements may result in improperly routed traffic and that non-
ready, non-network systems may result in errors in customer billing and
accounting records. The Company may also be adversely affected by general
economic disruptions caused by the Year 2000 issue even in circumstances where
the Company's systems and the systems of the Company's suppliers and customers
are Year 2000 ready.
Contingency Plans. Primus has begun to develop appropriate contingency plans to
mitigate, to the extent possible, any significant Year 2000 non-readiness. If
Primus is required to implement its contingency plans, the cost of Year 2000
readiness 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 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 Registration Statement on Form S-4 filed with the Securities and
Exchange Commission on August 2, 1999.
13
<PAGE>
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 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 (i) 1997 $225 million 11 3/4% senior notes due
August 2004, (ii) 1998 $150 million 9 7/8% senior notes due May 2008, and (iii)
1999 $200 million 11 1/4% senior notes due January 2009. As of March 31, 1999,
the aggregate fair value of the 1997, 1998 and 1999 senior notes approximates
their face value.
14
<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 June 30, 1999, the Company issued $45.5 million of 11 1/4%
senior notes due 2009 pursuant to the January 1999 Senior Notes
indenture in connection with the Telegroup acquisition. The
Company issued the note in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act of
1933.
(c) In June 1999, the Company acquired Telephone Savings Network
Limited (TelSN), a reseller of local Canadian services to small-
and medium-sized business customers, for $2.4 million in cash and
152,235 shares of the Company's common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on June 17, 1999,
the stockholders of the Company approved an amendment of the Company's
Stock Option Plan to increase the number of shares reserved for
issuance under the Plan from 3,690,500 to 5,500,000 and renewed the
term of two directors of the Company. Each of Mr. K. Paul Singh's and
Mr. John F. DePodesta's terms was renewed as a director of the Company.
The voting results were as follows: 22,493,094 and 22,492,894 shares
were in favor of Mr. Singh and Mr. DePodesta, respectively, no shares
against either Mr. Singh or Mr. DePodesta, and 176,334 and 176,534 were
withheld against Mr. Singh and Mr. DePodesta, respectively. The vote
approving the amendment to the Company's Stock Option Plan were
16,013,083 shares for, 520,988 shares against and 69,869 shares
withheld. Messrs. Herman Fialkov, David E. Hershberg, John G. Puente,
and Douglas M. Karp continued as directors of the Company after the
meeting.
ITEM 5. OTHER INFORMATION
(a) In May 1999, the Company organized our Internet and data services
business into a new subsidiary, iPRIMUS.com, which will provide
services in some of the markets where we operate. We expect that
iPRIMUS.com will use our existing global network infrastructure to
offer a full range of Internet Protocol-based data and voice
communications services.
(b) In May 1999, the Company entered into a reciprocal capacity
agreement with Global Crossing Holdings Limited. Under the
agreement, the Company agreed to purchase up to $50 million of
fiber capacity from Global Crossing and Global Crossing agreed to
purchase up to $25 million of capacity on the Company's global
satellite network.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits (see index on page 18)
(b) Reports on Form 8-K
A Form 8-K was filed on June 8, 1999 announcing that the Company
had extended its exchange offer of its outstanding unregistered
11 1/4% senior notes due 2009 for registered 11 1/4% senior
notes due 2009.
16
<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 August 13, 1999 By: /s/ Neil L. Hazard
--------------- ------------------
Neil L. Hazard
(Executive Vice President, Chief Financial
Officer and Chief Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2.1 Asset and Stock Purchase Agreement dated June 30, 1999, by and
between Telegroup, Inc. and the Company; Incorporated by reference
to Exhibit 2.1 of the Company's Current Report of Form 8-K dated
July 14, 1999. (The exhibits and schedules listed in the table of
contents to the Asset and Stock Purchase Agreement have been
omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy
of such exhibits and schedules shall be furnished supplementally to
the Securities and Exchange Commission upon request.)
3.1 Amended and Restated Certificate of Incorporation of Primus;
Incorporated by reference to Exhibit 3.1 of the Registration
Statement on Form S-8, No. 333-56557 (the "S-8 Registration
Statement").
3.2 Amended and Restated Bylaws of Primus; Incorporated by reference to
Exhibit 3.2 of the Registration Statement on Form S-1, No. 333-
10875 (the "IPO Registration Statement").
4.1 Specimen Certificate of Primus Common Stock; Incorporated by
reference to Exhibit 4.1 of the IPO Registration Statement.
4.2 Form of Indenture of Primus regarding the 1997 Senior Notes (the
"1997 Indenture"); Incorporated by reference to Exhibit 4.1 of the
Registration Statement on Form S-1, No 333-30195 (the "1997 Senior
Note Registration Statement").
4.3 Form of Supplemental Indenture of Primus to the 1997 Indenture
dated January 20, 1999, between Primus and First Union National
Bank; 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 (the "January 1999 Indenture"); Incorporated by
reference to Exhibit 4.7 of the Company's Annual Report on
Form 10-K for the year ended December 31, 1998.
4.8 Specimen 11 1/4% Senior Note due 2009; Incorporated by reference to
Exhibit A included in Exhibit 4.7.
4.9 First Supplemental Indenture to the January 1999 Indenture, dated
as of June 30, 1999, between the Company and First Union National
Bank; Incorporated by reference to Exhibit 4.1 of the Company's
Current Report of Form 8-K dated July 14, 1999.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
4.10 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.
4.11 Form of legend on certificates representing shares of Common Stock
regarding Series B Junior Participating Preferred Stock Purchase
Rights; Incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form 8-A, No 000-29092 filed with the
Commission on December 30, 1998.
10.1 Amendment 1999-1 to the Primus Telecommunications Group,
Incorporated Stock Option Plan; Incorporated by reference to
Exhibit 10.14 to the Company's Registration Statement on Form S-4,
No. 333-76965 dated August 2, 1999.
21.1 Subsidiaries of the Company as of July 30, 1999; Incorporated by
reference to the Company's Registration Statement on Form S-4, No
333-76965 dated August 2, 1999.
27.1 Financial Data Schedule for the six months ended June 30, 1999.
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE BALANCE SHEET OF
PRIMUS TELECOMMUNICATIONS GROUP, INCORPORATED AT JUNE 30, 1999 AND THE INCOME
STATEMENT FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 168,679
<SECURITIES> 38,561
<RECEIVABLES> 174,578
<ALLOWANCES> 28,410
<INVENTORY> 0
<CURRENT-ASSETS> 388,128
<PP&E> 250,233
<DEPRECIATION> 33,610
<TOTAL-ASSETS> 1,028,444
<CURRENT-LIABILITIES> 304,948
<BONDS> 649,909
0
0
<COMMON> 287
<OTHER-SE> 73,275
<TOTAL-LIABILITY-AND-EQUITY> 1,028,444
<SALES> 0
<TOTAL-REVENUES> 316,854
<CGS> 0
<TOTAL-COSTS> 247,456
<OTHER-EXPENSES> 92,339
<LOSS-PROVISION> 8,361
<INTEREST-EXPENSE> 34,293
<INCOME-PRETAX> (51,223)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,223)
<EPS-BASIC> (1.80)
<EPS-DILUTED> (1.80)
</TABLE>
